Not Even Next Can Save Christmas for Britain's Retailers

(Bloomberg Gadfly) -- Investors in British retailers are getting the good news first. What follows is likely to be more disappointing.

Next returned to its historic form -- beating analysts' expectations of full-price sales under the Next brand by some margin. They rose 1.5 percent in the period from Nov. 1 to Dec. 24. The consensus of analysts' forecasts was for a 0.5 percent decline.

Part of the improvement was down to much colder weather in the run up to Christmas. That should have lifted other clothing retailers too, and shares were up across the board. Even with a slightly brighter outlook for the British consumer, investors shouldn't count on this turning into a lasting trend.

Next has been trying to improve the balance between having the latest fashions in its stores and enough basic items, such as work blouses. It also bought carefully, with stock going into its Boxing Day sale (including its first Black Friday event), down 6 percent on last year.

Nevertheless, the trends it alludes to are positive for Marks and Spencer Plc, which has been taking some much needed medicine when it comes to discounting. M&S has cut back on the relentless special offers that damaged customers' confidence in its pricing, and hurt its profit margins. That might hold back sales growth, but it should be beneficial to margins.

Online retailers, such as Asos Plc should also have had a good Christmas. Next's internet arm performed better than its stores, and this pattern is likely to be repeated across the sector.

But as Bloomberg News's Sam Chambers and Tom Beardsworth have noted, the outlook is likely to be more challenging for Debenhams Plc and House of Fraser Ltd. as department stores are particularly under pressure. New Look Retail Group Ltd has been struggling with weak sales, and has the additional worry that it is owned by Brait, in which Christo Wiese is the biggest shareholder.

For Next, despite the ups and downs of 2017, it remains highly cash generative. It forecasts 300 million pounds ($407.7 million) of surplus cash in the year to January 2019, which it will use to buy back shares.

It has also upgraded its core forecast of pre-tax profit in the year to January 2018 from 717 million pounds to 725 million pounds. That's not that much different to its central forecast a year ago, even after the profit disappointments of the past year, underlining its resilience.

With a gain of about 8 percent on Wednesday, the shares have now recovered the losses that began with a profit warning a year ago. They trade on a forward price earnings ratio of just over 12 times, slightly ahead of M&S.

The companies face many of the same issues: a maturing customer base, consumers falling out of love with clothing and too many stores.

But as Gadfly has argued, Next has been proactive in managing its real estate. M&S has only lately begun to address the fact that it has too many stores, often in the wrong locations. Both companies should go further in pruning their outlets, but at least Next has less heavy lifting to do.

Chief Executive Officer Simon Wolfson still expects 2018 to be tough, just not as brutal as 2017. 

With Next expecting clothing price inflation to moderate to 2 percent in the first half of the year, and then disappear in the second half, that should ease some of the squeeze on consumers. Of course, shoppers may still feel other kinds of price pressure, while interest rates are another concern. But it does look like the strain should ease, helping Britain's beleaguered retailers.

However, the jump in their share prices on Wednesday looks overdone. Their longstanding problems haven't gone away. There's the perennial issue of competition with experiences, the onslaught of Amazon.com Inc., as well as knocks to confidence as Britain proceeds with its divorce from the European Union.

As for Next, in order for its shares to regain a sizeable premium to M&S, Wolfson needs to convince investors that the company has put the traumas of the past year firmly behind it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.

©2018 Bloomberg L.P.