Next (NXT) has been a perennial source of frustration for retail investors. In the past 20 months, the share price has gone precisely nowhere, up just 1.77%. There’s been ups and downs along the way, though, with results fluctuating quarter to- uarter.
Of course, it’s in a tough sector. Retailers have had to contend with the threat of online offerings taking market share from the traditional bricks and mortar sellers. Consumers’ purchasing power has been squeezed, too, by rising inflation and stagnant wage growth.
Since the start of 2016, the FTSE All-Share General Retailers sector has declined by almost 10%, compared to growth of 36% from the wider market. In that time, Next has even underperformed its sector.
What essentially amounted to a profits warning back in March 2016 didn’t help. Chief executive Lord Wolfson told investors at the time that “the year ahead may well be the toughest we have faced since 2008”. That statement sent the stock down 15%.
But he wasn’t wrong. A further slip after the Brexit vote ensued and poor half-year results followed by an even worse fourth-quarter update continued to put pressure on shares. They eventually bottomed out at a four-and-a-half-year low 3,617p in July 2017.
But shares are on a recovery mission. Since that low point, they are up 60%. First-quarter results last week smashed broker forecasts, with profits having been “boosted in recent weeks by unusually warm weather”. As a result, full-year pre-tax profits should be 1.7% higher than previously expected.
Scott McKenzie, manager of the TB Saracen UK Income fund, says Next is “a high-quality company in a difficult sector”. McKenzie initially bought Next for the fund two years ago when it was heavily out of favour, shortly after the profits warning.
“At that point, we dusted off the file, had another look at it and concluded that [the share price fall] had been massively over-done,” McKenzie tells Morningstar.co.uk. He says 2016 looks like “a temporary blip” and that the firm is doing much better now. “It’s proving the doubters wrong.”
Online Offering Ahead of the Curve
Still, Next’s retail stores are clearly struggling, like most on the high street. Next’s full-year retail sales are down 9.6% since 2015. First-quarter results showed a further 5% drop. But online sales are thriving – and that’s where Next differentiates itself from many others on the high street.
Since 2013, Next’s online sales have grown by 58% and were up 18% in Q1 alone. As a result, they’ve been able to grow sales in the past five years by 16%. While pre-tax profits were down last year, they had previously been trending in the right direction and have improved 53% since 2013.
Next moved its Directory business into an online-only offering years ago and McKenzie says that put it well ahead of the curve when compared with some of its more traditional peers. Its store presence gives their customers the flexibility they demand – they’re able to click and collect and return unwanted items to a physical shop.
McKenzie doesn’t see Next dropping that high-street presence but, with over 500 stores around the country, there’s the option of slimming down if necessary. “Arguably, that’s too many in the long run and I could see that coming down, so maybe keep all the flagship stores but lose some of the more marginal ones.”
Stephen Message, manager of the L&G UK Equity Income fund, says the terms of its leases give it an added advantage. “They have reasonably short lease terms when compared to some of their competitors,” he explains. This allows them the option to churn their estate into more economically viable spaces.
Management is well regarded and Message says the firm has put in place a number of initiatives after going through “some self-inflicted issues around its range and stocking”. “What you’ve seen a year on is some of those issues have started to dissipate,” he says.
“They have improved their credit offering to their customers, through the introduction of things like Next Pay, and they’ve also improved their online marketing offering, although there’s still further to go within that.”
McKenzie adds that Next is “one of the best companies I’ve ever seen for giving you up-to-date information and strong forward guidance”. That probably doesn’t help the share price – “they tend to tell it like it is, so you do get times when they’re struggling”. But it does suggest they’re “a very well-managed company”.
Buying Opportunity?
Between 2012 and 2017, earnings per share shot up by 73%. After a slight pullback last year, broker UBS expects growth to continue through to 2020. Its forecast for a 10% increase puts the stock on an attractive forward earnings multiple of 12.6 times.
Alongside that, while its ordinary dividend, which has been flat for the past couple of years, amounts to a modest yield of 2.86%, its total shareholder return makes it an interesting proposition for income seekers.
It’s been known to supplement that payout with special dividends, as well as the odd share buyback scheme. They’ve been doing a lot of the latter in recent months, which McKenzie says “makes sense because the shares have been weak, so they’re buying at attractive valuations”.
He adds that investors would be wise to heed that advice. “The way I would see it is when it goes through periods of weakness, generally speaking it’s time to add to your investment.”
Despite recent good performance, shares still languish around the same level as two years ago. But both managers see scope for a re-rating, with Message pointing to the previously mentioned self-improvements as one catalyst.
Meanwhile, McKenzie says that delivering more consistent results “is a key factor”. But he adds that, actually, many sellside brokers remain very negative on the stock. “I think there’s quite a lot of analysts that might have to change their minds and reassess the situation. I take that as a positive.”
