Salvation for retailers? Next’s mildly upbeat report on its pre-Christmas trading was good for share prices in the sector, but nobody overdid the cheer – and rightly so.
First, it is hardly a revelation that properly cold weather is useful for shifting coats and jumpers. Second, Next runs to its own financial rules. It can tolerate a 6% plunge in sales in its shops because its online operation is so much bigger than most rivals’. Online growth of 13.6% meant Next’s overall sales for the Christmas period netted out at plus 1.5%. The mechanics may not work so smoothly for others.
Even at Next, however, there are two ways to view the numbers. An optimistic interpretation says the group has come through a tricky year in fine shape given that the chief executive, Simon Wolfson, was warning a year ago of “exceptional levels of uncertainty in the clothing sector”.
On the other hand, expected full-year profits of £725m represent a fall of 8% and, if Lord Wolfson’s early guess proves correct, they will go lower yet. For the 12 months to January 2019, £705m is pencilled in. That would mean three years in a row of falling profits. The peak was £821m in 2016, thus the City frets that Next has become an exercise in managing decline.
Which view is right? For the time being, Next shareholders should probably relax. Yes, plunging sales in the shops (at a rate of about 8% on a like-for-like basis) looks alarming, but Wolfson is not ignoring the problem. The stores would still be an asset if the like-for-like decline was 10%, he argues, given the luxury of short leaseholds and the relative freedom to shut shops. He deserves the benefit of the doubt: no other retailer dares to display similar leasehold calculations, probably because their numbers would be less reassuring.
What’s more, Next is still generating £300m of surplus cash a year, enough to keep the share buyback wheels turning and boost earnings per share. There is no disgrace in being a mature business when you have those advantages. Just don’t assume the same applies to the rest of the mainstream clothing sector: Next started early online and is a rule unto itself.
Carillion talks itself into trouble
An investigation by the Financial Conduct Authority into “the timeliness and content” of the ailing construction firm Carillion’s announcements between December 2016 and July 2017 was inevitable. Take a look at the run of the breezy and confident headlines in Carillion’s dispatches to shareholders that proceeded the confession of corporate calamity.
December 2016: “Meeting expectations led by a strong performance in support services.” March 2017: “Performance in line with expectations.” May 2017: “Trading conditions unchanged. Positive work winning performance.”
Then came the humdinger 10 weeks later: “Strategic review and management changes,” which translated as a monstrous profit warning, debts going through the roof and the ousting of the then chief executive, Richard Howson. The share price halved in the next three days, and ended 2017 90% lower than it started the year.
The case for the defence is that big construction outfits can be volatile and complex businesses at the best of times. Profit margins tend to be thin, cost overruns happen and contracts can turn sour suddenly. Yet, even by industry standards, the cratering of Carillion, which employs 43,000 people, has been spectacular.
In the last annual report, shareholders will find eight pages devoted to the management of risk, including this proud boast: “The group’s policy is to ensure that all risks are identified, evaluated and an appropriate response determined prior to any commitment being made to any other party.” If that’s your position, don’t be surprised that the regulator wants to know more.
‘Fat Cat Thursday’ highlights pay divide
The average corporate fat cat may regard the High Pay Centre’s “Fat Cat Thursday” exercise as terribly crude. If so, they would be missing the point. The beauty of the calculation lies in the way it brings raw statistics to life.
Talking about a pay ratio of 120:1 between chief executives and average employees can sound too theoretical. It is much easier to understand the disparity in earnings through this lens: it takes the bosses less than three working days to earn what the average employee will pick up all year.
The fat cat day, which has been running for a few years, may have played a small role in persuading the government to support the mandatory publication of pay ratios for companies. Once adopted, the ratios should allow workers at those companies to do their own calculations.
If remuneration committees are embarrassed by the results, so be it. They could always try defining what they regard as fair – and then making it happen. The average, note, was 50:1 two decades ago.
