NEXT plc (NXT) Earnings Call Transcript & Summary

Good morning, everybody. Before I get into the meat of the presentation, 2 things to remind you of. The first is that these accounts are 100% IFRS 16 compliant as are all the comparisons for the last 1 and 2 years. The second is: throughout this presentation, unless we say otherwise, every number is given on a 2-year comparison. Now I should start this presentation by saying that the numbers are an awful lot better than we were expecting -- they were in the first half, and they have continued that way into August and September. And although the numbers are good, one thing I'd like to stress is that they are probably not quite as good as they look and that there are a number of factors that we feel are artificially boosting sales at the moment that could mislead you as to how strong the rest of the year will be. And that basically comes down to pent-up demand for clothing, and we're seeing that very strong items like suits and women's formal wear. Secondly, is the amount of savings that consumers have saved over lockdown, which they are beginning to unwind. And the third is the fact that in August and September, far fewer people went overseas. And not only does that mean that they save the money they would have spent on travel, but they were here to spend their money in U.K. retailers. Those factors, we believe, will slowly work their way out of the system as we go through to the rest of the year. That said, although things may not be as good as they currently appear, we do think that the outlook is much, much better than we thought it was going to be a year ago and actually much better than we thought it was going to be 2 to 2.5 years ago. So the first half of this presentation is really going to be on the numbers and our forecast for this year. And the second is going to be -- the second part is going to be on how we see the future going forward sort of over the next 5 years. And while we feel the outlook is potentially a lot brighter than we thought it was maybe 2 or 5 years ago. So moving on to the numbers. Sales were up 8% in the first half. Full price sales were up 9%. If we look at that between the periods that we were locked down and the periods that we weren't. In the lockdown period, Online was up 70%. Obviously, Retail 0. Once England came out of lockdown, looking at that period of time, Online sales fell back to around 46% up on last year. That was much higher than we thought. We thought we would lose an awful lot more of that online trade than we did once the shops had opened. And the shops did much better than we were expecting as well, down 8% in total, but on a like-for-like basis, only down 4% on 2 years ago. We were expecting compound annual decline of 6% in our retail store sales. So that would have given us around 12% decline. So that just gives you a measure of the difference between what happened and our expectations, and we think is evidence of this pent-up demand. Moving on to profit. The profit was up 3%. The difference between the growth in sales and the growth in profit is largely, we believe, down to the GBP 20 million or so we lost as a result of lockdown. In terms of interest, our interest was down significantly on 2 years ago. Two reasons for that. The real reason was the GBP 2 million drop in external interest, and that's all about the fact that we have less debt than we had 2 years ago. The other factor is the lease interest. This is an IFRS 16 accounting measure that is the interest that we don't actually pay on the stores that we don't actually own with the money that we haven't actually borrowed to buy the stores that we don't own. Profit before tax, up 6%. Tax charge down on 2 years ago. That's partly super deductions and partly the revaluation of our deferred tax asset which has increased in value. And the full amount of that increase in value is taken in this half, and that's because future corporation taxes are going up. Profit after tax, up 8%. Earnings per share on 2 years ago, up 11% as a result of the buybacks we did 2 and a bit years ago. Moving on to cash flow. I'm not going to talk about capital expenditure because the outlook and history of capital expenditure is exactly the same as we set out in March. So there's no new news there. There's quite a lot to say about working capital. Seen a big swing in working capital of GBP 4 million inflow as opposed to GBP 35 million outflow 2 years ago. Lots of things going on there. First of all, less outflow because we'd paid for less stock, and that's all about the fact that 2 years ago, we would have been increasing our stock as we went into the [ autumn ] and season. This year as a result of stock delays, our stock is actually slightly down. We sold the land upon which our new Elmsall 3 warehouse is being built. We have charged GBP 21 million in our accounts for the repayment of business rates for the period of time our shops have been and will be open. But we haven't yet paid that money, so that comes as a cash inflow. And finally, credit has gone up, mainly VAT, and staff incentives we plan to pay that haven't yet paid. The flip side of that outflows. We're beginning to build back customer receivables, that cost around GBP 45 million, and we invested GBP 43 million in Reiss. It looks like we've had a big increase in employee share option trust costs. This is all about this year. We've done this year's amount and last year's, and that gives cash flow before distribution up on 2 years ago, by about GBP 11 million. And you can see the difference between the GBP 20 million of profit and GBP 11 million of cash flow is all about the increase in CapEx. Once you move all the noise, underlying cash consumption of the business has been marginally impacted by an increase in CapEx, which in turn is all about the increase in the new warehouse that we're building