Next posted a poor update today after total sales fell in the first quarter and retail like-for-likes were estimated to have fallen nearly 10%.
Overall sales dipped 0.2% while full-price sales fell by 0.9%. Sales at the retail division – ie, stores – fell by 4.7% versus analysts’ expectations of a 1.6% decline. The Directory business, however, delivered growth of 4.2%.
Broker Canaccord Genuity estimated that retail like-for-likes were down 8% – a bit of a shock when Next’s performance is usually considered the measure by which other fashion retailers are gauged.
However, the headline results, while disappointing, were not a complete surprise given Next boss Lord Wolfson’s warning in March that 2016 could be “the toughest since 2008” and might “feel like walking up a down escalator, with much effort required to stand still”.
Next failed to stand still during the first quarter and has downgraded its sales forecast accordingly.
So what is behind this lacklustre showing from one of fashion’s foremost frontrunners?
The retailer stuck to its narrative on a change in consumer behaviour, specifically a shift in spending towards experiences rather than retail categories including fashion, as well as the unpredictable weather – warm in winter, cold in spring.
But observers did not unanimously agree with Next’s portrayal of its position.
“Next’s trading update is unsurprisingly weak, but we don’t completely buy the commentary,” said Peel Hunt analyst Jonathan Pritchard, referring to Wolfson’s analysis of consumer behaviour.
While he acknowledged that the “frankly ridiculous weather that we’ve seen in April” was responsible for fashion sector weakness, Pritchard maintained that there were “Next-specific issues to be solved as well”.
The broker singled out logistics as a key reason for Next’s faltering performance and said: “The competitive advantage that the business had from its excellent logistics [especially the speed of its order and collect services] is now played out.”
Verdict Retail consultant Nivindya Sharma believed that consumer behaviour has played a part in Next’s poor results, but pinpointed the change as a shift not to leisure but to a constant consumer desire for the new.
“Even the mid-market, family shopper who is 35-plus has become more in tune with a younger demographic in terms of behaviour,” she says. “We have become so used to seeing new products every week, which don’t necessarily align with summer and winter, when shopping online.
“That is essentially where the problem is. That mindset of new products is really starting to translate into the high street – and players like Next are the most affected by it.”
Peel Hunt also mentioned product and argued Next’s “ranging could be more punchy”.
It was a theme picked up on by Radio 5 Live Wake Up To Money presenter Louise Cooper.
I just think their clothes have become really boring.— Louise Cooper (@Louiseaileen70) May 4, 2016
Even as a 45yr old I don't want to wear just beige! https://t.co/jLWfSTGq11
But Sharma disagreed. “I wouldn’t say that it is product design and quality per se,” she said. “It is more to do with merchandising and making it appealing.”
Grocers’ fashion offers doing well
Despite Next’s downbeat performance, some family-focused clothing retailers are doing well. Sainsbury’s reported an 8.5% rise in Tu sales at its full-year results. It is now the sixth largest clothing brand by volume and 10th largest by value.
“The mid-market players have lost share to the grocers over the recession,” said Sharma. “And that does put pressure on Next, though they aren’t losing share as much as they did during recession.
“The main competition is online and the grocers are much better online now.”
Indeed, part of the reason for Tu’s rise is that it is now available online: a development which is long overdue.
Has Next’s good run come to an end in the long term?
Sharma errs on the side of caution. “It’s too early to say,” she said. “I wouldn’t say it is coming to an end, but it will be more of a challenge for them to drive like-for-likes.
“It has been popular and had a few years of very strong growth. And, against tough comparables, a slowdown is inevitable.”
Pritchard echoed that view. “It appears that Next has won the easy share and the game gets tougher from here,” he said.
“Next is a pragmatic, clever and well-run retailer and its realism when it discusses the erosion of its competitive advantages is refreshing, but the new normal for Next is that progress will be hard yards.”
Many fashion retailers have suffered from the weather over the last six months. Assuming more typical weather arrives, it will then be easier to assess Next’s true health.