Next (LSE: NXT) shares are down 7% from their 3 June 12-month traded high of £130.85. This could provide a rare opportunity to pick up the stock on a dip following a 35% rise from January.
It all depends on how much value remains in the stock, as this is not the same thing as price. Price is whatever the market will pay for a stock at any given time, while value reflects fundamental business worth.
So, I looked deeper into the business and ran the key numbers to ascertain the state of play here.
How does the core business look?
The FTSE 100 clothing, footwear and home products retailer’s recent results have been strong.
The most recent – Q2 numbers released on 31 July – saw total sales increase by 10.5% year on year. Its Online International business was the standout performer – up 26.4%. Next attributed this to its digital marketing proving more effective than anticipated.
UK Online sales rose 9.5%, while retail stores saw a 5.6% increase. The firm highlighted that these numbers benefited from warm weather and disruption at a major competitor. Industry data points to Marks and Spencer (which suffered a cyberattack) as being the rival to which Next referred.
A risk to its future earnings is any further rise in the UK and Europe’s cost-of-living crisis. This could cause customers to reduce their discretionary spending.
However, as a result of the Q2 figures, the firm increased its fiscal year 2025/26 profit outlook for the third time in five months. It now expects profit before tax to rise 9.3% year on year to £1.105bn, from the previous 6.8% forecast increase.
This is set to come from a 7.5% jump in sales to £5.44bn, compared to the 6% rise previously projected.
How does the share valuation look?
The first part of my price assessment is to compare Next’s key valuations with those of its peers.
Starting with the price-to-sales ratio, Next is top of its competitor group – at 2.3 compared to their 0.7 average. These firms are Marks and Spencer at 0.5, Frasers Group at 0.6, Abercrombie & Fitch at 0.9, and H&M at 1. So, it is very overvalued on this measure.
The same is true on the price-to-book ratio, with Next top of the group again – at 8.7 against its peers’ 3.5 average.
And it is also overvalued at its 19.3 price-to-earnings ratio compared to its competitors’ 16.6 average.
The second part of my price assessment is a discounted cash flow (DCF) valuation. This identifies where any firm’s stock price should trade, based on cash flow forecasts for the underlying business.
The DCF for Next shows the shares are trading around its fair value now — at £121.63. So, they are not a bargain at all.
My investment view
I would never buy a stock that is at or above fair value. I want it as much below that as I can get.
The reason is that in my experience fundamentally solid assets tend to converge to their fair value over time.
And I want the difference between the price at which I buy a stock and its fair value to be as great as possible.
Consequently, I do not think now is the time for other investors to consider the stock either.
