Next Says Retailer Can Offset Higher U.K. Wages via Price Hikes

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Next Plc said the U.K. fashion retailer can offset the U.K.’s minimum wage increase with price increases after reporting first-half profit that beat analysts’ estimates as the strong pound reduced garment costs.

Pretax profit advanced 7.1 percent to 347 million pounds ($533 million) in the six months through July, the company said in a statement Thursday. Analysts surveyed by Bloomberg expected 340 million pounds. The stock rose as much as 3.2 percent.

Next said the rise in costs related to the U.K.’s new living wage can be offset by increasing prices 1 percent. The retailer joins Whitbread Plc, the owner of Premier Inn hotels and Costa Coffee shops, which said earlier this week it will raise prices to offset higher wage costs.

“We believe that the burden is manageable,” Next said.

The stock traded 1.8 percent higher at 7,815 pence as of 8:37 a.m. in London. From April, all U.K. companies will be required to pay 7.20 pounds an hour to workers over the age of 25, compared with a current minimum wage of 6.50 pounds. By 2020, that will rise to 9 pounds an hour.

"The commentary on minimum wage may ease some fears," Simon Bowler, an analyst at Exane BNP Paribas, said in a note.

Retail profit margins widened to 14.9 percent from 14.1 percent in the year-ago period, helped by the stronger pound, which strengthened about 7 percent against the euro this year.

The company has outpaced a sluggish U.K. fashion industry and confirmed its full-year pretax profit forecast, which it raised in July to a range from 805 million pounds to 845 million pounds. Next

If annual wage inflation falls below expectations, the knock-on effect of keeping up a differential between employees’ and managers’ pay could potentially be harmful, Next Chief Executive Officer Simon Wolfson said in an interview. Increasing productivity to offset the 27 million-pound jump in wage costs can be achieved without cutting jobs, he also said.

The increased minimum wage is the latest challenge to British retailers, who are under pressure to attract and retain customers. Despite a recovering economy, only 47 pence of every extra pound in the pockets of U.K. consumers is going through the tills of retailers, Exane BNP Paribas said in a research note last week.