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Edited Transcript of NXT.L earnings conference call or presentation 23-Mar-17 10:59am GMT

Thomson Reuters StreetEvents

Full Year 2016 Next PLC Earnings Presentation

Leicester Sep 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Next PLC earnings conference call or presentation Thursday, March 23, 2017 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* John Barton

NEXT plc - Chairman

* Simon Wolfson

NEXT plc - Chief Executive




John Barton, NEXT plc - Chairman [1]


As you all know, this is my last meeting, and it's customary to indulge the Chairman a little bit at his last meeting. So we are going to go a little bit off piste away from the presentation.

I joined this Board 15 years ago and when I joined, the earnings per share were 46p, the shares were GBP10, and the annual report was 48 pages. I leave today, the earnings per share of 440p, 11 times -- 10 times what they were then. The share price is GBP40, only 4 times what it was then. But the new annual report is now 150 pages and, interestingly, there isn't much more financial information in here than there was in here. So that's one of the sad things, I think, that's happened to all of us.

Across those years, there have been ups and downs. Two years after I became Chairman in 2008, profits fell by 14%, the share price halved, Armageddon. I can remember those days very well. We had no clear vision of the future. We stopped buying our own shares back and we decided best to just hunker down and get on with running the business; remarkably similar to where we are today.

If you look at your forecast for this year, we are predicting a fall in profits of about 10%. The share price has already halved. Armageddon is there. We don't know what's going to happen next. And we predictably, because we have no clear vision of what lies ahead, have stopped buying our shares back. Now, our reaction to that has been exactly the same as it was back in 2008, focus on the fundamentals of the business.

NEXT is a well-run, resilient Company and has an excellent management team. It will recover, profits will grow again, and the share price will go up again. Of that, I am absolutely sure. Simon.


Simon Wolfson, NEXT plc - Chief Executive [2]


Thank you, John. A rallying call. Slightly more optimistic than we would normally do, but there we are. (laughter)


John Barton, NEXT plc - Chairman [3]


That's why I'm leaving.


Simon Wolfson, NEXT plc - Chief Executive [4]


Fair enough. Fair enough, very good. This presentation is going to fall into broadly three sections: first section will be a review of the numbers from last year; second section, how we think the outlook is panning out; third section, some of the things that we are doing in order to improve the business and cope with difficult times.

Starting with last year's numbers, sales for the full year were flat on last year -- were down 0.3%. I should stress that all the numbers that I'll be talking about throughout this presentation, with the exception of the cash flow, will be 52-week versus 52 week-numbers. Last year was, in fact, a 53-week year.

Group sales down 0.3%. NEXT Brand sales, and this really strips out the effect of sales to franchise and sales through NEXT sourcing, they were flat on the year. That is a slightly better picture than the underlying reality. Full-price sales, which is what drives profits, were down 1.3%. Group profits -- operating profits down 2.8%; an increase in interest charge of GBP7 million.

At face value, this looks a little bit confusing because we finished the year with the same amount of debt as we started it with, but the average amount of debt in the year was GBP300 million higher than the year before; the big increase in debt coming at the back end of the previous year. The interest charge for the year ahead we anticipate will be somewhere in the order of GBP36 million.

Profit before tax down 3.8%. Slightly lower tax rate, but close to the corporate rate for the UK with 20%. We expect that rate to drop to 19% in the year ahead and be in line with the UK corporate rate. Profit after tax down 3%. Earnings per share boosted by share buybacks down 0.3%.

Dividends maintained at 158p, comfortably covered about 2.8 times. We intend to maintain the dividend in the year ahead. We think the ordinary dividend is extremely well covered, and even though we are forecasting that profit in the year ahead, we will maintain it and we intend to maintain it.

In terms of cash flow, this is the only point at which we are looking at comparisons that have a 53-week year last year. That's 53rd week adds around GBP15 million to last year's cash flow. So what you can see is around GBP20 million of -- sorry, GBP30 million of less cash flow this year than last year from operations.

Capital expenditure, GBP10 million higher than last year. The main driver of that is a GBP30 million increase in the amount we spent opening new space. We did open a very large amount of space last year, around 330,000 square feet. On average, we would expect that to be around 250,000. The reason for opening that much is all down to the timing of deal flow and the speed at which we could get the stores open.

We spent less on maintenance, GBP4 million less on maintenance. You should expect an average maintenance CapEx budget -- there's maintenance and cosmetic refits -- this would be around GBP14 million a year average going forward.

Much less on systems hardware. Just to stress, we haven't spent less on systems; this is on systems hardware. All the revenue costs of systems, the software, development, all of it, as much as we can we write off systems costs to revenue. The revenue cost of systems increased by GBP5 million last year and will increase by GBP6 million in the year ahead. So we are still increasing the rate -- the amount we invest in systems.

