Next shares fall 5% in the FTSE 100! Time to take a look?
Next (LSE:NXT) stock has a solid wealth-building track record. It has done well long term, but not today (18 September), as it’s the worst performer on the FTSE 100. As I write, it’s down nearly 5% to 11,500p.
The good…
Today’s drop relates to the fashion retailer’s first-half results, covering the six months to July. While the sales figures were strong, management tempered this with some extremely cautious commentary.
First, the good bits. Nextâs strategy of being a multi-brand marketplace (not just selling its own clothes) continues to bear fruit. Total group sales, which includes discounted items and subsidiaries, rose 10.3% to £3.25bn, while pre-tax profits jumped 13.8% to £515m.
This was much higher than expected back in March, when Next guided for full-price sales growth of 6.5% (it came in at 10.9%). Management attributed some of this to favourable weather and disruption at Marks and Spencer, whose online operation was temporarily shut down by the infamous cyber attack.
The interim dividend was hiked 16% to 87p per share, and the forecast dividend yield is currently 2.4%.
…And the ugly
Looking ahead, Next kept its full-price sales guidance for £5.4bn (+7.5%) and pre-tax profit of £1.1bn (+9%). Of course, almost every UK retailer would give their right arm for this level of growth.
However, management sounded extreme caution over the direction of the UK economy. The issues range from anaemic growth to “declining job opportunities, new regulation that erodes competitiveness, government spending commitments that are beyond its means, and a rising tax burden that undermines national productivity“.
Of course, such complaints are not new. UK economic productivity has long stagnated, while government debt continues to rise alongside business regulations. Taxes remain high. You don’t have to be a Nobel-winning economist to see that this isn’t a recipe for prosperity.
But what is new is that companies are flagging how more young workers are facing pressure from automation and AI. Next says this is likely being accelerated by the rising costs associated with employing humans. This is quite worrying.
International growth
Given these challenges, I’m not bullish on most UK retail stocks. But I do think Next stands out as the cream of the crop, with excellent management, margins, and strong returns on capital.
Speaking personally, I find great value in the range of clothes on the Next app. The firm holds a 74% stake in one of my favourite brands (Reiss). I can also buy some of my other go-to brands — including Barbour, Hawes & Curtis, and now On trainers — through the app.
In H1, international online sales rose by 28%. Encouragingly, Next is starting to get a toehold in the US, where sales surged 58%. Europe (60%) and the Middle East (30%) still make up the bulk of international sales.Â
In Europe, it has partnered with Zalando to tap into its pre-built infrastructure to efficiently gain more market presence. And it’s targeting more sales in Asia and through TikTok.
What about the stock?
Next buys back shares, but not at any price. It requires at least an 8% return, which currently caps repurchases at £118 per share.
Handily, this gives us a rough guide as to whether the shares might be overvalued. At £115, currently below the threshold, I think they’re worth considering. But I wouldn’t bet the farm given the UK’s economic challenges.
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More reading
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- Down 7% from June, are Next shares a bargain?
Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended On Holding. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
