UK fashion and homeware retailer Next Plc has warned it could lose up to GBP1bn (US$1.15bn) in sales as the coronavirus impacts demand – but says it is armed with various measures that could help control costs and conserve cash.
In a full-year trading update today (19 March), Next said it initially assumed the main impact of the coronavirus outbreak would be on its supply chain because China accounts for almost half of the materials required to make its clothes.
“So far, half the goods we were expecting from China in the month of February are running late,” the retailer says. “Most of our factories in China have now returned to work and we expect the supply of stock from China to improve as the year progresses. As yet, we do not know what impact the virus will have on our other territories.
“In reality, the threat posed to the supply of goods pales into insignificance when compared with the potential impact on demand,” the company continues. “Indeed, the inability of some suppliers to make and deliver the stock we have ordered may help manage stock levels at a time when we are certain to have higher than normal levels of surplus stock.”
Speaking on the firm’s earnings call today, CEO Lord Simon Wolfson said he had “no concerns” over stock being available from China for the autumn and winter seasons.
“What we’ve seen is China has returned to normal and pretty much business as usual in our other manufacturing territories.” The company has nine overseas sourcing offices (in China, Hong Kong, Vietnam, Bangladesh, Sri Lanka, India, Turkey and Portugal) and works with 1,700 suppliers.
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By GlobalDataTravel restrictions, however, have meant buyers are unable to visit factories – and the company is looking at different scenarios to make up for the lack of face-to-face contact, including video conferencing.
“Particularly in terms of developing new product, where we would have travelled to a factory, we’re asking manufacturers to send samples over. We will use video conferencing: one sample at each end. So it’s doing as much as we can to recreate the process. We are learning our way at the moment.
“We are finding new ways of communicating with manufacturers that we wouldn’t necessarily have used in the past. We will come out of the process with the ability to communicate with potentially more manufacturers that we were previously travelling to.”
“People do not buy a new outfit to stay at home”
The retailer says online sales are likely to fare better than its retail stores, but will also suffer “significant” losses. “People do not buy a new outfit to stay at home.”
Retail sales in the past week were down 19.7% and have fallen by 46% this week. Online sales were down 2% last week and 25% this week.
Next says the business could see more than GBP1bn in lost sales over the full year, but despite this has cautioned on its outlook. “Our gut feeling is that a -10% scenario is too optimistic, and we believe the -25% scenario is overly pessimistic.”
To offset any potential sales decline, the retailer says it could suspend its buyback programme, delay discretionary capital expenditure, the sale and leaseback of a warehouse, and suspend its dividend.
Full-year results
Next’s share price was up 11.9% this morning to 4.308 pence as the retailer revealed Next Brand full-price sales were up 4% for the full year, while brand total sales were up 3.5% to GBP4.27bn on 2019.
Group profit before tax edged up 0.8% to GBP728.5m for the year, just ahead of the GBP727m guidance given in Next’s January trading statement thanks to better than expected full-price sales in January. After tax, earnings edged up to GBP593.9m from GBP590.4m last year.
Next total retail sales, meanwhile, were down 5.3% to GBP1.85bn, while operating profit slumped 22.8% to GBP163.9m.
Online, total UK sales were up 8.9% to GBP1.46bn, while full-price sales were up 11.9% to GBP1.89bn. Next Brand sales grew 4.2% to GBP1.02bn, and total operating profit was up 18.6% to GBP399.6m.
The company’s internal sourcing agent, Next Sourcing (NS), which procures around 38% of Next branded product, saw profit increase by GBP2.4m to GBP32m.
CEO Lord Simon Wolfson commented: “Our industry is facing a crisis that is unprecedented in living memory, but we believe that our balance sheet and margins mean that we can weather the storm. The crisis will pass at some point. At that time, it will be the work we do to move the business forward that will determine our future success.”
He added there were no plans at present to close any stores, despite the threat of a sharp decline in footfall.
“The likelihood will all be down to the government and we don’t have any insight into their mind, so I can’t speculate. I wouldn’t want to rule anything out but it’s not something we are planning to do. We will try to keep our retail services available to our customers as long as we economically can.”
Good positioning
Sofie Willmott, lead retail analyst at GlobalData, believes Next is better positioned than most retailers to withstand the coronavirus pandemic.
“The immediate future does not look bright for any retailer selling non-essential items as consumers, worried about the threat of unemployment and the unknown length of the crisis, cut right back on discretionary spend. Additionally, although only a few retailers such as Selfridges, Sweaty Betty and Urban Outfitters have announced UK store closures so far, more are sure to follow and limited access to physical retail locations, which we forecast accounted for 74.8% of non-food spend in 2019, will severely hit sales.
“But Next is well placed to outperform considering that its digital channel accounts for over half of total product revenue now and it sells a wide range of categories some of which are likely to be more in demand such as childrenswear, adult loungewear and possibly pyjamas, and homewares. Its Next Unlimited delivery saver scheme will also benefit as consumers utilise delivery services they have already paid for and also choose to spend their cash with retailers they feel more loyal to.”
Greg Lawless, analyst at Consumer Equity Research, offers a similar view. “Given the uncertain outlook for consumer spending and volatile trading, given the Covid-19 outbreak and the potential duration, footfall to stores will be severely impacted in the weeks ahead, although Next remains relatively well insulated given its large online business, although consumer demand may well remain weak.”
