Next posts a fall in profits in “challenging and volatile” trading environment

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Announcing a fall in profits this morning, Next said that trading since its July sale had been "challenging and volatile".

The figures

Next's pre-tax profit fell 1.5 per cent to £342.1m, down from £347.1m a year earlier. It was weighed down by profit falls at Next Retail and Next Brand which dropped 16.8 per cent and two per cent respectively.

The company's group sales rose 2.6 per cent year-on-year to £1.96bn in the six months to July, from £1.90bn a year earlier. Next Retail sales rose 0.1 per cent during this period, while Next Brand swelled three per cent and Next Direction jumped seven per cent.

Why it's interesting

In March, Next slashed full-year estimates and warned this year could be its toughest since 2008. Chief executive Simon Wolfson pointed to slowing wage growth, as well as "uncertainty in the global economy".

Next and other retailers are now having to contend with a rising wage bill due to the introduction of the national living wage — M&S has been cutting staff premiums to deal with the changes and John Lewis announced this morning that it will be losing staff.

What Next said

The company said in its report: "There has been some talk of a general retail bounce in July and whilst Next did enjoy very strong sales in July, this was driven by a much larger end-of-season sale. Next's stock for the end-of-season sale was up 30 per cent on last year which increased both footfall and sales.

"Full price sales in July remained subdued, so we do not believe that July trading represented any change in underlying consumer spending patterns. Trading since July, which to some extent may have been affected by the sale, has remained challenging and volatile."

What the analysts said

Richard Lim, chief executive of Retail Economics, said:

Retailers are facing rising costs resulting from the collapse in sterling, higher wages through the implementation of the National Living Wage and rising rates which will all bear down on profitability.

In fact, the suggestion that passing on rising costs to consumers will be less damaging than taking a hit on profit margins is very telling.

Freddie George, analyst at Cantor Fitzgerald, said:

We are becoming concerned that the brand has lost its edge against some of the mainstream competitors and is being impacted by a more competitive and difficult market.