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I was right about the Next share price! Here’s what I’d do now

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Image: Next

In the middle of March last year, as the first wave of the coronavirus pandemic swept the world, I highlighted the Next (LSE: NXT) share price as undervalued.

At the time, I explained that Next’s heavy investments in its online offering should help the business cope when brick-and-mortar stores are closed. I also highlighted that the group’s strong balance sheet should help it “weather the storm.” 

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The company’s performance over the past 12 months has panned out just as I predicted. Even though the group was forced to close its stores, its online business has boomed. As a result, the Next share price has taken off. Since I covered the firm on 13 March last year, the stock is up 86%. 

I think the company is only just getting started. 

Next share price outlook 

Next has outperformed all expectations over the past 12 months. And it continues to do so.

According to a trading statement for 13 weeks to 1 May, the company’s sales in this period were down just 1.5%, compared to the same period in 2019. This is incredibly impressive, considering the UK was under one of the world’s strictest lockdowns for the majority of this period. Previously, management was expecting sales to fall 10% over the 13 weeks.

As a result of this better-than-expected performance, management now expects full-year profit before tax to be £20m higher than the previous projection of £720m. However, for the entire year, management has not raised expectations. Nevertheless, it is still expecting a 3% increase overall against 2019 figures.

These numbers mirror how the company has performed over the past 12 months. It has consistently set and beaten expectations. But, in my opinion, it’s improbable this trend will continue.

The economy has performed better than many analysts expected throughout the coronavirus crisis, and the Next share price has benefitted. Still, from now on, it seems likely the recovery will slow. This suggests Next’s sales growth will fall back. 

Outlook and risk 

Over the next five years, I think the company will build on its position in the UK retail market. This is because it has been (and still is) investing heavily to build out its online retail capacity for both its own brands and other retailers during the past few years. I think these investments will underpin growth for years to come. 

That said, the retail industry can be viciously competitive. Next won’t be immune to the trends in the industry, and it needs to keep investing to stay ahead. This is always going to be the biggest challenge facing the company. Other risks include the potential for higher costs and excessive spending on growth without suitable returns. 

Despite these risks and challenges, I think the future is bright for the Next share price. I reckon it has only reinforced its position in the retail market over the past 12 months. The company should be able to capitalise on this as we advance. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Next. 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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