Next shocks with profits warning

NEXT, the high-street retailer that has proved a phenomenal success over the past seven years, shocked investors yesterday when it issued a profits warning caused by buying mistakes in women's clothing and childrenswear. The company said it had over-stocked before Christmas, under-stocked after it and introduced too many higher-priced high-fashion ranges at the expense of "classic" items.

Next plunged by 24 per cent, closing 173.5p down at 544p and wiping pounds 644m off its market value, as analysts scrambled to downgrade their profits forecasts. The company's place in the FTSE-100 will be under threat when the constituents are reviewed in June if the shares do not stage a dramatic recovery.

The warning is a blow to Lord Wolfson, who recently announced his intention to step down as chairman of the company in May and who, together with David Jones, chief executive, has been credited with rescuing the company from the brink of collapse in the early 1990s.

"Let's be open and honest about it, we've made a mistake," Lord Wolfson said. "Maybe we're allowed one, I don't know."

Mr Jones said: "I'm very sad this has happened but we can gain advantage from it. People will realise that they don't have a divine right to be successful."

Analysts expressed surprise at the severity of the warning, though there had been rumours of poor trading. Julie Ramshaw at Morgan Stanley said: "It is certainly serious but is it an enduring problem? I don't think so. Next is still one of the best clothing companies, with a strong brand and good stores." Nick Bubb at SG Securities added: "It shows that they are human. These are the kind of mistakes that can happened in fashion. But it is a good brand and the company has a strong balance sheet. The question is how long it will take for the City to forgive."

The problems started before Christmas, when the group over-stocked with autumn/winter stock resulting in a much bigger January sale to shift pounds 30m- pounds 40m of unsold merchandise. The company's buyers then over-reacted and stocked too little merchandise for the spring/summer collection. The result was that Next's shops and its directory were short of merchandise in a number of their best-selling lines. Hilary Santell, Next's womenswear product director, resigned around Christmas time after a period off work because of a riding accident.

The company said this, together with the departure of another designer, may have caused problems but they denied her departure was related to the profits warning.

Next also said its internal controls had failed and would be strengthened. Christos Angelides, the former head of menswear buying, has taken over the womenswear ranges. "I am not going to point the finger at any individual," Mr Jones said. "If its anyone's fault, its mine as chief executive." The impact on trading has been dramatic, with sales in the Next shops down by 1.5 per cent in spite of a 12 per cent increase in selling space.

First-half profits will now be lower than last year's pounds 67m. Analysts have cut their full-year forecast from pounds 210m to pounds 175m.

The company said the first signs of problems came in November, when the group's Directory preview catalogue was distributed to 25,000 customers. But with the long lead times in fashion it was not possible to make adjustments to the ranges in time.

The profits warning overshadowed Next's results for last year, which showed an increase in profits from pounds 159m to pounds 184m. Next has been one of the brightest stars in the retail firmament in the past seven years, during which its shares have risen from 13p to a high of 835p last month.

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