Next Directory’s impressive performance in the first half, with profits up nearly 45 per cent, is the latest sign of the success of the UK retailer’s internet strategy. Around 45 per cent of Next Directory’s business is now conducted online, where the average order size is larger (though this may reflect the bigger spending power of online shoppers). Next Directory’s net operating martin has risen from 13.2 per cent last year to 16.6 per cent, thanks in part to a big improvement in product availability.

However, the Directory business delivers a significant chunk, but not the majority of profits, and it does not solve the persistent problem of poor like-for-like store sales. Next shares rose more than 5 per cent on Wednesday morning, following the company’s report of “encouraging” current trading, but management still expects like-for-like sales to be down by 2 to 5 per cent in the second half. The business continues to depend on its strong record of store opening for growth. Unlike some of its rivals, such as H&M and Zara, it has to continue to pursue these in the overcrowded UK market.

Competition remains fierce on all fronts, despite improved gross margins. A rejuvenated Marks & Spencer, already a threat on the high street, is about to relaunch its online offering, and there is talk that Tesco may start selling clothes online. The constant pressure on Next to keep running to stand still helps explain the continuing discount for the shares, currently trading at about 12.5 times this year’s earnings, compared with the sector average of 16 times.

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