Next warns of tough times ahead for retailers

Lord Wolfson, chief executive of Next, has warned of another year of “subdued” trading for the retail sector after the fashion chain delivered a healthy uplift in annual profits.

The star performer was its Next Directory catalogue and online business which delivered strong sales growth to account for nearly half of the group’s profits.

Wolfson expects consumer spending to remain under pressure this year, driven by average wage rises continuing to lag behind wider inflation.

He said: “It [spending] will remain subdued — not catastrophic or euphoric. As long as we have a real decline in earnings the discretionary end of the market is going to be a tough place to be.”

His cautious outlook came despite Next growing its pre-tax profits by 9% to £621.6 million over the year to January 26, driven by a stunning performance from its 26-year-old catalogue business.

The increase to its bottom line will add to the pressure on Marks & Spencer, which suffered a fall in the half year and is thought to have suffered challenging recent trading on clothing and homewares.

After a rise in its shares today, Next’s market capitalisation of  £6.9 billion is higher than M&S’s  £6.3 billion.

Next Directory delivered a 15.1% rise in operating profit to £302.1 million, compared with its retail operation growing by just 2.3% to  £331.1 million. To put this performance into perspective, Next’s online business delivered higher profits than grocer Waitrose’s profits of £292.3 million and department store John Lewis’s £216.7 million, despite a cracking year for both John Lewis Partnership chains.

Lord Wolfson described trading as “quiet” since two weeks of heavy snow in the second half of January, which he estimated accounted for a 0.3% decline in total sales. He said: “It was a painful couple of weeks but in the scheme of the whole year it was not a game changer.”

Asked about the impact of the continuing cold weather, he said: “It is a mixture of the economy and weather. Exactly what proportion we will not know until the weather changes.”

Next’s retail sales were flat at  £2.19 billion. The dividend is up 16.7% to 105.5p.