NEXT plc (NXT) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen, and welcome to NEXT's Annual Results Presentation. Before I begin, I'm going to start with a confession. When I went through this presentation with Alistair, our brilliant and slightly overly flamboyant PR guru, he took one look at it and went, "There are far too many numbers here. This could be boring." And there are a lot of numbers in it. We are going to -- we're going to give you more information than we usually do partly because what happened last year requires a lot of explanation but, more importantly, because the economics of the business have changed so much over the last 2 years. But what we think will happen next year requires a bit of explanation, too. And within each of the business divisions, Online, Retail And Finance, I'm going to also go through our projection for next year as well as what has happened in the current year. So starting with the year just gone. Sales were down 17%. And I should say, all of these slides, all of the numbers you'll see are on a 53- to 52-week basis. That 17% was GBP 736 million of lost sales. As you can see, we lost GBP 900 million of that in Retail and made up for just over GBP 200 million of it through Online gain in sales. That translated into a profit of GBP 342 million. And against last year, we lost GBP 387 million. Now you could look at the GBP 342 million and rightly think that there are a lot of one-offs in there that may distort the number. So I'm just going to go through the nonrecurring items. On the plus side, there was business rates reduction, property profit and the profit from the 53rd week, which gave GBP 138 million nonunderlying profit. But against that, we had GBP 100 million of property provisions and impairments. We took a stock provision of GBP 34 million, and we've taken an additional bad debt provision of GBP 20 million, and that provision is in respect to the bad debt that we think we'll incur in the year ahead rather than the one just gone. That gives a total of GBP 16 million negative. What you can see is that the underlying quality of earnings of that GBP 342 million is good, and that is particularly [ showing ] all the credits are cash and all of the negatives are noncash accounting provisions. So the underlying cash flow is actually slightly better than the profits first look. In terms of how we walk forward from the GBP 736 million of lost money in the tail to the GBP 387 million of lost profit, we recouped GBP 195 million through canceling the stock or not ordering stock. So we ordered GBP 195 million worth of stock less than we did the previous year. Wages were down GBP 130 million. A lot of that reduction was down to the people who were on furlough not being paid for the time that they're in the stores. And occupancy costs went down largely driven by the government's rates holiday. Reduced marketing costs online saved GBP 30 million. 2 things going on here. 2/3 of that is down to a reduction in the number of catalogs we produced, and GBP 10 million of it is about reduced marketing activity online. That's not because online marketing activity wasn't working. It's because at the point we closed our website, and when we were capacity constrained, we didn't think there was any point in advertising when we couldn't cope with the demand that we were generating. We had an increase in operating costs of GBP 55 million Online, and that comes from the GBP 220 million increase in Online sales and property provisions net of property profit of GBP 46 million, and that gets us to the GBP 387 million less. Profit after tax GBP, 291 million. What you'll notice from this is that the tax charge looks low at 15%. Our underlying tax charge is still at 19%. There are 2 things going on. The first is that some of the profit on the property disposal is not taxable, and that gives a 2% benefit this year. And then we had some provisions for international taxes of more than 6 years old and we now think will not be claimed. So we're releasing those provisions. Moving on to cash flow. We had a GBP 97 million inflow, mainly from the provisions that we made. The charge this year was GBP 100 million. The charge last year was GBP 10 million. So the difference is the GBP 90 million you see in the increased cash flow. Capital expenditure, up GBP 24 million on last year. In terms of capital expenditure, the shape of it, we cut back on a lot of the store maintenance CapEx that we could during the pandemic, and so that reduced from around GBP 14 million to GBP 8 million, but we carried on investing in the stores that we plan to open. We didn't think that there was any point because we're committed to open those stores. We're going to have to pay rent when the pandemic is over. We didn't think there was any point in not fitting them out whilst we could. So total store capital expenditure, in line with last year. The big increases came in systems and warehousing. On systems, the increase here is as a result of capitalizing GBP 16 million worth of software. Now NEXT doesn't normally capitalize software. The reason we're capitalizing these developments is because we are rewriting a lot of our legacy systems. The main effort this year is going to go into rewriting our website systems. We're not doing this all in one go. It won't be a ground launch. We're slowly redeveloping each module and releasing them. So there's -- we don't consider that there's any big risk to our website as a result of these developments. And then on warehousing, we increased the amount we spent on warehousing. That can broadly be broken down to 3 different types of expenditure. We spent GBP 20 million improving throughput through automation and building of additional mezzanines in existing space. We spent GBP 50 million increasing our high base storage, dense storage for Online stock. And we spent GBP 30 million on a new boxed warehouse that won't open until 2023. Looking ahead to next year, you can see we're continuing to increase the amount we invest in systems. And in addition to replatforming our website, we're also going to replatform all of our product systems and our warehouse systems, and the lion's share of that expenditure on systems will be on those 2 systems. In terms of warehousing, you can see we're ramping up the expenditure in the 2023 warehouse, GBP 67 million on that, GBP 25 million on storage and GBP 25 million on increasing throughput. Looking forward over the next 4 years, we're expecting to spend on average GBP 138 million a year. That is an increase on the number that I showed you 6 months ago. So we've increased the amount of CapEx we're expecting over the next 4 years by around GBP 90 million. Of that GBP 90 million, GBP 25 million of it is because we think that our boxed warehouse announced is actually going to be more expensive than we planned. That's an overspending like of GBP 25 million. The balancing expenditure is increased expenditure in automation and storage because Online is growing faster than we expected. We've accelerated our expenditure on our home warehousing, and we've added GBP 20 million to the systems modernization program. We've got GBP 