Wolfson says the outlook is grim, but the City is right not to buy into the forecast
It’s looking grim up at Next. The first decline in profits for eight years, falling sales, even online (where they’re growing) was lacklustre. Then there was the company’s outlook statement, which was about as bleak as it gets. Brexit backing chief executive Lord Wolfson bemoaned higher import prices, as a result of the slumping pound, falling customer wages, and people increasingly choosing to spend their diminishing
disposable incomes on experiences rather than things. Not a very happy situation to be in when you’re planning to try and push through price rises. To cap it all, there was a supremely bleak analysis of the prospects for the company’s bricks and mortar stores.
“With increasing amounts of business being transferred online, it is legitimate to question the long term viability of retail stores and whether the possession of a retail portfolio is an asset or a liability,” Lord Wolfson opined. “In the unlikely event that like-for-like retail sales continue to decline at high rates for the next ten years, we believe that our lease structure is such that the portfolio could be managed down profitably.”
Translation: the high street is doomed and even out of town shopping centres aren’t going to have a lot of fun. We should be more or less ok because we’re clever. But don’t you be expecting any fireworks from us. After all that, you’d think the shares would slump. Instead they shot up in early trading. Could it be that investors smell a rat? I think they do, and so do I.
Next has long been a stock market darling precisely because Lord Wolfson and his team have time and again played the City like Keith Richards plays the guitar. Next is a very good business, and it’s very well run. But in addition to that, its bosses excel at expectations management. They have a history of setting a low bar for Next’s performance that they inevitably go on to beat (often handsomely).
Lord Wolfson is quite right to say it’s tough out there and that it’s going to get tougher, in part because of Brexit, the lunatic political project he was such a big supporter of. He is also right to raise questions about bricks and mortar stores as increasing numbers of consumers move online. The trend is ongoing, and no one’s quite sure when equilibrium will be reached between the two channels. But it is interesting to note that Next is still opening up new space.
By cleverly positing a worst case scenario – a situation where that equilibrium I spoke of isn’t reached and shops die a death in as little as ten years – Lord Wolfson wants the City and his supporters among its investment community to think about the worst. He doesn’t want them too worried, which is why he was at pains to stress how Next could profitably manage such a decline, highlighting its short term leases and its ability to negotiate rents down. He just wants it at the back of their minds. That way, when Next outperforms, he can take a bow.
The trouble is the City has started to get wise to the trick. It thinks Next can do rather better than Lord Wolfson wants the stock market to believe, hence the bravura early performance of the shares. Lord Wolfson is just going to have to hope that correcting some recent mistakes – such as re-focusing on the every day staples Next was always good at after an attempt at selling fancier clobber didn’t do the business – serves to perk up performance. The low bar he has set for himself has been raised.