Next starts reporting season with a seasonal stink bomb

“A profit warning from Next means the Christmas trading statement season from the nation’s retailers is starting with a bang of the wrong kind,” says Russ Mould, Investment Director at AJ Bell.

“Next’s boss Lord Simon Wolfson trimmed sales and profit expectations for both this financial year and the next one, admitting that he had expected full-price sales to grow in the Christmas season rather than drop 0.4%.

“The company now believes it will make a profit around £792 million to January 2017 and £730 million in the year to January 2018.

“This compares to the analysts’ consensus forecasts of £805 million and £801 million respectively, so the 9% profit miss for next year helps to explain the degree of the share price fall this morning.

“Wolfson cited tougher trading on the High Street and the need to raise prices by 5% to compensate for the increase in raw materials costs that has resulted from the pound’s post-referendum plunge, notably against the dollar.

“The company also flagged hits to profitability in the coming year of £6 million from wage inflation, £10 million from investment in its website and marketing and £13 million from the National Living Wage, increased business rates the apprenticeship levy and also energy taxes.

“The profit downturn in 2017 ends a string of nine consecutive increases in annual profits at Next although the company does intend to make four special dividend payments of 45p each in the coming year. That 180p cash return – which is not guaranteed – does imply a 4.1% dividend yield on a £43.50 share price and this may provide some support to the stock.

“The cautionary tone offered by Next weighed on a number of other retailers’ share prices ahead of a slew of trading statements next week. Marks & Spencer, Primark-owner Associated British Foods and Burberry all joined Next in the list of the worst five performers in the FTSE 100 at the opening today.

“More positively an update from FTSE 250 member B&M European Value was much more up-beat and AIM-quoted car dealership Cambria continues to trade in line with market expectations.

“Value chain B&M reported a 7.2% jump in like-for-like sales in the UK and an actual increase of 20.7% including new store openings. The firm added it had had its best Christmas ever, helped by improved distribution and enhancements to its stores.

“Cambria meanwhile noted at its Annual General Meeting that first-quarter trading met expectations. However, the company did flag a 0.7% drop in new car sales (a 9.4% drop in like-for-like terms) and warned of some margin pressure in the new car business, owing to foreign exchange movements and broader economic uncertainty.

“This again highlights how pound is going to be a key influence going forward, as the market continues to prefer exporters and overseas earners (as they potentially benefit from weakness in sterling) over domestic plays.

“History suggests the General Retailers sector usually does best when the pound is strong and buying costs are compressed but struggles when the pound is weak and purchasing costs go up.”

FTSE All-share general retail sector tends to suffer when the pound is weak:

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