Wednesday, 29 April 2020

Bigger sales fall at Next, but firm has the cash and robust plans to see it through

Next issued a gloomy trading statement on Wednesday saying that the fall-off in sales in recent weeks has been "faster and steeper than anticipated” in its earlier stress test and it’s “now modeling lower sales for both the first and second half of the year”. Its worst-case scenario is for sales to fall 40% this year.

It hadn’t expected sales to fall off a cliff in quite the way they did. In the three days before stores closed on March 23, for instance, store sales were already down 86% as most of its customers decided to stop shopping in stores before the order came to shut them.

It said the retail sector, along with the wider economy, slowed faster and more steeply than it expected in March and this means sales from January 26 to April 25 dropped 52% through its Retail division (that is, its stores), and 32% through its Online division. Overall product sales at full price fell 41% and finance interest income rose 2%. It means the total was down 38%. Its worst week was the seven days starting March 29 when its stores and webstore were hit and all it generated was finance interest income.

So with Q1 full-price sales having fallen 38%, it’s now saying that Q2 could fall anywhere between 50% and 62%, Q3 by a range of 19% to 33%, and Q4 by 17% to 28%. That means a full-year reduction of anything from 30% to the aforementioned 40%.

The picture won’t be helped by the fact that its July clearance will prove “challenging if social distancing restrictions are in force”. It thinks clearance could be 11% down year-on-year, which is bad news as its unsold stock levels could rise between 15% and 45%.

That said, the firm has saved around £290 million on stock purchases so far, although it has committed to paying for orders due to leave supplier factories up to and including April 10. Orders due to leave supplier factories after this date that aren’t required have been cancelled and compensation payments made towards the raw materials.

It said it’s continuing to order stock for later in the year as “there’s no point in now not buying coats because we have too many T-shirts!”. 

And it thinks around £330 million worth of SS20 stock can be carried forward into SS21, which adds up to around 15% of SS20’s total and mainly comprises core pieces like tees and chinos. 


The company said it believes it can achieve higher cost savings and stock cancellations than it originally anticipated and that it has increased its cash resources through asset sales and suspending share buybacks and dividends. It’s completed the sale/leaseback of some warehouses for £107 million and is in the advanced stages of agreeing the sale/leaseback of its HQ for £48 million.

Additionally, it’s taken further steps to secure debt financing through agreements with its bank, although it thinks it unlikely it will need to draw on the additional funding available to it. 

It's confident that it has the cash to see it through, but it said “much will depend on our ability to continue increasing the capacity of our online operations within the constraints of new safe working practices and on the timing of store re-openings”.

It has been ramping up its online operations since reopening them in April and has added new product categories to its initial kidswear offer. It means nearly three-quarters of its ranges are now available to buy online. But the ability to supply this is constrained by its overall capacity — the number of people it has working. However, it’s steadily increasing working staff numbers and the capacity at which it’s able to operate so hopes to increase capacity to around 70% of normal levels within the next two weeks. 

The reduction in sales volumes has meant that it has a lot more stock in its warehouses than anticipated. This excess stock would have prevented the intake of new stock and inhibited ongoing operations, but it has dealt with this through the addition of third-party storage facilities in the UK and, in some cases, by holding stock in source countries. The additional cost of this in 2020 will be around £2 million.

It has also been making plans for the eventual reopening of its stores and these include screening of tills, distance marking walkways, sanitisation stations, exit and entry management systems and other measures. It will prioritise the opening of its larger out-of-town stores first as these locations have large car parks and outside space, they trade for longer hours so fewer people are concentrated inside them over shorter periods of time, and their layouts can be more easily adapted.

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