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Dress your age

24 March 2016 By John Foley

Maturity calls for more sombre attire. Or does it? Some retailers think that a less frisky market is no reason to stop dressing like a whippersnapper. Next, for many years a highly successful clothing retailer, plans to expand its selling space by 8 percent over the coming two years, even though its same-store sales are declining, inventory is rising rapidly, and it expects this year to be the worst since 2008. In fact, the whole UK clothing market is in the longest period of decline, both by value and volume, since 1991.

Even when times are tough, retailers tend to expand, for the sales boost that comes with new stores. But ultimately the number that tells the real story is how much they sell from each new plot. J Sainsbury, which estimates that 6 percent of its floorspace is insufficiently productive, is buying Argos owner Home Retail Group and shunting its stores into the UK supermarket group’s own. The purpose is, mathematically, to push up the “sales density” by which retailers gauge their effectiveness.

Falling prices and the shift online are the enemies of this sales density. Next’s has dropped by around a third in a decade. One day high-street stores might disappear in favour of warehouses or “dark stores” where online orders are prepared and shipped out, but until then retailers have to have both. Footfall is falling nationally by 0.8 percent a year, according to the British Retail Consortium and Springboard, yet vacancies in retail estate are falling.

Next, being efficient, is one of the lucky ones. Its operating margin has risen in the past decade from 15 percent to 20 percent, according to Credit Suisse. The shift to bigger stores means that while Next’s sales density has fallen, it can regain some ground on operating costs. But in the end, demand is the decider. If new space outpaces customers’ desire to buy, expansion strategies lose their youthful appeal. And Next’s valuation – a near-20 percent premium to its 10-year average judged on a forecast earnings-multiple basis – will start to look like mutton dressed as lamb.


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