This morning’s fourth quarter update from UK retail stalwart Next was never forecast to be impressive. However, the surprising magnitude with which the company missed expectations resulted in Next’s share price falling by as much as 16% shortly after the London market opening this morning, a performance that has continued into this afternoon with the shares down 12% at 3pm.

What may be even more worrying for other companies in the sector may be that this could be repeated in the coming months by many other companies due to the following factors:

Poor Christmas performance

Today’s trading update for Next was disappointing to say the least, as its normally stronger retail business underperformed the company’s ‘directory’ (mass buying) division. Like for like retail sales over the Christmas period, whilst not released by Next, were calculated by Morgan Stanley to be weaker by 6% against estimates that this figure would instead be in the region of 2% lower.

Perhaps this could be linked in to the rising market share of the online retailers. Next, traditionally benefiting from its retail sales in store, has seen young online upstarts ASOS and boohoo claim a greater market share in recent years. As shoppers look to avoid the nightmare before Christmas on the high street by moving their shopping online, the young clothing outlets are benefiting from their greater online presence as well as increasing portfolios, most recently highlighted by boohoo’s acquisition this week of the predominantly online stateside retailer Nasty Gal.

Next is notable for regularly being one of the first retailers to release results after Christmas. We are yet to see how its peers have fared; although with that said, a poor performance over the crucial Christmas period is the last thing retailers would want on their balance books given 2017’s most obvious challenge.

The Brexit Impact

Perhaps the greater worry keeping the sector bosses up at night is the impact that continued Sterling weakness after the UK’s vote to leave the EU could have. Inflationary pressures could leave retailers struggling to attract sales in the first few months of 2017, something that may be exacerbated further should the government trigger the negotiation-opening Article 50 as planned at the end of March. Rising materials costs in Sterling terms have already threatened to de-shelve Unilever products from Tesco’s aisles late in 2016 – “Marmitegate” – however there may be more similar (although less trivial and more serious) events on the horizon.

Next themselves have warned about the rising impact of inflation, stating that it will certainly have an adverse impact on its 2018 trading, while market analysts have revised expected 2017 earnings downwards in the wake of today’s results. Might the coming 12 months see retailers forced to raise prices to combat the potential looming impact of Brexit and further impact sales? Most shareholders at Next will presumably be hoping that is not the case.

Whilst 2016 proved to be the most unpredictable of years, 2017 may prove less so, although not to the benefit of many UK Retailers.

Henry Croft, Research Analyst, 4 January