Next over-performs in heatwave, but recent trading is strong too

By

Sandra Halliday

Published
Sep 25, 2018

Any information about the health of the UK high-street is of interest at the moment so the latest half-year results from Next are being closely watched.

And what did we get for the six months up to July? The company said that it “over-performed” in the first half, which is good news. But it added that its results were “flattered by the unusually warm summer” so it's staying cautious.

Full-price sales in the first six months of its financial year rose 4.5%, which was well ahead of the 1% uplift it had predicted as far back as January. But it was also ahead of the 2.2% rise that it was forecasting as recently as May.

Clearly the heatwave took Next by surprise as much as it did everybody else in the UK. But to be fair to the company, it wasn’t only blistering temperatures that drove its sales and it said it continued to take advantage of strong summer sales even after the heatwave faded in August.

“We [had thought] that there was a high risk that the sales gained in July would be offset by losses in August,” it said. “As it turned out, we did not experience any material loss of sales in August or early September.”

The result of all that was that on Tuesday it raised its central guidance for full-year pretax profit by £10m to £727m, broadly in line with last year's profit of £726.1m.

So plenty of good news then. But it also said that “the UK retail market remains volatile, subject to powerful structural and cyclical changes.  Many of these headwinds have not abated.  As expected, sales in our stores continue to be challenging.”

The company also pointed out how much retail is changing, saying that 10 years ago, Next Retail contributed £2.2bn turnover and accounted for 67% of group sales and profit. This year it expects Retail sales, at just under £2bn, to contribute less than half of its sales and only 30% of profit.

It added that the challenge in Retail is twofold. It needs to “rigorously control our Retail costs” and “must ensure that we take maximum advantage of the many lease expiries we will experience over the next few years. Our aim is to manage rent levels and new lease terms to match today's levels of trade and volatility.” And it is “intensely focused on increasing the role our stores play as an integral part of our Online Platform's delivery and returns network.”

THE NUMBERS

That’s the challenge ahead. But what happened in H1? Next Brand full-price sales rose 4.5%, as mentioned, and total brand sales (including markdown) were up 3.9% to £1.939bn. That divided into Retail sales being down 6.9% to £925.1m and Online up 16.8% to £892.3m. Total group sales, including finance and other smaller parts of the business, rose 3.8% to £1.986bn. Group profit before tax was up 0.5% to £311.1m and net profit was £254.2m, marginally up on the £252.2m of a year ago.

Within all this, full-price Retail (ie its physical stores) sales were down 5.3%, which was better than expected. And more good news (in a way) is that it has decided to close seven of its clearance stores at the end of their leases in response to lower levels of sale surpluses and the success it’s having clearing surplus stock online.

It remains heavily committed to physical retail and said that this is also supporting its online operations with a full 50% of the volume of its UK online orders fulfilled through its shops. And it's integrating the two much more closely with more of its retail stock made available to order online. In fact as much as 4% of its online sales are serviced with stock from its shops and this has helped it launch a same-day click-and-collect service for stock that is already available in a customer's local store.  

It's also looking closely at items that sell well online and shifting these quickly into shops that have a high probability of selling that item. “The potential downside is limited because, if required, the item can still be ordered online and serviced from store stock,” it said.

The aim is to bring some of the dynamism of the online offer to its stores but it said “it will take some time to understand whether the economics of this idea make sense, and it will then take more time to master the art of deciding what stock to send to which stores, so it is very early days for this concept.”

And talking of online, as the figures show, this business is thriving. Full-price sales grew 16% in the first half with total online sales growth of 16.8%. 

All of which sounds like Next is on the right track. Investors certainly think it is and the firm’s shares rose over 8% in early trading on Tuesday.