Retail group Next raised its profit guidance for the fifth time in seven months after ringing up £38 million more in sales than expected during the run-up to Christmas, but has warned of potential stock shortages in the coming year if Red Sea shipping problems continue.
Next joined furniture giant Ikea in cautioning that deliveries of goods could be delayed by attacks on ships in the Bab-el-Mandeb straight of the Suez Canal, leading to diversions adding thousands of miles to journeys. The attacks by Houthi rebels have forced container ships to travel around Africa rather than through the canal.
Chief executive Lord Simon Wolfson said delayed deliveries could "moderate sales" if the disruption continues for a prolonged period.
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“The extra sailing time eats into capacity in the network and we could begin to get constraints," he said. "At the moment it is an inconvenience, not a crisis.”
The warning came yesterday as the fashion and homeware retailer issued a trading update that one analyst described as "astonishingly strong". The group also said that it does not expect to raise shop prices in the coming year as easing cost pressures have ushered in a period of "zero inflation".
"The company points to a more benign outlook for the consumer than there has been for a while with better wage growth and zero sales price inflation," said Russell Pointon, director of consumer and media at Edison Group.
"However, the company is also alert to the risks from a weakening employment market, higher mortgage rates, and difficulties in the Red Sea which may affect the company’s supply chain – not least because some of its product is manufactured in Asia."
For the nine weeks to December 30 Next reported a 5.7% increase in sales compared to the same period a year earlier, far ahead of its previous prediction of 2% growth. In the last two weeks before Christmas, sales jumped by 10%.
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Profits for the full financial year to January 27 are now expected to come in at £905m, a 4% increase on last year. Full-year sales are expected to hit a record £4.78 billion.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said the numbers gave investors "plenty to be jolly about".
"Successfully keeping full-priced sales front and centre to avoid discounts is one of the reasons Next can boast some of the best margins in the sector," he said. "But it’s a tricky strategy to nail, especially alongside expanding its online presence and introducing third-party brands to its offering."
Next said the decision to raise its profit forecast came amid a consumer environment that looks “more benign than it has for a number of years”.
Costs have stabilised for the first time in three years, Next said, which should allow the group to "maintain zero inflation in selling prices". This is despite an expected rise in its wage bill in the coming year, including a £25m hit from the National Living Wage increase in April.
READ MORE: Retailer Next predicts year of 'zero inflation' in prices
Overall wage inflation is expected to come in at approximately £60m, without which Next said it would have been able to lower shop prices. As things stand, it will partly mitigate against higher wages by not passing through to customers all of the fall in factory gate prices.
Next said it performed particularly well online after it improved its service, with sales up by 9.1% in the three months to the end of December. Sales in stores rose by 0.6% after a fall in the previous quarter.
Lord Wolfson said the company traded better than expected after underestimating the effect of online service improvements in the wake of last year when deliveries were affected by an “extremely congested” warehouse and strikes at Royal Mail.
Mr Chiekrie at Hargreaves Lansdown said: "Unwrapping some of the headline figures, the group’s revenue growth came largely from its online channel where sales grew at near double-digit rates. Next still has a strong high street presence too, and growth here remains positive."
Shares in Next closed yesterday's trading nearly 6% higher, up 468p to an all-time high of 8,550p as the group forecast a 2.5% increase in full-price sales in the coming year.
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