The exceptional number on the CapEx was last year's number for stores, about -- maybe GBP5 million worth of CapEx went into a new till system, and that's why last year's number was exceptionally high.

Head office and essential infrastructure coming down from last year. This will come down again in the year ahead. The biggest single cost in that GBP10 million was we've built an on-site photographic studio at our head office site in Enderby. That allows us now to, when we receive stock, we're able to photograph it and get it online in two days rather than the 10 days that it was taking us.

In terms of warehousing, still spending a lot on warehousing. More than half of this expenditure was on our new automated storage and retrieval warehouse for sofas. That has now been completed, and that expenditure will now not go into the following year.

So looking at next year, much less on stores and this is, again, the timing of deal flow. Much more on maintenance CapEx, and this is all down to one really big project that we've got in Manchester Arndale which is our biggest shop, and I'm going to talk a little bit more about that later on.

Also, the other thing I should say is, obviously, warehousing expenditure, the GBP15 million that we spent on a new automated storage and retrieval system dropping out, so much less on warehousing next year as well.

In terms of working capital, the vast majority of last year's outflow and this year's outflow into working capital was the growth in Directory debt. Both last year and this year, that increase has been driven by the reduction in minimum payments. So the customers extending their debtor days, rather than people spending more on credit.

Distribution to shareholders around GBP500 million this year. That compares to near GBP700 million last year. There is a timing issue there. Basically, we accelerated GBP100 million of capital returns last year into share buybacks at a share price that we won't mention.

Balance sheet. Balance sheet is still looking very strong. Stock down 7%. We anticipate that we will finish the season with stock down 3% or 4%. Of course, that does depend on our sales performance, but that's what we are aiming for our budget, stocks to be down 3% or 4%. So the 7% is really a timing issue.

Debt is up GBP76 million. The vast majority of that, GBP70 million of that, was increase in Directory debt. And just for comparison, sales to credit customers were down 2%. So again, that's being driven by the increased debtor days.

Pensions, a lot of talk about pensions in our industry. Our surplus has gone up. This is our accounting surplus, gone up from GBP46 million to GBP63 million. In terms of our technical surplus, and this is the one that drives the amount of money that we have to pay into our pension fund; when we did evaluation at September last year, our triennial evaluation, that came in at a deficit of around GBP70 million. We have agreed with our pension fund that we will pay GBP14 million a year additional cash in order to eliminate that deficit over the next five years, if we still have a deficit at the point at which we have to pay the money.

As it stood in January, that technical deficit had moved to around GBP5 million positive surplus. So we don't anticipate in the current year the pension fund will be a big issue. And certainly in relation to the size of the Company, our pension fund is not something that you should worry about going forward.

Net debt up by about GBP11 million. Just walking forward the debt from last year, GBP850 million is where we started the year. We generated GBP717 million of what we've called discretionary cash. This is the cash that the business genuinely has discretion as to whether we spend or not. So this is after interest, after-tax, after working capital. We generated GBP717 million.

Of that, GBP161 million went into CapEx, GBP226 million went into our ordinary dividend, which left GBP330 million surplus to all the requirements of the business. GBP276 million of that we paid back into shareholders through a special dividend. GBP65 million we paid -- was used to fund additional Directory debt, and that gets us broadly to where we started.

Looking forward to next year, our plan is to maintain the level of debt in the business at around GBP850 million. That's around 85% of the value of our Directory databook. So it is more than matched by our Directory databook.

In terms of how we expect that to pan out, we expect surplus cash around GBP300 million. We've said that we are going to pay GBP255 million out as special dividends in four payments. That would get us actually to about GBP45 million less than last year's debt. The reason we've chosen that number is because our cash flow at the bottom end of our range is GBP255 million, and so that will get us back to exactly GBP861 million.

If we are in the fortunate position of becoming more confident of our trading conditions going forward, more confident in our profits and cash flow as the year progresses, that GBP45 million we also intend to -- we will return to shareholders either through special dividends or through buybacks.

But, at the moment, we are being cautious about distributions and limiting what we are promising to GBP255 million. Promising is probably too strong a word; intending, I think, is what we -- our auditors would want me to say.

In terms of our funding, the debt we have in the business peaks at GBP1 billion and very comfortably funded by GBP1.4 billion of bonds and bank facilities, the first of which falls in in 2020, so very comfortably financed debt.

Moving on to our Retail business, Retail sales went backwards by 2.9%. The underlying picture was slightly worse than that at minus 4.6%. Sales from new space delivered 2.5% and that is from 330,000 additional square feet, which represents around a 4% increase on our total portfolio, which now comes to around 8 million square feet.

In terms of store numbers, our store numbers actually shrank by two, and that is because the vast majority, if not all, of our new space is coming from where we are relocating stores; and in two situations, we closed two stores and opened in one. We don't anticipate our store numbers changing dramatically as we go forward.

