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Next - reopens online store at limited capacity

Sophie Lund-Yates, Equity Analyst | 14 April 2020 | A A A
Next - reopens online store at limited capacity

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Next plc Ordinary 10p Shares

Sell: 6,534.00 | Buy: 6,540.00 | Change -58.00 (-0.88%)
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Following the temporary closure of its Online store and Warehousing and Distribution Operations on 26 March, Next has decided to re-open these facilities in a "very limited way".

Extra safety measures have been introduced, and a reduced number of categories will be available. Further product ranges may be added at a later date.

The group plans to sell low volumes to make sure social distancing can be practiced in the warehouses, and as a result the website will only process a certain number of orders per day. Once that limit is reached the site will convert to a "browse only" function until the following day.

The shares rose 2.5% following the announcement.

View the latest Next share price and how to deal

Our view

"People do not buy a new outfit to stay at home." CEO Simon Wolfson has a very good point. The coronavirus poses an unprecedented challenge for retailers, and Next is dealing with the closure of all its stores and a much thinner online operation.

That's an added problem in an already tough market. Next's in-store sales have been going backwards for some time as the high street grapples with falling footfall and a shift to online.

But, historically, Next has been ahead of the pack.

The group's been able to capitalise on the shift to online shopping, thanks to its history as a catalogue company. Distribution infrastructure was already in place, and could be fired up quickly when e-commerce came knocking. The online business had been growing rapidly as a result, helped further by third party sales.

Interestingly, around half of online sales completed through click & collect, and over 80% of returns were made in store. That means Next still sees a place for bricks and mortar, and is behind its strategy to keep opening new shops.

New leases are typically short, providing extra flexibility. So far the group's proven adept at securing favourable terms from landlords, but there's no guarantee this will continue.

Something that sets Next apart from some of its neighbours, is its finance business - offering people the option to buy today and pay tomorrow. Interest income is growing steadily, providing an extra revenue stream. Investors should keep in mind that a particularly severe economic shock or recession could see bad debt creep up though. We're not concerned at the moment, but it's something to keep an eye on.

Of course, all these bright spots are being dulled by the current store closures and limited operating of the online business. The group's stress tests suggest it has some breathing room when it comes to a loss of sales, but even the best run retailer would find a prolonged shut down challenging.

The balance sheet isn't in terrible health, but there is a meaningful debt pile which was almost twice the amount of cash profits last year. If trading's shut down for longer than expected and cash flow takes a hit, it will be harder to service interest payments on debt.

The decision to delay a decision on final dividends is sensible, and as the pandemic progresses we wouldn't be surprised if "pause" is pressed on the buyback.

Overall the stress tests suggest Next could weather the coronavirus storm, but at this early stage no one can say for certain what the outcome will be.

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Full Year Results and COVID-19 update

The group conducted stress tests in the wake of COVID-19. The findings showed the group could sustain the loss of more than £1bn (25%) of annual full price sales. This scenario could require cash saving measures including some or all of: deferring or suspending the dividend, halting the buyback and non-essential capital expenditure.

The uncertainty means Next expects to propose a second interim dividend in June, rather than a final dividend.

Full year group sales rose 3.3% to £4.4bn, reflecting a strong increase in the online business. Operating profit rose 1.3% to £772.1m.

Total Retail sales declined 5.3% to £1.9bn. That reflects a 4.3% fall in full price sales- although this was ahead of previous expectations. The sales beat was driven by better stock availability and improved delivery processes.

Operating profit fell 22.8% to £163.9m. Net margins declined 2 percentage points to 8.9% due to the costs of store occupancy and other fixed costs. These increased as a percentage of sales because of falling like-for-like sales.

Next renewed 44 leases, with rent on these stores coming down by 30% and the average lease length on these stores is 3.6 years. Net new space grew 1.2%, and is expected to fall 0.8% next year.

Total Online sales rose 11.9% to £2.1bn, while operating profit improved 13% to £399.6m. Cost savings saw net margins improve slightly to 18.6%. NEXT brand still contributes the majority of divisional profit, accounting for 62%.

Online customers collect nearly 50% of their orders from a store, and over 80% of returns.

Next is working on new platform for its third party sellers and has agreed terms to build and operate their website for them. "The website would look and feel like the client's website but would be built on all the functionality available on NEXT's own website". This setup is going live with one client later this year.

Next's Finance business contributed £146.7m to group profit, finishing the year with £1.2bn of outstanding consumer debt. Bad debt fell 16.9% to £43.3m.

After dividends the group generated cash of £307m. Underlying net debt was broadly flat at £1.1bn.

The group said uncertainty around coronavirus makes it impossible to give meaningful guidance for the year ahead.

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