Next impresses again, but could its shares be about to crash?
Next (LSE:NXT) has proven to be one of the UK’s most impressive retail shares. Even in tough times, the FTSE 100 company has culvitated an excellent track record of growth.
The retailer was at it again on Thursday (26 March), raising profit forecasts for the current financial year (to January 2027). Next’s share price responded strongly to the good news and was last 5% higher on the day.
But can the business continue to impress? I’m not so sure…
Great performance
First let’s break down the key points of today’s strong announcement. In it the firm said full-year sales rose 10.8% in the financial year ending January 2026. Pre-tax profit was £1.2bn, up 14.5% year on year and ahead of recently upgraded estimates.
Sales in the UK continue to rip higher. And in overseas markets, revenues increased by double-digit percentages.
But what’s Next’s secret as the broader retail sector struggles? According to Hargreaves Lansdown analyst Aarin Chiekrie, “quality over quantity is what consumerinson s want, leading them to buy slightly fewer, higher-priced, better-quality items.”
As I say, Next also hiked its pre-tax forecasts for the current fiscal year, sending its shares higher. These are now tipped at just above £1.2bn, up £8m from prior forecasts. Still, it indicates the enormous and growing pressures the retailer faces — growth of 4.5% is far below that seen last year. Revenues are tipped to rise at the same lower rate, too.
Trouble brewing
Yet in the current climate, I think both sales and profits forecasts could be looking overly optimistic. Why? Retail sales in key markets are in danger of slumping as the Middle East erupts. In the UK, British Retail Consortium (BRC) chief executive Helen Dickinson said today that “consumer confidence [has] collapsed as the Middle East conflict raised the prospect of higher inflation in the months ahead.“
The war is also driving costs higher, and Next has predicted £15m worth of extra expenses this year due to higher fuel costs and other factors. This assumes the war lasts for three months. The trouble is, predicting when the conflict will end is almost impossible to call, casting a cloud over revenues and earnings for this year.
Are Next shares a buy?
I don’t believe this threat is factored into Next’s valuation, and especially after today’s further share price rise. The retailer trades on a forward price-to-earnings (P/E) ratio of 16.5. That’s above the 10-year average of 12-13, and also above the broader FTSE 100’s forward average.
Some could argue the retailer’s strong brand power and product quality makes it worthy of a premium valuation. After all, it’s underpinned robust, sector-beating sales and earnings for years.
It’s a valid point of view. Yet for me, signs of a sharp market contraction — combined with that enormpous valuation — leave enough scope for Next shares to slump before too long. Despite its resilience, I’d rather buy other UK stocks right now.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
