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Why I think 2019 conditions could be perfect for the Next share price

The fashion retail sector is facing upheaval with the online shift to the likes of Boohoo Group and ASOS. But when a sector is down in the dumps, I say that’s the time to be buying into the market leaders.

It’s the weaker operators who suffer the most. When the market swings back upwards, the stronger ones are in the best position to capture recovering market share.

Single-label fashion brands are ones to steer clear of, in my view, because they’re so subject to rapidly changing popular desires.

That’s why I’d never touch a company like Superdry, whose shares were doing fine until whichever sub-culture it caters for decided to move on. Don’t ask me who they are — I’m 60 and haven’t a clue. But I know a fad brand when I see one, and I can certainly see the 75% share price collapse that happened over the course of 2018.

Best in class?

But I see Next (LSE: NXT) as very different. As far as I can make out, people who shop at its stores want the stuff, not the brand. In fact, when it comes to brand-conscious buyers, I have more than once heard the Next brand being denigrated as “something I’d never be seen wearing.

The people who shop at Next are very much long-term customers, the kind who want to look good at a reasonable price and who eschew the snobbishness of some of the the up-to-the-minute brand wearers.

Solid performance

That approach to business is simply working. We saw a modest 6% decline in EPS in the year to January 2018, and the current year is expected to see a 4% recovery, with analysts suggesting 3% per year for the next two years.

In normal times, that might not look too great. But this is during one of the toughest spells for the sector that I can remember, and I see it as a testament to Next’s quality and resilience.

On a P/E multiple of 11 and falling, and with very well covered dividends yielding around 3.5%, I see Next as a buy.

Single brand?

I’ve said I’d avoid single-brand sellers, but I do see a possible exception in Burberry (LSE: BRBY). Fashion brands at the top end of the market command a very strong international following.

Importantly, that following is largely among the well-heeled middle-class-to-celeb bracket, and it’s immune to whatever the latest hoodie-wearing rap-followers want on their backs.

Burberry has seriously established itself as a must-have international brand, especially in countries with growing economies like China. But, and it’s a fairly big but, I don’t much like the Burberry share price valuation right now.

Big valuation

With forecasts for decent earnings growth for the next two years after a solid five-year spell, we’re looking at P/E multiples of over 20, with expected dividend yields of only around 2.5%. And that’s after the share price has lost 25% of its value since a peak in August last year.

I’m seeing a flight to quality here, as a response to economic hardship (like Brexit and all that). But though I like Burberry as a company, I don’t see the returns that I’d need to justify the current stock valuation.

Next is my choice in this industry right now.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group, Burberry, and Superdry. 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.