In terms of the performance of new stores, they missed the target by 3%, pretty much in line with the Company, but still hit the payback and profitability hurdles of the Company. And you can see the new store portfolio still very profitable at 23% net branch contribution before central overheads.

Looking forward to pipeline, we've got 900,000 square feet of pipeline in the year ahead -- sorry, in the five years ahead that we've identified. 65% of that is fashion, 35% home. In terms of how we expect that to open, the phasing of that space, we are only expecting 150,000 into next year, 250,000 the year after that, and it's too early to say when the balance of 500,000 will open. And I'm going to say a little bit more about the logic of opening new space later in the presentation.

In terms of Retail profit, margin declined. In terms of the walk forward of that margin decline, gross margin was slightly better than last year. This is all about freight costs coming in slightly better than we budgeted for.

Markdown was a big cost. Two things going on here. The increase in stock for sale was 17%. If our increase -- the fact of that increase would have eroded margin by 0.7%. The fact that our clearance rates dropped, that our markdown sales were lower than our stock for sale, added another 0.3% to margin erosion in the previous year.

Store payroll cost was flat. Underlying wage inflation including national living wage, would have added -- would have taken 0.5% off our margins. We made up for that through a number of different productivity improvements in the branches, so we pretty much saved the inflation in the branches.

Store occupancy cost, adverse movement of 1.1%; this is all about negative like-for-likes. Underlying rent inflation is very low. In most stores, we are either having zero or in some cases a rent reduction. Underlying average rental inflation was 0.5% on an annual basis.

Warehousing and distribution, adverse movement to 0.3%. Two things going on here: wage inflation in the warehouse without balancing cost efficiencies, and the carry cost of our new automated storage and retrieval warehouse which was open, we were paying rent on it, but we weren't actually getting any of the benefits from it. And we won't get those benefits until midway through this year.

Central overhead, a small savings. So that accounts for the margin erosion in Retail, which has dropped to now 14.7%.

Moving on to Directory, and just standing back from the Directory, there are really three things going on here. The first is underlying weakness in the NEXT branded UK business, and that weakness is being more than made up for by the growth in LABEL and overseas, and in our ability to get operating efficiencies and increased interest income from the existing operation.

Total sales in Directory up 4.2%; underlying full-price sales up 3.6%. In terms of how that broke down between the UK and overseas, the UK was up 1.2%. That was made up of a decline in UK NEXT branded sales of 1.8%, but an increase of 18%, 19% in our LABEL business. We think there is some attrition between the two businesses, so not all the LABEL sales are incremental, and some of them inevitably will be coming from the Directory -- the UK Directory business, but we believe the vast majority of the LABEL business is incremental and profitable.

Overseas up 18.5%. In terms of customer numbers, UK customer numbers up 2.6%. Overseas customers' numbers up 11%. That is an interesting number, the 11% number in overseas customers, because you would expect new customers to perform worse than existing customers and, therefore, it's unusual for the customer numbers to grow less than the sales.

The reason for that difference is that the countries that are growing fastest are countries that happen to have very high sales per customer relative to others.

In terms of the cash and credit business, credit sales down 1.7%, customers down 3% -- average customers down 3%. Cash customers still growing strongly. I'm going to talk a little bit more about credit customers later in the presentation.

In terms of margin and profit, Directory margin moving forward by 1.3%. Bought-in gross margin down by 0.3%. This is the 0.1% gain we got in Retail, we also got in Directory, but that was offset by a 0.4% erosion as a result of selling more branded stock, non-NEXT-branded stock, which has a low margin.

Markdown, adverse movement to 0.1%. Here clearance rates were maintained and stock for sale was up only 5%, so a much lower effect in Directory than in Retail. In terms of interest income, a 1% improvement in margin as a result of the tail end of the extended payments that we gave to our customers. And you shouldn't expect that increase in interest income to carry forward into the next year. So that was one windfall we got this year that you shouldn't expect next year.

Warehousing distribution, we've done a huge amount of work in our warehouses to improve the efficiency in both warehousing and the distribution network, and that's given us 0.6% improvement. And actually some of that improvement is also getting much better prices on our overseas distribution as well.

Marketing and catalogues, this is all about the savings on marketing -- on catalogues paying for the increase in marketing online. So in terms of -- that's all I'm going to say about the previous year.

In terms of the outlook, I have chosen a suitably sunny picture to get you into the mood as to what we are expecting in the year ahead. We've given our sales range of minus 4.5% to plus 1.5%. That is on a constant currency basis, and it compares to our trading statement at Christmas of minus 0.4%. So we are expecting the year ahead to be worse than the last quarter of last year, and worse than the whole of last year as well. So we expect a deterioration.

The numbers that we report won't look as bad as the underlying sales because of the effect of overseas sales getting a currency gain. That means that the reported numbers are likely to be between minus 3.5% and plus 2.5%.