110 million inflow from the sale and leaseback of warehouses and head office, and GBP 110 million is basically the book value of those assets. Working capital, we had an inflow of GBP 200 million. The lion's share of this, in fact, all of it is down to customer receivables. This is the amount of money that our customers owe us. And throughout the course of the pandemic, first, because of reduced spending, but then because of accelerated payments, we've got a big inflow in customer receivables. The GBP 20 million outflow in supplier payments is all about the 53rd week because the extra week was a big intake week for the business coming at the beginning of the year. That resulted in GBP 20 million more payments to suppliers. Looking at cash flow before distribution, around GBP 20 million up on last year at GBP 520 million. In terms of distribution to shareholders, obviously, no dividends, one very small and slightly embarrassing buyback at the very beginning of the year in February. And I say, when we saw this, it did remind us just how unaware we were at the time of what was about to happen. These buybacks were done not more than 4 weeks really before the lockdown. That said, we -- the average price is slightly lower that we paid -- is slightly lower than the current share price. That gives us GBP 500 million net inflow for the year. In terms of the effect that it has on the company's balance sheet, our net debt reduced from GBP 1.1 billion to GBP 610 million at the end of the year. Looking forward to cash flows from next year, we're expecting operational inflows of GBP 550 million, CapEx of GBP 185 million. We're expecting GBP 160 million to flow back into customer receivables, and I'll cover that in much more detail when we talk about the Finance business. We spent GBP 33 million acquiring 25% of Reiss, and that would leave us at the end of the year with net debt of GBP 435 million. Now we haven't made any decision yet about whether we will pay a dividend this year, and we think that it's too early to make that decision. We want to get the shops open. We want to be more certain that there aren't going to be further lockdowns later in the year before we make that decision. But what you can see from this is that we -- if we did want to pay a dividend, then the company could easily accommodate a dividend similar to the one that we paid in 2019 straight '20 of GBP 200 million. That would leave, if we did pay that dividend at the end of the year, Jan 22, we have GBP 635 million of net debt. Looking at how that GBP 635 million compares to the company's cash resources, clearly, the GBP 1.6 billion is much more than we need to finance the business. We have a bond that falls due in October this year, GBP 325 million. And we intend to repay that bond and not refinance it. In terms of what that means for the headroom -- operating headroom of the business, at peak, we have GBP 100 million. We expect to have GBP 100 million more debt down in the year-end. That still gives us GBP 515 million worth of headroom. Historically, we've had between GBP 100 million and GBP 200 million worth of headroom. So we think that the company is very comfortably financed. That said, we are not looking at increasing the gearing of the company for the foreseeable future. We think this is about the right level of gearing. I think if we've learned anything from the last year, it's that retailers are a much more volatile business than we perhaps thought it was. So we have no intention to increase the gearing beyond this level. Moving on to the balance sheet, GBP 104 million reduction in assets, that's from the sale and leaseback of our warehouse and head office. GBP 17 million more intangibles on the balance sheet, pretty much all of that is capitalized IT, software, and that would be depreciated over around 3 years. Stock was up 2% in theory. The stock we paid for was up 2%. Actually, the stock in the business in the U.K. was down 14% because, at that point in time, a lot of the stock was stuck either on the water or in the country of origin. As we stand today, stock is around 6% down. We were expecting that position to slowly improve, and we still think it will improve over the next 3 to 4 months. The issue in Suez, we had around 2.5% of our stock that has been delayed as a result of the Suez crisis. So it's an irritation, but it is not a major impediment to trade going forward. And we're not expecting any impact on sales from that problem in the Suez Canal. Moving on to debtors. Debtors were down GBP 200 million. This is all about customer receivables. Customer receivables were down 17%. That is much more than the drop in credit sales of 9%. And I'm going to explain the reason for that discrepancy when we come to the Finance business. That leaves us with net assets, up GBP 200 million last year. And I think the last 2 lines of our balance sheet really just show how radically the finances of the businesses has changed in the year. We've gone from net assets being around half our net debt to net assets being greater than our net debt this year. Moving on to the divisional analysis, starting with Online. Online, overall, was up 10%, at full price was up 13%. The headline number is extremely misleading because really, we had 2 very different halves. The first half was down 11%, the second half was up 31%. That 31% is a like-for-like number. If we look at the shape of the trade by month, what you can see is that we lost a huge amount of trade in April because we were shut for 2 weeks. And then for a lot of April and May, we had to turn off the website before we got to midnight. And it was only really once we got into June that our capacity was able to keep up with demand. We saw a big spike in demand in June at the end of lockdown as we sort of got a little bit of release of pent-up demand in the run-up to lockdown finishing. And I wouldn't be surprised if we saw the same over the next sort of 4 weeks as we come to the end of this lockdown. So please don't get too excited by April numbers. We're not seeing that. But if there is a spike, don't expect that spike to last. What you can see then is for the whole of the year is, very steadily, our Online business really got better and better every month. Even December when the stores were open, even in that month, Online continues to move forward. January looks a little bit disappointing relative to December and November, and actually it was. It was below our expectations. But February and March have been much better than our expectations. And whereas we expected to recover in the order of 50% of Retail sales during the closure period, it looks like we've recovered between 65% and 75% in the last 8 weeks of the lost Retail trade. Looking at the performance of the business by channel, you can see it appears that LABEL has underperformed on a full year basis. That was all down to stock problems in the first half. Looking at the second half, LABEL and the NEXT branded business performed pretty much in line with each other. In the first half, NEXT, along with the entire industry, canceled far too much stock. We then chased It back in. The reality is we were able to