Internet arm drives profits at Next

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Next, the UK’s third-biggest clothing retailer, on Thursday reported an increase in full-year profits above analysts expectations thanks to its successful catalogue and internet arm.

The news lifted Next shares 5.2 per cent to 221p in morning trading, making it the biggest gainer on the FTSE 100 index.

However, the company also warned that customer growth in Next Directory would be slower in the new year as the competition for online clients was expected to grow. The general consumer environment would remain challenging.

Net income for the group rose 5.7 per cent to £331.5m in the year ended in January, despite disappointing like-for-like sales at its 480-strong retail stores. Next Retail, which opened 41 new shops in 2006, said it expected to suffer a further downturn as a result of the new opening.

However, the group announced it would add a net 350,000 square feet of new space in 2007. Tough trading conditions hit like-for-like sales at its 439 stores, where sales fell 7.2 per cent compared with last year.

The results come as figures showed February UK retail sales rose the most in more than two years, rebounding from a drop in the previous month. The Office of National Statistics said sales increased 1.4 per cent in the month after a revised 1.5 per cent decline in January – the biggest gain since January 2005.

Simon Wolfson, Next chief executive, acknowledged the company’s difficulty in lifting sales at Next Retail, but forecast a significant improvement in the first-half of the year.

“Whilst we are still cautious for the year ahead we do expect to make progress in stabilising Next Retail like-for-like sales,” said Mr Wolfson.

He said Next Retail hoped full price like-for-like sales in the first half would be down between 1 and 4 per cent – “a significant improvement on the minus 7.2 per cent achieved last year”.

Next Directory, which impressed the City in September proved to be the star once again as it recorded exceptional growth, with sales up 13.1 per cent and profits up 45 per cent. The success behind the catalogue and internet arm is mainly due to a growing demand, up 4.9 per cent in 2006, and to improved stock availability and increased service charge income.

However, in the future Next expects greater competition will thwart its current market advantage. “We anticipate a significant increase in competition for new customers online, in the clothing sector and across all other retail sectors.”

Next said that following the successful performance at its 13 refitted stores, where sales rose 5 per cent, it planned to undertake a radical review of its shop fit and would extend the programme to renew the look of other stores.

Philip Dorgan at Panmure said: “Management recognises that it has a problem and is setting out to solve it. Given that earnings per share have improved strongly over a period of like-for-like sales weakness, we believe that the long-term earnings prospects have been enhanced and that this will be reflected in a higher valuation.”

The full-year dividend is up 11.4 per cent to 49p, with earnings per share up 14 per cent to 146.1p.

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