Three reasons why we think it's going to be tough. The first is what we began to talk about a year ago in terms of the shift in consumer preferences. We are definitely seeing that consumers' priorities are shifting towards doing things and away from what people are now describing as stuff, as they sort of sense that people have enough stuff.

I should say that we don't expect this trend to last forever. It's very easy to look at consumer trends and think, oh, this is going to go on forever and in 10 years' time, everyone will be walking around looking like (inaudible). We don't think that this is a permanent loss of interest in fashion, but equally we cannot see this -- we cannot see any signs that this trend is easing. And we are anticipating that it will continue for the balance of the year.

Just in terms of supporting numbers, this is just interesting. This compares the Barclaycard numbers on entertainment, pubs, and restaurants in quarter 4 last year to clothing spent on the High Street. And you can see it's not necessarily that people are spending less; it's that they have changed what they are spending on, and to some extent, where they are spending it.

Adding to that pressure is a squeeze on real incomes and, obviously, with clothing being at the discretionary end of customers' spending and with preferences moving away from clothing, a squeeze on real income, is all the more problematic. The top line shows the average weekly earnings in the UK. The bottom line shows CPI. This graph was put together two weeks ago.

Actually -- and the green dotted line was the Bank of England's forecast, and what you can see is actually CPI has come in higher than the forecast rate. So we think we are now at the point where real incomes are probably shrinking.

Inflation, obviously, is not just a problem for our customers; it's also a problem for us. We had currency rates that went against us in the first half. The headwind in the first half -- I've used the dollar rate here. Dollars account for around 60% of our purchases, but it represents a very good proxy for all the other currencies that we are buying in as well. The headwind was 10% there.

Our price rise was in the first half of 4%. We said less than 5%, which was almost universally reported missing the less than. So what looks like a win, 4%, but we did say less than 5%. Looking forward to next -- to the Autumn/Winter season, the headwinds get stronger, and that's because we were able to hedge a lot of the Spring/Summer exposure that we weren't able to hedge pre-June last year for Autumn/Winter.

So a 14% decline in [costing] rates. We still think that our prices will be up by less than 5%, probably around the same amount as Spring/Summer. And that's really all about two things. First of all, increasing capability in new and developing territories, manufacturing territories, and secondly, at the moment for clothing, it is definitely a buyers' market.

The decline in the sector generally, not just in the UK, has meant that there is a lot of capacity in warehouses and manufacturers are fighting for business.

In terms of margin impact, I just thought I'd talk a little bit about how we've balanced the margins between the gain that we make on overseas revenue and the losses we make elsewhere as a result of currency movements. So, in terms of additional profit, this is the additional profit overseas. Just to be clear, we haven't passed through any of the UK price increases to our customers overseas. So if a pair of children's jeans was EUR8, that pair of children's jeans will be EUR8 next year. That gave us a GBP22 million profit, and that goes straight into sales and profit.

Non-product overseas costs, these are things like paper for our catalog, cost us an additional GBP2 million. And the lower profit on our Sourcing operation is around GBP6 million. Our own Sourcing operation is, in essence, a manufacturing operation. And much as the rest of manufacturing has been squeezed, so has our own operation. So there is a GBP6 million loss there.

In terms of the GBP14 million balance, we have used that to reduce bought-in gross margin, so that has gone back into reducing prices; so a no score draw on that. In essence, we've used the overage from the overseas income to pay for tempering the price rises in the UK. That's worth just over 1% on prices.

Moving on to cost increases. The biggest cost increase we are looking at this year is wage inflation, ordinary wage inflation. This is not just in NEXT, but also in our supply base in the UK. So in particular, our career network. That's going to cost us GBP8 million. On top of that, the national living wage is GBP4 million; that gives us GBP12 million cost increases.

Taxes, and this is rates, an apprenticeship levy in the main, that's GBP9 million, and energy taxes is the other thing, actually. Those are the big three [nominally]increasing taxes. Interestingly, offset at the other end by a reduction in corporate tax rates, a reduction of 1% in there.

So a large -- the tax that we are paying one side on pretax profits, we are getting back a lot of that in post-tax profits, which I think is an interesting analogy as to what goes on in politics. So you sort of give with one hand, take with another; slightly more taken, by the way.

The other cost increase, and this is a, if you like, a self-inflicted cost increase. We are investing GBP11 million more in online. Most of this is going into systems, but some of it is going into bought-in software and also marketing resource as well. That gives us a total increase around GBP36 million.

Looking at that in the context of our forecast P&L, this is at the central point of our guidance for the year ahead; GBP36 million cost increases. We are anticipating like-for-like sales of minus 7% at our central guidance point. That will cost us GBP75 million in lost profit. A lot of that -- a lot of those lost sales just go straight through from the gross margin level to the net margin level.

