When I think of UK-based fashion and accessories retailer Next (LSE: NXT), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Diversified routes to market
Although Next’s fashion retailing business predominantly services just UK customers, the firm enjoys two major routes to market. Traditional retailing via a store estate accounted for 48% of the firms underlying operating profit during 2013 and the fast-growing directory arm of the business posted 49% of underlying profit. The remaining 3% of profit came from other activities.
Next’s profits have been growing and that trend seems set to continue, with the directory business looking likely to eclipse the retailing side of the business. Given the tough trading environment in the high street, that seems like a good thing. Other areas for future growth revolve around fledgling international sales and the internet.
2) Brand strength
Next shares have been tearing upwards for some time with only a slight recent pullback. The firm’s strong brand identity drives sales success. It seems to me that many customers buy Next over other brands because they want to be associated with what seems like a quality mark. Wearing Next seems to be hip.
That’s a great thing for investors because customers spread the word to others and return to buy again. You really can’t argue with the firm’s revenue and profit figures:
| Year to January | 2010 | 2011 | 2012 | 2013 | 2014 |
|---|---|---|---|---|---|
| Revenue (£m) | 3,407 | 3,298 | 3,441 | 3,563 | 3,740 |
| Adjusted earnings per share | 188.5p | 221.9p | 255.4p | 297.7p | 366.1p |
An update on 30 April reveals retail sales up 8.8% and directory sales up 13.7%, prompting the directors to raise full-year guidance for sales to increase between 5.5% and 9.5%. The firm also announced a 50p special dividend. Progress continues to impress, however, such resilient trading rarely comes cheap and the firm’s forward P/E rating for year ending January 2016 is running at a lofty 16.
