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Next (NXT), the fashion and homewares retailer, has signalled a potential change in direction for the company, with an out of character acquisition that could see it set a new trend in the world of fashion retailing.

It is rare to see Next on a buying spree of its own, so news that it has acquired a 25% stake in Reiss, with a view to taking control of the UK fashion chain by mid-next year, was sure to attract attention.

To fund the deal, Next is making a £33 million equity investment, by acquiring shares from majority investor Warburg Pincus and the group’s founding Reiss family. It will also lend the fashion retailer £10 million in a deal that values Reiss at around £200 million.

It also gives Next the option to acquire another 26% before July 2022, taking its holding to 51% and allowing it to consolidate Reiss’s sales and profits.

While Reiss is a more upmarket brand and has debts of around £60 million, the acquisition of the stake, while rare for Next, isn’t ground-breaking in itself. Where it does start to get interesting though is in Next’s plans to migrate Reiss’s online operations to Next’s Total Platform unit.

This is a piece of technology, not dissimilar to the sort of system used by online supermarket group Ocado, whereby Next allows other brands to use its IT, warehousing and distribution infrastructure for their own e-commerce operations.

The question is whether Next’s Total Platform, which currently only has one upmarket childrenswear retailer as a client, is about to become an increasingly important part of the Next business strategy going forwards.

Analysts seems to suspect it will be. Adam Cochrane at Citigroup has put a value of around £350 million on Next’s Total Platform’s potential. While Paul Rossington at HSBC has said it will enable Next “to move into the high-margin ecommerce solutions service market” with a fully integrated proposition.

The acquisition of Reiss, which sells men’s and women’s fashion from 79 stores and 104 concessions in 14 countries will not have an impact on profits in the current financial year, but it is expected to start making a positive contribution from the year after.

It is rare to see Next on the acquisition trail, but it did make an initial bid for Topshop before it was acquired out of administration by Asos. And Next is an especially interesting one to watch in these changing times, having already successfully transformed itself from a catalogue and then store retailer, to one which now predominantly sells online.

And not least because Next has said it expects profits for the coming year to recover to near pre-pandemic levels, even after three national lockdowns. It saw a 36% rise in online sales in the fourth quarter.

That far out-performed the 8% fall that had been expected by the company itself and Next has already said that were it not for the third round of UK lockdowns, full-year profits would have been £393 million on the back of strong trading in November and December, when online sales recouped almost all those lost due to closed stores.

Aruna Karunathilake, manager of the Fidelity UK Select Fund, has his eye on Next as one of the consumer-facing companies that stands to emerge stronger as a result of the shifting sands of the retail sector during the pandemic.

In a recent interview with Fidelity’s Tom Stevenson, he said he expects Next will get a bigger share of the fashion and homewares market post-lockdown, simply by virtue of the fact that there will be fewer competitors snapping at its heels, with so many having fallen victim, due to a combination of the pandemic and the prolonged retail rout that had seen so many retailers struggling long before the pandemic struck.

The group expects to see pre-tax profits of £670 million for the year to 30 January 2022, ahead of market expectations of around £640 million, although Next’s forecast assumes non-essential shops open at the end of March. Next made a profit of £729 million in the year to January 2020.

Next’s full year results are due out on Thursday.

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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