Next could lose £1bn in sales from coronavirus but stays confident on long term
Next, like a number of other major fashion retailers, issued its full-year results this week, but on Thursday what we wanted to hear about was the impact of the coronavirus and that’s clearly taking its toll.
The company said the pandemic is set to produce a “significant downturn in sales”, but what was most interesting is that it has modelled various scenarios linked to the outbreak. And it said one of them could mean a drop of £1bn in full-price sales in this financial year.
That said, this is only one possible outcome and as CEO Lord Wolfson said, it's currently impossible to predict the end result with any certainty.
The two other coronavirus ‘models’ it has produced suggested that sales could drop by around £445m or £820m. With the £1bn potential fall included, that means a potential sales drop overall of 10%, 20% or 25% on an annual basis. But the good news here was that even if the worst-case scenario plays out, the company is confident that it can sustain that loss quite comfortably without exceeding its bond and bank facilities.
So by how much have sales been hit so far? The company shared some tables that showed overall sales rising until mid-February (even though its retail stores were tracking down). Weather issues dented the performance in the middle of last month, then this month has clearly been hurt by the coronavirus. Sales in the week starting March 8 were down 8.8% (nearly 20% in its stores) and between March 15 and 17, they’ve fallen 30%, with a 46% plunge in the stores.
The company said that “the evidence we have from sales to date in the UK and from our (small) international websites in the worst affected countries is that demand will be the biggest issue and although the virus is likely to impact our operations, we do not believe this will be as damaging as the very significant drop in sales sustained both in Retail and Online. Online sales are likely to fare better than Retail but will also suffer significant losses. People do not buy a new outfit to stay at home. [And] some product areas are likely to fare better than others. To date, our homeware and childrenswear sales appear to be less affected than our adult clothing lines.”
Next said it’s looking at a number of cost-control measures and is “adapting its technology for greater home working and seeking to segregate critical operational teams so as to keep all our vital operations and projects on track”.
Looking back at the results for the year to January, the company said full-price sales rose 4% and total brand sales rose 3.5% year-on-year to £4.267bn. Online sales rose 11.9% to £2.146bn, while sales through its shops were down 5.3% at £1.852bn. Profit rose 13.3% at the online operation but fell 22.8% in its physical shops. That said, overall operating profit rose 1.3% to £772.1m and group pre-tax profit was up 0.8% at £728.5m. Profit after tax rose to £593.9m from £590.4m.
The company said it believes Online's sales performance was helped by improved stock availability, achieved through the faster processing of customer returns. This has meant £15m of additional stock (at full selling price) being available to its Online customers at any one time. During the peak trading weeks in the run up to Christmas, the value of additional stock available was £30m.
The most successful initiative has been fast tracking high demand items. High demand stock is now processed and available for resale within four days, which compares with 12 days in the previous year.
And while Retail clearly continues to decline, the company remains committed to its stores. It believes Retail sales were improved last year by better shop-floor stock availability. During the year it increased the frequency of deliveries at a cost of £1m. It also more closely aligned delivery processing shifts to van arrival times to reduce delay in getting stock onto the shop floor. Following these process changes, stock received and waiting to be put onto the shop floor was reduced by 55%.
It continues to add new space and to get better deals on existing space. Last year it renewed 44 leases and rent on these stores reduced by 30%, with an average lease term of 3.6 years. These reductions allowed it to continue to trade in stores which would otherwise have closed.
It also said that its July 2019, acquisition of the Fabled by Marie Claire premium branded beauty business by its subsidiary Lipsy has allowed it to significantly increase the breadth and depth of beauty products sold through the Next Online Platform. Full-price sales were £13m in the year, contributing £2m of profit to the group.
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