NEXT plc (NXT) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to NEXT's results. I think before I get into the numbers, there are really 2 big points I want to make. The first is that last year, throughout the year, we beat our expectations all the way through. And I think a lot of that came back down to the fact that the consumer was much more exuberant than we expected. I think as much as that helped us last year, it has tempered our outlook for the year ahead. Actually, our view of the year ahead hasn't changed dramatically from where it was in January. But I think what people thought of as being a very conservative outlook that we gave in January, now looks much more realistic. We have taken out some sales and a little bit of profit for the loss of our Ukrainian and Russian business. But other than that, our central guidance for the year ahead is broadly in line with where it was in January. So sales last year were up 11% on 2 years ago. Full price sales were up 13% on 2 years ago. In terms of how that panned out for the full year, the 47% up online and the 23% down in retail are misleading. If we break those down into 2 elements and just look at the period of time for which the shops were shut, online sales were up 70%, total sales were only down 9%. As we've said in the past, this might appear to be that a lot of the trade that we lost in shops had simply transferred online. And whilst the money spent did transfer, what consumers were spending it on changed dramatically. So actually, what we lost by way of women to men's formal wear, we gained it off that on kids and homeware. As we came out of lockdown, we saw a return to more normal trends. Online grew at 42% on 2 years previous, retail minus 7%. That number of retail was much better than we were expecting throughout the year. And in fact, it's slightly better than that because like-for-like stores were only down 5%. Looking back at the year, the only explanation we can really give for that was that by the time we reopened, a lot of the competition that we faced online, 2 years previously, had either shut some or all of their stores. So we think one of the things that explain the strength of our retail stores is the change in the competitive landscape versus 2 years ago. So operating profit up less than full price sales up 6%, and we'll be going into the margins in detail later on. In terms of interest, interest down around GBP 20 million. That breaks out into two different types of interest. The real interest, the interest on our debt, is down 27%. Our average debt throughout the year was about 50% down on where it was 2 years ago as a result of us having paid an awful lot of debt. The reason the interest hasn't fallen as fast to that is because from a lot of the year, the money that we pay down debt with was on deposit, earning very low interest. And it wasn't until we paid our bond off in October that we began to see those interest rate reductions really biting. Profit before tax up 10%; profit after tax up 11%, a slight reduction in tax rate, and that's all about the introduction of super deductions. Earnings per share up 12%. And that's because of the share buybacks that we did at the beginning of 2020, reducing our outstanding shares. Looking at cash flow, GBP 74 million profit before tax, resulted in a GBP 135 million outflow. And there are 3 big factors that are driving the difference, increased capital expenditure, a big swing in working capital and ESOT. Looking first of all at capital expenditure, increase of GBP 45 million. In terms of the increase, virtually, all of that increase came in warehousing, GBP 37 million increase. And what you can see is that the amount we're spending on our new Elmsall warehouse, GBP 71 million is what's driving that increase. We also have an increase in technology. We talked a lot about this 6 months ago, another GBP 16 million on technology CapEx. That needs to be put in the context of a total technology spend of it in the order of GBP 120 million, GBP 130 million. So we're still not capitalizing a lot of our technology spend. And just to remind you all that the reason we're capitalizing far more is because we're modernizing all of our systems or rewriting most of the code across most of our core systems. We're doing it piece by piece, module by module, but that's what's resulting in the CapEx spend on technology. All of the development of applications is still written off to revenue. Stores, about a GBP 10 million reduction in what we spent on stores. Looking forward, we expect to continue to spend a lot on CapEx in the year ahead. Again, the vast majority of this is being driven by technology and warehousing. We'll spend in the order of another GBP 70 million on Elmsall 3 in the year ahead. After that, we anticipate once that warehouse is built, our CapEx will begin to decline over the following 2 years. So with an average around GBP 160 million CapEx over the next 3 years, and we anticipate that will be the sort of more normal run rate of the business going forward. Moving on to working capital. Working capital, GBP 111 million, more outflow than 2 years ago, GBP 108 million on customer receivables. Going back in time to Jan '22, actually, the outflow in that year was only around GBP 27 million as our credit business was building quite slowly. This year, because we saw a swing back into credit after consumers paid down there, balances the year before last, last year, we saw a swing back into credit. So we've seen an outflow of GBP 108 million. Warehousing, land and buildings. This is land and buildings that we've bought and plan to lease back in the future. So this has held as stock. And I would expect some, if not all, of that GBP 53 million to reverse out in the year ahead as we lease back those assets and about GBP 50 million of Total Platform investment, of which the lion's share going into Reiss, about GBP 40 million going as equity and debt into Reiss and then the balancing GBP 10 million on Victoria's Secret and Aubin. In terms of positive movements, timing of freight and VAT on freight because a huge amount of our stock was late, we also paid for it later. And so that gave us an inflow of GBP 51 million. And the staff incentives number is the increase in bonus, the bonus that we will pay for last year across the business that has been earned but has not yet been paid, and that will come out of this year's cash flow. So that's a positive for last year, but that will reverse out in the year ahead. In terms of the employee share option scheme, much higher charge than usual, and that's because last year, we didn't buy any shares into the ESOT. So this year, in effect, we've had a double helping of ESOT shares, and we'd expect that number to be in the order of GBP 30 million to GBP 40 million in the year ahead. After shareholder distributions, total cash flow for the group, broadly in line with where it was 2 years ago, GBP 16 million outflow 2 years ago, GBP 10 million positive this year. So in effect, we have funded the outflows into working capital, CapEx and ESOT through reduced distributions to shareholders, with about GBP 350 million last year comparing to GBP 500 million. So moving on to the balance sheet. Goodwill and investments, GBP 41 million, and this is all about the equity investments that we've made that I just mentioned. In terms of stock, the stock on our balance sheet as at January was 19%, ahead of Jan 2020. Remember that is a 2-year growth