NEXT plc (NXT) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen. Welcome to the NEXT presentation. Almost exactly 6 months ago, I was talking to you and although we didn't know it, only days away from shutting all of our stores and a few more days away from shutting all of our warehouses. At that point in time, our biggest concern, in fact, our only real concern, was making sure that we had enough cash to get through the pandemic. I'm pleased to say that we are a long way from there now both in time and in terms of the business' performance. We're no longer worried about the financial stability of the business. And in the first half, somewhat to our surprise, we've delivered a small profit. Now people are always slightly skeptical when they see a small profit and naturally will think, "I wonder how they've jiggled the numbers just to get it above 0." I'm going to go through all the sort of one-offs in the first half that have occurred. There were some benefits. Property profit of GBP 37 million on our warehouse and head office. Our business rates reduction of GBP 32 million gave us a GBP 69 million swing. But against that, we had stock provisions and fabric write-offs of GBP 39 million, property provisions [ for store ] impairments of GBP 37 million and an additional bad debt provision of GBP 20 million. So actually, the one-off movements, the sort of the provisions and noncash movements, they actually gave a GBP 27 million adverse effect on profit. So I think what you can see from that is that underlying at a sales level of GBP 1.35 billion, NEXT would be profitable. Now for full disclosure, I have to say that this profit is reported in a way that we always report our profits. If you were to report it through IFRS 16, then it would give you a small loss. The property profit we made of GBP 37 million is not taxable and that gives you a tax loss of GBP 28 million in the first half, which gives a tax credit of GBP 6 million in the first half, which means that profit after tax is GBP 15 million. That profit after tax of GBP 15 million is from sales that are 34% down. Full price sales, down 33%. In terms of the shape of sales across the year, really, the 6 months divides into 3 periods. In the run-up to lockdown, our group sales were down 1%. That compares to a budget of plus 3%. The reason for the underperformance, we think, is down to 2 things. First of all, we had 2 weeks of flooding with Storm Dennis. And secondly, we think really from the beginning of February onwards, we were beginning to see fear of the pandemic affecting sales, particularly in our retail shops. We then have the period of lockdown, the closure period. And what you can see here is not only do the green bars, which are retail sales, disappear but also the dark blue bars disappear for 2 weeks as well. That's because we shut our warehouses for 2 weeks. I have to say it was one of the hardest decisions I've made over the last 20 years. Looking back at that decision, it was an expensive decision, but we're absolutely convinced that it was the right thing to do. Our warehouses really weren't geared up to operate safely and within government requirements. We had to shut them for 2 weeks, changed all of the warehouses around, putting one-way systems, perspex dividers, changed [ holdover ] systems to make sure that people were kept segregated. And the reason that when we turned the warehouses back on, sort of we commenced in 12th and 19th, the reason that the sales didn't go back up wasn't because the demand for our product wasn't there. It was because we had to induct people very slowly into the warehouses in order to train them properly. We were inducting [ people ] 2 and 3 at a time into the warehouse. So it took us 5 or 6 weeks to get the online business back up to speed. Once we did get it back up to speed, we very quickly started to get sales levels that were close to last year's numbers. And then post lockdown, when the shops reopened, first of all, the online sales carried on strong. In fact, they got stronger. And secondly, the stores recovered much better than we thought they would. We assumed that the stores coming out of lockdown would perform as they had done in the week before lockdown, sort of being 60% or 70% down. Actually, as it happens, they were, even in the worst weeks, only 30-ish percent down. So stores performed much better, which meant in the back half of the half year, sales were only down 8%. One of the reasons for the sales resilience was the performance of different types of products. Unsurprisingly, products that was geared up to work or sporting events, parties, occasions, our formal wear, occasionwear, holidays, shoes and accessories, that did much worse than the product that people were buying throughout lockdown: home, childrenswear, sports, loungewear, underwear. You can see that there was over 30% difference in the performance of those product areas. We were very fortunate that going into lockdown, more than 50% of our product categories fell into the better-performing areas. And I think over the years, I suspect people haven't quite noticed how big our home, children's, sports, lounge, underwear businesses have become. And it's really a testament to the teams that have continuously developed those areas over the last sort of 15 years. The second stroke of good fortune was the nature of our store portfolio. What this graph shows is the performance of our city centers, regional shopping centers and retail parks since lockdown. Now obviously, all the stores are performing badly, but the retail parks have done much better, more than 15% better than the regional shopping centers and city centers. That shouldn't come as a surprise. City centers is where people go to work. It's where you have to use public transport and it's where you're more likely to bump into someone in the street than a retail park where you can park by the front door, walk straight in and walk out again. 62% of our sales going into lockdown came from retail hubs. So when we came out of lockdown, the fact that those stores did so much better than the city centers and regional shopping centers really helped our sales. Normally, at this point in the presentation or at several points in the presentation, I will talk you through line-by-line 0.1% by 0.1% movements in our margin. We're not going to do that this time because the percentages are so big that they become meaningless. Instead, what we're going to do is just walk forward from our total sales to our profit before tax. So the group lost GBP 702 million worth of sales in the first half, and profit before tax was down GBP 311 million. We saved GBP 220 million on stock. Of that, GBP 100 million were canceled contracts, and these were contracts where the stock hadn't yet been made but the order had been placed. And wherever our manufacturers had bought fabric, we paid for the fabric but canceled the production. We reduced our future buy. We still had well over GBP 150 million worth of stock to place for the spring/summer season, and we canceled a lot of future orders for the half. We hibernated GBP 50 million worth of stock. So gross, we canceled GBP 260 million of stock. We have to deduct from that the cost of the fabric that we paid for and the provisions that we've taken against the hibernated stock that we've carried over into next year because we are assuming that the hibernated stock