Next profits slump but Morrisons growth shows resilience of retail

Added 15th September 2016

Next shares slipped 4.8% to 4960p Thursday morning as the Office for National Statistics unveiled healthy retail sales growth in August and Morrisons shares shot up 8.06% to 209.2p.

Next profits slump but Morrisons growth shows resilience of retail

Next posted a disappointing set of interim results after economic and cyclical factors made it “a challenging year” for the largest clothing retailer in the United Kingdom.

Although group sales were 2.6% ahead of last year’s figure, the British clothing company’s pre-tax profit fell by 1.5% to £342.1m.

Its retail division proved the least profitable component of the business, only generating £133.9m, down 16.8% from the year before.

Next’s half year results support a wider trend in consumer spending highlighted in the ONS’ retail sales report for the month of August.

Textile, clothing, footwear and household goods stores were the only retailers to experience a decrease in quantity of goods bought by shoppers compared with August 2015, in spite of lower prices. Consumers purchased 3.0% fewer goods in textile, clothing and footwear stores, bringing the amount spent down by 4.3%. Household goods saw a more modest dip of 0.5% in quantity bought year-on-year. 

Despite this, Cavendish fund manager Paul Mumford still views the sector as a good buying opportunity for the medium-term.

"Retail shares have understandably fallen back today on the results and outlook from Next, given its bellwether status for the sector,” he said. “With Sterling low and Brexit uncertainties looming, investors are inevitably colder on domestic importers. However, this makes the sector a good buying op for the medium term. Many retailers are fairly shielded from any short-term Sterling dip thanks to hedging and seasonal purchasing. And while Sterling may be under pressure now, it looks oversold. The picture could look very different in a year’s time - should the UK economy continue to hold up while the eurozone continues to struggle or deteriorate, Sterling could quickly regain its safe haven aura. At which point the momentum will swing back in favour of domestic brands.”

Total year-on-year sales growth in the UK retail sector was 6.2%, leading many analysts, including Hargreaves Lansdown senior economist Ben Brettell, to conclude that the vote to leave the EU appears to have had little impact on consumers’ willingness to spend at this stage.

“Retail sales held up well in August following a strong July – yet another piece of evidence which shows the economy has fared better than expected since June’s referendum,” said Brettell. “Furthermore July’s figure was revised upwards to 1.9%, marking the strongest July in 14 years. Sales fell just 0.2% between July and August, a much smaller drop than the expected 0.5%.

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