Next warns of tough year after Christmas struggle

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Next piled on the misery for retail investors yesterday when the high street stalwart admitted that it too had struggled over Christmas.

Next piled on the misery for retail investors yesterday when the high street stalwart admitted that it too had struggled over Christmas.

The company warned that weak demand in the run-up to Christmas had left it with too much stock to shift during its annual clearance sale, costing it £5m in lost profits. Simon Wolfson, the chief executive, said: "There is now evidence of a more subdued consumer environment. We think [2005] will be challenging."

Next's sluggish sales growth further knocked confidence in the retail sector just one day after poor trading forced Woolworths and House of Fraser to bring forward their scheduled post-Christmas updates. Shares in Next tumbled 54p to 1627p, while rival Marks & Spencer lost 6p to 338p. GUS, the owner of Argos, slipped 21.5p to 928p while Boots shed 14p to 634p.

Underlying sales at Next grew by just 0.5 per cent from 3 August to 24 December. While this was ahead of City expectations, it represented a slowdown for the clothing group, which has acquired something of an infallible reputation. Analysts estimated gross margins slipped slightly. Mr Wolfson said: "November and December were noticeably different and not as good as the first three months of the season."

The company's subdued growth bore out his prediction in September that the retail environment was becoming more challenging, but Mr Wolfson admitted the company had to take some of the blame. He said it had "overbought" and confessed the autumn/winter menswear collection had missed some trends. Christmas was "solid but not sparkling", he said.

Next trimmed its profit forecast by £5m, putting it on track to make £415m to £425m this year - in line with existing expectations. "It would be churlish not to be content with that but we know we could have done better," Mr Wolfson added. Total group sales rose 12.4 per cent during the period, boosted by 13.4 per cent sales growth at its directory business. Mr Wolfson predicted the company's like-for-like sales growth would flatten out during the next few months.

Iain McDonald, at Numis Securities, said: "The announcement confirms that the clothing market, in particular, has been very tough over the Christmas period, and we expect this to be reflected in statements from M&S and JJB over the coming weeks."

Further evidence emerged yesterday that retailers had to resort to slashing prices to lure in shoppers in December.

The CBI said retailers reported an unexpectedly strong surge in sales in the first two weeks of December, but warned this growth was won at the expense of heavy price discounting.

The number of shops reporting an increase in sales outnumbered those seeing a fall by 33 per cent, the same margin as Christmas 2003, the CBI said, but warned that retailers were expecting the worst January for six years. "It is a reminder that retailers are cautious that the pace of sales has probably slowed," said William Simpson, a senior economist at the employers' group.

Ian McCafferty, CBI's chief economic adviser, said: "If, as is likely, widespread discounting drove December's increase in volumes, then value and profitability will have remained subdued."

Economists said it was hard to gauge the true strength of Christmas shopping as the survey only covered the first two weeks of the month. "I think the [Bank of England] will need to see the retail sales figures for January as well and look at the two months combined," said Mark Miller, economist at HBOS Treasury Services. "But it suggests that consumer spending and retail sales held up better than was widely anticipated."

FootFall, a retail business consultancy, said the number of shoppers in December rose 6.3 per cent year-on-year.

Ideal Shopping Direct, the TV shopping business, said that a "buoyant" Christmas meant that its sales for the second half of the year would be up more than 50 per cent. The company said that City profit expectations were now too low and it would report a pre-tax profit of more than £4m - a record for Ideal. The business was also helped by the launch last year of its Ideal World service on Freeview, the digital terrestrial television platform.