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The Pros And Cons Of Investing In NEXT plc

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at NEXT (LSE: NXT) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

An expensive retail pick?

On first viewing, NEXT appears to be trading at particularly-elevated price levels, prompting fears of a potential price correction. The stock — which has now breached 6,000 for the first time — has gained 58% in the past 12 months alone, and 11% since last week’s latest trading statement.

The retailer is now changing hands on P/E ratings of 16.5 and 14.9 for the years ending January 2015 and 2016 respectively, representing a tidy premium to forward multiples of 13.6 and 8.9 for fellow retail stalwarts Marks and Spencer Group and Debenhams.

Profits projections upgraded again

But while the firm’s clothing rivals continue to toil, as transactions on the high street decline and pressure on customers wallets persists, NEXT has successfully hurdled these problems and continues to post solid revenue growth in its stores as well as online.

Indeed, management advised in last week’s update that “sales in the fourth quarter have been significantly ahead of our expectations,” with sales in the year to date beating the upper end of earlier projections by a meaty 1.25%. The results prompted the retailer to once again lift its profit forecasts for the 12 months to January 2014 to £700m from £684m previously.

Retail backdrop remains weak

However, investors should be aware that conditions in the UK shopping space remain extremely difficult, even as signs of a wider economic recovery continue to pick up. This is because the rate of inflation continues to outstrip rises in consumers’ pay packets, and sustained pressure here could still weigh on NEXT’s growth prospects this year, particularly should said recovery take a dip.

As J Sainsbury commercial director Mike Coupe told The Guardian in December: “You don’t need a crystal ball to see that many households will continue to struggle in 2014. Household budgets will remain under pressure and until we see an uptick in employment, the much-vaunted economic recovery won’t boost consumer confidence overall.”

Internet customer connections rolling

But NEXT’s stunning progress in the white-hot online retail marketplace, both in the UK and abroad, should help the company maintain positive earnings momentum. Sales at its NEXT Directory internet and catalogue arm surged 21% between November 1 and Christmas Eve alone, while in the year to date sales here advanced 12%. Strength here pushed group sales 11.9% and 5% higher over the same periods.

In my opinion NEXT is a standout pick for investors seeking an exceptional British retail stock. Although the company is an expensive pick compared to its rivals based on current earnings forecasts, in my opinion the company’s proven ability to generate growth despite broader economic pressures — not to mention its strong brand and weighty presence in online markets — makes it an exceptional share selection.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in Debenhams.