Next plc is a United Kingdom-based retailer offering products in clothing, footwear,

accessories and home products. Next distributes through three main channels: Next
Retail, a chain of more than 510 stores in the United Kingdom and Eire; Next
Directory, a home shopping catalogue and Website with more than 2 million active
customers, and Next International, with more than 180 stores. The Company’s other
businesses include Next Sourcing, which designs, sources and buys Next branded
products; Lipsy, which designs and sells its own branded younger women’s fashion
products through wholesale, retail and Website channels, and Ventura, which
provides customer services management to clients wishing to outsource their
customer contact administration and fulfillment activities.

Next Plc financial analysis

Introduction:

Next plc is a UK based retailer offering products in clothing, footwear,

accessories and home products. It has over 690 stores in over 23 countries
covering Europe, far and Middle East and even Latin America and through its
online channel it sells products in over 37 countries. Next distributes through three
main channels: Next Retail, a chain of more than 510 stores in the United Kingdom
and Eire; Next Directory, a home shopping catalogue and Website with more than 2
million active customers, and Next International, with more than 180 stores Its
annual turnover is close to £3.4billion dollars. With a market share of 10.4%
(Mintel), it has the second largest market share in the United Kingdom behind
marks and spencer (11.4%). Apart from its main retail business under the next
brand it also has various other businesses such as Next sourcing, Lipsy and
Ventura. It is listed on the London stock exchange and is constituent of the FTSE-
100. It was one of the pioneers of the multichannel retailing launching its
directory in 1988 and the online facility in 1999.

The management has steered the business well through the recession and it has
emerged in better shape than when it entered. The group has been constantly
increasing its revenue over the last three years. However 2009-2010 was the
first year of full like for like sales growth after four years of decline. Although it
operates in large number of countries, around 94% of the company’s revenue
comes from the u.k, which makes the company overly dependent on the home
economy. Also company has been largely unsuccesfull in managing its
international business. International like for like sales fell by 7%. The company
has mentioned in the report that it is changing its approach to international
trading. This is the second time in two years that it restructuring its international
operations which is cause of concern. The provision of 3.3 million against its
store in Europe show that it expects it stores to make loss in the future. Also
there is an impairment charge of £1.6 mn. to the goodwill in chezch republic.
This is a clear sign that its operations in the country are not running smoothly.
Overall the segment profit was down 87% to £ 1.2mn from the previous year.
The Company might have expanded in this country at a very fast rate without the
deeper consideration of the local culture and demands.(write about the
maturation of UK market in the conclsion)

It has to be noted that over the last few years the market environment and the
broader economic environment has been tough. The UK GDP contracted in 2009
and although the growth has resumed now it remains in a very fragile state. The
consumer confidence during the reporting period was at very low levels.
Research has also shown that consumers are cutting back on clothing then any
area of expenditure, which is next’s main business. Also the large spending cuts
by the government have added to the uncertainties. Also the retail market in the
Uk is very competitive one. The main competitors of the company include Marks
and spencer’s, Primark stores, Arcadia group, Tk maxx and the Arcadia group.

Despite these factors next has responded pretty well to the situation. Its revenue
were up by 4.1% and is fast catching up with the market leader. Also next has
played the recession well by upping its fashionability (both in terms of speed to
at which it incorporates new trends and depth of the range). The company has
moved to target the 25-34 age group where it is extremely popular. This
demographic remained the most resilient during the downturn. This shows
management effectiveness to identify the market opportunities at the right time.
These policies have meant that the profit before tax of the company for the
reporting period increased by 18 % to 505 million. It should also be noted there
were no unusual items (major disposals etc) this year. Hence the profit figure is
from continuing operation and is a sustainable figure. Company has increased its
trading area by opening new stores (7) and refurbishing existing stores (it spent
33 million on it). In the past NEXT had expanded too fast and was on the verge of
bankruptcy which also led to the firing of its CEO. Hence it has included in its
objectives that new stores must meet demanding financial criteria before
investment is made and success is measured by monitoring achieved sales and
profit contribution against targets. This is reflected in the performance of the
new stores, which have had a payback period of 13 months and net store
contribution of 21% against the target of 24 months and 15% contribution
respectively.

In the first part of the analysis, Next’s financial performance is analysed focusing
on return on capital, profitability and asset utilisation (i.e. the DuPont formula)
and stock market performance. These measures induce the analyst to
investigate the strategic dimension underlying performance. I will attempt to
focus on the issue of how we need to scrutinize what lies behind the numbers to
effectively assess Next’s performance. This is because as mentioned by Ruth
Hines, accounting not only communicates ‘reality’ but also creates it. I will take
advantage of this knowledge and use it show, via segmental analysis on few
occasions, how aggregate numbers represent varying performance levels in
different markets. Performance is not about the “what” (e.g. profit), but the
“how” (how that profit is achieved). This leads to second part, which discusses
non-financial aspects of the “how”, namely corporate social responsibility (CSR).

Financial performance measures:

Although the overall revenue of the company increased, A closer look at each of
the segments shows that not all of them were as successful. Sales in retail
increases by only 3.5% and average sales per store actually fell by 18.5% and the
sales densities have fallen even further. Also it is partly because of the adoption
of new home standalone format, which will inevitably depress sales densities
further. However Next directory was the star performer for the group with 7%
increase in the sales and a 3.6 increase in the average number of active
customers. This also helped to offset the decreasing sales in the international
business.

Operating margin ratio (PBIT/SALES):- the group’s overall operating margin

ratio improved to 15.55% from 14.62%. It can be said that group has done a
good job to increase its margins in the reporting period, as there were many
external challenges, which could have hampered the operating margin. Even
here directory’s margin was better then other areas. The margin of directory was
20.1. The retail margin was 14.2 and the international margin was 13.1. The
weakness of sterling was a great challenge for the company as it declined by 35
cents to the dollar. This was curbed by a combination of moving to new sources
of supply; negotiating better terms with existing suppliers, lower freight cost and
less fabric wastage. This was coupled with a very efficient stock management
policy of the company. The company marked down 16% less stores in their
mainline stores, which improved the margins by 1.4% in the retail category. The
company was also externally helped by the reduction of 0.5% in the VAT. It
should be noted that this will not continue in the future as the government has
announced a significant rise in VAT to 20% which might hamper the operating
margins in the future. The increase of central overheads eroded the margins by
0.7%. However this was largely due to a charge for sponsoring the 2012 Olympic
games. I believe this was an excellent move by the group, as this will help it to
market its brand in front of a large international audience and is in line its
strategy to revamp its international business. Directory’s growth was much
greater than the retail because of the sales of higher margins items grew faster
through this channel. Also Internet has helped the sales of the directory. The next
website has the highest number of unique visitors among the clothing retailers
(COMSCORE).

Return on total assets: - this measures how well the company’s management uses
its assets to generate profits. I have included this in my analysis, as it is a better
measure than ROE, which only measures profit generated on shareholder equity
but ignores debt funding. The group managed to increase its ROA from 27.17 to
31.28. Again this is largely due to the excellent performance of the directory
sales especially through the Internet. Unlike stores this channel of distribution
requires the least amount of Assets and hence revenue per asset is very high.
However, in the future company has indicated that as per their strategy they plan
to roll out more home standalone format stores, which will depress revenue
densities, and hence it will affect the Return on total assets. This is largely due to
the concept of this kind of stores. To mitigate the effect of this company plans to
increase its directory sales and sale to international consumers through the
online channel. However its international operations have been unsuccessful and
it will be interesting to see if the new strategy can boost the ROA. An amendment
to the IFRS 8 means that reporting of the group’s segments assets is no longer
required. Hence we are not provided with the assets of each segment and it is
difficult to precisely compare the segmental performance here.
Asset turnover ratio: - the company managed to increase its asset turnover ratio
from 1.86 to 2.01. This means that it was able to increase more sales for every
pound of assets. However this is partly a result of a decrease in total assets from
1760.4 mn. to 1693.5 mn. The asset turnover ratio on last year’s assets would
have been 1.93 which is still an improvement but not that significant. This is
mainly due to the disappointing international sales especially in central and
Eastern Europe, which was deeply affected by recession.

Financial leverage increased from 12.52 to 12.68. This may suggest an increase
in the debt financing from the previous year but this is not the case. It is largely
due to the scheme of share buyback, which reduced the shareholder’s equity. The
company spent 70 mn on buybacks. On a proportionate basis this is more than
the decrease in Total assets and hence the leverage ratio is more. We need to
calculate the gearing ratio to give us a better picture of the proportion of debt
financing used by the group compared to equity, which has actually decreased
from 4.05 to 3.90. This is mainly because the company reduced the net debt by
over 200 million.

