(Bloomberg) —
Next Plc raised its profit forecast as the hotter weather and return to formal events encouraged more Brits to buy summer clothing but warned that worsening inflation could hit consumer sentiment.
The British clothing and housewares chain said profit will be £860 million ($1.04 billion) this year through January, up from previous guidance of £850 million, according to a statement Thursday. Next stock was up about 3% at 9:08 a.m. Thursday in London.
The retailer said even though sales rose £50 million more than expected in the second quarter as people attended weddings and parties, it does not expect that surge to be maintained, warning that inflation is likely to have a negative impact on consumer spending for the rest of the year.
“I think people are moderating their expenditure on everything,” Chief Executive Officer Simon Wolfson said in a phone interview. “The way they are doing that in clothing appears that people are buying fewer, much better things rather than the same number of things at a lower price.”
There had been fears that clothing retailers would be badly affected as consumers, grappling with the worst inflation in decades, prioritize spending on essential items, such as food and fuel, rather than clothing. Next had lowered its profit and sales guidance in March as the war in Ukraine and higher inflation in the UK weighed on its outlook. The company is often considered a bellwether for the health of Britain’s main streets.
Next raised prices about 3.5% in the first half and this will rise to about 8% in the second half, as previously guided, said Wolfson. The higher prices in the second half may contribute to growth not being as strong as in the first, he said.
A lot of the higher input costs that Next is seeing stem from the price of freight and are particularly notable on big, bulky home products like furniture, he said.
In a departure for a retailer whose e-commerce growth has significantly dwarfed the retail store arm in the past few years, Next’s online sales were flat in the second quarter while shop sales rose.
Next said “growth online has ground to a halt”, blaming it on a “short term reversal of pandemic trends” when more people used the internet to shop and were wary of visiting crowded places. The switch to stores from online is likely to continue through to the end of the year, said Wolfson.
Customers are also returning clothes at more normal levels after two years of “exceptionally low returns rates” during the pandemic when people buying slouchy leisurewear, rather than more fitted clothing, sent back fewer items. Next increased the charge for online returns from £2 to £2.50 in late June while other retailers such as Zara and Boohoo Group Plc have started charging customers.
What Bloomberg Intelligence Says
With quickening inflation squeezing consumer incomes, management’s prediction of a subdued 1% sales increase in 2H seems realistic. A return to more normal online conditions, with the return-rate back to 42%, prevents a bigger increase in expectations.”
Charles Allen, Bloomberg Senior Industry Analyst
Next 1% Profit Boost Defies Waning Online-Retail Outlook: React
The uplift in the profit forecast “largely from the second-quarter performance, will not stop investors from focusing on a highly uncertain second-half outlook,” James Grzinic, retail analyst at Jefferies said in a note to clients.
Next has around 500 stores in the UK and Irelandand a large domestic and international online division selling its own range of fashion, as well as third-party brands. It also uses its infrastructure network to help rival brands sell their goods online.
(Updates with CEO comments from fourth paragraph.)
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