Shares in London-listed Next and Sweden’s H&M Group slid on Thursday as the two fashion retailers posted downgrades of profit expectations.
UK fashion retailer Next NXT, -12.21% said it’s now forecasting annual profit to rise 2% to £840 million, from a forecast in August of £860 million ($932 million). The retailer said its August performance was below expectations, though it said September sales improved, which it credited to the government’s intervention to freeze household energy prices.
It cut its forecast for full-price sales in the second half to -1.5% from +1%.
Next shares slumped 10%.
Next CEO Simon Wolfson said that despite high employment and savings of U.K consumers, “it seems inevitable that clothing and homeware growth will slow if not reverse.”
Wolfson also warned that sterling’s weakness may result in the U.K tumbling into two cost of living crises; “a supply side led squeeze, next year a currency led price hike as devaluation takes effect,” he said.
Richard Hunter, head of markets at interactive investor, said the profits downgrade was “rare and unwelcome” despite the circumstances. Hunter added that the results indicate some signs of a changing customer attitude to retail.
“For all its good work, Next has been swept into a current which is swirling as a result of wider economic concerns. Retailers are currently out of favor, and although there are few signs of customer default at present, there are some signs of a changing consumer mindset.”
H&M embarks on cost cutting
Meanwhile, Swedish firm Hennes & Mauritz AB HM.B, -5.33% posted a net profit of 531 million Swedish kronor ($47.4 million) for its third quarter ended Aug. 31, a large drop from the SEK4.69 billion reported last year. Analysts polled by FactSet had expected a net profit of SEK2.17 billion.
H&M bosses chalked the decrease down to a one-time cost related to the winding down of its Russian operations, and that it will start a cost and efficiency program.
Chief executive Helena Helmersson told analysts on a call this morning that the program will reduce costs to save SEK2 billion annually, and keep prices low when customers have less purchasing power.
“Obviously when customers have less money to spend, it’s very important in our commercial plans, both in physical stores and online to really highlight the great prices, great value for money that we have,” she said.
“The third quarter has largely been impacted by our decision to pause sales and then wind down the business in Russia. This has had a significant effect on our sales and profitability, which explains half of the decrease in profits compared with the third quarter last year,” she added.
Citi analysts led by Nick Coulter rated the shares “sell” highlighting the group’s brand reputation and cost cutting measures. In a client note, the team said H&M’s exposure to “shifting cyclical consumer demand on a global and national scope” and weakening currencies will weigh more on the group in the coming quarters.
Sreedhar Mahamkali, analyst at UBS, added: “We expect the shares to react negatively to the profit miss in Q3 and cautious Q4 gross margin commentary outweighing the positive comment on current trading.”