January 3, 2019 / 11:08 AM / 20 days ago

Breakingviews - Next divides UK retail into strugglers and losers

Shoppers walk past a Next store on Oxford Street in London, Britain December 17, 2018.

LONDON (Reuters Breakingviews) - Next shows how the sickly UK retail sector has lots of losers, but few real winners. The high street chain reported better-than-expected Christmas sales, helped by its larger online presence. But weak store sales suggest many high street peers, like Debenhams, are still on shaky ground. And even Next’s more diversified business is barely growing.

Next managed to weather many of the difficulties that are plaguing the UK retail sector. Customers spooked by the uncertainty of Brexit and a stagnant economy are spending less. But they are also shifting more purchase to cheaper online providers. Thus Next’s in-store sales between October and the end of December fell by over 9 percent compared with the previous year, while internet sales rose by 15 percent. The net effect was growth of 1.5 percent.

That was better than analysts had been hoping for, sending Next’s shares up around 6 percent, and giving other retailers a boost. But the read across is less encouraging for players like Debenhams and Marks and Spencer, which have a weaker online presence than Next, now makes 50 percent of its sales from the web. Shares in Debenhams jumped, but they are still down more than 40 percent since the start of October.

Even for Next, the future is hardly rosy. It expects high street sales to decline by 8.5 percent in the year ending January 2020 and online revenue to increase by 11 percent, implying combined growth of just 1.7 percent. And because online sales are less profitable, pretax profit will shrink by 1 percent. Over time, the shift to online is likely to lead to a more competitive, less stable market, as stores hold less sway over shoppers.

Even those forecasts don’t take into account the effect of Brexit. The retailer makes around 6 percent of revenue from charging customers interest on loans for its goods. A chaotic separation from the UK could make customers less willing to take out credit, and make more loans go sour.

Analysts have already downgraded Next’s valuation. The 6.1 billion pound company is now worth less than 10 times forward earnings, compared with a peak last year of around 14 times. With its gloomy forecast, it is unlikely the valuation will recover soon.   

Breakingviews

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