We are expecting cost savings of GBP26 million. We might get slightly more than that, so that's probably the only conservative number on here. GBP12 million more from new space and GBP13 million more from Directory, again, very much being driven by the overseas and LABEL operation there.

In terms of what we are going to do going forward, there are really three areas that I'm going to talk about, product, online and stores.

Starting with product, this is a good news/bad news story. You will remember that six months ago, and actually for over a year now, we've been talking about the need to move our buying processes on and become much faster at responding to new trends.

We've done a huge amount of work on that and we have succeeded in significantly reducing our product development lifecycle. Just to sort of explain that, we would normally start -- if we are planning an Autumn Winter range, so that would be a range that launches end of August into September, that process, traditionally in the Retail business, will start in October.

Have catwalk shows, inspiration trips, our designers will put together their design inspiration and, traditionally, we have then spent three months going out to the Far East, putting samples in to work, getting those samples, coming back to the UK.

Halfway between that time, we'll get all the samples together that we've made, review them, see where the holes are, rebalance the range, make sure we've got price architecture right, make sure we've got the balance between long-sleeve, short-sleeve, heavyweight, lightweight, all the sorts of things you have to do to balance the range. And then remake samples as necessary as a result of that and final selection in January/February.

That process does have its advantages. It means our ranges are coordinated, different items go with each other. We have balanced ranges in terms of pricing and end use and the product is extremely considered. The disadvantage is it takes a hell of a long time.

We've started to work, in some cases, in a different way. In terms of how we are working in a different way, we are now sending buyers out; they're going to factory and putting designs into work in the way they normally would. But rather than to come home and wait for the sample to be sent back to them, they are remaining in the Far East, going to other factories and then going back, sometimes the next day, to look at those samples.

It doesn't take long to make a sample. A good sample room can make -- overnight can make pretty much any sample you like. We are then using that time to -- that second day to amend it, fit it, work out a fabric consumption, begin to think about costing.

If any changes need to be made, it can be made that night. Third day, a buyer can go back and place the order. And this is the way that some of our -- internationally -- that some of our very best competitors work. It's an extremely fast way of doing things. And, in essence, it allows you to do in three days what we have been spending three months doing.

Now, it will be easy for me to exaggerate the importance of this, and to give you the impression that now our ranges are all built in three days; that's obviously not the case. What you can -- you can do this for an item or even a set of items. You can't do it for a whole range, so I wouldn't want to exaggerate this, but I think it does give a sense of what can be achieved if you're able to change the mindset and culture of buying.

What that means in terms of the product, even in -- even in an environment where we don't make the product any faster, and in a lot of cases, we are making the product faster, mainly by having the fabric available at the point of order, so buying the fabric long before you go to visit the manufacturer. So that when you visit the manufacturer and you place the order, you've got the fabric available to go. That will take about six weeks to eight weeks out of the production time just having the fabric available. And then there are small advantages -- a third small advantage you can get from making closer to home.

Where we've done that we found not only is it faster but also because we are in the factory, negotiating prices with money in our pocket, we have also been able to get better prices on a lot of these garments.

It's amazing the effect that being in a factory, with a factory owner with money to spend on a garment, say this line, $150,000; I'll give it to you at this price or I'll go away and think about it for a week. It's amazing how often you can walk out with prices that you would never get if you were negotiating by email or telephone.

Where we've done this last season we did have some huge success. So all of these products that you can see here all were products that would not normally have been in our range. They were some of our best selling products in the run-up to Christmas and they were all bought through rapid development.

So, we have moved the buying processes on and learned some valuable lessons, which we will continue to incorporate in our ranges going forward, but there have been unintended consequences. And what's happened, and this is an error, is that we have omitted some of our heartland product.

So this is the heartland product, the easy-to-wear stock, the mid-price point, power programs in four [color ways] that all customers can pick up, the sort of product you don't have to think about buying. That product we definitely haven't got enough of.

And we recognize this issue ends January, or during January, starts to take corrective action. It will take us some time to put it right. I think our customers will begin to see some improvement and some of those omissions being filled in quarter two. But we won't have the ranges really where we want them until the Autumn ranges really kick in and that's around September time.

So, all other things being equal, you should expect our first-quarter to be at or around the bottom end of our guidance range. Maybe some improvement in quarter two, though quarter two was our best quarter last year, but a big change in quarter three and quarter four. That assumes no deterioration in the underlying economy; that's just in terms of the -- how correct we've got our ranges.

In terms of online development, we've done an enormous amount of work, which we've been talking about for some time, but we are beginning now -- having spent a long time implementing new systems, we are beginning to see some real traction in direct trade.

We improved our stock availability from 65% to 75%. We've rolled out our mobile site across all handheld devices in the UK and are seeing significant improvement in conversion rates on mobile as a result of that.

We've got sofa order -- selection and ordering -- specialty site on our mobile sites now. We've got much faster at getting new product on our website. So if an item comes before the launch of a new book, we are now able to photograph it and get it online in two days rather than 10 days.

