NEXT, UK Retail Point to Diverging Trends

The UK fashion brand NEXT saw its results above expectations, but the broader retail sector for the UK is expected to decline.

Record High Profits for NEXT

UK fashion brand NEXT recently reported its earnings, significantly exceeding projections. The company grew profit in what its Chairman acknowledged as a challenging economic environment. The NEXT report records annual profits and forecasts further profit increases in the coming year. With UK wages rising faster than inflation, executives remain confident that customer footfall will hold steady as the company passes on lower manufacturing costs to its selling prices. From NEXT's perspective, the domestic consumer outlook appears benign for now.

However, the sentiment might not extend to the wider UK retail sector. According to the Office for National Statistics, UK retail sales were flat month-on-month (MOM) in February. However, the three-month growth rate declined 0.4%. While an upward revision to January's figures provided some optimism as wet weather boosted online clothing purchases, retail sterling sales rose 0.2% (versus an expected decline of 0.1%), potentially implying inflationary pressures have not been fully alleviated. Overall, the UK retail industry may be poised to slip back into decline after a brief period of stability.​

Positive Consumer Trends or a Temporary Bump?

Analysts suggested that rising retail figures in the year's first two months indicate that UK consumers may be adjusting to high inflation. Consumer price growth has moderated recently, leading to a near-unanimous vote at the latest Bank of England (BOE) meeting to hold interest rates, breaking a streak. After the decision, BOE Governor Andrew Bailey reiterated that future cuts remain "in play" and that markets reasonably expect easing. Lower rates could provide extra relief for consumers, especially with online shopping's rising popularity.

However, the Office for National Statistics noted that fuel sales may have dropped because prices climbed, pushing UK consumers to forgo travel and prioritise essentials. An optimistic view of January's sales increase overlooks the one-off impact of poor weather driving clothes purchases due to need rather than confidence-driven choice. Indeed, UK consumer sentiment stalled in March. The British Retail Consortium reported that February retail sales grew at the slowest yearly pace in eighteen months, with spending climbing slower than inflation. For other retailers to replicate Next's success, they may need to pass cost reductions through lower prices as UK shoppers increasingly hunt online for better value.​

NEXT Targeting 1000 GBX Next?

NEXT could be targeting the 1000 GBX mark next, a psychological threshold supported by the measured-move method. Specifically, breaking above the falling flag formation that concluded at 4300 GBX, NEXT may extend upwards the round barrier should bulls manage to maintain 8680 GBX. Only a movement under that support would risk opening the path towards the round 8000 support.

Key Takeaways

UK fashion brand NEXT reported record-high profits that beat expectations, though broader UK retail sales are expected to decline again. While NEXT executives are confident that demand remains resilient as factory price reductions are passed onto consumers, most analysts believe NEXT's success may be a one-off, and UK retail spending growth is slowing relative to inflation. This may suggest that consumers focus on essentials in the current economic environment.​