On Thursday, the Next (LSE: NXT) share price fell 10% in early trading on the back of first-half results. Next shares are now down 40% over the past 12 months.
The headline figures for the first half were actually positive, but inflationary pressures mean the fashion and lifestyle retailer has reduced its second-half guidance.
First-half profits up
Full-price sales grew by 12.4% compared to 2021. And they were 22% ahead of the equivalent period in 2019, before Covid. Profit before tax rose 16% to £401m. And again, that easily beat first-half profit in 2019, by 22%.
The downside is a reduction in full-year profit guidance, by £20m to £840m. It would still represent a 2% increase on 2021 though. Next’s forecast for earnings per share now stands at 545p, for a 2.7% increase on 2021.
Valuation
If that proves accurate, we’re looking at a forward price-to-earnings (P/E) multiple of 8.8, based on the latest Next share price.
So we have a company widely acknowledged to be a leader in the sector. It’s doing better now than before the pandemic, and it still expects profits to grow this year even in the current financial climate. Yet investors believe it’s only worth a P/E of 8.8.
Well, that’s market sentiment for you.
Key insight
I want to share one quote from Next’s latest report, which I will leave here without further comment. Making the case that addressing the supply side of the economy is key, Next says:
Government can (and probably should) ease the UK’s journey through this cost of living crisis. Smoothing the economic shock of sky high energy prices will prevent unnecessary suffering and bankruptcies. But ‘borrow and spend’ remedies can ultimately only treat the symptoms of inflation; they are not the cure. And there is a balance here, as we are already seeing, when a government borrows too much their currency will devalue, and stoke inflation next year.
Sales mix
The first half marked a definite change in shopping habits. Next’s high street retail sales jumped by 63% compared to 2021, while online sales fell 5%. Considering that online sales count for around 1.6 times the volume of retail sales, that means the total hasn’t increased as much as it might seem.
Total group sales grew by 15% compared to the previous year, and by 24% compared to 2019.
I’m particularly interested in how margins are going. And in the three years since 2019, Next’s operating margin has declined by 0.8% to 16.9%. I think that’s pretty good, considering the supply problems and intense competition the business faces.
The future
Next’s latest company report is, I think, one of the best I’ve read in a long time. By that, I mean it’s well written, insightful, and informative. Unlike most of the turgid prose I see every day, this one is a joy, and I recommend potential investors read it for themselves.
There are clearly plenty of economic risks ahead, and it might take a brave investor to put money into the retail sector right now. But Next strikes me as a company that truly understands what it’s doing.
And on the current valuation, I have it on my buy candidates list.
