Next profits dip, online business grows, set to be bigger than stores
today Mar 21, 2019
Next delivered full-year profits in line with its guidance on Thursday and also reported higher full-price sales. But that's not to say the results statement for the year ending January was full of good news as its full-price sales in its retail stores fell by as much as 7.9%. But in that respect it was no different from many of its retail peers – Next is clearly navigating turbulent waters and doing reasonably well at it, even though it's seeing some weakness.
It said the year was challenging and it “continued to experience a structural change in our business, with sales continuing to transfer from our stores to online.” But on an upbeat note, it said lower trade tariffs under a no-deal Brexit could save it millions and lead to modest price cuts.
Next chief Simon Wolfson added that consumers seem “numb to the daily swings in the political debate” around Brexit and there’s little evidence that this is affecting demand for fashion products.
In the latest year, total group sales were £4.2bn with full price sales rising 3.1%. That divided into a 14.8% increase online and that almost-8% fall for its physical locations.
Its retail store sales dropped to £1.95bn from £2.12bn a year earlier, while online sales rose to £1.91bn from £1.67bn. This is particularly significant because online sales are now almost as big as those through retail stores and chances are that by next year, they will be bigger. It means, perhaps, that we should no longer be referring to Next as a retail chain with an online arm, but as an online retailer with a retail stores arm!
The company also said that its finance sales rose 12.1% to £250m and it all meant total group sales were up 2.5% to £4.22bn.
What did this all mean for profit? Group pre-tax profit was £722.9m, down 0.4% on last year. Retail profit fell 21%, but online profit was up 13.8%, while profit after tax dipped slightly to £590.4m from £591.8m. The group said it expects profits to “marginally” decline by around 1.1% to £715m in the current financial year.
The company spent the bulk of its results report looking at the "big picture" and that was understandable given its flip from a mainly physical stores retailer towards being a mainly online one.
It said that “the internet has been good for consumers [with] access to an unprecedented choice of goods along with delivery networks that are faster, more efficient and cheaper than ever before. One way or another, less clothing, homeware, electrical goods and food are going to be sold on the High Street and more sold online. For Next, we believe that this market represents a long-term threat to our retail [stores] business but potentially, a much larger opportunity for the group as a whole.”
Next said the shift online brings it particular challenges as “last year, every pound of Next business that transferred from retail to online cost an additional 6p [and] in the short to medium term, the costs of structural change will persist.”
The company said “these costs mean that we have had to work very hard to stand still and the year ahead looks like more of the same.”
But it’s staying confident in the longer-term growth prospects for the group and said its stores “remain a valuable financial asset and an increasingly important part of our online platform.” Also, while retail costs remain fixed in the short term, “they are likely to decline in the longer run - they are not an everlasting weight on the business.” And it said “the internet age offers new and unexpected opportunities for growth as a UK aggregator and overseas brand.”
STORES VS ONLINE
The company stressed its commitment to its stores, saying “the shift online is not quite as one-way as it might first appear. It costs us less to deliver online orders to our stores than to a customer's home. For many customers the store collection service is not only cheaper, it is also more convenient. As a result, around half of our online orders are delivered to our stores. These orders, though smaller in value than orders delivered to home, represent one third of our online turnover.”
And the shops are even more important in facilitating returns. Over 80% of all its online returns come back through its stores. So, for the moment, its “retail estate and staff remain central to the service we offer online.”
But it admitted that it still has too much space and that the space it has is costing it too much. Last year saw it negotiating a rent reduction of 29% on the leases that it renewed and further reductions on leases renewed in the previous year. It expects similar cuts this year too.
Importantly too, the company said it also remained committed to its third-party Label business which now turns over £400m and delivers a profit of £66m. While that means it sells brands that compete with its own label, it recognises that customers will go online and will find those other brands somewhere else, so it would rather it finds them via Next than via its competitors.
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