Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at NEXT (LSE: NXT).
What is the sustainable competitive advantage?
Unfortunately, NEXT lacks a strong, sustainable competitive advantage over its peers. For example, while peer Marks & Spencer is credited with the title of the second most valuable retail brand in the UK, NEXT lacks any such acclaim.
Indeed, the lack of a strong competitive advantage showed through within NEXT’s first-half results, as the company reported that high-street sales for the period had fallen around 1%.
That said, during the same period, NEXT reported strong sales growth of 8.3% at its NEXT Directory business. However, peer Dunelm Group also reported a rise in sales of 12.2% for the same period, so it likely that NEXT is benefiting from a trend affecting the whole industry.
Still, despite the lack of a competitive advantage over its peers, NEXT is an extremely cash generative company.
In particular, the company reported operating profit margins of 20% for its 2013 financial year. In comparison, peer Marks & Spencer reported operating profit margins of only 7%.
Moreover, NEXT has been able to keep its operating profit margin between 18% and 20% for the last three years. This indicates to me that the company is able to set the prices on its goods and maintain a high level of cash generation, a very good trait in a buy-and-forget share.
Company’s long-term outlook?
Without a strong competitive advantage it is hard to comment on NEXT’s long-term outlook.
Furthermore, NEXT also lacks a time-tested history as the company has only been around since the 80s, which makes the firm look young in comparison to the centenarian Marks & Spencer.
Having said that, the company’s online and catalogue offerings are popular with customers and this sales channel allows NEXT to keep costs down and profits up.
Foolish summary
Unless they are leaders in their field, retailers generally do not make very good shares to buy and forget, and NEXT is no exception.
The lack of strong competitive advantage combined with the company’s dependence on the UK’s highly competitive high street do not lead me to believe that the company will continue to outperform its peers.
So overall, despite the company’s cash generative nature, I rate NEXT as a poor share to buy and forget.
