Next Sees Tough Quarter Ahead and Price Hikes Coming in 2017

(Bloomberg) -- Next Plc warned that the current quarter will be its toughest this year and said 2017 sales will be hurt by Brexit-induced price increases as conditions remain difficult for the U.K.’s second-biggest clothing retailer.

The subdued outlook comes after a first half in which profit margins shrunk because of increased markdowns, the company said in a statement Thursday. Sterling’s plunge will prompt an increase in garment costs of no more than 5 percent next year, it said, which could drag down like-for-like sales by as much as 1 percent.

“There continue to be some worrying signs for Next,” Exane BNP Paribas analyst Simon Bowler said in a note. “Next have played down any suggestion of consumer strength in July and believe demand continues to look subdued.”

Like Marks & Spencer Group Plc, Primark and Hennes & Mauritz AB, Next has had to contend with weaker demand amid unseasonable weather and a growing tendency among consumers to spend on leisure activities rather than apparel. H&M on Thursday reported August sales that missed analysts’ estimates on hot August weather, and Next Chief Executive Officer Simon Wolfson said unusually warm September temperatures in the U.K. have had a “massive” impact on sales, which will get worse as long as the spell lasts.

Next’s shares fell 5.1 percent to 4,943 pence at 11:08 a.m. in London, the biggest drop in Britain’s benchmark FTSE 100 Index, and extending this year’s decline to 32 percent. M&S dropped 2.6 percent, while H&M slid 3.1 percent.

The shift toward spending on experiences like travel instead of apparel has hurt Next’s sales, which were “very strong” in July but boosted by increased markdowns, the company said. The retailer’s first-half profit margin narrowed from 14.9 percent to 12.4 percent.

“There has been some talk of a general retail bounce in July and while Next did enjoy very strong sales in July, this was driven by a much larger end-of-season sale,” Wolfson said in the statement. “It has been a challenging year so far, with economic and cyclical factors working against us, and it looks set to remain that way until mid-October at the earliest.”

Clothing and footwear sales at all U.K. retailers dropped 3.4 percent in August, the Office for National Statistics said on Thursday.

Pound’s Weakness

The pound’s weakness will increase sourcing costs for Next, which are largely dollar-denominated. Next’s pretax profit fell 1.5 percent to 342 million pounds ($453 million) in the six months through July, in line with estimates. The company reiterated its full-year sales and profit forecasts and said it would have more visibility on conditions in November.

Raising selling prices will result in some revenue loss, Wolfson said in an interview, yet that’s preferable to jeopardizing profit margins. “Either way it is going to be painful, but much less painful if we take a hit to the top line,” the CEO said.

To contact the reporters on this story: Sam Chambers in London at schambers7@bloomberg.net, Janice Kew in Johannesburg at jkew4@bloomberg.net. To contact the editors responsible for this story: Matthew Boyle at mboyle20@bloomberg.net.