Why I’d Buy NEXT plc Ahead Of Marks and Spencer Group Plc & N Brown Group plc

When the retail sector is still struggling with post-recession spending reductions, and there are numerous competing clothing outlets in a fashion market that’s ever changing, there’s one UK company that seems to stand out — NEXT (LSE: NXT).

NEXT has just released a trading update for the half-year just ended, and it makes for impressive reading in such tough times. The company reported a 3.5% rise in total sales for the period, with the latest end-of-season sale shifting 4.8% more than last year’s. Of critical importance for the future is a 7.5% gain in NEXT Directory sales — a number of competitors have been struggling with the multi-channel sales approach, but NEXT seems to have mastered it pretty well.

Guidance lifted

Full-year guidance has been raised too, with sales growth now expected in the range of 3.5% to 6% (previous guidance had 1.5% to 5.5%), and pre-tax profit now expected to grow between 2.9% and 8% (against 0.4% to 6.7%). Including dividends, NEXT expects total shareholder returns of between 8.3% and 13.4%, up from a 5.8% to 12.1% range.

Shareholders in Marks & Spencer (LSE: MKS) must be green with envy looking at that kind of performance, while their company is still struggling to get clothing sales growth back on track after years in the doldrums. Sales for the year ended March were up, but the gain was only 0.4% (though the firm claimed an underlying pre-tax profit rise of 6.1%).

But that positive performance was largely driven by food sales, with M&S admitting that General Merchandise performance “did not meet expectations“, though there was some like-for-like growth in the final quarter.

M&S does seem to be back to overall growth, but only just — and there’s really not much sign of strength in clothing sales coming back any time soon. My local M&S and NEXT are on opposite sides of the same street and I often wander in their gents’ clothing departments — one is always busy while the other is usually almost deserted, and I’m sure you can guess which is which.

Multi-channel competition?

But let’s get back to multi-channel shopping, where we might expect online and catalogue specialists like N Brown Group (LSE: BWNG) to rule the market. The company, which owns a number of brands including JD Williams, Jacamo, Simply Be and High and Mighty, can trace its origins back to 1859, but it’s seen earnings declining over the past few years.

There are decent growth forecasts for the next couple of years, and the first quarter of this year saw a 2.5% rise in overall revenue (and importantly, revenue from products grew 4.3% — the firm’s financial services arm dragged it down).

But when it comes to solid, year-on-year performance, with a management team that just seems to know how to do it, I don’t think NEXT can be beaten in this business.

Even though NEXT shares have more than trebled in three years, at a price of 7,668p they’re still on a forward P/E for 2017 of around 16. That’s higher than the FTSE 100 average, but there are dividend yields of more than 5% on the cards and that’s not a bad premium to pay for them.

If you the idea of an investment with great growth potential, our hot new report identifies 1 Top Small-Cap Stock From The Motley Fool that's looking good. It's a smaller company that has already rewarded its shareholders with a stonking performance, yet the Motley Fool's top analysts reckon there could be a further 45% upside to come.

Want to know the name of this potential small-cap winner? Just click here to get your completely free report today.

Alan Oscroft has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.