Next (LSE: NXT) shares are rising after a £10m share purchase linked to CEO Lord Wolfson. The retailer’s share price has climbed more than 5% since the trade was reported on 7 July.
I’ve admired this well-run business for a long time, but I’ve had concerns about Next’s slowing rate of growth. Today, I want to take a fresh look at this business. Is now a good time to buy?
Insider dealing?
I should point out that the insider trading I’m talking about is completely legal. Lord Wolfson is connected to a charitable trust that recently bought £10m of Next shares. This trade was reported to the stock market, in line with normal practice.
I think it’s safe to assume that the CEO played a decisive role in the trading decision, although we can’t be certain of this.
Lord Wolfson has worked at Next since 1991 and has run the FTSE 100 business since 2001. He owns almost 1% of Next shares, giving him a stake worth around £83m, at current prices.
Although he’s well-paid by Next, I estimate that Wolfson’s shareholding will provide him with a dividend income of £2.6m this year. This suggests to me his interests should be quite well-aligned with those of shareholders.
Why I like Next
For most of my life, Next has been a reliable presence on UK high streets. However, this has become a difficult market over the last 10 years, with many fashion shoppers shifting their purchases online.
At first it looked like Next could suffer a slow decline. But the company has steadily expanded its own online business to offset lower profits from its stores. In addition to selling its own products online, Next now operates a marketplace that provides a full e-commerce platform for other brands.
Meanwhile, Next’s stores remain profitable and are used for online collections and returns, cutting delivery costs. The group’s results are also boosted by its popular customer credit offer, which contributes around 15% of profits.
The end result is a business that generated an operating profit margin of almost 20% last year. That makes it one of the UK’s most profitable retailers.
The right time to buy?
I can still see some risks for Next. One possible concern is Lord Wolfson himself. He’s led the retailer since 2001, so he’s virtually created the business in its current form. If he decided to retire, or move on, his replacement might lack the same vision for the company.
Perhaps a more pressing risk is that with the UK economy apparently slowing, Next could struggle to increase profits over the next few years. Broker forecasts show the company’s earnings flatlining over the next 18 months, before returning to modest growth in 2024/25.
With Next’s share price hovering around £65, the business is valued on 12 times forecast earnings. There’s also a forecast dividend yield of 3.1%, providing a useful income that’s just below the FTSE 100 average.
Nothing is ever certain in retail or the stock market. But, on balance, I think Next shares look reasonable value at current levels. In my view, they could be a decent long-term buy.