Freddie George Comments: Next blames Britain’s mild winter for poor Christmas sales

 January 05, 2016, Yahoo Finance

LONDON (Reuters) – British clothing retailer Next reported disappointing sales in the run-up to Christmas, with the normally reliable company blaming unusually warm weather for a slowdown that is expected to have hit the wider sector. 

Next has been the strongest player in Britain’s clothing sector for a decade and its shares fell by up to 5.5 percent on Tuesday after it said full-price sales rose just 0.4 percent in the two months to Dec. 24. 

It also blamed poor stock availability and increased online competition, worrying for a company seen as having one of the industry’s slickest logistics operations and online businesses. 

The outcome compared with company guidance for second-half growth of 3.5-7.5 percent and third-quarter growth of 6 percent. The retailer said it now expects full-year pretax profit will be at the lower end of its forecast range, but also announced another special dividend payment. 

Next, which trades from more than 500 shops in Britain and Ireland, about 200 mainly franchised stores overseas and its Directory catalogue and Internet business, is the first major British retailer to report on festive sales and its poor performance augurs badly for rivals. 

Shares in Marks & Spencer , which is due to report on Thursday, by fell up to 2.1 percent, while Debenhams , dropped by as much as 2.5 percent. 

Unlike Next, which has a longstanding policy of not discounting before Christmas, those two retailers discounted pre-Christmas. 

Shares in Next have now lost more than 14 percent in the past month as the sector was battered by worries that the mild weather would hurt sales. 

Britain recorded some of the hottest November and December temperatures on record, depressing demand for winter clothing, and the retailer wwwuced a graphic showing the correlation between the warm weather and weaker sales. 

"The reality is that the vast majority of underperformance is about weather," Chief Executive Simon Wolfson told Reuters. 

"My guess is that most but not all clothing retailers will have been affected in a similar way," he said. 

However, he said the slowdown in growth in Next Directory’s sales to 2 percent from 6.2 percent in the third quarter was compounded by poor stock availability at its smaller brochures. Wolfson pledged to completely resolve that problem by Christmas 2016. 

But he also highlighted that online competition was getting tougher as industry-wide service propositions catch up with Directory. 

"It was always going to happen. That window of Next having such a big lead in terms of its evening service (order before 10 pm for next-day delivery) has now disappeared," he said. 

Thanks to good control of margins, costs and stock, along with healthy clearance rates in its post-Christmas sale Next expects to make a 2015-16 pretax profit of 817 million pounds ($1.20 billion), towards the lower end of previous guidance of 810-845 million pounds, but up 4.4 percent on 2014-15. 

"The disappointing Directory results are likely to resurrect concerns re the maturity of the Directory channel," said Cantor Fitzgerald analyst Freddie George, who has a "buy" stance on the stock. 

"Next, however, has an outstanding record and has achieved guidance even if it is at the lower end of the range in a volatile trading environment." 

The retailer, which has a well-established policy of returning surplus cash to shareholders through share buybacks or special dividends, also said it would pay another special dividend of 60 pence. It maintained its share buyback limit at 69.62 pounds. 

Next is budgeting for full-price sales growth in the 2016-2017 year of 1 percent to 6 percent, with profit growing in line with sales. 

($1 = 0.6793 pounds)