Next has reported another profit warning, is the sell-off now overdone? Possibly.
Next reported a 0.2% decline in total sales for the first quarter. Full price sales fell 0.9%. Next Retail's total full price sales fell 4.7%, offset by 4.2% growth in Directory. Given new space contribution of 1.6%, this is a poor report.
Management point at colder weather in March and April arguing that sales will improve with the weather. Guidance is reduced and widened on the possibility "of weaker underlying demand for clothing and a potentially wider slow-down in consumer spending". Full price sales guidance is now -3.5% to +3,5% with Group PBT between £748m-£852m.
Let's take a step back: is it likely that consumer spending is slowing down? No...and management know this. Obviously, the last profit warning was a total disaster. Little had changed at that point, management were just being cautious. As it has turned out, this caution was justified but today's report tries to unwind some of this by referring to a red herring argument whilst nominally warning on profits.
If you need evidence of consumer confidence, look at the saving ratio. After years of deleveraging, consumers are (once again) almost spending more than they earn. Hardly a sign of low confidence. The actual problem for retailers isn't consumer confidence but changing footfall.
Aggregate high street footfall is tracking -2% YoY. Since 2009, footfall is off 15%+ on high streets. Footfall is falling quickest in the South East (i.e. this isn't caused by economic factors, the most affluent customers are leaving the high street quickest). Through last summer, footfall was actually down 6% YoY in the South East at one point. Let this sink in: down 6% in the most affluent part of the country...in just one year. The trend in shopping centres is the same, although South East centre traffic is basically flat. Only retail parks have avoided the woe with footfall tracking up 2% in aggregate.
No-one has really reported on this trend. Not journalists, not analysts, not investors, not companies. No-one. This is a secular factor causing mid-single digit headwinds for retailers (given the operating leverage in retail, this is massive) but everyone is still blaming the weather or consumer weakness. As far as I am aware, only Greggs got ahead of this trend and told investors they had to move locations from high streets. Most other retailers grew fat and lazy on the growth of…
