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Next Sales Improve in Q2, Warns of Price Increases


British high-street clothing chain Next narrowed its sales guidance for the year Wednesday and warned that a weakening pound could push up the price of goods going forward.

The retailer revealed full-price sales inched up 0.3% in the second quarter ended July 30, helped by a 5.7% increase in Next Directory (catalog and e-commerce) sales. In addition, clearance rates were better than expected, which caused total sales—including markdowns—to rise 1.8% year-to-date.

“We went into the end-of-season sales with significantly more stock than last year, the sale has gone well and clearance rates have been slightly ahead of our expectations,” Next said.

With that being said, the retailer said trading remains “extremely volatile” and weather dependent, not to mention a weak consumer demand for clothing. To that end, the third quarter is expected to prove particularly challenging and Next is preparing for full-price sales growth to be worse than in the last quarter. However, business should pick up again in the fourth quarter, especially if the U.K. has a cold winter.

For that reason, Next now estimates full-price sales for the year to be between -2.5% and 2.5%, while earnings per share are expected to be in the range of -2.5% and 6.3%.

“Our wider than normal range reflects the continued uncertainty and volatility of consumer demand,” the retailer said.

While Next noted that it was too early to tell how Britain’s decision to leave the EU would impact consumer demand, the retailer said tariffs and other barriers to trade in continental Europe are unlikely to be any different because it already has a warehouse and fulfillment operation based there. This could be expanded in the event that fulfilling sales from the U.K. becomes less efficient.

The devaluation of the British pound is another story. Based on current exchange rates, Next said it expects costing rates to be around 9 percent worse next year than in 2016/17, while cost prices will rise by as much as 5 percent on like-for-like products.

However, a number of factors could mitigate this, including: the weakening of some Asian currencies against the U.S. dollar; increased efficiency and improving capabilities in new and emerging markets, such as Bangladesh, Cambodia and Myanmar; fewer capacity constraints and greater competition between Next’s traditional sources of supply, particularly China, and newer manufacturing regions.

The retailer will provide a further update in September when it will have greater visibility of spring and summer contracts.

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