Thank you for contacting MegaBank PLC with your investment analysis request. This report will be analysing the medium/long term investment suitability of Next PLC, a publicly traded (LSE: NXT), British fashion and homewares limited company.
Background
Next plc was originally founded in 1864 by Joseph Hepworth as Joseph Hepworth & Son, Gentleman’s Tailors; however, the current Next fashion brand evolved in 1981 when the company purchased the chain of Kendalls rainware shops as a means of launching stylish and affordable womenswear stores under the name Next. The first store opened in February of 1982, and by the end of the same year, a total of 70 UK stores had been opened.
Within the next five years, Next branched out to include menswear, home interiors, and childrenswear, and also permanently changed its name from J Hepworth & Son to Next. In 1988, Next introduced their high production seasonal catalogue, and by 1994, they had opened their 300th store and were trading in 16 countries. Since 2001, they have provided directory customers next-day delivery as standard for all orders placed before 5pm. In 2009, Next extended its online shopping network (nextdirect.com) to over 30 countries, and in 2014, Next launched its own premium brand publication, ‘LABEL’. Currently, Next is available in over 70 countries worldwide and operates over 500 stores.
Performance
The graph to the right depicts the annual EPS growth rate percent, dividend yield percent, price-to-earnings ratio (P/E), price-to-books ratio (P/B), and earnings per share (EPS) ratio of Next plc (NXT), compared against two competing clothing and homewares retailers, Debenhams plc (DEB) and Marks & Spencer plc (MKS). From the graph, it can be observed that Next easily outstrips its competitors in both the earnings per share ratio and the average annual EPS growth rate percent.
The P/E of Next is also highest among the listed competitors, being just ahead of MKS, but falls below the general retailers sector average of 21.6 (FTSE Actuaries Share Indices – 8 Aug, 2015), which could indicate either undervaluing of the stock or underperformance. Other possibly negative factors in Next’s financials include the dividend yield being the lowest of the three (and also below the sector average of 2), and its P/B being enormous compared to its competitors’.
While a high P/B normally would point to overvaluing of the stock (and thus from the larger sector average P/E detailed previously –underperformance), this effect is negated by the ratio of the P/E to the EPS growth rate (PEG) being nearly equal to 1 – an indication of a fair market appraisal relative to expected growth. MKS and DEB both have PEG ratios greater than 1, P/E ratios below the sector average, and low P/B figures which suggest these stocks are underperforming in the market and may also be overvalued in comparison to expected growth.
Furthermore, the two graphs below illustrate a strong positive growth over a five year period for Next, in addition to low current volume for the past three years that suggests little market volatility, and thus a safer long to medium term investment. Its primary competitors, MKS and DEB, show much higher degrees of price fluctuation and volatility over the past five years, as well as larger and more frequent spikes in volume recently, indicating that, while possibly undervalued, they are much higher risk, may continue to underperform and are better suited to short term investment.
Conclusion:
Due to Next’s strong and consistent stock performance over the past five years, compounded with its high P/E, moderate PEG, good EPS, and minimally fluctuating volume, the client is recommended to invest in Next for a medium or long term period. Next’s stability and record of steady growth make it ideal for a safe long term investment, and, compared to its competition, namely Marks and Spencer and Debenhams, Next is vastly outperforming its market sector and shows positive signs of continued growth. Should the economy or housing market suddenly decline, the decision to invest in Next might be re-evaluated, but currently the retail and consumer market, particularly online, is rapidly increasing in popularity in both the UK and overseas.
E-commerce is the fastest growing retail market in Europe, and according to a study by Shop Direct, 95% of Britons shop on the internet and roughly 25% do so once a week, with fashion being second only to books in the most popular category of purchases. UK online retail sales are expected to reach £52.25 billion in 2015 – a 16.4% rise from 2014, with similarly high expected growth rates in continental Europe and North America. In conclusion, investment in Next should produce long term gains for the client, given the current and projected market growth, and Next’s proven track record.