Next (LSE: NXT) chairman Michael Roney introduced today’s annual results with a reassuring statement: “The NEXT Group has delivered profits exactly in line with the guidance we issued in January 2019 and we are maintaining our guidance for the year ahead.”
But the shares fell as much as 3.6% in early trading. In this article, I’ll discuss the key features of the results, and look at whether the company’s current valuation and prospects make it a stock I’d be happy to buy today.
De-rating
Let’s begin by noting that Next’s shares hit an all-time high of 8,000p in 2015, and are currently trading nearer 5,000p — around 37% below their peak. We’ve actually seen an increase in earnings per share (EPS) over the period, which means the fall in price is entirely down to a de-rating.
Investors were willing to pay a high-teens multiple of EPS for the stock back in 2015. Today, the shares are changing hands at a multiple of less than 12. Has the market become overly pessimistic about the stock, or have the prospects for the business deteriorated so much that the de-rating is fully justified?
Cash generator
The company today reported a 2.5% rise in total group sales to £4,220.9m, but a 0.4% fall in pre-tax profit to £722.9m. Meanwhile, EPS increased 4.5% to 435.3p. How can EPS have risen when profit fell? Well, the company generates sufficient cash over and above the needs of the business that it’s able to buy back and cancel chunks of its own shares. There’s also sufficient to pay dividends — 165p this year (up 4.4% from last year), giving a yield of 3.3%.
More of the same is in store, as reiterated in today’s guidance for the year to January 2020. Management expects full-price sales to increase 1.7%, pre-tax profit to fall 1.1% and EPS to rise 3.6%.
Time to buy?
Next has been a superbly-run business for years, and — as ever — today’s report is a model of clarity and detail on how the business works, and on management’s strategy for navigating the rapidly-evolving retail environment.
I strongly recommend you read the report in full, as I believe it provides a compelling case for how and why the business can continue to thrive, despite declining store sales (-7.9% last year) versus increasing sales online (+14.7%) and in its finance arm (+12.1%).
The finance business — nextpay— offers customers “flexible monthly payments to balance your budget.” With charges for being in debit at a representative 23.9% APR, this is a highly lucrative operation. It contributed £121m to group profit last year. Stores contributed £212m and online £353m, so finance is a smaller but very far from insignificant contributor to the Next cash-generating machine.
I was a little concerned by the company reporting “a leading indicator for increasing bad debt rates” in its last half-year results. However, today’s report suggests that the impact of what appear to have been some loose historical internal credit decisions has washed through. As my concern about this has been allayed, and in view of the sub-12 earnings multiple, and the quality and strategy of management, I rate the stock a ‘buy’.