Next's Christmas sales fall short but profits hit target

In its much anticipated post-Christmas trading update, Next revealed sales were below expectations but said profits were within the range of guidance after the clothing retailer held back from discounting until Boxing Day.

With the mild weather "mainly" to blame, full price retail sales fell 0.5% in the period from 26 October to 24 December, which was short of estimates and distinctly underwhelming compared to the rest of the year.

Full price sales from its Directory catalogue were up 2.0%, meaning total sales were up just 0.4%, both well below estimates as the weather was exacerbated by poor stock availability from October onwards as well as the admission that "the online competitive environment is getting tougher".

Full price sales for the year to 2 January are currently 3.7% ahead of last year, just below the bottom end of management's previous guidance of 4.0%-6.0%.

But the refusal to bow to discounting until the traditional beginning of the Boxing Day sales, meant Next expressed confidence that profits for the full year will remain within existing profit guidance of £810m-£845m, issued in October.

However, the 'central' forecast for full year group profit has now been revised to £817m, a 4.4% annual increase but below the prior Bloomberg market consensus of £829m, "though this might increase or decrease by £7m depending on trade in January". Earnings per share guidance is now for 4.8% growth.

On the basis that management expects the company's strong cash generative trading to continue, with surplus cash from operations of around £370m, a further special dividend of 60p per share was declared.

For the next year, Next said it was currently budgeting for full price sales growth in the year to January 2017 to be between +1.0% and +6.0%, with profits grow in line with sales.

With Next regarded as one of the strongest and most reliable performers on the high street, industry experts and analysts suggested the disappointing showing was likely to be reflected across the fashion retail sector, even if Next had some specific stock issues.

Analysts at Shore Capital said: "Noting in particular that sales and profit fell below management expectations for FY2016F, we believe the market will take today’s statement as possibly an early indicator that trading for apparel retailers was challenging in the final quarter of CY2015.

"This could possibly have a negative impact across the sector during today’s trading on the stock market."

Richard Hunter at Hargreaves Lansdown said Next provided "a stark reminder that the situation within retail is precarious" and said the comments on the ferocity of competition around its flagship Directory business were ominous and unsettling.

"Nonetheless, at a time when investors have been debating whether to prefer online or retail space sales, Next has an established foot in both camps. In addition, the group’s cash generative ability remains unscathed and the declaration of a further special dividend is proof of some confidence in prospects, given the company’s tight control of margins, costs and stock."

Independent retail analyst Nick Bubb noted that with the shares test Next's self-determined share buyback limit of 6962p, “Mr Share Buyback Man is likely to waken from his slumbers".

Shares in Next fell 4.9% in the first hour of trading on Tuesday to 6,840p.