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Next plc slumps 10% as sales slide. Is it time to sell retail stocks?

Photo: Dorsetdude. Cropped. Licence: https://creativecommons.org/licenses/by-sa/3.0/

Yet another disappointing trading update has sent investors in shopping colossus Next (LSE: NXT) heading for the hills. The stock was last dealing 10% lower from Tuesday’s close and at levels not seen since April 2013.

Reflecting the increasingly-difficult conditions on the high street, Next advised that total sales of its full-price items dipped 0.4% during the 54 days to December 24, with demand sinking 1.1% over a one-year time horizon to Christmas Eve.

As a result of these fresh till troubles, Next now expects pre-tax period for the 12 months to January 2017 to fall 3.6% year-on-year, to £792m. This is down from the company’s previous guidance of £805m.

Not over yet

And the retailer warned that conditions could be set to worsen still further.

Next warned that “the fact that sales continued to decline in quarter four, beyond the anniversary of the start of the slowdown in November 2015, means that we expect the cyclical slowdown in spending on clothing and footwear to continue into next year.”

The company added that “we may see a further squeeze in general spending as inflation begins to erode real earnings growth.” And Next warned that the prices of its goods may rise by up to 5% thanks to the devaluation of the pound, causing sales revenues to fall 0.5%.

These aggregated pressures are expected to weigh on sales again during fiscal 2018, Next warned. It now expects full-price sales of its fashion and homeware items to range between a 4.5% fall and a 1.5% rise.

As such, Next is expected to endure another bottom-line drop in the year to January 2018. The clothing giant expects pre-tax profit to range between £680m and £780m in the period.

Just the start?

Next is the first major retailer to update the market in 2017, and investors will now be eagerly awaiting updates from its peers in the weeks ahead Marks & Spencer and Primark owner Associated British Foods are both due to announce on January 12, for example.

Investors will be particularly interested following Next’s poor update as, for the most part, sales of goods on the high street and online have been better than expected, at least according to recent surveys. The CBI reported last month that consumer demand in December rose at its fastest pace since the autumn of 2015, for one.

But regardless of recent activity, market experts are more-or-less in agreement that conditions for the likes of Next are set to become tougher in the months ahead.

Last week the KPMG-Ipsos Retail Think Tank, for example, warned that a combination of rising inflation and uncertainty concerning Britain’s withdrawal from the EU is likely to sap shopper appetite in 2017.

At the same time, the vast competitive pressures facing the sector’s major players is putting huge strain on their already-growing cost bases. Next expects to spend £10m on marketing activities as well as improvements to its website in fiscal 2018 alone, it announced today.

Share pickers clearly need to think carefully before ploughing headfirst into the retail segment, particularly at Next where I believe fresh downgrades to sales forecasts could be in order.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.