Skip to content

Next shares: should investors stick with retail leader despite economic headwinds?


Next [LON:NXT] still looks like it is capable of pulling the proverbial rabbit out of the hat. The company reported this week that sales were up 6.9% versus last year, while profit before tax increased 5.7% to £870m. But we’re sailing in stormy waters in UK retail at the moment: should Next shares still be on investors’ radar?

“This is another solid performance from the bellwether of the UK High Street, reinforcing Next’s reputation as one of the best run UK retailers,” said Charlie Huggins, who manages the Quality Shares Portfolio at the Wealth Club.

Huggins says that many other retailers have struggled in the current environment, but Next’s proposition is clearly resonating with the UK consumer. The removal of pandemic restrictions has certainly helped, leading to a strong recovery in store sales. But this shouldn’t take away from Next’s excellent operational execution.

Looking to the year ahead, the environment is set to get tougher. Next’s sales are expected to fall modestly, with profits down close to 10%, as cost pressures take their toll.

Next expects cost inflation to peak at around 7% in the spring summer season before falling to 3% in the second half. This is materially lower than previously feared, due in part to falling freight costs. It means Next doesn’t have to push through such big price increases, which in turn should support demand for its wares.

Overall, Next, and the rest of UK retail, are still facing a very difficult economy in 2023. But with inflation starting to moderate, things are not looking as bad as they were a few months ago.

Artificial intelligence analysis from Bridgewise indicates that Next is a Hold, despite the recent share price gains. It is starting to underperform on a number of key metrics against peers, including balance sheet, income and cash flow. The drop in its price to book ratio was flagged up, although Bridgewise said the company looked like it would be able to sustain its income metrics going forward.

Next compared to Retail Sector

At filing, Next’s asset turnover metrics were 1.2, representing a 3% change from the previous period. Companies in the same sector and market capitalisation will usually be affected by up to 1.91% percent by this parameter. Next’s impressive asset turnover metrics, specifically in contrast to their industry peers’ performance, should support a tailwind in the company’s stock price.

UK retail is starting to feel the pinch

Wander around the average high street and things still look busy. The UK is finding it’s shopping habit hard to kick it would seem. Retail sales volumes have come in stronger than expected for the second month this year despite the cost of living squeeze.

But beneath that headline, there’s clear evidence that shoppers are being careful with their money. Growth in non-food sales was driven by discounters and second hand shops, while the rise in food volumes is attributed to people choosing to eat in and avoid pricey meals out. Shoppers may be more willing to spend, but only when there’s a bargain to be had.

Longer term, sales volumes remain lower than they were this time last year. With the Bank of England expecting the UK economy to hold up better than previously expected, that provides room for several months more sales growth. Whether shoppers find the confidence to return to the mid-market space though remains to be seen.”

Looking for great investing ideas? Sign up to our free newsletter.

This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

'How to' Guides

Our latest in-depth company reports

Detailed reviews of selected companies and investment trusts.

On the podcast

Sign up for great investing stock tips

Thanks to our Site Partners

Our partners are established, regulated businesses and we are grateful for their support.

FP Markets
CME Group
Back To Top