in stock. So it is broadly in line with our expectations for the year ahead versus our expectations as they were in Jan 2020. The difference in those expectations around 4% is down to the fact that this year, we have ordered stock earlier than we would have done 2 years ago or last year to account for the additional time it's taking freight to get into the business. Those stock levels at 19% up are actually a little bit misleading when you look at the actual stock available to the business. The graph that I'm about to show you shows that this is the levels of stock versus 2020, of stock that is available to the business and the difference between the minus 2% that was available to the business in January and the 19% on our books was the amount of stock that was on the water and in transit, waiting to get into the business. So this is a reflection of the delays that we've been experiencing in the run-up to Christmas. That's NEXT branded stock in the blue line. In terms of total stock in the business, including all the LABEL stock that we had available to sell on third-party brands, total stock was up 7%. And you can see that our stock position on LABEL were significantly better than it was on our own brand. And that accounts for some of the growth in the LABEL sales over the last year. Some of the exceptional performance was down to the fact that stock that we didn't have in our own brand, we were able to transfer those sales to other brands. In terms of where we stand today, stock available to the business is broadly where we want to be, marginally up on last year. Moving on to debtors. Debtors down on 2 years ago, GBP 34 million. There's an awful lot going on here. The biggest single number, the customer receivables, are down GBP 71 million on 2 years ago. I'm going to talk about how our debtor book has changed over the last 2 years when I talk about the Finance business. But in summary, the reason why that number is down is because we had a big drop in the year ending Jan '21. And that -- a lot of that reversed out last year. In terms of things moving the other way, we've got GBP 18 million commercial loans to TP partners, of which about GBP 10 million is to Reiss. International third parties, this is where we've sold stock on third-party aggregators, and they haven't yet paid us the money for those sales. And the final one is about the timing of rates payments. Looking at our right-of-use assets and lease debt, you can see those two broadly match each other in terms of the swing in the values, which means our overall debt as against 2 years ago, is down GBP 500 million. And that really is all about the opportunity that we took in year ending Jan '21 to pay down debt. Looking forward at the cash flow over the following year, we are expecting operational cash flow to be around GBP 740 million. I've already said, we expect GBP 195 million of CapEx. We expect to invest around GBP 100 million in customer receivables. And then other investments will actually result in an inflow of around GBP 5 million. Three things going on here. First of all, we're going to exercise the option that we have to buy a further 26% of Reiss. We anticipate acquiring another GBP 32 million worth of property stock, mainly to develop warehousing. But against that, we anticipate that we will lease back warehousing, resulting in an inflow of around GBP 73 million. We're going to return to paying dividends in the year ahead. And the first one will be in August, and that is announced in this set of results, and we expect ordinary dividends to be in the order of GBP 240 million. And to give you a sense of where we -- our dividends are aiming, we intend to cover dividends around 2.8x, which is where we were 2 years ago. The balance between the GBP 400 million and the GBP 600 million of debt, we don't believe that it's right that we further reduce the gearing of the company. We think our balance sheet is extremely strong at the moment. And we would anticipate our gearing moving forward in line with our profits, our guidance of our profits in the year ahead to be up 3%. So we'd anticipate that year-end debt will be around GBP 620 million and the balancing GBP 220 million will either be buybacks, special dividends or investments in other businesses to be determined as and when we go through the year. So moving on to the online business. Online business had an exceptional year, up 45% on total sales, full price sales up 47%. Three phases within this, you've got the period when the stores were shut and the exceptional growth; you've then got between April and July, where we think that some of the lockdown trends, particularly on home, persisted; and there was a little bit of sort of restocking of the items that people hadn't bought during lockdown. So we had this sort of quite euphoric period between April and July of being up 46% and then dropping back to 40% 2-year growth in the second half. In terms of how that 47% broke down by U.K. and Overseas, you can see Overseas and U.K. grew by pretty much the same amount. Looking at the U.K. sales, U.K. sales were hugely driven by LABEL. So a set of third-party brands increased in the 80% as against our own brand at 33%. And that will have had an impact on margin, which we'll cover later. In terms of Overseas sales, nextdirect.com did well at 36% up. But the really big increase came in the sale on third-party aggregation sites. The sites that we were already trading did well. They were up 117% like-for-like sites. And then we added some new third parties, particularly ZFS in some countries where we weren't trading with them, which contributed towards the balancing 60-odd percent of growth overseas. Looking at sales in terms of cash versus credit, U.K. credit sales were up 27% in the period. U.K. cash up [ GBP 116 million ]; Overseas, which is all cash of 36%. Where that leaves the group is that means that overall, just over half our sales now on credit and the balance, I mean, one way or another on cash, looking forward, we anticipate that our cash business will continue to grow faster than our credit business. In terms of customer numbers, U.K. credit customers up 7%; cash customers up 75%; Overseas customers up pretty much in line with sales at 37%. What you can see from that is that a lot of the U.K. growth was driven by growth in spend per customer, 19% on credit, 23% on cash. We think the vast majority of that is about the increase in offer that we have on our website versus 2 years ago. And the obvious question is, well, how much of that is driven by lockdown. If we look at the period of time from the end of lockdown, so quarters 2, 3 and 4, where you can see is that even in those periods where the shops were open, we're still seeing significant increase in spend per customer across credit and cash customers, driven, we believe, by the improved offer. Looking at the margin, margin online broadly flat with last year. In terms of the movements, lots going on in the movement. So first of all, a big drop in both in gross margin, 2.9%, 2/3 of that was driven by the increase in LABEL mix. The LABEL product is at a lower margin than our own, so that reduces margin. The other 1/3 of that drop comes down to the unplanned freight cost. So this is where we've costed our goods and priced them on the basis of freight being one price and the market has moved away from us too quickly. And so we weren't able to reflect the increase in cost of freight of goods in our prices. And that cost us around 0.8%, which we took as a hit to margin. Lower -- much lower surplus gave us back 1.5%. So our achieved gross margin was down 1.4%. Marketing photography gave us a big increase in margin, 1.7% increase in margin. Believe it or not, 2 years ago, we were still printing catalogs. So we've got a big saving from no longer printing catalogs. The cost of photography reduced largely because we couldn't travel overseas to take photography for our website. So that saves on photography costs. And then digital marketing, we actually increased that faster than sales. So digital marketing budget was increased by more than 47% on 2 years ago. And whilst that looks like an adverse movement against margin, it's a positive thing because we are still getting very high returns on the money that we're investing in digital marketing. In terms of warehouse and distribution, a slight saving here, two different things going on. Online returns were dramatically lower during lockdown and that reduced our warehousing and distribution costs by around 0.9% of sales. However, air freight surcharges, and this is on the goods that we're delivering to customers overseas increased dramatically. And in many territories, we took the cost of that to our P&L rather than pass it on to our customers. So that pretty much wiped out the benefit that we got from online returns. It's worth saying at this point, because it will become relevant when we look at the margins of our Overseas and U.K. businesses, that the returns rate benefit of the U.K. business, whereas the freight surcharges hit the Overseas business. So although on our total online business, they net each other out, when you break it down by U.K. versus Overseas, they have very different effects. Other overheads, technology, we continue to increase that as a percentage of sales. Central overheads increasing as a percentage of sales, largely as a result of the fact that in the reported year, we will pay bonus on the reported year and 2 years ago, we paid no bonus at all. Just looking at the profitability by channel, so this is the margin of the NEXT-branded stock sold on our U.K. website, LABEL sold to the U.K. customers and overseas. Here, we saw big swings in margin, big improvement in our NEXT U.K. business, driven by a combination of reducing markdown on our own stock and lower returns rates. LABEL, flat. And what happened here is that the savings that we achieved through the returns rates were offset by the fact that we had some one-off costs in the year to set up new clients, which sort of wiped out those benefits. So we see no change in the LABEL U.K. margin overseas. That's all about freight surcharges. Looking forward to the margins next year, we anticipate that the U.K. margins will see the reversal of the gain on markdown and a reversal of the gain on returns. So that dropping back to in the order of around 21%. LABEL, we anticipate being broadly the same as it was around 14%. Overseas, 2 things happening here. One is that we will -- we think we will continue to have to bear the cost of some higher freight costs throughout the year. And of course, we'll be carrying some of the overheads that were paid for by the Russian and Ukrainian business, particularly the Russian business, where we have actually got fixed overheads in country. So that will serve to erode our margins overseas next year. Okay. So moving on to the Finance business. Credit sales were up 13%. Now for the sharp-eyed viewer, you will remember that only a few minutes ago, I said credit sales were up 27%. Remember, all the sales we're talking about before were full price sales. Full-price credit sales were up 27%. However, we had much less stock, relatively much less stock going into our sale online. So markdown sales running up 5%. Retail credit sales are the sales where our retail customers can use their online account in stores. Those are down dramatically, largely as a result of the shops has been shut for 10 weeks. And of course, the interest income, which also goes into the credit sales line was down, and that was because we started the year with lower balances. So customer receivables actually down 10%. That looks contradictory, but the reason that there is an apparent contradiction is that the 13% increase in sales covers 2 years. And in those 2 years, the balance went down and then back up. To illustrate that, what this graph shows is the balances throughout up to Jan 2020. And you can see a dramatic drop in balance as we move through 2020 through COVID. But from Jan '21 onwards, you can see a return to more normal growth. And if you look at the average balance, drops 10%. However, if you look at the balance in Jan '21 compared to the balance in Jan '22, that has grown by around 13% to GBP 1.16 billion. Moving on to bad debt, bad debt down 37%. This is all about the reduction in the observed default rate. We have seen a dramatic decline -- over the last 2 years, we've seen a dramatic decline in the observed default rate, dropped around 26%. The 3.2% you can see from the bars to the left-hand side actually is an historical low. And that's all about the savings that consumers accumulated during COVID. In terms of our bad debt provisions, we haven't actually reduced those by much. And in fact, when we look at our bad debt provisions, they are back up at around 9%. And in essence, what we've done is that the provisions that we took for what we thought might be the default after COVID, we're hanging on to, to make allowances for the defaults we think we might get as a result of cost of living increases. So profit before funding, down 6%. Overheads of GBP 49 million, actually higher than last year, despite the fact that receivables are lower, and that's because overheads are not driven by the amount we've got to collect, but the amount of customers that we're dealing with, and that is driven by credit sales. So overheads have gone up in line with credit sales and have increased as a percentage of our receivables. Moving on to net profit, after cost of funding down only 3%, and that's because our cost of funding has dropped much faster than our receivables, and this is all about the lower average cost that NEXT is paying for its debt as a result of reducing total group debt from [ GBP 1.1 billion to GBP 600 million ]. In terms of next year, we expect the Finance business to make in the order of GBP 160 million of profit. Moving on to Retail. Retail, obviously, had a very tough year with the closures, total sales down 23%, like-for-likes down 5%, which, as we said earlier, it was much better than we were expecting. When I presented our results a year ago, we talked about the fact that for the time the shops are open in 2020, '21, our retail parks did an awful lot better than the shopping centers and city centers. If we look at that same measure of performance, over the last year, what you can see is that the performance is much more even. And that retail parks and shopping centers are broadly in line with each other at minus 2%. And it's really only the city centers, where you see a significant lag. Our belief is that as we continue to come out of lockdown, we will see a more even performance between the 3 different types of shopping locations. Operating profit down 54% at GBP 107 million. That GBP 107 million, just to remind everyone, is actually overstated because it doesn't include lease interest, which appears in the group accounts. If you add the lease