Why NEXT plc’s Investment Plans Should Thrust Earnings Skywards

Today I am looking at why I believe NEXT‘s (LSE: NXT) ambitious expansion plans should significantly enhance long-term returns.

Significant store and cyberspace expansion planned

NEXT is taking a multi-pronged approach to generating earnings growth, and not surprisingly the business is planning to plough vast sums into its Online operations. This area continues to enjoy stunning growth, facilitated by surging activity via smartphones and tablet computers. Indeed, sales via the company’s NEXT Directory internet and catalogue division surged 12.4% during 2013.

And the retailer is looking to build on this “through improving UK delivery services, developing new overseas markets and
expanding our online product offer
.” In particular the company has steadily expanded into lucrative foreign climes and now operates across 70 countries, a trend that helped to push online sales abroad 86% higher during 2013.

But NEXT is also looking to advance its footprint on the UK high street, and plans to add 360,000 square feet of net new floorspace this year alone. The company saw total space breach the seven million square feet mark for the first time in 2013, up 4% from the previous year and which was achieved by store extensions and relocations from underperforming sites.

The retailer plans to dedicate almost a third of 2014’s quota to creating three large Home out-of-town stores. And NEXT is looking to capitalise on surging demand amongst its homewares products, the business having already doubled its floorspace amongst this sub-sector over the past six years.

Behind the scenes, NEXT is also investing heavily to cater for surging sales activity, from upgrading a number of its back office operations through to expanding its warehousing capabilities in its Home division. The company is planning to shell out £24m alone in the current year on such initiatives.

Earnings set to stomp skywards

NEXT has a formidable track record of spectacular earnings expansion stretching back many years, and the firm boats a compound annual growth rate of 18.1% since 2009 alone. And City analysts expect growth to keep on rolling — albeit at a slower pace — with growth of 9% and 8% pencilled in for the years ending January 2015 and 2016 respectively.

These forecasts create P/E multiples of 16.7 for 2015 and 15.5 for 2016, far below a forward average of 21.8 for the complete general retailers sector. Given NEXT’s terrific record of stunning earnings expansion, and investment strategy in white-hot growth areas — particularly that of online shopping — I believe that the retailer is a formidable stock selection.

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Royston does not own shares in NEXT.