Next – bellwether for the bounce back?
COVID-19 Market Update – 07/05/2021
10 minutes to read
Introduction
This is the 40th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on two key themes:
- Assessing the 1st month of bounce back
- Contrasting trading performance between Boohoo and Superdry
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- BoE predicts GDP growth of +7.25% in 2021
- Strongest growth since WW2
- Economy back to pre-pandemic levels by year-end
- Retail footfall +264% versus 2020
- But still – 26% lower versus 2019
- Record weekly takings at Primark post lockdown
- Trade higher than post previous lockdowns
- Next upgrades FY profit guidance by £20m
- Full price Q1 sales -1.5% vs projection of -10%
- Q1 sales £75m higher than budget
- Full price sales up +19% since lockdown lifted
- FY sales guidance unchanged at +3% vs 2019
- Boohoo FY revenue +41%; UK up +39%
- Superdry FY revenue down -21%
- But discernible turnaround in Q4/post lockdown
- Strongest brands thrive, regardless of channel of operation.
1. Assessing the 1st month of bounce back
The good news is coming thick and fast. First of all, Barclays proclaim that the UK is about to experience its biggest economic boom since WW2. The Bank of England subsequently announces it agrees with them. Within retail, footfall recovers dramatically as lockdown is lifted. And key retailers such as Primark and Next report a surge in demand. After so much doom and gloom, this is almost all too much to take.
Last week, Barclays CEO Jes Staley set the trend towards this new-found positivity with a particularly upbeat market update. "We estimate the UK economy will grow at its fastest rate since 1948. That's pretty spectacular," he stated. A combination of the successful vaccine rollout and Barclays' estimate of an extra £200bn sitting in customer and company bank accounts meant the UK would join the US in seeing some of the fastest economic growth in decades.
The Bank of England chimed his sentiments this week, agreeing that the UK economy will enjoy its strongest growth since WW2 this year. The economy is expected to expand by 7.25% in 2021, with extra government cash for workers and businesses helping to limit job losses. This would be the strongest growth since official records began in 1949. The Bank expects the recovery to gather pace as stores and restaurants reopen and overall, the economy is expected to get back to its pre-pandemic size before the end of the year.
Clearly, the retail and hospitality sectors have a crucial role to play in this rebound. And the initial signs since Lockdown V3 was lifted on 12 April are good, as we predicted they would be. With a further boost likely from 17 May when indoor hospitality is again able to re-open.
Recent footfall figures have been spectacular, although, in fairness, only tell part of the story. In the first week post lockdown, footfall in shopping centres was up +126.6% week-on-week. The year-on-year figures were higher still (+404.1%) largely on account of the comparable period being Lockdown V1. But probably the most meaningful figures are the two-year comparisons, which showed that shopping centre footfall was -25.9% lower than it was in 2019.
Last week, across all retail destinations (shopping centres, high street and retail parks), footfall was up +263.6% on last year, but down -25.9% on 2019 levels. The week-on-week trend was also slightly negative (-2.0%). The broad read on this these figures? Consumers have returned to retail destinations in significant numbers since stores re-opened, but there has been an inevitable slight dip after a strong initial surge. But there is still some way to go before we can call a recovery.
Most of the feedback from retailers thus far has been purely anecdotal. Most are just pleased to be up and running again, but few are taking anything for granted and any optimism is cautious. On top of that, retailers with significant rent arrears are hardly going to go public with reports of how buoyant trade is, certainly not for the moment at least.
Primark is an exception to this. As the media ‘poster child’ for the high street rebound, Primark reported record weekly takings in England and Wales in the weeks after lockdown. Parent company ABF’s finance director John Bason told Retail Week: “Fashion is back - it’s come back, and not by a little. They [consumers] see the likelihood of going out. There seems to be a broader-based expectation that things are normalising.” He said that transactions and footfall have been in line with pre-COVID levels across the business, whereas following previous lockdowns they had been “somewhat down”.
Of course, Primark is not a typical retailer and not all operators will have enjoyed the same level of bounce back. The combination of a lack of online presence, exclusively own-branded product and a unique store experience mean that pent-up demand for Primark would be greater than for most other retailers on the high street. Primark is a broad barometer of wider consumer trends, rather than necessarily a bellwether.
The same could be said of Next, on the basis that it is also one of the UK’s strongest retailers. Nevertheless, there was much to cheer in its trading statement released this week, not least that it was upgrading its full-year profit guidance following a much stronger than expected performance in the first quarter.
For the 13 weeks to 1 May, Next’s full-price sales were down just -1.5% compared with two years ago. This was far better than budgeted figures, based upon sales projections down -10% on pre-pandemic levels. First quarter sales were £75m higher than forecasts, leading to an increase in FY profit guidance of £20m to £720m.
As a reporting timeframe that covered a significant period of lockdown, the underlying figures were all over the place. And there is much devil in the detail. By channel, Online was predictably by far the strongest for the period, with sales up +65% on 2019. In contrast, Retail (the store-based business) saw sales down -75% on two years ago. Hardly surprising, given they were closed for 10 weeks of the 13 week reporting period.
