Next never looked like a company that would accompany its first-half figures with a profit warning – its shares have rallied nearly 17 per cent over the past fortnight – and yesterday’s update did not disappoint.

Profits for the six months to July 31 were down 12 per cent at £173 million – or just 5 per cent in the core Next Retail chain – which was better than expected, while the company confirmed that it expected full-year profits to be within the consensus range of £400 million to £440 million.

That did not stop Simon Wolfson, chief executive, from predicting that the clothing retailer faces another tough year. Apart from declining consumer confidence, Next must contend with the additional pressure of inflation creeping up through the supply chain from the weaker pound and the cost increases that are being passed on by its Chinese suppliers.

Even so, Next deserves plaudits for positioning itself where it is performing as well as can be expected in the current environment. Mr Wolfson was accused of crying wolf last year when predicting the downturn ahead but he called the market right such that Next prudently budgeted for the ensuing carnage in the retail sector. The upshot is that the amount of stock that Next had to mark down and put into the summer sale was down 20 per cent, while gross margins rose a hefty 2.8 percentage points.

Part of that advance can be pinned on Next’s decision 18 months ago to reposition itself away from the “basics” end of the fashion market and invest more in the quality and look of its ranges. As a result of the changing product mix, average transaction prices for women’s wear are up 6 per cent. Customers are shopping less but are spending that bit more as the perceived “newness” of its products have improved – which in the past year has meant lace, ruffles, paisley and tartan. Further, it is confident of extending that trend, with average selling prices in women’s wear heading for an 8 per cent increase.

Elsewhere, sales at Next Directory – which accounts for about one third of operating profits – were up an above-forecast 2.2 per cent, with a dip in bad debts helping to lift net operating margins to 20.6 per cent.

Next’s virtue is that, unlike Marks & Spencer, it is not seeking to make radical changes to its strategy in the teeth of a consumer recession. Where M&S had gone downmarket, and is trying to go up again, Next has found a formula for fashion’s hotly contested middle ground that appears to be working in straitened times. It has also sensibly scaled back on its store expansion programme.

However, at £11.20, or less than eight times current-year earnings, that makes Next a relative safe haven in retail, rather than a share to chase.

Just Retirement

Like most of its customers, Just Retirement has seen better days. Shares in the annuity and equity release specialist sit more than 60 per cent below last year’s peak, while its sales growth has inevitably slowed from the stellar pace set in its first year as a public company. But if there was a disappointment with yesterday’s full-year figures, it came with Just Retirement’s caution that the value of this year’s new business is likely to be similar to last year’s – some £42 million. The bind is that falling investment markets have prompted retirees to postpone the conversion of their pension pots into annuities. Just Retirement contends that this is a matter of sales being deferred, rather than lost – it is a decision that must be taken sooner or later – but there must also be the suspicion that increased competition from Aegon, Norwich Union and Prudential is taking its toll.

However, there was also much in Just’s figures to encourage. The recent yield premium of corporate bonds over swap rates – the benchmark against which it must value its £1.4 billion investment portfolio – should lift current-year earnings by a healthy £13 million. More important, the long-term trends that underpin Just’s business model remain intact. Demographics and greater longevity suggest that annuity sales should rise by 20 per cent a year over the next five years, while the equity-release market is immature and should benefit from higher mortgage rates. However, with growth slower to come through and the shares, at 119p, offering a negligible dividend, there is little short-term attraction.

Prezzo

If last month’s results from The Restaurant Group (TRG) lifted the gloom pervading the eating-out market, then yesterday’s interims from Prezzo brought the dark clouds rolling back. Whereas TRG reported a 3 per cent rise in like-for-like sales, Prezzo looks as though it has entered firmly into negative like-for-like territory.

Although Prezzo, which runs 134 eateries, does not give like-for-likes, the message from Jonathan Kaye, its chief executive, was clear. Sales and profit margins will stay under pressure for some time as the group wrestles with weak consumer spending and rising costs in areas such as food, wages and utilities. Throw in the dire summer weather, preventing its restaurants from using their outside seating, and the picture looks grim.

In comparing these mixed messages, investors should consider two factors. First, whereas Prezzo is exposed to the retail malaise on the high street, TRG, as well as enjoying greater size, focuses on airport concessions and cinema parks, tapping into semi-captive audiences.

Secondly, it is hardly in Mr Kaye’s interests to talk up prospects, given that he and his family, who hold almost 70 per cent of Prezzo’s shares, are trying to raise debt funding to take the company private. Such a bid would undoubtedly be at a premium to the current 34½p share price and a deal is likely to be struck, but on fundamentals there is little to tempt new investors. Avoid.

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