Should you invest in Next shares? We look at the profit machine stock

Fashion conscious: Nowadays Next sells not only its own brand, but a host of others

The story of Next, the £12.5billion retail giant, began 160 years ago in Leeds. The company, then known as Hepworth, was the first High Street chain, supplying bespoke and off-the-peg tailoring.

Next’s transformation into a 21st century clothing and homeware powerhouse is an exemplar of how to survive and thrive amid radical shifts in a sector. 

The company, which holds the number one slot in the UK clothing market, is preeminent in the shopping mall – and also on the internet.

Nowadays Next sells not only its own brand, but a host of others, including Gap, Laura Ashley, New Balance, Victoria’s Secret and The White Company. 

Maintaining its tradition in tailoring, the retailer also owns 72 per cent of Reiss, the upscale chain celebrated for its chic suiting.

No wonder Next shares, which have soared by 33 per cent this year, are seen as one of the stocks to own if you want to back great British businesses that are also poised to become global stars.

Last month the company reported a 14 per cent rise in half-year sales to £2.86billion. Richard Hunter, of Interactive Investor, hailed the figures as ‘next-level numbers’. He argues that Next, under its cerebral chief executive Simon Wolfson, has ‘an unparalleled understanding of the market in which it operates and its ability to capitalise on new opportunities’.

Some of these opportunities will emerge here at home. In the past few days Next has snapped up a 16 per cent stake in the homeware brand Rockett St George.

But other opportunities may lie abroad, given the surging demand from overseas for Next fashion. A spokesman for the retailer says that, thanks to the influence of Netflix shows, the tastes of diverse nations are converging.

Next also forecast that it would deliver £1billion in profits for the full year, even against a tricky economic climate. This prediction was not viewed as hype, for Next tends to under-promise and overdeliver.

Will McIntosh-Whyte, of Rathbones Asset Management, is optimistic about the outlook. He says: ‘The business is well positioned to take advantage of a recovering UK consumer – this is if the new government doesn’t destroy consumer confidence with their doom and gloom narrative.’

Ben Preston, of the Orbis Global Equity fund, is also sanguine about Next’s prospects. He says: ‘Strong companies can often use tough times to their advantage, and that’s exactly what Next has been able to do.’

This ability to adapt to circumstances began to become apparent back in 1987 when Hepworth changed its name to Next. The move was an acknowledgement that its future lay not in fusty formalwear, but in the Next fashion stores set up in 1982.

These shops, catering for younger women in search of glamorous suiting, were the creation of George Davis, a major retail personality of the 1980s.

Davis, who went on to launch Per Una at Marks and Spencer and George at Asda, served as Next’s chief executive between 1984 and 1988. Although this was a turbulent period, this mould-breaking retailer ushered in a new era.

This pattern of disruption resumed under the 56-year-old Wolfson who took over in 2001, having done a stint on the Next shop floor after his Cambridge law degree. He has deftly navigated the subsequent attrition in retail that has claimed victims such as Debenhams.

Rivals may have shuttered their shops, but Next has 460 stores and will open more. It also has a sophisticated online offering built on the infrastructure of its mail order arm Next Directory.

Next’s Total Platform, established in 2023, provides distribution, warehousing, website and other services to other retailers in return for a fee.

Such is the investment in logistics, IT systems and software to cater for Total Platform and the online shopping revolution that Next now employs more people in technology than in its product divisions. As Wolfson puts it: ‘History has been given a shove and, having moved forward, seems unlikely to reverse.’

Aruna Karunathilake, portfolio manager of the Fidelity UK Select Fund, a long-time investor in Next, underlines the extent of the switch to online. He says: ‘Most people think of Next as a bricks-and-mortar retailer given its presence on our high streets but in actual fact store-based retail is now less than 10 per cent of its profits.’

This radical alteration in the nature of the business explains the general approbation in which Next is held – and the respect for its stance even on controversial issues.

More stores: Next has 460 stores and will open more

Last month the company said it could shut stores if it lost the appeal against a long-running equal pay claim. But this did not slow the ascent of the share price. The assumption seemed to be that Next would follow its usual policy of closing stores with lower profitability, rather than penalising workers.

Russ Mould of AJ Bell describes the company’s management as ‘a showcase in how to run a public company’. He highlights the ‘detailed guidance’ that Next provides. Its report and accounts outlines the reasoning behind its strategy, mentioning mistakes that have been made on, say, acquisitions but also how others have been avoided.

Next regularly steps in to snap up struggling names such as FatFace and Made.com, the furniture company. Yet Wolfson contends that this does not mean that Next is a conglomerate, suggesting that it is more akin to a venture capitalist group.

In the report and accounts ‘Big Picture’ section, Wolfson sets out the tasks ahead. These pages provide a hint to his thinking: his public pronouncements are relatively rare – and to the point.

It is this candour that investors appreciate about Wolfson who, as Baron Wolfson of Aspley Guise, sits in the House of Lords, As the son of a former Next chairman –Lord Wolfson of Sunningdale – he could be seen as a beneficiary of nepotism, but it is hard to find anyone who holds this view.

There is respect for his expertise – and also for his low-key lifestyle. In his free-time, Wolfson, a father-of-three, likes gardening. He also sponsors the £250,000 Wolfson Economics prize.

His wife, Eleanor Shawcross, was adviser to Rishi Sunak as Prime Minister and George Osborne during his time as Chancellor. Wolfson is unlikely to be checking out soon, although he is the FTSE 100’s longest-standing chief executive. He loves his job and investors will be hoping that this continue to be the case.

A Long-term hold for future growth

If you are contemplating adding Next to your portfolio, do not look for a quick killing. This is a long-bet on economic recovery in the UK – and elsewhere.

Next shares have jumped by 50 per cent over the past five years to 9742p. As a result of this increase 13 of the stockbroker analysts teams that follow the stock consider it a ‘hold’ and four a ‘buy’.

McIntosh-Whyte, of Rathbones, is among those who argue that the valuation may be stretched, albeit in the short term.

Others are more confident. Karunathilake, of Fidelity, argues that Next is underappreciated by the market given its good return on capital and its cash flow.

The shares are valued at 15 times earnings, in line with other retailers. But Karunathilake says this undervalues Next’s online capability. This is set to be the engine of its expansion in Britain and beyond.

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