FTSE 100 fashion, home and beauty products retailer Next (LSE: NXT) is down 8% from its 3 June traded high of £128.85. Much of this followed the 18 September release of its H1 2025 results. The numbers themselves were solid, but the firm’s outlook based on the UK economy was cautious.
The thing I always remember in situations like this is that I am a long-term stock investor. A key reason for this long-term investment horizon is that it allows stocks to recover from any short-term shocks. These could concern either the firm itself or the broader market or global economy.
So, Next expecting UK sales growth to slow due to April’s employer tax increases dampening consumer spending is largely irrelevant to me.
I am only concerned with how well the underlying business is positioned for the long term. This feeds through into its earnings prospects, which drive any firm’s share price over time. And this is pivotal in identifying a gap between its share price and fair value, and how much it is.
How does the underlying business look?
The H1 2025 figures saw sales up 10.3% year on year to £3.249bn. Profit before tax rose 13.8% to £515m, while post-tax earnings per share jumped 16.8% to 330.2p.
Guidance for price sales growth in H2 is 4.5% year on year, with a full-year projected increase of 7.5%. This is unchanged from the guidance given in the firm’s 31 July trading statement. Also unchanged is this full year’s pre-tax profit guidance of £1.105bn, which would mark a 9.3% rise against last year’s.
The potential weakening of the UK economy about which Next warned – perfectly sensibly in my view – would mainly apply to next year’s sales numbers. And this is a risk to the business.
However, the underlying business looks in good shape to me, given its growth-oriented structure. As seen in previous results, Next has leveraged its ability to tap into overseas third-party distribution networks. This has enabled its international websites to increase sales by 350% over the last 10 years. These should not be directly affected by any UK economy-specific factors.
More affected may be sales coming from other firms’ products on its Next Platform in the UK. This resulted in 42% of its online sales recorded in its previous annual results not being Next-branded items.
But is there a notable price-valuation gap?
A share’s price and its value are different. Price is whatever the market will pay, whereas value reflects underlying business fundamentals.
In my experience as a private investor over three decades, asset prices tend to converge to their fair value over time.
The best way I have found of identifying and quantifying the price-value gap is through the discounted cash flow model.
This pinpoints the price at which any stock should trade, based on business fundamentals.
In Next’s case, it highlights that the shares are 8% undervalued at their current £118.40. Therefore, their fair value is £128.70.
An 8% undervaluation is of no interest to me, as it could be accrued and then wiped out through regular market volatility. I look for at least a 30% undervaluation before I consider a stock buy.
However, it may be worth the consideration of other investors with different selection parameters.
