The Surprising Buy Case for NEXT plc

Today I am looking at why surging activity in overseas markets look set to drive British retailer NEXT’s (LSE: NXT) earnings higher.

Foreign sales shooting higher

NEXT has long been a heavyweight on the UK high street, defying the impact of wider macroeconomic travails in recent years to post consistent sales growth. But what is lesser known is the surging progress the company is making in foreign markets, activity which is likely to provide an increasingly-important earnings driver in coming years.

NEXT directly owns more than 17 stores in six countries, while on a franchise basis its partners operates almost 170 outlets in 32 countries. Although the retailer has been forced to shutter six loss-making stores recently, sales from its non-UK stores continue to rise — these advanced almost 7% during February-July, to £40.4m.

Indeed, NEXT saw the number of overseas cash customers surge to 223,000 during February-July, up more than 75% from the corresponding 2012 period. And the company is ratcheting up increased marketing costs in order to build its brand and drive its popularity with overseas shoppers still higher.

Furthermore, the firm’s increasing exposure to foreign climes has provided a weighty uplift to the firm’s NEXT Directory online and catalogue division — operations abroad contributed 2.9% to the arm’s total sales growth of 8.3% seen during the first half of fiscal 2013.

The retailer noted that “much of this improvement has been driven by our ability to reduce operating costs, which have in turn been passed on to customers by way of price reductions.” Following the update, NEXT raised its full-year online sales forecast in overseas markets to £90m from a previous estimate of £75m.

Bucking the effect of enduring pressure on consumers’ wallets, particularly in Europe, NEXT has consistently punched robust double-digit earnings growth in each of the past four years. And analysts expect growth to keep rolling into the medium term, with an 18% earnings per share expansion in the year ending January 2014 expected to be followed by an additional 9% rise in the following 12-month period.

In my opinion NEXT can look forward to accelerating growth both at home and in its foreign territories. The company’s tentacles stretch from the developed markets of Europe and North America, through to emerging regions across Latin America, the Middle East and Asia. As the company builds it store network and online presence across the globe, I expect earnings growth to follow suit.

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> Royston does not own shares in NEXT.