The last few years have been exceptionally challenging for investors in Next (LSE: NXT). The UK fashion retailer has experienced difficult trading conditions which have put its top and bottom lines under pressure. Weak consumer confidence has continued and this has caused its share price to decline from around 8,000p in 2015 to its current value of 6,100p.
Looking ahead, further uncertainty is expected for the UK economy. However, could Next be worth buying alongside a retail sector peer?
Uncertain outlook
With the Brexit process not being as smooth as many investors had hoped for, the prospects for the retail sector remain challenging. This is affecting a wide range of companies, with brick & mortar retailers arguably hit hardest. They’re also facing the shift of consumers to online buying. And while Next has an e-commerce offering, which is delivering impressive sales growth, its stores continue to see a decline at a time when business rate changes are beginning to bite.
Despite this, the business’s performance in the current year has been relatively impressive. Its first quarter sales growth beat many investors’ expectations, and this has helped its share price to begin a recovery. Clearly, it’s still around 1900p off from its all-time high. But with positive earnings growth forecast over the next two years, it seems to be moving in the right direction.
While the outlook for retail shares could deteriorate, Next has a solid business model that’s more defensive than many of its peers. Therefore, with the firm continuing to post positive growth, even in a difficult period for the industry, its performance in the long run could be impressive. This may mean that it surges past 8,000p over the coming years.
Low valuation
Also offering the potential to generate improving share price performance is home furnishings retailer Dunelm (LSE: DNLM). The company is currently experiencing a period of change. It has a refreshed management team and an updated strategy as its seeks to adapt to rapidly-changing market conditions.
In response to greater competition, Dunelm is seeking to become more efficient and offer an improved level of customer service. This seems to be a sensible strategy given the outlook for consumers is relatively downbeat. It may help the company to compete more effectively with rivals, as well as help it to differentiate itself on factors other than price.
With Dunelm forecast to post a rise in its bottom line of 7% in the next financial year, it seems to be performing well compared to some of its peers. And since it trades on a price-to-earnings growth (PEG) ratio of 1.9, it could offer a margin of safety. As such, now could be the right time to buy it. The stock may experience a period of volatility, where paper losses could be experienced. But in the long run it seems to have a strong position and the right strategy to generate growth.
