As fashion bellwether Next reports a “faster and steeper” fall in sales in the wake of the coronavirus outbreak than expected, how is the retailer adapting to tough conditions afflicting the whole industry?

  • Next boss Lord Wolfson calls Covid-19 a “unique historical event – we’ve never had a pandemic in a modern, global economy”
  • “We underestimated the amount of work involved in social distancing in our warehouses,” Wolfson admits
  • CEO says business has the opportunity to move forward if it maintains “a strong balance sheet”

The Covid-19 pandemic has brought unprecedented disruption worldwide and retailers are confronting catastrophic trading conditions.

Fashion giant Next’s trading update today was one of the most detailed and extensive responses so far to the impact of the emergency and likely repercussions.

Next chief executive Lord Wolfson tells Retail Week: “What we’re experiencing at the moment is a unique historical event. We’ve never had a pandemic in a modern, global economy.”

As it navigates the perilous waters of the outbreak, Next is focusing on three areas: ensuring financial stability; adapting operations so it can trade as safely as possible, online and when shops reopen; and continuing to invest “to take the business forward once the storm has passed”.

Next is renowned as one of the fashion sector’s most robust and resilient players. Its troubles have worrying implications for the level of challenges being faced by the rest of the clothing market, particularly as non-grocery prices registered the sharpest fall on record this month.

GlobalData lead analyst Sofie Wilmott says: “Considering Next was outperforming the market prior to Covid-19 hitting sales, helped by its strong online channel and wide product range, many clothing retailers will be performing much worse than it is.”

Cash and customers

Next laid bare the extent of the financial hit from coronavirus. Between January 26 and April 25, full-price product sales slumped 41%, a decline it described as “faster and steeper than anticipated in our March stress test”.

Next Q1 2020 chart

Shore Capital analyst Greg Lawless notes: “If Next has been a little too optimistic about the impact of the lockdown upon its business, well what of the rest of the retail trade? We consider Lord Wolfson to be one of the more informed, astute and savvy operators in the UK retail scene.”

Next is now working to stress tests that assume sales declines in every quarter, including over the Christmas period, on revenue declines of between 30% and 40%. That represents lost sales, excluding VAT, of between £1.30bn and £1.66bn.

The focus then is on cost savings, cash preservation and cash generation – “the first and most important thing”, according to Wolfson.

“With a strong balance sheet we can deal with the vagaries of trade and what may emerge, then we have the opportunity to move the business forward,” he adds.

Measures implemented by Next include the suspension of share buybacks and dividends, savings of £290m of stock purchases, banking covenant waivers and an application for the Bank of England’s Covid-19 corporate financing facility. The retailer also expects to benefit by £85m through business rates relief.

Next Q1 2020 table

Next also anticipates wage costs will be £135m lower than would have been the case prior to the pandemic and subsequent support schemes offered by the government. Approximately 84% of staff are on furlough, but Next said that £40m of the wage savings “relate to the lower sales we anticipate from July onwards”.

In other words, fewer people will be employed than would traditionally have been the case in the second-half and the golden quarter.

In the three days before Next shuttered its store estate on March 23, retail sales plummeted 86%. The retailer observes: “The majority of our customers had decided to stop shopping in retail stores before the order came to close them.”

Similarly, Wolfson thinks that “it will take some time for customers to return to their normal shopping habits and that sales will be very subdued when trade commences”.

Because of the “unique historical event” in progress, Wolfson is uncertain how Christmas will play out. However, Next’s fourth-quarter scenarios would mean a sales fall of between 17% and 28%.

In similar anticipation of depressed consumer behaviour, Next expects it will lend £325m less to customers, they will take longer to pay off their balance and defer £20m of payments into next year, and higher defaults will hit payments by £5m.

In such punishing conditions, the more Next can rebuild sales the better – and that will be dependent upon its ability to trade safely.

Trading safely

When the lockdown was ordered, a strong online business was seen as an advantage.

While that has proved to be the case, the online model had to be changed more than many expected as warehouse staff at many retailers expressed fears about their health and safety during the outbreak.

Lord Wolfson

Lord Wolfson: ‘My sense is that retail parks are just so much easier to marshal’

Next’s staff were among them, and the retailer surprised the industry when it shut its online business at the end of March. “To be brutally honest, we underestimated the amount of work involved in social distancing in our warehouses,” Wolfson admits.

When it reopened after 18 days, a raft of changes had been made, many of which have also been adopted across retail, to better protect workers.

That also meant reduced sales, as Next’s website closed when a certain number of orders that could be safely processed daily was reached. At present, Next’s main warehouse is operating at 40% capacity and is expected to reach about 70% within a fortnight.

Attention is now turning to what changes may be needed in store when shops are permitted to open once again.

Next will reopen big, out-of-town branches first because it is easier to reconfigure them to ensure social distancing than it is in smaller stores. Car parks also mean there is more space outside to manage shopper numbers, and typically longer trading hours mean there are fewer customers in store at any one time.

Wolfson thinks high street reopenings will bring particular challenges, partly because of the physical fabric and layout of town centres.

“My sense is that retail parks are just so much easier to marshal,” he tells Retail Week. “There are some city centres with broad pedestrian streets and spacious shops, like Manchester, but in smaller high streets where the pavement’s three metres wide, how do people social distance? We’ll monitor how efficiently we can manage social distancing inside and outside, and the greater success we have the more shops we’ll reopen.”

Still investing

While much of retail, and Next’s business, is in deep-freeze during the pandemic, Wolfson insists Next will carry on investing – particularly in warehouses and systems, such as improving pick, pack and despatch capabilities, and a website overhaul. “We haven’t taken our foot off investment,” Wolfson says.

That applies to some business spending in the short- as well as longer-term, such as purchasing ranges of relevant stock for later in the year.

“No amount of information about the past can accurately guide us in our deliberations on the future. Our job is not to guess exactly how things will pan out but to prepare for all outcomes that seem reasonably possible”

Lord Wolfson, Next

Wolfson says: “In big companies, sometimes people make rules at the top that when you get to the bottom are insane. There is no point in not buying coats because we have too many T-shirts. Ensuring we continue to develop a range of well-priced, good-quality clothes is very important.”

The coronavirus pandemic still has a long way to play out, and there will undoubtedly be more challenges along the way, but Wolfson is determined to ensure Next is well set up to address them.

He says: “No amount of information about the past can accurately guide us in our deliberations on the future. Our job is not to guess exactly how things will pan out but to prepare for all outcomes that seem reasonably possible.”

Wolfson is known as being a man with a plan, and this pandemic is no exception – but whether the rest of the fashion sector can claim to be as prepared, strategically and financially, is another question.

Coronavirus: Next’s Lord Wolfson on cash, customers and trading safely