A profit upgrade but reduced expectations for the year ahead – what to make of Next’s Christmas update? Chief executive Lord Wolfson unpicks the trading messages

Lord Simon Wolfson

Next chief executive Lord Wolfson sees ‘light at the end of the tunnel’

Apparel and home goods powerhouse Next’s Christmas stocking was fuller than expected after shoppers splashed out over the festive period.

A near-5% uplift in sales, powered by stores, led Next to increase profit expectations for this year by £20m to £860m.

Even so, Next struck a cautious note on the year to come and trimmed back expectations.

Full-price sales for the year ending in January 2024 are likely to be down 1.5% and pre-tax profits down 7.6% compared with the current year.

Despite that trimming, Next chief executive Lord Wolfson ultimately sees “light at the end of the tunnel” for a hard-pressed retail industry.

Next’s wariness reflected particularities of the peak trading period that benefited it in the current year and ongoing headwinds that will persist in the next 12 months.

At Christmas, cold weather in December sparked demand for seasonal clothing – Next described it as a “dramatic boost” that released pent-up demand. Had that not occurred, Next’s Christmas performance might not have been as stellar.

Next weekly sales chart Q4 2022

Caution on the months to come also takes into account other characteristics of the year just gone. 

Wolfson tells Retail Week: “We came up against much stronger comparatives. If you look at the first half of last year, we had a very good second quarter.

“There was a lot of restocking, summer came early and it was very warm, which was very good for our summerwear product, and there were an enormous number of pent-up events and pent-up demand for clothing for those events.”

Prudence is also on the back of continued cost pressures and associated price rises. 

From the consumer’s point of view, Wolfson flagged inflation in essential goods, especially energy, and rising mortgage costs as fixed interest rate deals expire. And Next will have to increase its prices to take account of its own cost increases.

“If sales don’t grow, as we expect, and costs grow that’s going to be a challenge – but it’s something we can manage”

Lord Wolfson, Next

The retailer is still negotiating with suppliers but anticipates that cost price inflation on like-for-like goods will peak at approximately 8% this spring/summer season and come down to “no more than 6%” in the second half. Those increases will be passed on to customers. 

Factors expected to limit factory gate inflation as the year goes on include falling commodity prices, greater factory capacity and the devaluation of some currencies versus the dollar.

Next also envisages increases in UK operating costs, “mainly as a result of UK wage inflation and energy costs”.

The business has bought all of the coming year’s energy requirements “at rates significantly higher than the current year”. It will also benefit from savings, including on business rates.

Next profit guidance for the year ahead 2324

Wolfson says: “My sense is that the year ahead looks challenging because if sales don’t grow, as we expect, and costs grow that’s going to be a challenge – but it’s something we can manage. 

“Longer term, the news is slightly more encouraging. I think the fact that cost and price pressures are easing at the factory gate and freight prices are easing – all of that is hugely encouraging for 2024/25.

“So my sense is that next year’s going to be tough in the way we’ve set out, but we can begin to see light at the end of the tunnel in that the starting point in this whole crisis is the supply side. 

“If other industries and other people in our industry are seeing what we’re seeing, and cost and price pressures are beginning to ease as we move into 2024, I think the medium- to long-term outlook looks more encouraging than the short term.”

“The pace of transfer from retail to online appears to have eased. We’ll need to get to halfway through this year to get a proper read on whether we’ve reached an equilibrium”

Lord Wolfson, Next

One factor that remains unclear is how the balance of sales between online and stores will play out after the volatility of the last few years. Stores suffered and online surged as lockdowns were imposed, then the trends shifted as the pandemic receded.

Wolfson says: “I don’t know is the honest answer. What we’re definitely seeing is that the pace of transfer from retail to online appears to have eased.

“It’s too early to say that it’s reversed because a lot of it is about the comps last year. We’ll need to get to halfway through this year to get a proper read on whether we’ve reached an equilibrium between online and stores.”

Despite the circumspection about the coming year, the City took heart from Next’s update, with the retailer’s shares up 7.3% on Thursday. 

Next has a habit of underpromising and overdelivering but if, as Wolfson points out, other retailers are observing the same trends as he is, this time next year the outlook for the industry may be much brighter.