The Subsequent (LSE: NXT) share price is edging larger in morning buying and selling on Thursday 8 Might, after the corporate upgraded its revenue steering for the second time this yr.

Shares on this FTSE 100 retailer have now doubled in three years.

On this piece I’ll clarify why Subsequent is doing so effectively – and whether or not I’m shopping for the shares.

Heat climate increase?

Subsequent says that gross sales throughout the first quarter of its monetary yr (to late April) had been £55m larger than anticipated. The corporate had beforehand forecast a rise of 6.4% in comparison with final yr, however precise gross sales had been 11.4% larger.

The gross sales increase appears to have been pushed by the early heat climate, with further gross sales targeted on “summer-weight clothing”. Subsequent’s administration reckons consumers introduced ahead purchases they’d usually have constituted of Might by way of to July.

Gross sales forecasts for the remainder of the yr have been left unchanged. However the Q1 increase to gross sales is sufficient to permit Subsequent to raise its full yr pre-tax revenue steering by £14m to £1,080m.

That’s equal to an earnings forecast of 698p per share, virtually 10% larger than final yr.

Subsequent’s secret sauce!

In recent times, the excessive avenue stalwart has given different retailers a masterclass in how to adapt and revenue from on-line retail. By constructing a portfolio of manufacturers, the group has added new prospects and located new sources of development.

One other benefit that’s usually neglected is the corporate’s nextpay credit score enterprise, which permits prospects to purchase now and pay later.

Credit score providers added about 18% to Subsequent’s buying and selling income final yr, lifting the group’s working revenue margin to just about 18%.

So far as I can see, that makes Subsequent probably the most worthwhile massive retailer listed on the London Inventory Change.

Will I purchase the shares at the moment?

Subsequent ticks a whole lot of containers for me as a possible funding. In addition to being a top-quality retailer (in my opinion), it additionally has a strong monitor document of dividends.

The bizarre payout has risen from 41p per share in 2005 to 233p per share final yr. Shareholders have additionally benefitted from share buybacks and one-off particular dividends over time.

Buybacks can increase future earnings per share and help dividend development. However in contrast to many firms, Subsequent doesn’t wish to overpay for its personal shares. The corporate has a transparent affordability check requiring a minimal anticipated return of 8% on buybacks.

Proper now, the shares don’t cross that check. Based mostly on at the moment’s upgraded revenue steering, the utmost Subsequent will pay for its personal shares is £116. That’s 7% under the present share price of £124.

Subsequent shares are beginning to look costly to me on different measures too. The forecast price-to-earnings (P/E) ratio of 18 is on the high finish of the retailer’s historic valuation vary, in keeping with my research.

With the price of dwelling nonetheless excessive and the UK economic system underneath stress, I don’t assume it is smart to pay a high price for Subsequent shares.

I’d choose to have an even bigger margin of security, so I’ll be ready – a minimum of – till Subsequent itself is glad to purchase its personal shares.