Next upgraded its profit forecast on Tuesday after an expected slowdown in summer sales did not materialise, and as online revenues outstripped in-store sales at the high street chain for the first time.
Unusually, the company’s pro-Brexit chief executive Simon Wolfson also included a long statement in the half-year results on Tuesday on the potential impact of leaving the EU without a deal.
Next said the maximum potential cost of additional duty after a no-deal Brexit would be roughly £20m, which would add about 0.5 per cent “at most” to prices. It added that a greater risk was that of disruption at ports and other entry points to the UK.
Shares in the group jumped as much 9 per cent after the chain reported an increase in sales for the six months. This was despite fears that unusually warm weather during its second quarter would lead to shoppers buying shorts and T-shirts earlier in the year than normal.
“As it turned out, we did not experience any material loss of sales in August or early September,” it said, raising its forecast for full-year pre-tax profit by £10m to £727m.
Total sales rose 3.8 per cent, but that masked big divergences. Online revenues, including finance income, rose 16 per cent and now exceed in-store sales, which fell 6.9 per cent. Lower sales across a largely fixed cost base made for lower store margins — they declined by 1.7 percentage points in the first half and the company expects a similar decline over the full year.
Half-year pre-tax profit was £311m, up slightly from £309m last year. The interim dividend was lifted by 2p, to 55p.
“For the first time it feels like the incremental profit from online can outweigh the drag from the store sales,” said Greg Lawless, analyst at Shore Capital, who noted also that executives have stopped referring to “Next Directory”, the chain’s catalogue, and talk instead about “Next online”.
Next is mitigating the declining profitability of its stores in several ways. One is cheaper rents; the 33 leases it has renewed so far this year were at an average rent a third lower, with rent-free periods of about eight months. Fifteen mainline stores closed as their leases ended. “We believed it was unwise to make a new long-term commitment to these shops at this level of profitability,” the company said, adding that it had seen encouraging levels of sales transfer to nearby stores.
Lord Wolfson said landlords were “being very reasonable” and stressed that Next was not retrenching. “We do not anticipate closing stores at a faster rate, but just because a store is profitable does not mean we will renew the lease,” he said.
Stores are also being used to supply items for same-day click-and-collect sales, and feeding online deliveries if warehoused stock is unavailable. In larger stores, concessions ranging from Paperchase outlets to car dealerships have been introduced.
Capital spending on the shops will remain steady this year, but capex to support online sales will exceed it next year. The shift to online is also evident in marketing, where digital spend is set to double while spending on traditional forms of marketing will halve. “They are looking at what the likes of Asos are doing and following suit,” Mr Lawless said.
On the subject of Brexit, the company said that while a “departure from the EU without a free trade arrangement and managed transition period is not our preferred outcome . . . Next is well prepared for this eventuality and we have all the administrative, legal and IT framework in place to ensure that we are able to carry on running the business as we do now.”
Get alerts on Next PLC when a new story is published