Next (LSE: NXT) has been one of the more volatile stocks of the past five years. And in the past 12 months, its share price has fallen 37%.
But since a 52-week low of 4,306p in mid-October, Next shares have regained 15%.
I don’t know if it’s anything to do with Mike Ashley, but the Frasers Group founder has just upped his stakes in ASOS and Hugo Boss. Does his renewed interest in the fashion sector mean optimism is returning to Next too?
Forecasts put Next on a forecast dividend yield of 4%, with a price-to-earnings (P/E) ratio of just nine. In normal times, I think that would make it a no-brainer buy. But 10% inflation and rising interest rates are leaving people with a fair bit less spare cash to spend on new clothes, so a lower valuation does make sense.
Oversold
But I rate Next as possibly the best managed in the business. Considering that, and with a long-term view, it looks oversold to me. And it’s on my list of buy candidates.
Examining Next’s current performance, we face one problem. The most recent results only cover the six months to July. And the real inflation pain only kicked in after that.
Still, the half did look positive. Full-price brand sales rose by 12.4% compared to 2021 (and by 22.3% compared to the pre-pandemic year of 2019). Profit before tax was up too, by 16% over the first half of 2021 (and by 22% over 2019).
Second half
The update gave us a glimpse of how the second half is going. Next rated August sales as below expectations, but said that September sales improved a little.
The company has reduced its full-year profit guidance to £840m, from £860m. But that would still represent a 2.1% rise. Similarly, the board expects earnings per share to come in 2.7% ahead, at 545p.
We’ll hear more on 2 November, with Next’s third-quarter trading statement. The quarter will cover August, September and October. That’s a period in which inflation jumped to 10%, and the UK had three prime ministers and three chancellors. With all that going on, anything could happen to even the best retailer.
Buy the best
Speaking of the best, I think that’s what times like these bring out. When a sector hits the dumps, all companies in it can take a kicking — the best and the worst alike. And I reckon that makes it a great time for investors to load up on shares of the best.
The best in a sector will often come out of a downturn a lot more strongly than weaker competitors. And going forward after a shakeout, they can end up looking even better than before.
I think the risks are clear. Any sign of the business coming in below expectations in November’s update, and I can see the Next share price dipping again. And it looks like we might be in for a lengthy period of austerity. But if Q3 looks in any way positive, I think we might just be at a turning point.