City forecast: high-street stalwart Next expected to report Q4 sales drop as 'squeezed middle' rein in Christmas spending

Fashion chain Next is set to shine a light on the health of the retail sector in the aftermath of the crucial Christmas shopping period.

Investors will be closely watching the clothing and homeware giant's trading update on Thursday for detail on its sales figures over the festive season. In August, chief executive Lord Wolfson said shoppers were likely to spend less in the second half of the year because its prices were going up.

The cautious approach means there could be no big surprises for investors in the post-Christmas update, although the past few weeks will be a "crucial pillar" of current consumer spending habits, analysts said. The firm is expected to reveal a 2 per cent year-on-year drop in full-price sales for the fourth quarter of the year. However, it expects pre-tax profits to reach £840 million, marking a 2.1 per cent jump.

Russ Mould and Danni Hewson, analysts at AJ Bell, said: "Next is traditionally the last major retailer to go live with its end-of-the-year sales but the markdowns went live on Christmas Eve this year, to suggest that the FTSE 100-listed firm has not proved immune to the challenges posed by inflation, unco-operative weather and the squeeze put on consumers' pockets by the cost-of-living crisis.

Investors will also be keen to see whether Next has noted an increase in shoppers using credit options to fund their purchases. Picture: contributed.

"The anticipated drop in the festive period reflects not just the pressure on consumers' incomes – and Next's customers may be classic examples of the squeezed middle – but also the tough base for comparison as last year benefited from an easing in the pandemic, an end to lockdowns and pent-up demand."

Amid a tougher economic climate, investors will also be keen to see whether Next has noted an increase in shoppers using credit options. A rise in bad debts could indicate that more shoppers have relied on credit that they will struggle to repay, and be used as a litmus test for the wider retail sector.

Meanwhile, Next earlier this month announced that it had bought rival fashion chain Joules for £34m, rescuing it from collapsing. It followed the group buying the brand, websites and intellectual property of furniture business Made.com, adding to the household names now under its ownership. While 19 Joules stores are set to close after the takeover deal, Next could reveal any further shops earmarked for closure in its trading update.