Next sales and profits drop but firm is upbeat despite toughest year yet
Former stock market star Next has been facing tough times and its annual results on Friday illustrated that very clearly. And it expects those tough times to continue with total sales for the current financial year predicted to be up just 1%.
But while the year that ended in January wasn’t great, as expected, it wasn’t a wipeout either and the company’s shares rose after the news was released.
The company described it as “the most challenging year [it has] faced for 25 years” and said that full-price sales through its stores (Next Retail) fell 7%, which looks bad. But Online (what used to be known as Next Directory) rose by 11.2% and that resulted in total group sales of £4.1 billion, down only 0.5% in a year that could have been a lot worse.
As mentioned at least the year ahead should see it back reporting positive total sales, albeit only slightly positive as the environment will remain difficult. But the company thinks that it knows what to do to drive growth after owning up to self-inflicted trend-led product ranging errors and omissions in earlier periods. It’s boosting product, making stores more appealing with add-on experiences, controlling costs and ensuring that customers can get the products they want, and get them fast, when they order online.
As mentioned, group sales edged down 0.5% in the year to January to £4.117 billion (excluding VAT), but Next Brand full-price sales rose 0.7%. Next Brand total sales dipped 0.6% to £4.01 billion with Online up 9.2% to £1.887 billion and Retail down 7.9% to £2.123 billion. And operating profit was down 8.2% to £759.9 million with net profit falling to £591.8 million from £635.3 million. Next Retail saw its operating profit falling 24% while Online profit was up 7.4% and Next Brand profit dropped 6.8%.
Clearly, the Retail operation is the biggest problem and sales there fell despite new space contributing an extra 2% to sales. But Online continues to prosper and all aspects of this operation are doing well. International online sales rose a healthy 26% (or 10% with currency exchange issues factored-out) through its own sites and third-party sites, and that’s before it’s rolled out many of the functionality improvements that UK customers have enjoyed.
But the Next brand isn’t the end of the story. The firm’s other owned brand, Lipsy, saw a 27% sales rise to £114. 9 million. Lipsy has continued to reduce its UK wholesale business which is less profitable than (and competes with) its other sales channels and this seems to have been the right thing to do as sales via its own website rose to £10.4 million from £8.9 million and through Next Online they rose 62%.
Having looked back, what’s Next doing to look to the future given that it has been facing “unusually high” cost price inflation, squeezed incomes among its customers, and “a sectorial shift” away from straightforward shopping and towards experiences?
Well, on those three fronts, it sees the issues as cyclical and they should, at some point, go into reverse. Does that mean it’s going to sit back and do nothing? Not at all, although there’s a limit to what it can do.
The company said the pound seems to have settled at a level around 11% lower than two years ago and it has been very active in negotiating better sourcing deals. But it still saw prices up around 4% last year, affecting SS17 and AW17 ranges. But for SS18, the price rise is only 2% and by next season should be zero.
There’s little it can do about squeezed consumer incomes and it said this will remain a headwind in the year ahead, but it can do something about its product. Having admitted mistakes as it “allowed [its] ranges to become too focused on more fashionable lines and omitted some of [its] easier-to-wear heartland product,” it has been working hard and is “much happier with our ranges as we go into 2018.”
The action plan for the year ahead is to continue to focus on improving its product lines, to “defend Retail sales and profitability,” as well as maximising the potential for profitable growth online and to “attack costs through innovation and negotiation.”
The approach taken to “defend Retail sales” is interesting. It’s introducing restaurants, cafes and other concessions that generate additional revenue and increase footfall to its shops, as well as managing its costs “down to a level that suits the current retail environment.”
Its Manchester Arndale store, for instance, has a florist, prosecco bar, restaurant, children's activity centre, café, card & stationery shop, barber and, shortly, a car showroom. And it’s in talks to add a spa operator and bridalwear concession. It estimates that the concessions in Manchester will deliver around £800k of income to the store, accounting for around 40% of its rent, and 22% of total occupancy cost.
Importantly too, it said “we can develop the positive role our stores already play as an integral part of our Online platform bearing in mind around 50% of our orders are delivered through stores.” It has introduced ‘find in-store’ and same-day click-and-collect to counter the fact that 10% of online stock ordered is out of stock in a warehouse but that it could be located in a store near the customer. The company started this service in September and will widen it out this year.
But improvements will take time to come through and for this current year, the company expects full-price Retail sales to drop 8.5% and total Retail sales to be down 7.4%. Online full-price sales should rise 10.3% which means total full-price sales will edge up by 1%. That won’t exactly set the champagne corks popping but it’s good news nonetheless and shows Next is in recovery mode.
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