Today I am outlining why NEXT (LSE: NXT) could be considered a terrific stock for growth hunters.
Retailer feeling the heat
Undoubtedly the shock financial story of the day has been retailing giant NEXT’s uncharacteristic warning of potential profits trouble ahead. Investors have become accustomed to the retailer regularly revising up its bottom line estimates, so news of potential near-term sales turbulence comes as quite a shock.
NEXT advised that the impact of milder weather during September has seen third-quarter sales rise 6% so far, below the company’s previous guidance of 10%. Although the chain has kept its full-year profit guidance unchanged at between £775m and £815m, it cautioned that persistent warm weather through October could prompt a downgrade.
Growth tale has plenty of legs
Without doubt, NEXT is one of the FTSE 100’s great growth stories. The business has a formidable record of generating dependable year-on-year earnings rises, and has seen the bottom line expand at a compound annual growth rate of 18.1% during the past five years alone.
And City analysts believe that the retailer’s supreme earnings story has much further to run, with consensus pointing towards growth of 16% during the 12 months concluding January 2015, to 410.4p per share. And a further 9% advance is anticipated for the following year, to 446.3p.
These projections leave the business dealing on a P/E multiple of 16.7 for this year, comfortably below a forward average of 19.9 for the complete general retailers sector, and which falls to a more than reasonable 15.4 for fiscal 2016.
Strength across the business
And in my opinion this makes NEXT a terrific option for growth hunters in spite of today’s developments. The business has invested heavily in its NEXT Directory internet and catalogue business, a drive which pushed sales here 16.2% higher during February-August.
The surging popularity of internet shopping has undoubtedly boosted sales volumes in recent times. But interestingly NEXT noted that for the first time in several years the contribution from its High Street outlets contributed more than the Directory during the first half, highlighting the strength of the UK retail renaissance.
With the shopping giant also ramping up its expansion in international marketplaces — the firm’s franchise partners operate a colossal 183 outlets across 38 territories in addition to NEXT’s 16 directly-owned stores — I believe that the store should continue to enjoy excellent earnings growth.