Next Is My Best Buy On The High Street

Published in Company Comment on 4 May 2011

Easter sunshine and the Royal Wedding give Next a boost.

High-street retailer Next (LSE: NXT) released a trading update this morning.

Happy Easter

In the last 3 months, Next saw a near-1% rise in sales (excluding VAT) at its 500 Next Retail high-street stores in the UK and Ireland.

However, this slight improvement in sales was smashed by Next Directory -- Next's home-shopping catalogue with three million customers -- which saw sales climb by almost 15%.

Overall, sales across all three Next channels, including Next International, rose more than 5%. Happily for Next shareholders, this rise in sales was well ahead of expectations (below 2.5%).

Today's news caused Next's share price to leap 4.5% to 2,322p as I write. At this price, the retailer's market capitalisation exceeds £4 billion.

What went right?

While its rivals on the high street recently reported decidedly lacklustre results, Next continues to power ahead. The FTSE 100 firm estimated that 'at least 2.5%' of its outperformance came as a result of exceptionally warm weather over Easter, plus spending ahead of the Royal Wedding Bank Holiday.

Better ranges and improved stock availability for best-selling lines (especially womenswear) helped to boost Next's performance on the high street. Next Directory's surging sales were attributed to improved delivery, more aggressive marketing and, again, better stock availability.

As a result of these improvements, Next's gross margins and costs are under control and in line with forecasts.

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What next for Next?

Alas, Next warns that its spring bounce could turn into a summer slump, thanks to shoppers bringing forward summer purchases. Therefore, it does not expect this sales uplift to continue into the second quarter.

Next's CEO, Lord Wolfson, dampened expectations by warning that:

'The combined effects of the public sector deficit cuts and continued inflation in essential commodities are all likely to restrain growth in consumer spending generally.'

What's more, forthcoming price rises at Next -- estimated to be in the region of around 8% -- will also curb consumer demand for its clothing and other ranges. Hence, Next expects total sales for the first half of 2011 to be between 1.5% and 4.5% ahead of the same period in 2010.

For 2011 as a whole, Next hopes for a sales increase of 1% to 4%. This would generate pre-tax profits of between £535 million and £585 million, £15 million ahead of its March guidance.

Valuation

Next's cash flow is such that it can afford to buy back £160 million of its shares this year, of which it has already spent £90 million. Overall, this programme will reduce its share base by around 4%. These buybacks, plus enhanced cash generation, are expected to boost Next's earnings per share by roughly 6% this year.

Despite being the number-two fashion retailer on the high street, Next's shares are modestly valued. Based on 2010/11 historic figures, they trade on a price-earnings ratio of around nine and yield a tidy 3.9%, covered 2.8 times.

These fundamentals, together with Next's latest results, demonstrate why Next remains my pick of the high-street retailers. To be blunt, it's hard to find comparable value among Next's peers in the FTSE 350!

More from Cliff D'Arcy:

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

BLB53 04 May 2011 , 12:29pm

"To be blunt, it's hard to find comparable value among Next's peers in the FTSE 350!"

Cliff, Have a look at N Brown (BRNG)

shinygoldcar 04 May 2011 , 10:50pm

Yes I like Next. It's had good profit growth over the last few years and at a good P/E, so I bought.

mcturra2000 05 May 2011 , 12:38pm

Next looks a good company. I don't have any shares in them personally, but I think they will do well. Maybe not directly comparable, but I think JD. are pretty good, and it's cheaper. Both look strong financially, but JD. has a a great net cash position.

Despite all the doom and gloom, apparel retailers seem to be doing just fine.

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