Next PLC

LSE:NXT

Earnings Call Transcript 2019-Q2

[Michael J. Roney, Non]

Welcome to the half year results for NEXT plc. This morning, you'll hear about the financial performance and the outlook for sales and profits. While many companies will spend a lot of time explaining the past, the numbers and what's happened in the past, I believe the strength of this report is in its forward-looking nature and talks about what NEXT is doing to confront the challenges in a real challenging retail market. It shows the challenges of the retail world, and what NEXT is doing. We're not standing still. Fortunately, we're in a very strong financial position from both a balance sheet and cash flow standpoint. Second, there is a section in the report, and Simon is not going to talk much about it, about the Brexit preparation impact analysis. You can see the operational, administrative challenges and our plans to mitigate them. And you can see in numerical terms, a worst-case scenario, increase in costs and import duties in the event that no changes are made to U.K. tariff rates after a no-deal Brexit. With respect to this information on Brexit, I personally have not seen any other company yet put out the facts of the impact of Brexit under various scenarios. As I mentioned, Simon won't cover this material, but I really encourage all of you to look at it and read it in depth.Finally, I would like to thank our 40,000-plus employees for their hard work and dedication, which makes the results that you're seeing today, the success results, make them happen. Thank you, and over to Simon.

[Simon A. Wolfson, CEO & Executive Director]

Thank you, Mike. Good morning, everybody. Quite -- I think potentially quite an important set of results today. And really the whole story is told on the front page. So if you haven't got long, just listen to the front page and then you can go.The sales up 3.8%. Full price sales, these are the sales that contribute towards profit growth, up 4.5%. Operating profit up only 1.6%. And that really sums up the nature of the group, and there are 2 things going on. We've got retail sales moving backwards and online sales moving forward more, but they have to move forward more because the marginal profit we'll make on the increase in Directory is lower than the marginal profit we will lose on the sales in retail. But for the first time, it looks -- for the first time in the last 3 years, it looks like the gains in Directory would just outweigh the losses in retail. And we think that's a potentially important moment for the group.The other thing is -- sorry, interest charge, a reduction and sort of -- an increase of GBP 3 million in interest charges. It's all about the fact that we're lending more to our customers, so we're borrowing more to fund that lending.Profit before tax, up 0.5%. And then the other second important point, once done taxation, which will broadly remain the same for the full year about 18.3% is the earnings per share because earnings per share will go up 4.9%. It's one of the sort of, I think, much undervalued assets of the group is our ability to generate cash. I realize it's a very old-fashioned idea that a business should be valued on the basis of amount of cash it gives back to shareholders. But nonetheless, it remains quite important in our view, and we believe that we will remain cash generative going forward, and I'll cover that in great detail later.Ordinary dividends, we're going to increase -- we aim to increase ordinary dividends in the full year by the amount that we will grow earnings per share, but we don't yet know what we're going to grow earnings per share by, but we've raised it by 2p in the interim. So that we don't always end up giving all the increase at the end of the year.In terms of cash flow, capital expenditure much as expected. In terms of our outlook for the full year, this picture hasn't really changed since our forecast at the beginning of the year. The only difference is spending GBP 5 million more on warehousing, GBP 5 million less on stores. And what you can see here is the beginning of an ongoing trend, is the -- the expenditure on stores is flat, expenditure on warehousing increasing. That's really a measure that the online business where all the infrastructures is in the warehousing is going to grow and the retail investment is beginning to pay it back.If you look at the participation of our CapEx going back over the last 12 years, you can see that it's remained broadly stable with -- in terms of participation of warehouse, head office and systems and retail stores. Looking forward, that participation will almost certainly change. We will definitely increase the percentage of CapEx that we spend on warehousing. The important point here is that if you look at those projections in cash terms, and this is the sterling amount of CapEx that we've had over the last 12 years, what you can see is about 15 years actually that going forward, the increase in warehousing CapEx is likely to be funded by a reduction in store CapEx. So overall, we're forecasting an average CapEx over the next 5 years around GBP 120 million. If you take the average over the last 12 years, it comes to GBP 121 million. So we're not expecting the -- although we're going to have to invest an enormous amount in our warehousing, we're not expecting the overall burden of CapEx to increase as we move forward.In terms of working capital, 2 things going on here, increasing the amount flowing into Directory debt and an increase around GBP 10 million in stock. Tax, big difference in tax. It's all to do with the credit that we had last year. Cash flow before distribution down as a result of the working -- mainly as a result of the working capital movement.In terms of distribution to shareholders, in total last year, we made over GBP 325 million -- about GBP 350 million returned to shareholders. This year, we anticipate GBP 275 million, which we've already done. So the big difference in the special dividend/buybacks is the timing rather than the quantum we're expecting in the full year. It's GBP 275 million rather than GBP 300 million, which is the total amount of surplus cash we expect to generate. The reason for that is that we pulled forward GBP 25 million of it into January, which fell into last year.In terms of the balance sheet, stock. Stock levels have increased and this is a conscious decision that we have taken to increase the amount of stock in the business. We anticipate that our stock levels will run between 8% and 10% higher for the balance of the year. We don't anticipate any significant increase or did any increase in the amount going into the indices of sale. This is not because we're carrying more drop stock, it is because last year, one of the mistakes we made that led to the big difficulties in January is that we bought too many small contracts, which didn't turn up on time. And this year, we've bought slightly deeper in order to make sure that we have got the right amount of stock in the business.In terms of debtors, up GBP 156 million. This is driven entirely -- GBP 145 million of it is driven by the increase in Directory debt. That's up 15%. The drivers for that are twofold. First of all, an 11% increase in credit sales year-on-year over the last 12 months. And secondly, underlying payments are up 6% -- payment days are up 6%. So our customers are taking slightly longer to pay down their debt. It's a good thing in terms of interest income for us. It's a bad thing in terms of -- sort of leading indicator of slightly more distress in the debt market, and we are seeing higher levels of bad debt, which we will come onto.In terms of net debt, just doing the walk forward to the end of the year. Started the year with GBP 1 billion of debt. We expect to generate GBP 300 million of cash, distribute GBP 275 million of it because GBP 25 million was distributed last year. Increase -- I mean, online debtors forecast to be around GBP 90 million, and we will fund that through debt. And that leaves us with GBP 1.1 billion year-end debt forecast. Peak debt will be near GBP 1.3 billion. And that very comfortably cover the GBP 200 million headroom by combination of our bonds and our