chase our own stock back in much faster than we were third-party stock. And in the first 6 months of the year, not only were we short of stock, we're short of the stock that was doing well, in particular, sportswear. Once that stock came back into the business, the LABEL sales ticked up immediately. And we are expecting a very good year for LABEL certainly very the first 6 months of the year on LABEL as we go forward. Overseas, it did well, again, better in the second half than the first half. The Overseas business in keeping with the rest of the business, we had to shut the warehouse for Overseas as well as U.K. So that suffered in -- that's the reason it suffered in the first half. But the vast majority of our countries performed very well during the entire sort of pandemic period overseas. In terms of the U.K. branded number, that 36% in the second half, looks unusually good. We would normally expect LABEL to perform better than NEXT branded stock. That number is a little bit misleading. It's heavily driven by Home sales. Home has been the real star of the pandemic. People haven't been able to spend money on holidays. They haven't been able to go out to restaurants, and there's been something of a boom in Home spending, and we've definitely benefited from that online. And we're not expecting that increase in Home to continue or to compound. As we go into next year, we're expecting Home sales to moderate at some point in the year ahead. Looking at sales by payment type. What you can see from here is that lost credit sales -- and this is all in the second half, credit sales did well up 18%, but it's the cash customers. These are customers that don't have an account that did particularly well. We think a lot of these customers -- the cash customers are customers who would have shopped with us in Retail. At least 50% of them, looking at our data, we think, are people who have switched from Retail. That now means that we have more cash customers than credit customers. The 8.4 million customers -- as we go into the year ahead compared to 2 years ago and all of our accounts we're referencing against 2 years ago, as we go into the year, we have 40% more customers than 2 years ago. But in terms of cash customers, we have 76% more and 50% more Overseas. That was a bigger question because we make a finance profit on our credit customers. So you might look at these numbers and begin to worry that the disproportionate growth in our cash customer base will begin to undermine the margins of the group. We don't think that will be the case. If we actually look at the profitability by customer type, what you can see is that cash customers actually make significantly more profit Online than credit customers. Now when I say they make more profit, this is before accounting for any finance profit that's made in the Finance business. The reason that cash customers are more profitable than credit customers, it's twofold. First of all, they return much less. Our credit customers do far more of try before you buy. And the reason they do that is because they got the credit facility to do it. If they can order as much stock as they like in a month or within their credit limit and they won't be charged for that stock if they return it within 14 days, so that try before you buy facility drives up higher returns. In addition, our credit customers are more likely to buy high-priced but also low-margin third-party branded stuff from our website. So we're not concerned about the profitability of the Online business as a result of cash customers growing. In fact, it may push it up. And even once we factor the finance profit in, that adds about 8.5% profit. So that -- actually, once you factor finance profit into the equation, credit customers only make 1.5% more margin. And we don't think that that's not enough to really alter the total profitability of the group as we move forward. The real advantage of credit customers is one that I touched on earlier. Yes, they return more, but they also order more. And having a credit facility definitely increases sales. So the reason that we push so hard to recruit new credit customers is not about driving profitability. It's about driving sales. And you can see from this chart that actually credit customers spend, on average, double what a cash customer would spend. You have to be a bit careful with that number. There's a little bit of self selection in there, in that customers who were going to spend more anyway are the ones who are most likely to apply for an account, but we have no doubt that actually the act of having an account does drive sales. Moving on to the profitability of the Online business. Profitability moving forward, profit was up 18%. Margins increased by 1.3% to 19.9%. Achieved gross margin was down 0.8%, but the important point here is that we didn't lower our prices. This is not about goods becoming more expensive or as discounting stock. This is all about the stock provisions that we took this year in respect of the canceled and surplus stock that arose as a result of the pandemic. Bottom-most gross margins were flat. Looking at the rest of the cost base, you can see the big wins in catalog and photography, which I've already covered; and also in marketing. The 0.7% improvement in marketing is about the digital marketing, but we didn't spend when the warehouses were closed and when they were capacity constrained. Some leverage of fixed cost in systems, just to -- I suppose reassure you in a way, the fact that systems has shrunk as a proportion of sales in the P&L is not because we're spending less on systems overall. It's actually because we're capitalizing a lot of our system spend, which is going into these long-term infrastructure projects. The warehouse and distribution change in margin looks minimal. Actually, there are 2 big things going on here. There was an adverse movement of 0.9%, mainly as a result of surcharges on stock that we shipped overseas through air freight. Air freight became incredibly expensive and is still more expensive than normal times during the pandemic. That cost us 0.9%, but the combination of labor efficiencies in the warehouse and, more importantly, reduced returns rates meant that we got a lot of that cost back through improved efficiencies. Looking forward to the year ahead, so this is looking at the year ending Jan 22, we're expecting profits of GBP 560 million and for margins to be broadly the same, 0.1% difference, slight improvement in margin in the year ahead. In terms of the margin of the individual channels, NEXT brand, LABEL U.K. and Overseas, what this chart shows is the 3-year history or 2-year history and for 1-year projection of the profitability of each of these businesses. You can see the U.K. NEXT branded profitability is moving forward very slightly. The reason for that is saving on photography and catalogs. The vast majority of that expenditure on catalogs was for U.K. NEXT branded customer business, LABEL recovering a little of the profitability lost in the previous year of 15% and Overseas nudging down to 15% because some of those surcharges that we had to pay last year, we're still