Next Third-Quarter Sales Fall as Britons Cut Spending

Next Plc, the U.K.’s second-biggest clothing retailer, forecast a “tougher” end to the year after a sales decline worsened in the third quarter.

Sales at stores open at least a year fell 3.3 percent in the period ended Oct. 30, the Leicester, England-based retailer said today in a statement. That follows a 1.5 percent decline in the first half. The shares fell as much as 4.6 percent in London trading, the biggest intraday drop since Aug. 24.

Next expects the fourth quarter will be a “little tougher” and forecasts price rises at the top end of its range in the following three months as cotton costs increase, Chief Executive Officer Simon Wolfson said in a phone interview. The Confederation of British Industry said its retail-sales index fell for the first time in five months in October as the government’s planned spending cuts hurt consumer confidence.

“Sales were not quite as good as hoped,” Matthew McEachran, an analyst at Singer Capital Markets, said in a report. “With tougher comparatives to come, sales will probably fade down the guided second-half range over the course of the final quarter.” He has a “fair value” rating on the stock.

Next shares fell as much as 102 pence to 2,127 pence and traded at 2,138 pence as of 9:14 a.m. The stock has gained 2.6 percent this year.

Inflation Risk

“There is a risk inflation could nudge up if cotton prices continue to rise,” Wolfson said. The retailer today predicted retail prices will increase “at the top end” of its previous prediction of 5 percent to 8 percent in the first quarter. The price of the fabric accounts for between 30 percent and 40 percent of a garment, Wolfson said.

Cotton futures in Zhengzhou surged to a record for a third day today, and futures traded in New York reached the highest price since trading began 140 years ago.

The CEO said he is looking at new suppliers and new territories such as Vietnam, Bangladesh and southern India to secure cheaper prices.

Sales at the Directory catalog business rose 7.9 percent driven by online revenue and improvements to service such as next-day delivery. The retailer’s new online partnership with Sears Holdings Corp., the largest U.S. department-store chain, will be a small but profitable business, the executive said.

Next is adding sportswear ranges and “shoe rooms” to its existing outlets and opening home-furnishing stores to drive profit as consumers curb spending.

Top-Line Growth

“We are concerned at the lack of top-line growth,” Tom Gadsby, head of retail research at Matrix Corporate Capital in London, said in a report before the release. “Store growth in Next remains very remote, and for all Next’s earnings growth driven by aggressive share buybacks we believe that the company may struggle without some support from the top line.” He has a “reduce” rating on the stock.

The company maintained its guidance for its Next Brand to grow as much as 3 percent in the full year, though the fourth quarter has “tougher comparatives” and Next may not “maintain the current position at the upper end of the range.” Next Brand sales rose 2.2 percent in the third quarter.

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