facilities. What you can see is that our facilities now are getting quite close, particularly 219 (sic) [ 2019 ] bridge that we've got there. So at some point over the next 12 months, we will look to -- subject to the bond market being favorable, we will probably look to increase our amounts of fixed debt through bonds and reduce the amount of finance through bank facilities.In terms of divisional analysis, an exciting new development here, which you'll always love because it gives you more detail and more things to analyze, so we're creating wonderful new work for you. This is how our half year results looks by division last year in terms of retail, online and other activities, which is basically group. This is in terms of profit. At the year-end, we reallocated costs between retail and Directory in order for Directory to pay its fair share of the retail staffing that it uses. I should say online, not Directory. We changed it to online. That's the big new [indiscernible] you speak, but I will slip into calling it Directory every so often. Apologies for that. But we transferred costs to account for the amount that we're spending in stores on delivering online stock. That would have reduced retail by GBP 5 million -- I'm sorry, increased retail by GBP 5 million, reduced online. What we're now doing is splitting out our finance business. That is GBP 77 million worth of profit within the -- previously shown within the online numbers that we're splitting out into a separate business. We think that's important because our online -- our finance business now is an important business in its own right. GBP 1.1 billion of the debt generates quite a lot of income. So that would give us GBP 77 million of income in that business. That doesn't give a fair reflection of the profitability of the business because it assumes that it is 100% financed through equity, it seems it has no debt. In order to account for the cost of debt in that finance business, we have assumed that the entire book is financed by group, so you have to imagine an intercompany formed group to the finance business. The interest rate charged is the passing rate of interest that the group incurs. So we just passed the group rate onto the finance business, assuming that it is all financed from the group. That means that there is a 6 -- an GBP 18 million charge to the finance business and then pays as a profit in the group. And what that gives us is a clear picture of what the finance business -- what's really happening in that finance business. Those are the half year numbers. The half year numbers are distorted by the fact that we've taken an increased charge on bad debt all in the first half, so later, I will cover the -- our projection for the full year finance profit.In terms of sales in the group, and these are -- moving from profit to sales now. In terms of sales group -- in the group, again, quite an important moment for NEXT. For the first time, less than half of our sales are coming from retail shops, the balance made up by finance and online and much less than -- just under 1/4 of our profits -- much less than 1/2 of our profits coming from retail. So there is sort of -- you can see -- sort of slowly see the nature of the group is changing.In terms of retail, retail continues to have a very difficult time. Total sales down 6.9%. Retail is having a difficult time, not quite as difficult as the minus 10% scenario that I gave you in sort of that 10- to 15-year projection last time. So we're not going to do that again this year. A, you'll be bored of it because we've done it twice now; and b, the numbers have been slightly better than this. So we don't see any reason to rerun that scenario. Full price sales down 5.3%, not quite as bad as the markdown sales, but the fact that markdown net of sales down more is actually a good thing because we have much less markdown stock.Sales from new space, 0.7%. In terms of what's going on in new space, we -- this is what we anticipate for the full year. To start with, we got 8.3 million of space. Mainline will give us 218,000. Actually, it's just worth commenting that of the new space we'll take on, it is -- just over 1/4 of it is coming from concession space. These are people like cafe operators, travel agents, stationary, people who are giving us an income. But this is 218,000 of new mainline space. Closures of 111,000 square feet, 65,000 of clearance closures. The closures in mainline are 1 store greater than we were expecting and the clearance closures were significantly more than we were expecting. And the reason for that is twofold. First, we have got a lot less drop stock in the business, so we don't need as many stores to clear it. And the other more important reason is that we're now finding that it is more profitable for us to clear that stock through our online clearance tab than through these shops.In terms of the closures, it's worth just looking at the mainline closures. The stores we closed made on average a 13% profit before central overheads distribution costs. And something you might look at that and go, why are you closing profitable stores? And the answer is because these are stores that came to the end of their lease and the renewal terms were simply not good enough to justify those -- renewing in those 15 stores. Now we wouldn't actively seek to market and close a store that was making 13%. But if we get to the end of a lease, unless we came through renegotiating the rents, unless we can push that profitability up to above 20%, then it is too risky in our view to take any form of long-term commitment. There are stores with holdover at 13%. There are stores where we'll take maybe a 1-year lease or an 18-month lease. But 13%, we certainly wouldn't make any long-term contribution -- long-term commitment.Quite interesting what's happening on transfer of trade. So I'll start with a -- and this is a good news, bad news story. I'll start with the good news. The good news is Chester Greyhound Retail Park, we took GBP 4 million. We had 3 other stores in Chester -- have 3 other stores in Chester. Overall, total count of GBP 22 million sales. When we closed Greyhound, we found that over 25% sales transferred to the other stores in so far as we could measure it. And what that meant was actually, in profit terms, the closure of that store actually increased the profit in those stores. And what you can see from that, you can do a very quick rule of thumb and work out that if 25% of the sales transferred and, let's say, the marginal profit after labor is say around 35% of the 25%, the store must have been making less than 7% in order for that transaction to be profitable. So once stores become very low profit, the transfer of trade can result in collection stores making more profit. That works beautifully when you've got lots of stores in a cluster. It doesn't work so well when you have places like Dumfries. Here in Dumfries, we took GBP 1.9 million. The local council took the incredibly sensible decision that they would rather be closed altogether than have an out of town retail park. There we go. The nearest store was 24 mile, not easy trek to Gretna Green. And when we closed that store, we lost absolutely everything, all the sales and the small amount of profit that we're making there. But again, in this situation, we weren't prepared to commit, make any form of long-term commitment to a store that actually we felt was in the wrong place because in today's environment, that doesn't make sense.Generally, we're having a lot of success renegotiating leases. I mentioned that we closed 15 stores. We've renegotiated 33 stores' lease renewals. This is, all in, excellent for the current year. We're fairly confident on this. The terms we think we'll get on those 33 that we renegotiate this year will be a rent reduction of 28%. That includes the amortization of any capital contribution that we don't spend on the store. In addition, we expect additional concession income in those stores around GBP 400,000, which gives you a 32% reduction in fixed occupancy costs for those shops. That takes the net rent to sales from 9% to 6.2% and the terms agreed on those shops are -- the average lease length is 5 years and the average profitability is 26 years -- 26%, sorry. At that level of profitability, it was 1 store, you could decline the like-for-likes by more than 10% and after 5 years, you'll still just be making a profit.Moving on to profit analysis. Bought-in gross margins up a small amount, slightly better negotiation on price system we're expecting. Big improvement in markdown, and there were 2 things going on here. First of all, we had much less stock going into the sale and our markdown sales were down less than our stock, which means that our clearance rates improved. This was quite an important reassuring moment for us because for the last 4 or 5 sales, our clearance rates have been getting progressively worse, so this is potentially a sign our clearance rates have stabilized, but don't get too excited about that because, obviously, we're up against that terrible first quarter season. So most of the stock that went into the sale the previous year was stock that we couldn't sell at full price. It wasn't surprising we couldn't sell it at half price. Achieved gross margin, 1.3%. Store payroll, an improvement of 0.1%. 