Mediaboss Marketing

Next (LSE:NXT) methodical reaction to the coronavirus pandemic resembles its reaction to another big challenge, the Internet. The retailer has won justifiable plaudits for modelling cash flows as High Street sales decline, and its annual report, published this week, models the potential impact of the virus (as best Next can).

Fashion and homeware retailer Next initially closed its online business, responsible for more than half of revenue and a greater proportion of profit, as well as its physical stores. Earlier this week, it opened back up for business online - initially supplying a limited range of childrenswear and home items.

It has also limited the quantity of products it will sell in a day, closing the website when it reaches the limit to ensure warehouses are populated by relatively few staff and employees maintain a safe distance from each other.

The impact of the pandemic will go beyond lost sales from closed stores and a reduced online service, the company says, because people buy fewer clothes when theyre not going out.

But Nexts modelling suggests it can withstand a reduction of more than 1 billion in sales (25% of the total) in the year to January 2021 without breaching the terms of its borrowing agreements.

Twenty-five percent of sales doesnt sound like much, it would be the equivalent of three months of lost sales if sales were spread evenly.

Theyre not though. Like many retailers, trading at Next peaks in the run-up to Christmas, so its a small blessing the pandemic appears to be peaking in spring.

High levels of profitability have allowed Next to return money to shareholders through share buybacks and special dividends, so Next does not have a hoard of cash.

Survival in the worst-case scenario requires Next to conserve cash by suspending buybacks, delaying capital expenditure, and deferring or suspending the dividend.

It would also need to find new sources of cash, potentially by redeeming a loan to its Employee Share Ownership Trust, by effectively borrowing more through the sale and leaseback of a warehouse and using money owed by customers as collateral for borrowing.

Somewhat reassuringly, Nexts modelling does not assume borrowing from the Government, but presumably the option is there if it needs it.

Even more reassuringly, this subheading is not mine. Its from Nexts annual report. The company remains committed to evolving into a predominantly online business that uses its diminished retail base as a resource.

This is a strategy that impressed me when I reviewed the company last year and, despite an unanticipated focus on survival in Nexts plans for 2021, its still embracing the future. Next says:

... when the dust settles it will be the work we have put into (1) securing the cash resources of the business and (2) moving the business forward that will make the difference to the long term future of the company.

Taking a leaf out of Amazons playbook, Next believes choice is the most important advantage offered by the Internet, and convenience is secondary.

If Next is to grow as an internet retailer, it says it must offer more choice, which means selling rival brands on its own website, sometimes as stockist but usually on commission, even though these products compete with its own higher margin NEXT Brand.

Next is giving customers the choice they want, which requires it to open the Next platform, the website, logistics, marketing, systems, and customer credit facility to rivals.

Having developed these online capabilities, it is also expanding its overseas websites. LABEL sales (third party brands), overseas sales, and online sales (which incorporates the other two) have been experiencing double digit revenue growth for some time.

Profit margins were high in the year to January, even though Next aims to be its partners most profitable route to market.

LABEL net profit margins were 15% in 2020, compared to 21% for NEXT Brand.

In the 2020 annual report, Next reveals that it has agreed in principle to provide a cut of the Next platform and serve it up as a third partys website.

It will be providing a pay-as-you-go operating infrastructure comprising every aspect of the Next platform. Perhaps it will be the first of many instances of Total Platform:

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Next's worrying statistic and a new share to follow - Analysis & Commentary - Interactive Investor