I believe the Next (LSE: NXT) share price can keep on rising. I’ve been bullish on the retailer for a while and I think its recent full-year results confirm my view. I’d buy Next shares in my portfolio. Here’s why.
The results
Next released its full-year results last week, and they were resilient given the coronavirus crisis. I’m not surprised that total sales fell by 17% to £3.6bn. Most of its shops were closed for much the 2020/21 period due to lockdown restrictions.
Of course, profitability took a hit as well. Next generated a profit before tax for the year of £342m versus the previous year’s £729m.
Again, I’m not surprised that online sales shored up the business. And Next expects the shift in consumer behaviour towards online sales to continue for some time.
Bright side
While the headline numbers may seem somewhat dismal, I don’t think they are. In fact, there are some great things that have come out of the retailer’s full-year results.
Next has managed to reduce its net debt position by from £1.1bn to £610m. I think most investors know the challenges the retailer sector has faced during the pandemic. But for Next to reduce its liabilities by a significant amount is encouraging to see.
At this point, I think it’s worth noting that Next has managed its stock inventory well through the pandemic. Unsold stock isn’t something a retailer wants. It can drag down profitability and hurt cash flow. So the fact that Next has managed to control its stock levels during the year is also pleasing.
The retailer has managed its store estate through the pandemic in a prudent way. During the year, 80 shop leases expired. It closed 18 branches and renegotiated rents in 62 stores, achieving an average reduction in rent of 58%.
Going forward, Next expects to manage its staffing costs at each shop and improve its store-based online services such as click-and-collect. I guess the main battle here is for Next to keep its stores relevant in an online world
Growth plans
Even more important though, I think the Next share price could see a boost from the company’s focus on expanding its Total Platform website service. This is the online infrastructure through which it provides third-party retailers with a comprehensive solution to trading online. Next will handle the website, call centres, warehousing, distribution, returns and retail services. So far, this has been going well and I expect this to continue.
Next has linked with prominent brands such as Laura Ashley and Victoria’s Secret UK (in which it has a stake). And in addition to a Total Platform service agreement, it has also recently taken a 25% stake in Reiss.
Risks
Let me be frank, Next isn’t immune to the pandemic. Further lockdowns and delays could impact sales and profitability.
In fact, Next has given a stark warning that it doesn’t expect to resume any dividends or share buybacks until it has further visibility on sales when its stores reopen.
But I reckon it’s taking the right steps to weather the coronavirus storm. I think it’s encouraging to see that the company has upgraded its profit guidance for 2021/22 by £30m to £700m. I expect it will be a rocky road for the retailer but as a long-term investor I’d expect the Next share price to rise from here.
