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Next's toughest trading period in 25 years underlines high street struggles, say analysts

Rising online competition and weaker consumer confidence have hit bricks and mortar retailers
Next reported a decrease in 2017 profits and sales

Full year earnings from Next Plc (LON:NXT) add to further signs of struggles on the UK high street following cautious statements from sector peers.

The fashion retailer said 2017 was its toughest year in 25 years, blaming the shift in consumer preference towards online shopping and the impact of higher inflation on disposable incomes

Pre-tax profit in the year to January fell 8.1% to £726.1mln – the third consecutive year profit has fallen.

READ: Next's 2017 sales hit by consumer spending slowdown and online shift

Full price sales at its shops dropped 7.9% while online sales increased 9.2%.

The results underline the challenges bricks and mortar retailers face with rising online competition and weaker consumer confidence.  

Fellow high street retailers under pressure

Fellow clothing retailer New Look this week said it would close 60 UK stores and cut 1,000 jobs after creditors approved its restructuring plan.

Toys R Us and Maplin collapsed into administration in February while John Lewis, Debenhams PLC (LON:DEB), Carpetright  PLC (LON:CPR) and Mothercare plc (LON:MTC) have all issued profit warnings this year.

“The headwinds facing the clothing sector, which include cost inflation, weak high street footfall and tighter consumer spending, are well known,” said George Salmon, equity analyst at Hargreaves Lansdown.

“However, the fact Next says it’s endured the toughest year since it’s near-death experience in the early 1990s, underscores the extent of these challenges."

Will Next shift focus away from retail to online?

On the upside, Salmon said it is “encouraging” that Next continues to see a sizeable bricks-and-mortar presence as important to the overall business, not least because of the benefits of click-and-collect.

However, sales from new openings have missed targets and the company has said it is willing to close stores if landlords failed to make enough concessions when leases are up for renewal.

In response to growing online sales, Next plans to continue to invest in its digital offering.  

Neil Wilson, senior market analyst at ETX, said the shift in the sales performance from retail to online “begs the question as to when Next will look to shift its operations away from stores and focus more on maximising its online divisional strength”.

He noted that the online business generated about two-thirds of profits, compared to a third for retail - a major shift from the 50:50 split just two years ago.

“The shift in profit mix over the last two years makes a look at the store estate again surely at the top of the agenda for the firm,” Wilson said.

Next guidance better than expected

For fiscal year 2018, Next expects total full price sales to increase 1.0% with a 10.3% rise in online sales to mitigate a 7.4% decline in retail sales.

The company left its pre-tax profit estimate unchanged at £705mln, representing a 2.9% decrease on the previous year. 

“Next’s 54-page-long results release is a whopper but it is what is missing from the statement that matters more than what is in it – there is no profit warning, there is no dividend cut and there is no sense of panic,” said Russ Mould, AJ Bell investment director.

“Instead, investors are getting a clear analysis of the challenges which face the retailer and a detailed study of its strategic responses, in terms of online investment, improved stock availability and how the company intends to manage its store estate. If only all companies were as transparent as this.”

As well as investing in its online platform, the company plans to roll out 98 concessions across its store portfolio. This is expected to generate annualised income of around £5mln. 

Dividend yield 'perfectly respectable', says analyst

“Next also remains very cash generative and this cash flow also underpins dividend forecasts,” Mould added.

“Next may not repeat the 180p-a-share in special dividends for fiscal 2017-18 but even an unchanged regular dividend of 158p would represent a perfectly respectable yield of 3.2% more than twice covered by earnings per share.”

Next generated £882mln in cash for the year and returned £361m to shareholders through a combination of ordinary dividends, special dividends and share buybacks.  

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