Next’s  record of earnings and cashflow is extraordinary and since it operates in a competitive environment, that must come down to management.

Next is mostly a fashion retailer in the UK and Eire, although 43 of over 500 stores exclusively sell furnishings for the home and its expanding into gardens too. It’s a ''5bn, FTSE 100 company, that earns almost a third of sales and almost half of profits from Next Directory, a catalogue and website.

Bargain | Recovery | Cyclical | Stalwart | High growth

The company is the very definition of a stalwart, having earned a median return on capital of 15% over the last ten years, with very little variation. Even during the credit crunch, returns fell no lower than 13% and in the year ending in January 2012, described by rival French Connection’s boss as the worst in his 40 years of retailing and by Next chief executive Simon Wolfson as "a perfect economic storm", Next returned 17% on capital.

Expectations

An elixir of stylish mass-market products, low-cost sourcing, active management of store leases, a hybrid high street online/business in which the shops provide services to all customers, and the gradual extension of Next into home and garden have sustained the company and its shareholders. I expect keen management of every aspect of the business to continue.

Threats

Competitive position ' strong
Next has found a sweet-spot in the very competitive fashion market, between discounters like Primark, supermarket chains, department stores like Marks & Spencer, and fashion brands like French Connection. Predictably fashionable perhaps, and reassuringly inexpensive, people seem to switch to Next in bad times, and stick with it in good.

Management ' strong
The proof of management is in the results, and the same team has managed Next since chief executive Simon Wolfson, who is only in his mid-forties, joined the board in 2001. The other executive directors had been in place for most of the 1990′s. It’s fair then to credit them with the company’s record and note that each owns between ''2m and ''5m worth of shares except Wolfson. Wolfson owns shares worth ''48m, 33 times his remuneration last year.

Finances ' strong
Traditional balance sheet measures make Next look heavily indebted, and its debts are dwarfed by off-balance sheet lease obligations, but profits have covered rent and interest by a minimum of three times in any of the last ten years, implying the company could earn two-thirds less and still pay the bills. In fact profits have only declined once in the last decade, in 2009, by only 11%. Ultimately, profits are accounting fiction, though, and companies go bust when they run out of cash. Next’s cash flows are almost as consistent as its profits.

Valuation ' neutral
The main risk is the share price. At nearly ''30 per share, the company’s earnings yield is about 7%, which is not much return for admittedly not much risk.

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Verdict

Analysing Next has made me a fan of the business, although I’m leery of the leverage implicit in retailing generally. Retailers use their landlords and suppliers as sources of finance, which is why they often seem unencumbered by traditional bank debt. When they get into trouble though, credit insurers withdraw, suppliers demand immediate payment and they run out of cash to pay the rent. This hidden leverage is particularly worrying due to remorseless competition from supermarkets and Internet retailers, which makes me doubtful of their future earning power.

Next looks financially strong compared to other retailers but I don’t know it could withstand a really big unexpected shock or how the retail landscape will look in ten years time. The fact that it sailed through 2009 is reassuring but no guarantee.

Ultimately I’m saved from agonising about retail, the shares are too pricey to add to the Thrifty 30 portfolio now.

Notes

• Commentary on this year’s results
• Next’s financial strength analysed
• Simon Wolfson: holding ratio
• The ten year record
• More on Next