This week has seen the survival of Philip Green’s Arcadia group by a whisker after landlords and creditors backed a plan that will stave off administration and, for now at least, potentially save around 17,000 jobs.
Had the rescue talks failed, the future of a number of popular high street brands would have been at risk, including Topshop, Burton, Dorothy Perkins, Wallis, Evans and others.
But, even though Green himself has spoken very optimistically about the result, I think it’s far too early to draw any conclusions about the long-term survival of his empire or what it will look like in the future.
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Carnage
After Debenhams shareholders were pretty much wiped out by its refinancing deal, and Marks & Spencer continues to struggle with its clothing offerings and is increasingly reshaping itself as primarily a food brand, would you be getting a bit twitchy if you owned shares in that other high street favourite, Next?
Admittedly I’m not in the Next target market, but the nearest branch to me is on the next block to a Topshop/Topman store, and I can’t see anything fundamentally different about them. They seem to stock very similar styles, and the ‘feel the width’ quality (of the mens’ clothing at least) is something I can’t really tell apart.
As if the high street itself isn’t enough cause for concern, shareholders in online fashion sellers could be looking at yet another slump. Shares in Boohoo have been falling back since late April, after starting the year with another of those dotcom-style spikes. And when that happened last year, the share price crashed right down shortly after — although this time, the shares might actually be good value.
ASOS shareholders are no strangers to ups and downs either, having seen their shares fall 50% over the past 12 months. And after some scary peaks and troughs along the way, ASOS shares have actually gained only 16% over the past five years (and without a penny in dividends to show for it yet).
Still positive
So why, after all that gloom, am I still bullish about Next? The difference, essentially, is cash. Next generates huge piles of the stuff. In fact, in its first-quarter trading update, the company estimated its surplus cash generation at around £300m, and reiterated its plan to return that amount to shareholders via share buybacks.
That programme is still under way, and it should help boost full-year earnings per share. The company expects EPS to grow by around 3.4% this year, which looks fine to me in an economic environment where even standing still should be seen as a success (even if it is partly due to the buyback boost).
Dividend yields of around 3% should be more than 2.5 times covered by earnings per share, with the shares on modest P/E multiples of 12 to 12.5.
Comfortable
Some might call for higher dividends from such a strongly cash-generative company, but I like the flexibility that comes from keeping yields modest and making one-off returns when there’s surplus cash. But either way, Next does not appear to be over-stretching itself.
I also think times like this, when an entire sector is performing badly, are precisely when we should be buying the strongest in the business — and I do think Next is one of them.
