Stock in Focus: Why I’m holding onto Next

Wednesday, Nov 08 2017 by
Stock in Focus Why Irsquom holding onto Next

There are no new stocks to add to the SIF portfolio this week. So I’m going to take a look at the numbers behind a stock that’s grabbed a lot of headlines recently. It’s one that also features in my own portfolio.

The market has become increasingly divided over the investment case for fashion retailer Next. Speaking personally, I bought shares during the first half of this year, at prices between £38 and £42.

As the year rolled on, this looked like a smart move. Next’s cash generation has remained robust, resulting in an expected yield on cost for me of about 8% this year. The firm’s profit guidance has also gradually firmed up, leaving the stock looking affordable on around 11 times earnings.

At the same time, costs appear to be under control and the group looked well positioned to take advantage of falling rents. My thinking was that performance wouldn’t have to improve by much in order to trigger a decent re-rating.

The jury’s out

I started to develop niggling doubts after the firm’s interim results were published. One reason for this was that it became more obvious that the group’s retail business may end up in a state of managed decline that could last years. Group profit and cash flow would remain positive, but might never increase.

My second concern was that I noticed an unexplained change in the information provided in firm’s financial reporting. Over the years, I’ve come to regard this as a useful warning flag. Such changes are usually the result of a considered decision by senior management.

For example, by changing the data that are reported, adverse trends can sometimes be disguised or presented in a more positive light.

What I noticed with Next is that the firm appears to have stopped breaking out the financial details of its Directory credit operations.

I won’t discuss this at length, as I added a comment explaining what I’d found to Paul Scott’s coverage of the 1 Nov trading statement. But in short, the company used to include a breakdown of Directory financials, showing how much Directory profit was derived from interest payments, rather than sales. The last time this was included was in the 2016/17 interims, shown below:


I haven’t sold any Next shares yet. But I have to confess that…

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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  Is LON:NXT fundamentally strong or weak? Find out More »

3 Comments on this Article show/hide all

Melvyngd 17th Nov '17 1 of 3

All of the comments you have made about this stock, would suggest a strong sell.
It seems that you are going against all of your nomal logic and for some reason reluctant to sell, possible a big gamble. I think its watch this space tlme.


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Roland Head 19th Nov '17 2 of 3

In reply to post #242378

Hi Mervyn,

Thanks for your (perceptive!) comment. I have an uncomfortable feeling you are correct.

I may yet sell before the year is out. I haven't decided yet. The only reason I've held on to Next (LON:NXT) this far is because of management's track record of accurate and sometimes overcautious guidance.

The group's prodigious cash generation also attracts me, but as I've written elsewhere, if this is as good as it gets, then in my view the current valuation may be about right.

The jury is still out, for sure.



Disclosure: At the time of writing this comment, I own shares of Next.

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Zipmanpeter 24th Nov '17 3 of 3

It is interesting that £NEXT have started buying their own shares again. Previously they have explained that they stopped doing this in 2017 to return cash to shareholders in uncertain times and also (further back in time) that buying their own shares makes sense when they expect to achieve a >8% return from doing so (since it is an almost certain gain for shareholders) vs investing and chasing growth.

From this I conclude they are more comfortable with the future, probably now that Directory is progressing well again. Directory including finance income is already the major profit earner and on current trends this will be significantly true in 2-3 years on just online sales alone. (I would expect net Retail space growth to slow and ultimately reverse but only slowly as they get to open more big stores at low rents as others vacate and they slowly close the tail of likely smaller stores; similarly mgt expect credit sales to drop as a share of Directory)

I therefore expect in time the market to re-rate Next up to reflect an established profitable business with a secondary supporting lines in retail stores & credit financing.

In the meantime, the 4% basic dividend is almost guaranteed and another 4% from special divis and/or buyback looks likely. I don't expect a huge return but am confident of say a relatively steady 10% TSR over a 3 year period. That's good enough for me so I remain a happy holder and will buy more if, as I expect and hope, it drops back to <4000p in the next 6 months on Brexit/consumer hardship fears.

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About Roland Head

Roland Head

I'm a private investor, analyst and writer on stock markets, with a particular fondness for free cash flow, dividends and value. My main interests are UK and US stocks. I also have an interest in (profitable) commodity stocks.  I have passed the CFA Level 1 exam and hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based and quantitative approach required for this kind of work undoubtedly influenced my investing style.  I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a very large and now defunct Canadian telecoms firm.  more »


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