A stronger Next will emerge from the cost-of-living crisis. Keep buying the shares

Its low valuation, range of growth opportunities and online focus make it a worthwhile long‑term holding, says Robert Stephens

The stock market’s prospects have significantly deteriorated over recent months. War, inflation, rising interest rates and a cost-of-living crisis have combined to weaken investor sentiment and send share prices lower. Now falling stocks are nothing new; there have been countless bear markets and corrections throughout history. Expecting the

FTSE 100’s 48pc surge since the depths of the March 2020 crash to continue indefinitely was never realistic.

In Questor’s view, consistently avoiding stock market declines is impossible because of the inherent unpredictability of share prices in the short term. The key to overcoming a bear market is to hold high-quality companies that can survive tough economic conditions so that they are able to take advantage of a subsequent recovery. The retailer Next is a prime example of such a stock.

Its share price has fallen by 26pc since this column last updated readers on its performance in September last year and is now just 1pc higher than at the time of our original tip in November 2020.

Weaker investor sentiment caused in part by the prospect of a cost of living crisis has contributed to its share price fall. The company also downgraded its financial expectations for the current year because of the closure of its websites in Ukraine and Russia and a more conservative outlook for its wider international operations.

However, it has the financial strength not only to survive but to take advantage of a challenging outlook for the retail sector. Notably, the company expects to generate £220m of surplus cash in the current year, which it plans to use for either special dividends, share buybacks or, more interestingly, acquiring stakes in other businesses that could become part of its “Total Platform”. This is where Next provides online infrastructure and logistics expertise to already established brands in return for a cut of sales.

A period of weaker performance for the retail industry could present a wider range of acquisition opportunities. Smaller firms that lack the financial means to cope with falling sales may become available for purchase at rock-bottom prices. Next’s financial standing, which includes a reduction in net debt of 46pc over the past two years and an interest coverage ratio of 11, suggests it would be in a strong position to capitalise on them ahead of a likely long-term recovery. This could improve the company’s market position relative to rivals.

In addition, it is becoming an increasingly diverse retailer that has a range of growth opportunities. For example, it is increasing the number of third-party brands that sell their items through its online aggregation service, Label. It also plans to license its brand name to third-party companies in areas such as paint, wallpaper and ski wear. And, with an international presence that accounts for 23pc of its online sales, the company’s long-term growth prospects are becoming increasingly broadly based.

Separately, Next is well placed to take advantage of digital trends in the retail industry thanks to its online presence. Digital sales accounted for 64pc of its revenues in the 2022 financial year. Although the end of the pandemic may cause a reversal to some extent in online versus in-store sales, the shift from bricks-and-mortar to digital sales is long standing: online sales as a proportion of total UK retail sales grew from 6.9pc in 2009 to 21.4pc in 2019.

Following its recent share price fall, Next now trades on a forecast priceto-earnings ratio of around 11. This suggests that investors have factored in a weaker trading environment that could yet deteriorate further in the short run. Indeed, additional downgrades to the company’s sales and profit guidance in the coming year would not be a major surprise.

However, in Questor’s view the company offers significant growth potential over the long run. It has the financial means to use short-term retail sector woes to strengthen its competitive position, while its online focus, increasingly diverse business model and international exposure provide added sources of growth over the coming years.

Questor says: buy

Ticker: NXT

Share price at close: £60.52

Read Questor’s rules of investment before you follow our tips: telegraph.co.uk/go/ questorrules; telegraph.co.uk/questor