Next reflects on 2018 profit decline

Retailer Next has revealed a picture of falling profits due to declining in-store sales in its FY18 results.

As the retailer anticipated, the year proved challenging, with sales continuing to transfer from stores to online. Despite the brand’s total sales being up +2.6% – a combination of online full-price sales growth of +14.8% and a decline of in-store sales by -7.3% – profit before tax was down -0.4% for the year.

Investment in stores, warehousing and system totalled £129m.

“Even though the high street looks set to remain challenging, our online business continues to increase its contribution to sales and profit of the group,” says chairman Michael Roney.

In its report, Next sets out a 15-year strategy for dealing with the ongoing trend towards online shopping, and concludes that a radical restructuring of its cost base and sales profile, while generating “significant positive cash flow”, is possible over time.

Fiona Cincotta, a senior market analyst at www.cityindex.co.uk, comments: “Next has stuck to the guidance that it issued in January for a fall in profits this year. More interestingly, it has provided a refreshing amount of detail about its longer-term prospects.

“Management has put together a stress test that indicates that Next could generate £12b of cash over the next 15 years – even if sales at its bricks-and-mortar stores slump by -10% a year.

“It’s certainly an optimistic scenario, and depends on a lot of swing factors going the right way for Next. But it makes for interesting reading and shows the company has a way out of its current profit-growth quagmire.

“To hit a £12b cash goal, Next would have to continue to grow its online offering quickly, while enjoying a substantial reduction in rental costs, among other assumptions. Next’s online business is certainly performing well. It isn’t some bit player these days and it’s pleasing to see its operating profits jump +14% in 2018 to make it by far the company’s biggest earnings contributor.”

 

 

By Paul Farley