Next Lifts Outlook as Strong Sales Offset Higher Iran Costs

Mannequins in the window of a Next Plc store in London, UK. Photographer: Chris Ratcliffe/Bloomberg Photo by Chris Ratcliffe /Bloomberg

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(Bloomberg) — Next Plc raised its profit and sales outlook as the British fashion and homewares retailer saw robust demand at the start of the year, even as estimated costs related to the conflict in the Middle East tripled.

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Pretax profit is expected to rise to £1.22 billion ($1.7 billion) this fiscal year, Next said Wednesday, slightly higher than its previous forecast. The retailer led by Chief Executive Officer Simon Wolfson also boosted its full-priced sales guidance to 5% growth for the year, up from 4.5% previously.

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Next plans to mitigate higher costs related to the Iran war including by raising prices — though it doesn’t foresee doing so in the UK. Additional full-year costs are expected to reach £47 million, compared to £15 million it set out in March.

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Shares of Next rose as much as 2.2% in early trading in London before trimming the gain. They had fallen 7.7% this year through Tuesday’s close.

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“This upgrade, we believe unexpected by the market, is complemented by a complete offset to Middle East cost increases and no signs of change to underlying consumer behavior,” Jefferies analysts including Frederick Wild said in a note.

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Strong Start

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Next said sales were particularly strong in the first five weeks of the year, before the conflict in the Middle East began. Trade in the region has also begun to recover as delivery services returned to normal. Overall full-price sales in the first quarter rose 6.2%, beating Next’s expectations of 4% growth.

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The retailer expects to start increasing prices by no more than 8% in some markets outside of Europe starting this month. It doesn’t plan to increase UK prices above the 0.8% rise that was already forecast at the start of the year.

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That outlook contrasts with the tone among other UK retailers. Grocer J Sainsbury Plc said last month profit may slip again this year with higher costs and shopper uncertainty due to the war. It joined market leader Tesco Plc in publishing a wide forecast range to reflect different scenarios around the war.

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The conflict is exacerbating strains in the UK economy, with companies already facing higher taxes and households grappling with inflation. That poses a dilemma for retailers over whether to pass on rising costs, especially given uncertainty around how long the conflict will last.

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Economic Pressure

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The British Retail Consortium has urged the UK government to help retailers keep costs down by easing energy bills and by delaying measures including a new packaging levy.

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Next, which has about 500 stores across the UK, has a track record of lifting guidance. Wednesday’s was the second this fiscal year.

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“While the market is familiar with profit upgrades from Next, this one stands out given ongoing sales and cost pressures stemming from the Middle East conflict,” Panmure Liberum analyst Anubhav Malhotra said in a note.

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It has been on an acquisitive streak in recent years, buying brands including FatFace, Joules, Cath Kidston and Made.com. In January, Next acquired shoe brand Russell & Bromley out of administration and last month it was reported to be among the suitors considering a takeover of handbag manufacturer Radley. 

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In the UK, non-Next brand items led the performance in the first quarter, with sales growing at more than double the rate of Next own-label online.

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(Updates with shares in fourth paragraph.)

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