in Elmsall 3. In terms of the balance sheet, stock down 2%. This number actually flatters the reality of the situation. A lot of the stock that we have on our balance sheet at that time was actually in transit. So stock in the U.K. was down 12%. And actually, NEXT stock was down 18%. And some of the difference is things like Beauty where we didn't have any stock 2 years ago. So the reduction in the NEXT stock levels is indicative of how short the business was up stock at that point. Since that time, our stock position has got worse. Actually, we -- at one stage, we were at minus 25% and it has now rebuilt itself back up to the levels that it's currently at. So we're currently at about minus 18% on NEXT stock. Each week that we move on, we can see our stock position improving, and we expect the stock to end the year around flat. In terms of debtors, unusually, there is quite a big difference between the reduction in our debtors and the reduction in our customer receivables. That GBP 50 million difference is money that we're owed by partners like Zalando and money that we're owned by companies that we've invested in like Reiss and Victoria's Secret, where we have lent those companies' money. In terms of the reduction in receivables, Receivables are down 11%. Now that compares to credit sales in the last 6 months, up 13%. The apparent contradiction between those 2 numbers is all about the amount of money that was paid down last year during the pandemic as customers savings increased and they use that money to reduce the amount that they owed us. That was accounted for about 22% of the difference. Further 2% was the fact that we have got additional provisions that we took last year that further reduced the receivables. Moving on to dividends. There were no dividends in the first half. But since then, we have paid GBP 140 million special dividend, so in line with 2 years ago. And then in terms of our right-of-use assets and lease debt, these are again the stores that we don't actually own and the debt that we haven't borrowed to buy those stores that we don't own. Both of those numbers have moved down. That is partially about the fact that as we're renegotiating our leases, the amount of rent we're paying in each store is reducing and the terms we're negotiating are shorter than they were 2 years ago. Moving on to Online. Online has had a fantastic half, up 52% in total, 55% on a full price basis. And what you can see here from this graph is that August and September have continued as strongly as May, June and July. Looking at how those numbers break down, between Brand, LABEL and Overseas. U.K. up 46%; LABEL up 70%, Overseas up 62%. If we take the total amount that sales have gone up by Online, the 55%, what you can see is that the story isn't quite as simple as it appears to be. It will be very easy for people to say, "Oh, well, what they lost in stores, they gained online" i.e., the blouse that someone didn't buy in a shop, they decided to buy on the internet. That didn't really happen. What really happened is that the money that people were saving on, for example, adult formal wear, they were spending on kidswear and Home. And so there's an enormous change in mix of the product we were selling during lockdown. That had a profound impact on our returns rate. So what the blue line shows on this graph is our returns rate in 2019, hovering around 40%. This year, you can see we started to deal with much lower returns rate. On average, during lockdown, down 16%. Of that difference, the vast majority of it, 11%, can be explained through just the change in product mix, i.e. if you take the return -- the low returns rate on Home and kids before the pandemic and use those to calculate what the returns would have been during the pandemic, you'll get 11% drop as a result of mix. The balance was consumer behavior, and this was phenomenal where customers reduce the total size of their orders because they were being more careful about only ordering the things that they really wanted to keep that gave a further benefit of about 5%. What you can see is that since the pandemic ended, our returns rate has come back to where it was broadly 2 years ago. And you can see that the customer behavior changed pretty much overnight, and the mix has more slowly moved back to a more normal level. And I think that's indicative of the fact that we are expecting product mixes to return to prepandemic levels slowly as the rest of this year and next year progresses. Moving on to growth by customer type. What you see is that all areas grew strongly. U.K. cash customers grew the most, mainly driven by new customers. If we look at the Overseas number. That Overseas number at 62% could be misleading taken on its own. If we look at the growth on sales on our own website Overseas, they were up 49%. However, we're getting an increasingly important contribution from third-party websites, people like Zalando in Europe. And those are -- those grew at 210% during the pandemic. Looking at sales per customer, what you can see in the U.K. is that we saw a significant increase in both credit and cash sales per customer. That phenomenon, we believe, is down to lock down. And you can see that the average sales by month and how once the lockdown finished in April, they returned to levels of 2 years ago. Moving on to profit. Profit up 74%. So a significant improvement in achieved margin, just over 2.5%. Bought-in margin was down 1.4%. Two things going on there. The first is increased cost of freight. As the season progressed, freight prices went up, and we didn't have time in many cases to incorporate that into our prices. What that meant is that we took around an GBP 8 million hit to our P&L in the first half absorbing those price increases. In the second half, all but GBP 7 million of those have been incorporated into prices. The balance of