Many Americans know British retail brands like Burberry and Harrods, but it’s a less-familiar United Kingdom retailer that has helped cheer up its beleaguered sector in the new year.
Next NXT, +0.24% has about 700 stores that sell clothes, shoes, and home furnishings, and runs a growing online unit that reaches roughly 70 countries, including the U.S. The shares, a constituent of the FTSE 100 UKX, -0.08% , might be offering a good deal to investors.
The Leicester-based retailer kicked off 2018 by dishing out encouraging forecasts as well as better-than-expected sales from the holiday period. That has helped drive its stock higher by some 10% so far in 2018, extending gains over the past 12 months to around 23% versus the FTSE’s 6% advance.
Next said sales from Nov. 1 through Christmas Eve rose by 1.5%, beating its guidance of a decline of 0.3%. The retailer gave credit in part to “much colder weather leading up to Christmas,” implying that the nip in the air boosted demand for coats, sweaters, and other winter apparel.
The company sounded upbeat about 2018, leading some analysts to suggest that that might bode well for other U.K. retailers. “Subdued consumer demand driven by a decline in real income, the increase in experiential spending at the expense of clothing, and inflation in our cost prices remain challenges for 2018,” Next said in a Jan. 3 statement. “However, we believe that some of these headwinds will ease as we move through the year; we already know that cost-price inflation will reduce to 2% in the first half and believe it will disappear in the second half.”
British shoppers and businesses have been grappling with inflation that has reached 3%, spurred by the pound’s GBPUSD, +0.4589% weakness since the 2016 vote to leave the European Union, or Brexit. So it’s reassuring that Next foresees less of a squeeze.
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The company’s holiday-period growth of 13.6% for its online sales sparked bullish chatter, too. That offset a 6.1% drop at Next’s bricks-and-mortar stores. The unit that includes Next’s web and catalog operations looks set to become the company’s engine. It provided some 45% of total revenue in 2017’s first half, up from 42% a year earlier.
Some analysts have applauded Next’s plan to use 300 million pounds ($406 million) in cash for share buybacks, rather than for a special dividend. Still, that’s not to say the stock’s dividend yield, at 5%, is paltry.
Shares trade at 12 times estimated forward-year earnings. That’s been on par with Marks & Spencer’s MKS, +0.29% , though Next’s rival retailer has seen its multiple shrink to 11 in the past week after posting disappointing holiday-period results. A popular U.S. fund that tracks American retailers, the SPDR S&P Retail exchange-traded fund XRT, +1.14% – is much pricier, with a forward P/E of 18.
Next’s valuation is a key reason to own the shares, say Investec analysts, who also praised the company’s “operational flexibility to deal with a challenging market.” They noted that shares recently changed hands at a 25% discount to their 10-year average forward P/E. Next’s stock has traded for more than three decades.
The Investec analysts have a Buy rating on Next shares with a price target of 4,940 pence ($66.90), around where the stock’s been trading lately. Given their price target, they have warned against becoming too enthusiastic about Next even after its latest update, which suggested that sales in the year ahead will grow just 1% while profit declines marginally.
“Christmas wasn’t as bad as expected,” write Investec’s Alistair Davies and Kate Calvert in a recent note. “However, we would caution against reading too much across to other retail stocks—the reality is that even though Next’s Christmas numbers are better than expected, the company has still had a tough Christmas.”
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One big challenge for Next is that it remains heavily dependent on the U.K., which provides around 90% of its revenue, and is expected to see relatively modest 2018 economic growth of about 1.2%. About 540 of Next’s roughly 700 stores are in the U.K. and Ireland, while the rest are largely franchised in continental Europe, the Middle East, and Asia.
To be sure, the consensus among 26 analyst teams that cover Next isn’t all that bullish. Only three have the equivalent of Buy ratings, 13 say Hold, and 10 go with Sell ratings, while the average price target is around 4,500 pence, implying a drop of nearly 10%.
But that consensus target has been wrong so far in the new year. Next’s stock has managed to touch a two-month high north of 5,000 pence this month. It stands comfortably above its post-Brexit-vote low of around 3,500 pence, though it’s still well below its 2015 high of around 8,000 pence.