More than half of online orders are picked up in Next shops, and 80% of returns come back to its stores, some of which include restaurants and prosecco bars.

(Bloomberg Gadfly) Over fifty per cent of online orders and eighty per cent of returns are fulfilled through our shops. —Simon Wolfson, chief executive of Next Plc, has a reputation for looking on the bleak side.

But he’s also not afraid to point out when times are changing for the better. On Thursday he modestly upgraded profit forecasts for the full year, and said the company would resume its share buyback program. Next is No. 15 in the Internet Retailer 2017 Europe 500.

While he may come to regret those comments if the retail market takes another lurch downwards, judging by the 12% bounce in the shares, investors believe him.

They should do. Next, despite its recent travails, is a quality operator with the flexibility to withstand a further consumer slide.

It has had a torrid time over the past 12 months, hit hard by consumers falling out of love with fashion, compounded by a shortage of classic styles and its online Directory business losing its edge.

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For the half year ended July, Next’s Directory sales, which online, increased 5.8% to 868.4 million pounds ($1.16 billion) from 821.2 million pounds a year ago. Store sales declined 8.3% to 993.2 million pounds ($1.33 billion) from 1.083 billion pounds in the year-ago period. Total Next Group sales fell 2.2% to 1.914 billion pounds from 1.957 billion pounds from the same period in 2016.

But efforts to improve its product ranges and investments in Directory are showing early signs of success.

The company’s also making progress tackling the drag from its store estate. Analysts at Berenberg have argued that Next has too much physical selling space, given the shift in shopping habits to online.

It’s being more cautious on opening new stores, and will spend an extra 5 million pounds ($6.6 million) a year for the next five years upgrading current outlets. There should be an added benefit as the company joins the trend for putting restaurants and prosecco bars in stores. And Wolfson rightly points out that the shops create an advantage, in that they serve the online business by letting customers pick up and return orders. Next, in its report for the first six months of its fiscal year through July, states that more than 50% of online orders and 80% of returns are fulfilled through its stores.

The shares have made up the ground they lost after a profit warning in January. They trade on a forward price earnings ratio of about 12.5 times, just ahead of Marks and Spencer Group Plc (No. 23 in the Europe 500).

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It is right that Next has lost the discount to its rival. M&S has turnaround potential aplenty as seeks to revive its clothing business, turbocharged by the recent arrival of veteran retailer Archie Norman as chairman. But it needs to actually do it. And its upmarket food business has begun to run out of steam, a worry as consumer incomes get squeezed.

As Gadfly has argued, despite Next’s stumbles, it remains highly cash generative. It is also not alone in grappling with the problems of having a large store base in an increasingly online world, but the company’s in a better position to deal with it. Next has already been proactive, moving from smaller high street shops to out-of-town department stores. And it has more flexibility to adapt to changing conditions than most, as the average lease length is just seven years, and 72 percent of them will expire over the next decade.

Of course, part of the reason for Next’s recent optimism may be that the weather has been particularly favorable: the importance of high temperatures in the early summer and current autumnal conditions can’t be overstated, as many customers buy clothing only when they need it.

The crucial Christmas trading period will be a test of whether it really has put its self-inflicted wounds behind it. But it looks as if Next’s revival is built on more than just fair weather.

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

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