No consumer meltdown, says Next

On the plus side, Lord Wolfson said that he didn't expect a double-dip recession or a meltdown in consumer spending, because employment levels were holding steady. But that's as bullish as he got. "The outlook is balanced, not good, but not very bad, either," he said, arguing that while annual budget reductions of £20bn to £30bn would not, at just 2 per cent of total consumption, be large enough to derail the economy, they would be enough to subdue growth in total consumer spending for the foreseeable future.

As a consequence, he said that retailers would need to adapt to this lower-growth environment, and on the evidence of these half-year figures, Next is coping well. Like-for-like retail sales slipped by 1.5 per cent, but that was offset by the addition of new space and the strength of its directory business. Over 120,000 sq ft of floorspace was opened, with more than half of the extra area given over to standalone homeware stores, where sales are running 31 per cent ahead of plan. Directory sales were up 9.5 per cent, thanks to rapid customer recruitment, and with more and more orders placed online, profitability improved significantly, with operating margins up 240 basis points to 24 per cent.

Lord Wolfson was also sanguine about the impact of input cost inflation in 2011. Although the industry is facing higher cotton prices and manufacturing costs, which would be exacerbated by the increase in the rate of VAT in January, he was confident that product re-engineering and improved sourcing could mitigate the worst effects. He also said that the anticipated 5 to 8 per cent increases in selling prices would not have a dramatic effect on demand.

Broker Seymour Pierce expects pre-tax profits of £560m and EPS of 206p in the year to January 2011 (from £505m and 189p in 2010).

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