Next sees profits rise but cuts guidance after inflation hits customers

Retail giant Next has said it witnessed weak sales in August as customers saw the cost of living surge and is now set to miss sales and profit targets.

Next reported pre-tax profits of £400.6 million for the half-year, an increase of 15.5% compared to the same period in 2021. Full price sales increased by 12.4% over the six month period.

The high street retailer told investors on Thursday that sales in August were “below our expectations” and cost-of-living pressures on customers are expected to rise in the coming months, ahead of the key Christmas period.

It said profits are now expected to be around £840 million for the current financial year, downgrading a previous projection of £860 million.

Next added that it “seems inevitable” that growth in the clothing and homeware sector “will slow if not reverse” as inflation starts to bite. It revealed that prices across its autumn and winter range have been increased by 8% as it passes on some of the impact of higher costs to customers.

Amanda James, Finance Director at Next, said it is “too early” to say if these increases are putting off customers.

“These were fed through from August and if we had seen the weakness that month continue to September maybe you could link the performance to prices. I think the improvement in September proves it is not simply that and we saw a strong performance in the first half of the year, where we had implemented 4% price price increases.”

The group said it has seen some costs, such as freight and logistics, ease in recent months.

However, it added that weakness in the pound – which struck an all-time low against the dollar earlier this week – could persist into next year and would “serve to inflate selling prices, particularly in the second half of the year”.

Next said it believes weakness over August was likely to have been related to the heatwave following its summer sale, more customers taking holidays abroad and the “waning of consumer confidence as increasing energy and other costs begin to dampen demand for discretionary spending”.

The group stressed that it saw a better performance in September and may improve further as Government support for households kicks in.

Next has continued to gain momentum with its third-party brands strategy over the last six months, including a roll-out of GAP shop-in-shop concessions and financial investment in other businesses.

Rosalind Hunter, Partner at global consultancy Simon-Kucher & Partners, said: “Just a month and a half since its last update, Next released results this morning demonstrating the changing tide of consumer sentiment over the last quarter. Their H1 retail sales were up 63% versus the same period last year where lockdowns were still impacting store traffic, although performance worsened in August. Formal wear a key product line supporting this growth as the UK population increase their pre-lockdown activities alongside price increases of 8% across ranges. Online sales mirror those released by boohoo yesterday, with revenues down 5% versus last year. In addition, higher-than-forecasted return rates on aggregators are also highlighted.

“However, the forecast for H2 reflects the difficulty in navigating the current environment boards are facing across the country. Both sales and profit guidance has been lowered and its clear performance will be heavily reliant on external factors over the coming months.”