Next shares jumped 9 per cent on Thursday after the UK fashion retailer raised its profit forecast following better than expected Christmas trading and said it expected cost inflation to peak this year.
The FTSE 100 group is the first significant apparel retailer to update on trading over the most important period of the year. It said full-price sales were up 4.8 per cent year on year in the nine weeks to December 30 against its own prediction of a 2 per cent fall.
It said demand for seasonal clothing as cold weather hit in December had boosted sales, which were up 17 per cent in the final two weeks of the period, and that it may have underestimated the extent to which the Omicron coronavirus variant and stock shortages held back sales a year earlier.
The Covid impact was also reflected in the split between online sales, which were down 0.9 per cent against strong comparatives the year before, and store sales which increased 7.5 per cent against weaker previous-year figures.
That means profit for the year to January 2023 is now expected to be £860mn, up £20mn from the company’s previous projection and exactly in line with the figure predicted this time last year.
Next gave a cautious outlook for the year to January 2024, predicting a 1.5 per cent decline in full-price sales and a pre-tax profit of £795mn, which would be a fall of 7.6 per cent from this year’s projection. However, the figure was ahead of consensus forecasts of about £780mn.
Shares in the company rose as much as 9 per cent in early trading in London before slightly paring their gains.
Stifel analyst Caroline Gulliver said that “given all the macro headwinds” a forecast profit decline of less than 8 per cent would probably make Next one of the most resilient retailers in the coming year.
As was the case last year, Next intends to pass on price increases it is experiencing through the supply chain, meaning that spring and summer ranges will cost 8 per cent more than last year and autumn-winter lines about 6 per cent more.
But Investec analyst Ben Hunt said the cost inflation guidance was more moderate than previous predictions. Much of the increase is also due to the stronger dollar — Next said it would be buying merchandise for spring at $1.27 to the pound against $1.39 last year and the gap is wider still for autumn ranges.
It added that based on the current trajectory of wholesale clothing prices and sterling against the US currency, inflation should be lower in 2024.
Labour costs are expected to rise by £67mn in the coming financial year, driven by a large rise in the UK’s statutory minimum wage in April, while utility costs will be £28mn higher after the company forward-purchased its gas and electricity at significantly higher rates.
On the plus side, factory gate prices in dollars for clothing have decreased and freight rates from Asia have returned to more normal levels. Like all retailers with large store estates, Next will benefit from the changes to the business rate regime announced in the autumn Budget, which will add £10mn to profits.