the change was down to the fact that we sold a lot more LABEL, which has a lower bought-in gross margin. And within the mix, the Home and kidswear has a lower bought-in gross margin than the high fashion items in adult clothing. Surplus, we saw a significant improvement. This wasn't that we cleared the stock that we had any better than 2 years ago, it was the fact that our stock for surplus grew by only 12%, whereas our full price sales were up by over 50%. So it was all about the amount of sales that we had rather than the effectiveness with which we sold it. You can see that actually clearance rates were down very marginally on 2 years ago, stock up 12% and markdown sales only up 10%. In terms of other costs, the big saving here was the fact that we're no longer printing our catalog, and that is net of any increase in digital marketing costs. In terms of warehousing and distribution, 0.6% positive contribution from warehouses leverage over our fixed overheads and lower returns rate driving the gains there. And on the earlier slide, you all have seen that lower returns rates gave us a GBP 20 million benefit in the first half. That was partially offset by the fact that when we're delivering to customers overseas, the vast majority of those deliveries are done by air freight, and we're seeing big surcharges on air freight prices throughout the first half. And we think those will continue, by the way, into the second half and, to some extent, into next year, and you can see that cost us 0.8% of margin. Leverage over systems and central costs gave us a further 0.6% advantage, and that gives this huge swing in the first half. In the second half, we're not expecting the benefit from returns to filter through into the accounts in the same way. And you should expect in the order of 20% net margins Online, that compares to around 19% 2 years ago. So moving on to the Finance division. The Finance accounts are relatively straightforward with profits moving in line with receivables. The only marginal complication is the fact that the credit sales are up, as I mentioned before, but the receivables are down. This graph, it explains why that happened. What you can see here is our average balances for the last 2.5 years and the gray blocks are the books last year. And you can see that if I put monthly sales on this. You can see that where we saw the big drop in sales, just as the pandemic starts, and that's when we closed our warehouses and when consumers reined in their spending, you can see the balance is dropping. And conversely, where we saw sales rise at the back end of last year, credit sales rise, we didn't see an increase anything like the same increase in balances. And that's because for the whole of the last 6 months of that year and the beginning of this year, consumers were paying down their accounts faster than the previous years. Net profit down 13%, in line with receivables. Return on capital 12.9% this year compared to 13% 2 years ago. So not much change there either. As we look into next year, we are expecting our Finance profits to continue to grow in line with the credit business. Moving on to the Retail business. Retail had a tougher half, sales down 38%. As we mentioned before, like-for-like, down 4%. In terms of how the shape of sales when we reopened the shops, what you can see is in April and May, plus 2% and minus 1%, these are like-for-like sales. You can see that we really did get a significant bounce when the shops reopened, and we've got a bit of pent-up demand. And then steadily that fell away to sort of more normal or expected levels of sales of minus 12% in July. We believe that the sales in August and to a certain extent, the front end of September, and these are estimates that we put on here, we believe that, that is a result of the people not going around holiday. For the rest of the year, we're anticipating the Retail sales will be more in line with July. In terms of the performance between different -- the different types of stores that we own, we saw exactly the same pattern that we saw during the lockdowns last year with retail parks bouncing back much faster and, in fact, growing as against city centers and regional shopping centers, both have fared much worse. And although that trend was the same as last year. If you look at the difference in performance last year, you can see that it was much greater. And we think that what will happen is that as the city centers begin to come back to life, we'll see the difference in performance between city centers and retail parks beginning to narrow sort of over the next 6 months to a year. As you can see, we were fortunate when we went into lockdown, 62% of our sales were already coming from retail parks, which helped sales when we came out of lockdown. Operating loss of GBP 18 million in the first half. That number is significantly flattered by the protocols of IFRS 16 accounting. If you add in the lease interest, which in our accounts has to appear in the interest section, the loss in Retail would have been around GBP 39 million. And going forward, when we talk about our Retail profit, we will include for the purposes of our management accounts the lease interest within the Retail numbers. So a loss of GBP 39 million in the first half. We're expecting for the full year a profit on the same basis, including lease interest, of around GBP 60 million. In terms of rent, and this is the rent payable rather than lease interest, what you can see is that against 2 years ago, we've made around a GBP 40 million saving. GBP 20 million of that is as a result of closures and the other GBP 20 million is as a result of the renegotiation of lower rents with landlords. If we look at the leases that we've renegotiated this year and the ones we expect to complete this year, we will negotiate 73 shops this year. Rents in those shops, we think, will