John Lewis is Christmas winner as Next loses out
Next blames weather and discount frenzy for weak sales, while both retailers are cautious on outlook for high street in 2012
The fortunes of two of the UK’s biggest retailers diverged during the crucial Christmas trading weeks, with Next yesterday reporting “disappointing” sales at its high street stores while John Lewis trumpeted “outstanding” figures after the chain proved a magnet for gift buyers.
Next’s chief executive, Lord Wolfson, blamed a frenzy of unplanned discounting by rivals and the mild autumn weather for weaker than expected sales at its stores and predicted another tough year as turmoil in the eurozone and high unemployment hit consumer confidence.
“December was definitely disappointing, as we didn’t see a boost in the weeks that we saw a lot of snow last year,” he said, adding that after 2010 disruption perhaps Britons had “learned not to spend so much at Christmas”.
Analysts estimated that like-for-like sales in Next stores fell more than 5% in the last two months of the year, resulting in a worse than expected 2.7% decline for the six months to 24 December. That weakness was offset by a strong performance at home shopping arm Directory, where sales jumped nearly 17%. Together the divisions delivered growth of 3.1% which was in line with guidance given to analysts in November.
It was a rosier picture at employee-owned John Lewis, where like-for-like sales jumped 6.2% in the five weeks to 31 December. “Sales during the four weeks to Christmas Eve were outstanding,” said managing director Andy Street, flagging a new trading record of £133.1m set in the week before Christmas.
John Lewis’s “never knowingly undersold” pledge forces it to match rivals’ promotions, a promise that cost it dear in the first six months of the year when profits dropped 54.5% to £15.8m. Investors are keen to know if last month’s crop of profit warnings from quoted retailers was a sign that Christmas, when many retailers make the bulk of their annual profits, had been a washout. John Lewis’s clearance sale has attracted fewer customers than last year, when an impending VAT rise prompted a shopping spree, but the commercial director, Andrea O’Donnell, said the retailer was “genuinely very pleased” with its overall performance, with profit margins “level” with last year.
New ranges and successful TV advertising campaigns had helped to cement John Lewis’s reputation as a “one-stop shop” for Christmas gifts, said O’Donnell. “We are much more front-of-mind than three years ago, when we were seen as a traditional home retailer,” she said. “In uncertain times people are increasingly looking for retailers they can trust, particularly at Christmas, when they are looking at making a big purchase.” It also saw a strong performance from its home shopping arm, where sales jumped nearly 28%.
Many fashion stores started reducing the price of winter clothing in early December after the mild autumn left them with piles of unsold winter coats and boots. The strategy is likely to have hit Next, which refuses to discount before Christmas with 10% more stock going into its Boxing Day sale. Wolfson said some of the discounting by rivals appeared to be an “emergency and unplanned” reaction to the tough trading conditions. “One of the indications of that is the number of blanket discount days where everything had X% off,” he said.
Next is still on track to make annual profits of around £565m. Wolfson, however, was “more cautious” than three months ago about the outlook for sales in 2012 and predicted profits would be only “slightly up” in the coming year, sending its shares down 3.1% and pulling rivals chains down with it. “It will be another year of walking up the down escalator,” said Wolfson. Analysts are expected to make a small reduction to Next profit forecasts for the 2012-13 financial year.
Despite the December sales fillip, John Lewis is also cautious about the 2012 outlook. “We are forecasting for very low growth if not zero,” said O’Donnell.
Conlumino analyst Neil Saunders, analyst at Conlumino, said John Lewis was probably the “standout winner” in terms of trading but that Next deserved credit for delivering growth “profitably and largely at full margin”. “While John Lewis will have had a profitable Christmas, margins are likely to have been eroded by price matching and this will result in lower profitability for the full year and a reduced bonus pool for partners,” he added.