Blizzards blow Next off course as retail's freezing February claims another victim

Sales slump at fashion chain amid fears that tough conditions may continue for the rest of the year. Abigail Townsend reports
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Fashion giant Next will this week become the latest retailer to rock investors by unveiling a slide in sales.

Fashion giant Next will this week become the latest retailer to rock investors by unveiling a slide in sales.

Although the high-street chain is likely to meet profit forecasts for the 2003-04 financial year, there is concern that current trading will be poor. Expectations for like-for-like sales growth over the past few weeks range from flat to a possible 4 per cent decline.

Final pre-tax profits are expected to come in around £429m against last year's £353m. But Nick Bubb, a retail analyst at Evolution Securities, warned: "Next always meets the numbers - the real doubt is current trading. It should be poor and the like-for-likes must surely be down."

The main reason for the decline will be a tough February across the high street, as weakening consumer spending patterns were compounded by freezing weather that kept shoppers at home. Recent figures published by the British Retail Consortium (BRC) showed a 0.3 per cent slide in underlying sales in what the organisation dubbed the worst February for 13 years.

Next will not be the first to show how the tough conditions on the high street have started to hit home. Its smaller rival French Connection continues to struggle, while the health and beauty chain Boots stunned investors earlier this month with a profits warning. The John Lewis department stores, in contrast to their supermarket arm Waitrose, last week confirmed that trading remained tough. Further gloomy updates came from House of Fraser, B&Q-owner Kingfisher and the Wm Morrison supermarket chain, although its profits warning was largely due to further problems with the integration of Safeway stores.

And Next will not be the last high-street name to stumble. A number of retailers are due either to publish results or to provide updates on trading this week, and no one is expecting a buoyant picture to emerge.

Kingfisher's rival Kesa Electricals, for example, had a strong Christmas at both its Comet stores and its French chain, Darty. But Kingfisher's comments about a slowdown at B&Q have left most analysts nervous about whether Kesa's strong festive performance will have continued into 2005. Other retailers addressing the market in the coming weeks include Marks & Spencer and the Argos owner GUS.

But the biggest concern is that the dire Christmas and weak start to 2005 suffered by most of the sector has set a worrying precedent for the rest of the year. Price deflation remains an issue for retailers while competition is as fierce as ever, even for traditional high-street stalwarts such as Next.

Paul Smiddy, an analyst at broker Robert W Baird, said: "I don't see competition easing up. Inditex [the Spanish owner of the fashion chain Zara] continues to expand in the UK, and Philip Green has said he is opening more space over the next 18 months, and it's difficult to see that there will be more demand for clothes. So trading will be tight. It's not going to be the greatest year."

Next could also feel the pinch from M&S. Although few believe the group is enjoying strong trading, it is cutting prices, which could make Next vulnerable. And should chief executive Stuart Rose's turn- around strategy start to bear fruit, the pressure will increase. Next has benefited in recent years from the weakness of M&S, which should be its bigger competitor.

Ultimately, however, it is the consumer's changing spending patterns that will have the biggest impact. The sector has enjoyed a boom in recent years and eager shoppers helped keep the British economy afloat during a global downturn. But that enthusiasm is now easing off and some, such as the BRC, are calling on the Bank of England to trim interest rates to kickstart spending once more.

"We would be cautious on Next if Marks & Spencer was in recovery," commented Mr Bubb. "But we could be cautious on Next anyway because the consumer is clearly not spending."

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