Fashion retailer Next (LSE: NXT) is well known as a high street survivor. But long-time investors may wonder if this firm is now in a long-term decline, given the difficulties faced by many retailers.
Today I want to consider this question and explain why I think Next shares could be a great investment.
Nobody does it better
Next published its annual results last week. These showed that the retailers total sales rose by 2.5% to 4,220.9m last year, while its pre-tax profit edged down 3.2m to 722.9m. These figures confirmed that the group is still trading well, despite most rivals complaining of tough conditions.
I wont go into the results in too much detail my colleague Graham Chester covered them here but I do want to highlight two of the secrets to Nexts success.
The first of these is the way the group is managing the shift to online sales, which rose by 14.7% to 1,918.8m last year. This 246m increase outweighed the 168m fall in high street sales and lifted the groups online profits by 14% to 353m more than half the group total.
The second part of Nexts business thats essential to its success is its customer credit operation, now branded as nextpay. About 60% of UK online orders are made on credit and the groups finance business delivered 121m of profit last year. Thats about 16% of the groups operating profit.
Yes, but what about the shops?
Nexts rapid online growth is all very well, but what about its shops? Shop sales fell by almost 8% last year and the company has admitted its planning for a long-term sales decline of 10% per year on the high street.
Heres where things get really clever. The first thing to note is that 80% of online returns are handed in at Next shops, where customers can avoid postage hassles and get instant refunds. So we see that the shops have a purpose beyond retail sales.
The second clever thing is that Next has worked out how to manage and evolve its store estate to maximise future profitability. To cut a long story short, over the next 15 years the company expects to shut some stores, open others (new stores perform better) and run some at a loss as online return points.
12bn in cash?
Next believes that operating the business in this way will deliver 12bn of pre-tax cash flow over the next 15 years thats more than the groups current market cap of 7bn.Much of this cash is likely to be returned to shareholders.
Details of this fifteen-year stress test were included in last years results. The companys assumptions all seem realistic to me and its clear that Nexts boffins have been very thorough.
Other retailers may have similar plans but none have the courage or transparency to share them with investors in this way. I think its a great example of why Next is an attractive share to own.
Im also tempted by the stocks modest valuation. Although the shares have bounced from the 40 low seen at the end of last year, Nexts forecast price/earnings ratio of 12 and 3.1% yield seem reasonable to me for such a profitable business. I see this as a good long-term buy.
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