Next Raises Guidance Again as Wage Gains Boost Shoppers

Next Plc raised its forecast for the third time in recent months as inflation-linked pay rises and better weather at the start of the summer prompted people to buy more clothes.

(Bloomberg) — Next Plc raised its forecast for the third time in recent months as inflation-linked pay rises and better weather at the start of the summer prompted people to buy more clothes.

Full-year profit will total £875 million ($1.08 billion), up from previous guidance of £845 million, the British retailer said. It follows previous increases in June and August as Next continues its ascent at a time when many other retailers are struggling with consumers’ spending power capped by the cost-of-living crisis.

Next’s latest upgrade follows a solid performance in the first six months of the year driven by strong sales in its core UK market and overseas, improved service and lower-than-expected costs, Next said. 

“Demand has been stronger than we were expecting, particularly overseas, and the initiatives we put in place to save costs in the business have gone much better than we were planning,” Chief Executive Officer Simon Wolfson said in a phone interview. 

Next stock was up 2% at 8:33 a.m. in London. 

The company, which is often considered a bellwether for the health of Britain’s retailers, said full-price sales in the second half are expected to rise 2%, compared with previous guidance of a 0.5% gain. 

Inflationary pressures will ease going into next year, Next said, adding that sales growth will also likely moderate as the boost from earlier pay rises begins to wane. 

“We underestimated the effect pay rises would have in the months close to when they were being awarded,” said Wolfson. “Inflation picks up each month by a small amount, so in the month you get your annual pay rise, your real wages move forward quite significantly.“

“The thing to be wary of is that as time goes on, the benefit of that wage increase begins to diminish as monthly inflation slowly erodes it,” he warned.

Inflation has recently slowed to the lowest level in 18 months in the UK, finally showing some relief for a country which has had the worst inflation problem among the Group of Seven nations for months.

What Bloomberg Intelligence Says:

Next’s powerful mix of stores, online and an improved fashion stance is resonating with shoppers and has driven pretax-profit guidance 10% ahead of January’s initial figure.

— Charles Allen. BI retail-industry analyst

Next 3.6% Profit-Guidance Lift Shows Its Fashion Success: React

Wolfson said warmer weather in early summer had also helped to drive Next’s fashion sales. 

“May and June were pretty much the perfect months for clothing retailers,” he said. “We got a wave of very warm weather right at the start of the summer clothing season.”

Other retailers are also faring better with Marks & Spencer Group Plc raising its outlook in August to predict profit growth this fiscal year.

Next is becoming a consolidator within the retail sector, snapping up rivals including fashion label Joules, homeware brand Cath Kidston and baby goods retailer JoJo Maman Bebe in the past 18 months.

Earlier this month, Next announced that it’s buying the 34% holding it doesn’t own in Reiss for £128 million, strengthening its control over the UK fashion house. 

A third upgrade from Next in the space of three months is impressive, said James Grzinic, an analyst at Jefferies, but added that Next has indicated that a softening labor market in the UK could weaken consumer demand in the next fiscal year. 

(Updates with CEO comments from fourth paragraph.)

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