come down around 52%. The weighted average term of the leases we're negotiating is 3 years, and the annualized savings on this portfolio, around GBP 11.5 million. Importantly, of those 73 stores, 28 of them are on flexible rents. This is where the rents come down or go up as sales vary. And of those 28, 15 of them are total occupancy costs. And this, in many ways, is the ultimate flexibility where we pay landlords a percentage of sales to cover rent rates and service charge. Just to give you one example of that, this is a shop in Kent that we haven't renegotiated recently that was turning over GBP 1.6 million. That shop, the rent was GBP 200,000, rates GBP 124,000, service charge of GBP 88,000. We've negotiated with landlord to renew for 3 years on the basis that we pay 14% for the lot. So that would give us GBP 230,000 rent with a 44% overall reduction in occupancy costs. One of the things that we're finding with landlords is, in essence, the more flexible they are prepared to be with the rent terms, the higher the amount we're prepared to pay in the short term and the longer lease we're prepared to sign. So if landlord will give us a total occupancy cost, we're happy to sign up to 5 years. And we're happy for that number that we pay today as long as the store is profitable, to be slightly higher than it would be if we were negotiating to fixed rent. Just going to talk about the estimated cost of the lockdown at the beginning of the year in the context of the whole company. So starting with Retail, we estimate during that 10-week period, we lost around GBP 250 million in sales. Now that estimate is based on the assumption that the stores would have been down 12% on 2 years previous, i.e., a compound annual decline of 6% on 2 years ago. We think we picked up GBP 20 million of those sales in the April-May bounce, giving us a net loss of GBP 230 million in Retail. The marginal profit, because all of that loss was pretty much full price, was 54%. That cost us GBP 125 million of margin. But with rates relief in the period we were closed of GBP 20 million and some other cost savings, electricity, maintenance, and recharges that went to Online of around GBP 19 million. So the effect of lockdown on Retail profit, we think, was around GBP 86. If we then look what we picked up online, we think we picked up in the order of GBP 155 million, around 67% of the sales we lost in Retail. And just to quickly remind you that we don't think that was because people didn't buy blouse in store and bought it online. It's not as simple as that. It was more about the money that people were saving on buying clothing and restaurants and other things, they spent on Home and childrenswear. That gives us a slightly lower net margin, 39%, of GBP 60 million. There were other costs of GBP 14 million, mainly the share of central overheads that Retail wasn't paying. And return savings are very important that will disappear in the second half of GBP 20 million. That gave us total win online of GBP 66 million. So total cost of lockdown to the current year of around GBP 20 million. And if you're surprised that, that number isn't bigger than that, it was also a surprise to us. But we have been through these numbers again and again and again, and we think that's about as much as we can get to, mainly because we picked up so much business online in Home and childrenswear, and that wasn't necessarily a business that we were only picking up from the closure of our stores. So moving on to the outlook for the full year. In the first half, we were up 8.8%. Our guidance for the second half was that full price sales will be up 6% across the whole business. We've revised that today, and we now estimate that sales -- full price sales in the second half will be up 12%. That's a combination of 2 things. First of all, season to date, we are up 20%. And we are forecasting for the rest of the season that we will be up 10%. That corresponds to an increase online of around 32% and a decrease in Retail of around 13% on 2 years ago. Gives us -- that would give us 11% for the full year, breaking that down between Retail, Online and Finance, and focusing, first of all, on the GBP 410 million that we'll lose, or we anticipate losing, in Retail. We think that will cost us in the region of GBP 220 million of marginal profit at a rate of 54%. We'll win back some of that by NEXT branded sales Online, which we think will deliver around GBP 156 million of profit, slightly lower achieved margin than Retail, around 48% marginal profit. LABEL, again, lower marginal profit because we're working at lower margins, GBP 77 million, and Overseas GBP 40 million. Total Platform, we think, will deliver GBP 10 million of profit in the current year. Of that, only GBP 3 million is the profit that we make on the commission on our partner sales. The balancing GBP 7 million is the anticipated share of profit that we will make in the equity investments that we've made in various partners. The lion's share of that profit we anticipate, coming from the Victoria's Secret joint venture and some of it from Reiss. In terms of Finance, GBP 17 million move backwards on Finance, which we've explained. And then in terms of cost increases and cost savings, both of them equaling each other at GBP 135 million down and GBP 140 million gain. I'm not going to go through those in detail here, but they are detailed in your pack, which you can read at your pleasure. That will give us total profit, if things pan out as expected, around GBP 800 million, and an earnings per share growth of around 9.4%. In terms of that GBP 800 million, in terms of it translating into operational cash flow, we anticipate that it will translate into roughly GBP 690 million of operational cash flow. That's before CapEx of GBP 185 million, investment in customer receivables around GBP 116 million and the investment that we've made in Reiss, GBP 10 million debt, GBP 33 million of equity. We have declared and paid a special dividend of GBP 140 million. And if we left it there, the company's gearing would drop to around GBP 400 million, which we think is lower than it needs to be or should be. And so that we anticipate pushing debt to the year-end back up to around GBP 600 million. And to do that, we will be able to distribute in the order of GBP 208 million special dividend. So what we'll do is as we approach the end of the year, when we have a more accurate picture of how much surplus cash, we will generate. We will declare a special dividend impaired in the current year to get us to around GBP 600 million of year-end debt. In terms of why we're comfortable with that GBP 600 million as a level of debt for the business, the main reason is because nearly twice as much is matched by customer receivables. If we were only a customer receivables business, actually, that level of gearing would be low. In terms of the financing of that debt, it's very comfortable, GBP 1.3 billion of financing. This is after accounting for the bond that we will repay in October. And we think that will give us around GBP 500 million of headroom over our peak cash requirements next year. Taking a slightly longer view of the company. At the beginning, I said that we felt that the outlook for the company was not just brighter than 18 months ago, but a lot brighter than it was 2 years and 5 years ago. And it's worth just reflecting that 5 years ago, in 2017, we, at that point, stopped buying back our shares, not because the share price was too high. But because we weren't sure that there was a lot to invest the money in, in the company. And the best thing we could do with the levels of uncertainty we had at that time was to pay money out to shareholders. Two years later, the situation had got significantly better. We ran our 15-year stress test, our Online business was beginning to motor. And we -- at that point, we established that the economics of the business was such that as long as our Online business could go slightly faster than our Retail business was declining, there was a way through to a profitable business and that we would generate in the order of GBP 12 billion of cash over that 15-year stress test cycle. As we stand today, things feel significantly better than they did 2 years ago, really for 2 reasons. The first is that the threat to our finances from our Retail business has declined significantly. And the second is that the opportunities we have online seem more numerous and bigger today than they did 2 years ago. And just in terms of the Retail threat, really, there's nothing clever about that. That is just pure maths. 5 years ago, Retail took 60% of our trade. This year, we think it will take in the order of 30% and pretty much the same again next year, certainly no more as our Online business continues to grow. So moving on to the opportunities Online. There are 4 areas of focus. The first is within our own brand. Over the last 5 years, we've more than doubled the amount of choice within our ranges. And in essence, what has happened is that our buyers have ceased to be constrained by the 4 walls of our stores. and that's allowed them to experiment and push into new fabrics, price architectures, fits, sizes and designs that they simply couldn't have fit into our store portfolio. They've also pushed into new areas, everything from performance trainers through to garden furniture, extending the boundaries of the NEXT Brand, with the one caveat being, they have to be adding something to the product by way of design because if they're not doing that, they're just producing copy cats. So as long -- what we said to our buying teams is as long as you can create value, give something our customers will appreciate something that's new to them, then try it. And Online allows us to do that. In addition to the additional products that we've got within our own ranges, we've also dramatically increased the amount of third-party branded stock that we're selling on our website, to the extent the business this year, we think will take over GBP 700 million. That is partly about the addition of new brands. And this year, our growth over 2 years ago, about 1/3 of that will come from new brands. But much more importantly, we have deepened and broadened the products in the brands that we already partner. And an important part of that has been our Platform Plus system, which I think we first talked to you about, about 2.5, 3 years ago. This has allowed us to have visibility of stock that is available in our partners' warehouses that we don't stock that we can sell online. And what we do is that if the order is taken on a Monday, we'll pick it up from our partners on a Tuesday and deliver it to our customers. on the Wednesday. So we're offering Platform Plus stock on a 48-hour promise. And importantly, we have taken ownership of the service. So the moment that, that stock leaves our partners' warehouse, we have visibility all the way through to when it's delivered to our customers to when it's returned to our warehouses. So what we developed here is not a marketplace in the traditional sense of the word because our partners aren't delivering it to the customers, we are. So it's additional choice without degradation of service. We've increased our customer base. And of course, the vast majority of the increase in our customer base over the last year was down to lock down. But behind that, something else is going on. We have significantly improved over the last 3 or 4 years to software, techniques and the skills of the people who are placing our online advertising. To the extent that we are getting much, much higher returns on the investments that we're making in all forms of digital advertising. And that means that in the current year, we'll