January 3, 2018 / 12:12 PM / in a year

Breakingviews - Next cheer may delay essential style overhaul

Mannequins are pictured in the window of a Next clothing store in London March 26, 2009. REUTERS/Luke MacGregor

LONDON (Reuters Breakingviews) - A merry runup to Christmas may delay Next’s much-needed style overhaul. The British clothing retailer is more upbeat about the outlook for full-year profit. But healthier sales and diminishing price pressures may allow Chief Executive Simon Wolfson to dodge tough decisions, such as much-needed store closures.

Next on Wednesday increased the midpoint of its full-year profit guidance by 1 percent, to 725 million pounds. Though modest, the rise shows the retailer is selling more goods at full price and discounting less stock at margin-dilutive end-of-season sales. There is also good news on the prices that the company pays for clothing sourced from abroad. Next expects a spike in cost prices caused by the 2016 drop in sterling’s value to fade during the course of this year.

Cosmetic improvements may, however, tempt Next to neglect a basic problem. Its high-street stores are in difficulty, with full-price sales in Next’s bricks-and-mortar shops down 7.2 percent in the year to Christmas Eve. Yet Next will have added around 85,000 square feet of new selling space in the year to January 2018 at a time when other retailers are closing stores.

The issue is easily tackled. Roughly 70 percent of the company’s leases run out within a decade, while many of its rivals are locked into more onerous 25-year contracts. And Wolfson’s group has an edge when it comes to the internet. Thanks to a legacy catalogue business that dates back to the 1980s, its booming online arm now accounts for approximately 45 percent of group sales. Marks & Spencer sells only 18 percent of its clothing and home products over the web.

This advantage is not yet reflected in Next’s valuation. Its shares currently change hands for a little more than 11 times expected earnings for the next 12 months, pretty much the same as the valuation for M&S. By contrast, pure online players such as ASOS command an eye-popping 65 times. Next can close part of the gap by focusing on its fundamental problems rather than the festive cheer.


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