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Next raises profit guidance but warns higher taxes will weaken spending

Next Boosts Profit Outlook Amid Warnings of Tax-Induced Spending Squeeze

In a move that underscores the resilience of Britain's high street amid economic headwinds, fashion and homeware retailer Next has upgraded its annual profit guidance for the second time this year. The company, a bellwether for the UK retail sector, now anticipates pre-tax profits to reach approximately £980 million for the full year, up from its previous forecast of £960 million. This optimistic revision comes on the back of robust sales performance in the third quarter, particularly driven by strong online demand and a rebound in in-store shopping. However, the announcement was tempered by a stark warning from Next's chief executive, Lord Wolfson, who cautioned that impending tax hikes could dampen consumer spending and pose risks to the broader economy.

The upgraded guidance reflects a 7.6% rise in full-price sales during the third quarter, surpassing analysts' expectations and highlighting Next's ability to navigate a challenging retail landscape. Sales growth was particularly buoyant in the company's online division, which continues to benefit from investments in digital infrastructure and a seamless omnichannel experience. In-store sales also showed signs of recovery, buoyed by a successful autumn/winter collection that resonated with cost-conscious shoppers seeking value amid rising living costs. This performance builds on Next's half-year results, where profits climbed 7% to £452 million, fueled by overseas expansion and the acquisition of brands like FatFace and Reiss, which have diversified its portfolio beyond traditional clothing lines.

Lord Wolfson, known for his forthright commentary on economic matters, did not mince words about the potential pitfalls ahead. He pointed to the recent Budget announced by Chancellor Rachel Reeves, which includes a £40 billion package of tax increases, notably a rise in employers' national insurance contributions from 13.8% to 15% starting next April. This measure, aimed at plugging a fiscal black hole, is expected to add billions to business costs across the UK. Wolfson argued that these changes could lead to higher prices for consumers, reduced wage growth, and ultimately weaker disposable income, creating a "drag on consumer spending." He emphasized that while Next has managed to absorb some cost pressures through efficiencies, the cumulative effect of higher taxes, alongside persistent inflation and energy costs, could erode the fragile recovery in retail.

This warning echoes concerns rippling through the business community following the Budget. Retailers, already grappling with the aftermath of the Covid-19 pandemic and supply chain disruptions, fear that increased national insurance will force them to pass on costs to customers or cut jobs. The British Retail Consortium has estimated that the tax rise could add £7 billion to the sector's annual bill, potentially leading to store closures and reduced investment. For Next, which employs over 40,000 people in the UK and operates more than 500 stores, the implications are significant. Wolfson highlighted that the company might need to reassess pricing strategies, potentially increasing the cost of items like coats, dresses, and home furnishings to maintain margins.

Delving deeper into the numbers, Next's third-quarter update revealed that total sales, including those from its credit arm and international operations, grew by 8%, with overseas markets contributing a healthy 12% uplift. The company's Total Platform, which allows third-party brands to sell through Next's website, has been a key growth driver, generating additional revenue streams without the need for heavy capital outlay. Analysts at Shore Capital praised the results, noting that Next's disciplined approach to inventory management and cost control has positioned it well against competitors like Marks & Spencer and Primark, which have also reported mixed fortunes in recent months.

Yet, the tax warning injects a note of caution into what would otherwise be a triumphant narrative. Wolfson, a Conservative peer who has previously criticized government policies, drew parallels to historical economic missteps, suggesting that excessive taxation could stifle growth at a time when the UK economy is showing tentative signs of recovery. Gross domestic product (GDP) grew by 0.6% in the second quarter, but consumer confidence remains fragile, with households squeezed by mortgage rates, food inflation, and utility bills. The Office for Budget Responsibility (OBR) has forecasted that the Budget's measures could reduce GDP by 0.1% in the short term, with knock-on effects for employment and spending.

Next's outlook for the crucial Christmas trading period remains cautiously optimistic. The company expects full-price sales to rise by 3.5% in the fourth quarter, assuming no major disruptions from weather or geopolitical events. However, Wolfson flagged risks from global uncertainties, including the ongoing conflicts in Ukraine and the Middle East, which could exacerbate supply chain issues and inflate costs for imported goods. Domestically, the retailer is preparing for potential shifts in consumer behavior, with more shoppers turning to budget options or delaying purchases amid economic uncertainty.

This announcement has broader implications for the retail sector and the UK economy at large. Next, founded in 1982 and now a FTSE 100 stalwart with a market capitalization exceeding £10 billion, often serves as a proxy for high street health. Its shares rose modestly in early trading following the update, reflecting investor confidence in its core operations but tempered by the tax concerns. Competitors are watching closely; for instance, JD Sports and Frasers Group have also voiced apprehensions about the Budget's impact, warning of higher prices and reduced consumer demand.

Looking ahead, Next plans to continue its strategy of bolt-on acquisitions and international expansion to mitigate domestic pressures. Recent deals, such as the increased stake in Reiss, have bolstered its premium offerings, appealing to a more affluent customer base less sensitive to price hikes. The company is also investing in sustainability initiatives, like eco-friendly fabrics and reduced packaging, to align with evolving consumer preferences and regulatory demands.

In summary, while Next's raised profit guidance is a testament to its operational prowess and adaptability, the specter of higher taxes looms large. Lord Wolfson's candid assessment serves as a reminder that even successful businesses are not immune to macroeconomic forces. As the UK navigates a period of fiscal tightening, the retail giant's performance will be closely monitored as an indicator of whether consumer resilience can withstand the mounting pressures. For now, Next remains a beacon of stability in a turbulent sector, but the coming months will test its mettle against the twin challenges of opportunity and adversity.

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Read the Full thetimes.com Article at:
[ https://www.thetimes.com/business-money/companies/article/next-raises-profit-guidance-but-warns-hihger-taxes-will-weaken-spending-tlq78srpp ]