spend around GBP 100 million on online marketing, and we expect to push that further next year because I think in some ways, we're at the beginning of this journey, not the end of it. What we're also doing is that in the past, we have struggled to make a success or get the returns from adverts we've placed in third-party media to sell third-party brands on our website. So for example, where in the past we placed adverts for adidas or Nike or any of the other partners that we worked for, in third-party media, it's worked, but not enough to pay for the investment. And that's because we're only making half the profit or less than half the profit on the sale of those goods. The other half goes to our partners quite rightly. What we've experimented with recently is partnering with brands where they pay for half the advert and we pay for half the advert. We've had a very successful collaboration with adidas in the past year. And that has proved extremely successful. So a situation where it wasn't worth either of us advertising on other sites for their product on our website, means that combined, both of us make a profit doing it. And we think we spend about GBP 4 million on that this year, and we expect that budget to more than double in the year ahead. Moving on to Total Platform. Total Platform this time last year was literally a glint in our eyes. We didn't have a single operation live. Today, we have 4 clients live. We expect Reiss to go live in February next year and Gap to go live in the summer, towards the end of the summer next year. The partners that we've got are up and running, operational, their operations are working well. The sales that we're getting through those partners are overall in line with expectations and the profitability is coming through in line with our target margin for total platform of between 5% and 8%. You can see this year, we'll make around GBP 3 million profit on GBP 50 million of gross transaction value for the partners on their websites. As mentioned earlier on, we'll also make GBP 7 million on our equity investments. And just in case you're thinking of that GBP 7 million looks like too big a slug of the GBP 50 million gross transaction value, you're right, because a lot of that profit, particularly in Reiss and Victoria's Secret, relates to their retail turnover in which we have a stake, but which doesn't go towards the gross transaction value on total platform. So those are the opportunities. And we are quite excited about what we can achieve over the next 5 years on these opportunities and more. But I think there are 3 really tough questions that the business needs to answer if we're to make a success over the next few years. The first one is, are the customers that we've recruited through lockdown here to stay? Are they just people who came on our site for lockdown and will disappear? Or will they behave more like normal customers? The second is, can our warehouses cope, and in particular, before we open our new big automated warehouse at the end of 2023? And the third is, whether our technology, our IT systems, are really ready to deliver the sorts of applications we need to deliver to make a success of our Online business. I'm going to start with an analysis of the customers. And what I'll start by saying is that although the evidence we have looks good, it's by no means conclusive. What you can see, this chart just shows the customers we started the last 3 years with. And you can see that the big growth in customers has come in new customers. These are customers who, at the beginning of the year, had not traded with us for more than 20 weeks and placed more than 1 order. And so there is a question mark over those customers. And what I'm going to share with you now is the evidence we've got of their behavior since we've recruited them. So if we take the cohort that we recruited in the run-up to January -- in 2019. So those are customers created November, December, January 2019 and compare them to the customers that we recruited in the same months in the run-up to January 2021. If we look at their retention rate, the 806,000 customers, the retention rate there was around 18%. If we look at the 1.4 million recruited this year, despite the fact that it's a much bigger number, their retention rate over the last 9 months is slightly better than it was on the 2 years here. So there's nothing there that would suggest that these customers are going to leave us any more quickly than the customers recruited before lockdown. In terms of average spend, the average spend is up. That's what you'd expect because remember, earlier on, we were saying that during lockdown customers spent more. But the amount that the sales have increased for these customers is broadly the same as the amount of the rest of our customer base, around 23%. If we look at another cohort, and these are the customers that were recruited in February, March, April 2020. And traditionally, the customers recruited outside the Christmas period retain much better. Those customers are retained at 23%. Looking back to before then, to the customers recruited in 2018, they retained at 18%. So if anything, we're seeing better retention rates. And the same in terms of average spend, we're seeing an increase in average spend of the new customers versus those we were recruiting 2 years ago. It was too much to say that it looks positive, but it certainly doesn't look negative. It's early days. There's lots that still hasn't really worked its way through the system. There are a lot of people still working from home who may return to the office. Stores have only been opened 5 months. And retention may have been significantly improved in August and September as a result of people not being away. But where we stand today, the stability of the customer base that we've recruited during knockdown looks encouraging. In