will not sell as well as it would have done had it been new for the season. We reduced wages by GBP 100 million, and the vast majority of that were staff who are on furlough. Of the GBP 102 million wages that staff weren't paid, over GBP 70 million of that was covered by the furlough arrangements. The balancing saving was mainly down to the fact that the 20%, that wasn't paid on furlough. Occupancy costs were down by GBP 45 million. GBP 32 million of that was the rates holiday. The balance were things like utility bills. All maintenance in our stores ceased, and we've made some significant savings on service charges as well in big shopping centers. Online marketing, we saved GBP 21 million. The reason we stopped our online marketing was because for so much of lockdown, we were struggling to keep up with the demand that our customers were providing us with. So there was absolutely no point in spending money on marketing to try and increase the demand because we wouldn't have been able to service it. Moving on to depreciation and disposals. GBP 113 million of cash inflow from that. That is all about GBP 147 million we received for our head office and warehouse complex, but you need to add back the GBP 37 million of that that's already in profit. Capital expenditure was GBP 18 million down on last year. And what I should say here is that the reduction in the first half capital expenditure, when we really felt we needed to save the money, will be much less than the saving we're expecting for the year. If we look at the full year compared to last year, we're actually expecting CapEx to be down GBP 4 million. Once we realized that we weren't in a cash crisis position and that we could spend the money, we went back to all the warehouse projects and the store projects that we thought were good investments at the beginning of lockdown. So we needed to get back and spend that money and make that investment, and we've clawed back some of the GBP 18 million CapEx that we didn't spend in the first half. We have managed to invest in the second half. What's interesting is to look forward over the next 5 years, that the average we'll spend is around GBP 125 million. Now the lion's share of that, we believe, will be on warehousing. I've already spoken to you at great length about warehousing, and our warehousing plans haven't changed that much. So I'm not going to talk about that now. But I would like to talk about systems because our systems capital expenditure is set to increase significantly over the next 5 years. The reason for that is that whereas in the past, the vast majority of our systems costs have been revenue costs because they've been small developments to existing systems. Over the next 5 years, we're going to have a number of big legacy systems that need to be completely rewritten, a number of new infrastructure systems that need to be put in place. And all the systems that we'll build for third-party clients, like Total Platform, obviously, their life will be the life of the contracts that we sign with the clients. So they will be capitalized rather than a revenue cost. Looking at the revenue costs. This year, we will spend GBP 98 million on systems. The amount of money that we spend on systems has significantly increased over the last 5 years. So 5 years ago, we're spending GBP 68 million. We've increased that by 44%. And going forward, what's interesting, if you look at our systems expenditure as a percentage of that GBP 125 million a year that we expect to spend over the next 5 years, it comes to more than we're expecting to spend on our stores. And what's interesting about our capital expenditure is that whilst the total amount that we're spending we don't expect to change dramatically, the shape of the spend has completely turned around. And that's because in the past, a thing that determines speed at which we could grow was the speed of opening new stores. Going forward, the rate determining step won't be stores. It will be systems and warehousing. The comforting thing about this graph is that although the nature of our capital spend is going to change, the quantum isn't. And so the capital consumption of the group is not set to change dramatically over the next 5 years, which means the quality of our earnings will not be affected by the change in the shape of our capital expenditure. Looking at working capital, the lion's share of working capital inflow has come from customer receivables. The reason for this is that whereas our sales online, our credit sales, fell, the amount our customers paid us did not. And just to sort of put that in context, what this green dotted line shows is the percentage of customer balances that were paid each month last year from February to July. If you look at the same figure this year, what you see is that when the lockdown started in March and April, our customers did reduce their payments a little bit. Clearly, nervous as to what might happen during lockdown, encouraged our customers to conserve their cash. As lockdown progressed and people became more confident and potentially, as we went into summer and people had less money to spend on their holidays, what you can see is this, our customers more than made up for the fall in their payments in March and April and that trend has continued into August. In fact, I think in August, it actually got a little bit stronger. So as we stand today, our customer debtor days are down on last year, and our default rates are no worse than last year. So at the moment, the quality of our debtor book has held up extremely well throughout the pandemic. We reduced stock by GBP 94 million. This is all about all those cancellations we made, meant that we had less stock on the balance sheet in July. We deferred GBP 20 million worth of VATs because we're able to under government scheme. Now that we're back in cash, we actually paid that money to the revenue, so that will reverse out in the second half. In terms of tax, GBP 7 million more tax paid in the first half of this year, and that's despite the fact that we're obviously going to make much less profit in the first half of this year than last year. The reason for the increase is all down to the change in HMRC rules, which means that in the first half of this year, we have to pay 4 quarters tax rather than 2 quarters tax. Our ESOT, obviously, ESOT is a discretionary spend. We don't have to buy shares into our Employee Share Option Trust. We could issue shares. So when we thought we needed the cash, we stopped buying shares for the ESOT. In fact, we did more than that. We actually sold some shares in order to raise cash. We've since reversed out that sale. And we expect in the second half, the savings that we've made on ESOT purchase, we will make those purchases in the second half. So you will see that cash saving reverse out. In the first week of February, we thought buybacks looks like quite a good idea. As we got into the second and third week of February, we realized it looked like a very bad idea. So we stopped that. We've returned GBP 260 million less to shareholders this year than last year, which gives us net cash flow for the half year of GBP 347 million. Looking at that GBP 347 million in the context of the group's total debt, net debt at half year was GBP 765 million. We expect a further cash inflow in the second half of GBP 115 million. You might look at that and think, "Well, that's