As Next upped its profit guidance again, on the same day JD Sports issued a profit warning. Retail Week explores the differentiating factors between the two
On the same day Next upped its full-year profit guidance for the fifth time in the past eight months to £905m, JD Sports issued a profit warning and lowered its forecast from £1.04bn to between £915m and £935m. The sports giant blamed the “milder weather” and “cautious” consumer spend for sales growth falling behind expectations.
Amid Next’s celebration of its golden quarter performance, JD Sports started the year by saying goodbye to its ambitious target of becoming a £1bn-profit business as its apparel ranges in particular struggled.
As the spotlight shines on both for different reasons, Retail Week explores why the two retail giants told two very different stories.
UK vs US
One of the key differences setting these two retailers apart is Next’s UK focus compared to JD’s global aspirations.
GlobalData lead retail analyst Emily Salter says a slowdown of spending in the US and varied consumer confidence depending on the market is separating Next and JD Sports.
“Next is the majority in the UK whereas JD Sports has quite a few businesses in the rest of Europe and the Americas so there is that difference in terms of how consumers are feeling,” she says.
”I know there has been a bit of a slowdown of spending in the US so maybe that has affected it. With JD, because it does have quite a few brands, even though JD Sports makes up the majority of its sales, I assume there are some weak performing fascias that it owns that could be dragging it down.”
Peel Hunt analyst Johnathan Pritchard adds that while Next may not be facing the same international problems that have hit JD Sports, some issues are market-wide across Europe, the US and the UK and have a lot to do with competition discounting aggressively, rather than the problems coming from within.
“In the UK, it’s fair to say that Next was probably keeping its fingers crossed going into Christmas but everything ended up OK. With JD, it started slowly but didn’t pick back up again,” he says.
“JD is the market leader and it will continue to win market share, I don’t think a major consumer boom is around the corner. If the market is weak, that’s something that they’ll have to deal with.”
If JD Sports can remain competitive amid challenging external market conditions, boost its brand portfolio and continue to attract shoppers and grow market share, chief executive Régis Schultz has every reason to be “confident” in his business moving forward.
Lack of innovation
While JD Sports blamed milder weather and a more cautious consumer for its muted growth, experts say that the sports apparel category in general has suffered from a lack of innovation in the last couple of years.
Investec equity analyst and head of retail Kate Calvert says that Next’s broader and diverse product range has acted as its safety net against adverse market conditions in comparison to JD Sports.
“The difficulty with this is that Next is a much broader business than JD Sports. It’s slightly difficult to make an exact comparison because we don’t know how well Next did in its athleisure area relative to other categories.
“There is probably a lesson there for JD Sports to look at Lord Wolfson’s script, which is to set expectations at a manageable level”
Clive Black, Shore Capital
“The issue for JD was apparel, rather than footwear. And in the UK, it has a higher proportion of apparel in its business. To an extent, the innovation in apparel hasn’t been as strong as it has been in footwear from the brands.
“I think it comes down to the nature of the consumer being far more selective over what they want to spend their money on and over value. And value isn’t just price, it is also getting something different and new.
“Given the scale of Next and the diversity of its product range, it hasn’t been impacted as much.”
The most obvious difference between the businesses is their consumer base, with Next targeting families and a slightly older demographic than JD’s younger market.
Despite it seeming that younger consumers have the advantage amid the cost-of-living crisis due to having either lower or no mortage, rent and bill payments, they are seeking lower prices, promotions and turning to competitors for a better deal.
Salter points out that Next is thriving due to its older customer base which is more “financially confident” to spend across its broad portfolio.
“It is slightly contradictory in a way because we’ve been saying that younger consumers are a little bit more protective because they are less likely to have mortgages, bills or be paying rent but then they are also on lower wages,” she says.
”If you’re purchasing branded sportswear from JD Sports, you have so many different retailers that you can purchase an item from. If Asos is doing a bigger discount on the Nike shoes you want, then you are just going to purchase from there instead.
“Even though Next has perhaps some more financially constrained shoppers − family shoppers whose mortgages have gone up and have childcare costs − its wider range of price architecture has protected it a lot more.
“It has got its Next Pay [credit] offer, which definitely helps set it apart, and it also has those more premium brands that more financially confident consumers are going to buy from.”
Next’s broader and more mature core customer is contributing to its ongoing success, with JD Sports needing to prioritise attracting more full-price sales and building customer loyalty to triumph in this department.
Shore Capital head of research Clive Black says despite the profit warning issued by JD Sports, it is still on track to post a profit before tax for the full year of at least £915m, which is greater than Next’s forecast of £905m.
“JD seems to have clutched defeat from the jaws of victory in that its expectations were set too high,” he said.
“In that respect, it has missed expectations, particularly around apparel in the UK and some increased promotional activity in the US, which meant that it couldn’t meet market expectations.
“It is not a bad performance in the grand scheme of things that has emerged as a profit warning. There is probably a lesson there for JD to look at [Next CEO] Lord Wolfson’s script, which is to set expectations at a manageable level. He has guided the market and set expectations on the basis that he has beat them rather than missed them.”
While JD Sports’ dramatic profit downgrade in comparison to Next’s forecast might appear alarming, all is not lost for the sports giant as there is plenty of scope for it to overcome the challenges it is facing.