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Should I Buy NEXT Plc?

I’m out shopping for shares again, and here’s the question I’m asking right now. Should I buy NEXT (LSE: NXT)?

NEXT up

Last time I checked out retail clothing chain NEXT, in January, I liked the cut of its cloth. With an expanding network of more than 500 shops in the UK and Ireland, and its flourishing online Directory business, it looked cool and confident. There was only one problem. Its share price had just leapt 50% in a year to £39. I prefer to buy great companies when they are out of favour, rather than at the height of fashion. I decided it was too pricey. Was I right? And should I buy NEXT today?

When it comes to investing, cheap isn’t always cheerful. NEXT is up another 50% over the past year, against just 12% for the FTSE 100. Over two years, it is up 100%. Over five years, it has delivered a stylish 359% growth (more than 12 times the FTSE). It has done all this in the middle of downturn, when wages have been rising at a slower pace than inflation, and austerity chic has been the order of the day. It’s a stunning performance.

The price of fashion

Yet its first-half 2013 results weren’t exactly cutting-edge, with sales rising a steady 2.2% to £1.67bn. A 7.2% rise in operating profit to £285m and 13.8% rise in profit after tax to £217m were more impressive, although already reflected in the share price. The stock barely shifted on the day, which struck me as a bit harsh.

NEXT has plenty to offer investors. It has recently spent £170m on share buybacks. Earnings per share (EPS) rose 19.9% to 142p. And still the market wasn’t impressed? Like me, maybe it has been fixating too much on the price. Yes, these are tough times for retailers, but surely NEXT has weathered the storm in style. That puts it in a strong position if the economy is really recovering (I did say if…).

Out of my price range

Back in January, I was unhappy about its 2.3% yield. Today it is even lower at 2% against an index average of 3.5%. But management is progressive, recently announcing an interim dividend of 36p, a hike of 16.1%. NEXT is even more expensive today, however, trading at 17.1 times earnings. I’m also worried about EPS growth forecasts. After five years of double-digit growth of between 15% and 20%, EPS is forecast to slip to 8% in the year to January 2015. I should have bought it back in January at £39. I find its £51.40 price tag a little offputting today.

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> Harvey doesn't own shares in Next.