Despite the damage of Covid-19 restrictions, the Next (LSE: NXT) share price has been on a happy trip over the past 12 months. Prices of the UK retail share have soared almost 60% since this time last year as sales across its online operations have impressed. Its digital division now accounts for two-thirds of group turnover following a 10% rise in online sales in the last fiscal year (to January).
The rocketing Next share price doesn’t mean it looks expensive on paper however. City predictions that annual earnings will soar 99% this financial year leaves the company trading on a bargain price-to-earnings growth (PEG) ratio of 0.2. Investing theory dictates that a reading below 1 suggests a UK share might be undervalued.
Can the Next share price continue to fly higher? And is this one of the best FTSE 100 stocks to buy for my Stocks and Shares ISA today?
Will the Next share price keep rising?
Here are two reasons why I think Next could be considered an attractive stock to buy:
#1: The e-tail segment has grown at a stratospheric rate over the past 12 months, due to Covid-19 lockdowns. And online shopping is expected to keep expanding at a heady pace long into the future. It’s a phenomenon which Next, thanks to its excellent multichannel operation, is well-placed to exploit. Indeed, the Footsie company invested an extra £121m on warehousing and systems in the last fiscal year to boost its opportunities in this fast-growing segment.
#2: Profits at Next more than halved in the last financial year as its stores were forced to lock down. But things were much worse for many of its industry rivals which went out of business or had to scale back their operations. This thinning out of the competition provides the company with an opportunity to grab lots more custom.
Buyer beware
This doesn’t mean I think Next’s profits — and by extension its share price — will keep rising however. I’m particularly concerned about the rising margin pressure Next faces. The mid-level clothing market in the UK is still fiercely competitive. And its rivals have also invested heavily in their online operations to grab a slice of the growing e-commerce market. This means Next might be forced to aggressively discount to stop its market share falling.
This isn’t the only reason why profit margins at Next might suffer either. As British Retail Consortium chief executive Helen Dickenson recently commented: “In the months ahead retailers will have to battle the cost pressures from Brexit red-tape, rising shipping costs due to international supply issues, as well as increasing global food and oil prices.” It’s my opinion these pressures could persist long into the future too.
The Next share price is cheap based on current estimates. But I think the retailer’s cheap for a reason as it still faces considerable risks. I’d rather buy other low-cost UK shares right now.
