Several UK funds were hit after high street fashion retailer Next revealed that it had revised its full-year profit guidance downwards following weaker-than-anticipated sales in the run up to Christmas.
The retailer cut its pre-tax profit forecast to £680-780m, as full price sales fell by 0.4 per cent between November and Christmas.
It warned the full-year group profit forecast could increase or decrease by £7m depending on trade in January.
While the decline in full price sales was a better showing than the previous quarter’s 3.5 per cent year-on-year fall, the retailer had anticipated stronger performance after poor figures in 2015.
The FTSE 100-listed firm also revealed that figures for the end-of-season sale were 7 per cent lower than the previous year.
The share price fell by 18.02 per cent on 4 January, according to Google Finance, as investors reacted to the lower profit forecasts.
Next share price performance vs FTSE 100 over one month
Source: FE Analytics
“The fact that sales continued to decline in quarter four, beyond the anniversary of the start of the slowdown in November 2015, means that we expect the cyclical slow-down in spending on clothing and footwear to continue into next year,” it noted.
The slowdown was likely to be exacerbated by a squeeze in general spending as rising inflation erodes real earnings growth, the firm said. It also highlighted the potential impact of sterling’s devaluation and the rise in prices.
Chris Beauchamp, chief market analyst at trading firm IG, said: “A trading update from Next was always going to be interesting, but few thought it would be this interesting.
“The firm has issued yet another dire report, with sales below expectations and full-year profit downgraded. Unsurprisingly, this has resulted in heavy selling across the rest of the clothing sector, with nuances in branding, demographics and pricing cast aside.”
Helal Miah, investment research analyst at The Share Centre, said: “The tough conditions on the British high street have been reflected in the latest results from Next plc, a bellwether for the clothing industry.
“Management’s forward looking guidance wasn’t encouraging either. They cited a cyclical slowdown in clothing and footwear, a squeeze in general spending as inflation erodes consumer earnings, while the devaluation of the pound will impact on garment cost prices. Their guidance for the upcoming year has therefore also been downgraded.”
The analyst predicts that trading conditions are unlikely to improve anytime soon, noting that the only good news in Next’s results came from growing online sales and good translated earnings from international operations.
“The UK retail market is only going to get tougher and we therefore continue with our medium risk ‘hold’ recommendation for investors looking for a balanced return,” Miah added.
The impact was also felt by several UK fund managers who include the retailer among their top 10 holdings.
While UK equity funds have been buoyed by the strong performance of the FTSE 100 index over the Christmas period, those with exposure to the UK retailer have faltered.
Performance of funds with Next in their top 10 holdings over one month
Source: FE Analytics
Two funds include the retailer among their top five holdings – BlackRock UK Focus and Stonehage Fleming UK Equity Income – while a further three hold the stock among their top 10 holdings, according to data from FE Analytics.
The £208m BlackRock UK Focus fund, managed by Luke Chappell and Imran Sattar, had a 6.36 per cent of the portfolio invested in the retailer, according to the most recent factsheet (November 2016), the fourth largest holding.
According to data from FE Analytics, the BlackRock fund fell by 0.96 per cent between 3-4 January.
Performance of funds with Next in their top 10 holdings on 4 January
Source: FE Analytics
However, with UK consumer confidence at more subdued levels since last year’s referendum to leave the European Union, fund managers have shunned consumer discretionary stocks, limiting the effect of Next’s share price fall and the impact on the wider sector.