Next Heads Up the Down Escalator

Wolfson's still got the best chance of weathering the storm

Lord Wolfson's escalator indicator is back, and it's pointing in the wrong direction.

The chief executive of Next, who has a strong track record in predicting the direction of British retail, has likened conditions this year to "walking up the down escalator."

He's used this analogy before -- it last made an appearance in 2012 -- to flag how difficult the external environment can be for retailers. This year, he says, could be the toughest since the financial crisis struck in 2008. He pared the company's forecasts from his January estimate, and now sees a chance revenue could shrink.

The huge drop in Next shares -- at one point they were showing the biggest one-day loss since 1998 -- shows investors weren't expecting such bearishness.

Tough Run of Late

Next's share price has taken a beating since November as it revamps its key Directory unit

Source: Bloomberg

The trend of consumers shifting spending to experiences such as travel and away from clothing has been running for a little while already, as Gadfly has noted. The twist today is that Wolfson sees evidence of a slowing economy, plus the uncertainty created by a possible Brexit.

Wolfson's caution comes at a particularly delicate time for Next, as it deals with challenges at Next Directory, its online and catalog business that's been its engine of growth over the past five years. Sales at the division have risen by 75 percent in the period, enabling Next to capitalize on the growing trend of customers preferring to shop online rather than at physical stores. But in the fiscal year ended in January, sales grew just 7.7 percent.

New customers to the Directory are also preferring to pay by credit card, rather than taking out a credit account with Next, which is more profitable. So, it is not good news that this customer base shrank 4 percent. 

Rivals are also catching up with Next's digital prowess. Consequently, it is having to invest to improve its proposition, making it more suitable for smartphones and tablets. It will spend another 8 million pounds ($11.3 billion) this year to try to win more customers to Directory, although it hopes to make up for this by publishing fewer traditional catalogs. So it is little wonder that, even before today's hit, Next shares had already fallen 16 percent since the end of November.

But they'd already had an incredible run, rising from just over 20 pounds per share in March 2011 to around 80 pounds last year. The company generated total returns of 308 percent over the past five years, compared with 47 percent at Marks and Spencer. Those big gains are unlikely to be repeated, particularly given that Directory is stalling.

Big Gains

Next's returns to shareholders over the past five years have far outstripped those from rivals

Source: Bloomberg

But at least Next is addressing the issues at Directory, and the rest of the company is in decent shape. The company has a strong track record of delivery. It keeps a tight rein on costs and manages its property cannily -- its average lease length is just over seven years, whereas BHS, which had deteriorated so much that it had to be thrown a lifeline on Wednesday, has leases up to 100 years.

Next also throws off cash, and lots of it. It generated surplus cash from operations of 372 million pounds last year, and expects another 350 million this year. It has already spent 150 million pounds buying back shares, and will distribute another 200 million pounds to shareholders.

The task of overhauling Directory should not be underestimated, but the company's strong track record means it's in a position to weather a hit from the external environment. Next is less likely to take a nasty tumble while scaling the down escalator than its rivals. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Andrea Felsted in London at

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