If I’d invested £1,000 in Next shares at the start of 2023, here’s what I’d have now

Like many of our retail peers, Next (LSE:NXT) shares started the year on the front foot. However, they have been in turmoil in recent weeks. With that in mind, would it be better if I bought the shares earlier this year?

A slim back

If I had invested £1,000 exactly three months ago, retail shares would have returned roughly 10% of my investment. This translates to an estimated profit of £117 (excluding brokerage fees and/or capital gains tax).

Metric	Next share
Amount invested	£1,000
stock growth	10%
Total dividends	N/A
Total return	£1,110

Given the time frame and performance of the stock market, Next Shares have actually returned quite well. At FTSE 100 it’s pretty much flat, while on S&P 500 up 7% since January. However, there are several reasons for the stock’s rally in the first quarter of the year.

For one, consumer confidence began to retreat, which encouraged an increase in discretionary spending. In addition, the forecast for the UK recession was withdrawn. Thus, it is not surprising that the shares of clothing companies have gained up to 20%.

Fashionable figure

Having said that, the strong double-digit gains that Next shares had experienced since early March have disappeared. This can be attributed to the wider effects of the banking crisis, as well as cautious investors.

The positive outlook for the sector is not a cause for celebration while businesses and consumers are still facing a cost of living crisis.

Harry Leyburn, Saxo

What’s more, investors don’t seem too happy about the company’s latest earnings report, despite its higher-than-guided profit. The group even reiterated its guidance for next year. It expects full-price sales to fall 1.5% and profits to around £800m.

Metric	FY23	FY22	Change it
Total revenue	£5.03bn	£4.63 billion	9%
Operating profit	£0.94bn	£0.91bn	4%
Profit Before Tax (PBT)	£0.87bn	£0.82bn	6%
Basic earnings per share (EPS)	£5.73	£5.31	8%

All in all, this is a good report with a lot of positives to take away. Therefore, it is surprising to see a sell-off in Next shares. What’s more, the FTSE 100 stalwart expects inflation to play a lighter role in its cost structure, which is good news for its bottom line.

Should I buy Next shares?

Healthy free cash flow and a strong profit margin (14%), despite the inflationary backdrop, show that Next is a strong business with good pricing power. However, the country’s balance sheet leaves a lot to be desired – it has a high level of debt with thin liquidity.

Additionally, Next Shares are not very cheap when evaluating their valuation multiples against the industry average. So, it’s no wonder broker Jefferies and Shore Capital gave the stock a ‘hold’ rating. And with a target price of £67.50, the potential gain from the current level is not large (12%).

Metric	Next	Industry average
Price-to-book (P/B) ratio.	7.0	1.7
Price-to-sales (P/S) ratio.	1.6	0.9
Price-to-Earnings (P/E) ratio.	11.4	17.6
Price-to-sales ratio (FP/S).	1.6	0.4
Price-to-earnings ratio (FP/E).	13.0	12.3

Finally, I believe the company will continue to grow in the coming years. After all, the acquisition of many small names should expand the product offering. But given the high multiples, I see better opportunities in other FTSE retail names at the moment, so I won’t be buying Next shares today.