What it takes to succeed in the high street

Fashion retailer Next’s annual report is a lesson in how to run a business efficiently. It’s impossible not to think of struggling retailers while reading it.

Evidence above, in the F_Score, that in a year when the main theme on the High Street was retailers going bust, or nearly going bust, Next produced a pristine performance despite, in the words of its chief executive a "perfect economic storm". Customers were restrained from spending by price rises unmatched by wages and tight credit, while cotton and other cost prices soared.

Thanks more to Next Directory, its online and catalogue division, where sales rose 16% to 32% of total sales and operating profits rose 18%  to 44% of the total, profitability improved, as did its drivers, profit margins and asset turnover. Cheaper sourcing and higher pricing played their parts too.

Next also opened almost twice as many stores as it closed, more than half of them exclusively selling homewares, not fashion, which, it says is very profitable and likely to become more so when the housing market recovers.

The annual report puts the efforts of struggling retailers into perspective. French Connection is on my mind. It’s in the Thrifty 30 portfolio and has just issued another profit warning.

Like Next, French Connection is moving into homewares. Like Next, French Connection believes stores are an essential part of its online service (20% of parcels sold by Next Directory are collected through stores and 59% of returns are made through them). Like Next, French Connection is adopting an aggressive attitude towards underperforming leases. Like Next, French Connection will be resisting the urge to discount.

French Connection has a more difficult hand to play in a recession. High-end high street fashion is vulnerable to competition from retailers with mass appeal like Next when customers have less to spend. But Next has always been aggressive, while losses are forcing French Connection to review leases, products, and pricing.

Next also sets out in detail its expectations for the year, store sales will fall by up to 3%, Directory sales will increase by between 9% and 12%, earnings per share will grow by between 3% and 12%, ''200m of surplus cash will be used to buy back shares.

How can management be so confident, when other retailers are so uncertain? And how can I be? Next’s operational efficiency, its bountiful and predictable profits, have enabled it to make financial efficiency, maintaining what might normally be considered dangerously high levels of leverage, part of its business model.

French Connection has cash to burn, but it will burn until  the stores turn around.

I am beginning to wonder which is the better story.