If 60 is the new 40, as some sprightly baby boomers claim, how about 160? That’s the ripe old age of UK retailer Next, which reported its Christmas sales figures on Tuesday. Until recently, calling a retailer “mature” was something of an insult. But some high-street elders no longer look so fusty.
The outlook for British retail isn’t easy. Changes in the UK Budget to minimum hourly wages and the threshold at which employers start paying national insurance (NI) contributions have bumped up costs.
Shares in many major retailers have duly moderated in recent months, although Next’s and M&S’s are still up 17 and 32 per cent respectively over a period of 12 months.
But Next’s fourth-quarter trading update on Tuesday offered hope that some larger retailers — particularly those that have been investing in ecommerce — will prove resilient.
True, on the face of it, Next’s guidance for the year ahead reinforced expectations that 2025 will bring challenges. Its chief executive Lord Simon Wolfson is forecasting full price sales growth, including contributions from online sales overseas, next year of 3.5 per cent versus 5.6 per cent for the year to December 28.
Similar growth is expected in next year’s pre-tax profit, which would also be a deceleration on forecast growth of 10 per cent for the current year.
But Next has a reputation in the City for outperforming what is usually quite conservative initial guidance. It expects a £67mn hit in the year ahead from wage inflation and NI increases yet there is plenty of scope to compensate for a large slug of its higher costs through efficiencies. It has been mechanising its warehouses and is beginning trials of self-service tills — which provide obvious opportunity for savings — in February.
Analysts expect that M&S, which is midway through a programme to reach £500mn of savings by full year 2028, should also be able to shoulder cost increases more easily than others.
It helps that some competitors — including fellow retail elders — have crossed retail’s rainbow bridge. Mid-market rivals such as the Arcadia Group have either collapsed or closed stores in the last five years. Capacity additions in terms of UK clothing stores is now at a 10-20 year low, says RBC Capital Markets’ Richard Chamberlain.
Many storied retailers have another major attraction: strong cash generation. Next expects to have generated £670mn of surplus cash in its current financial year. This has helped to fund share buybacks totalling over £320mn. Surplus cash the following year is expected to be at a similar level. Sure, youth is precious — but there’s something to be said for the discipline and experience that comes with maturity.