High street stalwart Next has posted sales up 0.3% in the second quarter (ending 30 July) and has warned that customers should expect an increase in prices next year due to the slump in the value of sterling following June’s Brexit vote.
The modest sales increase was an improvement on quarter one when sales dropped 0.9%. Sales were buoyed this quarter by a strong performance from Next Directory which was up 5.7% and had benefited from growth in overseas sales while Next Retail was down 3.3%. Next said its summer clearance had gone well and performed slightly ahead of its expectations.
This is the retailer’s first financial announcement since the Brexit vote in June and it said it was too early to speculate on the long-term impact of the decision to leave the EU. Apart from a drop in sales in the immediate aftermath of the referendum it said it could see “no clear evidence of any appreciable effect on consumer behaviour“.
However due to the slump in the value of sterling the retailer did warn that higher prices could be on the horizon. Its CEO Lord Wolfson, who had been a leading voice in the pro-leave camp, had previously warned this would be the case and also voiced his concerns that a dramatic cut to immigration post Brexit would be detrimental to UK business.
Due to currency hedging in place until January 2017 the effect of any higher costs to manufacture goods (Next currently estimates these to be less than 5% on like-for-like goods), which may result in higher prices to the customer, would not be felt until next year.
There are some mitigating factors that may mean the cost impact may not be so great, such as the weakening of some Far East currencies against the dollar, increased efficiencies at new and developing sources of supply (Bangladesh, Cambodia, and Burma) and less capacity constraints and greater competition in more established sources of supply such as China.
Next has promised an update on the situation when it reports its next set of figures in September and has greater visibility of its Spring/Summer contracts.
Around €200m of revenue is generated in the EU and the business already has a fulfilment centre on the Continent, which it said could be expanded to handle all of its EU business should the cost of doing so from the UK become uncompetitive in future, but it said this was an “unlikely event”.
Moving forward Next said the trading picture was volatile on a week-by-week basis and dependent on the weather, which has been especially unfavourable to retailers this year. It is therefore budgeting for full price sales growth to be down in the third quarter but it may see some upside in the fourth quarter due to soft comparisons and, especially, if there is a cold winter.
Half year results will be announced on Thursday 15 September.