With many high-growth technology shares experiencing sharp corrections over the past few months, it’s interesting to see where investment funds might be flowing to instead. The industrials and financial sectors have gained so far this year, while technology and clean energy have lagged. Which sector could lead the next few months?
I think it’s time to look in the consumer retail sector. The FTSE 100 is home to some high-quality, established, and innovative retailers. With the next tax year fast approaching, I’m considering one FTSE 100 retailer in particular to add to my new Stocks and Shares ISA.
A top FTSE 100 share for my ISA
I would consider the fashion and homewares retailer Next (LSE:NXT). The UK retail industry is changing fast and the pandemic is accelerating the change. There have been several non-food retailers that have gone into administration in recent months including Arcadia Group and Debenhams.
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Once the pandemic is over, I believe that the retailers that survive could be well-placed to gain market share and become stronger businesses. In my opinion, Next is the best-placed retailer in the FTSE 100 to thrive. It’s also among several ‘reopening’ shares I’m watching.
Run by formidable management, Next successfully shifted its business strategy online. Even before the crisis, more than half of its business came from online. This has helped it to navigate and survive store closures in the pandemic.
In addition, the crisis has created acquisition opportunities for Next. Last year it expanded its beauty business by taking on several empty beauty halls in Debenhams stores. More recently it took a 25% stake in upmarket fashion brand Reiss. These actions should provide further long-term growth.
Next has always been forward-thinking, in my opinion. This becomes apparent with its relatively new concept called Total Platform. The platform allows smaller brands to make use of Next’s 20 years of expertise in web systems, marketing, distribution, and warehousing. In return, Next receives a commission of sales. Almost like being the “Amazon of fashion”, the concept has much potential, I think.
I particularly like businesses that display high-quality metrics. At 18%, Next offers one of the highest return on capital figures in the FTSE 100. It also demonstrates profitability with a decent operating margin of around 14%.
Retail uncertainty remains
Despite being a high-quality operator, the retail environment remains uncertain. Risks remain as to consumer behaviour post-lockdowns, and the risk of future pandemic-related disruption. Physical stores still remain a large part of the business and the extent to which footfall bounces back will have a large effect on profitability. In addition, the retail sector is competitive and risks remain of online-only retailers taking market share.
These unknowns could be concerns for the investment case over the coming months. However, on balance, I think that the UK consumer will bounce back when allowed to do so. I expect many parties and social gatherings once the pandemic is over. Demand for new clothing could be robust and I reckon Next should benefit.