odd. In the second half, you're expecting to be better than the first half but to get less cash in." There are 3 main reasons for that. The first is that we're making up for the CapEx that we didn't spend in the first half by spending in the second. Second is we are buying the shares into the ESOT that we didn't buy in the first half. And the third and most important is that in the second half, we expect our credit sales to grow, and therefore we expect our lending to increase rather than decrease as we progress through the second half. If we take that GBP 650 million and put it in the context of our total bond and bank facilities, what you can see is that the company is very comfortably financed. Even at peak, and we expect peak next year, which will be in around August, to be about GBP 100 million higher than GBP 650 million, we will still have GBP 825 million worth of headroom on our balance sheet, which clearly isn't necessary. In October, we have a bond that becomes repayable. If we don't refinance that bond, we would still have GBP 500 million worth of headroom. As it stands today, and we haven't made a final decision on this, but as it stands today, we do not intend to replace that bond and refinance it. We think GBP 500 million is more than enough headroom. And given the experience that we've just had, we think actually, investing that money, having a stronger balance sheet is a sensible thing to do. And just in terms of the strength of the balance sheet, we believe that you have to take the GBP 650 million debt in the context of a financial asset, that is, our debtor book. And we are forecasting that at the end of the year, we'll have GBP 650 million of net debt but have a financial asset of GBP 1 billion of customer receivables, receivables that we have proven in the first half are of high quality and can be collected out very quickly in the event that we stop lending. So we think anyone looking at the security of our bonds can look at this graph and look at the shape of our finances coming out of lockdown and be more comfortable than they were at the end of last year. Moving on to the balance sheet. Stock down in July, 12% on last year. Our teams are buying to minus 5%. Our central scenario for sales for the rest of the season is minus 12%. The reason stocks were down at the half year isn't because we were buying to our central scenario. It is because we were chasing stock back in. Whether or not we beat our central scenario will depend a great deal on how much stock we can get in. What I can say at this point is don't get too excited about the possibility of us beating the upside in the central scenario because we're unlikely to have the stock to do it. Moving on to receivables. Receivables decreased by GBP 198 million. This is all down to the reduction in the debtor book. Debtor book was down 16% on last year. This compares to the last 12-month sales, which were 12% down last year. The reason the receivables have moved back faster than the credit sales is down to 2 things. First of all, increased debt provisions reduced our book by 2%; and secondly, accelerated payments in the second half of last year also reduced debt faster than credit sales. Net assets at the end of the first half are GBP 593 million. I think this is really important that at the end of the pandemic half after lockdown, our balance sheet is GBP 185 million stronger than it was going into the pandemic. So just looking at some of the detail, starting with the Online business. Online sales were down 14% in total, 11% at full price. The reason that markdown sales were down much more than full price sales was all about capacity. We went into our mid-season sale literally the week before lockdown and the week before we had to shut our warehouses. At that point, we had to cancel a lot of our mid-season sale orders. That significantly reduced our markdown sales. If we look at the shape of the online sales throughout the year, what you can see is that in the third phase post lockdown, we have seen much stronger sales online than we saw in the first phase. And we think that there is a possibility and probably a probability that the lockdown has served to increase the rate of structural shift out of retail and into online and that whereas we don't expect our online sales to continue at anything like 21% up, we do think that the difference between the performance of retail and online will continue not just for the rest of this year, but into next year as well. If we look at the U.K. sales, U.K. sales were down 13%. NEXT branded sales were down only 10%. The last 5 years, our LABEL sales have grown much faster than NEXT branded sales. The reason we have such a poor performance on LABEL was mainly because of Lipsy. Now Lipsy specializes in party dresses, party dresses and occasionwear. These are outfits not designed for social distancing. So they had a really tough time. They were down 48%. In some weeks, they were down 70% to 80% on their key category of dresses. If I look at the performance of the other elements of LABEL, the other fashion brands were down 19%. Partly that's because some of those fashion brands were similar to Lipsy in that they were geared up to occasionwear. But mainly, it was because having canceled out of a lot of wholesale stock, we found it much harder to then reinstate that stock and bring it back in. So we were short of stock in a lot of the branded fashion areas. Beauty and home brands did really well, and our beauty and home branded business continue to grow very strongly. And I'll talk about that a little bit more, particularly beauty, later on. In terms of overseas sales, overseas sales did better than the U.K. and actually, the picture overseas is a little better than it looks with the number in the half. If you split it down into first and second quarter, what you can see is that actually, the first quarter did much, much worse than the second quarter. And the reason for that is that when we shut the warehouses, the first business we turned back on was the U.K. business, and it took us weeks to turn on all of our international sites. In addition to that, our German and Russian warehouses were not replenished for about 8 or 9 weeks. So they ran very short of stock. In the second half, once we've got our online business overseas back up and running, we saw extremely strong growth overseas, and this has actually been very encouraging. The main driver of that overseas growth has been our business on third-party sites. These are sites like Zalando or [indiscernible] in India, Otto Versant. Part of the reason that those third-party sales increased so much was that we added some new third parties. But even on a like-for-like basis, third parties were up 31%. The reason for this was because we pushed much more stock onto those sites. They have a much better choice of stock. And secondly, in those countries that we operate, when they had retail lockdowns, a lot of people who haven't shopped online in those countries went online and found our products. If we look at customer growth, it looks as if our U.K. customers have grown faster than overseas. Again, we think that's slightly misleading because all of the customers who would have bought our stock overseas through a third party, we can't see. We count Zalando as one customer. So we think actually, in terms of the numbers of people shopping our products