Next shares drop as it warns of volatile market

Shares in bellwether high street retailer Next took a hit this morning as it revealed that "week by week sales volatility" made it difficult to forecast future sales and its Q3 retail sales had dropped more than the market had expected.

Its shares dropped by 8% at the start of trading to £45.52 as it announced that retail sales had dropped by 7.7% in Q3 (ending 29 October), a steeper drop than analysts had been expecting. However its Directory division had a strong quarter with sales up 13.2% leading to an overall growth in full price sales of 1.3%.

Looking forward the business said it was difficult to determine an underlying sales trend as the market was "extremely volatile" but it said it anticipated full-year full-price sales to be down -0.3% in line with its guidance. It said it expected profit for the year to be between £692m (down -12.4%) and £742m (down -6.1%), which represents a slight narrowing on previous forecasts.

"The guidance [...] implies that our fourth quarter will be down -0.3% and this may seem pessimistic compared with our performance in the third quarter (up +1.3%), particularly as we believe that our product ranges have continued to improve. However, as we highlighted in September, the third quarter last year was very weak, down -3.5% on 2015, whereas the Christmas trading period was only down -0.4%. So the comparative numbers are much more demanding in the last quarter," the retailer explained.

Analyst Conor Campbell at SpreadEX described this morning as "an ugly, ugly one" for Next and explained why a growth in Q3 sales had led to the share price slump. "While Q3 total sales grew 1.3%, an improvement on the 2.2% decline seen in the first half of the year, that was lower than the 2.9% growth expected as the firm warned on the ‘extremely volatile’ sector landscape.

"Similarly, though Directory sales rocketed 13.2% higher, retail (i.e. high street) sales plunged a far worse than estimated 7.7%, leading Next to revise its annual pre-tax profit forecasts from £687m-£747m to £692m-£742m. None of these were particularly bad figures; but the expectation created by the past few updates meant these Q3 results couldn’t help but disappoint," Campbell wrote in his update.