Next has raised its annual profit forecast after sales were boosted by the warm weather and people buying outfits for weddings and other social events, but warned of a slowdown in the coming months caused by the cost of living crisis.
The clothing and homewares chain said sales of full-price items rose 5% in the three months to July 30, compared with the same period a year earlier. “Many product trends have returned to pre-pandemic norms: lockdown winners such as home and sportswear retreated, while formalwear returned to favor,” Next said.
However, the company said sales had been boosted by an unusually warm summer, but added that the impact of high inflation on consumer spending was “likely to worsen in the second half”. It increased its prices in the first half of the year by 3.7%, and plans further rises of 8% in the second half – 6.5% for fashion and 13% for homeware.
Sales were better than expected because of the hot spell in June and July, and because of a “marked return to formal dressing”, driven by an increase in social events. The sales performance prompted Next to raise its full-year profit estimate by £10m to £860m, which, if correct, would be 4.5% higher than last year.
Next stores have also benefited from the closure of a number of competing outlets in the last three years, the company said, adding that sales were 4.7% higher than pre-pandemic levels.
The chain, which is considered a bellwether for the UK economy, does not expect its recent sales performance to continue into the second half of the year as customers rein in spending. Next is sticking to its sales growth forecast of 1% for the rest of the year.
The company said the return rates on items had gone up again and were close to pre-pandemic levels at 42%. Far fewer customers returned products during the pandemic, when homewares, children’s clothes and sportswear were popular. Such items tend to be returned less often.
Online sales fell 11.1% in the first quarter compared with the same period last year, when Next stores were closed during a Covid lockdown, and edged up 0.2% in the second quarter. However, compared with pre-pandemic levels, online sales were up 44% in the second quarter, suggesting they will continue to grow in the long term.
Richard Lim, the chief executive of the Retail Economics consultancy, said: “These are solid results against a backdrop of fiercely challenging trading conditions. The business quickly reacted to shifts in consumer trends, many of which have reverted closer to pre-pandemic norms as many of us returned to the office and enjoyed a summer of social events.
“However, the tone is one of opportunistic fortune and caution for the future. As the summer draws to a close, the cost of living crisis will clamp down hardest for households across the country. Consumers will look to delay, trade down and cancel some purchases altogether as the rising cost of essentials erodes any spare cash they have left at the end of the month.”
Next shares rose 2%, making the retailer one of the biggest risers on the FTSE 100 on Thursday morning.