Alarm bells rang across the sector today when fashion bellwether Next reported a dramatically worse than expected Christmas trading period.
Next reported overall sales increased by just 0.4%, falling far short of 5.7% forecasts.
“If this is what the most outstanding high street clothing retailer in the market has produced over the period, God help most of the others,” warned independent analyst Richard Hyman.
Sales at Next’s high street stores dropped by 0.5% during the nine weeks to December 24, while its Directory sales rose 2%, down on expectations of 10%. Next boss Lord Wolfson signalled heightened online competition as a factor, as well as stock problems.
“The online competitive environment is getting tougher as industry-wide service propositions catch up with the Next Directory,” said Wolfson.
City analysts were quick to describe the results as “disappointing” and “well below forecasts” – terms not usually associated with the clothing retailer.
Given Next’s stellar trading relative to the market in 2014, observers are now fearing downbeat Christmas updates from its rivals, and expressed concern over the margin impact of those that, unlike the fashion giant, lost their nerve and went on Sale in the run-up to Christmas.
As for the winners this festive season, Wolfson’s caution of increasing competition online prompted Peel Hunt analyst Jonathan Pritchard to place his bets on etailers.
“We certainly think that the pure-plays are in rude health (we think Asos and Boohoo both had very good Christmases,” said Pritchard. “Next’s remarks nod to something much more underlying than any short-term trading form: customer habits are changing fast. Online is winning the arm-wrestle with bricks and mortar, and fashion [and its delivery] is getting faster. Only the fleetest of foot can expect to see medium-term growth.”
As for Next, Cantor Fitzgerald analyst Freddie George expressed concerns over the maturity of its highly regarded Directory channel.
Stifel analyst James Collins said: “We should heed its warning that online competition is building.”
Westnedge also believes the competition has upped its Game when it comes to online and fulfilment, and predicts that the Directory’s sales growth will be outperformed by the rest of the market. “Next was one of the leaders in click-and-collect but now rivals have caught up. For example, we’ve seen House of Fraser and Debenhams really invest in online. They’re facing more competition in online and that also comes down to having the right product and the desirability of discounts. Next stayed true to its full price strategy, however, maybe this season that impacted their sales performance.”
Weather was also a factor in Next’s disappointing trading. Last month was the mildest December in the UK since records began, on top of the unseasonable weather the previous year.
Big-ticket fashion items such as coats, Boots and knitwear – the most profitable categories for clothing chains – were left hanging on rails.
While some retailers including Jigsaw and Next held steady, much of the market hoisted the red Sale signs up even as early as October.
But Verdict analyst Honor Westnedge was wary of retailers blaming the weather. “There are still some things retailers can do to offset the weather and that includes bringing in more transitional ranges, buying closer to the season and bringing in smaller quantities of heavy knitwear,” she said.
Even Wolfson was keen to point out there was more to the fashion retailer’s problems than the weather.
“We would not want to allow difficult trading conditions to mask any mistakes and challenges faced by the business,” he said.
While analysts believe Next will bounce back, the year ahead is set to be tough, warns Hyman. “Do I think Next will continue to trade at 0.4% sales? No, they will do better. But we are entering a period when retailers are generally not going to be delivering the kind of trading performance progress that they have in the past.”
Pritchard said: “They have had a quarter they will want to forget, but they will bounce back from this. They will realise they need to be fleet footed and what needs to be done.”