Next upgrades sales and profit forecast

Fashion retailer Next has upgraded its forecasts for full-year sales and profits after seeing "encouraging" trading over the past three months.

While the retail environment remained tough, Next said its prospects appeared "somewhat less challenging than they did six months ago".

Next now predicts full-year profits of £687m-£747m, compared with its previous estimate of £680m-£740m.

Its forecast came as it reported a 9.5% fall in half-year profits to £309.4m.

Next also said it had not been affected as much as it feared by the fall in the value of the pound following last year's Brexit vote.

It had originally said prices were set to rise by 5% - as the weaker pound pushed up the price of imports - but it said excess capacity in the clothing manufacturing sector meant it had managed to negotiate better terms.

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Next also predicted that price inflation next year would be lower, as the one-off Brexit devaluation worked its way through the system. It now expect prices to rise by no more than 2% in the first half of 2018, and no price rises at all in the second half.

Shares in Next jumped 12% in early trade, making them the biggest riser on the FTSE 100 index.

The retailer admitted that the first half of the year had been "difficult", but said sales and profits for the period were in line with its expectations.

Sales growth at Next's online Directory business helped to offset falling sales at its High Street shops.

The retail business, reported an 8.3% fall in sales for the six months to 29 July and operating profits sank by a third to £89.5m.

However, its Directory business reported a 5.7% increase in sales, with profits up 6.3% to £217.1m.

Next is now forecasting that its growth in full-price sales - which excludes discounted clothing - will be between -2.0% and 1.5% for 2017 as a whole, compared with its previous estimate of between -3.0% and 0.5%.

Next chief executive, Lord Wolfson, said: "The wider economic environment, clothing market and High Street look as challenging as ever, and we do not underestimate the task of managing our stores through a period of prolonged negative like-for-like sales.

"Nevertheless, we believe our stores will remain cash generative for many years to come and represent an important asset for the group."

He added that improvements the company has made to its online business were beginning to "bear fruit".

The retailer is also experimenting with adding concessions to its stores, in an attempt to attract more shoppers.

It said the refit of its store in the Arndale centre in Manchester gave it the chance to try out several types of concessions, including a Prosecco bar, restaurant, hair salon, barbers and children's event space.

However, Neil Wilson, senior market analyst at ETX Capital, said investors would be wondering when Next is going to rethink how many stores it needs.

"Within 10 years 72% of the group's leases by value will have expired," Mr Wilson said.

"This gives it flexibility to start managing down store volume as required and rationalise the footprint so it better complements Directory. Currently over 50% of online orders and 80% of returns are fulfilled through stores. But Next should be doing more here - fewer, smaller and leaner stores might be where the future lies."