The Next share price is rising. But I have one worry

The Next share price has performed brilliantly during the pandemic but I’m wondering whether it has flown too high, too quickly.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of Next. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Would Warren Buffett buy BP shares, as oil excitement grows?

Warren Buffett is a big investor in the oil business, and BP's performance has been attracting investor attention in results…

Read more »

Cropped shot of an affectionate young couple posing with a bunch of flowers in their kitchen on their anniversary
Investing Articles

Here’s how long-term loyalty to UK shares can lead to dazzling returns!

The most successful UK and US share investors buy shares to hold for the long term, as this report shows.

Read more »

Investing Articles

NatWest has just smashed brokers’ dividend forecasts!

After NatWest delivered a Valentine’s Day surprise to investors, our writer thinks the experts may have to raise their dividend…

Read more »

Investing Articles

The NatWest share price slips in early trading despite positive FY 2024 results. What’s the deal?

The NatWest share price is down slightly this morning after the bank released its final results for 2024. Our writer…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

My Legal & General shares have climbed just 7% — so how come I’m sitting on a 20% gain?

Harvey Jones' trading account is showing only a modest return on his Legal & General Shares, but on drilling down…

Read more »

Investing Articles

Prediction: the BP share price could rise in 2025 (or it might fall!)

Following this week’s release of the energy giant’s 2024 results, our writer reviews the prospects for the BP (LSE:BP.) share…

Read more »

many happy international football fans watching tv
Investing Articles

What’s gone wrong with the FTSE 100’s ‘King of Trainers’?

Feeling the pain of a 28% drop in the JD Sports share price over the past three months, our writer…

Read more »

Investing Articles

Is it too late for investors to consider buying these outstanding FTSE 100 shares?

Stephen Wright wonders whether now's the time to consider buying shares in the FTSE 100’s outstanding companies, despite some high…

Read more »