2 things going on here. Cost of living and -- cost of living increase and national living wage increase would have had an adverse movement of 0.3%, but through all sorts of measures our stores, it was incredibly hard to save man-hours and to work more efficiently. So -- and we've made about a 0.4 saving, so that's about 0.1%. We're expecting about the same for the full year. We're expecting that store payroll will not have an adverse impact on margin for the full year.Store occupancy costs. This is all about negative like-for-likes. Warehousing and distribution. Some pay rises in the warehouse contributing to some of that, but mainly it's about fixed costs and falling turnover.Central overheads, anticipating slightly higher staff incentive payments this year than last year.So moving on to a slightly happier story, the online story. Sales up 16.8%. Full price sales up 16%. Full price sales analysis. In the U.K., we increased our sales by 14%. That broke down into 2 halves. NEXT branded stock was up 11%. LABEL stock, this is our third-party business, up 24%. So you can see significantly faster growth in LABEL than in our own stock. Don't get too excited by these numbers because they contain that first quarter. Much better, we think, to look at the second quarter numbers in terms of any sort of forward-looking projections you might do in terms of the performance of the brand and LABEL in the second half.Overseas up 22%; constant currency, 19%. So some improvement there. And in terms of customer base, you see 3% improvement in the U.K. So a lot of the gain that we're getting in the U.K. is about us selling more to our existing customers rather than increasing the total number of customers that we have. That shouldn't come as a surprise because a lot of the game is coming from LABEL in the U.K., where we've increased the amount of offer that we've got. Overseas about the same growth in customers as sales.In terms of sales and assets, you can see that 13% increase in credit sales, 19% increase in cash sales. The credit sales, I would urge a little bit of caution on it. It's not indicative of what we're expecting for the full year. One of the things you'll see later is that we're increasing our bad debt provision. We will also be tightening some of our credit limits and that will mean that we're expecting much, much slower growth in the second half from U.K. -- on U.K. credit sales.Operating profit up 21%. Bought-in gross margin down 1.1%. We've got the same improvement in bought-in gross margin on NEXT stock of 0.2% that we got in retail. The adverse movement is all about the fact they make much lower margins on third-party stocks as you would expect.In terms of markdown. Similar story to retail, but not quite as dramatic. Stock for sale down 12%. Markdown sales down 6%. So again, improving clearance rates online and a positive movement of 0.9%. Achieved gross margin minus 0.2%.Warehousing and distribution costs, an adverse movement of 0.9%. Three important things happening here. The first, biggest of them, about 0.4% of it is down to the increase in international trade, where distribution, in particular, is a much bigger part of the international businesses' cost base as you'd expect. So the growth overseas has pushed up warehousing and distribution costs. NextUnlimited whilst it's overall profitable because we are not getting the income from our customers for deliveries that comes out of this -- that cost about 0.3% and the 0.2% -- final 0.2% is about operating inefficiencies within the warehouses as we begin to bump up against capacity.Big saving on catalogs and photography. Part of that is about real cost savings on photography and the paper we're using, but most of the saving is about the fact that more and more customers are simply electing not to have the catalog.Marketing and systems, a positive movement here. We haven't grown our expenditure on marketing and systems in the first half as far as to sales. But don't worry, we'll be spending more in the second half. So overall, the full year estimate is that there will be an adverse margin movement for marketing and systems. Central costs, slightly adverse movement, giving us a total of minus 0.7 -- plus 0.7% margins overall.In terms of things that are driving online growth, really, I'd like to talk about 4 things. Digital marketing, LABEL, overseas and warehousing. I'm going to start with digital marketing. What this shows is a breakdown of our total online marketing spend by category. So we've increased. This is a full year estimate. We plan to increase our digital marketing by 125% to GBP 28 million. That increase of GBP 16 million is partly funded by a reduction in direct mail, TV and other offline promotion. We anticipate saving GBP 11 million on catalog production, which means overall, the increase in marketing -- digital marketing, we think, will be paid for -- more than paid for by the savings that we make in catalog production and actually gives us a little bit of headroom there. If we're successful -- if we carry on being as successful as we are on digital marketing, we could push that number forward. I can say that because our marketing director isn't in the room.The reason that we're fairly confident about this is because the internal rate of return we're getting on digital marketing are very, very good, in excess of 75%. You might wonder how do we measure internal rate of returns, and it would be a very good question and there's all sorts of sorcery that goes on, but I just thought I'd explain it. If you take -- this is one particular marketing campaign. I should stress, it's not aiming to sell our dress. It's aiming to sell NEXT generally. That will cost us GBP 200,000 to show that to all the customers that see it online. So that's the cash outflow. Then, we measure all the customers, who have seen the advert who spend with us and look at the profit those customers generate, breaks down into 2 categories. Existing customers who see it and new customers. And you can see from this that overall, the profit generated from the sales from those customers who saw the advert was 1 -- over GBP 1 million. Now that looks really exciting, and if you go to an advertising agency, those are the numbers they will show you. What they'll be reluctant to tell you is that, of course, a lot of those existing customers would have bought from you anyway. If not that day, then a little bit later. We always hold back control from any customer group to see which customers would've bought anyway. And what's interesting is that on the existing customers, this is bad news for advertisers, the incremental sales are only 10% of the sales that we generate from -- that we think -- that you could be fooled into thinking are generated by the adverts. That gives you GBP 85k. New customers unsurprisingly a higher percentage, but still only 40%, so a lot of those customers that we're targeting would have actually decided to shop with NEXT Directory anyway. That -- initially, we think that can't be right, but actually because these adverts are targeted at