Marks & Spencer (LON:MKS) holds the title of the second most valuable retail brand in the UK. However, thanks to falling sales, some City analysts have suggested that if the company’s troubles continue, Marks & Spencer could be overtaken by Next (LON:NXT) as the UK’s largest clothing retailer by revenues in the near future.
With this in mind, there are three other reasons why Next looks more attractive as an investment than it’s older, larger peer.
Online
It is well known that online sales have been overtaking high street sales during the past decade and Next has positioned itself well to benefit and ride this trend.
Specifically,Next’s Next Directory online and catalogue division accounts for 35% of group sales and is still growing rapidly. In comparison, Marks & Spencer’s online offering accounted for only 6.5% of group sales during the 2013 financial year.
What’s more, as one third of Next’s sales are online, the company is able to achieve a larger profit margin, which brings me onto my next point.
Cash generation
Standard bricks and mortar retail stores usually have high running costs, thanks in part to staffing needs. However, online retailing does not require a high number of staff, so costs are usually much lower. Indeed, despite the fact that Next’s Directory division only accounts for around 35% of sales, overall, it provides 47% of the firms operating profit.
What’s more, thanks to the company’s highly cash generative operations, Next has been able to return a large amount of profit to shareholders through share repurchases. These repurchases have pushed Next’s earnings per share up 91% during the past five years, while profits have only expanded 47%. Over the same period, Marks & Spencer earnings per share have grown only 18%.
Homeware
With the housing market getting back on track around the country, it is likely that both Next and Marks & Spencer will see their homeware sales rise.
However, thanks to its online sales channel and greater selection of products, Next is in a better place to ride this trend than Marks & Spencer, which is still known best for its clothing and food ranges.
Foolish summary
All in all, Marks & Spencer is a cornerstone of the British retail landscape but Next is now outperforming the old dog on several metrics.
Next’s online offering is strong, the company is generating plenty of cash and investors are reaping the benefits with rapid earnings per share growth boosted by stock repurchases. Meanwhile, Marks & Spencer is floundering.
