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As with many of its retail peers, Next (LSE:NXT) stock started the year on the right foot. However, they have faced quite a bit of turbulence in recent weeks. With that in mind, how much better off would you be if you had bought the shares earlier this year?
a graceful comeback
If I had invested £1,000 exactly three months ago, retail stocks would have returned about 10% of my investment. This translates to roughly a £117 profit (excluding broker fees and/or capital gains tax).
| Metrics | next actions |
|---|---|
| amount invested | £1,000 |
| stock growth | 10% |
| total dividends | N/A |
| trotting return | £1,110 |
Given the time frame and the broader performance of the stock market, shares of Next have generated a pretty decent return. He FTSE 100 is quite flat, while the S&P 500 it is up 7% since January. However, there are a couple of reasons for the rally in stocks in the first quarter of the year.
On the one hand, consumer confidence began to recover, which encouraged an increase in discretionary spending. In addition, forecasts of a recession in the UK were retracted. So it came as no surprise to see the clothing company’s stock jump as much as 20%.
fashion numbers
That said, the strong double-digit gains that Next’s stock experienced have dissipated since early March. This can be attributed to the broader effects of the banking crisis, as well as investor caution.
The positive outlook for the sector is not yet cause for celebration, as both businesses and consumers still face a cost of living crisis.
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What’s more, investors didn’t seem particularly jubilant with the company’s most recent earnings report, even though it posted higher-than-reported earnings. The group even reiterated its guidance for the coming year. He anticipates full-price sales to be down 1.5% and profits to be around £800m.
| Metrics | fiscal year 23 | fiscal year 22 | Change |
|---|---|---|---|
| total revenue | £5.03 billion | £4.63 billion | 9% |
| operating profit | £940 million | £910 million | 4% |
| Profit Before Taxes (PBT) | £870 million | £820 million | 6% |
| Basic earnings per share (EPS) | £5.73 | £5.31 | 8% |
Overall this was a good report with many positives to take away. So it comes as a surprise to see Next’s stock sell off. What’s more, the FTSE 100 stalwart expects inflation to play a more benign role in his cost structure, which is good news for his bottom line.
Should I buy Next shares?
Healthy free cash flow and strong profit margins (14%), despite the inflationary backdrop, show that Next is a strong business with excellent pricing power. However, the state of its balance sheet leaves much to be desired: it has high levels of debt with dwindling liquidity.
Also, Next’s stock isn’t particularly cheap when you assess its valuation multiples against the industry average, either. As such, it is not surprising that brokers jefferies and Shore Capital rate the shares as ‘hold’. And with a £67.50 price target, the potential upside from current levels isn’t great either (12%).
| Metrics | Next | industrial average |
|---|---|---|
| Price-to-book (P/B) ratio | 7.0 | 1.7 |
| Price-Sales Ratio (P/S) | 1.6 | 0.9 |
| Price-Earnings Ratio (P/E) | 11.4 | 17.6 |
| Forward price-to-sales ratio (FP/S) | 1.6 | 0.4 |
| Forward price-earnings (FP/E) ratio | 13.0 | 12.3 |
Ultimately, I think the company will continue to grow for years to come. After all, the acquisition of many smaller names should expand its product offering. But due to its high multiples, I see better opportunities in other FTSE retail names for now, so I won’t be buying Next today.
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