overseas has gone up, but it doesn't come into our customer numbers. In terms of the U.K. numbers, the split between credit and cash was skewed towards cash. Now that has been the case for the last 2 or 3 seasons. We see much stronger growth in cash customers than credit customers. We think the differential here is partly about the fact that we had a lot of new customers who may not have even shopped online before, and those customers definitely will be customers whose first purchase would be with cash, not with credit. Just looking at the total sales to total operating profit. You can see that we managed to save about 2/3 of the sales in terms of reduced costs. Partly that's because we're able to turn off the marketing. The one comment that I do need to make about this line is the logistics line. You would expect us to save money on logistics because we have fewer deliveries, less stock going out stores. You'd expect that to deliver less expense, and indeed it did. But we had spent a lot more money delivering stock overseas because of surcharges on airfreight, on parcels that were delivered to customers overseas. And we had to spend lots of money in our warehouses, making the warehouses fit for purpose, putting it all one-way systems, all the new systems to make them COVID-ready. And the combination of those 2 costs meant that our logistics costs went up. Credit sales were down 26%. Credit sales were down a lot more than our total U.K. sales, which were down only 13%. The reason for this is simple, and that is that the credit sales traditionally have been on the areas that perform badly. What the pie chart shows here is the percentage of credit sales that are on markdown, adult fashion and children and home. And what you can see is that children's and home accounts for only 29% of our credit business, and those were the areas that did well. The other areas did really bad. Markdown and adult fashion did badly, and that served to reduce our credit sales overall. That had a knock-on effect on customers, which although the average customer base was flat, the customer base in total fell by 5.5%. Partly that's just because we took less money. And if customers aren't shopping, they're more likely to go dormant. But in a large part, it's also because we turned off our marketing, and a lot of our marketing is geared up to recruiting credit customers. Once we turned the marketing back on, our credit customer base stabilized and has started now to recover. We expect that for the full year, we'll finish the year with credit customers down 1% to maybe flat, we think between flat and minus 1%. Receivables were down 6%. Receivables are down a lot less than credit sales because the receivables in this half are, in a large part, down to the sales we made in the second half of last year. The real pain in terms of receivables is going to be felt in the second half of this year, where you'll see a much bigger decline in average customer receivables than we experienced in the first half. Interest was down in line with customer receivables, down 5%. Bad debt was up 53%. Two things going on here. First is that when we make a credit sale, we will always provide some of that sale as bad debt. Because our credit sales went down, we made less provision on new sales. In addition, we had written off some debt that we subsequently sold. So we made a GBP 4 million profit on that. Against that GBP 10 million benefit to bad debt, we took a GBP 20 million provision for bad debt in the second half. We genuinely don't think this is being overly conservative. When we look at the economic environment, the fact that furlough hasn't yet ended, the fact that a lot of the economic pain has yet to filter through into the economy means that whilst we might not be experiencing any of that increase in bad debt at the moment, it is very likely that we will experience some in the second half. And we think GBP 20 million is a reasonably conservative provision for that eventuality. Cost of funding, this increase here is actually a technicality. The interest we charge to the finance business is a recharge from group. The total amount of sterling interest the company has paid in pounds hasn't changed. It's GBP 21 million last year, GBP 21 million this year. What has changed is the total amount of borrowing and the shape of that borrowing. We are borrowing much less overall, in particular, borrowing much less bank debt, which means that we've lost the cheap bank debt. The expensive bond debt remains and, in part, it actually increased because we issued a bond at the back end of last year, which means that our average interest rate for the group has gone up and that average interest rate is passed on to the finance business. In terms of profit, profit down 22%, but return on capital employed is still very healthy at 10.8%. Looking at retail. There is not a long story to tell here. It's a very short story. We closed -- we didn't take any money. It cost us a lot of profit. Quite interesting just to look at store openings and closures. We intend to open 6 stores this year. That's not because we've suddenly gone on a spree to open new shops. 4 of those shops are beauty and home stores in Watford, Metro Centre, Milton Keynes and Reading. These stores, we are opening in partnership with landlords on a risk-reward basis, and they are a trial. We don't yet know if they'll work, and we will have much more on this in 6 months' time. The product that we'll stock is branded beauty, NEXT and some branded women's nonclothing accessories, things like handbags and laundry and a big home offer. Whether or not these stores are successful in this format, we think we will learn a great deal from the exercise. And the important thing about this project is not necessarily the retail element, but the fact that this retail element is part of a much bigger endeavor to grow our beauty business. Our beauty business has grown very strongly online even through lockdown. It's up around 19%. And over the last 10 weeks, it's been up around 50%. We continue to add new brands to our beauty offer. We think it sits very well with our fashion offer, and we'll be continuing to add brands to our online business as the season progresses. And these stores really need to be seen in the context not just of a small retail trial, but in terms of a much bigger effort to grow a serious beauty business for NEXT. In terms of store closures, we're closing 13 stores. We haven't closed any stores because of COVID. These are largely stores that we planned to close at the beginning of the year. In terms of lease renewals, we've made great progress with lease renewals, unsurprisingly, in the current environment. Average rent reduction of 50%, average term of 3.5 years. That gives the group a rent reduction on an annualized basis around GBP 10 million. In terms of the profitability of the stores that we've renewed, the profitability will be 24%, which we believe even given, say, 10% like-for-like per annum will be enough to keep those stores in profit for the 3.5 years of the average lease length. And I should stress that the 24% profitability is on the basis of what we think those stores will take next year, and we've assumed that those stores will take 20% less next year than they took last year. That's 2019. Moving on to our full year scenarios and guidance. Obviously, the first half doesn't give us much of a clue