having to pay in the year going forward. So that's the Online business. Moving on to the Finance business. Credit sales, as we mentioned earlier, were down 9%. The important thing here is not so much the total drop in credit sales but when they happened. What this chart shows is the variance in credit sales throughout the year, and you can see that we had a dramatic fall in credit sales when we shut our warehouses and we're capacity constrained. And then by August, credit sales had recovered, and we're growing for the balance of the year from August onwards. What that meant is that the drop in our receivables came early in the year, so a big drop in receivables right until June. And then when credit sales recovered and you would have expected some recovery in the credit book, that didn't happen. And the reason it didn't happen is because at the point customers increased their credit spending, they also increased the rate at which they were paying down their accounts. What this blue line shows is the change in the percentage of balances that customers paid down throughout the year. And you can see in April, customers were conserving cash and actually paid a smaller proportion of their balance down each month. But by the time we got to August and right through to the end of the year, customers were increasing their monthly payments as a percentage of the balance by around 20%, 25%. That trend has continued into January, February and March. Now going forward, we are expecting payment rates to return to more normal levels, and that's why we're expecting a big outflow into the credit book this year. But if that doesn't happen, we won't get the credit out, but we also don't get the interest income either. In terms of interest income, interest income was down 7%. The reason that interest income is 4% lower than customer receivables is twofold. First of all, there's a 2% boost to interest income from the 53rd week. And secondly, the bad debt provision reduced receivables by around 2%. But because that debt is still performing at the moment, it's a provision for future write-offs, we're still getting the interest on it at this point in time. Moving on to bad debt, a big increase in bad debt. And you can see the bad debt rate as a percentage of the receivables has gone from 3.7% of the book up to 4.9%. In terms of the reasons for that change, you can see that if we charge last year's run rate, we would have charged GBP 39 million of bad debt. Because customers were paying down their accounts faster, we have fewer accounts in 1- to 3-month arrears, which means we took lower provisions against those arrears. That gave us a GBP 3 million benefit. We sold about GBP 5 million worth of debt that we'd actually written off. But against that, we took this extra GBP 20 million provision for bad debt that we may incur in the year ahead as and when furlough comes to an end and sort of reality sinks into the U.K. economy. Actually, as time goes on, that provision looks increasingly conservative. So profit before cost of funding, and this is sort of real profit to the group, was down 12%. After accounting for cost of funding, a much bigger drop. Just to remind you, the cost of funding is the internal charge the group charges the Finance business for the money that it lends it. We assume that 85% of the money that isn't lent by the Finance business is borrowed from group, and we charge the average interest rate incurred by the company in that period. The reason the group's interest charge has gone up by 1.5% is not because we own more or because interest rates have gone up. It's because, ironically, we've been paying down our debt, and the debt that we've paid down first is the short-term low-interest revolving credit facility, which means the debt that remains is the high-interest bonds. So the average interest cost -- costs of the group have gone up as a percentage, even though they've actually come down in total. Net profit, down 23%, but still a very healthy return on capital employed in our Finance business. Looking forward to next year, and we recognize that this is a very difficult profit forecast because not only are we forecasting what's going to happen to credit sales, but we're also forecasting what's going to happen to payment rates. But our forecast is that credit sales will be up 17% mainly driven by increased credit sales in the first half when we're up against very soft comps. Average customer receivables will go up by -- we think, by 2%. The reason average receivables are going up by much less than credit sales is because it takes quite a long time for the debt built up and through sales to filter through into interest payments. It takes a while for that debt to accumulate. Customer receivables at the end of the year, we expect to be up pretty much in line with credit sales at around 16%. In terms of the other lines on the P&L, the big change here is the bad debt charge and that is all because we're not expecting to have another bad debt provision of GBP 20 million in respect to the pandemic. So we're expecting profit before cost of funding to be up 5% year-on-year. It's an GBP 8 million year-on-year increase from the Finance business in the current year. Moving on to Retail. Retail sales were down around 50%. In terms of the shape of sales when we were opened, in the run-up to lockdown, sales were down 11%. That was worse than we thought. We were actually budgeting -- at the very beginning of the year, we were budgeting for like-for-like sales to be down around 6% or 7%. What we saw is that as we got closer and closer to the lockdown, fear began to drive people out of the shops, and we saw a very sharp drop-off in sales really sort of from 2 or 3 weeks before the lockdown began. In the first post-lockdown period, this is sort of June onwards, like-for-likes were down 20%. They were much better. In December, when our stores were open, they were down around 12%. We were very fortunate that so many of our stores were on retail parks. We went into the pandemic with 62% of our sales coming from retail park shops. And what you can see from the bar chart on the right of the screen is that retail park like-for-likes were only down 11%, whereas regional shopping centers and city centers that rely far more on long distance travel and on public transport and, to a degree, in city centers, office worker flow, those really took a much, much bigger hit of around 30% in city centers, 25% in regional shopping centers. That gave an operating loss in Retail around GBP 200 million. Looking forward to next year, we're expecting like-for-like sales to be down 20%. But because we've got the 10-week lockdown period at the beginning of the year, total sales, we're expecting to be down 32%. That means that in the current year, we're expecting a Retail loss of around GBP 20 million. In terms of one-off movements in the year, the lost margin from the sales lost in lockdown, the estimate will be GBP 135 million. Offset against that, we have the rates relief in the current year of GBP 48 million; and other cost savings, including wages from people who are on furlough, around GBP 17 million. This gives