Next surprise trading update reveals warm weather sales boom

By

Sandra Halliday

Published
Jun 19, 2023

Unscheduled trading updates are usually cause for alarm. But Monday lunchtime saw one from Next and given that this is one of the most successful fashion retailers in the UK, it's unsurprising that it actually contained good news, not bad.

The retailer said “trading in the last seven weeks has been materially better than the guidance we issued in May and we are updating the market accordingly”.

Just how good has trading been? “Full-price sales in the first seven weeks of the second quarter were up 9.3% versus last year,” the company said. “This compares to our guidance of -5%. In the period, we have beaten our full-price sales estimates by £93 million. We are upgrading our full-price sales guidance for the full year by £137 million and our full-year profit guidance by £40 million to £835 million”.

Revising guidance from -5% to +9.3% is undeniably impressive. So what are the reasons for the changed outlook? 

Well, the sudden and late arrival of warmer weather in the UK has been key. “The onset of warmer weather has made a significant difference to our performance, particularly coming after a wet and cold April,” it said.

And while inflation hasn't been good for the retail sector generally, it can have some surprising upsides. “In an inflationary environment, annual salary increases deliver a significant uplift in real household income at the time they are awarded,” Next said. “For example, during April annual inflation was running at 8.7% and monthly inflation was 1.2%; if an individual received a pay rise of 5%, then their real income would have risen by 3.8% in that month. We do not think it is a coincidence that sales stepped forward so markedly at a time of year when many organisations make their annual pay awards”.

But there was a slight sting the tail. The company added that “if recent pay rises and the sudden change in weather have indeed contributed to the current over-performance, then it is reasonable to expect that the effect will diminish over time because ongoing inflation will slowly erode the positive effect of annual pay increases. This is why we are not anticipating the current performance to continue at the same level going forward, albeit we have moderately improved our guidance for the rest of the year”.

Looking across the year, Q1 sales were down 0.7% and Q2 so far is up almost 10% as mentioned, despite an earlier gloomy prediction of a sales fall. For the rest of the year, the company had been predicting that sales would be down just over 1%, but it's now operating on the assumption that they’ll rise by 0.5%. This means that guidance for the full year has been revised from a drop of 1.5% to an increase of 1.4%. We’ll know more in early August when the company delivers its Q2 figures.