Next chief executive Lord Wolfson has said the retailer is preparing for a “very significant” impact on trading, as the coronavirus outbreak continues to affect demand.
Wolfson said the online business was “likely to fare better” than stores, but “will also suffer significant losses”.
He said: “People do not buy a new outfit to stay at home.”
Next drew up models of sales declines for the year, varying from a 10% decline (representing a loss of £445m) to a 25% decline (£1bn).
The retailer reiterated, however, that the balance sheet would survive even with a £1bn hit, aided by the one-year business rates holiday that the government has brought in as a support measure.
Potential cost-saving measures to mitigate the effects, at varying levels of sales decline, include the sale and leaseback of a warehouse; the suspension of its buyback programme; the delay of discretionary capital expenditure; and in the most extreme scenario, deferral or suspension of the company’s August dividend.
Wolfson said that, combined, these actions could retain up to £835m of cash within the business. Should the company lose 20% of annual full-price sales, Next would still have £835m headroom within bank and bond facilities at the end of the year.
Next outlined that it could realise £100m from selling and leasing back some of its freehold warehousing and properties.
Results update
The warnings were included in Next’s annual results update, which showed total group sales rose by 3.3% to £4.4bn in the year ending January 2020.
Online sales grew by 11.9% to £2.1bn, but retail sales dropped by 5.3% to £1.9bn. Profit was up 0.8% to £728.5m.
However, retail sales between 15 and 17 March plummeted by 46%, and online sales fell by 25%. Total sales fell by 30%.
Store closures
Next closed seven mainline stores during the year. In the year ahead, it plans to close 14 low-profitability stores, measuring a combined 122,000 sq ft.
It will open two new locations, however, and relocate five existing shops, resulting in the addition of 57,000 sq ft. The net impact on total retail space will be a 0.8% reduction (65,000 sq ft).
During the year ending January 2020, 44 leases were renewed. Rent on these stores reduced by 30% after renegotiations, with an average lease term of 3.6 years.
Next said it plans to negotiate lease renewals on 53 stores in the year ahead, targeting a 40% reduction in its rent bill.
This includes eight short-term lease renewals with terms of less than two years, at a very low rent. In stores where the lease has been renewed for more than two years, Next expects to reduce rents by an average of 29%.
Next estimates 50% of its leases by value will expire or break within 4.8 years; 81% within the next 10 years.
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