as to how the second half will perform. If we take the last 13 weeks, the last 13 weeks have only been 2% down. Please don't be fooled by those numbers. They are hugely boosted by the fact that a lot of people who would have gone overseas didn't and stayed in the U.K. and spent money in the U.K. And secondly, the weather made a huge difference in August. Now I know retailers like to use weather as an excuse for bad sales, but please -- I'm sure you'll all believe me when I tell you that the fact that it was much, much cooler at the end of August meant that our ability to sell back-to-school clothes, the childrenswear, early autumn product was hugely enhanced over last year partly because August, towards the back end, was unusually cold, but also because last year, the bank holiday was scorchingly hot. It was 30 degrees last year. We had a terrible bank holiday last year and a really good one this year, and that is artificially pushing those numbers up. Our best guess for the second half is that our sales will be 12% down. Now that assumes that there won't be another lockdown and closure of our stores. It does assume some level of second wave, some level of increased pandemic activity. It assumes that there will be greater economic pressure. And we also think that the rule of 6 will affect sales of Christmas gifts and of the clothing that people wear to those family get-togethers. So we think there's quite a lot of money spent preparing for and going to family get-togethers. And if the rule of 6 persists, then we think that will affect sales in the run-up to Christmas. So that is our best guess. In terms of how that relates to our upside and downside, we think the upside for the rest of the year is minus 4%. The downside is minus 34%. What that would give you for the second half is a range of minus 2% on the upside to minus 25% on the downside. As I mentioned earlier, we think the upside is constrained by stock. So it's very unlikely that we'll beat the upside. The downside you might look at and go, "Actually, that's not enough because if they were 33% down in the first half and there was a full lockdown, if there's a full lockdown in the second half, surely, it will be commensurate with that level of pain." Now you might be right about that, and of course, we don't know. The reason we think it might not be as bad for us in the second half is mainly because we don't think we'll have to shut our warehouses again because we've already got them COVID-ready, and that should make up the difference between the minus 33% and the minus 25%. In terms of underlying profit, that would give us sales for the full year down 20%; underlying profit before tax of GBP 300 million; and net debt, as we mentioned earlier, at GBP 650 million. At either end of the spectrum, on the upside, maybe GBP 370 million, downside of GBP 110 million. And in terms of net debt, just one thing that you might look at there and go, "Well, hold on. If on the upside you're going to make GBP 70 million more profit, why are you only reducing your debt by GBP 15 million between the central and the upside scenario?" And the reason for that is because we think if there is an upside, it will come on our online business, and that will drive greater credit sales and that will eat a lot of the cash. So that's all the numbers for today. Now I'm just going to talk for a little bit about where we think we are as of the moment. And if your slides don't move, it's because this part of the presentation isn't animated. I'm just going to talk for a bit. And there are sort of really 3 themes, I think, from the first half. The first is really all down to the resilience of our sales where I think in one way, you could look at it and say the group has been extremely lucky, whether that be because of the spread of our shops, the diversity of our store portfolio and the fact that we take so much out of town and also because of the breadth of our product offer. And I think you would be right to look at that as a stroke of good fortune. We didn't build our children's and home business and retail parks in order to survive a pandemic. But I think it does speak to the resilience in general of the group and the fact, in particular, the fact that our product offering is so diverse. Not only does it make the business more resilient to the vagaries of sales in any one of those product areas, it also creates opportunities for us. The fact that we sell everything from NEXT branded to trainers all the way through to suits means that we can push into areas when they are successful with the brand, though other brands can't. I think the second thing that whilst we can't take credit for our sales resilience, we can take some credit for the financial resilience of the group. That is not an accident. That is absolutely planned. And I think it comes down to 2 things. The first is our belief that I've expressed many times in these presentations that fashion businesses need to make healthy margins. Fashion is a volatile business. You've got the vagaries of consumer demand, the vagaries of fashion itself and, of course, the fact that every so often, fashion businesses have a fashion accident. And that means that we've always run the business to make healthy margins. That may well have come at the expense of growth. But we've always taken a view that we're much better to build the business on solid foundations and healthy margins than go for very high growth on margins that could leave the business vulnerable. The second thing is that we have always insisted that in every part of our business, we insist on high returns on the capital we invest in the business. And what that means is that we have a business where our CapEx is genuinely discretionary, that if we need to turn it off, we can as we did in the first half. What do those 2 things mean combined? The luck of our sales resilience and the judgment of our financial stability means that as we come out of the year, we will have a more financially stable business with plenty of cash to invest, that has retained pretty much all of its people throughout the pandemic, retained its talent. And that's important because whatever profit we make this year, in 5, 10 years' time, no one will really mind about whether we make GBP 250 million, GBP 300 million, GBP 350 million. What will matter is the foundations we built for the business going forward. And one of the features of this pandemic has been that it has accelerated opportunities partly because it's forced us to look more diligently with more urgency at what opportunities are available, partly because -- and it has opened our minds and the minds of potential partners to collaborations that we might not have undertaken in the past. And partly, I think, because there are so many opportunities -- good opportunities, we have been prepared to take slightly higher levels of risk than we would normally in terms of starting new ideas. One of the opportunities that I talked to you about 6 months ago was Total Platform. Now at the time, Total Platform was just an idea. 2 weeks after I spoke to you, we signed our first contract for Total Platform. And 2 weeks ago, we launched our first Total Platform customer. So this idea has gone from being an idea to being a real business. Our first customer is a business called Childsplay Clothing which specializes in the sale of luxury, really top-end childrenswear