Next raises profit guidance but warns UK growth will slow due to tax rises
Retail industry bellwether Next has upgraded its expected profit before tax by £5m after sales and growth exceed expectations during the Golden Quarter while it vies for over £1bn in profit, although it has warned its prices will tick up and national growth will slow due to wage costs.
It said that full price sales were up six per cent in the nine weeks to 28 December, nearly double its previous guidance of a 3.5 per cent rise in sales.
This retail “overachievement” added £27m to its bottom line, leading the retailer to increases its full year guidance for profit before tax in the year to January 2025 by £5m £1,010m.
To date, only a small number of UK retailers have exceeded £1bn – an elite class of Tesco, Marks and Spencer, and Kingfisher. This year, both Next and JD Sports are expected to pass the 10-figure milestone, with Next’s trading update an early sign that it will comfortably breeze into the club.
Next also raised its forecast for profit before tax for the year ending January 2025. It now expects the figure to be up ten per cent year on year, with pre-tax earnings per share up 11.4 per cent.
Higher payroll costs to push prices up
Next said it faced a £67m increase in wage costs in the coming year. The Autumn budget pushed up payroll costs for almost all UK retailers, which now find themselves having to pay more tax on their employees’ wages .
The retailer also warned that UK growth was likely to slow UK growth is likely to slow “as employer tax increases, and their potential impact on prices and employment, begin to filter through into the economy”.
Next said it would deal with the cost increase through a combination of “operational efficiencies and other cost savings”, as well as an “unwelcome” one percent increase in prices on like-for-like goods. It added that this price increase was “still lower than UK general inflation”.
Charlie Huggins, manager of the ‘Quality Shares Portfolio’ at Wealth Club, said: “Calendar year 2025 is likely to be a bloodbath for the UK retail sector. The Autumn Budget means retailers will face a significant increase in employee costs and many will not be able to offset this. Next stands apart for its ability to do so, with its high margins, strong overseas growth and efficiency initiatives all helping it to preserve profitability.
“Next has also warned it will need to put up prices in the year ahead. Many other retailers are likely to follow suit. This is likely to add to inflationary pressures and could encourage consumers to tighten their belts in 2025.”
Overseas and online to drive growth
For the year ending January 2026, it has forecast full price sales growth at 3.5 per cent, profit before tax at 3.6 per cent, and pre-tax earnings per share growth at 6.7 per cent, with the latter largely the result of its share buyback programme.
This growth will be bolstered primarily by online and overseas markets. The company said that in the run up to Christmas, online sales growth increased “at the expense” of growth in retail stores, while overseas sales growth “unexpectedly” accelerated in the run up to the holiday period.
In 2004, retail stores accounted for 72 per cent of the Group’s total sales and 70 per cent of profit. Today, retail accounts for 30 per cent of sales and just 19 per cent of profits.
Next has previously said that the significant changes which occurred during and post the pandemic have now largely stabilised, and that 2024 was “the start of a new phase in the Company’s development”.
Huggins said: “Next has enjoyed a strong Christmas with its online business seeing an acceleration in sales growth in the fourth quarter, both in the UK and overseas. The year ahead is forecast to be more challenging, but Next still expects to grow sales and profit. It is a classic example of a strong business getting stronger.
“Next has pulled another rabbit out of the hat this Christmas, beating its sales forecasts once again. More important for investors is the guidance for the coming year.”