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2 Reasons To Steer Clear Of NEXT plc

In recent weeks I have looked at why I believe NEXT (LSE: NXT) is poised to hit the high notes (the original article can be viewed here).

But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, seriously damage NEXT’s investment appeal.

Discounting intensifies on the High Street

Undoubtedly, NEXT has been hugely successful in keeping sales ticking higher in recent years, staving off a backdrop of rising nextinflation and stagnating salaries prompted by the 2008/2009 banking crisis.

However, NEXT is facing the prospect of having to step up its discounting operations as competition on the High Street intensifies. As latest data from the British Retail Consortium Shop Price Index showed, shop prices dropped 1.7% during March from the corresponding month in 2013, the biggest decline since the Index began in late 2006.

And more worryingly for NEXT, non-food deflation to the tune of 3.2% was also the biggest recorded decline, with clothing prices falling for seven successive months. With all of the UK’s major fashion outlets engaged in an escalating price war, NEXT may see margins come under serious pressure as it bids to keep shoppers away from its rivals.

Continental retail sector on the slide

On top of troubling conditions at home, NEXT should also be concerned by signs that the retail environment in Europe is beginning to worsen.

The retailer’s international operations — which cover vast swathes of the continent from Germany to France, Estonia to Luxembourg — saw online sales almost double to £101m in the year concluding January 2014, while its retail and franchise stores saw revenues tick 10% higher to £85.6m.

However, latest eurozone retail purchasing managers’ index (PMI) numbers indicate that wider sector conditions remain troublesome. The latest survey for March came in at 49.2, the second consecutive monthly sub-50 reading which indicates contraction rather than subtraction and the sixth negative reading in seven months.

NEXT has said that it plans to reduce prices in only five countries next year versus 28 in 2014, but the business may be forced to take drastic action should sales pressure intensify in coming months.

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Royston does not own shares in NEXT.