clothes. If you go to the website, as you can see on this graphic, it looks and feels like Childsplay Clothing. The images are theirs. The photography is theirs. The layout and the structure of the homepage is theirs. But underneath that skin and the veneer that looks like them, the entire guts of the system are driven by NEXT website. And the advantage of that for the client is they get all of the functionality that goes with the NEXT website that we've been developing over the last 10, 15 years. Whether that be the artificial intelligence that we put into our search engine or the functionality in terms of the way we work with our stores, all of that functionality is embedded in their website. It also means that if 1 of our 2 million credit customers or indeed any 1 of our 5 million customers who have an account with NEXT go to their website, they can log in to their website with NEXT. We believe this will, for a lot of their customers, will hugely reduce the friction of signing up to a new website. In addition to being able to log on with NEXT, all of the customers on Childsplay, whether or not they've logged on as a NEXT customer, will be able to pay using nextpay. And for the client, this is the first time we've had a credit offer, and it's a credit offer that exists with 2 new customers, who, between them, have GBP 9 billion worth of headroom on their accounts and who are used to ordering and receiving fashion to their home or through our stores. So we think in terms of the platform's ability to help clients, offering our credit on their website will make an enormous difference. When the customer receives their goods from Childsplay Clothing, the look and feel and experience will be entirely Childsplay Clothing. It won't come in NEXT branded packaging. It will come in beautiful magnetic clipped boxes with tissue paper that have been hand-wrapped by someone whose name you'll see on a card. And when you open the box, there's this one thing where they put a little bit of scent in the box. So you get a nice smell when you open it. So the whole experience of the customer, the front-end experience of the customer is very much a Childsplay customer experience. But the service they can provide, the logistics, the actual -- the cutoff for next-day delivery, the speed at which they get the delivery, the accuracy in which they get the delivery, all of that is NEXT quality service. And that's a huge step forward for this particular client and indeed would be for most U.K. businesses. In order to maintain the sort of integrity of their packaging, one of the things we've done is we have fitted out especially [ their own ] warehouse that is dedicated to them, so that they can begin to build a sense of team amongst the people who are packing their product. Total Platform is potentially a very exciting business because what it does is it takes a partner brand and it allows them to plug in to 20 years' worth of investment that NEXT has made in its web systems, its marketing, its online warehousing, its distribution, whether that distribution be through couriers, through NEXT stores, through overseas networks, it plugs them into our call centers and gives them our credit offer. And that integration allows them to have a much more powerful and robust presence both in terms of U.K. online presence, their online presence overseas where they can tap into all of the work that we've done to develop 70 different international websites for our business. We can put their product into those countries on websites that are translated, that deal in local currency and it takes specialist forms of local tender types, for example, cash on delivery in Russia. They also have the advantage, if they want it, of being able to deliver their stock through our stores. We know that 50% of our orders are picked up in our stores. So we think actually, the use of NEXT stores as a post office is actually a very powerful marketing tool, even more powerful as an easy way to return stock. Recently, we've -- as we've been talking to more potential clients, we've realized that we can extend Total Platform to cover retail as well. We think this potentially is very important. What it provides clients with is, first of all, retail till systems. Now the chances are, and certainly the people we're talking to, our retail till systems are capable of doing much more than their systems, not least because for the last 15 years, we have been integrating our retail operation with our online operation. And what that means is that clients, whose stores are on Total Platform, can do things like order stock that isn't available in their online warehouses from their stores, order stock that's available online for delivery to their stores whilst customers are in their stores. It gives them the power of all the software we've developed to keep our shop floors replenished, to do RFID stock counts within stores and ultimately, all of the intellectual property in our man-hour planning systems as well. It will also provide them with, we believe, much cheaper solution to delivering stock to their stores partly because the warehousing will be cheaper if it's done through our automated retail warehouses and partly because we are already delivering to the vast majority of towns and cities where potential partners have shops. So their deliveries will be able to ride with us, and we believe that can significantly reduce their costs and ultimately, of course, will give us a cost saving as well. So that links our partner stores -- they will obviously still run. That will link them into our retail distribution and warehousing system. I think one of the messages that's been hardest to get across about Total Platform is the fact that it is a total platform. And the totality of it, the fact that it does everything, retail stores to credit to call centers to web systems, actually makes it much easier to integrate than were you to outsource any of these services individually. Because you could look at this and you can go, "Well, this is just a giant outsourcing contract." There are companies that will outsource your call centers. There are companies that will do your warehousing, create your website, sell you till systems, do your retail logistics. But to my knowledge, there's no one that can do absolutely all of it. And the advantage of doing all of it means that all of those services are pre-integrated. Anyone looking at an outsourcing contract, let's say, I'm going to outsource your website. That website has then got to be integrated into your warehouse, your credit systems, your customer account systems, your call center systems and call center operatives. And all of that takes time and money. And the reality is that giving people the whole jigsaw premade is much, much more efficient and easier to do than giving them individual pieces of jigsaw piece by piece because ultimately, the way that we integrate these systems with third parties is very simple. It is through a label, and we know this. And the reason we developed this so quickly is because we've already done this for LABEL for many, many years. LABEL stock is delivered from hundreds of third-party brands into our warehouse. In order to integrate that stock into our system, we simply put a label on it with a unique identifier. Extending that principle to another website that we run for another party is very simple, and the power