Next is showing retail may have skipped a meltdown

Britain’s retail sector isn’t saving the best for last. Next Plc has kicked off the post-Christmas reporting season with what looks like a pretty decent performance.
True, sales in stores were slightly worse than expected, while its forecast for full-year profit has been trimmed slightly. But that’s due to higher sales of lower margin items, such as beauty, and better-than-expected sales online, which have higher costs.
Given the poor November for retailers and Brexit uncertainty weighing on shoppers, this is a good sign. Even though they left it late, it looks like the consumer did come out to spend.
Next is usually one of the stronger performers, so it would be easy to dismiss Thursday’s news as an aberration. But even so, Marks and Spencer Plc and Debenhams Plc, may not be all bad news.
M&S didn’t buy too much stock, so it shouldn’t have a large surplus to discount. It also doesn’t look like it suffered the logistics problems that have plagued it in the past.
The uncertainty, however, is what impact the heavy discounts across the high street in the run up to the holiday had on margins. M&S has also been curbing special offers, and Debenhams looked more promotional. Overall, the risk is on the downside when it comes to profit. As for Next, its holiday results makes the 30 percent fall in the shares since their 2018 peak in June look harsh.
They trade on a forward price earnings ratio of 9.7 times, 21 percent below the Bloomberg Intelligence EU apparel peer group.
Next is not immune from the severe pressure piling onto the high street. What’s more, as CEO Simon Wolfson outlined last September, things could get worse in the event that the UK crashes out of Europe without a deal. But Next should
be better placed to deal with the turmoil than many rivals.
First, the group has carefully managed its store estate for many years. This means that while it still has more than 500 locations, its portfolio is in good shape and it is renegotiating rents as leases come up for renewal. But there is another strategic pillar that is supporting the company, and this could become even more pivotal as conditions deteriorate across the market.
However much of a respite from a run of bad news the holiday proves to have given some shops, the environment for retailers could well get worse before it gets better. But Next’s steady management, readiness to exploit its online prowess and strong cashflow should make it more of a haven than many other places on the high street.

— Bloomberg