interest in, then the real profit that our Retail business making is around GBP 65 million. It's GBP 112 million down on the equivalent number 2 years ago. In terms of how that pans out, achieved gross margin was down pretty much in line with sales. Occupancy costs down pretty much in line with sales. And the reason for that was because of the rates holiday that we got for the period the shops were shut and also because whilst we were shut, we were able to save things like electricity, the consumption of plastic bags and things like that. So we were -- overall, occupancy costs went down broadly in line with sales. Well, we really had deleverage of the business was over payroll, warehousing and central costs. Payroll moved backwards, not quite as much as sales. Obviously, we're able to furlough a lot of people during the closure period. But once the shops were open, it was much harder to manage the staffing in line with the sales decline. Where we really saw the big fixed cost was in central warehouses and distribution networks and central costs. And central cost is actually made slightly worse by the fact that Jan 2020, there was no bonus, whereas in the year reported there was. Guidance for next year, we anticipate with the stores open, we'll make in the order of GBP 115 million of profit in the order of sort of 7%, 8% net margins in our retail business. Just focusing now on rent, rates and service charge, this is the actual cash charge during the year as opposed to the lease interest and depreciation. That came down around 7% against 2 years ago. In terms of the shops that we actually renegotiated in the year, we renegotiated the leases on 60 of our stores. The average reduction in occupancy cost in those stores was around 46%. The average lease term was just under 3 years and total savings was GBP 9 million. Of those 60 stores, 19 of them were on flexible rents, where the rent is paid to the landlord as a percentage of the sales in the shops. Of those, 11 are total occupancy deals. And this is where we pay a fixed percentage of our sales to landlords in respect of rates, rents and service charge. So those are sort of, if you like, where the landlord is taking all the risk of deleverage. Looking at the year ahead, we anticipate that we will renegotiate the leases on 72 stores. We think that the rent reductions we'll get will be in the same order around 45%. And quite a big saving around GBP 17.5 million because there are some big shops in that number. We also expect that the average lease term we'll agree to will go up to around 4.5 years. This isn't because we're generally taking longer leases. It's because a number of the bigger stores within that 72, we have agreed or in the process of agreeing a total occupancy cost deal. Total occupancy costs means that the risk of trading that shop is much lower, because the rent rates and service charge will vary as a percentage of the sales we take. So we're able to agree to longer lease terms in those shops, which is what we've done. So moving on to the outlook for the year ahead. In January, we gave our trading statement. We said at that time that we thought our sales in the year ahead will be around 7% up. We have moderated our sales expectations since then. The vast majority of that is about the loss of our Ukraine and Russian business, which we've assumed will be shut for the rest of the year. That has cost us 1.5% of the 2% we've lost. As far as our U.K. business is concerned, our numbers to date are in line, if not slightly ahead of our expectations. So the balance, the half -- the difference in the 1.5% we've lost in Russia and Ukraine and the 2% is all about reducing our expectations in other overseas territories. In terms of how that growth of 5% pans out over the year or how we're expecting it to pan out over the year, we're expecting the first quarter to deliver growth of around 21%. Q2, 0% as we come up against the sort of euphoric period of reopening last year and then 1% in quarters 3 and 4. I should stress at this point that it is particularly difficult to forecast the next 3 quarters' trade. And there is an argument so that actually Q3 and Q4, given all of the pressures that are likely to amount in the economy, could be worse than Q2. The only thing that's weighing against that -- well, there are two things weighing against that. The first is that we anticipate we will be much better stocked in quarter 3 and quarter 4 than we were last year. And the other thing to stress is that these are nominal growth, these are the growth in pounds in the till. And of course, in real terms, particularly if wages have moved forward 4% or 5%, then we're looking at a real decline, particularly in those latter quarters of the year. So I think the important thing to stress is it's very difficult to look forward, but the numbers we're seeing at the moment would -- are in line with the plan that we set at the beginning of the year. If we look at the numbers against 3 years ago, which is the only year we've got, which has not -- is not affected by COVID, what you can see is that our compound annual growth that we're expecting 3 years ago remains pretty much flat for the rest of the year. In terms of how we're expecting the business to break down by between retail and online, in the first quarter, we expect online to be down around 9% and retail to be up a lot because for 10 of the 12 weeks last year, retail was shut. Then looking at the remaining 3 quarters, we're expecting online to be up around 4.6%, retail to be down just under 7%. In terms of what that means for profit, if we just take the growth in retail sales and apply our normal marginal profit on retail sales, we would get a profit -- that GBP 160 million of increase in sales would give us a profit around GBP 89 million, 55%. Because last year, we had a number of one-off benefits. Actually, the increase in profit we think we'll get from retail on these numbers is near GBP 61 million. GBP 20 million of rate relief reverses out. Last year, we had very low stock loss because if the shops are shut, people can't make stock. And we also saved money on energy and other store consumables during the lockdown period. If we look at online, we're expecting total sales across the year to be up by GBP 30 million, delivering a profit of just GBP 2 million. On the face of it, that marginal profit on the online business looks far too low. And it's worth just explaining exactly how we arrived at those numbers. Basically, we think there are two things that will happen. We think our third-party branded business will continue to move forward, and we're expecting to add around GBP 70 million of third-party brands in the year ahead. But our own brand, which was far more affected by the lockdown and closure of our shops, we're expecting to move backwards. And it's the fact that on our own brand, the marginal profit is 46% and third-party brands near 30%, which means that actually, the difference in that delivers a profit that's broadly flat. In terms of Finance business, we're anticipating GBP 18 million increase in profit in Finance. Total Platform, and this is a combination of the margin we make on servicing our Total Platform customers and also the profit we make through the various equity shares that we have in the different partners businesses to deliver around GBP 10 million. About half of that GBP 10 million comes from the profit share and half from the Total Platform service. Looking at cost increases, this is where it gets a little bit scary, we're anticipating GBP 143 million of increases in the year ahead, GBP 55 million from cost of living, that's wage increases. We're anticipating that we'll have more normal levels of surplus and that will erode margin by around GBP 35 million. Energy cost inflation is going -- we think will cost us around GBP 20 million in the year ahead. We'll continue to increase the amount we spend on technology. This is -- of these numbers, this is the number that is the least bad, in fact, is a good number. We think that we need to invest in technology, and we will continue to do so. Marketing photography, an increase here, driven partly by the increase in the amount of items that we're photographing. We continue to increase the size of our ranges and also the fact that we're now able to travel to some of those more expensive locations for the best photography that we weren't able to do last year. Finally, warehousing distribution. This is the addition of some fixed costs as a result of opening Elmsall 3, for example, will begin to pay some rent and depreciation on that building as we begin to use it through the year. In terms of cost savings, lower incentive payments. This isn't -- this is because the year that we've just passed, we think there was an exceptional level of bonus. Going forward, we expect more normal levels of incentive payments. So GBP 35 million benefit there. Last year, we were unable to cost in a lot of the increases in our freight -- in freight costs. In the year ahead, we have costed in the anticipated increase in freight costs, and that will recover around GBP 25 million of margin. Interest costs in the year ahead will be lower as we continue to benefit from the paying off of our bond last year and we're anticipating a saving on overseas parcel surcharges of around GBP 7 million. Adding all those together, we get to a profit of around GBP 850 million, a 3.3% increase in total profit with earnings per share driven by share buybacks rising by around 4.9%. And that's a combination of the buybacks we have done in the past, but mainly the share buybacks we anticipate during the current year. That's the central scenario. As I said at the beginning, it is a particularly difficult year to forecast. So looking at our range, if we look at 3% -- on 3% downside, we anticipate that at that level with 3% less sales would result in profits falling from EUR 850 million to EUR 795 million. And on the upside, we think that the best we might do is about an 8% increase, and that will give us profit before tax of just under GBP 900 million, earnings per share growth of around 10.4%. So we think that what we put together is quite -- at the beginning of the year, we thought it was a very conservative budget. As we stand today, we think that our central guidance is realistic. And what we've given here is where we think of the book ends to the performance. Moving on to the longer-term outlook. We've rerun our 15-year stress test. Now there is an enormous amount of detail on this in the report that we've issued to you today. So I'm not going to go through it in huge detail, just run through the headlines. Just to remind you, the last time we did this, we were looking at cumulative net cash generation over a 15-year period of around GBP 12 billion. If we look at the assumptions that we use then, we assumed that retail like-for-likes would continue to decline at minus 10%, online sales will grow at 7.5% and annualized CapEx would be at around GBP 110 million. As we stand today, we've changed those assumptions slightly. We've seen retail like-for-likes remain at minus 10%, although certainly in the near term, that figure now looks very pessimistic. Online sales, we've moderated the assumptions going forward because we think that the highest growth was going to be when the business was smaller. And obviously, as time goes on, we're expecting that as the total online sales number grows, we would expect the sales increase to decline. Annual CapEx, we've increased to GBP 160 million as we've begun to see some of the increased capital costs of delivering online growth. Moving on to the online business. The assumptions we've made here is that NEXT U.K. will be at 3.8%; LABEL, our third-party business will be at 7.5%; and Overseas will be just under 10%, giving us total growth of 6.4%. We've assumed the margins will remain as they are projected to be in the year ahead. So it's 21% on NEXT U.K., 13.6% on LABEL, 12% Overseas. In terms of what that means for the model, the cash that generates, combined with the retail cash flow, gives total cash generation of around GBP 14.7 billion over the next 15 years, an increase of around GBP 2.7 billion on when we last ran the model in 2019. Just looking at the assumptions, I just want to make it clear that what we've done with assumptions, total compound annual growth for the group is forecast at 4.1%. That compares to 3% last time we did this. The increase is all about the fact that retail is -- retail, which was moving backwards, is a smaller part of our business over the next 15 years than it was 3 years ago. If we take the period of time that overlaps between the 2 models, the growth that we've forecast in this model, 2023 to 2034 is exactly the same as we had modeled in the last model. So the change in the economics of the group is all about reduction in the size of the Retail business and the relative increase in the size of the Online business. It's not that we've changed any of the assumptions on growth in either of those businesses in the periods from 2023 to 2034. We think that provides the group with a sort of solid foundation to move forwards. It doesn't include Total Platform. And I just want to stress, as we stressed last time, that this is a scenario that is there to inform shareholders what would happen to the company, given certain growth rates. It's not that those growth rates are a target for the business. Our job is to grow sales as much as we can across the whole group. It's not a plan, it's not a forecast, it's not guidance. But it is important because it gives shareholders a sense of the economic stability of the company and how that has changed over the last 3 years as we begin to move further into an online world and move further away from a world dominated by our retail shops. The aim of this section is to give investors a sense of how the business is evolving, the way that the different activities that we're undertaking are changing and an insight into the way that we are beginning to think about the management of the business. Now you could look at this section and I think NEXT is about to have a massive reorganization. And I want to stress that, that is definitely not the case. The changes that I'm about to describe are changes that have happened and are happening. You're certainly not going to see any big changes in the way we run individual departments going forward or lots of new job titles. But what you should get from it by the end of this section, is a sense of how the group is simplifying the tasks that it's doing. Because there's a risk that when you look at all the different activities we're undertaking from Total Platform through to licensing the NEXT Brand, when you look at all those activities, there's a risk that people within the organization could feel a smaller and smaller part of a bigger and bigger machine. The reality on what we're trying to achieve is exactly the