British clothing retailer Next on Wednesday (4 January) warned of a tougher trading year ahead as a weak pound caused by Brexit uncertainty pushes up raw material costs.
Shares in Next slid 11% on the news, dragging down stock values of clothing competitors Marks and Spencer and Associated British Foods, which owns also budget garment chain Primark.
In a trading update, Next said the weak pound would result in prices of its garments rising by up to 5% in its financial year to January 2018. “In the year ahead we face a number of inflationary pressures in our cost base,” Next said in a statement.
British annual inflation is at the highest level in more than two years as a slide in sterling to multi-year lows against the dollar and euro following the Brexit vote in June has lifted the cost of raw materials imported by Britain.
“We may see a further squeeze in general spending as inflation begins to erode real earnings growth,” Next added.
The group did, however, note that its overseas sales would be boosted this year by the currency’s weakness making the UK’s exported goods more price-competitive for foreign buyers.
Following a weak Christmas trading period, Next said pre-tax profits would be slightly lower than expected for the year to January 2017.
They could tumble by as much as 14% in the year to January 2018, but may fall by only 2%, it said in further guidance Wednesday.
Next added that “in the light of the exceptional levels of uncertainty in the clothing sector and with little visibility of the approach the UK government will be taking to Brexit”, the company had decided to bring forward the announcement of dividend payments to shareholders through the use of surplus cash.
However, traders did not take kindly to the overall trading update, sending shares in Next crashing 11% to £42.43 in morning trades on London’s benchmark FTSE 100 index, which was flat.
Shares in Marks and Spencer shed 4.5% and Associated British Foods slid 4.0% compared with Tuesday’s closing values (3 January).
“Across the UK market, investors need to start to face up to the additional challenges associated with the long and tortuous Brexit process,” Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor, said in reaction to the share price movements.
“So far, this has mainly involved winners and losers from a weak pound. As 2017 unfolds, however, the effects are likely to be felt more widely across the UK economy. Sectoral volatility across the UK markets is, therefore, likely to remain high in the weeks and months ahead,” O’Keeffe added.
Less than three months before the UK is due to trigger its departure negotiations from the European Union, further uncertainty has been added to the Brexit process after Britain’s ambassador to the EU resigned Tuesday.
Ivan Rogers, a highly-regarded diplomat who had been due to end his four-year stint in October, stepped down as London prepares to invoke Article 50, which starts a two-year countdown to Britain leaving the bloc.