Next profit warning suggests difficult Christmas for high street retailers

Next warns on outlook for 2017 after sales fell in the run-up to Christmas as consumers curtail spending on fashion and clothing.

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Next, seen as one of the bellwethers of the British high street, saw sales fall in the run-up to Christmas and has warned that the outlook for 2017 will be “challenging” for retailers.

Full-price sales for the 54 days to 24 December were down by 0.4%. While this was an improvement on the third quarter, when sales fell by 3.5%, Next says it was expecting growth due to its weak performance in the final quarter of 2015.

Sales at its end-of-season sale, which runs from Boxing Day and typically pulls in customers, slumped by 7%. That, says the company, has cost it £3m.

The poor sales have caused Next to cut its profit forecast for the year to the end of January to £792m, at the lower end of its previous forecast of between £785m and £825m. Next says it expects a “cyclical slowdown in spending on clothing and footwear” to continue into 2017.

It also expects its results to be hit by a further squeeze on general spending due to inflation. That is backed up by new research from retail analysts Retail Economics, which found that 48% of consumers think they will have less spending power in 2017 than last year.

The devaluation of the pound will also hit revenues as prices rise. Next predicts that the price of like-for-like garments will increase by “no more than 5%”, causing sales revenue to drop by 0.5%.

The outlook for 2017 is therefore a concern, with Next forecasting that sales will be down by 1.5% for the year to the end of January, worse than this year. Profits will also  fall to between £680m and £780m, with added pressure coming from the national living wage, business rates revaluation and increased energy taxes.

Next is the first of the big high street retailers to lay out its Christmas trading and the figures are likely to be a sign of things to come. The gloomy outlook has hit shares at other fashion retailers, including Marks & Spencer, Debenhams and Burberry.

Richard Lim, CEO at retail analysts Retail Economics, says: “Despite positive consumer momentum in the run-up to Christmas, these latest figures confirm that underlying conditions on the high street remain desperate for clothing and footwear retailers.

“Structural changes in consumer behaviour, the relentless shift towards online shopping and the emergence of nimbler pure online retailers has changed the competitive landscape for the clothing sector. Traditional incumbent apparel retailers are feeling the brunt of these challenges.

“The outlook for consumer spending remains tough. The labour market is already showing tentative signs of weakening and as inflation accelerates real incomes will come under increasing pressure. Given the weaker consumer backdrop it will be a difficult time for UK retailers to be raising prices.”

M&S and John Lewis are set to reveal their Christmas trading figures next week, as are Tesco, Sainsbury’s and Morrisons.

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