Warmer weather and pay rises for workers have increased sales at Next in recent weeks, prompting the clothing and homeware retailer to upgrade its profit forecast for this year.
The company, which has about 500 stores and is considered a good barometer of consumer spending, said in a surprise update that there had been an “over-performance” in sales over the past seven weeks, sending its share price nearly 5% higher and making it the top riser on the FTSE 100.
Next, which is helmed by its longstanding chief executive, Simon Wolfson, cited the warmer spell of weather – “particularly coming after a wet and cold April” – that had prompted people to update their wardrobes with summer clothing.
It said pay rises awarded to UK workers at the beginning of the financial year in April were also likely to have played a part.
The retailer said: “In an inflationary environment, annual salary increases deliver a significant uplift in real household income at the time they are awarded. We do not think it is a coincidence that sales stepped forward so markedly at a time of year when many organisations make their annual pay awards.”
Annual inflation remains high, having fallen to 8.7% in April, a smaller-than-expected decline. Nevertheless, April’s monthly inflation figure, comparing prices with March, stood at 1.2%. That prompted Next to argue that a worker given a 5% pay rise that month would get a 3.8% increase in real income, temporarily putting more money in consumers’ pockets.
Next said full-price sales from the end of April until mid-June were 9.3% higher compared with a year earlier, enabling it to beat estimates for the period by £93m. This compared with a 5% decline in sales predicted for the period in early May.
As a result of better trading, the company upgraded its full-price sales guidance for the whole year by £137m and its annual profit forecast by £40m to £835m.
The “materially better” trading at Next comes just weeks after it warned the cold and damp weather during early spring and the cost of living crisis had knocked its sales, and predicted this would continue.
Shares in other retailers including the Sports Direct owner, Frasers Group; Primark’s parent company, Associated British Foods; and the electronics retailer Currys also gained in response.
Emily Salter, lead analyst at GlobalData, said Next’s trading update showed that consumers had “continued to spend, whether supported by any remaining savings they built up during lockdowns or by the proliferation of buy now, pay later schemes” and that Next had been a beneficiary of this.
Next warned the impact of recent pay rises and the arrival of warmer weather would fade over time, as inflation remains elevated, eroding the effect of higher salaries. It said it did not expect its current performance to continue at the same level in the coming months.
Analysts at the US investment bank Jefferies said Next’s improved sales showed that “the combination of pent-up demand on seasonal items and the recovery of purchasing power through wage rises” was proving “more powerful a driver” for consumers than the impact of higher mortgage rates on homeowners, and the challenge of higher UK government borrowing costs.
Recent UK wage data from the Office for National Statistics showed growth in average regular pay, excluding bonuses, strengthened to 7.2% in the three months to April – the highest level on record, excluding the Covid pandemic.
The wage figures, combined with elevated levels of inflation, drove up yields on two-year UK government bonds – known as gilts – and reinforced expectations that the Bank of England will raise interest rates again on Thursday.
Next’s trading update “could also signal more enduring pressure on the gilt front,” Jefferies analysts said.
