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Should I buy this FTSE 100 retail stock or avoid it?

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FTSE 100 incumbent Next (LSE:NXT) has flourished since reopening. Should I buy shares for my portfolio?

FTSE 100 opportunity

Next originated in 1982 with its first womenswear store. It then acquired a mail order firm and launched its own directory business. As I write, it has more than 500 stores in the UK and Ireland and approximately 200 stores overseas. It also has a strong online presence via its website and mobile applications.

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Shares in Next are currently trading for 8,032p per share as I write. This time last year, shares were trading for 6,018p per share. Next’s share price has increased by 33% in 12 months. The FTSE 100 index as a whole has increased only 14% in the same time period. In the year to date, Next has seen its share price rise 16% too. At current levels I do believe Next could be a good opportunity for my portfolio.

Performance

Next released its most recent trading update on 21 July. It covered an 11 week period until 17 July. I saw that Next compared results to 2019/2020 levels as it noted “comparisons with last year were not meaningful.” I tend to agree. The pandemic affected retail massively therefore comparisons would be skewed.

Next confirmed sales were up 18.6% compared to the same period two years ago. This surpassed guidance of a 3% increase by some margin. With such strong sales performance, Next confirmed it would be repaying business rates relief to the government. More importantly for me, the FTSE 100 incumbent decided it would be increasing guidance for its profit and cash based on sales levels reported in this period. It also confirmed the first of a special dividend is to be paid in September. I like it when a firm pays a dividend and also like the confidence Next has shown in updating its guidance ahead of previous projections.

Next also has a good track record. I understand that past performance does not guarantee future performance. I use it as a gauge when assessing investment viability. Using Next’s method of discounting the year affected by the pandemic, I see progress each year. It increased revenue and profit year-on-year for three years prior to the pandemic affecting it.

Risk and reward

The Next share price is a tad expensive. It currently trades at a price-to-earnings ratio of close to 36. It is also trading at close to all-time highs. This means the share price might decrease sharply if there is any negative news or if updated guidance is not achieved.

My other issue with Next is that competition in the retail sector is intense. Next recently reported strong online sales. There are many other retailers who continue to make a play to dominate the retail sector, especially via online channels. This competition could affect the bottom line.

Ultimately, I would consider adding Next shares to my portfolio. I believe the FTSE 100 incumbent will continue its impressive performance since reopening. It is also backed by a good track record and an expanding online and physical presence. It also pays a dividend which sweetens the pot for me.

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Jabran Khan has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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.

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