Mar 23, 2017
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Next results make tough reading but online, new stores, Lipsy and Label are strong

Mar 23, 2017

So just how bad were Next’s full-year results? Well, they were not great and the outlook was discouraging with the firm talking about a “sectorial shift” as consumers move their spend away from the fashion sector.

But with its profits decline having been widely flagged in advance, there was little to shock in the Thursday morning statement. And it would be a brave analyst who suggested Next was in terminal decline as the firm has previously shown an impressive ability to bounce back.

Next had a tough year and expects more pain ahead

The company has plenty of bright spots with Next Directory still strong online at home and abroad, the Lipsy and Label businesses outperforming, and new or refurbished stores certainly proving their value. But for now the big headline story is its sales and profits woes.

However, it admitted that a focus on changing its buying culture while adopting “exciting new trends” saw it missing some of the “best-selling, heartland product… easy to wear styles that can be delivered in large volumes and great prices across several colours” from its ranges. It has started to address this and the new approach should yield results by the autumn season.

So let’s look at the numbers. In the year to January 2017, underlying pre-tax profit declined 3.8% to £790.2m, a figure broadly in line with predictions of a 4% fall. Profit after tax fell to £635.3m from £666.8m.

It saw a profit decline of a massive 15.8% at Next Retail, which is undeniably troubling, especially as a 9.6% increase at Next Directory was simply not enough to make up the shortfall. It meant profits for the Next Brand as a whole fell by 3%.

Not that the sales picture looked quite as bad as those profit figures would suggest. Next Retail sales excluding VAT fell 2.9% to £2.305bn and Next Directory sales rose 4.2% to £1.728bn with the result that overall Next brand sales were broadly flat. Other revenue was down to £103.7m from £117.5m meaning a revenues decline for the whole company of 0.3% to £4.137bn.


Unsurprisingly, outgoing chairman John Barton described the year as “challenging” but he did highlight how the firm has recovered from downturns before, referring to 2008 when profits fell and the share price was halved, only to grow strongly a year later.

But when chairmen have to make points like that, what is clear is that things are not going well and the company’s inability to sell more goods at full price is a fundamental problem.

Next saw strong sales online

CEO Lord Wolfson said that while 2016’s Next Brand total sales were level with last year, full-price sales were down 1.3%. That is where the profits problem lies as margins are hit and the company has to work so much harder for every £1 of profit it makes. The retail net margin of 14.7% compared to 16.9% a year earlier made that very plain.

And with net new space of 2.5% contributing to the sales figures, that meant comparable sales were in negative territory, not surprising given that inventory going into its clearance sales rose 17% year-on-year.


But while stores are suffering, does that mean the firm is re-assessing it approach to physical stores. Yes insofar as stores are being modernised, but no if you think that it will retreat from bricks-and-mortar retail. In fact, the company said that stores opened or extended in the last 12 months are performing well above its profitability benchmark and paying back their investment within 24 months. As well as benefitting from its latest design concepts, Next said the new stores are also “ significantly cheaper than the current portfolio, both in terms of rent per square foot and rent-to-sales ratio.”

In fact, as a result of the “active management of the store portfolio,” the vast majority of its stores make a healthy profit, with 97% of its space delivering a net branch profit of more than 10%, it said Thursday.

But it cannot be denied that it is online where the firm continues to shine. The Next Directory operation may not have the ‘first mover’ advantage it once enjoyed, but it is still growing, as the figures show. And that is happening abroad as well as at home with while overseas Directory sales up 18.5% to £36m.

The firm said that Directory is benefitting from improved stock availability, enhanced website functionality.

The Directory ops also benefitted during the year from the convergence of the UK and overseas websites allowing faster rollout of new functionality and content across all websites, as well as the domestic market launch of mobile websites and improved apps for Apple devices.

The company also launched a new stock ordering system for Directory, improving stock availability from 65% to 70%, boosted parcel shop collection so that this now accounts for 2% of its delivery volumes, developed a new flowers website, and improved online sofa selection and ordering.

Florist services is one area where Next has boosted its online ops

It spent £6m more on marketing all this during the year and expects to continue to support Directory this year with more targeted advertising and more personalisation.

Next said it would also increase spending by £11m this year to develop its online services and capabilities. Key features will include the rollout of Next Unlimited which allows customers to pay £20 for a year's unlimited next-day delivery anywhere in the UK and Northern Ireland.

Also added will be a rebranding of its Directory Account as 'nextpay' along with the development of new, more targeted, credit offers; a save for later facility and saved bags across devices; implementation of systems allowing a deeper level of personalisation; precise delivery service offering a one hour delivery slot, selected at checkout, for a £2 premium; a website redesign, including faster and simpler registration and checkout; and the launch of an overseas mobile website. Currently mobile users overseas can only access a desktop website on their mobile devices.  


Not that the Next brand in-store and online is the firm’s only focus. The continued growth of its brands-based Label offer is key and full-price sales at Label in the UK rose 18.9% during last year to reach £34m

And the Lipsy business, the young fashion brand, saw total sales up 22% to £90.6m, despite dips in wholesale. The company said Lipsy has continued to reduce its UK wholesale business which is less profitable than (and competes with) its other sales channels. But this has been more than offset by increased Lipsy sales in Next Retail and Directory.

So where does all that leave us as far as the outlook for the whole company is concerned? “We remain extremely cautious about the outlook for the year ahead,” it said. “The clothing sector faces three potential threats: a sectorial shift away from spending on clothing, price inflation as a result of sterling's devaluation and potentially weaker growth in real incomes in the wider economy.

Lipsy is another bright spot for Next

“These headwinds are likely to be felt most acutely in our retail business, as sales continue to migrate away from the high street to online shopping.”

What that means in practice is that the year ahead is too tough to call. As a result, Next is predicting full-price sales that will be anywhere from up 1.5% to down 4.5% (or a range of -3.5% to +2.5% with currency gains added-in). Pre-tax profit should fall 13.9% to £680m.

As we said at the start, not a great set of results and certainly not an encouraging forecast. But there is enough in there to suggest Next could just pull off one of its stunning turnarounds again. Only time will tell.

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