And that's been particularly important for our LABEL business where suppliers are constantly delivering new stock. So we don't -- on LABEL, we don't have the big launches that you would expect, the six weekly launches you would expect in NEXT. So this facility to get new stock on the website has been particularly important in LABEL, and I think will become more important as we go forward and get better at promoting the new stock.

We've got a new flower site. And I think the biggest single change is that we have had some success in arresting the decline in our credit base. This hasn't been rocket science; it's not terribly exciting stuff. It's really just very basic incentivization to take account -- to take an account at the point customers are placing an order.

The vast majority of the promotion has been around that. And that's meant that, whereas we started the year with a minus 6% -- our credit customer base down 6% on the previous year -- by the end of the year, that improved to minus 0.8%.

Please don't do the old, I want to say, analyst trick, but I don't mean retail, it's a general analysis trick of drawing a straight line through this wavy line and sort of projecting it into [sending] out plans.

That -- the promotion of the (inaudible) we'll annualize it around now, so we expect that that step change will moderate and that -- we are anticipating that we will maintain our credit customer base at a modest, modest decline in the year ahead.

In terms of the year ahead, we are not standing still. We've still got matters to do. And on credit, we are going to look at the way we market our account and also the underlying credit offer.

In terms of the way we market our account, we are going to move it -- for this is our current marketing for the next stretch. You see that hasn't even changed from the logo we were using in 2006. So we are going to move from sort of less Grace Bros store account to Apple-style nextpay.

That will be what we are promoting. And to promote that, on our website, this is not something we are promoting or paying for widely, but we will be using things like video and advertising on the website to promote it, in order to get more customers interested in nextpay.

In addition to that, we'll be launching Next Unlimited. This allows customers to pay GBP20 for a year's free delivery to home or to any home in the UK and Northern Ireland. We trialed that last year; we got a take-up of around 4%; 4% of the customers offered it took up the offer and the sales uplift from those customers, it was around 12.5%. So it's an important addition to the offer we make our customers, but the take-up is such that it's not going -- don't expect this to radically change the business.

The other useful thing about having this type of offer is that you can use it as a promotion in itself. So rather than say, open an account, you get GBP10 off. We will be able to say to customers, open an account, get GBP10 off, three months interest-free and three months of free Next Unlimited. So we can use it to incentivize the account, and we are going to trial that -- the use of it as a promotional tool -- as we go into the next year.

We now have intelligent recommendations; these have just gone live. This is where you show the customers items within the product group they are looking at, within the product type that they are looking at, and you show them the other products that customers have looked at, who have also looked at that item.

And we are going to shortly be comparing that to customers also bought and see which one of those is most powerful at stimulating sales. We suspect that it's probably worth having both of those on site, but those will be rolling out over the course of the next two months.

Very importantly, we will be rolling out our mobile site across our international websites. You will remember that last year we spent a huge amount of time and money converging our international and UK platforms.

What that means is that we are now able to roll out content and functionality across all of our websites. And the first thing we're going to do in respect to that is the rollout of the mobile functionality across overseas business.

That will be with 70% of our overseas customers by September and we think it's more important overseas than it is in the UK as a much higher percentage of our sales come through mobile devices overseas than they do within the United Kingdom.

In terms of the other things we are doing, we are going to change the look and feel of our homepage both on website and on mobile. We are going to improve the way that our search -- our searches are presented back to customers. We are going to improve the Directory Lookbook. This is the part of the Directory that you can browse like a book.

We are going to improve our selling pages, faster registration, faster check out. And just to give you a feel for some of the things that we are doing, the registration, faster registration, is a good example of the sorts of things we are doing.

At the moment, in order to register, the customer has to go through three different screens, and two of those screens are two pages long, so they really have to look at five sheets on their iPhone in order to complete the registration process. And you can see that actually just reducing it to one would reduce dropout rates by around 3%. We will be changing that to just a one-page registration.

In terms of checkout, at the moment, for a credit customer, and this is the shortest journey to purchase that we have, for a credit customer currently, that is three screens. For a new credit customer, that will fall to two screens. Once we know the customer's preference, as long as they don't want to change their preference, that will move to a one-screen checkout.

So we think -- again, none of these things on their own are going to make an enormous difference, but it's a sort of 0.2%, 0.3% improvements that you can get from these small changes which, added together, we think will have a significant effect on Directory.

And in terms of the timing of those, you can see that the vast majority of the projects will be delivered by the half-year with only fast checkout and improved search coming after the half-year. And that basically is what the GBP11 million is being spent on.

And just to be clear, those aren't the sum total of the improvements we are making to the Directory. These are just some of the main projects that we are doing in the current year ahead.

