“Retail stores are an asset,” says Next plc as it confirms plans to add between 150,000 and 200,000sq ft of net trading space in 2018. Despite reporting tough trading in H1, with retail sales falling 8.3%, a  predicted pick-up in H2 has lead the firm to upgrade its forecast for the full year.

Sales for the group, including its Next retail stores and online and mail order Directory operation, were down 2.2% to £1,914 million. The retailer explained H1 has been difficult, adding that sales and profits are in line with its cautious expectations.

However, its performance over the past three months has been encouraging on a number of fronts, with the fashion, home and garden retailer adding that, “whilst the retail environment remains tough, our prospects going forward appear somewhat less challenging than they did six months ago”. As a result, Next said it has “modestly upgraded” its sales and profit guidance for the full year.

Group pre-tax profit was down 9.5% for the half and Next said the trading period saw a marked divergence of performance between its Retail and Directory businesses, with the latter moving ahead, while Retail suffered a particularly difficult half.

Total Retail sales reduced by -8.3% and full price sales were down -7.7%. Net new space contributed +2.5% to growth. The combination of falling sales, a large fixed cost base, some one-off increases in costs and higher markdown costs, all served to reduce profit, which fell by 33.1%.

Next chief executive Lord Wolfson of Aspley Guise said: “The wider economic environment, clothing market and high street look as challenging as ever, and we do not underestimate the task of managing our stores through a period of prolonged negative like-for-like sales. Nonetheless, we believe our stores will remain cash generative for many years to come and represent an important asset for the group.” 

Next expects to increase net trading space by 85,000sq ft this year, taking its estate to 8.1 million sq ft. An initial announcement in March that space would increase by 150,000sq ft has since been amended, as three store openings have slipped into next year and Next plans to close 13 stores this year. An additional 14,000sq ft will also be converted to concessions.

Explaining the expansion strategy, Lord Wolfson of Aspley Guise said: “There are those that believe that retail shops will be more of a liability than an asset in the future; we do not see it that way. There are two important reasons. Firstly, our store portfolio looks set to remain profitable and strongly cash generative for many years to come. Secondly, our shops are an important part of our online service to the increasing number of customers who collect and return their orders through our stores.” 

Next still expects a profitable return on the new stores – with those opened or extended in the past 12 months forecast to reap 23% of VAT inclusive sales. However, payback on the net capital invested in these latest stores is expected to exceed Next’s 24-month goal, with five outlets failing to meet their targets in H1 after they had been extended and extensively refit. The retailer conceded it had overestimated the sales uplift that could be generated from the cosmetic element of upgrading these shops but stressed that, going forward, it would be maintaining its 15% hurdle rate and 24-month payback target.

Meanwhile, Next revealed that the process of improving its range “is by no means over”, adding that design led, high quality homeware will remain a key part of its focus.