Today’s questions: how cautious would Next be about the economic headwinds for the sector? And how optimistic is it about any tailwinds for the business?
Since becoming Next chief executive in August 2001, Lord Wolfson has acquired a formidable reputation as both a guru on the UK economy and a highly skilled manager of his business.
The focus with today’s final results was on what sort of balance Wolfson would strike
But Next is under pressure, from a variety of internal and external factors, and the share price has more than halved since its peak in the autumn of 2015.
So the focus with today’s final results was on what sort of balance Wolfson would strike when discussing the outlook.
On Sunday The Observer described Wolfson is “an Eeyore-ish character whose default setting is caution, if not outright pessimism”.
But the great man himself always likes to say that the infamous Greek prophet Cassandra was actually right… so did he try and moderate his caution and beat City expectations, as has happened so often in the past?
Well, the underlying pre-tax profits of £790m were more or less bang in line with the guidance given on January 4 after the disappointing Christmas trading statement.
And the 2017/18 guidance that profits are likely to drop further, to between £680m (-14%) and £780m (-1%) was maintained.
Next still think that this will be a tough year given the downwards pressure on sales and gross margins and the upward pressure on operating costs.
Interestingly, the word Brexit was not mentioned in either the results statement or the presentation to analysts.
Wolfson pinned the problems of the clothing sector on three potential threats: the sectoral shift away from spending on clothing (from ”stuff” to ”experiences”); the product price inflation driven by sterling’s devaluation; and the squeeze on real incomes in the wider economy.
Interestingly, the word Brexit was not mentioned in either the results statement or the presentation to analysts
All this seems fair enough and Next is right to be budgeting for further significant declines in like-for-like store sales at the UK Retail division.
A caveat to that will be stress tests showing that branches would still remain profitable even if the recent rates of like-for-like sales decline continued for 10 years (by which time 70% of leases would have expired).
Of course, just as in 2008/09 at the height of the financial crisis, Next is not just accepting whatever the economy throws at it and is focusing on all it can do to improve things internally, in terms of the product, online efficiency and stores.
In terms of the product, Next now admits that in the rush to move into fast fashion last year, it neglected core “heartland” ranges and that shortage cost it a lot of business.
Next is engaged in a huge variety of projects, ranging from an improved mobile website platform to the new marketing of credit accounts
In fact, its optimism that sales momentum will get better gradually this year, after a poor first quarter, is based solely on the view that it will get range issues right by the start of the second half.
In terms of online growth, Next is engaged in a huge variety of projects, ranging from an improved mobile website platform to the new marketing of credit accounts, to faster registration and faster checkouts and the new ‘Next Unlimited’ offer of free next-day delivery for customers willing to pay a £20 annual fee.
The world is not exactly standing still in this sort of field – competition is fierce – but it sounds as if Next is doing all they can to maintain the sales and profits of the lucrative Directory operation.
Stores still star
As for the stores, space growth will continue as new branches are still very profitable.
Next showed today that management remains very focused on exploiting and maintaining the strengths of the business
In fact the 32 large-format retail park stores opened since the pioneering Shoreham unit in 2011 made a healthy £95m branch contribution last year.
And, beginning with the £10m refit of its huge Manchester Arndale flagship store, Next is determined to make its bigger stores more exciting places to shop and generate more income, by sub-letting surplus space (for bars, restaurants, stationery concessions, hair salons, florists etc).
Many challenges remain and the economic headwinds may well get worse, but Next showed today that management remains very focused on exploiting and maintaining the strengths of the business and generating some offsetting tailwinds.
And the 8% rise in the share price so far today shows that the City feels relieved that Wolfson has got the balance right.