City overexcited by Next's modest improvement

A day after we were talking doom and gloom on the high street and here’s Next sashaying out onto the City’s dance floor with a bang.

Is this a sign that the grim predictions are about to be proven wrong and that the rest of the retail sector is about to join the party?

The City certainly thought so, and the media joined in. As a result, a rash of retailers pushed into positive territory on the stock market.

At this point it should be remembered that the City likes nothing better than a whiff of optimism, and the media likes nothing better than a hint of excitement.

Next provided both but with the emphasis on the “hint” and the “whiff”.

The clothes retailer proved analysts’ predictions of a small fall in full price sales (0.3 per cent) wrong, instead turning in a small rise (1.5 per cent). Very creditable.

It also upgraded its profit guidance slightly, although Next’s forecasts on this front have been all over the place over the past 12 months or so.

But there are good reasons for caution when it comes to drawing any conclusions about the high street as a whole, and I for one wouldn’t be joining in the financial centre’s January sales rush for retail shares.

Consider that this time last year Next reported sales falling 0.4 per cent over Christmas, and 1.1 per cent for the year, so the latest numbers had only a low bar to clear to look good.

It should also be remembered that, in response to some miserable trading, Next took a hard look at itself. It jettisoned a bid to climb upmarket and refocused on the basics it does best. That seems to have worked, particularly at the high flying Next Directory business covering the online and catalogue channels. The performance of the bricks-and-mortar stores was a lot less rosy.

Those are company-specific issues. The one where there may be a read across to other retailers, at least other clothes retailers, is the weather. Next – to its credit, given most companies use the latter an excuse when they do badly – made no bones about the pre-Christmas cold snap providing an unexpected sales boost.

Of course, to benefit from a chill you still need to stock clothes people want to wear to warm them up. Next did that. Others? Well, we don’t know yet.

The takeaway from these numbers is that this company, once one of the country’s better retailers, seems to be moving back in the right direction. If it’s right that the inflation everyone’s worrying about will fall away and life will get easier in the second half of this year, it’s possible to feel some optimism about its prospects going forward.

Against a difficult economic backdrop, it has emerged as a tentative winner.

As for whether the rest of the high street will join it on the dance floor? Best keep the champagne on ice for now.