Next shares soar as sales smash expectations – is the stock a buy?

High street and online retailer Next has reported a big rise in sales and profits. John Stepek looks at its performance and asks if it's worth buying Next shares.

Shares in retail chain Next (LSE: NXT) shot up by as much as 10% this morning on news that it is set to beat market forecasts for profits this year.

In a trading update which was pulled forward by a fortnight, Next noted that sales over the last 11 weeks “have been materially ahead of our expectations.”

Full-price sales for the period were up by 18.6% compared to the same period two years ago – ie, back before the coronavirus pandemic shut the economy down and life was basically normal. Next had been assuming that growth would be more like 3%.

The gain was driven by a surge in online sales, which for the six months to 17 July were up by 56% compared to the same half in 2019.

By contrast, physical retail sales were down by 43% – though this drops to just a 6% fall if you take the first quarter (when strict lockdown was still in place) out of the equation. Within that, sales of homeware and children’s clothing have done particularly well.

As a result, the company is not only going to be able to repay £29m of business rate relief back to the government, it also raised full-year profit guidance by £30m to £750m.

There will also be a special dividend, because the company expects to be carrying £240m in surplus cash. The first instalment of this will be paid on 3 September at 110p a share, totalling £140m to shareholders. The rest is planned to be paid at the end of January 2022.

It’s little wonder that shareholders are chuffed with that.

What’s driven the gains? Next has some suggestions. These include general pent-up demand; the higher savings levels among customers; a fall in overseas holidays boosting domestic spending this summer; and the burst of nice weather we got towards the end of May – apparently “growth significantly slowed once the warm weather passed”.

Another thing worth noting for those of us wondering how the pandemic has affected household finances is that Next’s interest income from its credit sales fell quite significantly (though in line with expectations). Why? Partly because customers chose to pay down their balances faster, presumably using some of those excess savings to do so.

Should you buy Next shares?

Anyway, from an investor’s point of view, what does this all mean?

Next is probably one of the best examples of a reliable, high-quality company in the FTSE 100. It’s not remotely “sexy”. It sells middle-of-the-road clothing and middle-of-the-road furnishings. It’s not fast fashion or haute couture. It’s sensible and reliable.

But the thing is, while it’s not an Asos or a tech stock, it is extremely well run. I often make this comparison, but on the surface, Next looks a lot like Marks & Spencer, if you split out M&S’s food business (which many people argue should happen, but that’s a different story).

The clothing is similar – nice and reliable but not special. They both sell homeware. And yet one business is far more successful than the other.

M&S was late to the internet party. Next, by contrast, has long since parlayed its catalogue and credit business into a thriving online business. Even before the pandemic broke out, more than half of Next’s sales came via its online channel.

So the company has always been more resilient to threats from Amazon and other online retailers, never mind the advantage this online capacity gave it during the early days of near-total lockdown.

Did it take a lot of foresight to realise that online retail would be a big deal? Frankly, by this point, not really. You would think that the fact that Next’s rivals have struggled so badly to move online says more about them than about any particular stunning insight at Next.

And yet, Next is unusual. It communicates well with shareholders; it regularly beats expectations because it understands how to manage market expectations; and it manages to keep looking ahead without taking any stupid risks.

As long as that continues to be the case, I suspect that shareholders can continue to expect positive surprises in the longer run.

As for today’s price – I own shares in Next and we have tipped it in MoneyWeek magazine before. It’s not as cheap as it was in the depths of the pandemic, but not many things are. And, to be fair, it’s trading on a lower price/earnings ratio than its European peers, notes Aimee Donnellan, and is still below the 52-week high it hit just a month ago.

So I certainly have no qualms about continuing to hold it, and nor would I have any qualms about buying more.

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