Next fixes its mistakes

The face of UK retail is changing as millennial trends take over and online shopping dominates. But bosses at Next believe “unusually high” cost inflation, a squeeze on real incomes, and a shift away from discretionary spending on clothing - in favour of leisure and entertainment - are all cyclical issues, implying they could conceivably reverse.

If not reversed, then at least some of these pressures have certainly stabilised. The pound has settled around 11 per cent below pre-referendum levels, and Next has mitigated much of the impact via new arrangements with existing suppliers and finding brand-new supply sources too. The group also believes the pricing environment will be “much more benign” this year, leaving year-on-year costs more comparable. The decline in real incomes has moderated too, which reflects the easing of inflation in Next’s own business across the wider economy.

But the group has made mistakes – particularly in terms of unappealing product ranges, incorrect cost allocation, poor in-store experiences and inefficient stock management and fulfilment. It shouldn’t be surprising, therefore, that Next's retail sales fell by nearly 8 per cent to £2.12bn last year. But quick action to make clothing ranges less fashion-driven and more focused on “easier-to-wear, heartland” items helped online sales grew by 9 per cent to £1.89bn. Even better, within that division, full-price sales grew 11.2 per cent – an encouraging achievement in a competitive clothing market. Last year’s poor start should also flatter first- and second-quarter figures this year, although comparatives will get tougher moving into the second half.

Analysts at Peel Hunt still expect pre-tax profits of £727m for the year ending January 2019, giving EPS of 409p, compared with £726m and 416p in FY 2018.