Next raises profit forecast after Christmas sales surge; JD Sports issues profit warning

Introduction: Next raises profit forecast after Christmas sales surge; JD warns on profits

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The UK clothing chain Next has raised its profit forecast for the fifth time in seven months, as it reported better-than-expected sales for the Christmas period, while JD Sports Fashion blamed warm weather for a worse-than-expected performance and warned on profits.

The fashion and homewares retailer said sales rose by 5.7% year-on-year in the nine weeks to 30 December, better than its previous estimate of 2% growth. In the last two weeks before Christmas, sales jumped by 10%.

It upgraded its profit before tax estimate by £20m to £095m, up by 4% from last year. Of that, £17m came from the sales beat so far and £3m from an upgraded sales forecast for January.

Richard Lim, the chief executive of the consultancy Retail Economics, said:

These figures are astonishingly strong and they will set them apart from the competition. There’s a gap emerging between those retailers who have invested heavily in their digital proposition over the last decade with those who have not and Next is leading the pack.

Next went into the end of season sale with 12% less stock than last year. The retailer said:

On the face of it, the consumer environment looks more benign than it has for a number of years, albeit there are some significant uncertainties.

Next pointed to wages rising in line with, not more than, inflation, but said it does not intend to raise its selling prices in the year ahead.

Risks include a weakening employment market, as vacancy rates in the UK have already fallen over the last six months, and if this continues, is likely to result in increased unemployment. Fixed-rate mortgage deals will continue to expire forcing homeowners to refinance at much higher rates than they have been used to in recent years.

Next also mentioned that difficulties with access to the Suez canal (caused by Houthi attacks in the Red Sea), if they continue, are likely to cause some delays to stock deliveries in the early part of the year.

The largest cost increase will be wage inflation, estimated to be about £60m, due to inflation and the rise in the national living wage.

The sports retailer JD Sports didn’t fare as well, and blamed milder weather and a glut of promotions in the sports market. Like-for-like sales rose by 1.8% in the 22 weeks to 30 December, behind its expectations, while total revenue growth was 6%.

It lowered its estimate for profit before tax and adjusted items to between £915m and £935m, 10% below its previous guidance of £1.04bn.

Its new chief executive Régis Schultz said:

We have made good progress against our five-year strategic plan, delivering global organic revenue growth of 6% in the period, against very tough comparisons with last year, and opening over 200 new JD stores in the year. Our key markets have seen increased promotional activity during the peak trading season, driven by a more cautious consumer, but we continue to grow market share.

The agenda

8.15am-9am GMT: HCOB Services and Composite PMIs for eurozone
9.30am GMT: UK Mortgage approvals and lending for November
9.30am GMT: UK S&P Global/CIPS Services PMI final for December
1pm GMT: Germany inflation for December
1.15pm GMT: US ADP Employment change for December
1.30pm GMT: US Initial jobless claims for week of 30 December
2.45PM GMT: US S&P Global services and composite PMIs final for December

Key events

UK services activity stronger than thought

Britain’s service sector grew at a brisker pace in December than previously thought and optimism among firms hit a seven-month high, according to a survey.

The findings will be welcomed by Rishi Sunak who is expected to call a general election this year. Official data published last month suggested the economy could already be in a mild recession.

The final headline reading from the S&P Global/CIPS services purchasing managers’ index was 53.4 in December, the highest since June. It was up from 40.9 in November and a preliminary reading of 52.7.

Firms’ optimism regarding the outlook for 2024 improved for the second month in a row to its highest since last May, driven by hopes of a sustained turnaround in client demand.

The composite PMI, which combines the services survey with a weak reading of the manufacturing sector published on Tuesday, rose to 52.1 in December, the highest since May, and compared with 50.7 in November.

Next boss warns Suez Canal disruption could lead to slower sales

The Next boss Simon Wolfson has warned that disruption to shipments through the Suez Canal could lead to slower sales growth this year.

If attacks by Iran-backed Yemeni Houthi militants in the Red Sea continue throughout 2024, the clothing and homewares retailer’s sales growth would be affected, he said.

He told Reuters:

It will be a factor. If it continues, it will moderate sales growth in that we’ll have slightly less stock in the country than we would like.

After a stellar Christmas performance, Next is still at the top of the FTSE 100 with the shares up 4.8% to a record peak. JD Sports, on the other hand, which warned on profits this morning, is at the bottom of the index with the shares falling 23%.

JD is on track for a record daily fall, as the share price fall wiped nearly £2bn off its market value.

Spain’s services upturn picks up in December

The recent upturn in Spain’s service industries continued last month, with activity rising modestly for a fourth month in a row – perhaps because mild weather has lured Spaniards to the beaches, boosting spending.

