Wednesday preview: Next's festive trading update to set the retail tone

Wednesday will see a post-Christmas update from Next as the first trickle of news from the retail sector before the floodgate opens in coming weeks.

Among the macroeconomic news, there will be a UK construction industry survey from IHS Markit for December, coming a day after a disappointing manufacturing report.

Although heavy snowfall across much of the country in early December is likely to have hampered the amount of work, the market consensus for the construction purchasing managers index to show no change from the reading of 53.1 the month before.

As well as poor weather, economists at Pantheon Macroeconomics saw other reasons to estimate a fall to a PMI of 52.0 for December. "Uncertainty about the long-term outlook for the economy due to Brexit also is continuing to depress demand in the commercial and civil engineering sectors."

Traders will also be looking further afield for news to trade, including minutes from the most recent US Federal Reserve rates meeting after interest rates were increased by 0.25 percentage points in December. The minutes will be closely read for hints about the number of further rises in rates this year under the new chair Jerome Powell.

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The festive weeks are crucial for Britain’s retailers, many of which take as much as a quarter of their total turnover in the run up to and just after Christmas, then provide investors an update on trading in the new year.

Wednesday's trading statement from Next will kick off this key period for the retail sector, with the following week beginning with an update from AO World, followed by Morrisons and Majestic Wine on Tuesday, then Wednesday's reports from Sainsbury, Ted Baker, Shoe Zone and Gear4music, followed by a busy Thursday with updates from Tesco, Marks & Spencer, Boohoo, Moss Bros, Mothercare, Debenhams and Dunelm, with the week closing with Booker and B&M European Value on Friday. Yet more will follow later in the month.

Traditionally the first out of the blocks with its Christmas update, last year Next's trading statement set a grim tone for the sector in 2017 with a warning about the drag from rising inflation on consumer spending, as well as a warning about sales and profits due to the cyclical slowdown in spending on clothing and footwear, together with the structural changes in the industry from online shopping.

If Next has struggled through the festive period it does not bode too well for the rest, said analyst Laith Khalaf at broker Hargreaves Lansdown, though on other side of the coin signs of a better than expected performance could lift spirits across the sector.

"Customers shifting from the high street to the web presents Next’s Directory division with an opportunity, but the rise of online-only players like Boohoo and ASOS means picking up online sales is no formality, while more traditional retailers are also upping their digital game," Khalaf said. "We’ll be interested to see what impact recent upgrades to Next’s mobile and online offerings have had on this part of the business."

"With online taking share and in-store sale in reverse, it may seem odd for Next to continue opening new stores. However CEO Lord Wolfson reckons the costs can be recovered within two years and that physical stores are actually complementary to growing online sales because they offer customers a convenient location for collection and returns."

Next's third quarter update in early November saw the FTSE 100 group report 1.3% growth in full price brand sales, up from 0.7% in the second quarter and down from 3.0% in the first.

The divisional split for the quarter showed shop sales down 7.7% and Directory, which is mostly online these days, up 13.2%.

Wolfson admitted week-to-week sales volatility was making it "very hard to determine any underlying sales trend", so could only modestly adjust full year guidance, with full price sales expected to be similar to the year-to-date decline of 0.3%.

The mid-point of profit before tax guidance was kept at £717m.

Broker Numis noted that market data for November suggests that clothing sales were slightly lower on a like-for-like basis, including online.

More recent news indicated LFL store sales in the week ending Sunday 24 December 2017 were 5.3% higher this year than a strong equivalent week last year. According to the BDO High Street Sales Tracker fashion store sales rose by 3.9% on a LFL basis, while footfall across the sector was 10% high in the week.

Online sales were notably strong, up nearly 40%, with online fashion sales rising 32.5% compared to last year, making it the second best week of 2017 with only one week remaining.

Wednesday January 03

INTERNATIONAL ECONOMIC ANNOUNCEMENTS
Construction Spending (US) (15:00)
Unemployment Rate (GER) (09:00)

TRADING ANNOUNCEMENTS
Next

INTERIM DIVIDEND PAYMENT DATE
De La Rue, Rolls-Royce Holdings

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