UK's Next warns of second cost of living crisis from sterling plunge

By James Davey

LONDON (Reuters) -The plunge in the value of the pound looks set to create a second cost of living crisis for Britons, clothing retailer Next warned on Thursday, cutting its sales and profit forecasts.

Shares the company tumbled more than 7% after it said August trading had been below expectations and pressure on household budgets was set to intensify in the coming months.

"It looks like we may be set to have two cost of living crises: this year, a supply side-led squeeze, next year a currency led price hike as devaluation takes effect," said CEO Simon Wolfson.

Next, which trades from about 500 stores and online and is often considered a gauge of how British consumers are faring, said it now expected full price sales in the second half of its financial year to fall 1.5%, and a full year pretax profit of 840 million pounds ($905 million), up 2.1% versus 2021-22.

It previously forecast second-half full price sales growth of 1% and a full year pretax profit of 860 million pounds.

The company said cutting its guidance was a difficult call, given sales in September had improved and the company may see benefits from recent government measures, such as an energy price cap. Sales to date in August and September are down 0.3%.

The group reported a pretax profit of 401 million pounds for the six months to July, up 16%, with full price sales up 12.4%.

TURMOIL

Confidence levels among Britain's consumers sank to a record low this month as they struggle with the accelerating cost of living, even before the government's mini-budget on Friday sowed turmoil in the mortgage market, leading to warnings of a sharp drop in house prices.

Wages are failing to keep pace with inflation that was 9.9% in August and Next's rivals Primark, ASOS and Boohoo have all warned on profit this month.

The government has announced a raft of tax cuts and help on energy costs for consumers and businesses, but the pound/U.S. dollar exchange rate has fallen to almost parity, raising the price of imports.

Wolfson said that while it seemed inevitable that clothing and homeware sales would slow, healthy employment and savings levels provided some comfort.

He said it was too early to tell what impact government help would have, though it was likely the scale of the measures would support spending.

Looking to the 2023-24 year, he said if the weakness of the pound continued, it would likely inflate selling prices, particularly in the second half.

Separately on Thursday, H&M, the world's No.2 fashion retailer, launched a cost savings drive after reporting weaker-than-expected profits.

($1 = 0.9282 pounds)

(Reporting by James Davey; editing by Jason Neely and Mark Potter)