Market darling (and not without reason) Next (NXT) reported this week that it had beaten expectations, courtesy of better-than-expected sales in the first quarter. It’s held up as the poster child for its detail in its communications to the market, and takes the time to explain how the business is performing as well as what investors can expect in future.
It’s one of the few retailers that is performing strongly, and with pre-tax profit margins of 19 per cent it’s easy to see why this business is the sector favourite. But just because a retailer is a favourite now doesn’t mean it always will be. Remember, Tesco (TSCO) was once a market darling because of its fat profit margins and rollout of out-of-town shopping centres, meaning it could increase the space of shelving and ramp up stock-keeping units (SKUs), as well as charge ‘back margins’ by offering suppliers preferred retail shelf space, such as close to the checkout or at the end of an aisle.
But Tesco’s profits were high because discounters didn’t exist and shelf space was finite. Along came the internet, which made shelf space unlimited, and instead of responding to the discounters with a war on price to drive them out of business, the Big Four supermarket management teams showed their naivety. They refused to abandon the golden goose that had served them so well in prior years but was no longer golden. The financial crisis hit, and Tesco opted to keep prices high, citing inflation. This instead drove shoppers into the welcoming arms of Aldi and Lidl. And supermarket shares have never been as profitable since.