Late surge gives Next a happy Christmas after all

Retailers' shares surge back into fashion after clothing chain raises full-year profits expectations to at least £340m
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The Independent Online

Next proved that some retailers had enjoyed a Merry Christmas after all when it revealed yesterday that a last-minute raid on its shops had helped sales to soar over the crucial festive trading period.

The group, whose womenswear chain celebrates its 20th birthday next month, raised its full-year profit expectations after reporting a sharp rise in sales. Retail shares leapt back into fashion on the news: Next led the charge, gaining 120p to 1260p; while GUS, Tesco and Big Food Group also performed strongly. The only loser was Marks & Spencer, which slipped 5.75p to 279p, on fears that Next's sparkling performance had come at the expense of the high street stalwart.

Simon Wolfson, Next's chief executive, said three "poor weeks" had culminated in an "absolutely fantastic" Christmas week, helping sales in December to hit the company's targets. There were only "dribs and drabs" left in the retailer's legendary post-Christmas sale, when bargain hunters queue through the night to bag the best offers, he added.

Next held its nerve during the dire start to the holiday season, when rivals such as Marks & Spencer and French Connection slashed prices and even brought forward their January sales, which meant full-price sales during the Christmas week beat its own forecasts. Mr Wolfson insisted that even during the group's worst weeks, an early sale had never been an option. "We have never discounted before Christmas: and we won't. It just wasn't a question we had on the table."

The company said total sales surged by 15.8 per cent in the period from 4 August to 24 December. Even stripping out the effect of the retailer's push to open bigger new stores, underlying sales rose by 2.8 per cent. It now expects pre-tax profits of at least £340m for the financial year to 31 January, up from analysts' previous consensus of £325m and last year's £301m.

Analysts had expected Next to fare better than the rest of its mainstream rivals. But few had anticipated the strength of customers' eleventh-hour demand. Asked how Next managed to outperform, one analyst said: "Why Next works well is one of those questions no one has been able to answer. Put simplistically, they sell the right product at the right price at the right time in the right location."

Not that Next always gets it right. As Iain Macdonald, an analyst at Numis Securities, said: "You're only as good as your last season as a fashion retailer." And Next's prosaic customer base found its last autumn/winter collection about as palatable as the thought of wearing a Vivienne Westwood creation for daywear. This season the company played it safe, treating the trend for ultra-short minis teamed with thigh-high boots with the disdain most Next clientele felt it deserved. "We sold quite a short skirt; not a scary one," Mr Wolfson, said.

For the 36-year-old Mr Wolfson, who reaches his third anniversary in the hotseat this May, Next's steady progress will come as something of a relief. Although BSkyB's James Murdoch is only 30, the Next boss is still one of the youngest chief executives around. As with Mr Murdoch Jnr, charges of nepotism still haunt Mr Wolfson, whose father, Lord Wolfson of Sunningdale, chaired the clothing retailer when he was appointed to the executive board aged just 29.

Despite making a noise when Mr Wolfson was given the top job, the City quickly appreciated his retailing skills. A law graduate from Trinity College, Cambridge, Mr Wolfson joined Next as a humble sales consultant at its Kensington branch in 1991, a year after his father became chairman. The young scion of the Wolfson dynasty got his break after writing a report on the business, which prompted his elevation to the position of assistant to the then chief executive, David Jones. From there he moved up to become retail sales director in 1993, before becoming head of sales and marketing in 1996.

"He commands a lot of respect from store managers because he has learnt the business from the bottom up," one retail analyst said. But Mr Macdonald added: "To be fair, he inherited a very good business. It's not as if he's had to turn anything around."

The company's saviour was Mr Jones, the current chairman who joined when Next bought the mail order company Grattans. He rescued the group from diversification hell in the late Eighties, when its very own chain of newsagents competed with umpteen clothing sub-brands for founder George Davies' attention. Since its reversion to one brand, under Mr Jones, it has gone from strength to strength - barring the odd fashion wobble, that is.

These days the main quibble surrounding Next is its disdain for like-for-like sales figures, the retail industry's key benchmark. The clothing group argues that bottom-line profit is what counts, and this has almost doubled over the past five years. It prefers to focus on total sales, arguing that its strategy of increasing its average store size by replacing smaller outlets with new, larger stores distorts its underlying sales figure. But as Mr Macdonald says: "The acid test is profitability is growing." Next's voracious appetite for buying back its own shares, its preferred way of spending its cash, means its earnings per share will soar by 30 per cent this year.

Although Next is proving that bigger stores are better, they are cannibalising existing sales. And it will eventually run out of room to expand in the UK. One solution could be to look overseas: the company is planning to open a store in Copenhagen in March. Another could be to push its home furnishings line, carried in only its larger stores, more aggressively.

In the Next Directory, the UK's largest direct mail order business, the company has a useful growth adjunct; the division's sales climbed 16.1 per cent in the period to 24 December. Although the Directory has been a steady performer, contributing a quarter of group turnover, analysts believe it needs some attention. At 864 pages, the spring/summer hardback catalogue is a daunting read. Here the family connection must help: as founders of the former mail order bastion GUS more than three generations ago, the Wolfsons are the original mail order barons.

As for what 2004 has in store, Mr Wolfson will say only that he is "cautious, not pessimistic". All will depend on how wildly the group embraces next spring's more unlikely fashion trend: yellow.

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