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Next shares: 5 reasons to buy (and not buy) in 2023!

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Image source: Getty Images

Next’s (LSE:NXT) share price has risen strongly in start-of-year trading. The FTSE 100 retailer has been helped by a blend of resurgent investor confidence and better-than-expected Christmas trading numbers.

City analysts are mildly positive on the stock’s prospects looking ahead too. Of the 25 analysts with ratings on Next shares, 11 rate the company as a ‘buy’, 13 have a neutral take on the company, while one broker has placed a ‘sell’ on it. That’s according to stock screener Digital Look.

Will the Next share price continue to surge? And should I buy the retail stock for my portfolio in 2023?

2 reasons to buy

As I say, robust festive trading numbers have boosted Next shares this week. Full-price sales rose 4.8% in the nine weeks to December 30 (it had been expecting a 2% fall).

Consequently, the company raised its pre-tax profits forecasts for the financial year to January 2023. They are now expected to increase 4.5% year on year to £860m.

Next wasn’t alone in releasing bumper Christmas trading numbers though. Baker Greggs, value retailer B&M and health & beauty chain Boots also all put out better-than-expected releases on Thursday. This could suggest that the doom and gloom many are predicting for the UK retail sector in 2023 could be exaggerated.

Next’s reputation for selling quality, fashionable clothing might have driven those strong Christmas sales numbers. Recent acquisitions of other popular retail brands could help it to weather tough industry conditions this year too.

Last month, the business bought fashion company Joules for a cool £34m. It also invested in a range of other highly-popular retail brands last year like Reiss, Made.com and Jojo Maman Bébé.

3 reasons to avoid Next shares

However, big questions linger over Next’s ability to continue growing sales as it hikes prices to protect profit margins. The business reckons price inflation will hit 8% in the first half of the new financial year and remain elevated at 6% in the latter half.

A sharp decline in consumer spending power might hamper the firm’s plan to pass these costs on. So could its focus on the mid-range segment of the British clothing market. This area is particularly competitive and more bloody price wars could be around the corner.

As an investor, I’m also concerned about the company’s high net debt levels. This is forecast to sit at £700m at the end of this outgoing year. This is down considerably from £1.04bn in the summer, but it’s still uncomfortably high for me, given the difficult trading outlook.

Next said yesterday that “some might look at our forecast for 2023 and again assume we are being over cautious”. But predictions that full-price sales and pre-tax profits will fall 1.5% and 7.6% respectively are still enough to make me worried.

The verdict

Recent gains mean that Next’s share price now commands a forward price-to-earnings (P/E) ratio of 13.1 times. This isn’t an outrageously-high reading. But I don’t think this represents attractive value, given the huge risks the company faces. I’d rather buy other UK shares today.

The post Next shares: 5 reasons to buy (and not buy) in 2023! appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023