Investors find some relief in Next's chilly outlook

LONDON (Reuters) - British clothing retailer Next NXT.L reported its first drop in annual profit since 2009 and said it was "extremely cautious" about the year ahead but its battered shares rose on hopes its management has got to grips with its problems.

FILE PHOTO: Pedestrians walk past a Next shop in Oxford Street in London, Britain, January 6, 2009. REUTERS/Andrew Winning/File Photo

Britain’s most successful clothing store chain this century has faltered over the last two years, saying it is suffering from a broader slowdown in spending on clothing and footwear that it first identified in late 2015.

It has also cautioned that sales could be depressed this year by a squeeze in consumer spending as inflation erodes real earnings growth, and by price rises on garments due to the pound’s devaluation.

However, its shares rose as much as 9.3 percent on Thursday, paring year-on-year losses to 38 percent, as investors took comfort from Next maintaining the guidance it issued in January when it warned that profit would fall again in 2017-18.

“There are pockets of good news in this set of results,” Chief Executive Simon Wolfson told Reuters. “One of them is what happened to the credit customer base, which has definitely stabilized.”

He also highlighted "corrective action" on clothing ranges that will put them "exactly where we want them to be" in the third quarter, as well as further work to modernize Next's Directory online and catalogue business, whose once leading position has been eroded by rivals such as Marks & Spencer MKS.L.

Analysts have raised concerns about the size of Next’s UK store estate, some 540 stores, and its track record of underlying sales declines.

However, Wolfson said Next had “stress tested” its store portfolio and concluded that opening new space was still a sound strategy - a further 150,000 square feet (14,000 square meters) is targeted for 2017-18 and 250,000 sq ft in the following year.

“Although the move of spending away from the high street (to online) will detract from our retail profit, the retail stores themselves are an enormous asset and the risk is that they become less productive, not that they become loss making,” he said.


Wolfson also said that pricing pressure should ease in the second half of 2018, assuming the pound does not devalue again next year.

“It looks like the external economic pain will last into the first half of next year. When there’ll be a shift back into interest in clothing is a much harder one to call,” he said.

Shares in Next were up 8.3 percent at 4,209 pence at 1233 GMT.

“(Next’s) valuation now offers support, despite the challenges,” said Investec Securities analyst Alistair Davies, who upgraded his stance from “sell” to “hold”.

Others highlighted the surplus cash Next is still generating, noting four special dividend payments it plans to make in 2017 give it one of the best dividend yields in the FTSE 100 index.

Next made underlying profit before tax of 790.2 million pounds ($990 million) in the year to January 2017, in line with January guidance but down from 821.3 million pounds in 2015-16.

For 2017-18, Next forecast full price sales, at constant currency, in a range of down 4.5 percent to up 1.5 percent and pretax profit of 680-780 million pounds.

It has also highlighted inflationary pressures on its cost base, including the government mandated National Living Wage, business rates, apprenticeship levy and energy taxes.

Separately on Thursday official data showed British retail sales in the three months to February recorded their biggest slide in nearly seven years.

Editing by Keith Weir and Ruth Pitchford