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Can accelerating store expansion be good for the Next share price?

It is a trend affecting every retailer: customers are shopping online more and going to actual bricks and mortar stores less. We all know this, so why then is fashion retailer Next (LSE: NXT) accelerating its rate of physical store space expansion faster than expected?

Well the simple answer is that it will make money from the expansion. The company has managed to secure large rent reductions on stores that it was previously going to close. CEO Simon Wolfson stated the obvious point that “we have to make a certain level of profit to keep a store open”, and with reduced rents, these shops now remain profitable and ripe for extra space to be added.

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Expanding space on and offline

Next currently operates about 507 stores – a number that has changed little in the last 10 years – but has been adding square footage steadily. This year the company is expected to add 100,000 square feet compared to earlier expectations of just 50,000 square feet, as it continues to move to larger, out-of-town locations compared to smaller stores in towns.

Next has an advantage with this move in that it allows it to offer more concessions to other companies for using its space, notably Costa Coffee and Paperchase. While both of these stores perhaps seem fairly good fits for a clothes retailer, Next also said that in 2020 it expects to add 37 travel agents and four mobile phone operators as well. Perhaps it envisions people booking their holidays then buying the shorts and T-shirts to match!

Next has managed to keep a strong online presence however, which could be key to its future – last year the company’s revenues from online shopping surpassed those of its physical stores for the first time, and topped the $1bn mark in its H1 results this year, also for the first time.

Fair-weather shopping

Unfortunately for Next, its latest quarterly results were somewhat lacklustre, though again the shift to online was evident – while store sales decreased 6.7% for the latest quarter, a boost in online sales meant that there was an overall 1.6% full-price product sales rise.

The company reiterated its full-year guidance for both sales and profit (an increase of 3.6% and a £725m target respectively), and attributed this latest decline in stores sales to unseasonably good weather. According to Next, warm weather in September reduced sales of its new-season line, though October saw the numbers bounce back as temperatures fell.

The shares

The market seemingly took these latest results with a mildly negative tone – the shares down about 3% after the news. That said, the stock had already reached its highest level since 2016 earlier this month, which might suggest it is on the expansive side for any investors looking to pick up the stock.

Its forward-looking P/E ratio comes in at about 14 – pretty middle of the road considering its current high price, though not exactly a bargain. Its dividend is at the lower end of the spectrum – an annual yield of 2.5% at today’s prices, and perhaps more worryingly, this has been declining steadily for the past five years.

I think Next could be a solid buy as a blue-chip retail play, but at these prices I just think its too expensive to get my interest.

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Karl 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.

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