One fast-growing competitor I’d buy ahead of Next plc

Despite a 7.5% yield and P/E ratio of 11, I’m not tempted to invest in Next plc (LON: NXT).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Fashion retailing has always been an incredibly tough business and recent shifts in consumer habits have made it even more challenging for retailers. Yet, while the likes of Next (LSE: NXT) blame their relatively poor trading on this gloomy sector outlook, some competitors such as Superdry parent SuperGroup (LSE: SGP) continue to grow at a double-digit pace without batting an eyelid.

Growth galore 

In the half year to October, SuperGroup revenue rose 20.4% year-on-year to £402m driven by increased same-store sales, the opening of new outlets and £12m in benefits from the weak pound. Now, gross margins did fall by 170 basis points during the period due to input cost inflation and very good performance from franchised wholesale stores, which produce lower margins for the parent group.

While they may come with lower margins, these franchised stores are still a smart investment. They allow management to focus on developing the brand and increase the speed at which the group can open stores in growth markets such as the US and China. Evidently, management’s focus on brand development is working as like-for-like sales rose a very solid 6.3% across the portfolio during the period.

Now, this rate of growth is slower than the 15.4% posted in the period before and future performance should be followed closely by shareholders, but it’s still a good sign of positive momentum for the brand. Management also disclosed that it expects to hit consensus analyst estimates for full-year pre-tax profits of around £98m, which would be 16% ahead of the year before.  

Maybe next year?

In opposition to SuperGroup’s cheery update, Next’s management team sent the group’s stock price downwards after its Q3 update earlier this month due to a pessimistic outlook for the critically important holiday shopping season. Full-price sales in Q3 were decent and rose 1.3% y/y as Directory sales grew by double-digits and compensated for a large decline in Retail sales. Yet the company’s share price still retreated by some 7% on the day results were announced.

That was because year-to-date sales were down 0.3% and management said it expects Q4 sales to reduce by a similar amount with full-year earnings per share down anywhere from 10% to 3.5%. This fits in with consensus analyst estimates of an 8% drop in EPS that would put Next on a valuation of 11 times forward earnings.

This may appear to be an attractive price for the company given that analysts expect it to pay out some 335.81p in dividends this year that would yield roughly 7.5% at today’s share price. But with sales in retreat and few signs of management figuring out how to staunch the bleeding in the company’s huge estate of retail stores, I’d be hard pressed to invest in Next at this point in time.

Although the clothing sector scares me due to its cyclicality and reliance on ever-changing consumer habits, if I were to invest in the industry, SuperGroup would be near the top of my list due to its rollout potential, despite its shares trading at an elevated 19.5 times forward earnings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any of the 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »