Next saw no impact on consumer demand from the referendum, apart from a few days following the vote, according to a trading update released today. However the company believes it’s still too early to draw any firm conclusions about the longer term impact of Brexit on consumer behaviour.
Sales in the second quarter rose 0.3% overall, driven by strong performance from the Next Directory which saw a 5.7% increase in sales. Things weren’t so pretty on the high street though, with sales for Next Retail falling 3.3%.
The company upgraded its guidance for earnings for the year, though it continues to expect the consumer environment to remain tough for the rest of the year.
The devaluation of Sterling does mean Next is likely to start facing higher costs for the goods it sources abroad. Although the company’s currency hedges mean that there will be no impact on results in the current year, Next estimate that currency movements will have an impact of up to 5% on the cost of products from 2017 onwards. This hints that inflationary pressures could be around the corner for the UK economy, thanks to the weaker pound.
George Salmon, Equity Analyst, Hargreaves Lansdown:
‘So far Next has hardly seen any adverse impact from the referendum, but like many retailers it faces higher costs for the goods it sources from abroad, thanks to the devaluation of Sterling.
The highly competitive market means UK retailers will want to try to push this additional cost back onto their suppliers, or soak it up themselves, but some may yet leak through into prices for consumers. This could mean inflationary pressure coming into the UK economy next year when currency hedges start to fall out of the equation, yet another conundrum for the Bank of England, which is widely expected to cut interest rates this week.
The retail sector has had a tough time over the last year, and has significantly underperformed the UK stock market, with Next being at the sharp end of this trend.
Unseasonal weather has impacted sales across the sector, and Next has had issues with stock availability within its Directory. More worryingly, competition is coming from all angles, with online-only players like Boohoo and ASOS taking market share, while traditional retailers like Debenhams have significantly raised their game in recent times.
Next are responding by seeking to improve their mobile app and modernise their online proposition, which is likely to be a key determinant of success for the foreseeable future.
Operationally, Next is a very well-run business, with market-leading margins of over 20%. The record on cost control is unparalleled, and the group's focus on cash generation over headline growth has been hugely successful.
However, Next is clearly finding life tougher, and the outlook for the business is more uncertain than it has been for some time.’
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