Next (LSE: NXT) published its interim results today, reporting “its strongest sales growth for many years”.
Total sales were up by 10.3% on the first half of last year, operating profit was up by 19% and the interim dividend rose by a spectacular 39%, to 50p. The firm’s operating margin moved higher, too, rising from 18.3% during the first half of last year to an impressive 19.3%.
However, Next shares fell when markets opened, and at the time of writing, were down by around 2%, leaving the shares hovering around the £70 mark.
So what’s happening — and should shareholders be worried?
Slowing growth?
If you are a Next shareholder, I don’t think you should worry, but it might be unwise to expect this rate of growth to continue indefinitely.
Next made this clear in the opening remarks of today’s report, when discussing the first half’s outstanding sales performance:
“However it is important for us to recognise that this performance is, in some part, down to external factors … We remain mindful that some of these factors are likely to be less favourable next year and this year’s fine summer weather could present tough comparatives next year, when interest rates are also expected to rise.”
Guidance doesn’t come much clearer than that, and this measured and cautious outlook is, in my view, the main reason the firm’s share price is has fallen today.
A buying strategy?
Next has been a very rewarding stock for long-term investors, climbing by 308% over the last five years, during the retailer’s ordinary dividend has grown from 55p to 129p; an increase of 134%, or 18% per year, on average, plus special dividends, which have totalled 150p this year.
Although the company’s valuation is reasonably demanding — with a 2014 forecast P/E of more than 17, and a prospective yield of 2.1%, or 4.3% with this year’s special dividends — quality businesses tend to continue to outperform for longer than you might expect.
It’s worth noting that Next’s current limit price for share buybacks is £66; more than 5% below the current share price. Next’s buying limit for share buybacks is designed to ensure an 8% rate of return.
In my view, buying Next shares in line with the firm’s own share purchases could be a smart strategy for long-term investors.