Next beats Q3 expectations, sales rise, profit guidance upgraded
Next saw better than expected trading in the third quarter with its full-price sales up 2.8% year-on-year and total sales up 1.4%. Those figures may seem tame by normal standards, but in a year devastated by the pandemic, they show the company to be one of the winners in the hard-hit UK fashion retail sector.
Full-year profit before tax, based on its new ‘central sales scenario’, is now forecast to be £365 million, £65 million higher than the central scenario given in September. And year-end net debt is set to fall by £487 million to £625 million.
Looking at the sales in more detail the company said that its online revenue rose 23.1% in Q3, a powerful performance given that sales for the year as a whole are up only 1% online. Quarterly e-sales did well both in the UK and abroad. But of course, its physical stores were worse off with a 17.9% drop in Q3, although this was much better than the 47.2% drop for the year to date. Out of town retail parks continued to perform better than high streets and shopping centres.
Markdown sales were down 12.3% against last year, caused by lower footfall in its retail stores and capacity constraints in its online warehouses, where it chose to prioritise full-price sales over its clearance operation.
As mentioned, it has upgraded its profit expectations for its central scenario based on an expectation of further local lockdowns and some shoppers beginning to avoid physical spaces as they get busier in the weeks before Christmas. That scenario also envisages more capacity constraints online as some staff need to self isolate. In that central scenario, it's predicting sales to be down 8% year on year during Q4, although a worst-case scenario also suggests they could fall as much as 20%. And the best case would see them flat year-on-year.
But of course, this is all speculation for now. “We would not want to give the impression that the assumptions and their consequences are scientific or precise,” Next said. “They are intended to give an indication of the sort of things that might help or hinder sales in the run up to Christmas”.
It added that the biggest single unknown is whether England, Scotland and Northern Ireland will follow Wales' decision to shut non-essential retail shops. A two-week lockdown in the rest of the UK in November would reduce retail full-price sales by around £57 million (depending on timing), representing 17% of retail full-price sales and 6% of the group's full price sales in Q4.
The company added that it’s well prepared for Brexit, which is no surprise given that CEO Lord Wolfson was one of the most prominent supporters of the UK leaving the EU. Despite this, it said a no-deal exit isn’t its preferred option but it thinks it’s in a good position to cope should such a scenario play out.
It also expects new tariffs to increase its annual import duty costs by around £13 million, which “would only add 0.3% to prices in theory, but in reality much of this increase is likely to be offset through re-sourcing or renegotiation”.
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