Popular UK retailer NEXT (LSE:NXT) has seen its share price shine in 2023, rising 18% amid a gloomy market. But with apparel inflation beginning to taper off, some will be keen to sell before it’s too late. Having said that, there are still reasons to still hold this (what I consider to be a) value stock.
A thread to unravel?
NEXT has exceeded expectations this year through consistent sales growth and upgraded guidance. By underpromising and overdelivering, it has kept investors cheerful. Strong full-price sales show pricing power remains despite high inflation.
Nonetheless, this momentum could be peaking as the board is yet to give any guidance for FY24. That’s because extra disposable income tailwinds may begin fading in H2 as wage growth slows. This could end up affecting the value of NEXT stock.
In fact, the cracks may already be starting to appear as July’s BRC retail sales data badly missed forecasts. This could suggest hard times ahead for high-street shops.
Falling inflation also signals shrinking margins if NEXT can’t maintain its prices. This is worrying because promotions are reportedly up as retailers fight for foot traffic. And although easing cost pressures from falling inflation do help on the one hand, lower prices can also dent profits and hurt the stock’s prospects.
Stock up on good value?
Even so, it’s still worth noting that NEXT has numerous strong points that would suggest holding on to this value stock. Management has so far navigated difficult conditions adeptly so far, and its focus on full-price sales has largely allowed the company to avoid having to issue too many margin-eroding discounts.
However, this is largely due to the firm’s lower surplus inventory, which has plagued many of its peers. This is also a positive as it shows the hot demand for NEXT’s offerings. A case in point is that clearance rates (with controlled markdowns rather than panic-driven price cuts) in Q2 exceeded forecasts, boosting profits.
Strong online sales have also provided some insulation against potential high street struggles. The group has invested heavily in digital and integrated online operations.
But perhaps more lucratively for investors in this stock, a dividend yield of 3% offers income during volatility too. And at 13 times forward earnings, NEXT stock remains reasonably valued for a quality retailer.
What’s next?
The apparel market outlook may seem concerning, but risks appear balanced for long-term NEXT shareholders. Inflation should moderate over time, and this should eventually benefit margins again.
And even though consumer spending may decline as a result of higher interest rates, the business can adapt its inventory and costs given its recent history of successfully doing so. After all, its healthy balance sheet provides stability in downturns.
But it’s worth noting that the stock is currently trading close to its fair value given its average price target of £70.50. This only points towards a mere 1% price rise potential from its current levels. That said, its EV/revenue sits at 9.8, which could indicate good value.
Nevertheless, market volatility brings chances to buy quality at a discount — and any drops in the NEXT share price could present a buying opportunity in the future.
While there’s no doubt it faces uncertainty like all retailers, it’s also more robust than most of its competitors. For long-term investors, hurrying to sell this value stock could be a mistake. As such, it may be worth holding onto the shares for now and buying more at cheaper prices.