opposite. We want to simplify what we're doing, explain exactly what the objectives of each part of the business are, understand the underlying economics so that the people within our organization are very clear about exactly what it is they've got to do, exactly what success looks like and exactly how the decisions that they're making will transform the business going forward. Conceptually, when you look at an online business, traditionally, you thought about 3 basic functions, product teams that go out and source beautiful product, marketing team that builds the customer base, designs beautiful website, optimize the sales on the website and markets to those customers to maximize the sales. And finally, in operations side of the business, the warehouses, the call centers, the technology, the software, which traditionally have thought of themselves very much as being support functions or cost centers. As time has moved on, our -- and we've begun to sell other brands, our marketing function has begun to change. It's become marketing and aggregation, the assemble -- the assembly of all the different product offers that we have on our website has begun to feel like a function within itself that sits in the middle of the business. And the marketing aggregation and operational side of the business begin to feel more and more like businesses in their own rights and that people who work in software, warehousing, marketing, aggregation begin to see their role not as support or cost center, but as profit center as that actually we are selling a software product. That's really important to how we think about the group. And I think a very positive thing for both sides actually of the business because you end up with sort of buying side and a selling side. If we think a little bit more about the buying side of the business and what we're doing there, the buying side is all about creativity. It's about sourcing, design, stock control, quality control. And initially, when I say stock control, stock control could sound like a very sort of boring function, the controller's function. Actually, stock control is about the management of risk. The investment, how much stock we invest in and what returns we get on that investment. And the buying side of the business has changed dramatically as a result of the Internet. And the reason for that is that suddenly, it has become liberated from the four walls of our stores and the pages of our catalogs. In the past, buying teams have very much been designing ranges to fit into our stores. And what that meant was that you couldn't introduced niche products because they just wasn't the space, they didn't earn their space in the stores. We just didn't have enough display space to keep increasing the size of our ranges. And even within the catalog, every item had to earn its page. As we begin to trade more and more of our business online, which in essence has an infinite amount of space, the amount of diversity our buying teams can put into the range, their ranges, has increased exponentially. And you can see that in the amount of options that the business is now selling. Now a lot of that increase is about increased diversity of print and colors, additional sizes that we're able to stock, stretching our price architecture. So that has been the main driver of increase in options in our own brand. But in addition to that, we've been able to experiment and push the boundaries of our brand further than it's ever gone before, pushing into new product areas such as outdoor clothings, performance sportswear, pet's clothing, children's, bedroom furniture, areas that we haven't been in before that we believe we're able to use our design and our sourcing base to deliver great products to our customers. We've taken that concept one step further and began to draw on design inspiration from outside the group to augment our own designs. And we've done this through collaborations with businesses like Scion or Morris & Co. We've partnered with various top end mills, you've got a collaboration with [ Lokon Shoes ]. And this is all about pulling in external sources of design and inspiration and wonderful prints and getting those on to a product that is essentially still NEXT product. In addition to that, and there are some areas we recognize where although we've got great design ideas, we haven't necessarily got the technical expertise to deliver those products to our customers, areas like, for example, wallpaper or paints or skiwear. And in those ranges, what we've done is we have licensed our brand and our designs to a third party. They've taken the stock risk and we take a royalty on sales. We've taken that idea and also turned it on its head. And undertaken a number of licenses where we have taken the design expertise of other businesses and used our sourcing expertise to create ranges that neither of us could have created on our collaborations with companies like Ted Baker on their children's wear, jewels or men suits, Laura Ashley on sofas. The very important point here is that we have to be absolutely sure that both we and our partners are really delivering value. If these products end up looking like just NEXT items with somebody else's label in the back of them or our sourcing and technological expertise are not delivering anything of value to the client, then this business will fall over. But at the moment, it's a very exciting business. Finally, in markets where we feel that the NEXT Brand isn't quite right, we have experimented, developed -- we're developing new brand concepts. Mainly, this has happened through our Lipsy subsidiary, where we've developed brands like Friends Like These, Love and Roses, which is a sort of design boutique inspired brand at affordable prices, where we've created our own beauty range and OWN DENIM, where we've created a young women's fashion jeans brand. Now the jury is still very much out on all of these brands. But I think what it gives us a sense of is how we're taking the product origination skills of the business and beginning to use them across a whole host of different areas. And I think what that's doing is it's creating a very different sense of what the buying side of our business is all about. It's not that hasn't lost anything from the days where it focused entirely on our next retail ranges, but its capabilities and its horizon to have expanded enormously. And actually as a stand-alone business now feels much more exciting than it did 5 to 10 years ago. Moving on to the selling side of our business. We've still got lots to do on the selling side of the business through LABEL. We continue to improve the service we offer to our clients. And the main emphasis here will be on improving our systems and the integration we have with our clients. We recognize that we can make it easier and slicker for them to get product onto our website, for them to have better information and reporting from our website to further improve the service that we give them. And our aim is to continue to increase the profit they make on our website. To that end, we reduced our commission rate for fashion brands for the third time last year by 1%. And as and when we're able to get economies of scale moving forward, our aim is to continue to keep passing back the benefits to the clients. We need to make our profit. But once we've made our profit and our returns, our aim is to keep passing the benefit back to our clients. Because we recognize