Lord Wolfson’s default setting is caution.
So, as shopkeepers across the land await the coming squeeze on consumers’ incomes, it is not a surprise to hear the chief executive of Next drifting closer to outright gloom.
The slowdown in spending on clothing and footwear, which he says started in November 2015, will continue this year. Next’s post-Christmas sale was a flop. Inflation is arriving and a weaker pound means prices will have to rise by up to 5%. Then there are cost pressures from the “national living wage”, business rates, the apprenticeship levy, etc. In short, conditions look rough. Next’s profits could fall anywhere between 2% and 14% in the next financial year, after a predicted decline of 3.6% in the current period.
It would be silly to say the Next empire – expanded spectacularly over the past 20 years via the catalogue and online directory business – is crumbling. Next may be overreliant on consumer credit – and the clothes may be dowdier since the departure of the design guru Christos Angelides in 2014 – but most of the pressures described by Wolfson apply to the majority of mass-market clothing retailers.
Pre-tax profits of £792m-ish this year will still mean Next makes substantially more profit than Marks & Spencer. The company also has less debt than M&S.
Yet there was a detail in Wednesday’s trading update that should alarm the Next fanclub. For the time being, Wolfson is giving up on share buy-backs and will hand surplus cash – expected to be £255m-£345m – to shareholders via special dividends next year.
At other companies, one might applaud the prudence. But Wolfson is the acknowledged maestro of the buy-back game. Next buys its shares when they are cheap according to a return-on-capital model Wolfson has refined over the years; and it refuses to buy when the formula says they are expensive, as when the price rose to £81 in late 2015.
The policy sounds like mere common sense, but the logic escapes too many companies who buy at any price whenever they have a few quid on hand. The relevant point now is that Next no longer stands at £81. After Wednesday’s 14% tumble, it’s almost at £41. You’d expect Wolfson to be itching to grab a few at almost half the old share price. But he’s not. If Next is not buying its shares when it can afford to do so, it’s hard to see why others should rush in.
Nothing has been ruled out permanently, it should be said: the statement allowed the possibility of buy-backs if trading turns out to be better than expected. But the shift in policy – attributed to “the exceptional levels of uncertainty in the clothing sector” and the lack of visibility on “the approach the UK government will be taking to Brexit” – looks significant. Wolfson is saying he doesn’t know how bad things will turn out, or when conditions will improve for retailers. Be warned: his forecasting record is strong.
Word of caution over construction sector’s mini-revival
Still, the construction sector seems more cheerful. In December, it enjoyed the fastest growth in new orders in almost a year, according to the monthly Markit/CIPS survey. Housebuilding led the charge but the overall headline index has now been in positive territory for four months in a row. The post-referendum pessimism seems to have been overcome. As the survey from the manufacturing sector on Tuesday also suggested, a weaker sterling seems to have acted as a spur to activity.
Let’s not get carried away, however. There are reasons to treat these findings with care. First, the construction sector also reported the steepest rise in input costs since April 2011. Those inflationary breezes could yet spell trouble in the form of lower profit margins.
Second, the post-Brexit relief rally could turn around once negotiations in Brussels start in earnest. The building sector relies heavily on imported labour and will not welcome any talk of stiff curbs on immigration.
Third, it’s the service sector – about 75% of the economy – that drives broader confidence. News from that quarter arrives on Thursday but a slowdown in the overall economic growth in the UK is on the cards for this year, according to most forecasts. The construction sector, usually the most sensitive part of the economy, would be expected to react, even if the chancellor is throwing a few billion quid at new infrastructure and housing.
Fourth, the mini-revival for the construction sector requires context. On the Markit reading of 54.2 for December, the sector is roughly halfway between its post-referendum low (46) and its expansionary highs of 2014 (65). Improvement is very welcome, but you wouldn’t yet call it secure.
Rex Tillerson’s leaving card
Rex Tillerson, departing boss of ExxonMobil, will receive $180m from the oil company if he is confirmed as Donald Trump’s secretary of state. The accelerated vesting of his stock options is designed to ensure he cuts his ties with ExxonMobil, we are told. Really? If someone had just paid you $180m, in addition to a decade of multimillion regular pay packages, could you say you felt not even a twinge of loyalty?
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