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Next’s buy-back bonanza

Tight stock management and conservative financing help to give the fashion retailer its remarkable all-time-high share price

Shares in Next closed at an all-time high today of £24.83, which is a remarkable statistic given the squeals of pain elsewhere on the high street (and doubly remarkable when you remember Next’s shares touched 7p in the distant past of near-collapse in December 1990).

The reasons for Next’s resilience and popularity are well-known. It manages stock tightly, doesn’t do adventurous acquisitions, finances itself conservatively and mastered the logistics of home shopping via its directory business a decade before the arrival of the internet.

And it generates an awful lot of cash – so much that a share buy-back programme has been running more or less constantly for years. The 2004 annual report showed an average of 275m shares in issue during the year; today there are 172m. Pre-tax profits these days are about 60% higher, so the effect of reducing the number of shares in issue has been to turbocharge growth in earnings per share. Chief executive Lord Wolfson, one might say, almost gives share buy-backs, which have had a terrible press lately, a good name.

What’s the secret? The short answer is that he does something almost no other buy-back enthusiast ever does: he states in advance the price at which it would be earnings-enhancing to buy back shares. Thus January’s report said spending £160m to buy back shares at £20 apiece would enhance earnings by about 5%. The arithmetic, of course, becomes less attractive the faster the share price rises, which is why Next shareholders should be thankful that all but £10m of that £160m was spent before the shares touched £25.

Purists point out that earnings per share is a poor measure of real value-creation and that return on capital is superior. True enough, and even Wolfson could do more to spell out the relevant calculations for Next. But at least he has established the principle that share buy-backs have to be justified by the price paid. Most other companies simply ignore the point.

Look no further than Next’s great rival, Marks & Spencer, which in 2007-08, under Sir Stuart Rose’s leadership, spent £556m buying back shares at 441p. Price today: 326.5p. A bad deal, especially now that Rose’s successor finds himself spending £600m on yet another revamp of the stores. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds