Next crashes after shock warning

Next did OK in the year to 30 January, and some of the numbers were actually better than expected. But a warning from chief executive Lord Wolfson that business will be harder this year than at any time since the financial crisis had the shares down 13% Thursday. A slowdown at the fashion retailer's core Next Directory business is a huge worry, too, and company forecasts have been slashed.

"The year ahead may well be the toughest we have faced since 2008," warned Wolfson. "Our instinct, along with the volatility of our own sales, suggest that it would be sensible to prepare for a tougher economic environment. We are therefore revising our full year guidance for sales and profits in the year ahead."

It's still early in the year, so estimates could change - a cold winter would boost sales of winter woollies. But if Next's number crunchers are right, sales could fall by 1%, or grow by 4%. Profit before tax could be anywhere between £784 million, a 4.5% decline, and £858 million, up 4.5%.

That's a big downgrade from the last guess Next made in January. Then, the company tipped both sales and profit to grow by 1-6%. Consensus forecasts had been for profit of £851 million in 2016/17.

Worryingly, Next's credit business, a key driver of growth at Directory for years, is in decline. The drop in average number of credit customers accelerated to 4% last year and will likely be 5% in 12 months' time. That matters, because credit customers are estimated to be worth around five times the annual contribution of cash customers.

"We anticipate that it will take a number of years for our credit customer base to stabilise," warns Wolfson.

This grim forecast helped plunge Next shares to their lowest in over two years Thursday, taking their dive since December's record high to over 29%.

"Next has been pushing the Directory very hard over the past couple of years to compensate for the weakening of the credit business that has formed the basis for growth post 2010," says Haitong Securities analyst Tony Shiret. "Today sees the first real sign of unwinding of that strategy as management acknowledges that the model needs a fairly major re-build rather than over-stimulation in its legacy form.

"The issue for investors is whether this can be done easily or whether we are seeing a major re-positioning that will take a long time and involve a major investment."

For the record, Next made an underlying pre-tax profit of £821 million in 2015/16, up 5% and ahead of Haitong's estimate of £816 million. Revenue of £4.1 billion was in line with forecasts, while underlying earnings per share (EPS) of 442p beat estimates by 8p.

"We know that Directory is not fit-for-purpose and that it will take some time before it is re-set," says Shiret. "There is clearly a risk that even after this it will be playing catch-up. We expect this to overhang prospects in 2017/18 as well and so investors should, in our view, expect minimal or even negative EPS growth for two years."

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