terms of whether our warehouses can cope or not? What this graph shows is the capacity, the weekly picking capacity, of our main boxed warehouse, and that is where we do 80% of our picking and it's where all the capacity constraints of the business are. Two years ago, we could pick 3.4 million units a week. Over the last 2 years, we've increased capacity by around 15% to 3.9 million units a week. If we compare that 3.9 million units to the profile of demand over the last 6 months and project it forward, What you can see is that at several points already we're past that capacity. It's not as bad as it looks for 2 reasons. The first is that what I'm going to now show on the graph are full price sales. And you can see that where we bust capacity is normally because of a sale event in particular, the mid-season sale in March, April earlier this year. The reason that's not a problem is because sales stock is not promised for next-day delivery. So we give ourselves 2 weeks to deliver most of our sales stock, if not longer. That's the promise the customer gets upfront, which allows us to smooth that markdown sale picking into quieter times. It does beg the question, though, as you look at the end of the graph towards December, as to whether capacity will constrain our ability to deliver sales at Christmas. It also makes the other question is that if we beat our demand target, will we have the capacity to serve that demand? Or will the constraints of our warehouse stop the business in its tracks? the answer to that question, we believe, is that the capacity won't stop us and that we can deliver significantly more than the apparent capacity of our warehouses. But that will come at the expense of service level. And I just want to spend a little bit of time explaining that. What this graph shows is the amount of stock we pick and pack by our -- throughout a 24-hour period. And what you can see is that at 2 a.m., there's a dramatic drop impacting. And the reason for that is that 2 a.m. is the last time we can get stock out of our warehouses in order to get it to the customer that day. So if we stop taking orders at 11 p.m. for next-day delivery, we've got -- then got 3 hours to get -- the order we take out at 1 minute to 11, got 3 hours to get out of the warehouse at 2 a.m. And that gives us a lot of spare capacity the following day. If we hit a problem where we can't fulfill where we bust that capacity.,, What we can do is pull forward the cutoff. So in this example, we pulled the cutoff for next day delivery forward to 8 p.m. That gives us 6 hours to pick and pack the last item promised for next-day delivery. But much more importantly, it allows us to take the picking that we would have done before 2:00 a.m. on the orders taken after 8, 9, 10, 11:00 at night and move those into the following day. So we can smooth our orders into times of the day where we have the capacity to pick and pack. Now that does come at a cost because it's more expensive for people to be working through the early hours of the morning than it is during daytime. And obviously, there is a degradation in service. Some of the customers ordering stock at 9:00 might think, well, if I can't have it tomorrow, I won't order it at all. Our experience is, particularly at the busiest times of the year that most customers will tolerate a 2-day delivery rather than a 1-day delivery after [ 8:00 ] at night. And the worst that can happen is that we will lose some of the demand that will be way in excess of our forecast anyway. So we're not overly concerned about this. And we believe that we do have the capacity to get through Christmas and to beat our targets if necessary, albeit that, that may come at the expense of the service we offer our customers. Just looking slightly further ahead into next year and the following year in the run-up to the opening of our big warehouse. Next year, we will -- we think we can deliver another 15% capacity in around about July. This is partly the use of picking space in the shell building of the new warehouse and partly the addition of a new automated packing sorter which will come online around February, March next year. Once we're into 2023 in October, we'll begin to commission the new automated Elmsall 3 warehouse. And that, as we go into the following year, should give us a 45% increase in capacity. So the pinch point is going to come next year where we'll be up against this 15% increase. But on our forecast today, we think that we will get through next year okay. And again, we've still got that same ultimate safety valve that we can pull forward to the cutoff in order to give ourselves more capacity. Just to put the 45% capacity in context. The graphic that you're about to see is of our Elmsall 3 warehouse. The buildings behind our existing warehouses, they're outlined in red. And this new building on the front, half of it will give us the 45% of the mention on the graph. Within 18 months of us deciding to mechanize the second half, we can give the company a further 45% in capacity to take that increase to 90%. So once we've got Elmsall 3 up and running, we think not only do we have more than enough capacity to cope with what we can reasonably expect by way of online growth in our own business, but also the capacity to take on a significant number and amount of business on Total Platform. And in case you're wondering about what we're planning to do once the 90% is bust, we have acquired land next to the warehouse and we'll be looking to get planning permission on that to build an Elmsall 4 to cope with the growth that we may get in 4, 5, 10 years' time. Final question is whether our technology, our IT systems are ready. And the answer to that is, we think they are ready, but getting them in the state that they need to be in, in order to move our business forward, is going to be expensive and take