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UK fashion retailer Next has said it now expects to post a profit this year after recent trading had been “much better” than it had previously forecast but warned rising unemployment could hit sales.
The London-listed company said its new baseline scenario was that it would generate earnings of £195m with annual sales down roughly a quarter. Analysts had been expecting profit of about £120m, albeit with an unusually wide range of forecasts.
“The company is in a much better position than we anticipated three months ago: consumer demand has held up better than expected and our online warehouses have achieved much higher capacities than we thought possible,” it said in a second-quarter trading update on Wednesday.
But Simon Wolfson, chief executive, said the outlook was still highly uncertain. “As yet the real pain has not really been felt,” he said. “The furlough scheme is coming to an end which means unemployment may become more of an issue.”
The company has made provisions of £20m against a potential increase in bad debts in its credit business, although Lord Wolfson stressed this was based on expectations rather than experience to date.
Total sales were down 28 per cent in the quarter to July 25, better than the 41 per cent decline reported for the first quarter and half the 56 per cent drop the company had expected for the second.
In the most recent six weeks, the rate of decline in total sales had slowed to just 8 per cent.
Same-store sales were down 32 per cent, reflecting the fact that most of its shops were closed for about half of the period. But store sales were in decline long before Covid-19: in the same period last year, they fell 4 per cent.
Online revenues were 9 per cent higher in the second quarter, helped by the lower return rates typical of categories such as leisurewear. Next said its warehouses were operating at normal capacity after changes to shift patterns and the introduction of an earlier cut-off time for next-day delivery.
Its central scenario now envisages net debt falling by £460m, to £650m. The company has already suspended dividends and share buybacks, reduced forward orders and leased back its main warehouse to conserve cash.
However, Lord Wolfson said the company would not be claiming the £1,000 per employee bonus on offer from the government for retaining staff. Several other retailers, including Primark and John Lewis, have also said they will forfeit the potential windfall.
Next’s worst-case outcome envisages a fall of a third in sales, which would reduce profit to just £15m. In the best scenario, profit would be £330m. Last year, the company made more than £700m in profits.
Shares in Next were up 6 per cent by midday on Wednesday at £55.74, and have risen by more than 50 per cent from their April low point.
Richard Lim at Retail Economics said Next’s response to the pandemic had been “nimble” and reflected years of investment in its online operation, which accounted for more than half of sales even before the pandemic.
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