NEXT (LON:NXT) fielded a wide range of investor questions on its latest earnings call, with management addressing store investment hurdles, the role of online aggregators, Middle East disruption and logistics, international third-party brand growth, and the potential implications of AI for retail economics and operations.
Stores, payback targets, and the online relationship
Asked whether store payback targets consider the benefit of stores as free pickup and returns points for online customers, management said it does not allocate any online benefit to stores.
Aggregator sites: limited customer insight, focus on marketing returns
On aggregator websites, management said it receives little customer-level insight from the platforms and indicated that is appropriate, adding it also does not share such insight with its own brands.
What aggregators do provide is visibility into marketing performance. Using Zalando as an example, management said it spends around 2% of sales on marketing on the platform and applies the same requirement as elsewhere: marketing must clear a return hurdle to justify the spend. The company said it can spend profitably on aggregators and does so, but the feedback it receives is primarily on the return from marketing activity rather than on who the end customer is.
Middle East: cost actions, operational disruption, and volatile demand read-through
Several questions focused on the Middle East. Management discussed £15 million of cost savings identified since the start of the year and said it expects “very little” of that amount to reverse even if demand improves or geopolitical conditions stabilize earlier than budgeted. It added that downside risk to the savings figure appeared greater than upside risk, noting that some portion may not materialize because it has not yet been incurred, but it was not “getting excited about that.”
On franchise stores in the Middle East, management declined to provide detail because it is “not our business,” but said franchise operations have “definitely been impacted.”
Operationally, the company described significant logistics disruption affecting lead times and costs:
- From the U.K. to the Dubai hub, NEXT is shipping by air and receiving replenishment “at a very high premium,” which management described as a significant contributor to increased operating costs.
- From Dubai to other territories such as Saudi Arabia, Oman, and Kuwait, the company has shifted from air freight to trucking, adding roughly two to three days to lead times in most territories.
- Management said air service from Dubai to regional territories has returned intermittently and is changing “daily,” with hopes that air freight for Saudi Arabia could resume soon, depending on the war.
When asked what the Middle East is “trading at” currently, management said it is “very, very hard to read,” citing timing differences around Eid versus last year. It said comparisons shift day by day depending on the post-Eid period used.
Marketing allocation also came up in the context of Middle East disruption. Management rejected the idea of a fixed marketing “pot” that can be repurposed across regions, saying instead it invests according to a hurdle rate—described as a £1.50 return—and will continue spending in territories that exceed that threshold and reduce spend where returns fall short. Management said it still expected marketing to be up about 25% based on what it had seen so far, but noted that rising air freight costs can reduce marketing returns and therefore constrain spending ability. It also said the best estimate at the moment is that overseas sales have been reduced by around 2% as the full impact, while keeping the marketing budget unchanged.
International growth and warehouse execution
On international expansion of third-party (partner) brands, management referenced materials “in the pack” and said overseas growth in third-party brands is around 22%. It attributed much of this to improved selection in key brands, as well as some partner brands newly agreeing to list products on NEXT’s overseas websites where they had not previously.
Questions also addressed warehouse capacity and service levels. Management said that since Christmas, “not delivered in full and on time” rates have improved from around 8% to around 6%, and at one point reached about 5%. While it said it was cautious about highlighting the improvement given it has only been evident for a few weeks, management described the trend as encouraging and did not see anything in the year’s numbers suggesting the company would be unable to maintain performance.
Management highlighted execution factors it believes will matter to sustaining improvements, including effective deployment of new mechanization and the ability to replenish forward warehouse locations from off-site reserve warehouses. It acknowledged a small risk of misallocating inventory between reserve and forward stock but said it was not a major concern and expressed confidence in continued year-on-year improvement based on current performance.
On options to reduce U.K. capacity pressure by shipping more inventory directly to international hubs, management said it is not currently delivering direct to Germany, primarily because third-party logistics costs are expensive, and the company aims to operate with about six weeks of cover in that context versus a normal 12–14 weeks. However, it said direct delivery could be an option if capacity becomes an issue. Management also cautioned that direct delivery is difficult beyond roughly 20%–25% of anticipated demand due to uncertainty about which items will sell in specific territories.
In the Middle East, the company said it is delivering direct, but noted an execution setback: its first cargo ships from the Far East that departed four to five weeks earlier were recently turned back from Dubai, which management characterized as “a great plan implemented at exactly the wrong time.” Looking ahead, it said the plan would be to deliver around 20% of Middle East requirements direct from manufacturer.
AI, customer retention discipline, and shifts in sizing mix
On AI, management said it is not “overly concerned” about disintermediation risk at present and framed the main potential threat as disintermediation of the retail website rather than other parts of the value chain. It argued that online clothing retail’s key assets are logistics infrastructure and product rather than the website itself.
Management also raised economic and operational hurdles to an AI-driven “intermediary” shopping model that consolidates purchases across multiple retailers. It cited the cost of delivery relative to average order value (net of returns) and said splitting orders across several retailers would multiply delivery costs. It also emphasized complexity around returns—particularly how consumers would return items from multiple vendors and how refunds would be processed—describing “big customer service issues.” In contrast, it pointed to Google’s approach of directing consumers to individual retailers as an “enhanced form of advertising,” which it suggested could benefit industry demand by improving search and product discovery.
In the U.K., management was asked about strong customer acquisition and whether performance reflected gross additions or retention. It stressed that its philosophy is that “everything’s got to make a profit” and said it is not prepared to spend unprofitably to “hang on” to customers. Retention programs are performing in line with last year, though management said it is too early to draw firm conclusions given last year’s strong weather and competitive disruption have not yet been fully annualized.
Finally, on GLP-1s and sizing trends, management said it has seen subtle changes in womenswear sizing mix, with the most dramatic change in the very large outsize segment. It said participation in sizes “22+” is “definitely falling,” while emphasizing that these participations are “tiny.”
About NEXT (LON:NXT)
Founded as a tailoring business in Leeds in 1864 by Joseph Hepworth and Son, today, the company offers clothing, footwear, accessories, beauty and home products to our UK and International customers.
NEXT has over 500 stores in the United Kingdom and Eire, and over 180 franchise branches across Europe, Asia and the Middle East. The company’s main divisions are NEXT Online, NEXT Retail and NEXT Finance. We also launched Total Platform, an online, distribution, tech and logistics solution, in 2020.