A closely watched survey from Hamburg Commercial Bank showed the headline services PMI (purchasing managers’ index) at 51.5, up from 51 in November, signalling the highest growth since July. This was better than economists had expected.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said:

In contrast to the overall economic weakness in Europe, Spain’s service sector appears to be charting its own course. Rather than succumbing to the broader economic downturn, service providers in Spain are still on an expansion trajectory. While it is far away from a full-blown boom, the resilience is surprising, especially considering the subdued mood in the manufacturing sector and the lacklustre performance of the service sector in other parts of the eurozone.

This noteworthy performance may be attributed to two key factors: the new government’s commitment to extend measures supporting private households and, secondly, the warm temperatures in recent weeks possibly inspiring residents of Spain to head to the beaches, leading to increased spending.

People celebrate New Year's Day by taking a traditional first bath of the year at Sant Sebastia beach in Barceloneta neighbourhood, Barcelona, on January 1, 2024. — People celebrate New Year’s Day by taking a traditional first bath of the year at Sant Sebastia beach in Barceloneta neighbourhood, Barcelona, on January 1, 2024. Photograph: AFP/Getty Images

In France, inflation picked up slightly in December on the back of higher prices for energy and services.

A preliminary estimate from the national statistics office INSEE showed annual inflation rose to 4.1% from 3.9% in November, in line with economists’ forecasts.

Food price inflation slowed to 7.1% from 7.7% but energy prices rose by 5.6% year on year, faster than the 3.1% in November. Services inflation accelerated to 3.1% from 2.8%.

Next shares surge to top of FTSE 100, JD Sports plunges

Here is our full story on the contrasting fortunes of Next and JD Sports.

Next is the top riser on the FTSE 100 index, up by 5.4%, while JD Sports shares plunged by 17.7%.

The boss of JD Wetherspoon, Sir Tim Martin, said Dry January is turning into a “minor cult”, as pub chains across Britain prepare for a month of slow trade.

Martin told City A.M that people have “always overindulged at Christmas and then tried to compensate in January”.

To an extent Dry January has just given a name to what happened anyway. But perhaps it is turning into a minor cult, even so.

Overall, I’m not sure that pubs can legitimately advise people to start drinking in January if they don’t want to.

Many people try to give up alcohol during January, in a challenge encouraged by the charity Alcohol Change.

Founder and chairman of JD Wetherspoon, Tim Martin, who has been made a Knight Bachelor in the New Year Honours list, for services to hospitality and to culture. Photograph: Dominic Lipinski/PA

The outspoken founder and chairman of JD Wetherspoon, a prominent Brexit supporter, has just been awarded a knighthood for services to the hospitality industry.

Simon French, chief economist at Panmure Gordon, said Next’s “very decent” performance bodes well for the economy overall in the October to December quarter.

V decent trading update from Next plc – an important UK retail bellwether with full price sales +5.6% in 9 weeks to 30 Dec. Chimes with what retailers/hospitality have been saying about Dec – it rebounded from a soft autumn. Points to UK GDP in Q4 recovering from a soggy October

— Simon French (@shjfrench) January 4, 2024

Charlie Huggins, manager of the ‘Quality Shares Portfolio’ at Wealth Club, who owns shares in Next, said:

Next has pulled yet another rabbit out of the hat today, leading to a further upgrade to its full-year sales and profit guidance. It has demonstrated once again why it is considered one of the best run retailers around.

UK consumer spending appears to have defied gravity. A strong employment market and rising wages have helped cushion inflationary cost pressures, meaning consumers have continued to fill their Christmas stockings with Next’s wares, despite the gloomy economic headlines.

Next’s online sales were particularly strong reflecting better stock availability and excellent operational execution. This stands in stark contrast to other retailers like Superdry which have struggled in the prevailing economic environment.

The future for Next looks bright and is reflected in the group’s guidance to grow sales and profits again in the year ahead.

Next’s core proposition is clearly resonating with the UK consumer and is being augmented by intelligent acquisitions of brands like Fat Face. With inflation falling and wages rising, the economic picture also looks a lot less bleak than at the start of last year.

Next said it had done especially well online after improving its service. Online sales rose by 9.1% in the three months to the end of December following a decline in the previous three months.

Retail analyst Richard Lim added:

Their online sales were the driving force this Christmas but it was only made possible with the evolving value of their stores. Click and collect, showcasing products in shops, and returns to stores are all critical requirements for an increasing number of consumers.

Their clever acquisitions over the last few years are also beginning to reap rewards.

Next has been on a buying spree and recently acquired the casual clothing chain FatFace. It also snapped up Cath Kidston, the online furniture retailer Made.com and JoJo Maman Bébé since the height of the Covid pandemic.