Next upgrades profit forecast as Christmas sales soar but warns on rising costs

Next, the retail industry benchmark, has raised its profit forecast for the year following a robust performance during the Golden Quarter. The FTSE 100 firm increased its expected profit by five percent as sales surged six percent in the nine weeks leading up to 28 December, nearly doubling its prior forecast of 3.5 percent.

Consequently, Next has revised its full-year profit before tax projection for the year ending January 2025 upwards by £5 million to just over £1 billion. To date, only a select few UK retailers, including Tesco, Marks and Spencer, and Kingfisher, have surpassed the £1 billion mark, as reported by City AM.

This year, both Next and JD Sports are anticipated to join this exclusive group, with Next's trading update indicating it will comfortably make the cut.

Next also adjusted its profit before tax forecast for the fiscal year concluding in January 2025, now expecting a ten percent increase year on year, with pre-tax earnings per share rising by 11.4 percent. Richard Hunter, Head of Markets at interactive investor, commented: "Next has delivered another classic update, following a stronger than expected Christmas showing."

He added, "In typical fashion, the group continues to exceed previous estimates, up its profit guidance for the year yet again while providing a cautious outlook for the year to come – a positive cocktail which investors have almost come to expect."

Next has warned of a £67m increase in wage costs in the upcoming year, following the Autumn budget which has escalated payroll costs for nearly all UK retailers.

The company also cautioned that UK growth is expected to decelerate "as employer tax increases, and their potential impact on prices and employment, begin to filter through into the economy".

To manage the cost surge, Next plans to implement "operational efficiencies and other cost savings", along with an "unwelcome" one per cent price hike on like-for-like goods.

However, it noted that this price rise is "still lower than UK general inflation".

Charlie Huggins, manager of the ‘Quality Shares Portfolio’ at Wealth Club, commented: "Calendar year 2025 is likely to be a bloodbath for the UK retail sector. The Autumn Budget means retailers will face a significant increase in employee costs and many will not be able to offset this. Next stands apart for its ability to do so, with its high margins, strong overseas growth and efficiency initiatives all helping it to preserve profitability."

He added: "Next has also warned it will need to put up prices in the year ahead. Many other retailers are likely to follow suit. This is likely to add to inflationary pressures and could encourage consumers to tighten their belts in 2025."

For the year ending January 2026, Next has projected a full-price sales growth of 3.5% and a profit before tax increase of 3.6%. The retailer also anticipates pre-tax earnings per share to grow by 6.7%, primarily driven by its share buyback programme.

This expected growth is set to be supported mainly by online and international markets. According to the company, in the lead-up to Christmas, online sales surged "at the expense" of retail store growth, while overseas sales growth "unexpectedly" picked up pace during the same period.

In 2004, retail stores made up 72% of the Group’s total sales and 70% of profit, but today, physical retail represents just 30% of sales and a mere 19% of profits.

"The overseas offering is one which holds up some interesting prospects. The group believes that international tastes in clothing are beginning to converge, not least of which is due to the increasing visual power, appeal and presence not just of the internet, but also the rise of streaming services which are now increasingly used by younger audiences."

Next has previously stated that the significant changes experienced during and after the pandemic have now largely stabilised, with 2024 marking "the start of a new phase in the company’s development".

Huggins stated: "Next has enjoyed a strong Christmas with its online business seeing an acceleration in sales growth in the fourth quarter, both in the UK and overseas. The year ahead is forecast to be more challenging, but Next still expects to grow sales and profit. It is a classic example of a strong business getting stronger."