Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

 Simon Wolfson, chief executive of Next Plc, has a reputation for looking on the bleak side.

But he's also not afraid to point out when times are changing for the better. On Thursday he modestly upgraded profit forecasts for the full year, and said the company would resume its share buyback program.

While he may come to regret those comments if the retail market takes another lurch downwards, judging by the 12 percent bounce in the shares, investors believe him.

They should do. Next, despite its recent travails, is a quality operator with the flexibility to withstand a further consumer slide.

It has had a torrid time over the past 12 months, hit hard by consumers falling out of love with fashion, compounded by a shortage of classic styles and its online Directory business losing its edge.

But efforts to improve its product ranges and investments in Directory are showing early signs of success.

The company's also making progress tackling the drag from its store estate. Analysts at Berenberg have argued that Next has too much physical selling space, given the shift in shopping habits to online.

Mind The Gap
The divergence between Next's online and physical store sales has raised questions about its real estate
Source: Bloomberg Intelligence

It's being more cautious on opening new stores, and will spend an extra 5 million pounds ($6.6 million) a year for the next five years upgrading current outlets. There should be an added benefit as the company joins the trend for putting restaurants and prosecco bars in stores. And Wolfson rightly points out that the shops create an advantage, in that they serve the online business by letting customers pick up and return orders.

The shares have made up the ground they lost after a profit warning in January. They trade on a forward price earnings ratio of about 12.5 times, just ahead of Marks and Spencer Group Plc.

Making Up Lost Ground
Next shares have recovered from a profit warning in January
Source: Bloomberg

It is right that Next has lost the discount to its rival. M&S has turnaround potential aplenty as seeks to revive its clothing business, turbocharged by the recent arrival of veteran retailer Archie Norman as chairman. But it needs to actually do it. And its upmarket food business has begun to run out of steam, a worry as consumer incomes get squeezed.

Deserved Discount
It makes more sense for M&S to take second place, as Next is in a better position to weather consumer and retail storms.
Source: Bloomberg

As Gadfly has argued, despite Next's stumbles, it remains highly cash generative. It is also not alone in grappling with the problems of having a large store base in an increasingly online world, but the company's in a better position to deal with it. Next has already been proactive, moving from smaller high street shops to out-of-town department stores. And it has more flexibility to adapt to changing conditions than most, as the average lease length is just seven years, and 72 percent of them will expire over the next decade.

Of course, part of the reason for Next's recent optimism may be that the weather has been particularly favorable: the importance of high temperatures in the early summer and current autumnal conditions can't be overstated, as many customers buy clothing only when they need it.

The crucial Christmas trading period will be a test of whether it really has put its self-inflicted wounds behind it. But it looks as if Next's revival is built on more than just fair weather.

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

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net