LONDON (Reuters) - British clothing chain Next forecast a fourth straight fall in annual profit on Thursday as it grapples with the sector’s structural shift from physical stores to online.
The group, which trades from more than 500 stores in Britain and Ireland, about 200 stores in 40 other countries and its Directory online business, reported a 0.4 percent fall in pretax profit in its 2018/19 financial year and forecast a further 1.1 percent decline for the following year.
However, full-year earnings per share rose 4.5 percent and are forecast to rise by 3.6 percent in the current year as Next buys back shares with surplus cash.
Although retail sales fell 7.3 percent in the year to Jan. 31, compared with a 14.8 percent rise in online sales, the company continues to expand its store network, with plans for a net 60,000 square feet of additional space in 2019/20.
The company says its stores will remain profitable even if they become less productive.
Full-year pretax profit of 722.9 million pounds ($955.7 million) was in line with company guidance but represented a third straight annual decline.
For the current year Next forecast full-price sales to increase 1.7 percent, with an 8.5 percent decline in retail sales more than offset by an 11 percent rise in online sales. It forecast profit of 715 million pounds.
Shares in Next, up 9 percent year-on-year before Thursday’s update, were down 1.5 percent at 1114 GMT.
“Next ... continues to manage a difficult channel shift dynamic as well as could be expected,” Peel Hunt analysts said.
Next Chief Executive Simon Wolfson said the impact of the structural shift should become less of an issue as store operations shrink relative to the size of the online business.
The group has carried out a 15-year stress test on the transition to an online-dominated business. The test assumes an extreme scenario of like-for-like store sales declining at 10 percent a year for the next 15 years.
The conclusion of what he described as a very extreme test would be that Next would still have more than 300 shops open, Wolfson added.
Next said there is no evidence that uncertainty over Britain’s exit from the European Union is affecting consumer behavior.
With only eight days until Britain is due to leave the EU, the government has yet to agree a withdrawal agreement or an extension, meaning the risk of a disorderly “no-deal” Brexit cannot be ruled out.
Some companies and industry surveys have pointed to UK consumers reining in spending ahead of Brexit, but Next disagrees.
“Our feeling is that there is a level of fatigue around the subject that leaves consumers numb to the daily swings in the political debate,” the company said.
Wolfson said he believed that consumer behavior in Next’s sector will be changed materially only if Brexit, or continued uncertainty around it, begins to affect employment, prices or earnings.
“At the moment, the uncertainty over Brexit doesn’t appear to be having a negative effect on employment and wages and ultimately those are the things that drive the consumer economy,” he told Reuters.
Wolfson, a prominent “Leave” supporter and Conservative peer in the upper house of Britain’s parliament, said that even with a no-deal Brexit the government’s proposed tariff schedule means Next’s prices would actually come down by about 1 percent.
He said Next is prepared for Brexit, whatever the outcome.
Reporting by James Davey; Editing by Edmund Blair and David Goodman