In terms of space, we will continue to grow our space. And this is counterintuitive; only 150,000 square feet in the year ahead. That is not because we are scared and slowing down. It's because of the timing of deal flow, mainly as a result of the amount of space we took on this year.

But a lot of people are asking questions, quite rightly. Is it sensible to take on new space at a point at which you can see businesses continuing to migrate online? It's a good question.

I won't bore you all by giving you the same information, although it is in your pack that I gave you last time, and that's really the fact that the new space we are taking on is much cheaper than the space that we've got. So, on average, new space is 25% cheaper both in terms of pounds per square foot and in terms of rent sales than our existing portfolios. So, yes, we are taking on new space, but that space is less risky than the space that we are closing.

But we thought we would look at it in a different way because one of the questions that people are asking is, is having a retail portfolio a valuable asset or is it a liability? I'll view it as that it's an asset. Now it may be that that asset becomes less valuable as time goes on, but we don't think it will become a liability.

And to prove that point, we did an exercise, and I should say this is an exercise, a scenario, not a plan. I've had several journalists this morning read this section and say -- so you are planning to wind down your whole store portfolio? We are not. In fact, we are planning to grow it.

But, in the event -- let's say we continue to see negative like-for-likes and we couldn't find cheaper new space. So we couldn't open any new space. And in the event that we only close stores at lease expiry and weren't able to renegotiate those rents, in our experiences in at least half of the cases, the landlord will come back and offer us a lower rent and make the store profitable.

But let's say that's not possible and we assume that we only keep open profitable stores at their lease end and hold them over on the short-term lease. What would our portfolio end up looking like?

Using those rules, on a minus 4% like-for-like for 10 years, that would mean that we would have 7.1 million square feet left at the end of those 10 years. In terms of the profitability of that portfolio, that would mean the profitability of the portfolio would drop from 20% down to 15%. So we would still have a very profitable portfolio.

Now that's not quite the whole story because, obviously, we've got fixed costs to go with that. But, even on those, you would have to assume that some of this business would migrate online, and because a lot of our fixed costs are shared between Retail and Directory and some of those fixed costs would be mitigated by growth elsewhere.

If we look at the average like-for-likes over the last five years, the portfolio would end up at 19%, so barely less profitable than it's forecast to be at the end of this year. And if they -- if we have minus 6% for 10 years, which is pretty much a disaster scenario, the portfolio would still make in that brand contribution of 10%. And in terms of cash, that's GBP360 million at the top end, and GBP110 million at the bottom end.

So, please don't look at this and think, oh, they are planning to wind down their stores; we are not. But what I am hoping is that it gives you some comfort that, much as retail profits might move backwards, the retail profits we are left with and the retail estate we are left with will still be an asset to the business.

And the reason that these scenarios are more benign than you might expect is partly because the profitability of the stores that we have is so high at the beginning, and partly because so many of our leases expire within 10 years.

And our view is that as long as we are taking on short-term lease liabilities, around 10 years, as long as the stores we're opening are making more than 20% when we open them, and as long as we are getting two-year payback on the capital we are putting in, we are still right to continue to invest in new space.

While we are on the subject of new space, I mentioned earlier on that we would be spending GBP10 million on our Arndale store. This is our biggest store in the Company and, actually, I think pretty much joined top turnover in the Company.

It's got far more space than we need and we are going to experiment in the store to see if we can use some of the surplus space to introduce offers into our stores that will do two things. First of all, generate rental income and, secondly, make our stores more exciting places to go.

So simple thing, we are going to have the new format cluster rather than the old format and it will be a larger cluster. we are going to add a florist so you get a nice atmosphere when you walk into the shop. We will be introducing a stationery concession, the sort of things that people pick in -- pop into shops to pick up. We've already got a number of very successful concessions with Paperchase, and those are working well, both in terms of footfall drivers and generators of income.

We will be introducing a hair salon. And those of you who have seen Alastair's new haircut, as shocking as it is, that was actually an experiment in order to test the idea. (laughter) Having seen it, we decided we are not actually going to do the haircutting. We will -- this will be a concession of a well-known branded offer.

We will be introducing a large prosecco bar and a upscale restaurant which will sit on the top floor over -- and will be very visible from outside the shop. And that will be -- the pitch of that restaurant will be quite upscale, so one level above sort of the (inaudible) shares level, that sort of offer.

That -- all those things added together -- some of them are on our profit share, some of them are on rent. We think we'll contribute in the order of GBP0.5 million to the overhead to that store. That will cover around a quarter of the rent.

But much more importantly, what we want to see -- and we don't think all of these ideas will work -- what we want to see is do they in any way contribute towards the footfall and the ambience of the store?

This is one of those exciting projects that it's very important people don't get too excited about, because it is only one store. Most of our stores don't have anything like the spare capacity or space that this store has, so it's not the sort of thing you could say we could roll this out across the estate.

But, if we are going to go into an environment where like-for-likes continue to decline, it's likely that bigger space will become available at more reasonable rates as we go forward.

