Up 33% for the year, where’s next for the FTSE 100 retailer’s share price?

In my opinion, the directors of The next one (LSE:NXT), i FTSE 100 Clothing, home goods and beauty products, they are experts when it comes to managing the expectations of investors.

That’s because, since the start of 2023, the company has issued eight separate earnings enhancements, which have helped push the stock price up 68%.

Now, it might just be a matter of under-promising. Or it may be that the group continues to outperform its directors’ predictions. Either way, the proceeds are clearly going in the right direction.

A wolf in sheep’s clothing

The Economist recently defined Next as “boring brand” suggesting that “sells clothes that are unlikely to grace the runway or go viral on TikTok“. That might be a little unfair, but admit that the “happy business” with a reputation for delivering strong results.

With Lord Wolfson at the helm, the company achieved record profits and profits during the 53 weeks ending 27 January 2024 (FY24). However, it expects to do better in FY25 and is now forecasting pre-tax profits of £995m.

Part of its success is due to the way it has adapted to changing shopping habits with nearly 60% of its revenue now being generated online. It sees the Internet as a complement to its brick-and-mortar stores rather than a threat.

In FY24, it reported earnings per share (EPS) of £6.62. In the first six months of the current financial year, EPS was 6.2% higher than the same period in FY24. If this continues for the rest of the year, the shares will be trading at a forward price ratio of 13.9.

While it’s not in the bargain, I think this is a reasonable valuation for a company with a good track record of growing its earnings. It is also in line with the overall FTSE 100 average.

With over 800 stores in the UK, I suspect domestic growth will be slow. That’s why the retailer plans to focus on expanding overseas. It is in talks to launch franchising and other partnerships in the US, Asia and Australia. It also hopes to generate additional revenue from licensing its technology platform to third parties.

These are the reasons why I recently added the stock to my portfolio. But as with any investment, there are potential risks.

Reasons for caution

Retail is a tough business. And operating a chain of stores is very difficult, especially from a logistics perspective.

This sector is facing a wide range of economic conditions. Any downturn in the UK economy is likely to impact Next’s sales. Although growth is expected, it is not guaranteed. The budget, due to be held later this month, is likely to be difficult.

We’ve also seen before how quickly consumers can fall out of love with once popular fashion brands. Dr. Martens again Burberry are two good examples of this.

Also, I don’t like the fact that the dividend yield is so low. With a yield of around 2%, bounty hunters can do better elsewhere.

However, despite these potential risks, I am happy with my purchase. The vendor’s strong management team has built a reputation for delivering strong returns to shareholders. Long may this continue.