The retail sector is struggling but it is unlikely to have anything to do with the UK’s impending departure from the European Union, according to fashion retailer Next PLC (LON:NXT).
In its full year results statement on Thursday, Next chairman Lord Wolfson said it has seen no evidence that the uncertainty surrounding Brexit had affected consumer confidence.
READ: Next confirms 2019 profit decline as it tackles challenging retail market
"Our feeling is that there is a level of fatigue around the subject that leaves consumers numb to the daily swings in the political debate,” he said.
In fact, he expects provisional import taxes outlined by the government in the event of a no-deal Brexit would reduce its tariff bill by about £12mln to £15mln because tariffs on goods imported from outside the EU would fall.
Next intends to pass this savings onto customers through price cuts.
'Structural shift'
Yet there is no denying the downturn seen on the High Street, with many retailers closing stores to offset sluggish sales or collapsing into administration.
Next thinks the problem is down to a “structural shift” in the sector, where consumers are shunning physical stores for online shopping.
The retailer said online was a “long-term threat” to its retail store business but potentially, a much “larger opportunity” for the group.
“No one knows what the High Street will look like in ten years, but one thing is certain: the people walking down it will be wearing clothes,” Wolfson said.
The company is adapting to the change by moving more sales online, investing in its website and distribution network.
However, the group said its stores “remain a valuable financial asset and an increasingly important part of our online platform”.
It plans to keep 120 loss-making stores in order to service online sales in key locations.
Next pointed out that it costs less to deliver online orders to stores than to customers’ homes so it offers free delivery for orders collected in store and charges £3.99 for home delivery.
For this reason, more than half of online orders were delivered to stores and most returns are made in store.
Online outpaces store stores
In the year to January, online sales exceeded store sales for the first time, accounting for 53% of total revenue.
“The difference between the fortunes of stores and online is becoming increasingly marked,” said Richard Hunter, head of markets at Interactive Investors.
“The online business, which has long been the jewel in the crown, continues its growth apace with full-price sales increasing nearly 15% over the period.
“The fact that there is a slow transition to this channel (now representing 53% of sales as opposed to 47% for retail) is of comfort, even though the additional costs of transferring in the form of warehouse picking and delivery, need to be carefully managed.”
Despite a continued decline in store sales, Next has 46% more selling space than it did 10 years ago.
Lord Wolfson insisted Next does “not have too much space, we have too much rent, rates and service charge”.
Instead of opting to close a large number of stores, the company has negotiated lower rents.
Last year, it negotiated a rent cut of 29% on the leases it renewed.
"We experienced a reduction of 25% on leases renewed in the previous year [2018] and we expect similar reductions in the year ahead,” Next said.
Next doing 'decent job' at adapting, says analyst
Despite a tough retail market, Next delivered a 3.1% rise in full-price brand sales in the 2019 financial year and expects 1.7% growth in 2020.
However, pre-tax profit dropped 0.4% to £722.9mln and is expected to fall to £715mln in the year ahead.
“Ultimately, the market backdrop continues to make life very difficult for Next and its peers," said Russ Mould, investment director at AJ Bell, adding that the full year results continue the theme of the company’s “online gain and in-store pain”.
“However, Next makes a fair point when it says that no one knows what the high street will look like in 10 years, but we do know that there will be people walking down it wearing clothes.
“Next’s job is to adapt and evolve with the changing market and it would be fair to say it is a doing a decent job so far.”