The massive shake-up in the world of retailing over the past few years has caused the disappearance of many stores from the nation’s high streets. Of course, the internet has been a big factor driving the change. But other trends have been playing out as well. One example is the shift from high streets to retail parks near the edges of towns and cities.
Next has been adapting well
But the FTSE 100‘s NEXT (LSE: NXT) has been coping well with this onslaught of change. The business sells clothing, footwear, accessories, beauty and home products. And it’s emerging as a strong survivor from the pandemic.
Today’s full-year results report contains some resilient figures. Most of the firm’s stores were closed for a “significant portion” of the trading year to 30 January. However, total sales for the year only declined by just under 17%. And that drove a revenue fall of almost 18% and a plunge in earnings per share of nearly 53%. Under the circumstances, the numbers could have been worse.
Chairman Michael Roney said the company “carefully managed” its cash resources during the period. Part of the measures included the suspension of shareholder returns, such as dividends share buybacks. But the pain might have been worth it for long-term shareholders because net debt declined to £610m compared to £1.1bn a year earlier.
Next was resilient through the lockdowns because of its strong online sales. And Roney reckons the shift in consumer behaviour towards sales online will continue. That’s why the firm “accelerated” part of its planned capital expenditure for the internet business. Around £121m went into warehousing and systems.
Business evolution
The report showcases Next’s evolution as a business. For example, in 2004, online sales were 23% of the total. But in 2021, the company expects online sales to come in at around 71%. That’s a massive shift and helps illustrate how well-placed the business was through the pandemic.
Over the same time frame, overseas sales will have increased from zero to around 19% of total sales. And home products sales will have moved from 10% to 21%, reducing the reliance of the business on fashion clothing. But Next has also been diversifying from its own brands. And third-party label sales will likely constitute 27% of the total this year, compared to zero back in 2004.
Next has demonstrated its flexibility and willingness to adapt over the years. And I reckon the company looks set to be a strong retail force for the future. And the stock could make a decent long-term hold in my portfolio. However, the valuation isn’t cheap.
With the share price near 8,034p, the forward-looking earnings multiple for the current trading year to January 2022 is just below 19. And the anticipated dividend yield is around 2.1%. City analysts expect a strong bounce-back in earnings this year. But they’ll still likely fall short of the earnings peak achieved prior to the pandemic.
Yet the stock is above its pre-pandemic high after a strong performance over the past year. I think there’s a significant risk the valuation and share price could both retreat in the short term. And there are always risks to consider associated with the cyclicality of the retail sector, especially fashion retail. Nevertheless, I’m tempted to add some Next shares to my portfolio at opportune moments to hold for the long-term growth potential of the underlying business.