a lot of hard work. And just to remind you, we're up to -- we talked about modernizing our systems before. At the moment, our systems are pretty much all developed in-house. They are function rich, they're resilient and secure. But the code is written as a monolith. And what that means is that each application, say, the login application will reference lots of other applications within its code as it's being written. And what that means is that because we have a lot of interconnected code within all these different functions, when we develop one part of the website, let's say, log in, it can have an adverse effect on any of the other parts. So it could knock over our delivery screens. What that means? That's not a problem as far as the operation of our technology is concerned. And it's not a risk to our current operation. What it does mean is that developing our software takes a long time because we have to spend almost as much time testing it as we do developing it. The process we started 2 years ago takes all of these functions, divides them into discrete containerized applications and each piece of code, each application only communicates with the others by passing data between them through a communication layer. That process is well underway. It means that all of these applications will be able to be developed alongside each other. The progress we've made so far is mainly on our e-commerce site, where we have modernized header navigation, footer services cloud infrastructure and the test and release system. Over the next months, we'll deliver search and product testing customer login, product display page and content personalization. And what that will do is that will modernize the parts of our website that we change most frequently. And once we've done that, we should see a significant acceleration in our ability to develop the website. We're modernizing the back end of our website over the following 2 years. And at the same time, we've kicked off modernization process for all of our other major technology applications. So whilst everyone can see the need to modernize our systems. And what I wouldn't want you to think is that because we're modernizing them, we're not developing them. Actually, we have to continue to develop our systems as fast as we would have done where we're not modernizing them. The analogy that our IT Director uses is that this is like -- it's like running a hotel where you've got to redecorate, rewire, replumb every room in the hotel whilst continuing to trade and only ever shutting 2 rooms at any one point in time. And we recognize that, that is the big challenge, but it's what we've been doing for the last 18 months. It also means that every so often, we're going to have to write code in our legacy system and except that we may have to rewrite that code when we modernize that particular application 9 months to a year later. But we've taken the view that we'd much rather move our systems forward and duplicate some of the efforts than we would to stand still because at this point in time, really, our technology can't stand still. And what that means is we're going to spend a lot more money. These costs, these capital costs are already in the projections that we've given you. We anticipate that in the current year, we'll spend at least GBP 36 million on technology capital. The vast majority of all of this expenditure is on software, at least 75% of it will be on software, and that's really people costs. The balance will be on infrastructure, a lot of which will actually be code in the cloud. Putting that in the context of our revenue expenditure, what we anticipate is that over the next few years, our total spend on technology will get up to around GBP 170 million a year. And what is interesting about this number apart from the size of it is the fact that where we are today, we employ pretty much the same number of people in our technology teams as we do in our buying, design, merchandising and sourcing teams across the business. So what it shows is not only the amount we're prepared to invest in technology, but also the importance it will have in moving the business forward. In order to do that, as I've already mentioned, we're going to have to take on a lot of people. We have reorganized our entire technology department. And if you're interested in this sort of thing, there are, I think, 3 or 4 pages in our annual report that explains exactly what we're doing. And we also regraded and recalibrated our wage rates within the business to make sure that we're competitive in terms of recruitment. So those are the 3 sort of challenges and uncertainties. I think are the 3 biggest challenges and uncertainties facing the business. And where I think it will be very easy to do is to look at the success we've had over the last year, in particular -- and in the last few months, and kid ourselves and our investors that it's plain sailing from here on in it. It is not going to be plain sailing. It's going to be really hard work. But we think all of these things are double, and we are on with them. And they need to be taken in context of the opportunities that are now -- the group is now presented with, which I think are significantly more numerous and bigger in scale than we have had for the last 5 or 6 years. And the way that NEXT feels at the moment is it feels like a very different business from the one that we were managing 5 years ago. For the last 5 years, a lot of what we've done has been a rearguard action against the problems caused by the decline of our retail business. Where we stand today, those problems are far smaller in size in the number and the opportunities for bigger. So that's all I've got to say today. I'm finishing on an unexpectedly optimistic note, and hopefully, in a time period that is slightly less than our normal presentations. So over to questions.