FTSE 100 retailer Next (LSE:NXT) delivered an upbeat second-quarter trading update this morning (I August) and the share price moved higher in early stock market trading.
I don’t think it’s too late to become interested in the company though, despite the stock making new highs.
The clothing, homewares, and beauty products specialist trades online and from its stores and is a leading business in its sector. It appears to be a well-run operation and, in theory, looks like a decent candidate for a diversified portfolio of UK shares.
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Sales beat estimates
In the firm’s second quarter to the end of July, sales rose by 3.2% year on year. But that outcome exceeded the directors’ expectations, and that’s always good to hear!
Next had a good summer last year, so it was a tough period to beat. In fact, the directors reckon they expected sales to decline a little bit this time. So the beat is good news and speaks well of the underlying strength in the UK economy and consumer finances.
For the whole of the first half since the end of January, total sales jumped up by 8% year on year.
On top of these robust sales figures, the management team has raised profit guidance for the full year by just over 2%. That means the company expects this year’s profits to be almost 7% higher than 2023’s.
The improvement is being driven by rising overall sales and cost savings in the firm’s logistics operation.
Good news like this is becoming more frequent from companies as the year progresses. To me, it feels like the environment for investing has shifted. Shares can go up as well as down. But I’d almost forgotten that because the past few years have been so difficult.
However, buoyant stocks and bull markets can lead to another set of considerations. One of which is the potential for investor exuberance to drive valuations too high.
Cyclical volatility
That’s one of the risks with Next now. On top of that, there’s no denying the retail sector is cyclical. Things are looking upbeat right now, but it’s almost inevitable there will be more economic downturns ahead — we just don’t know when.
Therefore, I reckon it’s important to keep a close eye on Next if owning some of the shares.
Nevertheless, the general economic outlook and the company’s own optimism both encourage me. If further operational progress continues, the share price may climb further in the years ahead.
Meanwhile, with the price near 9,814p, the stock is changing hands at just under 15 times next year’s predicted earnings.
That valuation compares to a forward-looking rating of about 14 for the Footsie as a whole. So I’d say Next is priced about right and is up with events.
There’s no low-priced bargain here. But that won’t stop me from considering the stock for purchase on market dips and down-days.
We’ll find out more from the company with the interim results due on 19 September — I’ll be watching closely.
