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LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy Next (LSE: NXT ) ?
I still clearly remember when retail clothing chain Next launched 30 years ago in 1982. Its slick yuppie chic defined the times, and it could boast 70 outlets within a mere five months. Now it has more than 500 shops in the U.K. and Ireland and a flourishing directory business. I'm in the fitting room now, sizing up Next. How well would it fit my portfolio?
Last time I popped into Next, there was plenty of stuff I wanted to buy. That's a feeling I don't get when visiting rival retail chain French Connection, but maybe that's just me. I left with a bag full of clothes for the kids and was happy with the price and quality. I also found clothes to tempt less groovy grown-ups like myself, which I didn't when I nipped over the road into rival clothing chain Gap. That's only a personal impression, but this midrange chain seems to know what it was about. A kind of Costa for clothing, and almost as ubiquitous.
Other shoppers seem equally impressed, with Next's recently reported Q4 results showing a 14 million pound rise in group profits to 625 million pounds for 2012. A 2.3% profit increase isn't exactly fab and funky, but given the current consumer climate, it's no fashion disaster. Sales from its directory home shopping unit rose 11.2%, compared with just 0.8% from its High Street stores. That surprises me, because I would never buy anything without trying it on first, but others clearly feel differently, and this suggests Next is well placed to survive the consumer migration from the high street to Internet.
There's no question that Next, like all U.K. retailers, is facing tough times, with management warning that trading conditions will be "subdued but steady." If clothing retailers are forced into a discounting price war, that could eat into its margins. New store openings were a key factor in the group posting a 3.9% rise in like-for-like Q4 sales, but plans to open new stores has been hit by lengthy planning permission delays.
Wait for the sales
I like the cut of Next's cloth, but what about the price? The business generates plenty of cash and recently launched a share buyback scheme to maintain group earnings per share. It also has a progressive dividend policy, with the board recommending a 12.7% rise in the interim dividend in September. In fact, I have only one serious problem with the stock. One year ago, you could buy it for 26 pounds. Now you have to pay around 39 pounds, some 50% more. This has forced the dividend yield down to 2.3% and the price-to-earnings ratio up to 13.9, so you aren't picking up a bargain here. When I go shopping for clothes, I usually wait for the sales. That applies to clothing retailers as well.
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