And whilst it may not have any impact in the short term, NEXT -- our way of doing business is to start with small experiments and see how they go. And it's amazing how things that we do do -- so our first side-by-side big home and fashion store out of town. We opened that just barely 5 years ago, just over five years ago, 2011, [shore] in a store. That format of store today, we have 32 of them, and they contribute GBP95 million to our turnover -- to our profits.

Coffee shops, the first one again was in Shoreham. We now have 112 coffee shops, concessions in our stores, GBP5.5 million income. So much as the Arndale experiment won't really register in terms of its effect on the Company in the next two or three years. It may be important in terms of what the Company looks like in 7 to 10 years time if retail changes as much as we think it might.

So moving on to the profit guidance for the year ahead, we've already said sales between minus 3.5% to plus 2.5%. Just to remind you that we think the first quarter will be at or around the bottom end of that range.

Profit before tax between GBP680 million at the very bottom to GBP780 million at the top. Growth in earnings per share, slightly boosted by buybacks, 12.5% at the bottom end -- down 12.5% at the bottom end -- up, what, 0.5% at the top end.

Ordinary dividend yield of 4%, special dividend yield of 4.7%, taking total yield on NEXT shares. This is on February's average share price.

I did have a joke planned for today at this point where I was going to say -- and I am pleased to say that yield has gone up today -- but it seems that share price has gone the opposite way to what I expected, when we started the presentation, at any rate. (laughter)

There is a question as to whether -- and we have been asked this question many times as to whether we should have used the money to buy back shares given that shares are on a relatively low multiple, or whether we should use it -- whether we should issue as a special dividend.

We have taken exactly the same view that we took in 2008 which was at a time of high uncertainty, buying back shares is, in essence, increasing your shareholders' risk and, at that time of very high uncertainty, we felt the right thing to do was to give that decision back to shareholders. And, of course, shareholders can use special dividends to buy back shares, but we thought the right thing to do was to pass that decision back to shareholders.

Now in hindsight, we were wrong in 2008 not to buy back shares. I'm very much hoping in hindsight you will all be able to point your fingers and say you were wrong again at this point in time. But, as we say in our statement, no company ever failed for being too prudent with its shareholders' money and we think that this is the right thing to do in the circumstances.

I should say also that when we return to more normal times, if we can see growth coming through, then we will return to buying back shares. That is still our preferred route to distributing cash, but not at this point in time.

If you include the dividend yield, at dividend yield to earnings per share, we are looking at total underlying returns to shareholders of between minus 3.6 and plus 9.3, so a very difficult year but in terms of total returns to shareholders, not a disastrous year. Certainly, not as bad as the -- as our share price would reflect.

We understand all the reasons for that, but it's worth saying that our view is and always has been that the Company should focus its entire efforts on the earnings per share of the Company. And our experience is that if you do that and grow your earnings per share, and this is a graph of our earnings per share since 1996, if you focus on the earnings per share, then the share price will pretty much look after itself.

There will be points, several points, where for one reason or another a share price takes a big hit. What I want to assure you is that the -- we are not going to be derailed by the difficult times.

So what we are not going to do, we are not going to rush off and make an acquisition and we are not going to rush off and try and implement quick fixes. We are going to do what we've always done which is focus on our core business; get our ranges right; develop our website and online functionality; the service we offer our Directory customers both in the UK and overseas; the products we offer our customers both in terms of our own products and other people's products through LABEL; and continue to develop and change and adapt and evolve our retail offer.

Our view is that if we keep doing those things at some point things will turn and I'd hate anyone to look at this graph and go, oh yes, it will be exactly as it was all those years ago, 1997, 2007, 2017, same story. It may be much harder, but our response will be exactly the same. And I think if there is one further lesson from this is that in 2026, sell the shares. (laughter)

And on that note I'm going to finish the presentation. Our Chairman, as he mentioned at the beginning, has to leave, but it wouldn't be right for him to just skulk out of the room unannounced.

I would just like to take this opportunity, John, to thank you for being an amazing Chairman. He's been -- John has been an incredibly steadying force in the business. He is brilliant with people. He is calm under fire; unflappable would be a word that many people would use about John. And it doesn't matter what conditions are like, the unflappability always has within it the seeds of a wry sense of humor that is slightly poking fun and you are never quite sure at whom.

John is the -- has been the perfect Chairman. One of the greatest qualities, I think, is an absolute absence of ego, absolute absence of ego and just focusing on what's right for the business, what's right for the people in the business. That is what has characterized John's tenure, along with a focus on financial discipline. And for those things, John, we are extremely grateful. Thank you very much.


John Barton, NEXT plc - Chairman [5]


Thank you very much indeed. Thank you.


Simon Wolfson, NEXT plc - Chief Executive [6]


(inaudible) and now symbolically leave the building.