Next Finds It's Worth Sticking Some Cars in Your Clothes Shop

(Bloomberg Gadfly) -- The chill winds sweeping across Britain's high street have touched its strongest player: Next Plc.

The retailer reported its second consecutive fall in annual pre-tax profit before exceptional items after what it described as its most difficult period in 25 years.

But it maintained its guidance for the current financial year despite recent arctic weather.

There were a couple of niggles. Net debt has increased to just over 1 billion pounds ($1.4 billion) from 861 million pounds last year, while inventories also climbed by almost 9 percent. Meanwhile, Next is still forecasting a decline in margins this year due to the transfer of sales from stores to online.

That is a concern, even as Chief Executive Officer Simon Wolfson forecasts that the squeeze on consumers should start to ease this year.

But Next deserves credit for tackling head on the plethora of issues it faces as a mature retailer, with a large store base, and significant exposure to the clothing and home furnishing sectors.

It is already reshaping its real estate portfolio, and expects to renegotiate leases on 29 stores this year, which should result in a 22 percent reduction in rental costs. Another 10 smaller units will close.

These actions seem to be paying off. The company was in the habit of stress testing its stores against a 6 percent deterioration in like-for-sales, but in its most recent analysis it increased this to a 10 percent sales drop. It found that at the deeper level of sales decline, there's a cash drain of as much as 19 million pounds within 15 years.

However, leases will expire in all but 10 stores within that time, so it should be able to exit underperforming properties before they become too much of a drag.

Next is also taking other steps, such as putting services and restaurants in its larger stores. While there is a question mark over whether some additions -- for example, a car showroom in Manchester -- represent the right fit, at least it is doing something.

Similarly, it is trying to improve its online operations, as rivals have eroded some of its advantage. By far the most profitable part of its Next Directory business is its credit customers. It is exploring offering credit in store. This is risky, but it's a step worth taking.

Shares on Friday rose more than 6.5 percent. Next trades on a price to earnings ratio of around 12 times, a premium to M&S, which is just under 10 times.

While both retailers are under pressure as customers age and consumer taste change, Next's premium is deserved.

It is being proactive, but as it's taking incremental steps its actions shouldn't be too much of a jolt to the business.

M&S Chairman Archie Norman is also making changes, such as appointing a new food head on Thursday. But those alterations risk significant profit gyrations from, for example, resetting prices in food, big capital investment in infrastructure and potential write-offs of past spending.

Next is by no means perfect. But the likes of Toys "R" Us failed because they didn't try to adapt to shifting consumer habits. Next's actions might not pay off, but nobody can accuse it of standing still. 

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

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

©2018 Bloomberg L.P.

Bloomberg
View Opinions From Business And Policy Experts On BloombergQuint