Next thrives by buying up iconic British brands like Cath Kidston

Cath Kidston closed its last remaining store in London’s Piccadilly this week, after it was bailed out of administration last year by an £8.5 million takeover by Next.

It subsequently bought the brand, domain names and intellectual property of the vintage-inspired clothing and homeware company, but the retail giant saw Cath Kidston’s physical presence as unnecessary.

But Cath Kidston is just one of many big British brands that Next has acquired, partnered with or invested in in recent tumultuous years.

Success Story: Next proved to benefit from both pandemic restrictions and the recovery in store attendance as curbs lifted

Gap, Victoria’s Secret, Reiss, Joules, JoJo Maman Bebe and are all now helping to drive the group’s growth through the ‘Total’ platform.

The flexibility and size of the retail giant have made it stronger and stronger since 2019.

Next has been a major beneficiary of the pandemic and has continued to thrive against a backdrop of high costs and consumer pressures that have pushed its smaller rivals to the brink of extinction.

It revealed pre-tax profit of £870.4 million for the year to January, up 5.7 per cent on the previous year and 16.3 per cent more than in the 12-month reporting period before the emergence of Covid-19. 19 in Britain in 2020.

Next’s online presence put the company in a relatively strong position as Covid-19 lockdowns and restrictions rolled in, while other retailers with weaker or no e-commerce offerings suffered by comparison.

Since the pandemic hit, Next’s active online customers have grown by about a third.

And as the Covid-19 curbs began to ease, Next once again thrived amid the uptick in footfall to its brick-and-mortar stores.

Head of money and markets at stockbroker Hargreaves Lansdown Susannah Streeter said: “Next’s prowess as an omnichannel retailer has really come to the fore.

“It’s really diversified — it’s not just diversification in terms of the brands on its platform, but also the services offered to other retailers.”

High Street giants benefit from sales of smaller brands

Next isn’t the only retail giant to use its size and scale to take advantage of what relatively weaker brands have to offer.

Marks & Spencer now sells Skechers, Crocs and Toms footwear through its ‘Brands at M&S’ platform, and House of Fraser and Sports Direct owner Frasers – owned by Mike Ashley – has chunks of Curry’s, Boohoo, Asos and AO World bought up .

Next bought Cath Kidston from administration in an £8.5 million deal last year

Next bought Cath Kidston from administration in an £8.5 million deal last year

Streeter said, “It’s a similar strategy. I think what has happened is that other companies have seen how well Next is doing and are almost copying it.”

She added that there has been a “survival of the fittest” shift in retail as larger companies have shown their dominance in a tough trading environment.

For the companies that Next has taken out of administration, partnered with or invested in, the Total platform enables them to leverage the size of the group to grow the business through services such as logistics, distribution and customer service.

Next also sells third-party brands online through its Label business, which is primarily for commission, and through its licensing unit.

Streeter said: ‘By bringing them onto the Total platform, Next enables brands to become slicker in areas such as ordering and delivery.

Miranda Kerr at the 11th Victoria's Secret Fashion Show.  The UK arm of the group joined Next's Total platform in 2021

Miranda Kerr at the 11th Victoria’s Secret Fashion Show. The UK arm of the group joined Next’s Total platform in 2021

“The idea is that they rehabilitate these brands and rebuild that brand power.

“And the mere fact that it can offer these kinds of umbrella brands on its platform has actually helped its resilience.”

Investments in the Total platform appear to be paying off, with revenue from the device skyrocketing 269 per cent to £144.4 million last year.

The impact on operating income, when including gains in the equity value of the stakes it has taken in these companies, is a 135 per cent increase in pre-tax profit to £16.3 million. Next expects that figure to exceed £20 million this year.

John Stevenson, an analyst at Peel Hunt, said: ‘That’s a relatively small percentage [of Next’s total profits]but for something relatively nascent regarding the overall company, [the group] gains a meaningful contribution by participating in the equity it has created in those companies. And that’s exactly the rationale.

“You’ve had retail companies that have gone out of business, like Made, Cath Kidston and Joules, and these are companies that resonate strongly with and are relevant to consumers.

That’s the flip side of the coin [Next] creates a highly consumer-relevant offering that will make people want to shop on Next – and so will sales [Next-brand goods].’

The sale of Reiss, Princess of Wales’ favorite brand, could mean further success for Next

The following could also soon be set for the strategy’s biggest success to date, with the group reportedly lining up a sale of the Princess of Wales Reiss exclusive favorite.

New York-based fund manager Elliot would be one of the bidders in a deal that could value Reiss at £500 million. This would represent a significant gain for Next, which has built up a 51 percent stake in the group.

Gap's e-commerce offering was transferred to Next's Total Platform in September

Gap’s e-commerce offering was transferred to Next’s Total Platform in September

It was called “an outstanding brand with huge potential” by Next chief executive Lord Wolfson when he first acquired a 25 per cent stake in the company in 2021.

HL’s Streeter said, “If that offering comes in at the high end of expectations, it would certainly show that Next has done a really good job with Reiss. It’s too early to say how well it has fared with some others.

“But in terms of Next’s overall strategy, it’s clearly working as it continues to exceed expectations.”

Surprisingly strong consumer spending in the UK over the holiday season helped Next raise earnings expectations early this year and warm weather-driven clothing sales contributed to another improvement in June, although the group warned it expects sales to slow in the second half of the year. 2023 will moderate.

Streeter added, “The mix Next has on the platform now seems to be the right mix, and that suggests these turnaround strategies seem to be working.”

While insolvencies are expected to fall later this year, government data shows that corporate insolvencies rose 40 percent year-on-year in May as businesses continue to crumble amid high costs, rising interest rates and weak economic growth.

Should more compelling opportunities emerge through this route, Streeter said, “Next could look to snap [other businesses] from the bargain bin.

But Peel Hunt’s Stevenson cautioned that Next faces a logistical challenge in ensuring it has sufficient systems and distribution capabilities to bring in new brands while also building existing ones.

He said: “These deals are paused while Next commits enough capacity.

“But Next has gotten faster and faster at onboarding brands, so we should get to the stage in the next 12 to 18 months where it can bring brands in much more easily.”

Is Next a good investment?

While Next’s growth ambitions have been largely successful thus far, investors are likely yet to be fully rewarded.

Next stocks are up 50.2 per cent since October 2022 when it ramped up deals, but they have yet to recover their pre-Covid crash price of £71.28.

Streeter said: “Next’s share price has not yet regained its full shape, despite continuing to surprise positively.

‘If you compare it with Inditex, the owner of Zara, the price-earnings ratio is a lot higher than that of Next. So you could say that there is still potential for Next in terms of the share price.’

Brokers are divided about their opinion of Next

Brokers are divided about their opinion of Next

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