us the net nonrecurring costs from the lockdown of around GBP 70 million, which means were we not to have been shut, we estimate that Retail would have made around GBP 50 million of profit in the current year, so just profitable. Please don't make the mistake of assuming that were it not for the lockdown, the group would have benefited by GBP 70 million because, of course, a lot of the sales, more than 50% of the sales that we've lost in Retail, we have gained Online. So although our Retail business would be GBP 70 million more profitable, if there hadn't been a February, March, April lockdown, the group wouldn't be anything like GBP 70 million better off. In terms of the shape of what we expect in terms of costs in the year ahead, achieved margin, we're expecting to be down 2.5% and the -- all these numbers, I would stress, are on 2 years ago. We're expecting achieve margin without -- this is largely because we expect lower clearance rates in the year ahead than 2 years ago. For the last 5 years, we have seen slow deterioration in the ability of our retail stores to clear stock. We think that's mainly because our ability to clear stock online has improved, but we're anticipating 2.5% margin erosion from that in Retail. In terms of occupancy costs, we are expecting our occupancy costs to come down, but not by as much as sales. In terms of that drop in occupancy costs, which is around GBP 150 million, GBP 52 million of it is rates, GBP 48 million of which is the government holiday, GBP 4 million from closures. Other occupancy costs are expected to come down by GBP 40 million. This is mainly assets that we were depreciating last year but which are now fully written off and unwinding some of the onerous lease provisions that we took this year will be released in the current year. In terms of rent and service charge, we're expecting a reduction of GBP 23 million against 2 years ago. Just looking at that in a little bit more detail, GBP 8 million of the saving comes from stores that we've shut. We are receiving less concession income. That's not because we've closed a lot of concessions, although we won't be charging rent during the lockdown period, but in addition to that lost revenue during the lockdown period, we have gone back and renegotiated some of our concession rents, just as we've renegotiated our leases with landlords. So we've lowered our rents to some of our concessionaires, and renewals have given us GBP 18 million benefit against 2 years ago. Just looking at renewals, last year, we renegotiated 62 leases. The average rent reduction was 58%. Average lease term was 3 years, and total occupancy savings as a result of those renegotiations was GBP 10 million. In the year ahead, we're expecting a smaller number of shops but a similar sort of performance with 47% reduction in rents and 3-year average lease term, a GBP 7 million saving. Looking at the other costs for the year ahead, obviously, fixed elements of warehousing and central overheads just aren't dropping anything like as fast as sales. And the drops that we are achieving in warehousing and central overheads, a lot of those are about Online business taking more of their share of those central overheads. So for example, our product teams, as our Online business grows, they will take a greater share of those costs. So although there's a saving the Retail account, it's not necessarily a group saving. The saving in payroll of 24% is not as much as sales, but it's probably more than people are expecting in terms of wage costs reduction. One of the reasons that we have been able to reduce our payroll by as much as we have is because where we're opening shops with minimum crews, we need a certain number of people in the stores just to open the doors. We are using some of that labor to do online tasks. So our Online business is beginning to soak up some of the surplus hours in Retail that we would have to have in a shop anyway but we're able to put them to use Online and, therefore, mitigate some of Retail's costs. So that's the divisional analysis. Moving on to our central guidance for the year ahead. We're expecting, against 2 years ago, for sales to be flat. In terms of the phasing of that, we're expecting a 3% drop in the first half, 3% growth in the second half. The total numbers look unimpressive, ordinary, in fact, for flat sales. When you look at the changes involved, actually, it's enormous. We're anticipating that over GBP 0.5 billion would have been lost from our Retail business and made up for through our various Online. In reality, because we'll be unwinding some of the provisions that we've made in respect of onerous leases, that GBP 305 million will, in fact, be nearer to GBP 283 million loss. Of that lost GBP 565 million of sales, we expect to make up around GBP 265 million from NEXT branded U.K. Online sales. That will deliver GBP 128 million of profit. And you can see that the structural cost, the marginal difference is around 6p, a difference in 48% and 54%. LABEL, we're expecting to deliver around GBP 200 million increase in sales, GBP 55 million of profit. And again, if we lose Retail sales and it translates into LABEL sales Online, that will raise a significantly more margin around 25%. Overseas, we're expecting to contribute GBP 125 million to sales, GBP 23 million to profit. Total Platform, we're expecting to deliver in the year ahead around GBP 10 million. I should say that the majority of that GBP 10 million profit is not the commission that we anticipate charging on Online sales. The lion's share of it is actually what we expect to get by way of profit share from the joint venture with Victoria's Secret. Expecting to lose GBP 14 million against 2 years ago on Finance. In terms of cost savings, the lion's share of cost savings, we're expecting to come from the fact that we're not producing catalogs in the year ahead and not producing catalogs or brochures or all the expensive photography that goes into them. In addition to that, our depreciation charge will drop by GBP 25 million as a result of assets that we were depreciating last year reaching the end of their life. We'll get a rate saving of GBP 55 million and other retail savings of around GBP 10 million. In terms of cost increases, the biggest single cost here is going to be inflationary cost in wages, particularly national living wage, which is rising faster than inflation. Warehousing and distribution cost increases, partly as a result of increased operational complexities against 2 years ago, but mainly from the rent on warehouses that we have leased back and from depreciation on some of the investments that we've made in warehousing over the last 2 years. Group clearance rates were expecting to be slightly lower than 2 years ago, and that will cost us, we think, GBP 12 million. So where that leaves us is an estimate of GBP 700 million profit in the year ahead as against GBP 729 million 2 years ago. The GBP 700 million is GBP 30 million better than the forecast we gave in January, and it's worth just briefly explaining the reason for that movement. There are 3 things going on. First of all, as against that original forecast, we've