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Why Next plc is set to be a millionaire-maker stock

Next (LSE: NXT) reported a trading update for the third quarter on Wednesday which showed that its total sales increased by 1.3%. At first glance, this may appear to be relatively positive given the difficult first half of the year which it had endured. Indeed, consumer confidence in the UK is at a low ebb due to higher inflation, which makes the company’s performance appear to be even stronger.

However, the firm’s share price declined by over 7% following the update. Investor sentiment seems to have come under pressure because of a fall in Retail sales of 7.7% in the third quarter. But with online sales growing by 13.2%, the company’s outlook may still be very positive.

Difficult outlook

While a 7% share price fall is disappointing, the reality is that Next seems to be performing well in a difficult period for UK retailers. It is expected to report a decline in earnings of between 3.5% and 10% for the full year, with it being relatively downbeat regarding its fourth quarter performance. Despite improvements in its product ranges, it anticipates a decline in sales of 0.3% in the final quarter of the year.

However, such figures may prove to be relatively strong in what could prove to be a highly challenging UK retail environment. Inflation is now at 3% and above and beyond the pace of wage growth. This is likely to lead to consumers trading down to cheaper products, or postponing purchases of items which are non-necessities. In such an environment, the company’s current level of performance may be relatively sound.

Investment potential

Of course, Next’s share price may be volatile in the short run due to the difficulties it faces and their impact on market sentiment. However, in the long run it has the potential to generate high returns for its investors. For example, it trades on a price-to-earnings (P/E) ratio of just 11.4. This suggests that it has a wide margin of safety which could lead to high share price returns in the long run. And with a dividend yield of 7.2%, including special dividends, it could offer a potent mix of income and capital growth.

Retail prospects

Clearly, Next is not the only retailer which could help investors to generate a seven-figure portfolio. Sector peer Supergroup (LSE: SGP) is expected to post a rise in its bottom line of 13% in the current year, followed by further growth of 17% next year.

Despite this, the company trades on a price-to-earnings growth (PEG) ratio of just 1. This suggests that the stock market has not yet priced-in its growth prospects over the medium term, which may lead to further share price growth following its 15% gain in the last six months.

With a strong brand and loyal customer base, Supergroup appears to have significant investment potential. Its international focus may help it to overcome potential difficulties in the UK economy, with its risk/reward ratio seemingly highly favourable at the present time.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Supergroup. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.