Business Analysis: And for his Next trick, will the retail wonderkid Wolfson double in size?

High street clothing chain delivers 16 per cent rise in sales to leave rivals full of envy
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The Independent Online

Next was the envy of its retail peers yesterday when the clothing chain once more defied the sector's doomsayers to report a sharp rise in interim profits and buoyant same-store sales.

Next was the envy of its retail peers yesterday when the clothing chain once more defied the sector's doomsayers to report a sharp rise in interim profits and buoyant same-store sales.

The group's shares became the City's must-have retail stock as analysts rushed to upgrade their full-year forecasts, sending the stock up 3 per cent to a record high of 1,558p. Even Next's caution that the recent "benign" retail climes were set to end failed to dampen the stock market's enthusiasm.

Simon Wolfson, the group's youthful chief executive, may have claimed he preferred to save the excitement for Next's clothing ranges and its stores. Yet little thrills analysts more than an unexpected additional £20m or so of profits and pundits rushed to outbid each other in their praise for this most British of clothing institutions. "Knock-out results for H1", was how analysts from Dresdner Kleinwort Wasserstein sold the figures to its clients, while Charles Stanley hailed "excellent results" that "smashed expectations".

But with even David Jones, the company's chairman, who along with Lord Wolfson of Sunningdale rescued it from the retail basketcase that it was in the late Eighties, quick to have a pop at its "boring and repetitive" strategy, yesterday's numbers beg the question, what next for Next?

Well, the retailer's army of core fans - namely white-collar workers up and down the country - will be relieved to hear that the group, whose womenswear chain celebrated its 20th birthday earlier this year, has no major surprises up its sleeve. Indeed, its directors are acutely aware that it is precisely when their thoughts turn just that little bit racier that the group's sales suffer. Even Next's most loyal fan goes on strike when she can't squeeze her thigh into that particular season's take on bootleg trousers.

Analysts who have long wondered what the future holds for the company that gave the country, and ironically Marks & Spencer, George Davies, were suddenly happy to accept the Next mantra that simple is best. Strategy-wise, this means opening new space - and lots of it - across the UK and selling more of the conservative clothing ranges for which it has become famed, and which continue to serve it so well, as yesterday's results show.

For the six months to the end of July, the group's total retail sales from its 371 shops grew 16 per cent, in a clothing market that rose just 2 per cent. Of this, 4.7 per cent was what it likes to call "underlying" like-for-like sales growth, which boils down to the sales gain it got from the 285 stores that weren't affected by new shops, or shop extensions, opening near by. Even including these stores, like-for-like sales grew 2.6 per cent - well ahead of the market. In the past six weeks, on Next's preferred measure, those underlying sales dipped slightly to 4.5 per cent, while the market's metric of choice grew 2.1 per cent.

What got the City really excited was the rise in the operating margin from its shops, which climbed almost 200 basis points to 12.4 per cent. This fed through to a 30 per cent rise in pre-tax profit to £162.7m - and a 36 per cent increase in earnings per share. Analysts upgraded their full-year forecasts by 5 per cent to about £425m. Richard Ratner, at Seymour Pierce, said: "With space continuing to expand in the immediate future, the worry must be that M&S stages a successful recovery, but unless this happens, the party is unlikely to be spoilt."

Mr Wolfson said the company was planning for "steady but not dazzling growth in general underlying demand", paying heed to the fact that "next year the high street will become more focused". This is Wolfson-speak (Next's directors studiously refuse to comment on their rivals for fear one might accuse them of gloating) for acknowledging that M&S is duty bound to muster up some kind of recovery for its long-suffering shareholders, which a certain Philip Green is more than anxious to stymie.

Not that analysts are worried. One pointed out: "We have been here before. When Roger Holmes took over [as chief executive of M&S] everyone said Next would have a hard time. But the reality was it made no difference at all." Another believes Next's uncanny knack of "being bland enough to be all things to all people at very good prices" would be more than enough to help it see off the additional competition that a revitalised Marks is bound to incite.

Even the ultra-cautious Mr Wolfson said the group could double both its space and its 6 per cent share of the clothing market over the next six to 10 years. "There are no market constraints on being able to do that," he said, although he was quick to add that the group's own growth targets "are a lot more modest".

Next revealed yesterday it was planning to add an extra 1 million square feet of selling space over the next two years - growth of 20 per cent and 15 per cent per year respectively - more than previously anticipated. Although most of the new space will be directed towards increasing the number of stores trading from 10,000 to 15,000 sq ft of floor space, the group's ambitious expansion plans will climax in October 2005 with the opening of its first 80,000 sq ft store in the Arndale shopping centre, Manchester. The site will be almost twice the size of Next's current biggest store, a 45,000 square footer in Cardiff.

Any market share gains will undoubtedly be helped by the continued success of that other pillar of the Next success story: the Next Directory. In the six months to July, the group's own take on the mail order phenomena that spawned the Wolfson dynasty grew profits by 28 per cent to £38.6m as its active customer base soared by 99,000 to 1.7 million. The rise in profits was helped by the easy comparisons after a weak start to trading in 2003 but shows just how useful its mail order business remains. GUS - which toyed with merging with Next in the late Nineties - may have sold its home shopping business to the Barclay Brothers, but the Wolfson mail order magic more than lives on via the youngest scion of the family.

The arrival of the Christmas 2004 edition of the Directory briefly sparked speculation that Next was attempting to turn itself into a general retailer, what with the £189.99 portable DVD player, the £249.99 set of DJ's decks, the £600 treadmill or the £36.99 cordless drill that the shopping Bible features. But Mr Wolfson was quick to quash such heretical thoughts. "We are fairly entrepreneurial so if people come up with ideas and they're good we will let them experiment. But ultimately the core business is what will drive Next forward," he said.

With its first company-owned overseas stores in five years disappointing after just four months - the Danes it seems don't buy into the Next clothing story - it will be down to the group's fast-growing homewares business and its under-exploited lingerie lines to fuel that market share growth. That and the fact that this winter's top secretarial fashion look plays right into its lap. Even Next can't scare its customers off with brown and green pussy-bow blouses.

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