Next's 'magic' touch is overshadowed

Sep 12 2007 by Iain Laing, The Journal

ATTEMPTS by Next to put the “magic” back into its brand were overshadowed yesterday by a warning of tougher times ahead for its Directory business.

Next’s online and catalogue division has been the company’s main growth driver in recent years – contrasting with falling like-for-like store sales – but Next said it was “very cautious” over Directory’s prospects for the rest of 2007.

Next expects flat second half Directory sales as other retailers bolster their online offering, consumers feel the pinch from recent interest rate hikes and tougher customer credit vetting hits revenues.

But the firm added that it could see a potential return to like-for-like sales growth from its 488-strong store chain next year, as the group spends £114m in the current financial year on new and revamped shops.

Chief executive Simon Wolfson said: “Our aim is to get the magic back into the Next brand, to re-establish our reputation for great style and good taste.” Refitted sites produced 5% higher sales, although overall like-for-like store sales were down 3.6% in the first half and a further decline of between 1% and 3.5% is predicted for the rest of 2007.

Finance director David Keens said the group expected a “difficult six months ahead“ but added: “It depends what happens in autumn and winter. If we are at the better end of our range, around 1% down – we could potentially see positive like-for-likes in spring and summer 2008.”

But Directory sales were ahead just 3.5% to £371.8m in the first half, underwhelming analysts.

Numis Securities’ Ramona Tipnis said: “This is a significant slowdown from the mid-teen growth that this segment has been experiencing over the last few years.”

Next has suffered from recent online fraud, where customers have signed up to buy goods without any intention of paying. It said lower bad debts from its more stringent customer criteria had added more than 3% to margins, but revenues grew more slowly as a result. Despite concerns over the more difficult outlook, Directory increased profits by more than 23% in the first half, accounting for the lion’s share of the group’s better-than-expected 11% rise in pre-tax profits to £198.2m. Profits from the retail business were virtually flat at £112.5m.

Alongside a store overhaul, the company has also sought to move its clothing range upmarket with its Next Signature range, which accounts for 3% of its womenswear items. The move towards higher-quality clothing is set to increase the chain’s average selling prices by more than 6% this year.

Panmure Gordon analyst Philip Dorgan praised Next’s forecast-beating profits despite the firm’s “bearish” outlook for Directory.

“Next is clearly vulnerable to a demand slowdown, but its change programme appears to be progressing well, with better sales, increased newness and improving average selling prices.”