Since the first UK lockdown in March 2020, Next (LSE: NXT) shares have soared. It seems that the coronavirus pandemic has sifted the strong from the weak in the the world of retail.
The company has fared better than its competitors but can it withstand the latest bout of UK lockdown measures? Let’s look at the investment case for Next shares in detail.
Online shopping
Although Next operates bricks-and-mortar stores, its strong online business has enabled it to weather the coronavirus crisis. E-commerce sales accounted for 50% of the British retailer’s 2019/20 revenue.
Next has been successful in leveraging its history in catalogue retail into a thriving e-commerce business. The infrastructure needed to deliver a mail-order parcel is not dissimilar to what’s needed to deliver an online order.
The pandemic is far from over and I expect the online division to continue to grow, which should be positive for Next shares.
Long-term behaviour changes
The staple British retailer, which sells clothing, footwear, home products and beauty, has a very strong brand, as well as selling other successful labels. Focusing on the bigger picture, I think Next is in a good place to weather the current disruption. Specifically, it is in a good position to capitalise on the long-term behaviour shift to online shopping.
Where some high street retailers lack an online presence of a similar scale to Next, the retailer’s early adoption of an omnichannel approach will allow it to reap the rewards in a post Covid-19 world.
Not only are Next’s online sales growing within the UK, but also overseas. This shows that there is international demand for the retailer’s offer. And I expect the company to capitalise on this international opportunity, which should prove positive for Next shares.
Store management
During the first UK lockdown, Next had to close all of its 500 retail stores. And as long as Covid-19 remains a threat, there is uncertainty over how long Next’s retail stores will remain shut.
What gives me some comfort is that the retailer has done a good job in managing its store estate. Next shops typically have shorter and more favourable leases than many peers. Its stores are also focused on retail destinations outside city centres, which have fared better during the pandemic. This has helped the shares and gives the company an extra degree of flexibility.
I think the retailer will continue to review its store estate constantly and close some shops when their leases expire if they’re not seen as profitable enough. This would reduce costs, boost profitability and ultimately increase Next’s share price.
Recent trading update
This week, Next issued a good Christmas trading update. Total Q4 online sales increased 38% and categories that performed well included home, loungewear and sportswear.
But it warned that the additional £28m profit it made from better than expected sales in November and December could be entirely wiped out by the forthcoming lockdown.
Would I buy now? Yes, even though Next is not out of the woods just yet. I think the company has done the right things and its forecast of a big year-end reduction in net debt, if delivered, will put the retailer in a strong financial position.
I expect Next shares to experience some short-term volatility. But for a long-term investor like me, the company has a lot of appeal.