But the narrative of Next’s release speaks volumes. ”Overall full price product sales (excluding interest income) were only down -0.6% despite the ten-week closure of our Retail stores. The number makes it appear as if almost all the sales we lost in stores were simply transferred Online. This was not the case. In fact, very few of the Retail sales lost on adult clothing were recovered Online.” A categorical statement from one of the UK’s (world’s?) best exponents of multi-channel retailer that others would do well to heed.
It even went as far as quantifying this through product breakdowns. In essence, the sales outperformance was driven by online sales of Next Homewares, Next Childrenswear and third-party clothing brands, along with increasing sales overseas. Total Next Adultwear sales were down -46%, a figure that incorporates both stores and online.
In terms of trading patterns since lockdown was lifted on 12 April, the business reported that sales In the last three weeks had been “exceptionally strong” - versus two years ago, total full price sales were up +19%. In that period, like-for-like full price sales in Retail stores were up +2% and Online sales were up +52%. Stores reopen and both the store-based and online-platforms reap the benefit, such are the co-dependencies of multi-channel retailing.
As is typical (and laudable) from Next, any optimism is at best cautious. Based on the evidence from last year, the business believes that “this post lockdown surge will be short lived” and it therefore expects sales to settle back down to previous guidance levels within the next few weeks. On the ongoing assumption that Retail will be -20% and Online will be +24%, overall full price sales guidance for the full year remains unchanged as +3% versus 2019.
Conservatism personified (these targets may well be surpassed), but still a strong general message of considerable, pent-up consumer demand, partially released through an initial surge, but then sustained at a slightly lower level through an extended timeframe. And a retail sector that can only operate to anything like its full potential when all channels are operational. Next is an out-performer rather than a bellwether, but these fundamental messages currently resonate across the retail industry.
2. Contrasting trading performance at Boohoo and Superdry
Of course, for all this positivity, all is far from normal on the high street. The closure of the final Debenhams stores over the next couple of weeks, and with it the liquidation of the high street’s former largest space occupier, serves as a sobering reminder that retailing is a survival of the fittest. And some operators are fitter than others.
This notion has been reinforced by trading updates at Boohoo and Superdry this week. Roll the clock back a few years, both were stock market darlings. The latter has since undergone a dramatic fall from the grace, while the former is still flying high, despite several questions being raised over its ESG credentials over the last year.
Boohoo reported a +35% uplift in pre-tax profit to £125m in the year to 28 Feb. Adjusted EBITDA climbed +37% to £174m, while group revenues soared +41% to £1.75bn, buoyed by surging sales in its international markets, which now account for almost half of Boohoo’s total revenues.
Sales in the UK (which remains its largest market), rose +39% to £945m during the year. That compared with a +65% surge in sales in the US, Boohoo’s fastest growing market, where it registered sales of £435m. Revenues in the rest of Europe were up +30% and the rest of the world +16%.The number of active customers using its websites jumped year-on-year by +28% to 18 million.
Of course, the year was one of “significant investment” for the group, which saw it spend £250m on acquisitions, including Debenhams and the former Arcadia brands Dorothy Perkins, Wallis and Burton. To support ongoing growth, it is opening a third distribution centre in the coming months, and has also signed a lease on a fourth facility.
Boohoo also hailed “significant” progress in its ‘Agenda for Change’ – the programme it launched last summer following allegations of poor and potentially illegal practices by garment manufacturers in some of the Leicester warehouses involved in its supply chain. Boohoo co-founders Mahmud Kamani and Carol Kane pointed to “greater oversight of our supply chain, stronger governance and more transparency. We are embedding a new way of working and improving the sustainability of the group for the benefit of all stakeholders.”
In contrast, Superdry reported a -21% slump in full-year sales to £556.6m for the 52 weeks to 24 April. By channel, Superdry stores lost around 40% of trading days during the financial year and revenues plummeted -50.9% as a result to £140.9m. Wholesale revenues also fell -19.9% to £212.8m. Online sales for the year were up +33.8% overall to £202.9m, but failed to compensate for lost store-based and wholesale trade.
But there was still some optimism in the release, notably a strong uptick in the final quarter of the financial year. Group sales inched up +0.8% in Q4, prompting chief executive Julian Dunkerton to declare that there is “light at the end of the tunnel”. Furthermore, the business said it was “confident of growth in FY22 revenue and profitability compared to FY21” provided that there were no further lockdowns and footfall recovered to near pre-pandemic levels.
Superdry’s relative fall from grace has prompted what it calls a “reset of the brand”. There is evidence that this may be starting to bear fruit after a few tumultuous years. Central to this is a full-price stance, when the knee-jerk reaction would surely have been to slash prices, to the detriment of brand equity. The business is also majoring on its ESG credentials and has a stated goal of being the most sustainable listed fashion brand.
The conclusion that Boohoo continues to flourish as it is an online pure-play and Superdry is suffering as it is a store-based retailer is facile in the extreme. COVID-19 may have thrown up more challenges for physical retailers than it did online-only operators, but they were only temporary. Ultimately, consumers shop brands and those that have the strongest brands will continue to thrive going forward, be they online pureplay (Boohoo), purely store-based (Primark) or multi-channel (Next).