Next cuts sales forecasts and costs to leave profits on track

Next trimmed its full year sales guidance after third quarter retail sales fell almost 6%, but thanks to cutting its cloth more severely it said profits would come in as expected.

Total full price sales in the three months to 31 October were down 3.5%, with flat online and catalogue sales under the Directory segment and a 5.9% decline in its shops.

Analysts had forecast the retail decline but the Directory sales were weaker than expected.

For the year to date, total full price sales are down 1.5% on last year and total group sales are up 0.4%.

After big summer promotions in July, the FTSE 100 clothing retailer faced a subdued August and its toughest comparative from last year in September, so was relieved to enjoy a significant rebound in October.

For the full year sales are now expected to come in between a fall of 1.75% and a rise 1.25%, down from its previous guidance range of -2.5% to +2.5%, meaning the midpoint moved to -0.25% versus 0% previously.

The central profit forecast remained unchanged at £805m, thanks to the aforementioned cost cutting, with earnings per share of between -1.3% to +3.7%.

Analyst George Salmon at Hargreaves Lansdown said 2016 was proving "something of an annus horribilis" for Next and what while some contributing factors such unseasonal weather can impact any retailer at any time, Next has some bigger issues on its plate.

"CEO Lord Wolfson is worried that the clothing sector could be seeing an underlying fall in demand, while the group has just woken up to the realisation that competitors have caught up with its Directory offering. Directory sales were again worse than expected this quarter, and the heady days of double digit growth are just a distant memory for the group now.

"With the weaker pound meaning imported textiles are now more expensive, Next will need to make some tough choices on how it tackles this extra cost,” Salmon said.

RBC Capital Markets highlighted concerns over Next Directory becoming ex growth, with flat sales versus consensus of a 3% gain.

"We think this will raise concerns that Next’s higher-margin, higher-rated Directory business has gone ex growth, particularly in the light of strong recent performances by the likes of ASOS and Boohoo albeit off a smaller base. Also in the UK any growth is likely to be driven by the lower margin Label third-party brands catalogue."

Looking forward, there are easier comparatives to come but headwinds in the form of dollar sourcing, with RBC forecasting the recent weaker trend in sterling against the dollar is likely to cause price rises in 2017 for Next of 3- 5% which could cause more of an adverse impact to 2017 LFL sales than guided in September.

Shares in Next topped 5,000p for the first time in over a months and by 1010 GMT were up 4% to just under that level.