lost 2 weeks of sales. We were expecting the lockdown to be over at the beginning of April. So we lost 2 weeks of Retail sales. That will cost us roughly GBP 30 million of profit. Against that, we've got the fact that we're getting around GBP 30 million more rate relief than we were expecting in January. So those 2 things are all square. Over and above that, we have overperformed in the last 2 months Online. We've done better than expected. And of course, some of the Retail sales that we'll lose in those additional 2 weeks of lockdown, we will recoup Online. All of those things put together mean that we think the profits are going to be GBP 30 million higher than we anticipated in January. Looking forward at sensitivity analysis on that GBP 700 million profit, if our sales are 3% over target, we think that would deliver a profit of around GBP 745 million. And in case you're wondering, an increase of around 2.2%, 2.3% in sales would deliver the profit that we delivered 2 years ago. On the downside, the 3%, I should just say, is there really to show you what the sensitivity is like on sales. If there's another long lockdown, then we could lose significantly more than 3% of sales. If there's no other lockdown, that 3% looks very pessimistic. Moving on to new business. I'm going to talk a little bit more about Total Platform and where we've got to it. Just to remind you, Total Platform is the service that we offer third-party brands where we do all of their online operations for them, everything from call centers to warehousing, online distribution, credit facilities, retail systems and retail logistics. We charge a fixed percentage of their sales for the service, and there's no capital investment. What that means is that clients can grow without having to make very significant capital investments they would have to make in warehousing and systems to fund that growth. More importantly, it leaves clients free to focus on the things that really make the difference for our brand, the design of their product, the marketing, the buying and the establishment of the brand DNA. We think it's potentially a great service. We've signed up 5 clients. In terms of when they'll launch. Childsplay and Laura Ashley have already launched. Victoria's Secret, we're expecting to launch in May-June this year. We have one very small new brand that's really -- this is a seed brand that is just starting out. We're expecting to launch that in the second half of this year. And Reiss, we're expecting to go live on Total Platform in February 2022. In terms of the relative size of those businesses, Childsplay is small. Laura Ashley and Victoria's Secret are medium-sized businesses. The new brand will be very small, particularly in its first year of operation, and Reiss is large. If we add together all of the turnover from those businesses that we're expecting those businesses to take in their first full year of operating Total Platform, I should stress that those years will be different for different clients. So these are not necessarily contemporaneous sales. The total first year turnover we're expecting online is around GBP 200 million. Our target margin on Total Platform is between 5% and 8%. Basically, the larger the client, the lower the margin will be, and that's because the fixed costs are set up, meaning that for very small clients, we'll need to charge nearly 8%. The return on capital employed are put here greater than 35%. It's actually significantly more than 35%. And the reason for that is because we're only accounting for the capital that we will have to invest going forward. Of course, the real capital investment is all the investment that we've made over the last 15 years in all of our online systems and warehousing, mechanization and automation. So although the return on capital appears to be high, it doesn't account for the return on the intellectual property that, in effect, we're giving to clients. In terms of the operating model, as we are dealing with different clients, we're beginning to develop 2 slightly different operating models. The first model, the one we're operating currently with Laura Ashley, we're calling Total Platform Light. What that means is that if you go in and type lauraashley.com (sic) [ lauraashleyusa.com ], you will go through to a landing page that looks entirely like their own website. If you search for products within that website, it will deliver only Laura Ashley product. But in reality, those pages are actually on the NEXT website. They're a sort of ring-fenced area of the NEXT website. And when customers go to check out, they will check out through NEXT. So you can see the customer is alerted here to the fact that Laura Ashley is powered by NEXT. The advantage here is that if you're one of the 6.5 million existing NEXT customers, you will be able to sign in using your NEXT credentials and your NEXT account to pay for your Laura Ashley product. In addition, the packaging the customer will receive will go in our logistics branded packaging, which is going to be branded NEXT GO, and that's a glimpse of the future there that's packaging that we'll be launching for all of our logistics in the second half of the year. The other 3 clients, Victoria's Secret, Childsplay and Reiss, similarly, of course, have their own landing pages and searches. But in addition to that, they will have their own branded checkout and packaging. So we kind of look at that as a grid. As you move down the grid, you sort of get fewer services on the left-hand side. In terms of other services, we'll be providing Overseas websites for Childsplay play and Reiss. We'll be providing Retail services for Victoria's Secret and Reiss. The reason I haven't put a red cross against Laura Ashley, the new brand and Childsplay is that there will be a very small element of Retail that we will provide to each one of those clients. Actually, in the case of the new brand and Childsplay, we're probably only one shop. Over and above that, for Reiss, we're looking at providing wholesale and concession services. And what that means is where they are selling to people like Nordstrom or other European concession businesses, we will warehouse and process their stock for them and then dispatch it in bulk to their partners. So we're developing 2 quite different services, and the big advantage of the Total Platform Light is that it's much quicker and easier for us to develop and deliver. We think we can onboard new customers in as little as 3 months for Total Platform Light, and the costs are significantly lower. So in relative terms, the full Total Platform service with dedicated checkout and packaging is going to be between 3 and 5x as expensive for us to implement as Total Platform Light. And what that means is that Total Platform Light, we will charge a much lower commission than we would do for the full Total Platform. In addition to providing new services, as we have progressed the idea, we have talked to potential partners about taking equity stakes in them. So we have a 51% interest in the U.K. and Eire franchise of Victoria's Secret. We bought 25% stake in Reiss with an option to buy a further 