This week Oliver Phillips looks at Next plc, a former stock market darling that has recently fallen out of favour with investors.
Next is divided into two divisions, Retail and Directory. The Retail division represents the bricks & mortar side of the business which sells to consumers on the high street and in retail parks. The retail sector as a whole is under strain and this division has seen a modest decline in recent years – management have attempted to cushion this by focussing on their retail park offerings and increasing average store size. The Directory division, the online business which has evolved from a mail-catalogue offering, has been the main driver of growth in recent years and has enjoyed a reputation for setting industry standards for logistics infrastructure and delivery capabilities.
Having reached a high of £80 last October on the back of consistently strong growth within Directory, the share price has since slumped to around £54 – so why have investors decided to take such a different view on the business? First and foremost, growth has been beginning to slow in the Directory division and there is a fear that the business has reached maturity in the UK market. Trends in the retail sector are also uncertain, and some predict the polarisation of consumers towards either premium or value products, away from the middle ground that Next currently occupies.
Looking forward, investors need to consider whether or not the business can continue to drive profitable growth. On the one hand, management has a strong track record of delivering, even in tricky circumstances. On the other hand, the fate of BHS shows that failure is punished hard in the retail sector.