A fashion victim no longer

Next almost folded in the recession but it has made a remarkable comeback on the high street

Bang the gong, sound the horns. Next, the high-street fashion chain, and once almost a victim of recession, has defied the odds, and achieved what most would have thought impossible a few years ago: promotion last week to the FT-SE 100 index.

As a comeback, it matches Newcastle United's return to the heights of the Premier League, and Tyson's renewed acquaintance with the ring.

Inclusion is likely to prompt a further flurry of buying, something true of most shares when they arrive in the FT-SE, as tracker funds investing solely in the index re-weight their portfolios accordingly.

What impact their appetite will have, however, is uncertain. Promotion to the market's own premier league could equally spark some concerted profit-taking, after a dazzling performance by Next's shares over the last five years.

Investors who bought at the nadir of the company's fortunes in 1991 - when the shares stood at 13p and many commentators feared it was all over - have been repaid handsomely: a rise of 4,300 per cent, to be exact, on Friday's 567p close. Over the period, they have also outperformed the FT All-Share index twenty-fold.

Tracing Next's fortunes further back to the go-go days of 1986, however, provides an object lesson in investment technique. Investors who held the shares through thick and thin over that time will have almost exactly matched the performance of the main market. Timing, as they say, is all - as is the need to take a long-term view of investments.

Elevation to the FT-SE does not confer success, however. Barely six months has elapsed since Greenalls, the wonder story of the brewing sector, was catapulted into the FT-SE - only to be one of the stocks to make way for Next last week.

Credit for the Next turnaround is due to Lord Wolfson, the chairman, and his lieutenant, David Jones, who took over from the group's creator, George Davies. He joined the struggling business from Great Universal Stores in 1989 and became chairman in 1990. Lord Wolfson this year returns to GUS as executive chairman.

That move has revived speculation of some kind of tie-up between the two, possibly with their mail-order divisions. Whatever the rumour-mongers speculate, however, Next needs little hype to justify its arrival as a

real bluechip counter.

Indeed, its relatively low share of the high street - 3 per cent, against 15 per cent for Marks & Spencer - suggests there is ample scope for further growth. The company has also been able to boost sales at existing stores by expanding floor space, and lifting overall sales densities, as it attracts a wider range of shoppers.

Mixed stores, where it sells home furnishings and children's wear alongside its more well-known clothing ranges, have also proved enormously successful. Meanwhile, consumer spending seems to be buoyant.

Mail order, which had its doubters when Next launched it, is also a steady contributor to revenues. Management continues to tighten up other aspects of the business, including distribution, where a new warehouse has already cut inventory turnaround and stock levels.

All this, however, has been well and truly underlined by the share price. There must be doubts over its stamina, and the changing face of the high street. When Next made its debut, it set the pace for other store groups. Now, there is a multitude of competitors who have emulated its format - sleek, well-designed interiors, with plenty of wood, selling stylish, reasonably-priced clothes. Its chosen market - young men and women, predominantly office workers - are spoilt for choice.

Some would say the Next formula has begun to look a touch tired. When it was first introduced, it helped define the yuppie revolution. No longer is Next the ultimate for fashion-conscious junior management and executives.

And if its ranges lack the same conviction they did five years ago, so too do some of its stores. However, no one criticised Marks & Spencer for selling plain white underwear in its familiar green St Michael format.

Next is different, too, from its previous incarnation in one other major sense. By 1990, its expansionist policy, high gearing, and a weak economy had almost spelt the end for the group. By contrast, Next Mark II boasts low gearing, good cash flow, and good dividend cover. Analysts reckon there is another three years of growth at 20 per cent a year to go for. Full-year results for the year to January showed turnover of pounds 773.8m, up from pounds 652.9m. Pre-tax profits grew over 40 per cent to pounds 141.9m. But it was in the detail that the more compelling evidence lay. Sales per square foot have climbed from pounds 355 in 1993, to pounds 524 last year. Next Directory, its mail order division, saw sales rise 26 per cent from the previous year.

It would be foolish to believe that the company can continue to grow at this sort of pace indefinitely. And on a prospective PE of over 17, the shares still remain pricey. Nevertheless, it is difficult to see how they can be treated as anything other than a good buy.

Each successive set of results has justified a premium rating. The shares may be due a pause for breath; but they are still one of the best ways of cashing in on the affluent twenty-somethings' spending habits.


Share price 567p

Prospective p/e 18.2*

Gross dividend yield 2.6%

Year to 31 January 1994 1995 1996* 1997*

Turnover pounds 544.2m pounds 652.9m pounds 773.8m na

Pre-tax profits pounds 73.5m pounds 107.4m pounds 141.9m pounds 150m

Earnings per share 17.3p 21.8p 28.2p 32.5p Dividend per share 5.5p 9.0p 11.75p 13.5p

*BZW forecasts

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