Self-examination in retail-land comes in different forms. At the John Lewis Partnership, management is contemplating the previously unthinkable and wondering whether to look for an outside investor to take a minority stake. Over at FTSE 100 firm Next, long-serving chief executive Lord Wolfson opened his annual sermon for shareholders by asking whether the clothing retailer had reached maturity.
While Next’s 20-year financial record is still terrific (compound annual growth in earnings per share of 14%), the more recent performance has been “unexciting in absolute terms,” judged Wolfson. The compound rate over the last eight years will be only 5.4% if this year’s forecast of a fall in pre-tax profits from £870m to £795m proves correct. It has been “an uphill battle,” he says.
The good news for shareholders, despite a 4% slip in the share price on Wednesday, is that Wolfson likes the look of the terrain beyond the next incline. “The group has far more ideas and opportunities for long-term growth than it has had for some time,” he reckons.
One can see what he means. Despite the impression of ubiquity, the Next brand isn’t necessarily at a saturation point in the UK – the share of the women’s clothing market is 6%. Meanwhile, rents in shops may finally have caught up with the rise of online shopping. More importantly, Next’s new adventures and experiments may finally be big enough to make a difference.
The first is online expansion overseas, where Wolfson reckons there are wholesaling and licensing opportunities in the US and Asia, places where dispatching individual packets to shoppers from a UK warehouse makes little sense. Second, there’s scope to boost Label, the bit that sells third-party brands such as Ted Baker, Superdry and Boss through Next’s own website.
Then there’s the “total platform”, more of an all-singing e-commerce service to other brands. The kicker with this division is that Next usually buys equity stakes to add juice to returns: the portfolio includes Laura Ashley, Gap UK, Joules, JoJo Maman Bébé and more.
It all makes Next’s setup more fiddly, but yes, one can see how the add-ons could add up. The investments, which started with a 25% stake in Reiss in 2021, delivered a profit of £16.8m last year. Meanwhile, Label business is already a £1bn turnover operation that makes £130m in trading profit.
In any case, the downside should be limited. Wolfson was clear that, if Americans don’t want to wear Next’s stuff, he won’t persist in trying to force it upon them. If more opportunities to invest in other firms on decent terms don’t materialise, “there is no shame in handing surplus cash to shareholders”.
Over at John Lewis, the board must look at Next’s parade of possibilities and weep. Unfortunately for them, there are three compare-and-contrast morals, and none is encouraging.
First, the best time to stop opening new stores was about 20 years ago. Next has spent that long shuffling its portfolio and renegotiating leases to make them shorter. By contrast, John Lewis’s about-turn in reaction to the rise of online shopping came late and suddenly: a big “flagship” store in Birmingham opened in 2015 and was closed in 2021.
Second, the online retailing game has moved on since the days when John Lewis was a pioneer. The rise of aggregator models such as Next’s represents bad news for traditional department stores. Third, nothing oils the wheels like predictable cashflow: even in the current “tough” year, Next expects to generate £467m. The partnership’s cashflow from operations almost halved last year to £348m.
Fourth – and must cruelly – John Lewis needs to get real about its own valuation, as argued here last week. Next is valued by the stock market at £8bn, so the currently loss-making partnership must be worth substantially less. If so, it is hopeful in the extreme to think anybody would cough up, say, £2bn for a stake of only 25%. If those are the terms, you’d put your money in Next every time. Self-help looks to be John Lewis’s best strategy – perhaps the only one available.
