Next and Burberry have investment appeal despite lockdown impact

Robert Stephens, CFA, focuses on the changes being made by FTSE 100 consumer goods stocks Next and Burberry.

Lockdown measures have decimated in-store sales for a wide range of companies. For instance, FTSE 100 stocks Next (LON:NXT) and Burberry (LON:BRBY) have been forced to close their stores for large parts of this year. This led to them reporting falls in total sales of 34% and 30%, respectively, in the first halves of their current financial years.

However, in my view, lockdown measures could have a positive long-term impact on both businesses. They are being forced to find more efficient ways of working that could compound their competitive advantages. They are also investing in online operations that may more closely attune them to a key part of future retail growth.

New ways of working prompted by Covid-19

Covid-19 has prompted change for Next and Burberry. For instance, Next reported in its half-year results that it has broadened its supply base, and in many cases it has reduced lead times and sourced better quality products. It has also discovered new ways of working within its warehouses and call centres that could lead to greater efficiency in the long run. Covid-19 has led to faster decision-making via online channels that may increase the company’s scope to respond quickly to changes in customer tastes.

Burberry has adapted its business model to cope with lockdown measures. For instance, it has ramped-up its appointment strategy through the launch of at-home appointments in some markets. It is using virtual customer appointments where possible, and providing in-store stylists to online shoppers to create a more personalised shopping experience. In addition, its operating expenses fell by 17% in the first half of the year following cost savings. Greater efficiency may improve margins over the long run.

A digital future is quickly approaching

Next and Burberry were both shifting their resources increasingly towards an online future prior to Covid-19. In Next’s case, it generated more than 50% of its total sales from online channels before lockdown measures kicked-off. Therefore, it is in a strong position to enjoy a continued shift in demand among consumers from in-store to online. Evidence of this can be seen in its growth in online sales in the most recent quarter. They increased by 23%, and are likely to act as a catalyst on its growth prospects over the long run.

Burberry is aiming to become more online-focused to attract a younger consumer demographic. It has launched several new online features that seem to be resonating with consumers. They contributed to double-digit growth in digital sales in the first half of the year. It continues to invest in social media channels to broaden its customer base, which could reduce its reliance on in-store sales over the long run.

Investment opportunities

Undoubtedly, Next and Burberry’s financial performances are being hurt by enforced store closures. At the moment, it is difficult for investors to see beyond the negative impact of falling in-store sales. However, both companies are evolving their business models so they are in a strong position to maximise their recovery potential over the long run.

Neither stock is cheap at the moment. Burberry has a prospective price-earnings ratio of 32, while Next’s forward price-earnings ratio is 30. However, both companies are forecast to record double-digit earnings growth next year. More importantly, though, their strategies look set to position them for growth as the pandemic comes to an end.