Next or Debenhams: Which tells the real Christmas story?

Yesterday’s update from Next, in which the retailer nudged its profit expectations up following a better-than-expected Christmas, resulted in a share price rise of 7% and the rest of the listed retail industry was boosted as a result.

Today, the market was surprised, if not exactly shocked, by Debenhams’ early Christmas update, brought forward by a week to include a profit warning and news of a drop in UK like-for-likes.

Market consensus had been that Debenhams’ profit would be around £83m for the year to September 2018.

But Debenhams had such a poor golden quarter that it was forced to slash its forecast to between £55m and £65m.

There’s no doubt that Next’s head office will be breathing a sigh of satisfaction while, at Euston, Debenhams’ management will have a bitter pill to swallow.

But what do the two updates say about what can be expected from the Christmas results to come?

Discounting – the drug that didn’t work

Debenhams’ approach to lacklustre sales and footfall earlier in the golden quarter was to go into discounting mode.

That delivered like-for-like growth in the core six-week Christmas period but meant it could kiss goodbye to any chance of making a decent margin.

Debenhams has spoken before about its desire to step away from discounting, but it clearly lost its nerve this Christmas.

“Next’s relatively good performance showed that Christmas success could be achieved without excessive discounting”

On the other hand, Next held back from discounting – despite its atypical, and in the event limited, participation in Black Friday.

Other prominent retailers managed to hold their nerve on discounting despite challenging footfall data.

While many will have failed to notch up spiralling like-for-likes, their bottom lines will thank them – Next’s relatively good performance showed that Christmas success could be achieved without excessive discounting.

Many other retailers, like Next, will have come through Christmas unscathed even if they didn’t shoot the lights out.

Never forget, product is king

Both Debenhams and Next have reported problems with product.

Next boss Lord Wolfson admitted last March that by chasing trends Next had missed the mark on core heartland product, but said that it would return to form by autumn, meaning that it would have benefitted in the run-up to Christmas.

But he also emphasised the role that autumn’s cold snap played in shifting winter product during the winter season. Fashion and department store retailers should, in theory, have benefitted from the same dynamic but some, such as Debenhams where clothing sales continued to fall, clearly failed to do so.

Debenhams boss Sergio Bucher also picked out gifting as a key area where the business struggled and this theme has been echoed by industry observers.

“The retailers that will avoid product woes are those whose unique, own-brand offer is strong”

Bucher identified new players in the gifting market and added that in hindsight he would have made sure that its gifting offer was more premium.

Although he didn’t mention specific names, some observers believe value players such as B&M, as well as traditional competitors, have stolen market share in this category.

It’s clear that many retailers succumbed to discounting because their product was either not up to scratch or not unique to them, as well as because of poor footfall.

The retailers that will avoid product woes are those whose unique, own-brand offer is strong.

John Lewis, which will report its full Christmas trading update next week, has already said that it enjoyed bumper sales in the pivotal seven days before Christmas, hailing its “biggest ever week” in fashion.

This, combined with positive updates from Next and Jigsaw, means that those who had strong own-brand product will have fared relatively well.

Viewed alongside today’s misery from Debenhams, where own-brand product is in need of significant improvement and branded product can be found cheaper elsewhere, it’s clear that retailers vulnerable to being undercut or outplayed by the competition will have suffered badly.

Too many will have a similar story to Debenhams when it comes to product.

Online

Online was once again the big winner this Christmas. Both Next and Debenhams performed well in this area.

Next’s online sales were up 13.6% while its retail sales declined by 6.1% in the 54 days to Christmas Eve.

Meanwhile, Debenhams said that digital sales rose 9.9% over the quarter and were up 22% over the last two years.

“Every year, consumers become more comfortable ordering gifts closer to Christmas”

Every year, consumers become more comfortable ordering gifts closer to Christmas and the big winners this year are sure to include those that consumers were able to rely upon to deliver at the last minute.

That includes Asos, which was offering delivery until December 23 and Argos, which promised shoppers it could deliver product on Christmas Eve.

Debs and Next both tell the same story – online is only going to get more important.

Strategic shifts

When trying to assess how much Debenhams’ dreadful performance can reveal about the rest of the market, it’s important to remember that Debenhams is under relatively new management.

Bucher only outlined his ambitious strategy 10 months ago, and market conditions meant a major restructure was never going to be easy.

“Only a few retailers have reported their Christmas trading updates so far but the likelihood is that Next will be most representative”

Next, on the other hand, has been led by Lord Wolfson for the best part of two decades.

Debenhams may not tell the story of the rest of retail in this respect, because it is only at the start of its turnaround programme.

Only a few retailers have reported their Christmas trading updates so far but the likelihood is that Next will be most representative – not a vintage year, but not a disaster either.