Next plc’s (LON:NXT) decision to omit some of its best-selling core ranges put a dent in the clothing retailer’s full year sales, the chief executive acknowledged today.
Speaking at a press conference after the company reported its first decline in annual profit for eight years, Simon Wolfson said the fashion chain had focused too much energy on adopting new trends and not enough on its so-called ‘heartland’ products.
Last year the clothing retailer failed to produce enough of these heartland products, which include its core easy-to-wear range, Wolfson said. The move had a slight impact on sales, which fell 0.3% to £4.14bn in the year to the end of January 2017 from £4.15bn, driven by a 2.9% drop in its retail business.
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“We focused too much on new processes and took our eye off our heartland products,” Wolfson said.
“We have taken corrective action to take our ranges back to where we really want them.”
Next expects these changes will begin to feed through to its summer range from May onwards. But the full changes won’t be realised until September onwards when the autumn products are released.
If all goes to plan, the group may see some improvement in its second half results but Wolfson said given the sector-wide challenges he couldn’t provide any specific guidance.
The clothing industry's greatest challenge is higher inflation, which provided the biggest drag on Next's results.
Wolfson noted that consumer spending habits had shifted away from clothing purchases as a weaker pound following last June’s Brexit vote has pushed inflation up and squeezed disposable incomes.
“We don’t think this will go on forever but we are working on the basis that this will go on for another year,” he said.
The group is expecting another fall in profits to a range of £680mln to £780mln this year and has guided to sales of between a 4.5% drop to a 1.5% increase.
For the year just past, pre-tax profit fell 3.8% to £790.2mln compared to £821.3mln the previous year. But it came as no surprise to the market after the company cut its profit guidance in January to £792mln from a previous estimate of between £785mln and £825mln.
Price hikes to clothing ranges...
The increase in inflation has not only had an impact on customers but on import costs for Next.
Next chose to pass these costs onto consumers and hike selling prices by 4% in the first half and by a similar amount in the second half.
Wolfson said the company plans to raise prices again this year “by no more than 5%” to offset higher import costs.
But he doesn’t believe the increase in clothing prices will be overly noticeable to customers.
“I don’t think people will walk into our stores and say everything is terribly expensive,” he said.
The group also looks to source more stock from areas less affected by a weaker pound such as Cambodia, where Next will invest in increasing the capacity for producing clothing.
Investment in Next Directory...
In an effort to boost sales, Next will bolster investment in its online catalogue business Next Directory by £11mln this year.
It will roll out ‘Next Unlimited’, which allows customers to pay £20 for a year’s unlimited next-day delivery in the UK and Northern Ireland.
The retailer will also develop new credit offers, improve its search engine functionality and launch an overseas mobile website in August.
The Directory business posted a 4.3% increase in sales but it marked a slowdown from the 7.7% growth in the previous year as its credit customer base fell 3%.
The credit offering allows customers to buy items on credit and make repayments over a longer period.
Wolfson said promotional efforts in the credit business had helped stabilise its customer base but confirmed the company expects a continued decline in the year ahead.
When asked if Next will offer free online delivery to attract more customers and fend off competition from the likes of Asos and Boohoo, Wolfson said it wasn't on the cards.
Brexit’s impact on workforce...
The government is set to trigger Article 50 on 29 March, which will kick off the formal two-year process of the UK's exit from the European Union. Prime Minister Theresa May has said “Brexit means Brexit” and the freedom of movement between workers from Britain and Continental Europe is likely to end.
Wolfson said he doesn’t believe changes to immigration will affect the company’s ability to find employees for its stores as most of its current staff are British or permanent UK residents.
In saying that, he is “hopeful the government takes an open approach to immigration”.
As for the impact of Brexit on the company's overall business, Wolfson made no secret of the struggles the retail sector faces but said the management team has taken the right steps to withstand any negative effects.