Next boss Wolfson on store resurgence, return of pre-pandemic habits and cost of living

Chief executive Lord Wolfson shared his thoughts on last year and the outlook for this one, in some of the most torrid times retailers have ever experienced. 

Store performance 

Next reported a “better than expected performance” within its retail business – the stores division – after shops reopened last April. There is optimism that will continue.

Although Next cut sales guidance for the current year by £85m (2%) and profit expectations by £10m (1.2%), that reflected the closure of its online operations in Ukraine and Russia following the invasion, along with “moderating growth expectations in some other overseas territories”.

However, the results reflected “an improved outlook” for sales at its UK stores that has “mitigated the anticipated loss of lower-margin sales overseas and the associated cost of increased markdown”.

Wolfson said performance last year was better than expected, helped by the release of pent-up spending, but he warned that Next is moving into a “very different consumer environment”.

That said, he observed of the UK market that “our expectations haven’t changed since January” – predating the outbreak of war in Ukraine and the latest 30-year inflation high. He admitted that Next’s view, seen by some in January as over-pessimistic, may now prove “optimistic”.

He said: “Our performance in the UK is slightly ahead of where we expected it to be in January. I wouldn’t want you to think that means the UK is strong – it is slightly ahead – but we were expecting a relatively muted consumer environment.

“The original expectation was that retail would be worse than the -7% we now expect for the rest of the year. We are less pessimistic about retail and not quite as optimistic about online. Because so many of our retail costs are fixed, it means we’re now looking at a slightly more favourable margin mix.

“The loss from shutting our Ukrainian and Russian websites, around £18m, has been largely offset by the improvement in margin delivered by the changing mix of the UK business.”

The shock of the pandemic prompted the collapse of some big retail names, such as Debenhams, and Next is likely to have benefited. Wolfson said: “One of the reasons potentially [for improved retail performance] is that we underestimated the effect of other [retailers] leaving the high street on our shops. 

“If you look at the high street today, versus where it was two or three years ago, there are a lot of names that were there that aren’t there today and that may be helping us more than we anticipated.”

Even if store sales continue to decline, they will remain part of the retailer’s proposition. A revised version of the retailer’s 15-year ‘stress test’ – which Wolfson emphasised was a “scenario” rather than an expectation or plan – suggested that a 330-store network was sustainable and worthwhile within Next’s multichannel model, even if revenues raked in by shops fell at a rate of 10% a year. 

The model showed Next could continue to run 195 loss-making stores, at a cost of £35m a year, to maintain online store services in key locations.  

Pre-pandemic habits return

As the pandemic has abated, shoppers have reverted to old habits, turning once again to smarter clothes and splashing out less on casual attire and homewares.

Next’s Lipsy brand posted a “significant increase in profit" as demand for formal dresses was “particularly strong” during the second half of its financial year amid the return of social events. 

Wolfson said: “I think we’re seeing a return to pre-pandemic trends across the board. The participation of different categories in our ranges is going back to where it was. It’s just a straight reversal.

“If you’re now going to work, you’re going to need a blouse and a suit. If you’re going to parties or restaurants, you’re going to need event clothing.”

He said there were signs of “a trend towards slightly more investment dressing and less churn-type purchases”, though it was too early to make a definitive judgement. 

However, not all old habits are back. More business has moved into the week rather than the weekend as people continue to work from home at least part of the time and can manage their days in different ways. “We’re not seeing as big weekend peaks as pre-pandemic,” Wolfson said.

Cost of living crisis

“We’ve never seen anything like this before, we don’t quite know how it’s going to pan out,” Wolfson said when asked about the current inflationary and disrupted environment.

Next's own selling price inflation is expected to rise to 8% in the second half - 6.5% in fashion and 13% in home. That is 2% higher than was anticipated in January. 

How would he like the government to intervene? Did Rishi Sunak go far enough with his spring statement? Wolfson was reluctant to go off-script and referred questioners to a statement on the economy in Next’s results document. 

It read: “The disruption to global supply chains, along with chronic labour shortages in many parts of the UK economy, means that there are simply not enough goods, energy and skilled workers to maintain living standards at the levels we have become used to.

“It is important to understand that the cost of living crisis is a supply-side crisis; the inflation we are experiencing is a symptom of underlying constraints in the supply of goods.

“There are two types of measures the government can take in response to a squeeze on supply. Firstly, they can (and should) ensure that those most in need can afford basic essentials, through targeted subsidies and grants. 

"While we’re expecting a difficult year, I wouldn’t want to exaggerate the difficulty"

Simon Wolfson, Next

“Secondly, they can take action to increase the supply of goods, property and services that are in such short supply. We applaud the efforts the chancellor has made to help out those most in need. But we are disappointed that the wider government has done little or nothing within its powers to increase the underlying supply of goods, energy and skilled workers." 

The statement continued: “It is important to recognise that government interventions to ‘pay for’ inflationary increases do nothing to increase the underlying supply of goods and services.

“The good news is that there is much the government can do to increase supply. It can reverse the self-defeating barriers it has placed on overseas workers supporting our economy and accelerate, simplify and reform the planning process to increase the supply of desperately needed housing.

“We hope that the government will use its powers wisely and do all it can to tackle the UK’s many supply-side constraints.”

Wolfson concluded on what he described as an “almost optimistic note” and said: “While we’re expecting a difficult year, I wouldn’t want to exaggerate the difficulty.” 

Other retailers may not feel quite so sanguine.

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