Next chief executive Lord Wolfson discusses the retailer’s “stress test” model, the importance of employee support and the need for continued innovation amid the coronavirus outbreak.
While I realise almost everyone will only want to talk about coronavirus, I want to reassure our shareholders and staff that, as a business, we are still moving the company forward. We still have a lot to do.
The retail sector is still changing, and we have lots of good ideas on how we move the business on. While we have an enormous amount to do to manage our business through the coronavirus epidemic, we will not stop developing the business.
Any estimates that we have made during the coronavirus epidemic are guesswork. We have no better understanding than anyone else on how long this will play out, and what effects it will have on consumers.
Our worst-case scenario – or what we believe to be the worst-case scenario – we’ve called at -25%
We have got some experience from what we’ve seen in our online business in overseas territories, where the disease is more advanced, and that has informed the modelling that we’ve done. But it is still anyone’s guess.
Our worst-case scenario – or what we believe to be the worst-case scenario – we’ve called at -25%. That’s not during the affected period – it’s more like -55% during the affected period and -25% of our whole-year sales. That would be equivalent to the company being completely shut for three months. We think that’s the most extreme things could get, but clearly, we don’t know.
Next’s ’stress test’ model
The models we have done are in three steps. The first is that we’ve come up with three different sales scenarios. There’s a -10% scenario, a -20% scenario and a -25% scenario. The first scenario is spread over 12 weeks, and the second two are spread over 24 weeks.
We have assumed that the second half of the year returns to normal, which may be optimistic.
The important point is the cashflow modelling that we’ve done. We have £1.6bn of the cash resources out of bank and bond facilities. We think that even in the worst-case scenario, as long as we take mitigating action within the business, we can still have our peak cash requirement as £110m of cash resources available to the business.
I think this is going to be the biggest hit the retail industry has seen,
We do not think that the business will need to draw on government facilities, although that option is open to us. The conclusion we’ve come to going through the modelling exercise, is that because our balance sheet is very strong and because the margins of the group are wide, we are placed to weather this storm without needing to seek relevant assistance from outside the business.
Having said that, as a precaution, we are in discussions with our banks about extending facility by another £200m. Those conversations are going well, and it is likely we will have those in place within the next month.
We think the -25% scenario, which would involve the company losing over a billion pounds worth of sales, is extreme. We could be wrong, but that is not the model we are working to, we are working to the minus 20% scenario.
The -25% would be the single biggest hit to sales in Next’s history. I think this is going to be the biggest hit the retail industry has seen, certainly in my career – and I’ve been in retail for 28 years. Our industry hasn’t seen anything similar since the oil crisis in 1973. But just to be clear, we do not think this is an existential issue for Next.
Government must provide employee support
The decision on rates and the scale and speed with which [the government] announced the £330bn facility was hugely welcome. I think it will make an enormous difference to large employers that were facing a temporary cash squeeze.
The one thing that remains, and is yet to be done, and in my view must be done, is some form of income support for those who cannot work. In our own plans we have not got any redundancies or widescale cutbacks in our employees. However, talking to suppliers in the UK, people are being laid off now in quite large numbers and more will come.
We’re looking at all the things we can do to make-up for lack of face-to-face contact
Anything that the government can do to underpin income support for those who can’t work, either through isolation or their shops or factories being closed, will make an enormous difference to the speed at which we recover from this pandemic. I cannot emphasis that enough. The risk is a domino effect that if people start being made redundant, then those people stop spending.
In the same way the government intervened very strongly to underpin all of our sales during the credit crunch, I think similar action needs to be considered in underpinning employment, for what is a relatively short period of time. The sooner government acts in clarity on this, the better.
New ways of working
We’re looking at all the things we can do to make-up for lack of face-to-face contact, particularly in terms of developing new product. Where we would have travelled to a factory, we’re asking manufacturers to send their samples over and the people that would have gone to that factory will all go into a room, there will be a video conference there, the people in the factory will be there and there will be one sample at each end. So, it’s doing as much as we can to recreate the process.
China has returned to normal and it is pretty much business as usual in our other manufacturing territories
We are learning our way at the moment, but it is interesting that now we have the need, we are finding new ways of working and we’re working of finding ways of communicating with manufacturers that we wouldn’t necessarily have resorted to in the past.
Although they’re not as good as being in the factory face-to-face, they are better than nothing and we will come out of the process with an ability to communicate with potentially more manufacturers than we have previously, as a result of what we have learnt from this.
I’m not concerned about stock, particularly for autumn and winter. China has returned to normal and it is pretty much business as usual in our other manufacturing territories.
Shaping the future store estate
I think it would be very unwise for us to make decisions about the long-term future of stores on the basis of one year’s sales. We will continue to renegotiate rents on our store portfolio when they come up but based on the estimates of the ongoing sales of those shops, not based on one year’s pandemic.
The bad news is that no one knows the future. The good news is that we have got time to wait and see. The business is financially stable and where we’re locked into a rental agreement with landlords it will not affect this anyway, but where we’re not, I don’t think landlords will hurry us to make our minds up if we want to wait and see how things pan out.
We won’t really have a clear picture of what effect this will have on the high street until we’re into the first half of next year, and I think at that point we will need to go through our portfolio and work out on a store-by-store basis, town by town, retail park by retail park if our plans have changed. I think it will vary from location to location.
Continuing to invest
We will increase investment online and will be accelerating our system development. Within our cashflow forecast, we are also focusing on increasing the amount we spend on digital marketing.
We think it is very important, particularly on systems, that we continue to move the business forward because at some point this coronavirus will pass, so anything we can do to develop those systems in this period, we will do.