Next lowers profit forecast despite trading in line over Christmas

The FTSE 100 company said “strong sales” in the three weeks prior to Christmas, along with a “good” half-term holiday week at the end of October, made up for disappointing sales in November.

It said that while total full price sales were in line with its expectations, online sales including interest income were £17m - or 2.2% - ahead of its expectations, and retail sales were £16m - or 1.7% - below.

Next said stock in its end-of-season sale, including the stock it put into its Black Friday event, was up 3% on last year.

Clearance rates were said to have been “broadly in line” with its expectations, and were consistent with the profit guidance given in September.

For the full year, Next said it expected full price sales growth of 3.2%, in line with that guidance given in September.

It said its central guidance for full year profit was now £723m, or 0.6% lower than its previous guidance of £727m.

The £4m difference was said to be the result of two factors - firstly, higher sales on seasonal products, such as personalised gifts and beauty products, had reduced its margin by £1.5m.

Next said those areas made a healthy net margin, but lower than its clothing ranges.

The remaining £2.5m reduction came as a result of the increased operational costs associated with the higher online sales.

It said profit for the full-year could increase or decrease by up to £5m depending on sales and costs in January.

Central guidance for earnings per share was now 435.2p, which would an increase of 4.4% on the previous year.

“Next year, our central guidance for full price sales growth including interest income is 1.7%, in line with the second half performance of the current financial year,” the Next board said in its statement.

“In the year ahead, we are assuming a similar economic environment as that experienced in the second half of the current year.

“Within this guidance, we expect retail sales to be down 8.5% and online sales to be up 11%.”

Next’s board cautioned that any sales forecast made in January came with a “high degree” of uncertainty.

“This year uncertainty around the performance of the UK economy after Brexit makes forecasting particularly difficult.

“We have not factored into our sales estimates the potential benefits of a smooth transition or the downsides of a disorderly Brexit.”

The firm said that at the current level of sales growth, it anticipated group profit would be £715m - a decline of 1% on the profit forecast for the current financial year.

“We anticipate that the company will remain strongly cash generative and our forecast for capital expenditure in the year ahead remains in line with the guidance given in September.”

At its central guidance, the board estimated surplus cash generation of £300m.

“We intend to continue our policy of returning surplus cash to shareholders through share buybacks, subject to market conditions,” the board said in its statement.

“We estimate that the enhancement to earnings per share from £300m of share buybacks would be 4.7% and at our central profit guidance, earnings per share would increase again in the year ahead, by 3.6%.”

Next shares rose on the day.

It was a "reassuring" trading statement, said broker Shore Capital, high a "continuation of their long-standing trend with retail sales down but offset from the advances from the online division".

Analysts at RBC Capital Markets said the trading update was "slightly mixed" but that recent share price weakness meant any short-term negative news had already been factored-in.

As regards the wider sector, "we think the statement today is a positive read for the UK apparel sector," they added.

UBS, while cutting its target for the online fashion retailer's shares from 6,600p to 6,000p but sticking to a 'buy' recommendation, said the performance highlighted "the benefit of holding full price for as long as possible".

The Swiss bank also trimmed its estimate for the company's profits before tax in 2020 from £753m to £725m "largely as a result of macro weakness", although that was still "slightly" better than guidance from Next's management.

"There will be upside from industry capacity reduction," UBS said.