NEXT plc (NXT) Earnings Call Transcript & Summary

Good morning. It's hard to believe, but it's been 3 years since the last time we were all together here in person. And it's good to have everybody here. Since our last in-person meeting, we've had 2 new Board members joined the next board. One is Soumen Das, Soumen is CFO of Segro; and second, Tom Hall, Tom is a partner at Apax. I came in as Chairman in 2017, and it's really amazing what happens over a period of 5 years. Back then, the LABEL business, international business were too small I would call gems, just starting to grow. And now 5 years on, they are really significant businesses. I think one of the unique things about NEXT is the company tries a lot of new things. If it works, the Board supports it with capital, and then it grows organically. And if it doesn't prove to be success in the marketplace, we look for something else. So it's really a good sign that you have a company that's constantly trying to look for new opportunities in new places to grow. So with that, I'll turn it over to Simon. Simon, go ahead.

Thank you very much. Good morning, everybody. It's lovely to see you all in person, looking thinner, a little bit older than before. And I have to say from a personal point of view, much as these presentations are quite nerve-racking in a way. They are so much better than doing a video presentation, 5 hours of recording for just one hour or one in a bit hours of presentation and all sanitized. You can't make a single gaff, a joke. It all gets cut out, even worse than that. Some of you will have noticed that occasionally, before it's taking too long on something, my voice was artificially speeded up. So those of you who remember Pinky and Perky, I sounded a little bit like that through some of the presentation. You'll be perhaps sad to know that there isn't such a button available today and we have a lot to get through, so I will press on. The first thing to say overall is that throughout the vast majority of this presentation, with the exception of the finance section, I will be focusing on the 3-year comparatives. One year comparators are so dominated by the closure of our shops and various subsidies and grants that we got through COVID and abnormal returns rates, but I would have spent the whole presentation reexplaining what happened during the pandemic. So we're going to focus on the 3-year numbers. And actually, having done that, I think there's a lot that it tells us about the business. It is actually informative in itself. The second thing, just to remind everybody is that this year, as with last year, the numbers are IFRS 16 compliant. I reported on that basis. They weren't 3 years ago. So we've restated the numbers from 3 years ago to be like-for-like in IFRS 16. The second thing to say is that despite the news today, actually, it was a good first half, a much better first half than we were expecting. Sales up 24%. On 3 years ago, 22% on full price sales, 46% of that growth has come from online. So you can see the lion's share of growth coming from online, and compound annual growth rates of just under 7% over the 3-year period. That compares to a compound annual growth rate of 3% that we gave in our stress test. So it has the last 3 years, taken as a whole have been significantly better than the stress test scenario that we presented to you 3 or 4 years ago. In terms of operating profit, operating profit up 14%. As a result of the wonderful IFRS 16, those profit numbers are actually overstated because they don't include a lot of our lease costs because they are classed as interest. If we take the operational lease interest and include that in the operating part of the business, the true operating profit is reduced and what you see growth there around of 18%. Margins, the group margins have moved from 16.9% to 16.1%. In terms of the main drivers of that margin decline and all of this will be covered in more detail as we go through. So 2 big negatives are overseas margin decline and what is euphemistically referred to here is the investment in technology, of course, actually spending in technology. The positives are an improvement in retail margin and the online business has got a significant boost from the fact that 3 years ago, we were still printing catalogs and doing all the photography for them, we're not now. Interest, significant decline on 3 years ago. This is all about the step change in debt levels the company did during the pandemic to about GBP 300 million of our debt in that time and a little bit of interest income, about GBP 2 million of interest income from loans to [ TP ] clients. Profit before tax up 22%. Profit after tax up 23%, and earnings per share is related to share buybacks is up 28%. Moving on to cash flow. CapEx up GBP 42 million on 3 years ago. Two things going on here, slightly less being spent on sports stores, a lot more being spent on warehousing and more on technology CapEx as well. In terms of CapEx, the biggest single item of expenditure over the last 2 years has been our new boxed warehouse in Elmsall 3. We have already started using the floor space in that warehouse. But we're using it for conventional picking. In essence, it's no more automated than what we have at the moment. We're using the floor space that's taking a lot of pressure of capacity. Towards the back end of this year, we will have a new sorter that will increase our packing capacity. We're giving total increase in capacity around 15%. As we move through next year, we will begin to commission the highly automated picking systems and highway storage in Elmsall 3 that will come on stream into the third, fourth quarter, that led another 35% of capacity. And then in the following year, we'll move to the mechanized packing system that's much more efficient. And it's also extremely useful for things like total platform because it allows you to have lots of different types of packaging going to the same courier. In terms of working capital, big outflow into working capital compared to 3 years ago, 2 big ticket items here: stock of GBP 90 million. We'll talk about that in a second; and staff incentives. This is the bonus we paid to our general staff last year that goes in last year's accounts, but is paid in cash terms in this year. Also big swing into the ESOT, GBP 40 million. This year, we expect that ESOT to cost us in cash terms, GBP 40 million more than last year. The reason for that is that we expect fewer redemptions with the share price where it is. So we're not issuing more options, but we are expecting fewer redemptions. Buyback is GBP 228 million. We did those all at the front end of the year, partly in order to get the maximum benefit of earnings per share in this year, partly because we thought the stock price was good at the time, which is proof that you are much better at your job than we would be. So you can take some comfort from that. In terms of year-end debt, broadly where we expected it to be. Operating cash flow, GBP 664 million is what we're expecting this year. That compares to GBP 740 million estimates at the beginning of the year. There's about GBP 10 million less cash flow from profits because we started the year at GBP 850 million. The next biggest ticket item is the