Post-Christmas blues

06 January 2017. Published by Jeremy Drew, Partner, Head of Commercial

On Wednesday 3 January Next issued a profit warning which triggered a dive in the retailer's share price and revived concerns that 2017 could be a challenging year for some high street retailers.

Next's shares closed down 14% following the announcement. Other household names, such as Marks and Spencer and Debenhams, also experienced a fall in share price.

Next's full-price sales fell 0.4% in the 54 days to 24 December with the retailer’s traditionally popular post-Christmas sales down 7% compared with last year. In November, Next said profits would range from £785m to £825m. On Wednesday the retailer warned profits were expected to be closer to £792m with potential for the figure to fall by a further £7m “depending on trade in January”. Next predicts next year's profit will fall by 2%-14%.

So why are certain high street retailers struggling? A combination of factors could be to blame:

  1. unseasonal weather - the erratic great British weather didn’t help matters in 2016 with many clothes retailers struggling to stock appropriate seasonal wear;
  2. increased base costs – examples include the post-Brexit devaluation of the pound, the new National Living Wage, a revaluation of the national business rates, increasing energy taxes and the Apprenticeship Levy. Retailers now face a tough decision as to whether they try to absorb these costs or pass them on to their customers. Next predicts that its customers could face price increases of up to 5% for identical garments in 2017;
  3. a shift in consumer spending habits – consumer spending data suggests that many households are prioritising spending on experiences such as holidays and eating out over spending on products, food and clothes;
  4. inflation - inflation is also starting to bite on real earnings causing concerns that there will be a general decrease in spending over 2017.

Despite these factors, it's not all doom and gloom on the high street as some retailers continue to prosper.  Discount retailer B&M was full of festive cheer as its sales rose 7.2% in the run up to Christmas, as were John Lewis which boasted a 36% year-on-year increase in sales during the week before Christmas and Mamas & Papas which recorded its best trading day in history on 27 December. 

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