In my opinion, the directors of Next (LSE:NXT), the FTSE 100 clothing, homewares and beauty products retailer, are experts when it comes to managing the expectations of investors.

That’s because, since the start of 2023, the company’s issued eight separate earnings upgrades, which have helped push the share price 68% higher.

Now, it might be a case of simply under-promising. Or it could just be that the group continues to outperform its directors’ own modest forecasts. Either way, earnings are clearly going in the right direction.

A wolf in sheep’s clothing

The Economist recently described Next as a “boring brand” suggesting that “it sells garments that are unlikely to grace the runway or go viral on TikTok”. That may be a little unfair, but it did acknowledge that it’s an “exciting business” with a reputation for delivering strong results.

With Lord Wolfson at the helm, the company achieved record turnover and earnings during the 53 weeks ended 27 January 2024 (FY24). However, it expects to do better in FY25 and is now forecasting a profit before tax of £995m.

Part of its success is due to the way in which it has adapted to changing shopping habits with approximately 60% of its revenue now being generated online. It sees the internet as being complementary to its bricks and mortar stores rather than a threat.

In FY24, it reported earnings per share (EPS) of £6.62. During the first six months of its current financial year, EPS was 6.2% higher than for the same period in FY24. If this continues for the remainder of the year, the shares will be trading on a forward price-to-earnings ratio of 13.9.

Although not in bargain territory, I think this is a reasonable valuation for a company that has a good track record of growing its earnings. And it’s in line with the average for the FTSE 100 as a whole.

With over 800 shops in the UK, I suspect domestic growth will slow. That’s why the retailer plans to focus on expanding overseas. It’s in talks to roll out franchising and other partnerships in the US, Asia and Australia. It also hopes to generate additional revenue from licensing its technology platform to third-parties.

These are the reasons why I recently added the stock to my portfolio. But like any investment, there are potential threats.

Reasons to be cautious

Retailing is a tough business. And operating a chain of stores is particularly difficult, especially from a logistics perspective.

The sector is also exposed to wider economic conditions. Any slowdown in the UK economy is likely to impact Next’s sales. Although growth is expected, it’s not guaranteed. The budget, due to be held later this month, is likely to be a tough one.

We’ve also seen before how shoppers can quickly fall out of love with previously popular fashion brands. Dr Martens and Burberry are two good examples of this.

Also, I don’t like the fact that the dividend on offer is a little mean. With a yield of around 2%, income hunters could do better elsewhere.

However, despite these possible risks, I’m happy with my purchase. The retailer’s strong management team has built a reputation for delivering solid returns to shareholders. Long may this continue.