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Next and the great e-commerce ‘shove’

Online scale and diversification meant the retailer remained profitable in the face of store closures
Next and the great e-commerce ‘shove’
  • The FTSE 100 retailer’s earnings dropped by almost a half last year, but online sales boomed
  • Next’s results were delivered against a rapidly-changing retail backdrop, with questions about how far online shopping will sustain as lockdown eases

As Easter weekend drew to a close, Boris Johnson brought hope of an economic resurrection to the people of England. Addressing a Downing Street briefing, the prime minister confirmed that the country would move onto ‘step two’ of its path out of lockdown – gradually reopening sectors which have suffered acutely over the past year.

Gyms, zoos, holiday campsites, hairdressers and beer gardens will resume trading this month, “cautiously”, Johnson warned, “but irreversibly”. Under Westminster’s exit plan, retailers across the country will also be allowed to raise their shutters once more.

Yet for many such businesses and their employees, the die is already cast. Despite extensive government relief programmes, almost 190,000 retail jobs have been lost during the coronavirus pandemic, according to data from the Centre for Retail Research produced exclusively for the PA news agency.

The blow has been severe enough to prompt industry leaders and retail experts including Mary Portas to launch a ‘Save the Street’ call to action, arguing that stores should receive the same help granted to restaurants last summer. So perilous is the situation, they say, that one in three British brands is at risk of disappearing this year alone.

Under a mooted ‘Shop Out to Help Out’ scheme, the government would cover half of the cost of goods at independent retailers, capped at £10. “The retail sector represents 20 per cent of the UK’s GDP”, the campaigners wrote in an open letter, “and it’s our independent retailers who will play a vital role in the economic recovery of local neighbourhoods”.

That said, the havoc wreaked by Covid-19 extends far beyond independents and mom-and-pop stores. As has been well-documented, various big chains have also been hit since the virus first took aim.

Fashion group Arcadia – purveyor of Topshop and Topman clothing – entered administration in November. Debenhams followed suit in December.

History ‘given a shove’

In short, the UK high street could look very different when the pandemic is over.

Yet the decline of physical retailing was not instigated by Covid-19. Rather, the global health crisis has expedited a pre-existing trend away from in-person shopping and towards the digital realm. As Lord Wolfson, chief executive of fashion and homeware company Next (NXT), put it: “History has been given a shove and, having moved forward, seems unlikely to reverse”.

For Next, however, this ‘shove’ was arguably more of a push. The FTSE 100 giant was “well placed to cope with the pandemic”, management said within its full-year report posted earlier this month, not least because of its extensive online footprint and the diversity of its product-base. The latter trait meant that the group could respond to changing preferences as consumers worked from home.

Such Darwinian advantages lend credence to Next’s status as a ‘great survivor’ against a rapidly shifting retail backdrop. However, the group still faces the challenge of keeping its remaining store estate relevant once restrictions ease, amid a wider discussion about how far customers’ e-commerce habits will sustain as restrictions ease.

Moreover, while its pivot online has outpaced that of high-street rivals, Next’s competitive arena now includes internet connoisseurs from Asos (ASC) to Amazon (US:AMZN). Notably, Asos bought Topshop and other brands from Arcadia for £295m in February. This followed peer Boohoo’s (BOO) move to acquire Debenhams’ intellectual property and customer data, but none of its tangible assets.

Resilient, but not immune

A decade ago, Next’s online overseas and ‘label’ businesses (non-Next brands) were “mere glints in the corporate eye”, the company said as it delivered its annual results. They are now expected to rake in £1.3bn in the financial year ahead, constituting almost a third of group sales.

Yet, in management’s words, “the building of a diverse, profitable, and well financed business, along with the development of new online routes to market, has not been accidental”. Instead of following a dedicated strategy, the group has “followed the money”, adapting to the “simple truth” that “retail stores were, and will remain, at a fundamental and irreversible disadvantage to online competition”.

Supporting its depiction of a multi-year, conscious transition, Next’s online revenues (including its financial products) are projected to rise by more than 400 per cent between 2005 and January 2022, making up almost three-quarters of its top line.

It helps that online sales were particularly strong in the 2021 financial year. In the second half alone, £368m in sales lost from Next’s retail stores were mitigated by online sales of £364m.

In turn, Next’s revenues slipped by just 18 per cent overall to £3.3bn. Operating profits came in at £445m; a fall of almost 50 per cent, but still better than the first-half loss posted by fellow retailer Marks & Spencer (MKS) last November; not to mention John Lewis’s full-year decline into the red.

Moreover, for the first eight weeks of FY2022, online sales are more than 60 per cent ahead of where they were two years ago. It follows that Next has raised its central profit guidance from £670m to £700m.

Still, the course of the pandemic never did run smooth. To that end, Next will not pay a full-year dividend until there is clarity on post-lockdown performance. Such performance will be determined, in part, by the rate at which customers return to stores.

For now, the group plans to reduce its occupancy costs to levels that its retail sales can support. Tellingly, 80 leases expired last year, Next closed 18 branches and it renegotiated rents in 62 shops. The group is also lowering its staffing costs. However, demonstrating efforts to reinvigorate its remaining physical space, the group will simultaneously boost its in-store online services such as collections.

John Lewis’s closures

Next is far from alone in tapering its store presence. Last month, John Lewis said that it would not reopen eight of its 42 stores when restrictions eased from 12 April. “Given the significant shift to online shopping in recent years - and our belief that this trend will not materially reverse - we do not think the performance of these eight stores can be substantially improved”, the company said.

This announcement followed on from eight John Lewis store closures in the year to 30 January. The question for the company now is how far it can compete, not only with businesses like Next but also with individual brands themselves – some of which could arguably opt to chase higher margins by engaging directly with consumers.

This is a scenario faced by sportswear retailer JD Sports (JD.) too, as two of its top labels – Nike and Adidas – have intensified their focus on ‘direct to consumer’ shopping during the pandemic.

For Next, however, its new ‘Total Platform’ may help in this regard. By offering brands access to Next’s online infrastructure (its website, call centres and distribution network, among other areas), the group should keep such partners on-side.

What next?

It is nigh impossible to gauge what post-pandemic behaviour, and post-pandemic personal finances, will mean for physical shops. Yet Next's digital savvy, attractive platform offering and varied merchandise are powerful weapons in a brave new world of retail where online competition is only heating up.

In that context, a forward price/earnings multiple of 18 times seems justified; higher than M&S's rating, but well below Asos. Still, to survive and to thrive are rather different fates. Time will tell which one plays out for Next, but history suggests the latter. Buy.

NEXT (NXT)    
ORD PRICE:7,920pMARKET VALUE:£ 10.5bn
TOUCH:7,892-7,920p12-MONTH HIGH:8,232pLOW: 3,429p
DIVIDEND YIELD:nilPE RATIO:35
NET ASSET VALUE:497pNET DEBT:102%
Year to 30 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20174.10790441158
20183.87726417158
20193.92734442165
20204.0074947257.5
20213.28342223nil
% change-18-54-53-
Ex-div:na   
Payment:na