Next Dials Down Inflation Estimates

Next Plc shares plunged as the UK retailer warned of a challenging year ahead and repeated profit and sales will probably decline this year.

The stock fell as much as 9.1 percent in London trading, the steepest decline in about six months.

“The year ahead looks like it will be challenging,” said chief executive officer Simon Wolfson. “The combination of inflation in our cost base and top line sales, which are likely to edge backwards, is uncomfortable.”

The fashion and homeware company is considered a bellwether for the British retail sector, with hundreds of stores across the country and a successful website. Next has been one of the beneficiaries of the cost-of-living crisis that has seen smaller rivals collapse.

Growth Questions

The company predicted pre-tax profit for the coming year of £795 million ($979 million) alongside a 1.5 percent drop in full-price sales in a statement Wednesday. Analysts had expected profit of more than £806 million on average, according to Bloomberg consensus.

Next’s recent performance has been lackluster, Eleonora Dani, an analyst at Shore Capital, wrote in a note to clients. The forecast for declining profits raises questions over the business’s prospects for longer-term growth, she said.

The retailer agreed to buy the Cath Kidston label out of insolvency on Tuesday, the latest in a string of brands that it’s adding to its offering.

Next said it had benefited from an “unintended consequence” of investing in companies in order to add them to its retail platform. The retailer made nearly £17 million in profit from nine investments in brands such as JoJo Maman Bebe, Joules and Made.com, it said, adding that the deals had proven more lucrative than fees earned by its so-called Total Platform, where the businesses use Next’s IT, warehousing and logistics.

Wait and See

Next will probably increase prices by 7 percent in the Spring/Summer season and 3 percent for fall and winter items, it said Wednesday. The forecast is down from estimates of 8 percent and 6 percent respectively.

“It’s very encouraging that price inflation is coming down in Autumn/Winter to much more manageable levels, not far off the Bank of England’s target rates, but as yet we haven’t built any optimism into our sales forecast as a result of that,” Wolfson said in a telephone interview. “We’ll wait and see what happens.”

The latest data shows that there’s little sign of relief in the UK’s cost-of-living crisis. The British Retail Consortium said this week that shop price inflation accelerated to a record 8.9 percent this month and the rate is still yet to peak. Some shoppers are finding their money going on necessities like food and heating rather than fashion.

“What we’re seeing is a moderate tightening of belts,” Wolfson said. “Inflation is rising faster than wages so you would expect people to be cutting back in certain areas, and they cut back more in the least essential areas.”

Learn more:

Next Agrees to Buy Cath Kidston Out of Administration

The retailer will pay £8.5 million ($10.5 million) for the brand and isn’t buying its remaining stock of goods, according to people familiar with the matter, who asked not to be identified.