Sunday 22 July 2018

New retail scene science fiction to traditionalists

John Lynch

Oldies who read this column will remember the British retailer of the middle years of the last century, Great Universal Stores (GUS).

The company had retail outlets, manufacturing and furniture stores under the Cavendish brand; several in Ireland. For five decades it was driven by a retail genius named Isaac Wolfson.

Fast forward, and today we find a new UK giant of retailing with a structure not unlike that of GUS with retail outlets, mail order (and internet) and a manufacturing operation for some of its products.

The company is NEXT, and its CEO happens to be Simon Wolfson, grandnephew of Isaac. When his father, the then chairman, appointed him CEO 15 years ago at the age of 33, the decision was greeted by mutterings of nepotism.

However, the retail game is not a place for looking back. Its landscape is undergoing extraordinary change. There, like everywhere else, the internet is moving mountains and apparel retailers are at the centre of the revolution.

Customers can now browse the internet with its video modelling, detailed size charts, price and free delivery (for the time being) and buy from the comfort of the sofa or even the office at lunchtime. Old Isaac Wolfson would have seen this as pure science fiction.

NEXT is a UK-based retailer of clothing, accessories and furnishings with a market value of £8bn (€10bn). The group has an extensive retail chain, internet and catalogue shopping with the name of NEXT Directory and an international franchise operation.

Eight years ago it bought the Lipsy brand for younger women which it sells not only in its own stores but to franchise partners.

The retail chain has 700 stores and its online and catalogue shopping is available in more than 70 countries. Unlike some of its major rivals, the company designs its clothes in-house and makes up to 40pc of its requirements in its own factories. It also sells third party branded fashion items online under the Label brand.

NEXT was set up in 1982 as part of Hepworth Ltd, at the time a retailer of ready-to-wear men's suits. By 1986 the parent company was renamed NEXT plc. While the 1980s was a development period for NEXT, it was also a troubling one. By the late 1980s the company hit a rocky patch that saw its share plummet to 7p, it is now £54.50 (€68).

The company today has 500 outlets in the UK and Ireland and 200 in Europe, Asia and the Middle East with group sales of £4bn (€5bn).

The company strategy remains focused on profitability and returning cash to its shareholders by way of dividends and share buybacks. Its success in the past 10 years has been outstanding. Earnings per share moved from £1.27p (€1.59) to £4.20p (€5.24); ordinary dividends jumped from 44p (55c) to £1.50 (€1.87) per share; while group profits before tax almost doubled to £780m (€974m).

Its internet strategy is also paying off and now accounts for almost half of group profits, but its rivals are making headway. The share price of £54.50 is down from a yearly high of £81 (€101). Surplus cash last year was given to investors by way of a special dividend in lieu of share buybacks. The number of shares in circulation is 16 million fewer than in 2010.

The company has expressed concern about the UK government's proposal for a living wage. It has said the increase this year is "manageable", but the 2020 estimated cost of £9.35 (€11.67) an hour is "not immaterial" and could cost £27m (€33.7m) a year.

To accommodate the wage increase, prices will have to rise by 6pc over the next four years. In addition, increased competition from the likes of Zara and River Island is not helping.

The CEO recently issued a downbeat outlook, saying this year will be "challenging". The share dropped 12pc, but some analysts believe the sell-off was an over-reaction.

Some also believe the CEO has previous form in over- hyping the downside. The company's price earnings multiple is a modest 12, but low multiples are usually low for a reason.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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