Next cuts profit guidance as sales fall in first quarter

Next trimmed its full year sales and profits guidance after sales fell in the first quarter of its financial year.

Full price sales for the 13 weeks to 29 April slipped 3.0%, worse than the market’s expectation of a 2% decline as retail sales tumbled 8.1% but Directory sales from the website and catalogue rose 3.3% in what management expect to be the weakest quarter of the year.

Earlier in the year Next admitted that its product range had fallen out of sync with its "heartland" customers, while its stores were being hit by a more challenging consumer environment and structural changes in the retail market.

Sales in February were weaker than those in March and April, with the difference attributed to the later, warmer Easter this year.

On guidance, Next now expects full year sales in the range of -3.5% to +0.5%, with the upper end cut from +2.5% at the time of its full year results.

Profit before tax is now seen coming in at £680-740m, with the top end cut from £740m, meaning at best they will fall 6.4% from last year or at worst by 13.9%.

As stated at its March full year results, Next expects to get the benefit of improvements in its product range from the autumn onwards, but warned that “the UK consumer environment remains challenging, particularly in the clothing and homeware markets, and real wage growth is now close to zero”.

Cash flow was said to remain strong but was at the lower end of the guidance range, with expectations of £255m of surplus cash to be generated for the full year after deducting interest, tax, capital expenditure and ordinary dividends.

Following the payment of the first of its four 45p-per-share special dividends on Tuesday, the second will be paid on 1 August.

Shares in Next fell more than 5% in early trading on Thursday, where they are well above February's lows below 3,900p but a long way from the 5,700p last September.

Analyst George Mensah at broker Shore Capital said the 8% decline in retail sales and space from new stores contributing 1.6% growth, this pointed to a possible near-double-digit decline in the underlying performance of same store sales at the full price level.

"Today’s outturn highlights not only the challenging dynamics that the business is facing in terms of a softening consumer environment and structural change, the latter is vividly demonstrated in the polarising performances between the two core divisions of Next," Mensah said.

He added that he does not expect this to relent, highlighting the recent introduction of an own-label from Amazon Fashion as it demonstrates clear ambitions in general apparel, and the rejig of the clothes business at Marks and Spencer, for example.