Next warns on no-deal Brexit and two-week lockdown but expects £365m profits

Tom Belger
·Finance and policy reporter
·3-min read
Undated file photo of a Next store. The clothes retailer has said the second quarter of the year was much better than it had expected as full-price sales dropped 28%.
Next reported better-than-expected sales. Photo: PA

Next (NXT.L) expects to make pre-tax profits of £365m ($473m) this year, despite the coronavirus crisis exacerbating UK high streets’ woes.

But it sounded the alarm on Wednesday over both a no-deal Brexit and potential two-week nationwide lockdown, saying it had seen no evidence clothing stores posed infection risks.

Next’s full-price product sales were up 4.1% year-on-year in the three months to 24 October, with a 23.1% surge in online sales offsetting a 17.9% decline in store sales.

Revenues came in higher than previously expected by the company, and the new profit forecast would be £65m more than expected just last month.

Home and childrenswear sales continue to over-perform, while demand for men’s and women’s formal and “occasion” clothing is still weak.

WATCH: Former Sainsbury’s CEO says COVID-19 not a ‘death knell’ for high streets

“Online sales remain strong, both in the UK and overseas. In Retail, out of town retail parks continue to perform better than high streets and shopping centres” said a trading statement published on Wednesday.

Revenues were lower when markdown sales are included, but still up 1.4% on last year’s levels. Lower sales at markdown prices reflected lower footfall in retail stores and “capacity constraints” in online warehouses, with Next choosing to “prioritise full price sales over our clearance operation.”

Next set out three scenarios for its fourth quarter, with the main forecast an 8% decline in full-price sales.

Further local lockdowns, customers starting to avoid busier shops in the run-up to Christmas, online warehouse capacity limits and increased self-isolation rates are expected to hit trade.

The worst-case scenario forecast is a 20% decline, if stores face two weeks of closures similar to restrictions in Wales across the rest of the UK. It would hit full-price retail sales by around £57m, according to Next.

Next shares have recovered much of their declines earlier this year. Chart: Yahoo Finance UK
Next shares have recovered much of their declines earlier this year. Chart: Yahoo Finance UK

“The biggest single unknown is whether England, Scotland and Northern Ireland will follow Wales' decision to shut non-essential retail shops,” the retailer said.

It also questioned the logic for including stores like Next in new restrictions.

“We have found no evidence of the virus being transmitted in our stores; nor are we aware of any studies that suggest clothing and homeware retail presents a significant risk of infection.”

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Next’s update included analysis of the impact of Brexit, including new tariffs due to come into force next year. Tariffs are likely to increase annual costs by around £13m, assuming pre-COVID sale levels, lower than the £25m previously anticipated.

It also urged the government to clarify what Brexit means for trade including new administrative processes in Northern Ireland and the Republic of Ireland, but said it was not expected to pose a “material threat.”

It said the biggest single risk from a no-deal Brexit was that ports “do not cope effectively with increased levels of administration,” but said its own systems were well prepared for such an outcome.

WATCH: Retailer Next rebounded in September as John Lewis struggled