September 25, 2018 / 6:21 AM / in 25 days

Next lifts profit guidance, plays down Brexit threat

LONDON (Reuters) - Clothing retailer Next raised its profit guidance after better-than-expected trading in late summer and said it was well prepared should Britain crash out of the EU without a deal, sending its shares higher.

FILE PHOTO: Shoppers pass a branch of Next retail in London, Britain, September 15, 2016. REUTERS/Toby Melville

The company, which trades from over 500 stores in Britain and Ireland, about 200 stores in 40 countries overseas and its Directory online business, said that while a no-deal Brexit would mean additional administrative costs, in the context of the overall group they would not be material.

However, Next did highlight the risk to its business if no-deal caused delays at British and EU ports when Britain leaves the EU next March.

“The thing we’re most worried about is the ports,” Chief Executive Simon Wolfson told Reuters on Tuesday.

He said it was not clear how well prepared the government’s revenue and customs systems and staff would be for the potential increase in workload and data capture.

“In addition to increasing their capacities at the ports...we think it would be wise to review some of the processes and procedures to actually reduce the burden of work at the ports,” added, Wolfson, a prominent “Leave” supporter and Conservative peer.

Shares in Next rose as much as 9.4 percent on Tuesday, taking gains for the year to nearly 24 percent after the company bucked a negative sales trend for other fashion retailers in a hot European summer.

Next enjoyed strong sales of clothes such as shorts, T-shirts and dresses, offsetting fears of a weak end to summer, with online sales providing the impetus.

VOLATILE CLOTHING MARKET

On the issue of a no-deal Brexit, Wolfson also cited the risk of a further devaluation of sterling but said the maximum impact of new tariffs on European goods on its prices would be “half a percent”, before mitigation through re-sourcing initiatives.

Next imports 15-20 percent of the products it sells from the EU, with the rest from Asia. It sells into 70 countries.

Wolfson said that while Britain leaving the EU without a free trade arrangement and managed transition period was not Next’s preferred outcome, it had all the administrative, legal and IT framework in place to ensure it could carry on running the business as it does now.

Wolfson said he did not believe uncertainty over the Brexit outcome was impacting consumer behaviour.

“I really don’t think that Brexit is affecting peoples’ decisions to buy a new pair of boxer shorts or a blouse,” he said.

Pretax profit for the 26 weeks to July 28 increased 0.5 percent to 311.1 million pounds ($407.7 million) after full price sales rose 4.5 percent, helped by Britain’s record hot summer and corrections to previous product range errors.

Last month Next had cautioned that sales gained in July could be offset by losses in August. Other clothing retailers have said that the hot summer in northern Europe had hurt sales.

“As it turned out, we did not experience any material loss of sales in August or early September,” Next said.

Because of that Next raised its guidance for 2018-19 pretax profit by 10 million pounds to 727 million pounds, which would deliver earnings per share growth of 5 percent, reflecting share buybacks.

Next did caution that “the UK retail market remains volatile, subject to powerful structural and cyclical changes.”

It said sales in its stores, which account for just under half of turnover, continue to be challenging, having fallen 5.3 percent in the first half. Online sales rose 15.5 percent.

It forecast overall full price sales growth of 3 percent for the full year.

“Next will still lose 8 pence in the pound from channel shift this year, but is working to ensure share and efficiency gains are maximised,” said Andrew Hughes, analyst at UBS, who has a “buy” stance on the stock.

Editing by Paul Sandle/Keith Weir

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