Sector movers: Next knocked off its perch again by slowdown in UK, global growth

Retailers registered the largest losses on the Footsie after Next cautioned that 2016 might be its toughest year since 2008 and downgraded its revenue guidance.

Shares in the Leicester-based outfit plummeted 15.09% to close at 5,655p – falling by 17.0% at one point in the day, their largest drop since 1998.

Company boss Simon Wolfson told shareholders the slowdown in the UK economy would take its toll on consumers' spend on clothing.

The coming year would be akin to “walking up the down escalator, with a great deal of effort required to stand still."

To take note of, the price of the company's stock was coming off an approximately seven-year run higher.

The warning hit shares in rivals Associated British Foods (5.58%) and Marks&Spencer (4.92%), while the DJ Stoxx 600 sub-index of Retail stocks ended the day 2.37% lower at 314.17.

“Shares will undoubtedly be marked down heavily on the back of today's news-flow. It should also be noted that Next has a tradition of conservatism on its guidance, and admits that a proper (ie cold) Winter this year would give upside risk to its guidance,” David Jeary at Canaccord Genuity said in a research note sent to clients following Next’s full-year results.

On the basis of their price as of the close of 23 March, shares in Next were changing hands at 16 times Canaccord's estimates for the firm's earnings in 2016 and 13.9 times those for 2017, with corresponding EV/EBITDA metrics of 10.1 and 9.6.

From the point of view of technical analysis, the 5,465p area - the stock's opening price on 31 December 2013 - was the closest area of so-called support on the price graphs.

Economists see slowdown in spending too

Somewhat ironically, Next’s cautious stance came just before the release of a better-than-expected reading on retail sales in Britain.

Retail sales volumes only dipped by 0.4% month-on-month (consensus: -0.7%) in February, after surging by 2.3% in January, the Office for National Statistics said.

"It makes sense to take a very careful approach in portfolio construction"

Clothing sales were one weak spot, which government statisticians attributed to colder-than-usual weather delaying spring clothing purchases, although some analysts expressed doubts about the accuracy of that explanation.

In any case, economists seemed to be in agreement that a slowdown in consumer spending was on the cards, with some pointing out the possibility that the uncertainty around the 23 June referendum might add further pressure on spending.

“A tighter fiscal squeeze, the recent moderation of firms’ hiring plans and the looming pick-up in inflation all suggest that the spending recovery will lose its vim this year. We expect year-over-year growth in real household spending to ease to about 2.5% this year, from 3% in 2015,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said in a research note sent to clients.

Dr.Howard Archer, chief UK+European economist at IHS Global Insight, held a similar opinion, adding that “a concern is that sentiment will slide further over the next few months as uncertainty over the outlook intensifies ahead of the 23 June referendum on UK membership of the European Union.”

Acting as a backdrop, Joachim Fels, global economic adviser at Pacific Investment Management Co., and the bond fund manager’s Global Fixed Income CIO, Andrew Balls, lowered their forecast for calendar year 2016 global real GDP growth by a quarter-point to a range of 2.0% to 2.5%.

Indeed, weakness in Asia was cited on Thursday by another retailer, Ted Baker, as an area of weakness in its outlook.

“There are three main swing factors for the global economic and financial market outlook this year: China, commodities and central bank policies. Depending on different paths for each of these “three C’s,” it is easy to imagine different shades of darker or brighter economic and market outcomes this year than in our baseline scenario. And given that we cannot know for sure which scenario(s) will come to pass, it makes sense to take a very careful approach in portfolio construction,” Fels and Balls said in a report on the 6-12 month outlook for the global economy.