Key points

• Next brand full-price sales were up to 12.3% in the first half of 2022.
• In February 2022, the company launched its largest client to date, Reiss, on its Total Platform.
• The total platform aims to give clients access to the £1.5bn that Next has invested over the last 15 years.

The Next (LSE:NXT) share price is down by over 41% in the past year. And all of this downward trajectory originates from its -45% year-to-date performance. What’s behind this poor performance? And is this a sign to stay away or an opportunity to add this business to my portfolio at a massive discount?

Let’s take a closer look at this retail stock and inspect both the risks and potential rewards.

How were the results in 2021?

In the words of the company Chairman, Micheal Roney, “2021 was another exceptionally productive year for Next as we worked hard to adapt and develop our business to enable us to maximise the opportunities of an increasingly online world.”

Amidst the challenges that 2021 presented, Next results were actually quite encouraging, despite what the stock price would suggest. The company’s full brand sales increased up to 12.8%, while earnings-per-share (EPS) came in 12% higher at 530.8p. Meanwhile, profits before tax landed 10% higher at £823m. Furthermore, commission sales in 2021 grew faster than wholesale and now represent 64% of the group’s total LABEL sales.

The positive news for shareholders doesn’t end there. Full-price sales were up 21.3% versus a year ago. And despite a cost of living crisis and rising inflation, management at the time maintained its 2022 full-year guidance.

Next shares: 2022 Half year results

Despite what the share price may indicate, Next had a fairly good first half of the year, all things considered.

Overall sales were ahead of expectations as there was an outstanding performance from its Retail stores. This seems especially true for its formal clothing lines that enjoyed an uptick in popularity. In fact, Brand full price sales were up 12.4% compared to the same period in 2021 and 22.3% higher than in 2019.

This translated into a respectable 16% jump in pre-tax profits compared to a year ago. Sadly, not everything was positive.

While the first six months of the year proved, fruitful, more recent trading activity started to show some wobble. Performance in August fell below management’s expectations as the pressure from the cost of living crisis continued to scale.

While things seemed to have improved in September, the group still ended up cutting its full-year sales growth forecast from a gain of 1% to a loss of 1.5%. However, recent changes in UK corporation tax are expected to give a small boost to earnings. As such, the earnings-per-share (EPS) guidance was increased by 2.7%.

The risks that lie ahead

With strong financials, I’m not too concerned about any immediate solvency or liquidity risk. But that’s not what seems to have investors in the United Kingdom worried right now.

High inflation paired with rising interest rates has many individuals understandably fearing a looming recession. And under such economic conditions, consumer discretionary retail stocks like Next often see sales suffer as people cut down on unnecessary spending.

After all, we’ve already started seeing weakness emerging in the UK retail market. And with its net debt currently standing at around £600m, profit margins could face additional pressure as loans become more expensive.

Combining these factors with the general fearful investor sentiment we’re seeing right now in the stock market, I’m not surprised to see the Next share price, along with other UK shares in the retail sector, suffer as a consequence.

Is the Next share price a screaming buy?

The concerns surrounding this business are valid. But I personally see them as only short-term issues. The group has plenty of cash on the balance sheet to weather the coming storm if the worst comes to pass. And while operating in the fashion space has a vast collection of challenges, Next has managed to demonstrate a good track record of keeping up with ever-shifting consumer tastes.

Today, shares of Next are trading at a market capitalisation of £6.16bn. That places the price-to-earnings ratio at 8.50. To me, this looks undervalued. So, as a long-term investor, I personally see the recent fall in Next’s share price as a buying opportunity for my portfolio. There are risks, of course, but I feel these are worth taking, given the potential returns in the long run.

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has published a Premium Report on Next. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.