Next benefits from late Christmas shopping but warns on profits

Sales at Next for the festive period (28 October to 29 December) were up 1.5% year on year, with a surge in shopping in the three-week run-up to Christmas helping to offset a “disappointing” November.

However, the retailer is expecting profit to be down for the next two years (-0.4% to £723m in 2018/19 and -1.1% to £715m in 2019/20) as the shift to online accelerates and physical stores continue to suffer – a polarisation that became even more apparent over Christmas, where online sales were up 15.2% and retail sales down 9.2%.

Next says the £4m reduction in its full-year profit forecast is a result of higher sales on seasonal products such as personalised gifts and beauty products, which have lower profit margins, and increased operational costs associated with online sales.

“Full price sales for the Christmas trading period have been in line with the guidance we gave in September,” chief executive Simon Wolfson says.

“Strong sales in the three weeks prior to Christmas along with a good half-term holiday week at the end of October made up for disappointing sales in November.”

Given Next’s maturity as an online player, Sofie Willmott, a senior retail analyst at GlobalData, says the acceleration in year-on-year online sales demonstrates how its strategy online is paying off with a wider array of relevant brands supporting its own range and its Next Unlimited delivery saver scheme driving loyalty in a competitive market.

READ MORE: Next cuts print and TV ad spend after seeing ‘impressive’ results from digital

“However, the retailer’s strong online proposition is now starting to show up its more limited offer in stores and Next must consider how it can stem the flow of rapidly declining physical sales to protect profits,” she adds.

Next, which is the first retailer to publish its Christmas results, is planning to more than double its digital marketing budget in 2019 from £12m to £28m, funded by a dramatic reduction in investment in above-the-line media and catalogue production.

Over the next five years it has built enough capacity to increase its online sales by £1.5bn. However, during a press conference last September, Wolfson said he thinks the shift to online will eventually slow down.

“Turning it from a retail-only business into an online platform that includes the stores, that process is still extremely arduous and hard but we’ve reached a point where this year it looks like we’ll be able to stabilise profits,” Wolfson explained.

“We’ve got the general direction of travel but we cannot predict the speed nor the endpoint of this change. Our job is not to try and guess where it’s going to end, but to make sure we are flexible and profitable enough, disciplined and innovative enough to make sure we can handle whatever the change is and we keep moving forward.”