As online sales grow, fashion giant Next has assessed the viability of its stores. In this extract from Next chief executive Lord Wolfson’s preliminary results business review, he considers three scenarios and explains why he is confident shops ”will remain a profitable asset”.

With increasing amounts of business being transferred online, it is legitimate to question the long-term viability of retail stores and whether the possession of a retail portfolio is an asset or a liability.

We believe that our stores represent a valuable asset and will continue to do so.

However, in the unlikely event that like-for-like retail sales continue to decline at high rates for the next 10 years, we believe that our lease structure is such that the portfolio could be managed down profitably.

In such a scenario it is extremely likely that rents would fall to reflect the new reality and that is our experience so far, but what if they do not?

To answer this question we projected the profitability of our current store portfolio in three different like-for-like sales scenarios over the next 10 years: -2% which is the average of the last five years, -4% and -6%.

For the purpose of this model we have made the following conservative assumptions:

  • We shut unprofitable stores at their lease expiry.
  • When profitable stores reach the end of their lease we are able to continue trading, paying the same rent on a short-term lease.
  • We take on no new space.

As can be seen from the graph below, even in our worst case scenario, the portfolio would still make around 10% net branch profit before central overheads.

 

In such extreme circumstances it is likely that we would be able to renegotiate rents downwards and open some profitable new stores, both of which would increase profitability.

In conclusion, our existing and new stores will remain a profitable asset even in very difficult circumstances. And this is why we continue to take on new space where we have the opportunity to increase sales and profit, as long as we continue to adhere to our strict profitability and payback hurdles and only take relatively short term leases (eg 10 years).

The weighted average remaining lease term of our current portfolio remains 7.5 years, with 50% of our leases (by value) expiring within six years and 70% within 10 years.

  • Text and graph taken from Next full-year results