26%. And the new brand, we're taking a 33% stake in. There are 2 reasons why we're taking equity stakes. The first and, in all honesty, less important is that it further aligns our interest with the client. Negotiating services and developing them is much easier if we both have an interest in the upside. But more importantly, we think this service can provide a huge competitive advantage to our clients. And so it makes sense for us to invest in them to be able to benefit from some of that upside. And to put that in context, as I said earlier, we're expecting around GBP 200 million of sales in the first full year of operation for these clients, which will generate around GBP 10 million of profit. In terms of our forecast for our share of their profits from our equity stake, in the first full year of operation, we're expecting that to contribute GBP 20 million to the group. So in very clear financial terms, you can see why we're taking the equity stake. If this is as good a service as we think it's going to be, it makes sense for us to invest in those businesses that choose to take the service on. That bakes the question what brands would we be prepared to invest in. And in simple terms, we're only going to invest in great brands. They have to have a clear customer proposition. It has to be very clear not just to customers but also to the people who work for those businesses, what their brands stand for. They have to have customer goodwill, and by this, I mean, that we had the sort of brands that people want to stick around it. It's amazing having been part of relaunching Laura Ashley. How many people have certainly how delighted they are that the brand is back? And that's the sort of brand we're looking for. And finally, as important as the previous 2, the online economics have to be good. Some brands are more suited to trading online than others. And basically, the lower the average selling price and the higher the returns rate that a brand incurs, the less profitable it will be for it to trade online. So we will be looking for brands on the whole that have either high average selling prices or equivalent to NEXT and reasonable returns rates. That, I suppose, bakes another question is if it's a good thing to buy parts of them, why not buy all of them. We think there are 3 reasons for this. First is we want to diversify risk. We would much rather buy 20% of 10 businesses than 100% of 2 businesses. The more that we can diversify our portfolio of brands, the less risk we'll be taking as a group. Secondly, and this is really an opinion, we think that businesses that are acquired and subsumed into a conglomerate run the risk of losing the very thing that makes them special in the first place. The thing that's special about a brand is the uniqueness of its product, the way its management team feel about it, the motivation of the staff that work for it. And the risk is that once the brand gets snapped up and engulfed in the corporate hole, it loses the very magic that we're trying to acquire. So we're determined to avoid the corporate blob. We are investors in these businesses. We are not there to manage them. We're not going to try and manage them. At the end of the day, the responsibility and onus on the management of the businesses that we acquire will be the management of those businesses. And the final point is really the flip side of that in that we don't want to turn what is a business that is extremely focused on NEXT into a business that is focusing on lots of different brands. Our operational teams will make sure that we deliver outstanding operational service to these brands. But our product team and our marketing teams, the people who are focused on the NEXT brand, they will remain 100% dedicated to developing the NEXT brand. So for all of those reasons, we won't be embarking on a journey of creating a huge retail conglomerate. We may well buy more stakes in businesses as and when TP develops. So the question is, what next? Now when we launched Total Platform, we were inundated with questions from our shareholders of what's the business going to look like in 5 years' time; how big will it be; what profit could it make. And the answer to all of those questions is that we don't yet know because what we're going to focus on for the next year is not developing new clients but making sure that the 5 contracts we have are executed brilliantly. So execution will be top of our list. If we're going to make a success of this business, we have to make a success of these first 5 contracts. Secondly, this year, we will be developing what for each of these different models is essentially a prototype into a production product. So the first time that we do Total Platform Light, the first time we do full Total Platform will be a great deal more effort from the fifth or sixth or seventh time. And part of the reason why it's going to take a long time to implement these first few clients is because, in doing so, we will make the effort to make the software configurable for our new clients. Finally, we have to understand the economics. We've done very detailed cost models of what profit we think we can make through Total Platform, but we won't be 100% sure until those businesses are up and running. So the long and short of all that is that don't expect any more news this year about Total Platform. We certainly can't take on any more clients in the current year, if we are to execute well, turn the prototypes into production models and understand the economics. So if Total Platform grows, it will very much be a 2023 to 2026 endeavor rather than any more fireworks this year. Standing back from Total Platform, what this business really comes down to is the planting of another acorn that helps make the company relevant in an online age. And if I look back over the last 5, 10 years, so many of the projects that we've done are all about making NEXT relevant in an online age. And when you look at that for the NEXT business, that has come down to really 2 things: increasing choice of products and the number of customers that we serve. And when you look at how the business has changed over the last 5 years, what in any one year appears to be a relatively small change, when looked at over a period of time, is actually dramatic. Within our own brand, once we have liberated ourselves from the physical constraints of the 4 walls of the retail shop, it allowed our buyers to experiment and develop product ranges that they could never have justified stocking in all of our stores. So we've increased the category of product we sell, whether that be sports bras or made-to-measure blinds or hiking boots. Within our own NEXT brand, we have increased the categories of product we sell. We've stretched our price architecture, whether that be a GBP 400 price-starter sofa-in-a-box or GBP 150 top of the range men's parka, we've pushed the boundaries both at the bottom and the top of our price architecture, and we've dramatically increased the amount of fit and size options we deliver within our range, which, for something like, for example, laundry, has been incredibly important part of that business' growth. And