Next on road to recovery after weak Q2
Jul 29, 2020
Next is slowly working its way back to health following the initial shock of the coronavirus crisis. But full-price sales in Q2 still fell 28% year-on-year, it said on Wednesday, without giving a monetary figure. However, it said this was “much better than we expected and an improvement on the best-case scenario” given in its April trading statement.
And it now has more visibility on what it expects for the rest of the year with the firm predicting full-year profit before tax of around £195 million and a reduction in net debt of around £460 million.
The firm’s warehouse capacity has come back faster than it had planned, and store sales have been “more robust than anticipated”. As a result, its Q2 sales were significantly ahead of its internal plan. It all meant online sales were up 9% and like-for-like sales in retail stores, since they reopened, were down ‘only’ 32%.
The company has modelled three new scenarios based on full-price sales for the year being down 18%, 26% or 33%. The -26% scenario is in line with its internal forecast and assumes that sales in the second half are down 19%.
As this shows, there’s still a lot of uncertainty and the company pointed out that it can't give the same sort of reliable guidance that it usually issues. “The duration of social distancing rules, post-lockdown consumer behaviour, earnings, unemployment, and, most importantly, whether there will be a second wave lockdown, all remain unknowable,” it said.
But its experience over the last 13 weeks has given it much greater clarity on its online capabilities during lockdown and the state of consumer demand, and it said “we are now more optimistic about the outlook for the full year than we were at the height of the pandemic”.
So, looking more closely at what happened during the second quarter, that 28% fall in full price sales was also matched by a fall of the same percentage in total sales (including markdown and clearance).
As would be expected, sales of childrenswear, home, nightwear and sportswear, along with some adult casual clothing, did “much better than the more formal parts of our adult clothing ranges associated with work, going out, overseas holidays and large social events”.
In recent weeks, the recovery of its sales has become more marked as you can see from the chart below. The company said that in the last six weeks of the season, total full-price sales were only down 8%.
It's also interesting that the company doesn't appear to have been forced into the ultra-deep discounting that some had predicted with Next saying that stock was well-controlled during the period. A combination of “reduced stock purchases, carefully controlled cancellations and the hibernation of core lines for next year, meant that we went into the end of season sale with only 1% more stock than last year,” it explained.
In fact, markdown sales were down 12% and worse than the performance of full-price sales in the same weeks, which as mentioned were down just 8%. There are two reasons for this. Firstly, in physical retail it didn’t want to create the large queues normally associated with its end of season sale, so it didn’t advertise the sale to reduce the risk of overcrowding. Secondly, it limited the stock available in its online sale in line with reduced picking capacities caused by social distancing.
It also pointed out that during lockdown, its returns rate was significantly lower than last year. This is because the product categories that sold well (such as childrenswear and homeware) have much lower returns rates than the areas that didn’t sell well (such as dresses and formalwear).
In addition, during lockdown, customers couldn’t return items through stores and relied on courier collections instead. “As a result, we believe customers were more selective when placing orders and ordered items they were more likely to keep,” it explained.
This reduction in returns meant that, in Q2, although it sent out 17% less full-price stock than last year, it saw the aforementioned 9% increase in online full-price sales.
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