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Is It Time To Double Up On NEXT plc, ASOS plc and Burberry Group plc?

Shares in high-street fashion stalwart Next (LSE: NXT) have hammered those of ASOS (LSE: ASC) and Burberry Group (LSE: BRBY) over the last five years.

Next shares have risen by 239% since 2010, compared to gains of 126% for ASOS and just 33% for Burberry.

I believe that all three companies have good long-term potential, but is now the right time to buy?

Next

Today’s third-quarter trading statement from Next demonstrated why this firm is the class of the field. Next reported a 6% rise in sales for the third quarter and a 4.4% increase in year-to-date sales.

Both figures were in-line with previous guidance. The firm also provided updated full-year financial guidance suggesting pre-tax profit will rise by between 3.6% and 8% this year. These figures are not unusual. Next’s post-tax profit has risen by an average of almost 12% per year since 2010, while its operating profit margin has risen from 15% to 21%.

Next has a strict policy of returning surplus cash to shareholders, either through share buybacks, if the shares are cheap enough, or through special dividends. This policy has reduced the total share count by nearly 25% since 2010 and will see shareholders enjoy an expected total dividend of £3.98 per share this year.

Next shares currently trade on a 2015/16 forecast P/E of 18.1, falling to 17.1 in 2016/17. Given the firm’s proven performance, I don’t think this is too expensive.

ASOS

Is ASOS the next Amazon or an overvalued online retailer? Views vary depending on who you ask. The company’s recent final results show that sales rose by 18% to £1.15bn last year, but pre-tax profits were only 1% higher, at £47.5m

Profits didn’t keep pace with sales because ASOS is investing heavily in new warehousing and IT capacity to support future growth. Investment totalled £50m last year and is expected to be £80m in the current year.

This investment in growth makes the shares look expensive, but the firm’s ability to generate cash is very impressive. ASOS generated net cash from operating activities of £93m last year, which was used to fund the firm’s £50m of investment spending and increase net cash to £119m.

Although ASOS does look expensive on 57 times 2015/16 forecast earnings, this could prove to be a reasonable price if growth and profit margins are maintained at current rates.

Burberry

Luxury goods retailer Burberry’s heavy exposure to the China market led to a profit warning recently. Earnings forecasts for the current year have been downgraded from 78.2p per share to 74.5p per share over the last month. This leaves Burberry with a 2015/16 forecast P/E of 17.7.

However, like ASOS and Next, Burberry is good at generating cash. Last year’s dividend was covered twice by free cash flow. Spending on new stores is self-funded and Burberry had net cash of £552m at the end of March.

Burberry is a high-quality business — the only question is how much investors should pay for the shares.

My view is that at today’s price of around 1,300p, Burberry rates as a hold, but isn’t cheap enough to be a compelling buy.

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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.