that, ultimately, if we're going to be a great aggregator, it will only be with the support of our brands that people have the equity in that stock. We'll continue to add new brands in the year ahead. Well, one of the biggest single things that we've done last year to increase our offer was to roll out our Platform Plus functionality. This is the functionality that allows our website to have visibility of stock that is not available in our warehouse, but is available in our partners' warehouse. That stock can be orders and is offered to the customer on a 48-hour, 2-day promise. The key here is that the stock -- we pick up the stock from our clients' warehouses and deliver it through our network. So from the moment that stock leaves our clients' warehouses, we have ownership of the service, and we're able to collate it with other items that customer has ordered in order to deliver all of those items to the customer at the same time, which is an improved service for the customer and, of course, significantly reduces the cost of distribution. The other thing we've begun to do is to use that Platform Plus system to tailor our own ranges. So where we can see, we're consistently selling items from our partners' warehouses rather than just call off the item that has been sold, we're beginning to call off, anticipate the anticipated sales on items we are almost certain to sell going forward. So what we're doing is we're using the Platform Plus system to tailor the ranges to improve the breadth of offer we have online and the speed at which we can deliver it to our customers. There are some items where actually it makes a lot of sense to deliver it directly from our partners' warehouse to the customer, items like large sofas where our chances of consolidating the item is slim, the item may be on a long lead time anyway. So the benefit of bringing into our network is limited. The problem with that type of direct dispatch business is that we don't have control of the service. So what we've done is we've developed what we're calling NEXT Direct Dispatch, where the product still goes from our partners' warehouse direct to the consumer, but it goes on a NEXT-nominated carrier. And again, from the moment it leaves their warehouse to when it gets on that carrier, we have complete ownership and visibility of the service that we're providing to our customer. As we've rolled that out across all of our biggest direct dispatch suppliers over the last year, and we'll continue to push it out over our direct dispatch partners portfolio over the course of the year ahead. And there is one other advantage to this, of course, and that is that normally, we will be able to deliver the item cheaper than our partner could have. So there's a saving in there that we can share with our partners and increase both their and our profitability. So that is the way the business is beginning to divide. And some of the initiatives that we are beginning to see in both sides of the business. And what I kind of hope people can see and certainly, I think what we're experiencing within the business, is that the increasing independence of the buying and selling side of the business is creating an environment in which both sides can begin to undertake activities, begin new businesses, take new initiatives that they couldn't possibly have taken in the old days when these 2 sides of the businesses were joined at the hip through a catalog and a shop. And I think when you stand back from it, actually both sides of the business, both the buying side and the selling side, look and feel like much more exciting places to work and create new ideas than they would have done 5 years ago. I think what it's also done is it's challenged us as a business to think about the profitability of all these different activities and where and how are they profit and where -- what sort of returns we make on the activities that we undertake. And I just want to sort of develop that idea a little bit further. When you think about Total Platform, Total Platform actually cuts out the marketing and aggregation part of the business and takes those third-party brands and puts them directly on their website through our operations and fulfillment. Now the margin we'll make on that in the year ahead is around 5%. The return on capital in that business on Total Platform is more than 20%. In the document, I've written a great deal about Total Platform so I'm not going to spend a long time talking here about Total Platform. I think what is important is to reiterate the objectives of this business. And that is that it will deliver to our clients, lower costs, much better service, 0 CapEx and frictionless growth. So for many of our clients, in fact, for all of the clients, a doubling of their turnover or tripling of their turnover would be only a small single-digit increase in our total NEXT group turnover. So the absorption of very high rates of growth in our infrastructure is much easier than if each of these businesses were trying to manage on their own. The final two benefits of Total Platform are actually more important than all four of those headings. And that is that it gives our client brands the ability to focus on the things that they really enjoy. As I've said many times before, no one starts a fashion brand because they love warehousing and systems. It allows them to focus on producing the great products and build the brand that they love. It also takes a fixed cost, warehousing, distribution, call centers and turns it into a variable cost. We charge just 1 percentage fee, we charge a commission on sales. And what that means is that as our clients rapidly expand their business, they never experience those huge step changes and lumpy costs that you would expect to see in a very rapidly growing business. More importantly, potentially is that in the rare occasions that fashion businesses have a fashion accident and all of us do every so often, all of their costs of operations are variable and will come down in line with sales. So it provides a huge amount of stability to the risky business of being a fashion brand. The 5% also tells us something about our own profitability. And sort of to explain that, I just sort of want to put the 5% that we make on our clients' turnover in the context of the 14% we make in LABEL and the 21% we make on our own NEXT product sold online through in the U.K. And many of our investors actually have asked us, "Well, how come you're making such a small profit on Total Platform compared to LABEL?" And the answer to that is that Total Platform -- really there are two answers there actually. The first is, but remember, this is the profit we make on their turnover. Actually, our turnover is the amount they pay us and commission. So actually, the commission on real sales rather than gross transaction value is much higher. But the other thing is that Total Platform only services our clients' websites. The reason the customer is there is because they've gone to buy the client stock. On LABEL, as soon as a third-party brand goes on to LABEL, it has exposure to 8.2 million customers that we have invested an enormous amount in building over the last 20 years. So when you look at the profit that LABEL makes and reverse out the part of it that is just infrastructure and fulfillment, you end up with 9% profit of that 14%, which is really the profit in customer base and the profit in aggregation. The profit in aggregations basically the profit