it gives the third party is enormous because what it means is that, that item, because it has a unique identifier on it, it doesn't matter where it's been sold. If it's returned, let's say, to a store, it can be scanned in a NEXT store as a return or in a partner store, and the system will know exactly who bought it, whether they paid for it on credit, whether they paid for it with a credit card or indeed, whether they paid for it at all. And that means that the customers can be quickly and accurately refunded their money in the correct way in any part of our system. Total Platform is not charged on an activity basis. The only exception to that is some of the retail activities charged on a cost-plus basis. But all of the online charges are basically one simple commission, exactly the same way we were with LABEL. We charge one commission on sales, and what that means is several things for the client. The first is it gives them a variable cost base. It means that in those years that we talked about earlier, the difficult years where you have a fashion accident and where your fixed cost base can and indeed, for many businesses, have extinguished all your profit, if you're on Total Platform, pretty much all of your variable costs, other than your stock, will drop in line with your sales. More importantly, on the way up and in this new world where brands can reach so many new customers so quickly and grow so quickly, on the way up, you avoid those painful step changes in costs that come with rapidly growing a business. Moving to a new warehouse, opening a new call center involves step changes in costs and these economies of scale that are extremely painful. A fixed commission means that you just sail through that growth. It's CapEx-free. In that, the cost of the capital is included in the commission we charge. So NEXT funds all the capital. We think that, that actually sort of has an economic efficiency to it. For the last 15 years, NEXT has been buying back shares or issuing special dividends precisely because we generate far more capital than we can productively invest in our business. At the same time, we know that a lot of new and developing brands are capital-constrained and having to pay enormous amounts to raise capital. So this marries our ability to generate cash with the capital requirements of rapidly growing new businesses. The final thing about commission is that it completely aligns our interests with the client. If their sales grow, our commissions grow. If their sales go backwards, their commissions go backwards. So it is as much in our interest to grow their sales as it is in theirs. All of the clients we're talking to, without exception, we will provide a better online service for less money. And the final thing is really an operational point, and it comes down to this thing about growing pains and the brand that's growing its business at 50%. If any of you have ever been involved in growing a warehouse at 50% or a call center operation at 50%, you'll realize that, that process is -- it's not impossible. It's perfectly possible, but it's very expensive and it normally involves a lot of stress and costs and it tends to reduce the quality of your service. The clients we're talking to in general, particularly the ones where the average selling price is higher than ours, a 50% growth for them is the equivalent in unit terms of growing our business 1% or 2%. So they can get the levels of growth that they would want to achieve and that they can achieve, but the pain of that in terms of operational pain and difficulty will be the equivalent of a 1% or 2% growth in net sales. I think the final and actually most important thing about Total Platform is that it allows brands and fashion businesses to focus on the things that they really love doing and the things that ultimately differentiate them from their competitors. No one sets up a fashion business because they're passionate about data security or warehousing or call center operations. Branded businesses are geared up to the design and sourcing of beautiful products. Their buying operations, their photography, their imagery, their -- the way they talk to their customers, social media, the marketing, that's the way that those businesses really differentiate themselves. And the operations are something that they have to do. But they're very unlikely to be able to significantly differentiate themselves through the back end of their operations. So what Total Platform does is that it allows the brands to focus on what they're really good at. It allows them to grow at much faster rate than they could possibly hope to do if they were doing their own operations, and it does so at a lower cost. Total Platform has been a very rapid journey for us. As I said earlier, it really founded upon the technology that we've used to integrate LABEL into our own website. Without it, we wouldn't have been able to do the deal that we've just announced with Victoria's Secret now. Victoria's Secret is owned by L Brands. And before I go too far into this, I should say that the deal that we've done with them is conditional and subject to regulatory clearances. But what I will explain is the structure of the deal subject to that regulatory clearance. We have set up a vehicle that is a joint venture, which has the U.K. and Éire license for Victoria's Secret products for 7 years. It's owned 49% by L Brands, 51% by NEXT. In terms of its routes to market, there will be 3. It will distribute stock through Victoria's Secret stores, most of which, in fact -- to start with, all of which will be some of their existing stores where we've been able to renegotiate the rents in such a way as to make those stores profitable. The second route to market will be through a Victoria's Secret own label website that serves the U.K. and Éire. And the third way is through the distribution of Victoria's Secret product, both beauty and lingerie, on next.co.uk through our LABEL business. In terms of the economics, the stock will be provided to the joint venture at cost and the joint venture will buy that. In terms of retail, the profit share is relatively simple. The stock will be sent and sold through the stores. The profits that the stores make will be divided according to our shareholding between the partners pretty much equally. NEXT will provide a whole suite of services to Victoria's Secret stores, whether that be warehousing, distribution systems. All of those services will be provided at cost without any markup. And we think that there's a degree of symmetry there in that L Brands are providing stock at cost. We're providing retail services at cost. In terms of the platform, the relationship is a little bit more complex. What we've done is we've treated the joint venture as if it were third party, not on to us, and we've put in place a potential contract for Total Platform. We will obviously receive a Total Platform commission, and we will make a profit on that commission in the same way we would with any other Total Platform customer. The joint venture will make a profit on the sale of the product through Total Platform, and that profit will be split equally between the partners. Now what you can see from this is that the neat symmetry of the retail arrangement isn't mirrored here because we will be making a profit on the Total Platform commission, which L Brands doesn't make, and the profits are