In the context of Next, which has just reported full-year pre-tax profits of £1.16bn, an estimated £15m of extra fuel and air freight costs arising from the Middle East conflict is tiny. The sum, which in any case assumes disruption lasts three months, can be lost in the wash, or more precisely “offset by savings elsewhere”.
The chief executive, Simon Wolfson, a boss who tends to err on the side of caution when guiding on profits, saw no reason not to add £8m to this year’s number as a mechanical read-through from last year’s outcome. If there wasn’t a war on, one can assume there would have been a proper profit upgrade. After all, trading seems to have been going like a train up until late-February – “encouraging” in the UK and “strong” overseas.
Thus the sole – but enormous – asterisk over these results was the impact if the conflict drags on. Wolfson obviously has no greater insight on duration and long-term implications than anyone else, and said so. “As yet, we have no feel for the medium-term effects on supply chain resilience, freight rates, factory gate prices and consumer demand,” he said. If higher costs persist, Next will put up prices – but that remains “a contingency not a plan”. Come back in May for the first-quarter update for a clearer view.
But there were, perhaps, two nuanced insights amid the uncertainty. First, the idea that consumer confidence has already “collapsed”, which is what the British Retail Consortium said this week, may be overdoing things. Wolfson said he had not yet seen a hit to sentiment. “If energy bills and the [higher costs] feed through to [retail] prices that is when they will respond,” he said. All retailers are different, but the same point is made privately by others in consumer-facing businesses: UK consumers tend to react to the arrival of higher prices, not the threat of them.
The second point is related: there are other lags. For clothing retailers, the spring-summer ranges are already in shops, online and in warehouses. There is no need (yet) for big adjustments. The possible increases in the cost of fabrics, plus any production disruption in Asian factories, would mostly be felt in the autumn-winter ranges. The crunch-point is still a way off, in other words. This is still the phoney phase, retailing-wise.
The stock market took the optimistic view. Next’s shares were the biggest riser in the Footsie, improving 5%. Well, yes, there is perfectly plausible reading that says, if a mere £15m in extra shipping and fuel costs turns out to be worst of it, Next could be upgrading profits in May. It remains a resilient business.
All the same, nobody will be immune if the energy price shock goes on much longer and if the OECD is right that the UK economy will grow by just 0.7% this year. The share price stands at £125.40, versus the £131 at which Next, under Wolfson’s strict formula for economic value, currently judges it worthwhile to buy back its own shares. One might expect the gap to be wider, as it has been at many points in the past 20 years when the outside weather has been easy to read. May’s update will set the tone for the entire retail sector, one suspects.
