Next fan club's faith still looks justified

Next retail; Taylor & Francis; Kidde
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The Independent Online

As shares in Next soared 12 per cent to an all-time high of 922p yesterday the high street fashion retailer's fan club was out in force again. The praise is justified, of course, as Next has been a text book example of how to get the little things right over recent years. Though it has suffered the occasional hiccup, such as lower-than-expected sales at Christmas and a buying error a few years ago, it has stuck to its position in the upper end of the mass market and continues to grow its business in a most single-minded, unfussy fashion.

As shares in Next soared 12 per cent to an all-time high of 922p yesterday the high street fashion retailer's fan club was out in force again. The praise is justified, of course, as Next has been a text book example of how to get the little things right over recent years. Though it has suffered the occasional hiccup, such as lower-than-expected sales at Christmas and a buying error a few years ago, it has stuck to its position in the upper end of the mass market and continues to grow its business in a most single-minded, unfussy fashion.

Next's core customers are 25-35 year olds who are fashion-conscious rather than catwalk-trendy and management's forte has been to give this group exactly what it wants.

Next is not afraid to learn from others and in the past it has picked up ideas from Gap on merchandise and from Zara on short turnaround times.

All this helps explain why Next's profits for the year to 27 January jumped to £217m from £195m the previous year in a tough environment. Like-for-like sales in the high street stores were up by an impressive 5 per cent on the previous year. In current trading underlying sales growth has improved to 11 per cent though this is partly due to weak comparisons in the equivalent period last year.

The Next Directory mail order division is also firing on all cylinders.

The store portfolio is constantly being improved with smaller stores closed and larger ones opened. Some 250,000 sq ft of new selling space will be added this year including most of the 15 outlets bought from C&A.

Financial management is sound with net cash of £104m and a programme of share buy-backs underway. Next spent £192m buying back 10 per cent of its share capital last year at an average price of 518p. That now looks very good business indeed. Further buy-backs are planned though only at earnings-enhancing levels.

Assuming profits of £245m the shares trade on a forward p/e of 18. About right for a quality company. A solid hold.

Taylor & Francis

Deconstuctionists may come and go but French philosopher Jacques Derrida's Writing and Difference, the movement's founding work published three decades ago, still shifts copies for academic publishers Taylor & Francis with scant regard to the health of the overall economy. It is not of course just philosophy titles that provide constant sales year in and year out but rather the whole academic market, ranging literally from anthropology to zoology.

Since its floatation in 1998, T&F has built on 200-year-old foundations to erect a formidable business. It has used stock or cash to acquire imprints such as Routledge, a social science publishing concern, linking it with other imprints such as medical books and journals publisher Martin Dunitz.

Overall, the company has some 500 journals, publishes a couple of thousand new titles each year and is branching out into online content delivery and e-commerce. There is also a 20,000 strong backlist that will sell titles around the world for years to come.

Full-year earnings reported yesterday jumped 30 per cent to £21.4m before exceptional items and goodwill amortisation, while sales gained 21 per cent to £116.4m. Despite several bolt-on acquisitions the group's strong cash flow helped net debt fall to £7.6m from £37m a year ago.

Since floating three years ago Taylor & Francis has benefited from the rush to embrace media stocks. That's taken the shares from 250p to near 650p, though a recent correction has seen the stock slide slightly.

Now, however, with the bear market mauling traditionally cyclical media stocks Taylor & Francis, with virtually no advertising revenue, is attracting defensive investors. That saw the stock close up 8.5p at 620p, putting the company on a price/earnings rating of 31 times house broker ABN Amro's forecast of 20.1p EPS for 2001. That's a full price for now.

Kidde  

Of the two businesses demerged from the the former Williams conglomerate, Kidde, the fire protection and safety division, was supposed to be the boring, lower growth part. It was Chubb, the security services operation which was supposed to light up the sky. But Chubb issued a shock profits warning within a month of the demerger while Kidde has proved the more fireproof of the pair.

Demerged at 60p Kidde shares now trade at 67p after falling 3p on yesterday's maiden results. Unfortunately, some 60 per cent of Kidde's business is in the US and the company could only be "cautiously optimistic" about future prospects.

So far, the downturn has not been apparent overall, though business with telecoms and internet service providers has certainly weakened. Kidde's says it is not so prone to an economic slowdown as fire protection equipment is needed whatever the health of the economy. The legislative burden on business means that they must spend money on this area.

Kidde's figures were certainly respectable with pre-tax profit jumping from £57.6m in 1999 to £72.1m last year. Sales increased by 16 per cent to £821m, and half of this growth was organic. Margins slipped slightly however, from 15 per cent to a still healthy 13.3 per cent.

Kidde, which is a member of the techMARK index, said that it will double expenditure on in-fill acquisitions this year to £40m-50m. It will also step up a cost-cutting programme.

CSFB, the house broker is forecasting profits of £87m this year leaving that stock on a forward p/e ratio of 10. This may look cheap but the exposure to the US economy means this is not one to buy.

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