Next trick is to sweat those assets; The Investment Column

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The Independent Online
Half-year figures from Next yesterday, showing a dramatic rise in pre-exceptional trading profits from pounds 44.1m to pounds 56m, suggested the clothes retailer's miraculous step back from the abyss five years ago remains as surefooted as ever.

The 4 per cent decline in the share price, 26.5p to 573.5p, implied the recovery was running out of steam. Which is right?

Unhelpfully, the answer is probably both. Having moved effortlessly into the FT-SE 100 index this summer, and with a market value of over pounds 2bn, it would be too much to expect the renaissance to continue at the same rate for ever and the market found enough in the sales figures since the half-year to worry about.

That said, however, it is hard to argue with like-for-like sales growth of 17 per cent leading to an operating profit increase of 37 per cent.

What is even more impressive is the fact that with more than 300 shops Next has in effect covered 90 per cent of the UK population.

What it is achieving is not the relatively easy act of buying growth through geographical expansion, but the harder trick of making its existing assets sweat that bit harder.

To be honest, it is not altogether clear why Next is such a success. Its formula looked extremely fresh in the mid-1980s when it took the dowdy British high street by storm, but it is now hardly unique, the clothes are not noticeably better quality or value than in comparable stores. In short it is hard to see what exactly the company's competitive advantage is.

The company is also plainly having its problems in exporting the concept overseas. Neither the French nor the Americans have taken the Next look to their hearts so management can be commended on dipping a fairly tentative toe into both markets.

No harm really done if the attempts are ultimately abandoned, but faced with a maturing market at home it would be a concern to investors if there really is no scope to move elsewhere.

No surprise then that some shareholders should be pocketing a profit after a 32 per cent rise since the beginning of the year.

Even after the fall yesterday, the shares are 26 per cent up on the year, a handsome outperformance of both the market and the rest of the retail sector. Since the black days at the beginning of 1991 when you could have picked the stock up for 13p, the shares have multiplied a sensational 44 times.

On the basis of BZW's forecast of pounds 155m this year and pounds 179m next time, those shares trade on a prospective price/earnings ratio of 19 falling to 17. Compared with a growth rate in the low teens, that rating leaves little scope for further outperformance. High enough.