that we make from pushing all of the items in the same parcel. It's much -- we end up with a much higher average order value than any of our clients would get on their own website. And that means that there's a cost reduction and we can take some of that cost reduction as profit. So you then see that the LABEL business, as I said, a 9% profit in aggregation and marketing. If you then look at the NEXT profit on our own stock of 21% and say, "Well, what if you reverse out the infrastructure profit from that?" And instantly the reason that you reverse out the infrastructure profit and not the LABEL profit, is because, of course, people are coming to NEXT for the NEXT product. So you can't -- you couldn't say, well, in effect, NEXT is a client of LABEL. But you could say it was a client of Total Platform. If you did, the profit in product would be 16%. Take those three profits in context, and you got two economically very different ends of the business, you've got Total Platform into the business, which is low margin, high CapEx, and you've got the product side of the business, which is very high margin and low CapEx. When you think about it, if you don't have to invest in any of your infrastructure and you contract that out to somebody else and they make the 5%, the only investment of product business really has to make us in stock. On an average, retailers holding maybe 3, 4 months of stock, of which -- 1 month of which is financed by their suppliers. So in terms of the return on capital, you're looking at north of 100%. You could look at that and go, "Well, hold on a second, why are you interested in this high CapEx, low margin business?" And the answer comes down to risk. The reason that the product side of the business needs to be a high-margin business is because it's much, much higher risk. And when you kind of think about that in the context of the last 50 years of retail history, if you think about the number of brands that have gone bust, some of them several times, you realize that actually fashion retail is a very risky business. It needs to make those returns. If you think of the number of distribution companies that have gone bust, it's hard to think of any. And I think the point we want to make here is that both businesses are great businesses. They have very different risk profiles, so they need to make very different profits. Our job as a business is to make sure that the profit each side makes is commensurate with the risk it's taking. And in answer to the question, "Well, which side do you want to grow the fastest?" The answer is whichever side we can because as long as we get the economics of both sides of the business right, it doesn't matter which one grows the fastest. The overall mix will be what it is. If you get the economic foundations of every part of the business right and grow them all as fast as you can, then the total will take care of itself. And that is what we're aiming to do as we push both the growth of our product and our infrastructure and our aggregation business forward. It does beg the question, "Well, hold on a second, if it's -- if by looking at these businesses as separate businesses and managing them as separate businesses, why not split them up all together?" And putting aside the enormous cost of doing that, there are some huge advantages of the selling side of the business and the product side of the business being part of the same group. The first is the mutual self-interest. The fact that our marketing and operations business, in effect, owns the product business, gives you a huge incentive to really get that service right. And for the product side of the business, understanding the requirements of the marketing and operations side, making sure that the product side of the business behaves in a way that is commensurate to efficient operations, is enormously beneficial to the marketing operations side of the business. So there is a sort of a dividend that you get from each side of the business having a strong interest in the other's success. Financially, there's also another very compelling reason why the 2 businesses sit very nicely together. And that's because the very high cash generation that our product business generates, can find somewhere very productive in which to invest. And with the return on capital of greater than 20% on the marketing and operations side of the business, as still a great place to invest the money that the product business is generating. And at the same time, the marketing operations side of the business because it has diversified its risk across lots of different clients and lots of different brands, and we really saw the benefit of that last year, when we made up for a lot of the business we lost in NEXT through selling client brands. That side of the business provides a level of stability and security to the product side of the business that we'd never have as a stand-alone business. So the product side provides cash to the selling side and the selling side provides stability to the product side. And the joining of those 2 benefits, we think, is more valuable than separating them. So convinced are we of this that where we have got into partnerships with Total Platform clients, we have bought a stake in those clients because we see that actually with us having that mutual self-interest with us providing them with a [ shelf and ] stability that our group provides them and with them generating the cash that the group can invest. We see that partnership as being a very powerful one, not necessarily wholly earned, but enough of a stake to achieve all of these synergies. So that is the end of the presentation. In summary, I think where we are today is we've had a great year. In many ways, the strength of last year has made the comparatives of the year ahead tougher than they would otherwise be. But in the short term and the long term, the finances of the group are looking very robust. And if we are going to go into a downturn, then the group has the cash generation and the margin to withstand the vagaries of what may be a very difficult consumer market. And we're going into that market with very -- we think, very realistic estimate of what we can achieve in terms of the top line. Standing a little bit further back from that, the long-term economics of the group through the stress test look better than they did 3 years ago. And the legacy cost of our Retail business is beginning to diminish as its rents go down and as the online side of the business increase in size. And finally, the way that we are managing the business and the way that our selling and buying side are beginning to develop as independent business entities as more independent entities has generated a huge number of initiatives and ideas for new business and new activity that should stand the group in good stead as we move forward. So I understand that ultimately, the investor community is only really interested in what we've got to say about the next 6 months and the next year in terms of profit. And who knows what that will be because we're going into a very difficult and volatile environment. But when you stand back from that and look at the structure of the group, the way we organize ourselves and the number of opportunities open to us, if you set your sights as we do on the 5- to 10-year horizon, then as we stand today, NEXT is a much more exciting and potentially, a company with far more opportunities than it was 5 or 10 years ago.