UK Edition
Next’s financial performance has been transformed by the release of pent-up consumer demand following the end of Covid-19 restrictions.
The return of consumer confidence to pre-Covid levels, combined with the unleashing of savings that reached record levels during lockdown, meant its sales were 7.8pc higher in the current financial year to July 17 than in the same period of 2019.
Encouragingly, the company appears to have a sound strategy through which to deliver further share price growth following its 39pc rise since Questor advised readers to buy it in late 2020. More information on its progress will be outlined with its interim results on Wednesday.
Crucially, it has embraced online retailing for many years. This means 71pc of its sales are expected to be generated via digital avenues in the current year.
As well as selling its own products online, Next also has a platform called Label that allows third-party sellers to list products in return for a sales commission. Label is expected to account for 27pc of the firm’s total sales in the current financial year and is one of its fastest-growing segments.
In addition, the company is investing heavily in areas such as its Total Platform offering. It provides online infrastructure and logistics expertise to brands that allows them to focus on marketing and design in return for a cut of sales.
As such, it is in a strong position to further capitalise on the well-established trend towards digital retailing that means 26pc of all goods sold in the UK are purchased online. This compares to 8pc a decade ago.
The company’s bias towards retail parks, as opposed to city centre locations, also provides some protection from the gradual demise of the high street. They have been less affected by the sharp decline in commuters during the pandemic and may be better placed to serve evolving working habits and the continued popularity of collection services.
Meanwhile, Next’s efforts to reduce shopfloor headcount, renegotiate leases upon expiry and shift some warehousing and call centre operations to stores could help to protect profits as in-store sales likely come under pressure. This could increase its competitive advantage versus bricks-and-mortar rivals and pure play online peers.
Increasingly ambitious international aspirations represent another major change in the company’s strategy over recent years. In 2005, it was an exclusively UK business. However, this year almost a fifth of its revenue is expected to be generated overseas.
Already, Next’s growth strategy has led to a significant improvement in cash flow. In fact, it expects to generate £483m in surplus cash in the current year. This will partly be used to reduce net debt by 45pc versus its level from two years ago. It will also fund a second special dividend in the current financial year following this month’s 110p per share payout. The company expects to resume normal dividends in the next financial year.
Of course, a stronger balance sheet does not make Next immune from ongoing threats facing the wider retail sector. For example, the prospect of lockdown measures is likely to remain in coming months. Meanwhile, recent heightened demand for the diverse range of clothing, home and other products sold by the company could dissipate as record savings amassed during lockdown are gradually eroded.
Furthermore, the unravelling of travel restrictions may shift consumer spending away from Next’s products towards leisure activities including holidays. This could lead to a more subdued financial performance than has been present since lockdown measures abated.
However, Questor remains optimistic about the stock’s outlook. Its forward price-to-earnings ratio of 16.5 suggests it continues to offer good value for money while it has a high single-digit earnings growth forecast for the next two financial years.
Its path to further growth may prove volatile due to sector-related risks. But its solid financial position, international expansion opportunities and capacity to successfully manage the online retail transition make it a worthwhile purchase for the long run.
Questor says: buy
Ticker: NXT
Share price at close: £81.78
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