January 3, 2020 / 7:17 AM / 24 days ago

Next's strong Christmas boosts hopes for UK retail sector

LONDON (Reuters) - British clothing retailer Next (NXT.L) raised its full-year profit forecast after a better-than-expected Christmas performance, fueling hopes the wider sector may have enjoyed solid festive trading and see a pick up in fortunes in 2020.

FILE PHOTO: Shoppers walk past a Next store on Oxford Street in London, Britain December 17, 2018. REUTERS/Simon Dawson/File Photo

The first major stock market-listed retailer to update on Christmas trading also forecast sales and profit growth for its 2020-21 financial year, which begins in late January.

Chief Executive Simon Wolfson said the fundamentals of the UK economy remained sound, with wages growing faster than inflation and employment still increasing.

However, he cautioned that the trend of the last two years of a shift to spending on leisure and entertainment at the expense of items such as clothing was set to continue.

“We’re not expecting any sort of significant swing into the clothing economy but the general consumer economy we don’t think is in bad shape,” Wolfson told Reuters on Friday.

Shares in Next were down 1.2% at 1048 GMT, having risen 60% over the last year in a reflection of the retailer’s sound trading performance through 2019 despite a tough economic and political backdrop.

“Next will be pleased with its Oct-Dec performance...That’s mildly encouraging for the sector as a whole,” said analysts at Peel Hunt.

“We expect the UK shoppers’ mood to continue to improve into 2020, which could mean that expectations, which are admittedly on the floor, start to be beaten,” they said.

Next said full-price sales including interest income rose 5.2% in the period from Oct. 27 to Dec. 28, the bulk of its fiscal fourth quarter, compared to Next’s internal forecast of 4.1% and third quarter growth of 2%.

The group — which trades from about 500 stores in the UK and Ireland, about 200 stores in 40 countries overseas and its Directory online and catalog business — said its performance in the period was helped by a much colder November than in 2018 and by improved stock availability in both its retail stores and online.

As a result Next raised its full-price sales growth guidance for the year by 0.3 percentage points to 3.9%. It also increased profit guidance by 2 million pounds ($2.6 million) to 727 million pounds, which would be 0.6% up from that recorded in the year to January 2019, and forecast earnings per share (EPS) growth of 5.4%, partly reflecting share buy backs.

STRUCTURAL SHIFT

While sales in Next’s stores fell 3.9% over the period, its online sales rose 15.3%, neatly illustrating the clothing industry’s structural shift from physical to virtual stores.

The group says its stores will remain profitable even if they become less productive. It plans to grow floor space by less than 1% in the coming year.

Wolfson, a prominent Conservative supporter and Brexit backer who sits in the upper house of Britain’s parliament, said Next’s Christmas performance had not been effected by last month’s decisive UK general election result, which saw Prime Minister Boris Johnson secure a commanding majority.

“In the year just gone people hugely exaggerated the effect of political turmoil on the consumer. Our observation was the news flow made very little difference to consumer sales in our sector at our price point,” he said.

“So I’m not expecting the improvement in the political environment to necessarily flow through into an improved consumer environment.”

For the year beginning January 2020, Next’s guidance is for full-price sales to increase 3.0%, profit to grow 1.0% and EPS to rise 3.4%. Surplus cash generation was forecast at 290 million pounds.

A host of British retailers will next week update on their Christmas trading, including Tesco (TSCO.L), Sainsbury’s (SBRY.L), Morrisons (MRW.L) and Marks & Spencer’s (MKS.L).

($1 = 0.7621 pounds)

Reporting by James Davey, Editing by Paul Sandle, Kirsten Donovan

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