Next raised its profit and sales outlook as the fashion and homewares retailer saw robust demand at the start of the year, even as estimated costs related to the conflict in the Middle East tripled.
Pretax profit is expected to rise to £1.22 billion (€1.4 billion) this fiscal year, Next said on Wednesday, slightly higher than its previous forecast. The retailer led by chief executive Simon Wolfson also boosted its full-priced sales guidance to 5 per cent growth for the year, up from 4.5 per cent previously.
Next plans to mitigate higher costs related to the Iran war including by raising prices – though it doesn’t foresee doing so in the UK. Additional full-year costs are expected to reach £47 million, compared to £15 million it set out in March.
Shares of Next rose as much as 2.2 per cent in early trading in London before trimming the gain. They had fallen 7.7 per cent this year through Tuesday’s close.
“This upgrade, we believe unexpected by the market, is complemented by a complete offset to Middle East cost increases and no signs of change to underlying consumer behaviour,” Jefferies analysts including Frederick Wild said in a note.
Next said sales were particularly strong in the first five weeks of the year, before the conflict in the Middle East began. Trade in the region has also begun to recover as delivery services returned to normal. Overall full-price sales in the first quarter rose 6.2 per cent, beating Next’s expectations of 4 per cent growth.
The retailer expects to start increasing prices by no more than 8 per cent in some markets outside of Europe starting this month. It doesn’t plan to increase UK prices above the 0.8 per cent rise that was already forecast at the start of the year.
That outlook contrasts with the tone among other UK retailers. Grocer Sainsbury said last month profit may slip again this year with higher costs and shopper uncertainty due to the war. It joined market leader Tesco in publishing a wide forecast range to reflect different scenarios around the war.
The conflict is exacerbating strains in the UK economy, with companies already facing higher taxes and households grappling with inflation. That poses a dilemma for retailers over whether to pass on rising costs, especially given uncertainty around how long the conflict will last.
The British Retail Consortium has urged the UK government to help retailers keep costs down by easing energy bills and by delaying measures including a new packaging levy.
Next, which has about 500 stores across the UK, has a track record of lifting guidance. Wednesday’s was the second this fiscal year.
“While the market is familiar with profit upgrades from Next, this one stands out given ongoing sales and cost pressures stemming from the Middle East conflict,” Panmure Liberum analyst Anubhav Malhotra said in a note.
It has been on an acquisitive streak in recent years, buying brands including FatFace, Joules, Cath Kidston and Made.com. In January, Next acquired shoe brand Russell & Bromley out of administration and last month it was reported to be among the suitors considering a takeover of handbag manufacturer Radley.
In the UK, non-net brand items led the performance in the first quarter, with sales growing at more than double the rate of Next own-label online. – Bloomberg
