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The Next share price soars after smashing sales guidance. Should I still buy?

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Man in a clothing store in a medical mask because of a coronovirus.
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The Next (LSE:NXT) share price soared by over 6% on Wednesday after smashing sales and profit guidance.

In a trading statement it released two weeks earlier than planned, the fashion retailer reported several positive figures. Its sales in the 11 weeks to 17 July were up 19% versus two years ago.

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The company had assumed an increase of 3%. The jump in sales is encouraging and could bode well for the Next share price over the coming months.

Who’s buying new clothes?

Next puts the boost in clothing sales down to several factors. It reckons there’s pent-up demand with “many customers having made few summer purchases during the last 18 months”. With more people getting out and about, that doesn’t sound too surprising to me.

Also, summer clothing got a bump from particularly warm weather in May and June. Next mentioned that some of that growth slowed once the very warm weather passed, but as we all know and feel, it’s been particularly hot this week. I reckon recent hot weather could help sales for the next update.

With fewer trips abroad this summer, it sounds like there’s more money being spent in the UK. This should be positive for many UK retailers, in my opinion.

Where next for the Next share price?

The Next share price is near its all-time highest price. Does that mean it’s too expensive? My answer is no, it’s not. It trades on a price-to-earnings ratio of 15. For a company that’s growing its earnings, I reckon Next shares are relatively cheap.

After a big one-day jump in the share price, should I still buy the shares? Yes, I really think I should. I used to own Next shares several years ago. I sold them for reasons I can no longer remember, but its progress and behaviour over the past year reminded me that I should own it as a long-term investment in my Stocks and Shares ISA.

A quality operation

Next has grown into a formidable FTSE 100 retailer with a market capitalisation of almost £10bn. It’s a well-run business that has adapted to change over many decades. In fact, even before the pandemic, more than 50% of its sales came from online channels. Having such a mix certainly helped in surviving store closures last year.

I like businesses that are entrepreneurial and on-the-ball. Next certainly fits this description, in my opinion. Last year it took several opportunities to buy struggling brands and businesses at knock-down prices. Its 25% stake in upmarket fashion brand Reiss and its investment in opening beauty halls should provide further long-term growth.  

Other factors to think about

Despite being a high-quality company, there are several risks to consider. Next, like all UK retailers, is dependent on the strength of the UK consumer. The retail environment remains uncertain, and customer trends can change quickly. Although many restrictions have recently been removed, uncertainty remains.

In addition, fashion retail is highly competitive and competition could grow from low-cost online-only operators like Boohoo and ASOS.

That said, Next has proved it can navigate through various challenges. It gives me confidence that it will continue to do so over the coming years. Overall, I’d buy the shares.

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Harshil Patel owns shares of boohoo group. The Motley Fool UK owns shares of and has recommended Next. The Motley Fool UK has recommended ASOS and boohoo group. 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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