split equally at the joint venture. To balance that, what we've agreed with them is that all online sales through Total Platform will be subject to a royalty that the joint venture will pay to L brands. And that evens up the profit share between the 2 parties, and we have exactly the same relationship in place for the profit, royalty and commission on LABEL sales. The only difference between the Total Platform and LABEL profitability is that the LABEL commission is higher, and we make slightly more profit on the LABEL side and L Brands makes slightly more profit on the VS Total Platform side. We think that's fair and probably because people are only going to the Victoria's Secret site because of their brand and they're only coming to the LABEL side because of the time and effort we've put into building up our customer base. So that's the structure, and it's an interesting structure because the [ thought that's pushed ] in our minds is that whilst Total Platform was designed as a service to U.K. businesses who wanted to rapidly grow and develop their online operations, it's made us realize that actually, it could be equally applicable to an overseas operator who's got fantastic operations in their own territory but wants to upgrade and turbocharge their operations, marketing, systems and distribution in the U.K. So potentially, another opportunity for a Total Platform. So that's sort of the new opportunities. I'm not going to talk about details. I'm not going to talk about licensing. But there is one theme that holds all of these opportunities together, and that is they all, in one way or another, leverage the assets we have in the group. Whether it's leveraging the synergy between beauty and fashion or leveraging our online infrastructure through Total Platform or leveraging our sourcing base and quality control through our licensing operation, all of them take assets within the group and look for other ways of creating value out of those assets. And I think as I had said, the number of opportunities that have arisen over the last 6 months have been significantly higher than the number of opportunities that have risen in these areas over the last 5 years. I think the pandemic has, in many ways, given a sort of turbo boosted change in our industry, and that's created an awful lot of opportunities. One of the things that we have to be careful of as a group is not just to plow on with any opportunities. And we've been very clear about which opportunities we will do and which opportunities we won't. And we have 4 very simple tests. I've talked to you about this before, but I'll mention them again because they're so important. First of all, whatever we do, we have to make sure that it's genuinely creating value. If we're going to license someone's product, what we can't do is just take their name and slap it on a NEXT product because actually that doesn't create value. That just creates cost. If our licensing business is to make money, it's because the combination of our clients' design skills and understanding of their customer base, when combined with our sourcing and quality, create something that neither party could create on their own, create something of real value to the customer and real value to our clients. Second test is that we have to play to our strengths. We're not going to suddenly go into the insurance business or the washing machine sector or electronics, things -- products that we don't know very much about where we're not really geared up to deal with those products or services. Thirdly, you won't be surprised to hear that we have to make a margin. As exciting as these businesses may be, we're not going to grow them for the sake of growing our top line. All of the businesses have to make a margin, not necessarily the same margin that NEXT makes. We have to make a margin that is commensurate with the risks and fixed costs of those individual businesses. And finally, of course, they have to make a return on the capital we employ. Now adhering to these principles and tests is not going to guarantee success. But what it does mean is that if any of these trials and businesses are successful, then they have the chance to be really successful. And the way that NEXT has developed businesses over the last 20 years and the new ideas isn't to sort of come up with one great ploy or strategy and just do that. What we've done is we tried lots and lots of different things. And the things that haven't worked, we've stopped doing very quickly. And the things that have worked, things like our international business or LABEL, those things we have grown as fast as we possibly can. So I'm not going to make any grand predictions about how big these businesses could be because we don't yet know. And any target set at this point would be at risk of making 1 of 2 mistakes. Either we will be targeting the business to take more than it naturally can, in which case we would end up breaking it by trying to grow it faster than its margins would allow; or we would under potentialize it by setting a target that was too low. I think the final thing to say about all these new ideas is that we're acutely aware of the risk that new ideas and new businesses are exciting. Everyone wants to be involved in them. And there's a real risk that it could detract from the most important part of our business, which is the NEXT Brand. And I want you to know that we are acutely aware that we are not going to put the froth before the beer. We know that ultimately, it is the NEXT Brand and its strengths that drive the success of the group. And without the NEXT Brand, we're nothing. And structurally, we've set ourselves up to make sure that, that distraction doesn't happen so that our product teams, the people who really drive the brand through creating the product, designing it, the marketing teams who are responsible for marketing the NEXT Brand, those teams are not involved with these new projects. The new projects systems involved, warehousing involved. Our LABEL team that is used to dealing with third-party clients, they're involved. But in some ways, we're almost treating the originators and creators of the NEXT Brand products almost like they are another client of the Total Platform. And it is as important for them to focus on our brand as it is for potential clients of total platform to have the opportunity to focus on that. So that's all for today and what turned out to be a much longer presentation than I was planning, apologies for that. I think in summary, we are in a much better place than we were 6 months ago. I'm sure you will all spend a great deal of time trying to forecast this year's profit. And we are working as hard as we can to make sure that we make as much money this year as we can. But ultimately, when you look back in 5 years' time, the most important thing about this year won't be this year's profits. It will be the financial platform that we create to move the business forward, the quality of the ideas we have, the success we have in developing both our own brand and these new businesses to create the foundations for something that in 5 or 10 years' time not only can be very different from what we have today, but almost certainly will have to be very different because the world is changing faster than it's ever changed before. So that's it for me today. Thank you very much. Look forward to speaking to you all soon.