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Next warns on profits

Next has warned that profits for the year will be lower than expected, with the high street clothing retailer blaming warm weather in September and October.

The FTSE 100 high street chain claimed that "unseasonably" warm weather has led to sales in the last three months growing at half the rate it expected.

The warning from Next will send shivers through the high street. The retailer is traditionally one of the most robust in the sector and its performance has been remarkably consistent under chief executive Lord Wolfson.

The British Retail Consortium has already warned that UK retail sales fell by 0.8pc in September compared to the same month last year, the biggest decline since 2008. Retail analysts expect a similar fall for October when the figures are released next week.

Retailers are blaming the warm weather because it is dampening demand for their new autumn and winter collections, which include coats and jumpers.

The weather is likely to drag down sales for Marks & Spencer, which posts its interim results next week and is under pressure to deliver an improved performance in clothing.

However, analysts warned that the slowdown in Next sales may not just be down to the weather.
Nicla Di Palma at Brewin Dolphin said: This is consistent with the general commentary from the retail sector - people are not feeling the need to buy winter clothes. Whilst we believe that the weather has definitely played a part in reducing Next’s sales growth, we are also concerned that Next cannot continue to grow at double digit rates given its market share - 7.5pc in the UK. For example, smaller players - Ted Baker - reported strong growth despite the warm weather."

Shares in Next fell by 1pc following the trading update.

Next said that its sales in the last three months grew by 5.4pc, compared to initial expectations of 10pc growth.

This has led to the company cutting its forecast for annual pre-tax profits by 3pc to between £750m and £790m, compared to between £775m and £815m previously.

However, although Next has cut its forecasts, the lower guidance still means the company is expecting profits to grow this year by between 8pc and 14pc.

The company warned in September that it would be forced to lower its guidance for the year if the mild weather continued into October.

In its new statement, Next said: "On 30 September Next advised that we would reduce our sales and profit expectations if colder weather did not materialise during October. In the event October remained unseasonably warm and sales for the third quarter were up 5.4pc, which compares to our original expectation of 10pc.

"Whilst a cool August meant that the season started well, this was more than offset by much weaker sales in September and October.

"Given the volatility of current trading and the very strong fourth quarter performance last year, we have moderated our expectations for the fourth quarter this year."
Alistair Davies, analyst at Investec, said the read across for the rest of the retail industry is "not encouraging".

"Lower than anticipated full-price sales mean growth forecasts for peak are lowered, and we suspect this represents a risk across the industry of a highly promotional run-in to peak," he added.

David Alexander, consultant at Conlumino, said: "Given the obvious mitigating circumstances, it would be difficult to see this slightly disappointing period as anything more than a blip, with the retailer continuing to look a good bet for strong growth in the months to come."

Source : Graham Ruddick -

29 October 2014

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