What a parable for our times is the story of Icarus-like Next. It’s a parable in so far as it provides lessons about the fragility of retail reputation. But I mention Icarus because there are Greek traditions here, too – successive managements have flown too close to the sun and there is a fair old dollop of hubris attached to the way they did so, which is straight out of Greek tragedy.
Poor Lord Wolfson. There will be schadenfreude directed at the Next chairman, not simply because there is an anglo-saxon tendency to enjoy seeing highly successful men set back, but also because his family business, Great Universal Stores, may have to watch its takeover bid for catalogue retailer Argos go pear-shaped.
It’s all too easily forgotten that what comes down must have gone up. As lesser people gloat at the commercial nemesis of the likes of Next’s founder, George Davies, and now the fickleness of fate with which the gods of retailing are playing with Wolfson, it’s worth remembering that, without the former, there would not have been one of the greatest retail success stories of his generation. And, without the latter, one of the longest and strongest growths in earnings that shareholders in the retail sector have ever enjoyed might not have occurred.
That’s tough for them and for Next’s chief executive, David Jones, who must be reflecting on just how swift can be the descent once that solar heat has had its effect on the wax that holds the feathers in place. But nobody – except possibly institutional shareholders – ever pushes these people to find extra altitude, so perhaps we shouldn’t feel too sorry for them. What we should do, applying the Greek principles, is look for what allegorical lessons there are to be learnt from the experience, rather than simply indulging in harder-they-fall commentary.
I think the Next story might be allegorical of international equity markets. There are more than a few analysts of such things in the City who would confirm that shares are horribly and absurdly overvalued and are long overdue the kind of slide in value that Next has just suffered. It may be unduly melodramatic to suggest that the FTSE index of leading shares in London is facing a slide in value, like Next’s last week, of some 25 per cent, but I have two points of similarity to offer.
The first is that Next’ s share price may not have fallen so fast and so far – from about 748p to 535p at close last week, wiping some 650m off its market capitalisation – if equities were not so full of artificial value in the current climate. The second is that if central bankers and institutions were half as honest as Wolfson’s trading statement last week, equity markets might not have as much steam in them as they do.
One shudders to think what might happen in Wall Street and the City (the Far East having suffered its correction already) if Wolfson’s remarks about Next became a rubric for equity markets as a whole. Bear in mind that, having just reported record sales in the year to end-January, with pre-tax profits rising to 176m from 156m on turnover that had broken the 1bn barrier for the first time, he observed that recent trading had been and would remain “difficult and disappointing”.
Imagine such an outbreak of candour among bankers and institutional fund managers. Equity markets would hang in the air at current levels rather in the way that bricks don’t. Gutters, not to mention dealers’ screens, would run red. There would be a correction in the equity markets rather in the same way as the British terrain corrects itself at Beachy Head.
I have no idea – I imagine very few do, apart from the individuals themselves and some senior helpers in the derivatives markets – whether the Federal Reserve in the United States or the Bank of England in Britain or the Bundesbank in Germany quietly intervene as buyers in equity markets when Armaggedon is in prospect, as it was recently in Japan, Indonesia and Malaysia. But if they do, then they are creating a bubble that will be all the more dramatic when it bursts. And, as Wolfson and Jones have learned this past week, they are doing corporates no favours – when their managements deliver mild-mannered warnings, shares have far further to fall than they otherwise might to find their “natural” levels.
One further thought in this regard: I’m ashamed to say that, when I heard over the weekend that German industrial group Vaillant was preparing a bid for Hepworth, I thought of the once fashionable men’s clothing chain. Perhaps I was thinking too much of Next. With Rolls-Royce Motors heading in the direction of Germany, we should beware a wholesale foreign purchase of our family silver.
If local economies are being propped up by their central financiers, then there will be prime pickings for those waiting for such economies to find more realistic levels for equities and interest rates. And what currency advantages might, say, Germany have within the next year or so? To coin a phrase: It’s not the economy, it’s the euro, stupid.
News Analysis, page 27