Next’s warning spooks high street shares

Next has lowered its sales forecast for the year, sending its shares plunging the most since the dot-com bubble burst in 2000, as slowing growth in consumers’ incomes threatens to hit spending at the UK clothing retailer.

The stock slid as much as 15% in London yesterday, the steepest drop since March 2000.

Chief executive Simon Wolfson likened the year ahead to “walking up the down escalator, with a great deal of effort required to stand still”.

The outlook for consumer spending “does not look as benign as it was at this time last year,” he said, adding that this may be the toughest year for Next since the financial crisis of 2008.

Such cautious comments from a company known as one of the industry’s most reliable added to concern over the outlook for UK retailers, whose sales fell in February.

Mr Wolfson also pointed to a possible shift away from spending on hoodies and jeans in favour of travel and dining out — areas that suffered most during the credit crunch.

“These wider consumer and economic trends may reverse as the year progresses,” said Mr Wolfson.

“However, our instinct, along with the volatility of our own sales, suggest that it would be sensible to prepare for a tougher economic environment.”

Next lowered its forecast for growth in sales of goods at full price by two percentage points. It now sees revenue in a range of minus-1% to plus-4%, compared with a January forecast for growth of 1%-6%.

Next, whose earnings have beaten analysts’ estimates each year for more than a decade, is facing increasing competition in its Directory online business.

Inditex’s Zara has been cutting prices relative to peers, according to Credit Suisse research.

“We think the statement will weigh on the rest of the UK apparel sector although Next does appear to have some more company-specific issues,” said Richard Chamberlain, an analyst at RBC Europe.

Marks & Spencer Group plc shares also fell, declining by over 4.5% at one stage.

Debenhams slid 2.8%, while Associated British Foods, which owns Primark and Penneys, also fell.

Separately, UK retail sales fell in February as colder weather affected demand for spring and summer attire, government data showed yesterday.

While the figures show a decline on the month, sales were up 3.8% compared with a year earlier. Consumer spending has helped to drive UK economic growth amid low inflation and an increase in employment.

The Bank of England said earlier this week that household expenditure has remained “resilient” in recent months.

“We doubt that February’s dip in UK retail sales is the beginning of a more pronounced slowdown in the pace of the consumer recovery,” said Paul Hollingsworth, an economist at Capital Economics in London.

Prospects for the consumer “remain fairly bright” as low energy, fuel, and food prices give real incomes a boost, he said.

Next also said that underlying pretax profit increased 5% to £821.3m (€1.04bn) in the 12 months through January.

Analysts surveyed had expected £818.4m in profit.

Full-year sales under the Next brand advanced 3.7%, with store revenue up 1.1% and sales at its home-shopping unit growing 7.7%.

* Bloomberg