Retail may have been under pressure in the past year but one big name has had a brilliant pandemic, considering the woes afflicting other high street clothing retailers. The Next (LSE: NXT) share price has flown. This FTSE 100 company has shown its resilience, and deserves a place in my portfolio. With one reservation…
Measured over 12 months, the Next share price is up a thumping 75%. That’s more than three times the 20% return on the FTSE 100 over the same period. It’s continued to rise in recent weeks, despite reporting earlier this month that profits dropped by half in the year to 31 January.
Next has developed a thriving e-commerce operation to run alongside its traditional high street business. So despite having to shutter its stores during the various lockdowns, group sales have avoided meltdown. Online sales are up more than 60% on two years ago and account for almost two thirds of group revenues. This is particularly good news, given that online also has higher margins.
The Next share price is flying
Management has also made big savings by spending less on stock, furloughing staff and cutting operational costs. It has also benefit from having many of its stores in retail parks where social distancing rules have been easier to maintain than in crowded city centres and shopping malls. All this has helped buoy the Next share price.
Despite this, pre-tax profits for the year more than halved to £342m, while sales fell 17% to £3.6bn, as stores were closed. However, the future should be brighter now that the country has opened up for non-essential shopping. Management has raised its central profit guidance by £30m to £700m. It’s also cut debt, by £502m to £610m.
Investors are holding their breath, waiting to see when dividends will be restored, as well as share buybacks. When they are, it could give the Next share price a further lift.
FTSE 100 retail star
Despite all these positives, I do have some concerns. While Next’s online business powers on, it must still bear the cost of running an extensive bricks and mortar operation, where sales will inexorably decline.
The Next share price should benefit if consumers splash their lockdown savings, as many assume. However, a strong recovery looks priced into the stock, which could struggle if we have any setbacks. Which brings me to my reservation.
It now looks expensive, trading at around 36 times earnings. The forward valuation is a more tempting 18.8 times earnings, presumably based on the assumption that sales will rise sharply as shoppers are liberated from their homes.
However, I’m concerned that rapid gains in the Next share price have been made for now. It has come a long way, and it’ll be difficult to maintain current momentum.