With regards to te stock market ratio:

EPS or Earning per share of the company grew from 156p to 186.7P. The group
has clearly stated that a constant and sustainable increase in this figure is a
financial goal of the company. The objectives and strategies of the company are
designed to deliver the long-term growth in EPS. The calculation on EPS without
the buyback stands at 187.8, which is in itself a very strong figure. This year’s
figure has been a record figure for the company and is a 57% increase from the
2005 figure. Hence it has been able to increase this figure on a constantly over
the last few years. Also there were no unusual events (disposals etc) and hence it
is a very strong figure.

P/E ratio: - the P/E ratio increased from 7.03 one year ago to 10.43, implying
increase in growth opportunities from an investor’s perspective. . It essentially
shows the current demand for the shares of the company. This increase is even
more significant as it has been achieved despite a 21% increase in the EPS
(denominator). It should be noted that this is despite the increase in the earnings
of the company and hence represents the confidence of the investors and the
markets in the company. However, the P/E ratio is a double-edged sword, it also
implies that it would take longer to recover investments from earnings. The
shares of the company has also outperformed the broader FTSE-100 index over
the last 5 years by over 34%. However the P/E multiple is slightly below the
industry average of 10.83.

Dividend per share- the dividend per share of the company has increased from
55p to 66p, which is an improvement of 20%. This is in line with the increase in
the EPS from the last year. It has to be also noted that that the dividend cover is
at 2.8 above the sector average of 2.4. This has been an improvement from the
last year when it failed to increase its dividend at all and is a proof of the good
performance of the company over the year. One may notice that although this
amount is an increase over the last year it is significantly lower than the earning
per share figure. However over the curse of the year the company has also
bought back 190 million worth of its own shares. Hence when both the figures
are combines the company has been proactive in sharing the profits with the
shareholders of the company. This may clearly reflect the shareholding pattern
of the company. The majority of the shares of the company are held by
investment management firms and large mutual funds which may expect short-
term returns from the company. The dividend yield has sharply fallen but this is
largely due to a large increase in the share price of the company (close to 100%).

Non-Financial performance measures

Legitimacy theory suggests that companies produce CSR reports to ensure
they are perceived as adhering to the norms and expectations of society. In
that sense, CSR reports may be biased and divert attention from theory
issues to achievements in other areas.
Next’s CSR efforts centre on the concept of “responsible business” for its
customers, stakeholders, employees and suppliers. It believes in maintaining
healthy links with the communities in which it operates.
It also mentions that third party provides independent assurances over the
firm’s CR report. It is also a member of ftse4good index series, which ranks
the firm on various parameters of the CSR. However group fails to mention
the procedure for the audit of the CSR report or the name of the independent
auditor.
In terms of dealing with suppliers it operates a ‘code of practice’ and also
carries out internal supplier audit and rates the premises of each of its
suppliers. This is a good initiative but it fails to back its argument with any
practical example or numerical data. Hence it may be argued that the group is
not serious about it and is only doing it for the purpose of corporate
advertisement.

Also in 2010 a bbc investigation showed that it breaking consumer law by failing
to refund delivery charges on goods bought online but then returned. It had
carried out this practice for several years and it caused widespread resentment
among the customers of the company. This was completely against its promise to
deal in an ethical manner with its customers.
In environmental matters it has maintained a good record. Especially it has
made a point to back its arguments with hard facts. The group reduced its UK
consumption of electricity and gas by 15% in the year.
Conclusion and future
In terms of 2009-2010 next has delivered a strong financial performance.
However the numbers are not as sweet as presented. Especially considering
its heavy reliance on the UK market and consistent failures of its international
operations. Also its “other activities” are very small part of the business and it
is not a highly diversified business. Also the good result can be a direct
consequence of the broad strategic restructuring it underwent three years
ago. Its main segment next retail has also slowed down and is expected to
further slow down in the coming year. Hence it will have to rely on the
excellent performance of the Directory business in the coming years. Non-
financial performance is difficult to assess objectively but it has an uphill task
to repair its image after the BBC investigation.
The coming year will also present the group with some very tough conditions.
Its main market is a highly mature market and the spending cuts will inevitably
squeeze consumer incomes. Also with strong inflationary pressures in various
areas it may face increasing costs from its suppliers.