Shares of Next (LSE: NXT) are up over 8% at 5,550p in early trading after the FTSE 100 retail giant reported higher-than-expected sales in the first six months of the year. A strong summer performance has led management to increase its sales and profit guidance for the full year to January 2019 for the second time this year.
The last few years have been a roller-coaster ride for Next’s shareholders. The shares reached an all-time high of over 8,000p in 2015 but last year hit a multi-year low of little more than 3,600p. With the turnaround we’re seeing this year, can the shares get back to, and surpass, their previous high?
Turnaround
Next’s first-half performance, in terms of the break-down of high street and online, was a familiar one. High street store sales were down 6.9%, while online sales climbed 16.8%. At the profit level, this translated into a 23% fall and a 21.2% rise, respectively. Group pre-tax profit for the period was up 0.5% and earnings per share (EPS) increased 4.9%.
On the back of this performance, management increased its full-year pre-tax profit guidance by £10m to £727m and upped EPS guidance to 5% growth from 3.7%. The table below puts this year’s expected performance in the context of that of the last three years.
| 2015/16 | 2016/17 | 2017/18 | 2018/19 guidance | |
| Pre-tax profit (£m) | 836.1 | 790.2 | 726.1 | 727 |
| Increase/(decrease) (%) | 5.2 | (5.5) | (8.1) | 0.1 |
| EPS (p) | 442.5 | 441.3 | 416.7 | 437.5 |
| Increase/(decrease) (%) | 5.4 | (0.3) | (5.6) | 5.0 |
As you can see, in the down years EPS has fallen less than pre-tax profit, and in the up years, has risen more. This is largely down to Next’s longstanding practice of delivering value for shareholders. This isn’t only achieved by paying cash dividends, but also by buying back and cancelling significant quantities of shares, thus giving continuing shareholders a bigger stake in the business.
Challenges
Next undoubtedly faces challenges, due to what it calls the ongoing “powerful structural and cyclical changes” in the UK retail market. However, this is one of the best-managed businesses on the high street and it appears well-equipped to handle the headwinds faced by its bricks-&-mortar estate, while exploiting the growth opportunities of its highly successful online platform.
Furthermore, it’s encouraging to read management’s assessment of the impact on the business should there be a departure from the EU without a free trade agreement and managed transition period. While this isn’t Next’s preferred outcome, it said: “We believe we can manage the business to ensure no material cost increases or serious operational impediments,” providing ports and customs procedures are well prepared for the change and tariff rates are adjusted to ensure no net increase in duty costs to consumers.
Solid hold
Given the ongoing challenges on the high street, I’m not expecting Next’s shares to return to 8,000p any time soon. However, with its experienced management having delivered terrific returns for investors over getting on for three decades, I wouldn’t bet against the company continuing to make progress from here.
A current valuation of 12.7 times the guided earnings for the current year, and a City forecast dividend yield of 3%, aren’t sufficiently appealing for me to buy the stock. But I do rate it as a solid ‘hold’.
If I were looking to invest in the sector with a view to bringing forward the day I gained financial independence, I’d be after a younger, vibrant brand with the potential to replicate, over the coming 30 years, the multi-bagging return Next delivered over the last 30.