whereas the doubling of options within our own range looks impressive, actually, if you look at it in terms of the branded offer that we have, 5 years ago, in the 6-month period, we only sold 7,000 branded items. This year, we'll sell 150,000 different branded items in the 6-month period. And within that, there's 20,000 industry items, none of which we saw 5 years ago. All of that has led to achieve a significant growth in our customer base. As we've increased the amount of different products we sell, we've attracted more customers. And there is a sort of a virtuous circle here in that the 75% increase in customer base also means that we are taking on customers who are open to buying different types of products from us. So new customers have increased our ability to sell new products, and new products have increased our ability to retain new customers. And what's interesting about the customer base is when you break it down and look at it in terms of the age of people we're attracting, and this is just one example, but if I look at the growth just last year in customer base and break it down by age segment, so from the 20s and under up to the 60s and over, what you can see is that we've increased pretty much every age category. But the categories that we've increased the most are both the oldest and the youngest. And I think the fact that we've been able to stretch our demographic online at both ends is testament to the increased diversity of product and choice on our website. Now when you look at that, it actually looks quite clever, and you could make the mistake of assuming that it has come as the result of some incredibly clever grand strategy designed by the Board 5 years ago at a strategy meeting facilitated by a changed director, but that is not the way that NEXT works. And the way that we have developed the business is not through a small number of big decisions but through a huge number of small decisions, individual buyers deciding to try new product areas, individual areas in the warehouse deciding to try new ways of operating the warehouse to increase efficiency. NEXT has developed from the sum total of different ideas generated from different parts of the business where we're prepared to let people try lots of different ideas. And the ideas that succeed, we invest in and move forward as fast as we possibly can. And the ideas that fail, fail fast and we drop. And it doesn't matter what part of the business you look at today. If you look at LABEL or our Overseas business, both of those started as very small trials. In the first year of operation, we hardly mentioned them in our year-end report. So it's really been through a process of evolution that we have developed the business. Now I wouldn't want you think that means that the Executive Directors sit around doing nothing. We are absolutely, all of us, involved in the of the business and in the detail in trying to help these ideas grow and even coming up with a few ideas ourselves. But equally, I wouldn't want you to think that the process -- this process of evolution was entirely random. There are some very important guiding principles that determine the type of projects we undertake, and that really comes down to 4 very simple principles. The first and most important is that we have to create value. We have to do something that our customers think, "That's great, I love that product", or "that service is useful." The day that we get to the point where we make the mistake of selling old rope -- and it's amazing how often people go, "Oh, this is selling old rope. This is easy". The day you think you've got a business like that, and funny enough, it's something that my dad used to often remind me of is that actually you don't sell old rope for long and people don't like old rope sellers, so we have to make sure that the new businesses we're developing are delivering value not just to our customers but also to our partners, our branded partners that are working through our website. Secondly, we have to play to our strengths. We have to only really go into businesses that we understand or that we stand a good chance of understanding, whether that be through our operational skills or through our products and design skills. But what you won't see us doing is rushing off to sell insurance or holidays because we really don't know anything about those businesses. And really, those 2 first principles come down to delivering value to customers and partners, but there's a third constituency, which is shareholders. We need to make sure that we're also delivering value to shareholders, and that comes down to 2 things: first of all, making sure that we make a margin. Every new business that we start has an appraisal. We don't undertake businesses in the hope that they'll become profitable. We undertake businesses having rigorously appraised them and make sure that they make a margin that is commensurate with the risk taken. That doesn't mean that all businesses have to deliver the same margin. High-risk businesses, for example, selling women's fashion dresses, our margin on women's dresses is high. It has to be higher because it's a very high-risk business. Our margin on branded beauty is much lower. We're not having to invest a huge amount in the development of those products, and they have a very long shelf life. So we'll make a margin that is commensurate with risk, and of course, we have to make a return on the capital we're investing. And never forget that the money we're investing in the business is ultimately our shareholders' money. And if we can't invest it wisely, then we should hand it back to them. And so it's really through the application of those 4 principles at the start of the business that we have controlled and grown the business because as long as every idea that we come up with conforms to these 4 principles. It really doesn't matter which one succeeds or fail. We can be sure that the ones that do succeed will contribute not just to the profits to the group but also the long-term success of the group. So that's it. That is the end of the presentation. Thank you very much for your attention. I think it's probably been record-breaking in terms of your time that I've taken. I hope that your takeaway -- really 3 things from this presentation. The first is that the company has been extremely resilient through the pandemic, and that really comes down to the diversity of the business, whether that be between Retail and Online or between different product groups. Secondly, that the economics of the business are sound going forward that if we are only able to maintain the sales of 2 years ago, we're still able to deliver a very healthy profit against those sales despite the huge structural changes within the group. And the third is that we haven't stopped developing the business, that we will continue to try new ideas, whether they be Total Platform or new products or collaborations or even the acquisition of stakes in Total Platform partners. We haven't stopped trying to move the business forward, and we are very clear about the principles and direction in which we want to move the business forward.