Next CEO’s Track Record Suggests Investors Should Keep Faith

Next Plc’s reduced sales outlook met with a predictably negative stock-market reaction Thursday, though history shows that investors would be wrong to lose faith in Britain’s second-largest clothing retailer.

Comments by Chief Executive Officer Simon Wolfson that some fashion collections aren’t doing so well caused the shares to fall as much as 7.2 percent, the most since September 2012. Yet Wolfson has shown in the past that short-term disappointment need not be a hindrance to long-term success.

Little more than a year after he started as CEO in 2001, Next reported a drop in sales that sent the shares down 11 percent in a day. A year later, they were trading 45 percent higher. More recently, a reduced profit forecast in October was followed by a 19 percent gain in the shares through yesterday.

“Next is doing very well, but they don’t want to get too caught up in their own hype,” said Kate Ormrod, an analyst at Verdict Research in London. “They’ve shown over the past few years that their strategy is robust and really bearing fruit.”

Next has invested in stores in its home market, while increasing its customer base abroad by expanding online. Since 2008, the retailer has increased its store space to 7.4 million square feet from 5.2 million square feet. It’s also focusing on improving delivery times and recently extended its cut-off to 11 p.m., with plans to extend to midnight by August.

That strategy has enabled the retailer to surpass main U.K. competitor Marks & Spencer Group Plc in terms of both earnings and market value. Thursday’s decline reduced Next’s market value to 11.2 billion pounds ($16.5 billion), compared with Marks & Spencer’s 8.8 billion pounds.

Since Wolfson became CEO, Next shares have risen almost ninefold, while Marks & Spencer has about doubled.

Cash Returns

Such outperformance is largely a function of a consistent record of profit growth and returning cash to shareholders, according to analysts at Canaccord Genuity. Next has handed more than 1 billion pounds to investors through special dividends and buybacks over the past two financial years.

Wolfson said Thursday that the company remains “very cautious” in its sales budgets, reinforcing a reputation for taking a conservative view of prospects.

“It’s very unusual that we would be happy with all collections, which we were at this point last year,” the CEO said. “We’re not saying that there’s a big fashion mistake.”

Warm spring and summer weather last year mean the retailer also faces a tougher task to maintain growth.

Yet analysts at Cantor Fitzgerald Europe said they plan to maintain their 835 million-pound pretax profit estimate for the year through January 2016 -- the top end of a forecast range that starts at 785 million pounds.

“Next is one of the clothing retailers to enjoy the greatest level of trust among consumers and is a brand that manages to truly combine a strong reputation with an image of vibrancy,” Richard Perks, an analyst at researcher Mintel in London, said in an e-mail.

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