people we think will want to shop with us, it shouldn't come as too much of a surprise. When you allow that, you get to about GBP 170,000 revenue in that year. Obviously, that's not quite enough, but the new customers continue to generate revenue. Some of them will leave you each year. If you take the total revenue stream, you get to an IRR of around 80%.NextUnlimited is the other thing that's definitely driving sales, 380,000 customers and that continues to grow. The good news is that they spend a lot more. But temper your enthusiasm because they order -- unsurprisingly, they order more often. They haven't -- there is no need for them to consolidate their orders, so they don't. As the items per order drop, the number of orders go up, it's more expensive to service and the returns go up. Not dramatically, but the returns do go up as well. Overall, that means you get a sales increase that is less than your orders increase because of the returns element and the items per order drive up costs, your profits on those sales -- the profit increase is less than the sales increase. It's -- we put here more than 5%. It's actually high single digits, but we're measuring in terms of increased profitability to those customers. But the profit result is not as good as the initial demand might suggest. But still definitely worth doing and 85% renew.In terms of the website experience, this is one of those sort of really tricky things where there's not that -- there's so many things to tell you about, but none of them are that exciting. They're not that exciting. Here's the sort of a list of a few of them we'd given just gratuitously to sort of feed the machine. But none of them on their own have made a very significant difference, and we can measure the difference they're making. It's about 0.2%, 0.3% increase in conversion when we A/B test them. Our view is that the combination of all these things together is bigger than the increase of any single one. Just making the site -- making it much quicker for customers to find the stock they want through personalization, making it much easier for them to transact as they go through checkout. We're making -- remembering their bag's cost price, all these things mean that the sum total of these effects, we think, is more than the individual measure of growth. And good news is next year, we've got a whole list of more things that -- some of you might even understand what these terms mean. I struggled myself, but there are 3 of them I want to draw attention to. First is we're changing our search engine. The search engine, we're moving to a sort of black box search engine that will use artificial intelligence rather than keywords to drive search results. This is when you sort of search for a dress, it will decide which order and which items it shows you. We're running about 25% of our searches on this engine at the moment. The balance being run on the old engine. And at the moment, we see much better results. When I say much better, it's sort of 1% or 2% better sales from the new engine versus the old engine. So we're quite excited about that, and that will roll out to 100% at the base as we progress through the year.The next step is to do personalized searches. So this is rather than just say, take all the customers who are looking for a black suit and, say, what is the -- what are the best black suits to show them, it will look at each customer's trading history and begin to adjust the search results in order to better target the products. So if you're a customer who always buys our expensive suits, it will push the expensive suits further up the search results. There are a lot of people in the business, who are very excited about that and some who are very cynical that it will have any effect at all because of insufficient data, and I'm one of them. But we're going to try that anyway and see how it pans out.We're also -- we've also begun to personalize our homepages. So when you go on to the website, you begin to see things that are more relevant to you in that sort of -- the initial hit. And again, we're trying that at the moment, and the results are moderately successful.Moving on to LABEL. LABEL continues to grow strongly. Net profit of 16%. This is about 1% lower than what we quoted last year. That's not because the underlying profitability of business, it's because it's now of a size where it's beginning to draw on our central fixed overheads, things like group finance, group systems, and we think it's right that we allocate those costs to the LABEL business and that's transferred 1% -- taken 1% out of the profitability of LABEL, but has obviously created a credit across the rest of the business. The underlying profitability isn't changing and the growth continues to be strong. We expect that to continue for the full year, and this is the full year forecast of GBP 370 million on LABEL this year. It's being driven really by 3 things. New brands, although that will be more -- we got more new brands in the second half than we had in the first half. More importantly than that, more choice within brands. Brands are giving us a bigger range of their stock to sell as they see their growth moving forward with us and more on commission. And those 2 last points are related in that commission is very much a push from the brand or supplier on to our website and using us as a service. They're our clients. And the more control they have over which stock they give us, the more success we have at selling their stocks. So you can see in the first half, the commission brands increased their sales by 30%, the wholesale brands by 19%. So slightly more than 1/2 of the brands now on commission.Overseas. Remarkably similar graph actually, not GBP 370 million we're expecting to see, but GBP 355 million. We're making net margins of 16%. Last year, that was 22%. So margins down, growth accelerating. So last year, we grew at 10%. This year, we grew at 20%. And one of this [indiscernible] last year said to us, "Why don't you take lower margins in exchange for faster growth overseas?" And obviously, your wish is our command. And that is exactly what we've done. And that will be a good story -- that will be a good story, wouldn't it? And it will sort of pass us on the back, but actually it didn't quite work like that. The reduction in profitability is not what's driven the sales growth. So just want to clarify what it is that has reduced the profitability. Three things. First of all, last year, there was a provision relationship, which added 1.5% to last year's profit. So the profit reduction is not quite as big as it looks.Product mix. This is actually -- this is exciting news for us and it's exciting because it is definitely contributing towards sales. We're finding that customers, who initially only shopped with us for 1 product, let's say, came on and only shopped children's wear are now beginning to buy other products. And generally, the products that we have been selling least of overseas are growing the fastest. So we're definitely getting more traction as a brand overseas. But those areas that are doing much better have high returns rates and that's pushing costs up.Closing China cost us 0.5%. And central overheads. Here again, we've done the same thing as with LABEL. We properly allocated all central overheads, including a share of the product -- the cost of the product teams. The cost of product teams so then took 1.5% of this. That cost didn't happen in LABEL because we were already accounting for that product teams because they have a separate product team. So this -- I think the 16%, if you add back the China closure, that gives a very true -- a much truer picture of our overseas profitability, around 16.5%, which we're still very comfortable with.In terms of our customer base, that's grown by 19%. We now have 1.1 million customers overseas. I think a lot of the growth that we experienced in overseas has not been pushed by us. There's nothing that we've done to create it. It's just the natural growth of online clothing sales generally and people around the world becoming more open to buying clothes from websites overseas.One thing that has made a difference is the introduction of our mobile site. We now -- this time last year, most of our customers on their mobile devices had to look at our desktop website. We since launched a mobile site and we think that's definitely making a difference. Now in 24 countries, which account for 90% of our sales now have visibility on mobile site, and we'll be pushing that up to 97% by the end of the year.And also we've got warehousing, infrastructure and our likely CapEx over the next -- over the course of the next 4, 5 years. Just to explain, and this is -- conceptually, there are 3 parts we have to our warehousing sort of stockholding infrastructure. Warehouses, big central warehouses, distributed depots through which the stock moves, gets moved in bulk and then distributed to the 500 stores from there. Broadly, 70% of the stock is held in the central warehousing, 30% of stock is held in stores. One thing we alluded to last year -- 6 months ago was that we will be increasing the amount of visibility our customer have on our stock. This time, last year, customers could only -- online could only see the stock that was available within the warehouses. We have changed our system so that customers now have visibility of stock within stores. And currently, we are fulfilling 4% of our orders from stock that is within the stores. So that's stock that we don't have in our central warehouse that is available in stores, and that's accounting for 4% of our online sales. Don't make the mistake of assuming that's all incremental. Some of those sales we would have got anyway, but the customer would have had to waited on a -- would have to have waited for a longer time because it would have either been waiting for a return or would have taken the order in the anticipated return, or that could have taken 2, 3 weeks. If we can get it there from the stores, it takes us only 4 days. We're working very hard to change this process to make -- to take that 4 days down to 48 hours. And we think that's important, and one, because it's a much better service, so you're more likely to get the sale. But the other is because we think there's a chance, if people got items coming tomorrow and they got items coming the next day, some of them will elect to consolidate their order, and obviously, that will be a big cost saving to us if they do that. So that improvement in service level could be quite important.Don't worry about our retail stores. We do ring fence the best-selling stock. So what we don't do is say, stock that has a high probability of selling in-store, it would be wrong for us to take out and sell online because we will just be increasing the overheads associated with selling that stock. So we limit the stock that is visible to the stock that is on a low rate of sale in-store. So we're only taking out stock that we think the stores won't need.In terms of our central warehouses, we got -- obviously, we got NEXT stock, we've got LABEL stock. And we would much rather have our LABEL stock in our warehouse because that means we can fulfill it within 24 hours. There is a problem with that though in that we only see a fraction of a lot of our partners' ranges, of our LABEL partners' ranges. We're going to do a trial over the next 6 months, and I would stress that this is a trial, so we don't know what success we'll have with it, and we're unsure of the economics of it. But what we will be doing is giving our customers visibility of some selected third-party sales warehouse stock in third-party warehouses. So they will be able to go online and they will see the item is available to order from NEXT, but actually we won't hold the stock, it will be in somebody else's warehouse. We're not going to distribute that directly from that warehouse to the customer because we think that -- because when you look at the costs involved in that, the whole exercise is extremely low margin. You don't get any consolidation, and you don't get any leverage over the buying power and efficiency we have in our distribution network. As important as that, we would also lose visibility of all tracking. So if we order something from somebody else's warehouse, distribute it to the customers independently, they ring us up and say, "Where is it?" We don't know. So what we're doing is, is slightly different than that. We're going to transfer the stock from their warehouses to us. We think we can do that in 48 hours again. So that will be a 48-hour promise on it. And the other big advantage of doing that is that it opens our store networks up as distribution points for that stock. And at the moment, about 30% of our sales are going through stores, so it increases the potential that we can do there. I've shown that stock going directly to the warehouse. In a lot of cases, it won't go to our warehouse. It will go to a local depot. That is particularly efficient for us because we already have vans going out to all of our stores to deliver next-day promised stock to the stores. And on their way back, if they divert to pick up from these warehouses, the incremental cost of the pickup will be very, very small.And really what we're developing is a sort of platform. The aim is to develop a very efficient stock distribution platform with our warehouses at the heart of it, other people's warehouses beginning to be integrated into it and our 500 stores as distribution points, along with our 5 million customer base. I would say 5 million rather than 4 million because the 5 million includes 1 million overseas. And one of the things that we'll be doing this year, which I'm very excited about but no one else in the business is, is the ability of our U.K. customers -- have the ability of our U.K. customers to be able to order anywhere in the world for 3.99 and to give their relatives in Australia a lovely Christmas present from NEXT. Now I'm very excited about that and no one else is. So there we are. And obviously, supporting the platform, we've also got the GBP 1.1 billion finance business. So kind of that is the direction of travel for the business, to integrate those 3 things: An efficient U.K. and international distribution network; 5 million customer base; and GBP 1.1 billion financing the business that is U.K. only.In terms of the strain that's going to put on our infrastructure, we are feeling the strain at the moment. We will need to spend a lot of money on our warehouses, and I thought I'd just run through some geeky stuff explaining our warehouses. All of our warehouses, doesn't matter what type of products they hold, have a basic structure of big, dark reserve warehouses. This will hold whole boxes or whole pallets. There'll be no human access. It will all be automated; very, very dense storage; very efficient; very cheap; but you can't actually pick from it. You need to move those boxes into a forward location, which is much more space hungry, so you can get human hands on it and pick it and give it individual items to the customers. So all of our warehouses have that structure. We have 3 different types of warehousing. We have a boxed warehouse, which is, by far, our biggest complex. We actually have 2 separate sites that do this; hanging warehouse; and a palletized warehouse, which is 2 closely connected sites, which just hold things that basically you can't fit in a box, a lamppost or those sort of things. Tying all that together, we have our return center, which feeds stock back into the business. That's a very important part of our operation. One of the big investments we'll be making this year is around GBP 30 million in enhancing the storage capacity and efficiency of our returns operation.In terms of how we'll transform the utilization going forward, we've set out a very helpful chart, I think, where just to explain it, this shows our current utilization of our boxed warehouses. You can see we are pretty much at the limit of our forward capacity. And what we're having to do at the moment is work very hard to use retail reserve capacity for Directory. We'll get by. We're not concerned about that, but it will be expensive moving stock in and out of our reserve. 