Next Pushes on With Store Expansion Amid Shrinking Town Centers

Next Plc (NXT), the U.K.’s second-largest clothing retailer, plans to plough ahead with store expansion as a tough consumer climate and a booming online market prove no barrier to the company’s goal of adding more stores.

About 1.4 million square feet (13,471 square meters) of new space has been identified for future development, the Leicester, England-based company said today. That would represent growth of about 20 percent at a time when town centers are shrinking and supermarkets are cutting back on building new outlets.

New space is highly profitable at about 22 percent of sales and without it Next’s retail profit would have fallen throughout the credit crunch, the retailer said as it reported first-half earnings that met analysts’ estimates. Store expansion also dovetails with the company’s online business, with 38 percent of orders from home being collected from outlets, it said, and finding attractive locations is easier in a weak retail climate.

“The addition of new retail space sounds counter-intuitive in an environment of declining like-for-like sales and growth in Internet sales,” Next said in a statement today. “However, we believe that investment makes sense.”

Next was unchanged at 5,190 pence at 10:38 a.m. in London. The stock has risen 40 percent this year, giving the company a market value of 8.2 billion pounds ($13 billion), about the same as its main competitor Marks & Spencer Group Plc. (MKS)

Next’s store expansion target isn’t guaranteed as 780,000 square feet of the space it has identified for development still requires planning permission. The retailer is finding it easier than before to gain planning consent from municipalities, Chief Financial Officer David Keens said in an interview.

Expansion Plan

“It’s now taking time to get a yes, whereas before we often took time and still got a no,” Keens said.

Next expects to open about 300,000 square feet of space this financial year and plans to sell from an additional 450,000 square feet in each of the two subsequent years.

U.K. retailers have been reining in spending on new stores as more consumers shop online. William Morrison Supermarkets Plc said today that it plans to spend less building new outlets, following Tesco Plc (TSCO) and J Sainsbury Plc (SBRY) in trimming spending.

Next’s pretax profit in the six months through July rose 8.2 percent to 271.8 million pounds, with growth being led by the Directory home-shopping business. The average of 10 analyst estimates compiled by Bloomberg was 272.2 million pounds.

The retailer said there is nothing it can see in the wider economy or its own business that would cause it to alter its sales budgets for the coming fashion season.

Profit Forecast

“The economy looks set to improve moderately, albeit at a slow pace and with the risk that credit easing may not translate into growth in real earnings,” Next said.

The retailer anticipates full-year pretax profit of as much as 675 million pounds and also stuck with a forecast for annual brand sales to gain as much as 3.5 percent. Underlying earnings per share growth will be as much as 19 percent this year, Next said, raising the forecast from as much as 15 percent.

The retailer also increased its prediction for full-year international online sales to 90 million pounds from 75 million pounds as price cuts attract more customers.

Next will seek to carry less inventory as it approaches end-of-season clearance events, Keens said.

“We don’t think the benefit will be as big in winter, because last winter was already an improvement,” Keens said. “But it’s definitely something we are going to continue to do, that is aim to have less stock going into the sale.”

First-half revenue increased 2.2 percent to 1.68 billion pounds, matching analysts’ predictions.

To contact the reporter on this story: Katarina Gustafsson in Stockholm at kgustafsson@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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