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The Next share price is up 10% today! I’d buy it in a shot

These are tough times for high street retailers, and mainstream fashion chain Next (LSE: NXT) knows it more than most. Today, it has shown once again it has the capacity to survive, and the Next share price is up almost 10% as a result.

The Next step

The retailer has been through a tough time and trades around 15% lower than it did five years ago, during a period when the FTSE 100 as a whole rose 15%. You know the reason why – stagnant wages, squeezed consumers, Brexit uncertainty, the falling pound pushing up the cost of imported materials and, most of all, the switch to online shopping.

Undaunted, the £8.15bn group has just posted a 4% rise in full-price sales for the second quarter, which covers the 26 weeks to 27 July. Total sales, including markdown sales, were up 3.8%.

The group has upgraded its full-year guidance, lifting full-price sales guidance from 1.7% to 3.6%, while full-year profits guidance has increased by £10m to £725m. That final figure works out at a rise of just 0.3%, but investors aren’t quibbling, especially with earnings per share (EPS) guidance increasing from 3.4% to 5.2% over the last year.

Bargain buy

The future looks a lot brighter as investors pile back in. So hooray for Roland Head who, back in March, called the Next share price the bargain of the year, praising the way it has managed the shift to online sales, built its customer credit operation, and carefully managed its estate of stores to maximise profitability. It adds up to a masterclass in how bricks & mortar stores can survive the internet with a balanced omnichannel mix.

Next’s background as a catalogue company has helped its transition, thanks to its directories operation. So don’t assume this model can applied to every embattled high street retailer – Mike Ashley has given the market a masterclass in how not to do it.

Warm and dry

I’m particularly happy by today’s rise in full-price sales, especially given the appetite customers are showing for discounts and bargain prices generally. Full-price sales grew 3% during May and June and 6.8% in July, but management has used the lower figure as a guide to underlying growth because July’s over-performance was due to lower markdowns in its end-of-season sale.  

Next may still be something of a bargain. Its forecast valuation is now 12.7 times earnings, which compares to 18.6 times across the FTSE 100.

Capital return

Its forecast yield of 3% is below the index average 4.3%, but with cover at 2.7 there’s scope for progression. After holding the dividend at 150p for three years, management is showing greater appetite to reward shareholders and it’s been edging up.

Today, Next maintained its guidance to return £300m of surplus cash to shareholders through share buybacks, purchasing £280m to date. With a return on capital employed of 42.2%, the group clearly knows what it’s doing. Retail remains a risky sector and Brexit looks set to cast even longer shadows, but today’s results show that Next deserves its place in a well-balanced Stocks and Shares ISA portfolio.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.