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Next chills clothing sector with cut to profit forecast
January 4, 2017 / 7:23 AM / in 10 months

Next chills clothing sector with cut to profit forecast

LONDON (Reuters) - Next (NXT.L) cut its profit forecast for the current financial year after a poor Christmas and warned of a further decline in 2017-18, sending shockwaves through Britain’s clothing sector as the most successful performer of the last decade faltered.

The company, which trades from about 540 shops in Britain and Ireland, said it was disappointed with its Christmas sales and highlighted “exceptional” levels of uncertainty in the sector, adding it was preparing for tougher times.

Next, which has said repeatedly that Britons are spending less on clothes, warned that its 2017-18 pretax profit could come in a full 100 million pounds ($123 million) below market forecasts, wiping more than 10 percent off a share price that had already slumped by a third in 2016.

Next was the first major British retailer to report on Christmas trading and its statement stoked concerns about lower customer numbers on high streets as shoppers increasingly shift to buying online.

Shares in Next’s retail rivals also suffered. Marks & Spencer (MKS.L), Primark owner AB Foods (ABF.L) and Debenhams (DEB.L), fell by 4.2 percent, 3.6 percent and 5.5 percent respectively.

Next Chief Executive Simon Wolfson believes Britons are spending less on clothes and instead using spare cash on holidays, eating out and events. He is also anticipating pressure on spending as inflation rises.

“Not only do we face a continuing cyclical downturn in clothing but over and above that we’ve got price increases and a squeeze on real earnings,” Wolfson told Reuters.

“So it makes sense to be conservative...I don’t think we’re being overly gloomy,” added Wolfson, who is a Conservative Party member of Britain’s upper house of parliament and a supporter of Brexit.

Chief executive since 2001, Wolfson said he remained committed to the business.

Following the plunge in the pound after last June’s Brexit vote, he expects Next’s prices to rise by up to 5 percent.

Given this tough backdrop, the company, which also has franchised stores overseas and the Directory online and catalogue business, forecast that full price sales could fall by up to 4.5 percent in 2017-18.

A man walks past a Next store in central London, Britain January 3, 2017. Picture taken January 3, 2017. REUTERS/Stefan Wermuth

Next is also facing rising costs, notably a national minimum wage, higher business rates, an apprenticeship levy and higher energy taxes.

Analysts are also concerned about a declining number of Directory credit customers and the erosion of Next’s position online as rivals step up investment.

STORE SALES SUFFER

Slideshow (3 Images)

In the run-up to Christmas, full price sales at stores fell 3.5 percent, while Next Directory sales were up by 5.1 percent, raising questions about the merits of opening more stores.

“The central debate here is generic to the UK clothing retailers though: is physical capacity correctly set given that at least part of the peak season miss is likely to have reflected continued switching online,” said Haitong analyst Tony Shiret, who put his “Buy” rating under review.

Next said its expansion plans were unchanged, stressing its rigorous investment criteria for new stores. It is targeting a further 250,000-300,000 square feet of net trading space in both 2017 and 2018.

By contrast, M&S said in November it would shut over 80 stores at home and abroad over five years as more sales migrate online.

Next said its guidance was for pretax profit of 792 million pounds for its year to Jan. 2017, down from the 805 million pounds previously forecast. It made 821 million pounds in 2015-16.

For 2017-18 it forecast a pretax profit range of 680-780 million pounds, below analysts’ average forecast of 784 million pounds, according to Reuters data.

In the 54 days to Dec. 24, the bulk of Next’s fourth quarter, full price sales fell 0.4 percent, compared with a third quarter decline of 3.5 percent.

Next had expected sales to grow versus the previous year as comparative numbers in 2015 were weak.

Editing by Kate Holton/Keith Weir

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