83% -- sorry, forwards at 99% and reserves at 83%. [ Forwards full ] are much easier to add to, I'm pleased to say, with [ 23 million ] increasing forward locations. Full year CapEx of GBP 132 million. That will give us a 43% increase in reserve and 123% increase in forwards.Now initially, you will look at those numbers and go, "Clearly, these guys have made a terrible mistake." What's the point of increasing your forward by 123% if you can only grow your reserve by 43%? And the answer to that is that the reserve holds retail and Directory stock and the capacity is transferable between the 2 businesses. So to accommodate growth in the online business of much more than 43%, we believe that a -- if we model our retail decline and project it to actually growth, that 43% will more than cover the growth online because we'll be using the retail capacity. The 123% is far more than the total sales capacity that we'll be adding across the whole network. And the reason that boxed forward has increased by so much is all about [ short ]. The reserve stock is, the more stock you have in unit value, the more you need, and it's a straight line relationship between the 2. You increase your stock by 10%, you need more -- 10% more reserve stock. If you increase your stock by 10% in forward but increase your options, the amount of choice by 20%. Because you need 1 box of every size forward, you end up increasing your forwards base far more than your total stockholding. And in order to allow us to increase the choice we offer our customers, we're increasing our forward capacity by far more than our reserve capacity, and that's not just accommodating growth in sales, it's accommodating growth in choice.Then we've just given the same figures, the hanging and palletized, and at your leisure, you can look through these. The red asterisk indicates areas where we're able to transfer retail capacity to direct -- to online. And I'd stress that, that is not without cost. It's not free to change all the equipment from retail handling equipment to Directory handling equipment, but that is why the capacity overall doesn't go up as much as the total capacity. The total amount that we'll need to spend on other things is GBP 13 million. Add it all together, rounds to around GBP 200 million. We think that, that will give us GBP 1.5 billion of sales capacity within the next 4, 5 years. We've put a little note, a special note to analysts in our report, which those of you who work at Merrill might have seen. It says, "Dear Analysts, please don't put GBP 1.5 billion in as your sales forecast for us for the next 5 years. That is the total capacity we're creating. It's not necessarily the amount of sales we expect to increase our online business by. And that is our online capacity rather than total capacity."In terms of what that means for the economics of the group, it means we got to spend 13p for every GBP 1 of sales capacity we create online. If we depreciate that over 12 years, which will be a reasonable average for warehousing equipment, that implies GBP 12 of revenue overall for 13p investment, gives you a depreciation charge of around 1.1%. Our current depreciation charge on warehousing fixed costs is 0.8%. So we don't anticipate that this will have a significant impact on the profitability of the group, this investment. And it won't rise to 1.1% either. When we've modeled it going forward actually, we think the charge will be between 0.8% and 0.9% because as much as we're adding new space, there'll be some space that becomes fully depreciated, some equipment that becomes fully depreciated that actually is still usable. So we're expecting that number, the sort of depreciation charge, to remain broadly steady over the next 5 years.In terms of return on capital invested. Again, average net margins across all the different online businesses is 19%. This is the cash margins, so this excludes depreciation. That gives you 19p annual profit for 13p expenditure. Model that, as we have done, we came to a frighteningly high number and then sort of reduced it to more than 75%. It's not quite as good as that because obviously, for every pound we invest in warehousing, we will need to invest in other infrastructure as well, maybe 10p, 15p in systems, head office, carpark and all the rest of it. So with the return, we believe the returns of the capital invested in the group will remain very healthy despite the big increase in CapEx we're expending -- we're anticipating in warehousing.So moving on to the finance business. In terms of finance, I can see you're all -- we're all flagging a little bit now. We've been going half an hour, so time to pack up for this new and exciting business that we're about to reveal to you. I can tell you're all very excited. So interest income, up 12.8%. The driver for interest income, and this is gross interest income, this is before any provision for bad debt, it's the amount charged rather than the amount paid, the driver for that is the average balance. We've already talked about the average balance. That's up 12.6% in the last 6 months. Sorry. I apologize. What we're doing here is we're giving a full year forecast for this whole business, just to make it easy. We don't know if it's going to be right, but we think it's a much more stable business than retail. So we think interest income will be up in line with average balances. Credit sales, we expect to be up 8%; and payment days, up 3%. Now obviously, you'll all remember instantly the numbers that I gave you at the beginning of the presentation for our current growth in credit sales, which are much higher than 8% and payment days much -- around 6% rather than 3%. This is a self-imposed restriction. We have bought in our credit limits in response to a slightly worse bad debt environment. So we are anticipating that will have an impact on our credit sales. We're expecting much lower credit sales in the second half than the first half, but -- and although that's painful on the sales front, we think, on the profitably front, it will make sense to do that.In terms of our customer base, broadly stable at 1%. We're not expecting this number to grow in terms of people with the traditional sort of catalog-style account. We will be introducing next3step. You'll remember last year, the sharp ones amongst you will instantly recall that we said this was coming in February. And obviously, what I didn't tell you is that, that is February in our systems calendar, not the normal Julian calendar that the rest of us all use, which means that actually it launched yesterday in order for us to say, it's live. So I think we're ramping up to around 1,000 on 3step. 3step allows people to pay 3 equal payments, and as long as you pay each one of those payments, there's no interest charge. If you decide on the second payment, I don't want to pay a third, I want to pay 10%, you can do that, but the balance that you haven't paid off then goes on to an interest-bearing account. If you buy another garment, that garment, you still have the 3step and you grow a 3step account. That garment, you still have the chance to pay in 3 equal installments with no interest. So you end up with a sort of split account, interest-bearing balance and your 3step balance. And the 3step balance, as long as you pay 1/3 of it off, you don't pay any interest. The interest on the balance will be higher to compensate for the interest-free bit that you get on the 3 months. But we think that in today's world, we think that's a very attractive and different proposition, and I think there's a little bit of push back against traditional-style accounts. I think this will feel to a lot of people like a lot more -- it's a lot more relevant to the modern world.The other thing we're doing is we're introducing an app, a credit app, so that people will be able to -- so we'll be able to promote our credit in-store. And the credit in-store -- the beauty in that is that it means that all the compliance issues and all the potential miscellaneous issues that you have, if you do anything, when you promote anything using staff, can be handled through the app. We'll do all the compliance through the app. So all the staff will do is say you can download the app. And we think we may be able to boost recruitment that way, but the jury's obviously out on that.Bad debt