The British Company That Doesn’t Fear a Hard Brexit

(Bloomberg Opinion) -- As Britain appears to be careering toward a no-deal Brexit, Next Plc Chief Executive Simon Wolfson is trying to reassure investors that the company should come out largely unscathed. That sounds overly optimistic, but Next has less to fear than most retailers.

Wolfson, a Conservative Party peer and well-known Brexit supporter, says that as long as Britain’s ports operate effectively, Next’s operations and profits won’t be significantly impacted.

That’s a big if. To be sure, Next doesn’t rely heavily on the Port of Dover, widely expected to face the biggest crunch if the U.K. crashes out of the European Union without a deal. But a disorderly Brexit on Oct. 31 could be a logistical nightmare for retailers because warehouses will be full of Christmas stock, leaving them little room to stockpile other items. A no-deal scenario could also make consumers reluctant to spend, especially if it results in higher inflation, as many expect.

The good news is that Next won’t be suddenly facing higher tariffs. It estimates that the U.K. government’s temporary tariff regime that will come into place in the event of a no-deal Brexit will actually reduce the duties on most clothing, saving the company 25 million pounds ($31 million) in the first year. That’s a mere rounding error for a company the size of Next, so not exactly a major boon, but still a plus.  

With U.K. inflation in August at its lowest rate since 2016 and wages rising, consumers have more spending power. But Next is already facing disappointing sales at the start of the autumn season, which caused shares to fall as much as 5%. The company blamed the warm September weather rather than political turmoil. Even so, it’s a worry ahead of the peak trading season.

There’s no doubt that Brexit uncertainty has weighed on consumers’ willingness to spend. British home-improvement retailer Kingfisher Plc said Wednesday that it had affected sales of higher-priced items like kitchens. Overall U.K. sales of household goods fell in August compared with the same period a year earlier.    

But even in a worst-case scenario of a no-deal, Next is better placed than most retailers. It believes the broader political uncertainty is less likely to impact smaller-ticket purchases such as clothing. And Next has outperformed many of its rivals in what has been a cut-throat retail market. It has developed a strong online business and isn’t saddled with too many stores with long leases or in the wrong places. It’s also been quietly developing Label, through which it sells third-party fashion brands.

Next’s clothing lines are now hitting the right notes. After admitting it got too trendy a couple of years ago, the company appears to have found the right balance between style and predictability.

The shares have risen almost 55% this year, far outperforming both competitors and the broader FTSE 100 Index. Next trades on a forward price earnings ratio of about 13 times, at a deserved premium to Marks & Spencer Group Plc, whose shares have slumped almost 15% this year after its pricey Ocado deal and subsequent rights issue.

All retailers need to worry about the danger of a hard Brexit, but Next should emerge in better shape than most.

To contact the editor responsible for this story: Stephanie Baker at stebaker@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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