I have written about Next (LSE: NXT) shares before. I reckon the coronavirus pandemic has sifted the strong retailers from the weak. In Next’s case, it has emerged as a winner.
I continue to like the FTSE 100 stock and would buy it in my portfolio. A recent announcement from the company has caught my eye and I reckon it’s worth analysing. So here’s my take on it.
Recent developments
On Wednesday, Next announced that it has agreed terms to acquire a 25% stake in Reiss. I should stress that this deal has not been finalised and is subject to regulatory clearance. Next will make an equity investment of £33m and a debt investment of £10m, financed from its own cash resources.
What I like about the agreement is that Next has the option to purchase an additional 26% interest until July 2022. This means its potential holding could be 51%.
Why do I think it’s good for Next shares?
Next has weathered the coronavirus crisis through its online sales. E-commerce currently accounts for over 50% of its revenue and I expect this to continue.
Reiss offers a luxury apparel brand that operates at the upper end of the high street. It sells clothing and accessories for men and women. Why I think this is great for Next shares is that the company has diversified its offering while allowing Reiss to retain its own management and creative independence.
The terms of the deal mean that Reiss’s website and online operations will use Next’s Total Platform. This includes warehousing and distributions services. Reiss is a much smaller retailer than Next and this partnership, in my opinion, should work well. It expects Reiss will go live on the platform in February 2022.
What I also like is that this could be a potential way for the retailer to expand its offering. If its partnership with Reiss is a success, I reckon other smaller brands could jump on the bandwagon of using Next’s infrastructure.
I think it’s a great way to lure in small retailers to use the company’s resources in exchange for investment stakes. This way Next can grow it’s retail empire in the UK and overseas.
Reiss: an overview
As I mentioned, Reiss pitches itself at the higher end of the high street in terms of clothing and accessories. According to Next’s statement, Reiss generated £227m in sales in the year to 1 February 2020.
I like that the brand is growing as it achieved an increase of 22% on the prior year. I think its a great addition to Next’s business. This comes after it was involved in a bid to take over Topshop, part of Sir Philip Green’s collapsed Arcadia empire, but pulled out earlier this year.
The risks
While Next has a big online business versus its competitors, it’s not immune to the pandemic. Potential high unemployment and reduced consumer spending could impact revenue.
The longer government restrictions are in place means the longer the company is paying rent on closed retail stores. Although the share price has slipped, it’s still close to all-time highs.
But for now, I think the crisis could throw up some great takeover opportunities. This could be a great way for the company to expand its retail empire. Hence I’d buy Next shares in my portfolio.
