Next has raised its profit forecasts for the year by £20m after better-than-expected sales in the run-up to Christmas, but said it remained “cautious” about the year ahead and warned more price rises were coming.
The fashion and home retailer said sales of full-price items had risen by 4.8% in the nine weeks to 30 December, which was well above the 2% fall predicted and delivered £66m more sales than expected.
Sales numbers were also helped by inflation, with prices for Next’s clothing up by 8% this spring and summer and prices expected to rise by a further 6% in the autumn.
The retailer said it may have underestimated the dampening on demand of the Omicron variant and shortages of stock in 2021, leading to a bigger-than-expected bounceback this year when shoppers felt able to visit stores more freely and could find the items they wanted.
In the first Christmas trading update of a large retailer, Next added that sales had boomed once the cold snap arrived in mid-December as people stocked up on warmer clothing.
There were further positive signs in the UK retail sector from Boots, B&M and Greggs, all of which reported strong trading over the Christmas period on Thursday.
Boots said sales were up by about 15% in December with festive favourites such as beauty, fragrance and gifts all performing well. That came after sales at established UK outlets rose 8.7% in the three months to the end of November helped by a return to high street stores.
B&M said it was paying a £200m special dividend after sales rose 12.3% in the three months to 24 December with profit margins up as it achieved strong sales of both grocery and general merchandise lines.
Lord Simon Wolfson, the chief executive of Next, said it appeared shoppers had not been as hard hit by higher energy bills as feared and had continued to buy more formal outfits for work and events.
“When you look at the fundamentals on employment, savings and bad debt rates they all look OK. A lot of the worry is about what will happen rather than what is happening,” he said.
Sales in Next stores were particularly strong – up 12.5% in the three months to 30 December – while online sales were virtually flat year on year.
The company said inflation was easing as the price of important commodities such as cotton were falling back and price rises were being led by the fall in the value of the pound against the dollar, which is used for freight and fuel bills and to buy clothing in the Asia-Pacific region.
“If it was not for the weakening of the pound prices would be flat or down,” Wolfson said. “This suggests the cost of living pressures will begin to ease as we move into the second half of this year and into the following year.”
The company now expects to make £860m in profits for the financial year to the end of January, up by 4.5% on the previous 12 months.
Next said the year to January 2024 would be tougher. Its guiding for pre-tax profits predicted a 7.6% fall to £795m on 1.5% lower sales.
Wolfson said it was difficult to predict how consumer behaviour might change in the year ahead but the “best guess” was that shoppers would be more cautious.
Next said it was not anticipating a collapse in demand but expected continued inflation on essentials, particularly energy, and rising mortgage costs as well as further rises in the prices of its own products to suppress spending.
Wolfson said Next would continue to look at buying or investing in brands, as it has done recently with Made.com and Joules, but its approach was “really opportunistic” based on “the right price, management and brand” that could fit with the company’s “total platform” online service.
Richard Lim, the chief executive of analysis firm Retail Economics, said: “These results are all the more impressive given the harsh squeeze on household finances. Store sales were particularly strong with shoppers opting to head back into physical locations to seek out the best deals and keep a tighter grip on their budgets.”
He said Next was well positioned, with its large store estate which could enable pickups of online orders, to benefit from disruption to home deliveries caused by strikes as well as rising charges for delivery and returns of online orders.
However, Lim added: “The outlook remains tough. The combination of rising mortgage costs, spiralling energy bills and ongoing inflation across staples will hit discretionary spending throughout 2023. This recessionary backdrop set against rising operating and input costs for retailers is going to hit profits hard for large swathes of the industry.”
Shares in Next rose 7% on Thursday, making it the top riser on the FTSE 100.
