Next chief executive Lord Wolfson this week asked the provocative question of whether the business should now be seen as mature or if it still has strong growth prospects. Here are the takeaways from the bellwether retailer’s full-year results

After a 20-year period of strong investor returns, Next chief executive Lord Wolfson posed what he described as “the big question” – whether “modest growth” over the last eight years is indicative of the future of Next, or can it return to higher levels of growth that characterise its longer-term performance?

His conclusion was that, as it stands today, the group has ”far more ideas and opportunities for long-term growth than it has had for some time”.

While the immediate outlook is tough, he sees potential in everything from the development of the Total Platform business, offering services such as delivery and online functionality, through to international growth – while not losing sight of the fact that the core business remains “the beer not the froth”.

Falling sales and profits

Next reiterated guidance that it anticipates full-price sales to be down 1.5% this year, hitting profitability and bringing it down to £795m compared to £870m last year.

The decrease reflects one-off factors last year, such as very warm weather in the first half, coinciding with greater demand for summer events such as weddings and proms after the relaxation of lockdown restrictions.

It also reflects the impact of the cost-of-living crisis, which continues to eat into shoppers’ spending power, and the higher costs of doing business.

Wolfson observed: “Consumer spending trails inflation rather than anticipating it.” He said he had no crystal ball and “we are no more sure of our sales estimates than is sensible”.

Wolfson trimmed like-for-like price inflation from the levels envisaged in January. He now anticipates that in spring/summer, it will be 7% rather than 8% and in the autumn, it will halve from 6% to 3%.

The improved outlook is a result of better factory gate prices as capacity grows again and a decline in freight costs for the same reason. Next will, as it has always done, pass on inflation to customers. “It’s not as bad as we thought it was going to be,” Wolfson said, though it will still contribute to a fall in revenues and earnings.

Stores resilient but ecommerce growing

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Retail park stores have not performed as strongly as city-centre branches

Total sales at Next’s retail division – its bricks-and-mortar stores -–were up 30% year on year and ahead 1% on a three-year basis, reflecting a better performance than some of the scenarios that had been considered possible. Operating profits also climbed over both periods.

Stores in city centres bounced back strongly – up 23% year on year in January and 5% compared to January 2020 – as shoppers returned. In contrast, retail park stores were down 3% year on year and up 1% versus the pre-Covid level. 

The changed economics of stores is bringing benefits. Last year, there were 62 lease renewals with an average term of five years, which reduced annualised occupancy costs by £11.1m. Next’s stores also benefited from changes to business rates in the November 2022 autumn statement, which will save £12.1m in costs and improve net margin by 0.7%.

Wolfson expected full-price retail sales to fall 4% this year. A likely 2% reduction in operating margin is “largely due to inflationary cost increases in energy and wage costs”. 

“I think we’ll continue to see a shift from retail to online”, he said. While online sales fell 2% year on year, they were up 40% on a three-year basis. Over the last three years, online has delivered compound annual growth of 12.3% and from 2016 to the pandemic, it was 13.1%. 

Wolfson noted, however, that the costs of online have grown along with sales.

Back to basics

Wolfson said Next will strengthen basics such as product ranges and service, while deploying its expertise on behalf of others through the Total Platform business, investing in and buying suitable brands – as it has with Made.com, Joules and this week Cath Kidston – and building a bigger international business.

Total Platform, which works with businesses in which Next has a stake or other interest such as Reiss and Laura Ashley, has grown strongly in just a few years. Last year, it generated £125.6m in revenue compared to £12.7m the previous year.

The total group profit from continuing clients and equity climbed from £8.4m to £22.2m. In the coming year, Next will implement new websites for Made.com and JoJo Maman Bébé. Capacity constraints in warehousing, systems timescales and people and expertise will be addressed and eliminated.

Next’s investments in businesses such as Reiss delivered profit of £16.8m last year. Investments in Total Platform clients have so far made more in charges for the service itself.

Wolfson said Next would continue to seek great brands with great management and the potential to add value but only at the right price. He added: ”We don’t make ’strategic’ investments, we only invest in businesses if we think they can deliver healthy returns on shareholders’ funds.”

As Next looks abroad, it sees big opportunities in international markets. At present Europe and the Middle East, which account for 26% of global consumer spending but 87% of Next’s online overseas sales, predominate.  The bigger markets of Asia, the Americas and Australia, may bring greater opportunity and Next will seek to grow there.

Next may change its model to facilitate overseas growth, such as through wholesaling and franchising, the use of local online aggregators and licensing deals with companies that might themselves manufacture the goods – cutting out or reducing the costly process of re-exporting products from the UK.

However, Wolfson was candid. People might just not like Next’s styles in some parts of the world.

Next will try out new ideas and see where they lead. It is not fixated on driving them all forward but will instead see what works as it has done in the past. As Wolfson said: “None of those things looked big through the windscreen, they only looked big in the rear-view mirror.”