Why I’d invest £2,000 in the Next share price right now

Today’s trading update from the FTSE 100’s fashion and home products retailer Next (LSE: NXT) is surprisingly good. Consequently, the shares have been rising over the first two trading days of the new year. However, at around 4,391p, the share price is still around 17% lower than it was in October when I last wrote about the firm. I was bullish on the stock then, and I’m even more bullish now.

The all-important Christmas trading period between 28 October and 29 December delivered sales 1.5% higher than the equivalent period last year. The company said in today’s statement that strong sales in the three weeks prior to Christmas, combined with a “good” half-term holiday week at the end of October, made up for “disappointing” sales in November.

The underlying story

Digging into the figures a bit provides a glimpse of the underlying dynamics of the business. Sales from the firm’s stores actually declined by 9.2% in the period, but internet sales rose 15.2%. The net outcome for full-price sales was a rise of 1%. On top of that, Next saw a 12% gain in finance interest income from its nextpay customers, which all adds up to the overall 1.5% gain in sales. Some 0.6% came from new space, so like-for-like sales rose 0.9%. That’s a great result considering all the doom and gloom in the news about the retail sector, and considering the plunge in the Next share price since the autumn.

The firm is making strong advances managing the decline of its store business and moving sales online, which is the great strength and differentiator for Next, in my opinion. In the current trading year, the directors expect sales from the store estate to deliver less than 50% of overall revenue, and just 30% of profits. With 70% of profits already coming from the internet, the only lingering threat I can see is the possibility that the store estate could start losing money, which would drag down the figures for profit. But despite in decline, the stores so far remain profitable.

Directors see more solid trading ahead

Next’s trading year ends on 27 January and the directors expect overall sales to come in around 3.2% higher than the previous year. However, full-year profit will be down 0.6% because of higher sales of seasonal products, which are less profitable, and because online sales generate increased operational costs. So it seems that online sales are steadier, albeit less profitable. But the decline in company profits doesn’t matter that much to investors because earnings per share (EPS) are set to rise around 4.4%. That means the company is also doing a good job of enhancing the EPS figure by ploughing surplus cash inflow into buying back its own shares

Looking forward, the directors assume a similar trading environment in the year ahead and expect similar financial performance to the one Next is reporting today. One feature of the business is strong cash generation, which management expects to continue. To me, that means Next’s fat dividend yield is attractive. I’d put £2,000 into the shares to collect the payment while waiting for meaningful growth to return to the overall trading figures in the future.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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