Can accelerating store expansion be good for the Next share price?

Bucking the trend of online retail – what will be the impact for Next shares?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It is a trend affecting every retailer: customers are shopping online more and going to actual bricks and mortar stores less. We all know this, so why then is fashion retailer Next (LSE: NXT) accelerating its rate of physical store space expansion faster than expected?

Well the simple answer is that it will make money from the expansion. The company has managed to secure large rent reductions on stores that it was previously going to close. CEO Simon Wolfson stated the obvious point that “we have to make a certain level of profit to keep a store open”, and with reduced rents, these shops now remain profitable and ripe for extra space to be added.

Expanding space on and offline

Next currently operates about 507 stores – a number that has changed little in the last 10 years – but has been adding square footage steadily. This year the company is expected to add 100,000 square feet compared to earlier expectations of just 50,000 square feet, as it continues to move to larger, out-of-town locations compared to smaller stores in towns.

Next has an advantage with this move in that it allows it to offer more concessions to other companies for using its space, notably Costa Coffee and Paperchase. While both of these stores perhaps seem fairly good fits for a clothes retailer, Next also said that in 2020 it expects to add 37 travel agents and four mobile phone operators as well. Perhaps it envisions people booking their holidays then buying the shorts and T-shirts to match!

Next has managed to keep a strong online presence however, which could be key to its future – last year the company’s revenues from online shopping surpassed those of its physical stores for the first time, and topped the $1bn mark in its H1 results this year, also for the first time.

Fair-weather shopping

Unfortunately for Next, its latest quarterly results were somewhat lacklustre, though again the shift to online was evident – while store sales decreased 6.7% for the latest quarter, a boost in online sales meant that there was an overall 1.6% full-price product sales rise.

The company reiterated its full-year guidance for both sales and profit (an increase of 3.6% and a £725m target respectively), and attributed this latest decline in stores sales to unseasonably good weather. According to Next, warm weather in September reduced sales of its new-season line, though October saw the numbers bounce back as temperatures fell.

The shares

The market seemingly took these latest results with a mildly negative tone – the shares down about 3% after the news. That said, the stock had already reached its highest level since 2016 earlier this month, which might suggest it is on the expansive side for any investors looking to pick up the stock.

Its forward-looking P/E ratio comes in at about 14 – pretty middle of the road considering its current high price, though not exactly a bargain. Its dividend is at the lower end of the spectrum – an annual yield of 2.5% at today’s prices, and perhaps more worryingly, this has been declining steadily for the past five years.

I think Next could be a solid buy as a blue-chip retail play, but at these prices I just think its too expensive to get my interest.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »