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Questor: ignore the high street gloom – look at what Next is doing and hold on to the shares
Questor Income Portfolio: far from being forced into decline by its store chain, the group has built a multi‑faceted base for a profitable future
It is hard to appreciate just how much Next has evolved into something beyond a simple chain of retail shops.
The introduction to last week’s interim results by Lord Wolfson, the chief executive, not only described that process with great clarity and detail but offered huge reassurance to holders of the company’s shares, such as this column.
While some embattled retailers give the impression that their answer to the explosion in competition from sophisticated online rivals is to “build a better website”, Next has for years been transforming itself into a business that can simultaneously handle sales from its own shops, sales of its own goods online, sales of other suppliers’ products online, returns, overseas sales of its own and other firms’ goods and a credit facility for customers.
This structure is able to sell, alongside Next’s own-brand products, £500m worth of goods from hundreds of third-party brands.
“In doing so, we have accepted and embraced the challenge of competing against ourselves as the price we pay for developing a leading aggregation business,” Lord Wolfson wrote.
Neither is the estate of high street stores tolerated as simply a burden for the business as the emphasis shifts online.
“It is counter-intuitive, but the fact is stores have become an important part of our online service,” Lord Wolfson said.
Fifty per cent of online orders are delivered to Next’s stores because some customers find home delivery inconvenient, while others prefer to avoid the £3.99 cost of home delivery.
Returns are also a central part of the retailer’s service and 82pc of them are made through the physical shops.
But the Next chief executive added that store rents were “way out of kilter with the value they provide as collection and returns centres” and that, if they were to remain open, “rents must fall, and fortunately that is exactly what they are doing”.
“I remember my dad [David Wolfson, former Next chairman and also a Conservative life peer] quipping that a business only discovers its fixed costs when sales decline,” he said.
“In retail, rents and rates have not yet materially declined with sales. As leases come up for renewal, we are seeing very steep reductions in rent, but the process can only proceed at the rate our leases expire, and that will take time.”
He added that Next expected to renegotiate 37 leases this year, achieving rent reductions of 28pc and renewing for an average term of 4.2 years.
Despite this, the group’s net retail space is expected to increase this year, partly thanks to successful renegotiation of rents in stores that were previously expected to close.
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The firm now expects total sales this year to be 8pc higher than they were in 2015. However, the costs associated with the shift in sales from retail shops to online mean that it expects profits to be 7pc lower.
“On the plus side, capital disciplines have remained central to the management of the group and it has remained strongly cash generative,” Lord Wolfson said. “From January 2015 to date, this has enabled Next to return £1.7bn to shareholders through special dividends (£685m) and share buybacks (£1bn).
"The earnings enhancement created through share buybacks means that earnings per share (EPS) in the year ending January 2020 are likely to be 9pc up on five years ago and the highest EPS the group has delivered.”
As we have often pointed out, this figure is of great importance to this column because higher earnings per share mean scope for higher dividends per share. Next described the delivery of sustainable growth in EPS as its “core financial mission”.
The company maintained earlier guidance of full-year pre-tax profits at £725m and increased the interim dividend by 4.5pc to 57.5p, to be paid on Jan 2.
This column’s advice to readers is to ignore the prevailing gloom on the high street, concentrate on the specifics of Next’s response and hold on to the shares.
Questor says: hold
Ticker: NXT
Share price at close: £60.28
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