The UK retail sector is struggling (to put it mildly). Consumer confidence is crumbling in the face of rising inflation, and cost pressures are also wreaking havoc for companies. Against this backdrop, FTSE 100 retailer Next (LSE: NXT) should be struggling. Indeed, every single retailer that has reported earnings this year has warned that costs will rise, and profits will take a hit as a result.
However, compared to many of its peers, the company seems to be navigating the current economic environment relatively well. Management now expects profit before tax for the current financial year to hit £850m, up 3.3% compared to last year. Earnings per share are set to receive a boost from share repurchases and rise 5% for the year.
The FTSE 100 retailer has developed a competitive moat
Next’s business model has several advantages over other companies in the retail sector. As well as the firm’s legacy business of buying and selling its own brands, the group also operates the LABEL platform. This platform stocks the brands of other retailers, generating commissions for Next when items are sold.
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Next has also been developing what management has called the Total Platform initiative, which allows third-party brands to access the firm’s infrastructure, charging a fee for the service (the fee is not disclosed but the group is targeting a profit margin of 5%-7% on sales). This increases the return from existing infrastructure investments with minimal spend on Next’s part.
Sales on the LABEL platform expanded 20% in the 13 weeks to April. In comparison, Next’s own online sales slumped -24%. While the company expected this decline in own brand sales as online sales were boosted by retail closures last year, the figures show the strengths of the multi-brand offering.
Compared to the same period in 2019, LABEL sales have risen a total of 106% over three years, while Next’s own brand sales are up 23%. Total online sales over this period (including the contribution from Total Platform) rose 47% overall.
Next looks appealing in a competitive market
A few weeks ago I stated that Next’s decision to invest to become the go-to aggregator for customers would help it stand out in a crowded sector. It looks as if that thesis is now playing out.
Next is navigating the uncertainty as other retailers struggle. Notably, Boohoo (LSE: BOO), a former market darling, seems to be really struggling as rising costs and competition bite. It is also having to invest heavily to build out the infrastructure to maintain the level of service customers demand.
Retail is tough business, but in this volatile industry, Next stands out for having a plan to help it rise to the top. So far, the plan seems to be working. With the stock trading at a price/earnings (p/e) ratio of just 11.2, the shares appear inexpensive.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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