increase. This is the big charge, the big cost increase we weren't expecting at the beginning of the year, 36% increase. In sterling terms, that's a GBP 14 million charge. The growth in our average balance means that you would expect a higher sterling bad debt charge anyway, and that would be around GBP 5 million. So GBP 5 million, about 1/3 of that, 13%, say 12% of it is from just the balances increasing. The GBP 9 million charge is of step change in the bad debt rate that we're experiencing at the moment. We're not overly worried about this. It's -- obviously, it's uncomfortable, but we want to put it in the context of the sort of bad debt history of the company. And what you can see is that although it's a big increase from last year's 3.3% bad rates, historically, it's a very normal and manageable level of bad debt. We haven't seen any further -- we haven't seen any indication that it will worsen further in the half year, and we're not anticipating it will, although there is obviously that risk. And we have deployed measures, particularly in terms of our credit limits, to ensure that this loss doesn't get worse -- to try and ensure it doesn't get worse.Cost of funding. A reduction in charge here. Remember, this is the fictitious charge assuming that we lend all the money, all the debt from group to Directory -- online finance, sorry. And the reason that it's gone down is not because we're lending less money, we're actually significantly more money, but the rates come down, and that is because the group's average interest charge has come down. Again -- and the average interest charge has come down. It's because we're using more of our bank facility, which is a floating rate, and therefore, cheaper than the fixed rate debt we have on our bonds.Average balances. As discussed, those are the group rates, 3.5% this year versus 4% last year. Profit, up 9%. In terms of return on capital employed, and there are lots of different ways of measuring this, we've chosen to take the cash profit to put back the cost of funding over the GBP 1.1 billion, and that gives you a total return on capital employed of 10.7%, which we think is a healthy enough return to make it a respectable safe business, which we can continue to invest in, but not so high as to attract any unwelcome attention from those who might not like the amount of money that we make out of credit.In terms of the outlook, I would just whisk through this because they're all in the pack. A lot of talk about consumers. We -- I should say, we don't think that people are not buying ties and blouses because of Brexit. Underlying, we think the consumer is in a healthier position than they were this time last year. You can see real rates of income are now rising. Our average real rates, that's the amount that each individual is paid, is going up, and people are working more. So if you add those 2 together, we estimate the total disposable income in the U.K. is rising in real terms, about 1.5%. Interest rates are going up. We don't anticipate that will have a big effect immediately. At the moment, 64% of mortgages are fixed. And what you can see is that, and particularly in the last year actually, anyone taking out a new mortgage has fixed it because people have anticipated the rise in interest rates. So any rise in interest rates will affect our sales, but we think it will affect us more slowly than you might otherwise think, given very high levels of fixed rate mortgages in the market at the moment. Pricing was a big issue last year. We had the one-off drop in currency as a result of the Brexit vote. Inflation spiked. All you can see is this is general inflation in our market. Spiked at around 4% and then has dropped back down to 0. And that's been exactly our experience. I should say that it's amazing that the general market inflation was 4% because as far as we were concerned, we were the only people who said that we're putting our prices up. Everyone else kept them the same, and yet the market's prices went up by 4%, which is an extraordinary piece of magic of where we are.In terms of our costing rates this year, costing rates slight adverse movements in the first half. We think our prices are up around 2%. Second half, actually, we have a benefit in terms of year-on-year costing rates. So we're expecting no price inflation in the second half. And on some products, we will see some price benefits. Looking forward to next year and anticipating potential fluctuation in the currency markets as a result of events in March, we have fixed all of our rates for the following year. So what you can see is that whilst we will not benefit from any recovery in the benefit in the value of the pound if it happens next year, we also don't have any risk to pricing next year. Our rates in the first half is 7% better than it was this year, and our rate in the second half of next year is equal to our rates there, and that's all fixed there in the currency markets now.So we don't think it's the consumer and price that's affecting the play of the market, it's much more about the sectoral shift. This is the graph we showed you last time, which shows -- these are Visa numbers for growth in entertainment, pubs, restaurants. That is moderating, and you can see that the numbers reported for the last 6 months are not as -- those areas are not growing as strongly, but they're still growing -- the consumer is still pushing more money into that sector than clothing. Apart from -- and it looks like the reduction in growth in entertainment has all gone into menswear, for some reason. I don't think it's that women have decided to buy men's clothing. It's very unlikely, but now there's sort of very odd thing where the menswear market is growing and the womenswear market is declining overall because the menswear market is much smaller than the womenswear market. Actually, the adverse movement in the women's market is more important. But that experience of the general market from these Visa numbers is our own experience as well. We're definitely seeing that menswear market is much healthier than any of the other clothing markets.In terms of the structural change in the business, you can see that what's happened in the last few years is that we have seen a significant improvement in the online business. So more business shifting online, but the adverse impact on retail appears not to have got any worse. And I say appears because I think retail, particularly in the first half, definitely benefited from a much warmer summer. And when the weather is good and people need summer clothing and getting to shops is easy because the weather is good, we think that benefited the shops. But nonetheless, these numbers on retail are not as discouraging as they have been, but they come with a health warning. The health warning is obviously the year-on-year comps. If we just take last year's numbers, blow them up, to remind you of last year's -- so what this line shows is last year's sales performance by quarter, and you can see each quarter, it got better. How we've performed in the first half is, in the first half -- first quarter, when we were up against the softest comps, we had good growth. And as the comps got tougher, our performance year-on-year got worse. We think that trend will continue, so we're forecasting as sales got progressively better last year, we're anticipating our sales growth will get progressively worse this year. We've been very kind and generous in giving you our forecast for the second half, and you can all get your rulers out and try and measure the fuzzy line. We've also sort of given you an indication of how we expect it to fall between the third and fourth quarter. And we're expecting the third quarter to be better than the fourth quarter.Overall, full price sales movement for the full year, if that 1.5%-ish comes through, will be around 3%. In terms of brand numbers, that gives GBP 107 million increase in sales for the full year. That breaks down into a negative movement of GBP 112 million in retail, a positive movement of GBP 219 million online. The GBP 212 million will cost us GBP 62 million of profit. So the retail sales we're losing, we don't lose rents, we don't lose fixed