Next plc is a British multinational clothing, footwear and home products retailer headquartered in Enderby, Leicestershire. It has around 700 stores, of which 502 are in the United Kingdom and Ireland, and around 200 are in continental Europe, Asia and the Middle East. Next is the largest clothing retailer by sales in the United Kingdom.
We continue to maintain our overweight recommendation on the shares as we remain comfortable with managements’ growth objectives and the industry it is in. Full year results will be announced on 24th March 2016 and we recommend holding on to the shares before the results.
We reduced our price target slightly from 7100p to 6960p by lowering the PE multiplier in our model from 18x to 16x, moving it closer to its long term average. Although we would we still feel comfortable with a higher multiple, we took a prudent stance due to the current global economic slowdown.
Our major concern at this point is Brexit. The exit from the Union will have negative repercussions on UK businesses.
We like Next as a company because throughout the years management has continually come up with new ways of how to increase revenue for the Group and we expect this to continue in the years ahead. We expect that the increase in online sales will increase economies of scale and reduce the operating expense margin of the Group.
Despite managements’ efforts to improve the performance of Next, the shares have underperformed the FTSE 100 this year mainly due to a slowdown in the retail sales in the last few months of 2015 mainly due to warmer weather. We expect the loss of sales at the end of 2015 to be recouped in 2016. In fact, recent data on ‘UK retail sales – textile clothing and footwear store sales per week volume year-on-year’ has shown a strong improvement in the industry in January. We expect this to continue in 2016 and beyond.
Other reasons why we are confident in the performance of Next shares during the year are as follows:
• We expect an increase in consumer disposable income due to the sharp drop in the oil price. We do not expect commodity prices (with particular reference to oil) to return back to high level. This will increase disposable income and part of is expect to go to the retail sector.
• The company has been successful in increasing its business online and we expect Next to continue increasing this revenue stream.
• Management have introduced Label. This is an online website on which a consumer can buy both Next as well as other brands.
• The Group is focusing on increasing its international presence.
• Next has a strong balance sheet and free cash flow position.
• Management rarely disappointed the markets with its forecasts.
• We expect management to increase its threshold for share buybacks from 6962p to 7100p due to the strong cash position the Company has.
• The shares are trading on an attractive dividend yield of 2.56%. We won’t be surprised if the company had to continue to distribute special dividends like it has been doing since 2014 due to its strong cash position.
• The weakness we are seeing in the Sterling will have a positive impact on foreign sales. Albeit we believe this will be a short term issue.
Concerns
• Brexit – the concern that the UK will leave the European Union
• Global economic slowdown persists
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.