UK clothing and homewares retailer Next Plc has seen its annual profits fall by 8% as the company described 2017 as the most challenging year it has faced for 25 years.
Next blamed the combination of a difficult clothing market and self-inflicted product errors and omissions for a drop in pre-tax profits to GBP726.1m (US$1.02bn) for the 12 months ended 31 January, marking the retailer’s third consecutive annual drop in earnings. After tax, earnings fell 6.8% to GBP591.8m.
Profit from Next’s shops fell by 24% to GBP268.7m, while sales were down 7.9% to GBP2.1bn in what the retailer described as “a particularly difficult year” for its stores. Online profits, however, climbed 7.4% to GBP461.2m, with sales up 9.2% to GBP1.8bn.
Next said sales of full-priced products at its stores fell 7%, while online demand pushed the division’s sales up 11.2%. Total group sales of GBP4.1bn were down 0.5% year-on-year.
The retailer said the clothing and homeware markets were adversely affected by unusually high cost price inflation last year, a squeeze on incomes, and a sectorial shift away from its core markets of clothing and homeware into leisure, entertainment and other experiential spending.
Next is forecasting retail sales will continue to fall in the new fiscal year due to the growing shift to online, while total retail full-price sales are expected to fall 7.4% and 8.5% on a like-for-like basis. Online sales are expected to grow 10.3%. Next’s 2018 profit estimate is unchanged at GBP705m, representing a drop of 2.9% on the the prior year.
“Whilst it has been an uncomfortable year it has also prompted us to take a fresh look at almost everything we do: from the structure of our store portfolio, the in-store experience and the generation of alternative retail revenue streams, the management of our cost base, our sourcing and buying methods, stock management and, most importantly, our online systems, marketing and fulfilment platform,” said CEO Simon Wolfson. “As a result of these endeavours, many challenges and opportunities have emerged.”
The retailer’s Next Sourcing (NS) arm procures around 40% of Next branded product and saw its sales fall 10% in US dollars, mainly as a result of the reductions in the dollar cost prices negotiated across its supply base. Falling sales and increased investment in product design also meant net margin fell by 1.4% to 6.0%.
“We are anticipating that NS will have another challenging year in 2018/19. We expect NS to make around $40m profit, a decline of 7% on the year to January 2018.”
The retailer says that while it has been able to mitigate much of the pound’s devaluation over the past two years through negotiating better prices with existing suppliers and developing new sources of supply, it is now entering a period of comparable year-on-year costing rates.
“Our provisional costing rate for spring 2019 is 10% better than the current year, so we may see a return to modest price deflation as we move into 2019,” the company says. “If we do experience any improvement in cost prices it is our intention to pass on any benefit to our customers by way of lower prices.”
Next also says it plans to roll out around 98 concessions across its store portfolio, including a bridalwear concession, which it expects will generate annualised income of around GBP5m.
Sofie Willmott, senior retail analyst at GlobalData says the results were impacted by a dismal first-half thanks to product ranges that focused too heavily on fashion at the expense of Next’s core product. An improved second half was not enough to prop up full-year sales.
Yet, she adds: “Although Next claimed 2017 was the most challenging year in the last 25 years, directory growth accelerated significantly on last year – an accolade for the retailer considering it is a mature online player and growth has slowed for other retailers including bellwether John Lewis. 2018 is set to be another tough year with consumer demand remaining weak, but the strength in Next’s online channel means the retailer is well placed to face upcoming challenges.”