Retail giant NEXT (LSE: NXT) hasn’t had the best run in the equity markets in the past five years with the trend line pointing firmly downwards until last year. But is that enough reason to be pessimistic about its future? This question is key, especially since its share price performance has picked up in the past year and I couldn’t help but consider the answer following its recent positive trading update.
Sales momentum picks up
I’ve been sceptical about NEXT because its sales forecasts had looked very weak compared to both its past performance and its positive outlook on potential demand. The latest trading update has addressed these concerns, making me way more optimistic about the share now. The company has upped sales guidance after a “better than anticipated” second quarter, which followed a good first quarter. Sales are now expected to grow at 3.6% for the year, more than double its previous estimate. It also expects profits to increase slightly, compared to a 1.1% reduction foreseen previously.
Transitioning into the future
I also think its long-term prospects are getting better every day, which makes it exactly the kind of investment that we at the Motley Fool like. At a time of disruption across sectors driven by deep changes in consumer behaviour and technology, established companies are trying to stay relevant by adapting. For retailers, the sharp rise in online sales, which, as a percentage of overall retail sales have grown 3.5x in the last decade according to the Office for National Statistics (ONS), has shaken up the traditional bricks and mortar business model. NEXT has a robust online presence, which now brings in half its revenues and is showing double-digit growth. In other words, the company is transitioning well into the digital world.
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The devil in the details
This is all very well, but I’m not ready to get carried away by the positive expectations, or at least not yet. The reason is that the company’s sales growth was 3.1% last year, and with the updated guidance, the expected increase is 0.5 percentage points. This isn’t bad in itself, but it’s not quite as positive as the 1.9 percentage point increase over the last guidance suggests.
Also, the wider environment isn’t always supportive, with retail sales numbers doing flip-flops. According to the Confederation of British Industry’s (CBI) latest survey, retail sales volumes fell for the third month straight in July. But the ONS’s June numbers showed growth. As a result, it’s hard to predict what the future holds. This is especially the case with an eye on Brexit, the risk of which really cannot be overlooked for a company with a strong UK presence.
The upshot for me really is this: I think NEXT is worth investing £1,000 in now, purely because of its continued consistent performance and its preparedness for the future. But the risks cannot be ignored either. I would wait for yet another trading release to be fully convinced, and then buy some more if it either maintains or ups its outlook.
