Shares - - TALKING POINT -

We recog­nise re­tail is com­pletely out of favour with in­vestors and so are UK­do­mes­tic stocks. How­ever, it feels the right time to take a con­trar­ian view and look for op­por­tu­ni­ties in both th­ese cat­e­gories.

We’ve picked Next in the be­lief that man­age­ment can nav­i­gate the tricky back­drop and that we may also see a bounce in UK-fo­cused busi­nesses, as­sum­ing there is an agreed Brexit plan which brings more cer­tainty to the mar­ket.

Led by re­spected shop­keeper Si­mon Wolf­son, Next’s thriv­ing on­line op­er­a­tion is widely over­looked. Be­sides a pris­tine bal­ance sheet, Next is highly cash gen­er­a­tive and should be able to with­stand flag­ging foot­fall while main­tain­ing profitabil­ity.

Next is so much more than a bricks and mor­tar fash­ion re­tailer. On­line mar­ket share gains, boosted by a grow­ing on­line over­seas op­er­a­tion and the third-party brands busi­ness, LA­BEL, should con­tinue to out­weigh the drag from lower shop sales.

De­spite fall­ing like-for-like sales, the vast ma­jor­ity of Next’s stores re­main very prof­itable. It also has many stores on short leases. When they come up for re­newal, it can shut the worst ones and those be­ing re­newed are be­ing done on much lower rents.

It is mak­ing more use of in-store stock to ful­fil on­line or­ders rather than solely depend­ing on ware­house in­ven­tory. And there will be a trial us­ing stores as a col­lec­tion point for third party, non­com­pet­ing busi­nesses.

While third quar­ter store sales fell 8%, on­line sales grew by 12.7% and Next main­tained sales and profit guid­ance for the fi­nan­cial year to 31 Jan­uary 2019.

With spend­ing mi­grat­ing to the web, Next is head­ing in the right di­rec­tion with more than half of sales now com­ing from its on­line and fi­nance busi­nesses.

In­vesco fund man­ager Mark Bar­nett also ar­gues that hav­ing a large phys­i­cal store es­tate is no bad thing. He says: ‘Next is com­bin­ing the best of off­line with on­line. A large num­ber of or­ders are click and col­lect ones via stores, so Next needs a high street pres­ence. Th­ese stores may not look the same in the fu­ture as they do to­day.’

Bro­ker Liberum fore­casts ad­justed pre-tax profit will hit £727.3m for the year to Jan­uary 2019 and then rise to £743.3m in 2020 and £773.4m in 2021.

The shares trade on a mere 9.2 times fore­cast earn­ings for the fi­nan­cial year to 31 Jan­uary 2020. Next is one of the best-run com­pa­nies on the stock mar­ket and that equity rat­ing is an ab­so­lute bar­gain for a busi­ness of its cal­i­bre. You’re also be­ing paid an at­trac­tive stream of div­i­dends, cur­rently yield­ing a prospec­tive 4.1%.


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