Surpassing analysts' projections, UK retailer Next Plc posted better than expected results for the first half of 2015. The pretax profit rose 7.1 percent to GBP347million ($533MN) for the first half. Retail profit margins grew 14.9 percent from 14.1 percent during the previous corresponding period. The strengthening British pound also helped Next Plc improve profit margins.
Despite pressure on consumer spending in the UK, Next Plc outpaced the competitors in the fashion industry. Next Plc has raised full year pretax profit forecasts to GBP845 mn from GBP805mn.
Encouraged with the better than expected performance, the UK fashion industry major has also assured to increase employee pay in October. This will be in line with the UK's National Living Wage. The UK government raised bar on minimum wage limit.
Next Plc's Chief Executive Officer Simon Wolfson said in a company's statement: "It's surprising that retail margins moved forward. The main reason for the margin improvement is that our buying teams over achieved in their target margins assisted by better currency rates."
After rising over three percent, Next Plc shares on London Stock Exchange (LSE) eased marginally 0.45 percent to 7,740pence on Friday. The 52-weekhihg of the stock was 8,055pence and low of 5,985.70p.
Next Plc is confident to offset the additional burden on the company in form of wage increase following the UK's minimum wage act. The company has decided to increase prices by one percent to offset wage hike.
With the announcement of wage hike, Next Plc joined Whitbread Plc, which runs Premier Inn Hotels and Costa Coffee shops. Whitbread has also decided to raise prices to offset higher wage costs. Stronger pound has reduced the garment costs for the company.
The UK government has raised minimum hourly wages to 7.20 pound to workers over 25 years of age. The current hourly wages are 6.50 pounds. The wage rise is expected to reach nine pounds per hour by 2020.
The retail companies in the fashion industry find it difficult to attract and retain customers as the British retail industry is reeling under pressure. It's estimated that though UK economy is in recovery mode, consumers spending is only 47 pence of every surplus pound in the retail markets. The British pound against euro rose seven percent this year so far.
The consumer spending is increasing more on holidays, leisure activities, etc. The competitors of Next Plc suffered drop in sales over four percent last month.
Wolfson sees a difficult situation in wages among employees and managers, if annual wage inflation drops below forecast. If wage inflation falls then higher wages payment capacity weakens. Otherwise, increasing productivity to offset GBP 27million additional wage costs will only prevent the company from slashing jobs.
The new minimum wage act has become a major challenge to UK retailers, who are reeling under pressure to increase their top line and retain the customers.
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