Following a rise in profits and sales at Next during the first half of the year – and another increase in earnings expectations – Retail Week highlights the vital factors from the fashion retailer’s performance that have contributed to its continued success
Next posted profit before tax of £420m for the six months to July 2023, up 4.8% year on year, as well as a 5.4% increase in group sales to reach a total of £2.64bn for the period.
As it focuses on four main priorities – sales, service, costs, and new and developing business streams – there was plenty from chief executive Lord Wolfson’s update that was relevant to the wider industry.
Costs
Next expects costs to fall and believes it can achieve an additional £46m in cost savings this year above what it had originally planned. Both the cost of operations and the cost of goods had a part to play.
Wolfson said: “The cost benefits in the first half that we weren’t expecting were first of all better control of stock and more importantly, the improvements from increased operating efficiencies of our warehouses.
“We have pointed out that a lot of the cost headwinds that we faced at the beginning of this year are easing as we move into next year – whether that be energy, transport, wage inflation or cost of goods, you can see the pressure coming off dramatically.
“You can see we have had a sort of bubble in year-on-year price inflation in like-for-like products. We are anticipating autumn/winter to only be 2% and by the beginning of next year it will be flat.”
Although cost moderation is good news for retailers it does not necessarily mean lower prices for shoppers in the short term, so businesses will need to remain on top form to demonstrate value for money during the continued cost-of-living crisis.
What lay behind Next’s strong performance?
After increasing full-year profit guidance for the third time this year, Next credited some “exceptionally warm weather”, alongside pay rises for many consumers and improvement in online service, for its performance.
“Pay rises filtered through to the economy at the end of February to the end of April. In the month that you get the annual pay rise, your real earnings move forward quite significantly,” Wolfson said.
“The weather was definitely on our side. If you’re a retailer that sells summer clothing then you really need warm weather in May and June, which is exactly when we got it.
“We significantly improved online with our service – the reliability, accuracy and speed of delivery.”
The opening of a new warehouse has been a key contributor because it gave Next the space it needed to manage the business more efficiently. The percentage of items delivered later than promised in June, for instance, was down 45%.
Staying on trend
The fashion giant reported “good progress” across all of its major product divisions. With an eye to fashion specifically, Wolfson observed that trends are moving faster resulting in an increased emphasis on newness and innovation in its product offering.
Alongside having improved and broadened the design content of ranges in order to appeal to a wider range of customers on colour, print and fit, he said Next will continue to “be brave in backing emerging trends”.
Wolfson said it has been absolutely vital to adopt trends quickly rather than having a “wait-and-see approach” and falling behind.
Price architecture has also been important in helping Next do well. The retailer said while it strived to offer great value amid the cost-of-living crisis, adding to the price of some of its items in a bid to “elevate” the proposition also seemed to pay off and attracted new customers who may not have previously considered Next to be a brand for them.
Jobs market caution for consumer spending
As well as crediting a strong employment market for good performance, Next cautioned that a changing labour market could bring challenges as well as benefits.
Its report said: “Whilst a softening of the labour market may reduce pressure on wage inflation, it may also somewhat dampen growth in consumer demand – a factor to bear in mind when thinking about the outlook for 2024/25.”
Christmas prospects
Looking toward Christmas, Wolfson said: “There is not a magic moment where suddenly everyone thinks, ‘it is Christmas, we will spend in a different way’. It is very rare that we see a much better performance in December than we saw in the previous month.
“The difference that the weather will make in December will be greater than the difference in how the consumer is feeling in terms of its impact on sales in any one week.”
He recalled that there was a particularly difficult run-up to Christmas across the retail sector last year – affecting online in particular – as a result of postal strikes that hit delivery speed. That does not seem to be on the cards this festive season.
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