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The Next share price is rising. Should I buy?

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A Next shop front inside a shopping centre
Image: Next

The Next (LSE: NXT) share price just keeps on rising. Since the beginning of the year, the stock is up 20%. And over the last 12 months, it has increased by approximately 70%.

I’ve covered the FTSE 100 company several times and have been bullish for some time. Even though the Next share price is trading close to all-time highs, I’d still buy the stock in my portfolio today.

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I reckon the retailer has a strong brand and a diversified product offering. It has a growing online presence, which has served it well during the coronavirus crisis. Next released a trading statement yesterday, which I think is worth exploring further.

Headlines

First quarter revenue for 2021 was down 1.5% on two years ago. I think it’s worth adding here that Next has specifically used sale comparisons relative to 2019/2020 rather than the last financial year (2020/2021). This means that it’s comparing the current performance with pre-coronavirus numbers.

I’m impressed by this. Although sales were down slightly, it highlights to me that trading in the first three months of the year is predominately on par with a period before Covid-19.

In fact, the retailer assumed that Q1 would be down -10%”. So it has surpassed its own guidance and Next even mentions in the trading statement that it has “beaten this Q1 forecast by £75m”.

Sweet profits

But I think what is fantastic news is how the company has upped its profit guidance despite the current climate. This has boosted the Next share price and I reckon it could go higher.

It’s pleasing to see that the retailer has increased its “central guidance for full year profit before tax by £20m to £720m”. But I’m not surprised that the beat has come due to strong online sales. In particular from third-party brands through LABEL as well as home and childrenswear. Overseas sales seems to be making up for revenue lost in its shops.

Will it continue?

The question I now ask myself is will this stellar performance continue? Well, according to the retailer, it expects sales to settle back to its guidance levels within the next few weeks.

Next is maintaining it forecast for full price sales for the rest of the year to be up 3% versus 2019. In particular, within this guidance it has “maintained the assumption that Retail will be down -20% and Online will be up +24%”.

Risks

The Next share price is expensive and is currently trading at a price-to-earnings (P/E) ratio of 37 times. Some investors may be uncomfortable buying a stock at this valuation.

It also did not mention anything about dividends in the trading update. It’s worth noting that the retailer had previously indicated that it did not expect to resume any income payments or share buybacks until it has visibility on sales from its stores.

I guess I’ll have to wait and see. The company will be releasing a second quarter statement on 4 August.

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Nadia Yaqub has no position in any of the shares 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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