Next Q2: online is up, retail is down and clearance is sluggish

It was only a trading update but Next’s announcement was closely watched Thursday morning as one of the UK’s leading fashion retailers told us how well (or badly) it did in Q2.


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And the story? Not so great, although it certainly wasn’t the disaster that some had predicted with the figures coming in above analysts’ expectations. One thing was clear though, the online division is still carrying the firm’s retail stores with its sales increase in percentage terms looking healthy. But while that offers hope for future performance as fashion retail increasingly becomes an online activity, the sales fall at physical stores was big enough this time to remain a major worry.

Also worrying, the company’s summer clearance sale wasn’t as good as hoped. The Next sale used to be a must-visit for bargain-hunters and while it’s still undeniably busy, it’s no longer quite the draw it once was.

Overall sales including online, stores, full-price and markdowns, Q2 saw a 1.6% decline but that was better than the first half overall when sales dropped 2%.

So let’s look at the numbers in more with the good news first. Full-price sales in the second quarter were up 0.7% on last year, which is much better than Q1 when they dropped 3%. The figures for the two quarters combined mean sales are down 1.2% year-to-date.

The online Directory unit had a “particularly good” second quarter with full-price sales up 11.4%, driven by strong sales in both the UK and overseas. Again, we can see just how strongly the company recovered in Q2 as Q1 had only risen a fairly tepid 3.3%. Year-to-date Directory sales are now running 7.4% ahead.

And the bad news? Unfortunately there was plenty of that. The firm’s Retail unit that covers its physical stores saw full-price retail sales falling 7.4%. OK, that wasn’t as bad as the 8.1% drop in Q1 and it meant that year-to-date it’s down 7.7%. But those numbers are hardly anything to get excited about, especially given Next’s former status as a star performer.

SLUGGISH CLEARANCE SALE

Of course, the figures above leave out markdowns, which not only skew sales figures but also dent profits. And the picture there doesn’t look great either. The company went into the end-of-season sale in July with 5% less stock but markdown sales dropped a much bigger 14%.

This meant that statutory total sales, including markdown sales, were down 2.1% in the quarter and down 2.3% in the first half. But those figures were affected by a delay in the timing of Directory end-of-season sale despatches. Adjusting for this distortion, is how we get the 1.6% Q2 decline and 2% H1 drop quoted at the start of this story.

Where does that all leave Next when it comes to the rest of the year? That’s a big question as the picture is still cloudy. As Q2 wore on, June and July sales were better than expected but that shouldn’t be taken as a sign that the worst over. “We believe there has been some improvement in our product ranges and our online functionality during this period,” the company said. However, it added that most of the increase in full-price sales was due to the much warmer weather and, to a lesser degree, lower markdowns in the end-of-season sale.


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So in the current consumer environment it remains cautious and is budgeting for second half full-price sales to be down 1.2%, in line with its performance in the first half.

Next has narrowed its sales guidance range for the full year to a range that could be anywhere between a 3% drop and a 0.5% rise. This is a small improvement to the mid-point of its previous full-price sales guidance.

But given that the improvement in full-price sales has been offset by lower clearance rates during its summer end-of-season sale, its assuming it will see the same issues come January. As a result, it’s sticking with profit guidance of anywhere between a 6.4% and 13.9% fall.

Clearly, the company has some way to go before it can get back to its previous star status. Whether it’s able to do that remains to be seen. The company has bounced back from periods of under-performance before but today’s environment is very different.

With Brexit looming and fashion retail migrating online, it faces unique challenges. But the strength of its Directory operation must surely give some cause for optimism. While recent unimpressive performances at this division led some analysts to suggest that its early mover advantage in online sales has been lost to nimble newcomers, this quarter’s stronger e-sales show that there’s life in the unit yet.

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