David Smith, Portfolio Manager of Henderson High Income Trust, provides an insight into one of the Trust’s long term holdings – Next.
“You own the retailer Next? I don’t know anyone who shops at Next” is a common phrase I hear when I start talking about one of my long-term holdings. But I feel there is this common misconception that the company is just another high street retailer that faces extinction. To be clear, Next is a high street retailer but this now only represents a quarter of profits and while names such as C&A, BHS and Woolworths have disappeared, under the management of Lord Simon Wolfson, Next has evolved and thrived in the last 20 years.
One of the key inputs into the investment process we look for is potential strong management teams running the businesses we invest in. Not only to steer companies through difficult short-term environments but to also have the foresight to evolve business models so companies remain relevant in the face of longer term structural pressures.
Next has invested and innovated to create a strong platform that draws on all its assets – stores, warehouses, delivery networks, systems, marketing and credit facilities – to create a powerful online aggregation business selling hundreds of third-party clothing and home brands alongside its own Next merchandise both in the UK and increasingly Europe. This has meant profits have increased almost 4 fold over Lord Wolfson’s reign as CEO, despite well-known headwinds for high street retailers during that period.
That investment and innovation continues today with the company now employing as many people in its Technology teams as it does in its Buying and Merchandise departments. This is indicative of how important technology has become in the development of Next.
Two recent technology developments have been Platform Plus and Total Platform. Platform Plus is an operating system that allows Next to draw on stock only available in its third-party brand partner’s warehouses for distribution through Next’s own fulfilment network. The advantage of this is to give the company access to much broader assortment of stock whilst ensuring they retain ownership of customer service from the moment the goods leave a partner’s warehouse. In the last few year Next has expanded the number of brands using the Platform Plus operating model which has helped increase the range available to their customers without utilising their own warehouse capacity. This has been a contributing factor to Next’s significant online growth over the last few years which should hopefully continue going forward as it adds new brands to the system.
Total Platform meanwhile, offers client brands a complete suite of online services, providing website, warehousing, distribution, call centre and returns processing. This frees up a third-party brand from capital constraining, complex and time consuming activities in which they have little competitive advantage and utilises Next’s infrastructure and technological capabilities. For these services Next takes a commission on sales. While only small in the context of the group today, the potential Total Platform could be significant and highlights how a good company innovates to generate additional profit streams from its existing assets and capabilities.
While the short term is uncertain for a retailer in a cost of living crisis, one needs to differentiate those companies that continually evolve and invest to produce strong returns for shareholders over the longer term. With the sell off in consumer discretionary stocks indiscriminate this year it provides a good opportunity to own a high quality company that has invested appropriately to remain relevant in an ever changing retail environment at an attractive valuation.
To quote Simon Wolfson from the recent annual report:
“The evolution of the Group might, in hindsight, appear to have been part of a grand strategic plan. In reality, the way in which we have changed has been tactical – lots of individual initiatives taken in response to the opportunities and threats of a rapidly changing market. Our business ‘model’ was not conceived in the Boardroom, but is the result of countless ideas conceived at every level of the organisation.“
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