Next bolsters hopes for high street sales with a festive leap

Profits guidance is raised after a fillip from online business and shares go soaring
  • @Thompj

The fashion chain Next today raised hopes for a modest improvement in high street trading conditions this year after it posted a robust performance over Christmas and raised its profit guidance.

The stand-out performer was its Next Directory online business, which posted double-digit sales growth, and the update sent shares in the retailer soaring to an all-time high.

Next's internet and catalogue sales were better than the City had expected and followed John Lewis, the department store chain, delivering barnstorming underlying sales up by 13 per cent over the festive period.

Marks & Spencer, Debenhams, JD Sports Fashion, Tesco and Sainsbury's, among others, will provide a clearer picture of Christmas trading next week. While most are expected to have held their own, Morrisons appears to have had a Christmas to forget, with joint house broker Jefferies forecasting a 2.8 per cent fall in underlying sales at the grocer.

Lord Wolfson, the chief executive of Next, said: "I don't think there will be any dramatic change in the consumer environment in the year ahead."

But crucially, he expects the pressure on household budgets to ease in 2013, as the gap between wage growth, which has been running at an anaemic 1.7 per cent, and wider inflation narrows further. Lord Wolfson forecasts a "slow recovery in real wages" this year that will give shoppers slightly more spending power.

Next ticked up its profit forecast for the year that ends this month to between £611m and £625m, which would be 7.1 per cent to 9.6 per cent ahead of the previous year. Its earlier guidance had been between £590m and £620m for 2012-13. Next's shares added 101p, or more than 2 per cent, to 3,873p.

The key drivers were "slightly better-than-expected" cost control and an improvement in markdowns and margins, driven by it carrying 8.2 per cent less stock into its clearance sale that started on Boxing Day. Lord Wolfson said: "Our clearance rates were ahead of last year." Similarly to previous years, shoppers started queuing outside its Milton Keynes store at 1am on 26 December ahead of a 6am opening, while its store in Manchester's Arndale centre was also packed.

Boosted by new stores, Next grew its retail sales by 0.8 per cent between 1 November and Christmas Eve. Analysts at Espirito Santo said this represented a 1.4 per cent fall in like-for-like sales. While the retailer's trading in stores was in line with City expectations, the 11.2 per cent surge in sales at Next Directory was streets ahead.

Joseph Robinson, a senior consultant at Conlumino, the retail consultancy, said: "Next's performance underlines the trend of this festive season: namely that online has been the principal driver of growth and is paying dividends for those players that have invested in their online offer."

He added: "Next is a very accomplished player in both the internet and multichannel arena and recent service improvements, such as extending order cut-off times for next-day delivery to 9pm, were heavily featured in festive advertising and have subsequently helped to drive online sales."

While many had tipped 3 December, dubbed Mega Monday by the PR industry, to be the busiest online shopping day, Lord Wolfson said it came later. "This is about people having more confidence that the things they want before Christmas will be delivered on time."

Total sales at Next, which has nearly 200 stores in more than 30 countries overseas, rose by 3.9 per cent over the eight weeks. The group plans to open a similar amount of new space – 250,000 square feet – in 2013 to last year.

Next tricks: How retailer racks up success

1. Next Directory

The 25-year-old catalogue and online business continues to power ahead, driven by the breadth of its offer and slick delivery operation. Next Directory alone delivered operating profit of £262.6m in 2011-12, which was more than Waitrose.

2. Management stability

Chief executive Lord Wolfson, product director Christos Angelides, finance chief David Keens and property boss Andrew Varley have been at the retailer for more than 20 years.

3. New formats

The chain has introduced successful fresh formats, notably Next Home, which has 40 shops. While it has only a few combined home and garden centres, it sees the potential for 19 Next Home and Garden shops.

4. Cost management

A key reason for its latest profit upgrade was a series of cost-control measures, such as improved markdown activity.

5. Share buybacks

Next has continued to drive growth in earnings per share, and thereby dividends, by buying back its shares.

6. Product

While some snobs may scoff at the fashionability of its clothing and homewares offerings, no retailer can prosper if it doesn't give customers what they want at the right price. Next's performance points to it continually evolving its range.