costs, so that is very -- those are very expensive sales to lose. The U.K. NEXT-branded stock that we're selling online has increased, but not by as much, by GBP 87 million, and it's lower margin. The difference, what you can see, the sort of so-called structural gap, has narrowed it a little bit in terms -- and that's -- down to our advantage control costs, better in retail, and to some extent, also get some leverage in Directory. So that's now, from last year's number, which, I think, was around 13% to around 7p this year. That's for every pound of NEXT sales that move from retail online will lose 7p on the pound. On top of that profit, we anticipate GBP 57 million growth overseas. The vast majority of that GBP 57 million is NEXT product. And when -- what's -- and so it's comforting from a group point of view is that, although NEXT brand sales in the U.K. are moving backwards, overseas is more than making up for that. So overall, in terms of our buying powers of brand and in terms of our relationships with factories, we're not losing any leverage overall from the brands. Then we got the LABEL profit on top of that. We've got cost savings in the group around GBP 43 million and much higher-than-expected costs in the business of GBP 55 million, just about to miss the good bit. That GBP 55 million, the biggest single surprise there was the GBP 9 million charge bad debt that we weren't expecting.In terms of what that will mean if we come through that, our central guidance, profit before tax, just in line with last year. Earnings per share growth of 5%. Dividend yield on the share price at the beginning of the year of around 3.5%. So overall returns of 8.5%. Now that -- in NEXT terms, this is, by no means, a good performance. But we think in the current market, it is one that we are -- we will be very comfortable with if we can achieve it.Moving on to summary. Now I've managed to avoid -- I even said events in March, I've managed to avoid, for the entire -- well, has felt to you like 45 minutes, but actually, it was only 35 -- I've managed to avoid the Brexit words. It's nice to get a break, isn't it? Just 35 minutes and no one mentioning Brexit, but it's over now. We have given a very detailed analysis of how we feel Brexit will affect the business. And the conclusion is that the direct impact on the business, we think, will be very limited. That's not -- if we stood still and did nothing, then there will be significant impact, but we're taking lots of measures by setting up European companies; bonding our German warehouse so that we can move stock without paying duty between our German and EU warehouse and U.K. warehouse without incurring duty when the stock moves; taking lots of measures, making sure our computer systems are up to scratch. I wouldn't want to pretend that this isn't hard work, it is, but we think, overall, in terms of the direct impact on the business, the impact will be very small. The biggest single impact is, if duty rates are held at their current level and we pay duty on EU stock, that would come to GBP 20 million. As always with NEXT, if we get a cost increase, that goes into our prices and it would equate to around a 0.4 increase in price. So much less than we've had to cope with, we'd say, for example, the devaluation or various other inflationary pressures we've seen in the clothing market over the last 10 years. And we won't experience the 4.4% because inevitably, some of the pain will be shouldered by the manufacturers in Europe, and we will resource some of that stock. So we think that is the biggest risk. The other thing is we think the government will rebalance tariffs. It doesn't make sense for government to get a hold of extra revenue on customs duties from EU stock and increase taxes at a time if we haven't had a deal where actually, raising taxes should be the last thing on their minds. So our view is, and we've looked through the clothing market, if the government were to take the revenue that it would receive on clothing and use it and say, use it to offset a reduction in tariffs on clothing, the tariff rate would drop, on average, from around 11.8%, we believe, to around 6%. And what that would mean is the government would raise the same amount of money. That would be the same amount of duty raised, but the impact to the consumer would be 0 because as much as they're paying more for European goods, they'll be paying less for the rest of the world. And we think that, that makes complete sense, and we're encouraging government to not necessarily tell us what tariff rates will be, but just to give us the direction of travel, [ accounts ] as to what their intentions are with tariffs because that will allow us to begin to price up next year's product.Having said that there's no direct risk, there is a big indirect risk, and the thing we are, by far, the most worried about are the ports and our ability to get stock into the U.K. because the extra volume of work. We've given some helpful suggestions. We think that the answer is not just about doing more work and gearing up -- the government gearing up to have a greater capacity to do existing work, but actually we believe there are plenty of rules and procedures that can be changed to take work out of the ports and do them in warehouses and after the event. So although we are concerned about the issues of ports, very concerned about it, we don't -- we believe that there are remedies available.So that's enough about Brexit. Brexit over. Back to NEXT. Really, summary, in summary, retail and online world is still very tough. We're getting good traction in terms of renegotiating our rents. The discipline that we have had in the past of not taking long leases, negotiating hard deals, getting very high returns on capital invested, means that our stock book value remains extremely profitable. And where we can get rent reductions, we are able to keep shops going. And perhaps, more importantly than that, we will be looking at further integrating our retail stores into our online distribution network in any way that we can think of because it's the building of the NEXT online platform that is our main focus, and that is not just about having websites and selling stock, it's about combining all the assets we have, whether that be warehouses, depots, customer base, stores, overseas trade, credit facilities, customer base, pushing those together and making them work more and more efficiently as -- in the hope that we will become our customers' first choice for clothing and home wear, whether that clothing would be NEXT clothing or whether it be other people's clothing as well.And we maintain our capital disciplines. We maintain our cash generation. We have anticipated and planned the amount we're going to have to spend on warehousing over the next 5 years, and we believe that will give us both the capacity for growth and will not result in an increase in the CapEx of the group because it will be matched by decline of CapEx in stores. We are often asked, and I'm sure, you get asked this as well, "What will the High Street look like in 10 years' time?" And the only honest answer to that, which I'm sure you will give is, I don't know. No one reason that we can predict that, and we are not basing our approach to this what we think will happen. Rather, we are basing it or we can see the direction of travel. We don't know which way it's going, but we have to ensure that the business is as flexible as it can be in transferring business from retail to online, if that's what our customers want, and making sure that we maximize the value of our stores as an online asset. Because the one thing that I can say with certainty, and maybe I'm going out on a limb here in making a 10-year prediction, but when you go down High Street in 10 years' time, I'm fairly sure that the people you see will be wearing clothes. And so in one way or another, our job is to make sure that we sell them those clothes in the way that they wanted to buy them as efficiently and profitably as we can, and that is what we're focused on. And so that was the -- rather, actually quite good and impromptu summary to what was a long, I can say, arduous presentations...[Audio Gap]