Next Shares Leap As Earnings Soar

Published in Company Comment on 14 September 2011

The FTSE firm looks to be the strongest retailer on the high street right now.

High-street fashion chain Next (LSE: NXT) is one of only two retailers that I'd buy right now. (The other is Marks & Spencer (LSE: MKS) and here's why.)

Why buy Next? Because it's just released another cracking set of results, yet its shares are modestly rated and offer good value.

Sailing through the storm

Next's chief executive, Lord Wolfson, claims that 2011 so far has been a "perfect storm" for retailers. It's really horrible on the high street, thanks to government austerity measures, falling disposable incomes, low consumer confidence, and high unemployment and inflation.

Yet despite the squeeze, Next has continued to outperform its rivals.

In the six months to the end of July, group revenue rose 3.6% to nearly £1.6 billion. This boosted Next's before-tax profit by 8.5% to £228 million. Earnings per share soared by nearly 19% to 98.3p.

Next raised its interim dividend by 10% to 27.5p per share, which clearly delighted its shareholders. As I write, the shares have leapt more than 6% to 2,478p, valuing the FTSE 100 firm at £4.3 billion.

What lies ahead?

Despite the well-publicised problems of British high streets, Next continues to forge ahead. It generates lots of cash, which it has used to strengthen its balance sheet and buy back shares. Net debt is down to £640 million, which is just short of 15% of Next's market value.

One high spot came from Next Directory, the group's catalogue and online division.

Here, sales rose an impressive 15% to £487 million and now represent almost a third (31%) of total turnover. Also, international sales rose 9% and, alongside Next Directory, more than offset a 1.8% top-line decline at Next's 500 UK and Irish stores.

For the full year, Lord Wolfson expects sales to rise between 2% and 4.5%, with profits up as much as 8.7% and EPS growth of between 7.5% and 16.4%. Also, he anticipates that "retail headwinds are likely to ease as we move into 2012", perhaps hinting at even stronger results next year

Next, please!

For now, Next shares trade on a price-earnings of 10.5, falling to 9.8 for 2011/12. The dividend yield is 3.3%, but should rise to 3.7% if the usual 10% uplift continues. What's more, this dividend looks safer than houses, as it is covered 2.7 times.

As I said in May when the shares were 2,322p, Next Is My Best Buy On The High Street -- and my view hasn't changed. Next's share price has climbed 6.7% in what have been four very volatile months for the market. Even so, I strongly suspect that there are more gains to come.

As I said at the start, other than M&S, Next is the only retailer I'd buy!

More from Cliff D'Arcy:

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