Next Sounds the Alarm About the UK Consumer |
As usual, Next Plc has defied the festive gloom and delivered a good Christmas, upgrading its profit outlook for the current fiscal year. The shares rose as much as 4%.
But dig a little deeper, and the real message here is the outlook for the next fiscal year to January 2026. For the broader British retail sector, it’s not an encouraging one.
Next Chief Executive Officer Simon Wolfson cautioned that UK growth was likely to slow, as the employer tax increases announced by Chancellor of the Exchequer Rachel Reeves in October — and their potential impact on prices and employment — begin to filter through to the economy.
Christmas didn’t turn out too badly for Next, although spending didn’t get going in earnest until close to the holiday. The UK held up, but this was driven by online sales and at the expense of its stores, where full-price sales fell 2.1% in the nine weeks to Dec. 28. Meanwhile, overseas sales were stronger than Next had expected in the run-up to the holiday. This helped the retailer increase its full-year pretax profit guidance by £5 million ($6.3 million) to £1.01 billion.
The real worry is the outlook for the UK consumer.
Next forecasts total UK full price sales growth of just 1.4% in the 12 months to next January, compared with an increase of 2.5% in the year to Dec. 28, 2024. Overseas online sales are expected to expand by a solid 14%. Even so, Next forecasts pretax profit in the year to January 2026 of £1.05 billion, slightly below the consensus of analyst expectations.
The biggest concern is the jobs market, with Next noting signs of weakening. For example, there were 50% more people applying for each vacancy in its shops over Christmas than in the year earlier.
Next faces a £67 million increase in wage costs in the year to January 2026. This comes from the increase in the amount employers contribute in National Insurance and also a lower earnings threshold at which they start paying the tax. A rise in the National Living Wage and the knock-on effect on pay at other levels will also add to Next’s wage bill. The reduction in the threshold at which businesses start paying National Insurance accounts for £20 million of the total increase, having a particular effect on the cost of part-time work in stores.
Next will be able to offset some of this through operating efficiencies and other cost savings. But it will have to increase prices by 1% to compensate for the remainder of the burden. This is manageable, given that factories are not raising their costs. Consumers are also buying fewer but slightly more expensive items. Not only does this make it easier to raise prices, but brings other efficiencies throughout its supply chain.
Yet if this level of price increase is repeated across the retail landscape, then inflation could go up. Analysts at Shore Capital estimate that food prices could increase by about 3% this year, compared with their previous expectation of 1.5% grocery inflation, as a result of the wage and tax increases. It was 3.7% in December, according to data provider Kantar. This in turn could feed into interest rates staying higher for longer.
There may be some compensation from Next’s customers having more money in their pockets from higher wages. But this will be little comfort if the jobs market weakens significantly.
The company is also one of Britain’s strongest retailers, with a muscular online arm, a developing overseas business and an ability to leverage its strong digital and distribution assets to serve other brands. It is also highly cash generative, with a surplus of £670 million in the current fiscal year, which it uses to invest and deliver returns to shareholders. And it’s consistently well managed by Wolfson. Many other chains are not so fortunate.
Wolfson has a history of guiding conservatively at the start of the year and upgrading that view as the seasons progress. Given the pressures faced by UK consumers this year, it might be tougher to outperform — even for the mighty Next.
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