Next’s financial disciplines have served it well over the years and created huge shareholder value, so do they need to move the goalposts?

Next’s financial disciplines have served it well over the years and created huge shareholder value, so do they need to move the goalposts?

After yesterday’s fiscally neutral Budget, it was good to hear Next chief executive and resident guru Simon Wolfson present his views at the analysts meeting this morning on the Next final results.

And after some vote-winning moves by the Chancellor and another great year for the Next business he seemed in a chipper mood. He was even quite restrained in his comments about the local authority planners who are holding up the openings of his beloved out-of-town big box stores: “They don’t say no, they just say yes very, very slowly”.

Ahead of today, the four key questions about Simon Wolfson were: Would he be more bullish about the UK economic outlook? How far would he go to control City profits forecasts. Would he commit to pay more special dividends to shareholders? And would he talk about the new Label branded catalogue trial?  

In terms of the UK economic outlook, Next is in fact the most bullish it’s been for six years. Employment is up, housing transactions are up, credit is up and the pressure on real income growth seems to be almost over.

But “risks remain” and a key one is that faster economic growth forces up interest rates. Other things being equal, Next thinks that a 1% rise in the mortgage rate takes 2% off total consumer earnings so it’s an important issue.

And when it comes to higher interest rates, Simon Wolfson says that it’s a bit like death: “Everybody knows it will happen, but they don’t believe it”.

After yet another year of outperformance versus guidance it’s not easy to keep City expectations down.

After a terrific fourth quarter, the pre-tax profit guidance range moved up in early January to £684m to £700m.

Next wisely kept the outcome to £695m - ie a bit below the £700m-plus that everyone expected) - by finding a few forex losses and making a few provisions.

Yet that outcome was still well above the £615m to £665m range set out 12 months ago. Needless to say, Next remains cautious in its budgeting for 2014/15, with only 5% to 11% profit growth expected, to between £730m and £770m.

However, if you can always rely on Marks & Spencer profits to come in a bit below expectations, you can always rely on Next profits to come in a bit above expectations, so nobody would be surprised if Next topped the £800m profit mark this year, which would put even more daylight between its profits and those of M&S.

As it is, the gap in profitability between Next and M&S is embarrassingly large. Next made £695m profit last year on group sales of only £3.74bn, thanks to the astonishingly high profit margins generated by Next Directory, the home shopping business.    

As for the commitment to pay more special dividends to shareholders, cash flow generation is so strong and its share price so high that Next needs to find a new way of returning the approximate £300m of surplus cash each year, beuseca share buybacks at this level no longer make economic sense.

Even by using the £750m mid-point profit forecast for 2014/15 Next can’t achieve its disciplined 8% Equivalent Rate of Return if it pays more than £62.45 for the shares.

The Next share price is currently trading at around £67. As Simon Wolfson joked “if you move the goalposts, make sure the ball is down the other end of the pitch first”. So regular quarterly special dividends of £75m now seem to be the order of the day.

Of course, the reason why Next has been re-rated by the stock market is because of the consistent ability of its management team to deliver the goods.

The buying team delivers more fashionable and well-priced product, the property team delivers highly profitable new store space and the distribution team delivers excellent online ordering and delivery options for customers.

But Next is not resting on its laurels and it’s good to hear that Next are focusing now on improving  the quality of store staff and customer service and is changing the traditional ranging approach to spring/summer and autumn/winter: it is now compulsory in the business to talk about spring and summer, and autumn and winter.

Finally, Next did not get where it is today by doing anything rash and Simon Wolfson was surprisingly reluctant to talk about the recently launched branded fashion operation called Label. He emphasised that it is just a trial.

Next has tried a branded catalogue before, but the 194-page catalogue features such brands as Hobbs, Diesel and LK Bennett, so the range is better, and the power of Next’s order and delivery proposition (order online by 10pm at night for delivery the next day to home for £3.99 or free to a local Next store) ought to help the new business do well.

When it comes to moving the goalposts on online fulfilment, Next has no need to change what’s been tried and tested already.

  • Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.