Fashion giant Next cut full-year expectations when it posted interim results today, flagging uncertain trading conditions as retailers confront a host of issues ranging from the soaring cost of living through to political and economic volatility.

During the update, Next chief executive Lord Wolfson shared his thoughts on some of the forces at play, although he said it was more difficult than ever to forecast near-term sales trends.

Two cost-of-living crises

Wolfson’s view is that there are two cost-of-living crises – “a supply side-led squeeze” that is having an impact this year and a “currency-led price hike” that will be felt in the year to come as devaluation takes hold.

Covid-related problems such as the disruption to manufacturing and freight have been compounded by Russia’s invasion of Ukraine and “exceptional increases” in energy costs. 

While Wolfson backed the government taking action to address the cost-of-living crunch, he also warned that “borrow and spend remedies can ultimately only treat the symptoms of inflation – they are not the cure”.

As forecast, Next’s prices have risen 8% and more inflation is expected. Wolfson said: “The scale of sterling’s devaluation means that, for us, the greatest pressure on our selling prices looks like it will come in autumn and winter 2023.”

Declining pound vs price

Although sterling’s decline will inevitably have an impact on prices, Wolfson maintained that there were some mitigating factors.

USD to GBP exchange rate

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He observed that many producer nations’ currencies have also fallen in value versus the dollar, lowering their own domestic dollar costs, and that commodity prices and shipping costs may fall further.

Next would be looking at its supply base to find savings – one of the most important actions it could take, Wolfson said.

“Our product and sourcing teams will have to work harder than ever to find new, ethical and reliable sources of supply to ensure we are getting the best value without compromising design or quality.”

Control what you can

Looking at the supply base is one example of how Next is acting to shape its own fortunes as much as possible, rather than throwing itself at the mercy of economic forces.

Wolfson set out a raft of “new priorities” to improve the business and create the conditions for continued success. 

Along with a determination to “push the boundaries of our supply base”, Wolfson said Next would seek to find more operating efficiencies in its distribution network to cut costs while improving service, actively managing margin – especially within its fastest-growing businesses, overseas and Label – and “managing” customer choice by removing product duplication and improving the functionality of its online offer.

There was no question of cutting back on technology modernisation and development, which is central to Next’s success, he said.

“Excellent technology is an intrinsic part of being a great retailer, although, of course, we’ll be reviewing our systems to ensure we’re getting good value,” he said.

Could be worse

Despite the economic woes afflicting the UK and the view of some leading retailers that conditions now are worse than during the pandemic as the cost of living and of doing business rockets, Wolfson sees some rays of sunshine.

The present situation was “much less worrying” than the Covid period, he said, adding: “In the pandemic, we had to shut our shops and warehouses. What we’re looking at now may last longer but it’s nothing like the scale – [Covid] was an existential challenge.”

Wolfson flagged what he termed “some rays of light … before this document sinks to levels of depression only usually seen in newspapers”.

Average household gross savings balance, indexed to January 2018

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High employment rates mean that Next – like other businesses – “is likely to see fewer debt defaults than might be expected in a recession”, while there is also the opportunity for part-time workers to up their hours and benefit financially and for those who have left the workforce to return. Household savings are in pretty good shape, too.  

Online is back on a pre-pandemic trajectory

Next reported that the “exceptional”  online gains made during the pandemic appear to have been temporary and that growth has returned to the pre-pandemic trend.

The compound annual growth rate anticipated this year is 12.4%, not dissimilar to the 13.1% rate from 2016 up until the outbreak of Covid.

Average number of active customers by year

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With sales of £880m, Next’s retail division (store estate) notched up a year-on-year increase of 63%, evidence of bricks-and-mortar’s bounce back, although the rise on 2019 is only 1%. 

The long-term shift towards online continues, was the message. While online revenues fell 5% year on year and profits plummeted 32%, those numbers are up 42% and 19% respectively compared with 2019.

Christmas caution

Wolfson said that, when it comes to Christmas, Next was “in the camp of forecasters who know that they don’t know”.

He did not share any trading expectations for the Christmas period but said: “We have lowered our [full-year] estimates. That is the best indication that we can give.”

Even though it has cut its profits and sales forecasts, Next remains one of the strongest players, not just in fashion, but across retail.

The fact that Wolfson chose to be, in many ways, quite pessimistic about the rest of the year will come as a concern to many in the sector.

As the old adage goes, when a retailer like Next sneezes, others may catch a cold. However, amid the gloom, if other retailers can act on the self-help message at the heart of Wolfson’s update then maybe, just maybe, the industry can ride out the challenges of the moment.

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