Nick Bubb’s verdict: Next – sensibly cautious or crying wolf?

Lord (aka Simon) Wolfson of Next has a well-deserved reputation for being cautious in his outlook for the business (a quality instilled in him by the estimable finance director, David Keens, who is about to retire after an amazing 24 years of service), but he is fond of saying that the ancient Greek prophet of gloom, Cassandra, was actually right in the end.

The City is, however, used to seeing Next consistently outperform and deliver the goods, despite the boss’s caution, so at first sight it might seem right to shrug off his renewed gloom today about the outlook for 2015/16 as the normal expectation management.  

A year ago, after a terrific fourth quarter, Next reported underlying pre-tax profits of £695m, a bit below the £700m or more that everyone had expected, after finding a few forex losses and making a few provisions.

Needless to say, Next remained cautious in its budgeting for 2014/15 with only 5% to 11% profit growth expected, to between £730m and £770m.

After an excellent first half, when Next Brand sales rose 11% and profits by 19%, that original full-year guidance looked very conservative.

But the warm autumn weather knocked Next off course a little before a decent Christmas trading period restored normal service.

Back on December 30 Next edged up its range to £765m to £785m and most people expected it to come in at the top of the range today with the finals.

It duly did, with an outcome of £782m - up 12.5% - although Next was quick to point out that that was helped by a £9m accounting profit on some forex hedges.

But the sting in the tail today was the outlook statement.

Next repeated what it said in December, that things should be getting better: “The economic outlook for the UK consumer looks relatively benign. Low inflation, an end to real wage decline, healthy credit markets and strong employment all paint a somewhat more positive picture than recent years”.

However, as French Connection pointed out on Tuesday, there’s not been much sign of the much-vaunted economic recovery so far this year on the high street for fashion retailers and it is clear that Next has also found trading quite tough in the UK so far in the Spring season.

Next has also found Overseas sales growth dented slightly by the recent problems in Russia and the Ukraine, but the upshot is that it has lowered its overall budget for full-price sales growth in 2015/16 from between 2.5% and 7.5% to a range of only 1.5% to 5.5%, with the first half expected to perform at the lower end of the range.

At the analysts meeting, Simon Wolfson made clear that there are two key reasons to be cautious about the sales growth outlook.

The first is that Next faces very tough comps in the first half on the back of the fine spring/summer weather last year.

It perhaps goes without saying that it’s been a bit cold so far this season, although even Next’s forecasting skills don’t extend to telling us what the weather will be like in April and May.

The second issue is more interesting, namely that Next has noticed some weakness in some of product ranges, although it did not shed any further light on what was meant, apart from saying that a year ago the product ranges were unusually good (“five out of five”) and that this year has simply been more typical and more patchy in terms of fashion winners and losers.

At the low end of the sales growth range, full-year profits would be broadly flat at £785m and even at the top end of the range full-year profits would be only 7% up at £835m.

Simon Wolfson rightly says that “whilst the prospective returns detailed above would be very respectable by most standards, they are low by comparison to Next’s historical performance”.

Of course, if as good a business as Next is struggling to grow that much in the current retail climate then it is tempting to think that it will be much harder for the likes of Marks & Spencer (which reports fourth-quarter trading on April 2).

After all, Next has invested significantly in refreshing its store portfolio (60% of its space would look new or nearly new to consumers since 2007/8) and it is changing perceptions of the Next brand with iconic new out-of-town stores such as Camberley, Hedge End, Maidstone and High Wycombe.

And Next has industry-leading distribution and warehousing skills and a highly profitable (if slightly mature) Directory home shopping business.

However, although consumers may in theory be better off from the impact of falling prices on their real incomes, it appears that they don’t ‘feel’ better off, and in a deflationary environment they also probably feel that there is no rush to go out and spend.

Ahead of the general election, it would be prudent for consumers to save a bit for a rainy day because afterwards things could get messy, both politically and economically, with a VAT rise by year-end by no means unlikely    

So, to hark back to the ancient Greek story about the boy who cried wolf (one of Aesop’s Fables), Simon Wolfson may actually be right to be cautious, both because of internal issues at Next and the external environment.

• Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.