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Next’s (LSE: NXT) share price is up 47% from its 25 July one-year low.
I am not surprised, as the FTSE 100 fashion, home and beauty products retailer has delivered consistently strong results over the period. In the full-year 2024/25 numbers released on 27 March, it broke the £1bn barrier for profit before tax.
This came on the back of an 8.2% increase in sales over the financial year, to £6.321bn. As a result, pre-tax earnings per share jumped 11.6%, to 845.2p.
Its Q1 2025/26 update published on 8 May showed sales rising 11.4% year on year. This compared to its forecast of a 6.5% increase.
Following this, the firm raised all its key performance forecasts for this full financial year. Sales are now expected to increase 6% (from 5% previously), and profit before tax to rise 6.8% (from 5.4%). Additionally, pre-tax earnings per share are projected to jump 10% against the earlier 8.8%.
What’s the secret here?
Next highlighted the key drivers to its success in its 2024/25 results announcement.
One is the development of the Next brand to grow beyond the constraints of its own infrastructure.
This has been achieved by tapping into overseas third-party distribution networks. It has enabled its international websites to grow sales by 350% over the last 10 years.
The other is building out the Next Platform beyond the reach of the brand to include other firms’ products. This means that 42% of its online sales in the UK are not Next-branded products.
The net result of all this is that the business is growing on multiple fronts. It has new routes to international markets, new overseas markets, new third-party brands on the platform, and new wholly-owned brands and licenses, among others.
That’s all great, but what about the share price?
There is no doubt in my mind that Next is a good business. But that does not mean I will pay any price for the stock.
A risk to the firm’s future earnings is from the intense level of competition in the sector. Another is from any further surge in the cost of living in its key markets. This might deter customers from buying its products.
On the share price itself, the key question for me is if any value remains following its rise this year.
Starting with the price-to-earnings ratio, Next is very overvalued at 18.9 against its peer group average of 12.8. This comprises Abercrombie & Fitch at 6.6, Frasers Group at 9.7, Marks and Spencer at 13.9, and H&M at 21.1.
It also looks very expensive on its price-to-book ratio of 8.5 compared to its competitors’ average of 2.9.
The same is true of its 2.3 price-to-sales ratio against the 0.7 average of its peers.
I ran a discounted cash flow analysis to ascertain what these all mean for the stock’s value. Using other analysts figures and my own, this shows Next shares are 30% overvalued at their current £126.35 price.
Therefore, their fair value is £97.19, although market vagaries could move them lower or higher.
I never buy shares that look overvalued on every key measure I most trust. However good a company it may be, Next looks very expensive to me, so I will not buy it.