outflow into ESOT as a result of nonredemptions this year. CapEx investments much as expected. In terms of the investments, the number itself looks low at GBP 3 million. This is because -- although we invested in more assets, Reiss, JoJo Maman Bébé. We also leased back a warehouse that gave us a big inflow. So those 2 things pretty much netted off. In terms of customer receivables, GBP 90 million increase. This is the rebuilding of our customer debtor book. Share buybacks at GBP 228 million, as discussed earlier. And GBP 240 million of dividends expected in the year. That's the August dividend we've paid and 66p interim dividend that we're declaring in respect with -- that we're declaring today. That leaves us with GBP 700 million of debt. That's about GBP 60 million, GBP 70 million more than we're anticipating at the beginning of the year. We're very -- I should suggest we are very comfortable with that level of debt. We won't work too hard to reduce that back to the GBP 630 million that we expected at the beginning of the year. To put it in context, we've got financing of GBP 1.25 billion. The earliest bond we have to refinance in case having looked at the bond markets, you're worried about that. The earliest bond mark -- we've got refinances in 2025 when hopefully, funding [ gains ] will be in one way or another over. And in terms of the actual debt of the business, what we are owed by our consumers is almost double the money that we owe in financial debt. So the business starts a very solid foundations in terms of its debt. Moving on to the balance sheet. Fixed assets, GBP 134 million increase on 3 years ago. GBP 109 million of that is the investments that we've made and another GBP 25 million of increase in CapEx where we spend -- although we've reduced expenditure on our stores, we've spent a lot more on our warehouse. So our CapEx is around GBP 25 million ahead of depreciation. Goodwill and intangibles. This is -- the increase here is largely about capitalized software. We capital -- we depreciate software on average over 3 years. So this will be quite a rapid impact through our P&L as time goes on. Stock is where we've got a really big increase, and this requires a little bit of explanation. Stock on paper in July was 38% up. It isn't anywhere in there today. The part of that increase was the increase in the amount of stock that we had on the water. That's all about the fact that we're having to place orders much earlier, 12 months -- between 12 months ago and 6 months ago in order to account for longer freight times. So as the lead times on freight went out, we placed orders earlier, that means we've got -- at July, we had an awful lot more on the water than we did at the same time 3 years ago. I should stress that is about buying stock and taking delivery of it early. It's not about being hugely overstocked. If we look at our forecast for the end of the year, we're anticipating that stock at the end of the year will be around 4% up on the previous year. So broadly in line with where we were Jan '22. And in Jan '22, if anything, we were a little bit understocked. So stocks -- and we're already beginning to see the value of the stock in the business decline as we begin to sell stock and deliveries slow up a little bit. In terms of debt, that's the GBP 331 million reduction that we did, partly as a result of investing the cash that we made during the pandemic in reducing debt, partly as a result of sale and leaseback of warehouses. In terms of our right-of-use assets and lease debt have both come down by roughly the same amount. So there you have it, it all does add up in the end. Moving on to retail. Total sales, up 1% on 3 years ago, full price sales down 1%. A large result of store closures in that period of time, like-for-likes, up 0.5%. In terms of the first half versus 3 years ago, you can see 2 very different performance in the first half -- sorry, first quarter and the second quarter of the first half. We think that the poor performance in the first quarter was partly as a result of low stock levels. We think the much better performance in the second quarter is partly as a result of very good weather in May, June, and July. Very good summer weather in May, June, July. And that had a significant effect. And the reason I say that is because it's important for you to remember next year when it comes to Q2 trading statement. One of the depressing things about being in retail a very long time is that whenever you have a good quarter, there's a big part of you that worries about next year's trading statement rather than taking pleasure in the good numbers, but I'll just be look out for that. In terms of sort of long-term retail trends, I think it's too early to call what is actually going on in retail. If you look at the 4 previous years to the pandemic, we declined -- sales declined at around 6.2%. That compares to our stress test number around minus 5% -- minus 10% like-for-like. If we look at where we've been over the last 3 years, including the estimate for the second half of this year, then the CAGR in the last 3 years will be about minus 1.7%. Now you could look at that and think that actually, retail is beginning to reach an equilibrium with online. And ultimately, that's a question of judgment. Our sense is that it probably isn't. And that the -- although the future decline in retail is unlikely, we think to be as aggressive as the minus 6.2% like-for-like. The 1.7% is flattered by the fact that our sales today and indeed everyone who's trading on the high street, are benefiting from the fact that a lot of people who were trading in 2019 are not trading today. And a lot of those were very direct competitors of NEXT. So we think that our store sales to a degree are being supported by that. Operating profit after lease interest up 34%, giving margins of 9.3% as against 7.0% 3 years ago, 2.3% improvement in margin. All of that and more is a result of declining occupancy costs. A number of things going on there. The most important thing is the underlying reduction in the actual cash cost of rent rates and service charge as a result of the various renegotiations that we've had with landlords over that 3-year period that accounts for around half of it. The other changes are accounting changes. So an increase in fully depreciated assets. That is a real cash saving because it reflects the fact that we are investing less CapEx in our stores than we were 3 years ago. And then there's impact of IFRS 16 timing, which means you pay less interest at the end of the lease than you do at the beginning, even though the actual rent you pay may be higher. And the utilization of the onerous lease provisions, the various onerous lease provisions that we've made over the last few years. In terms of lease renewals, we're still seeing an environment that is very benign in terms of lease renewals. On average, the leases that we either have already agreed or that we expect to agree in the current year, where we're a long way down the path of the negotiation. The 74 stores, we expect on average a reduction of 33% in occupancy costs, annualized saving of GBP 12.5 million, and an average lease term of 4.7 years. The number of odds there or at odds with previous years is the 4.7 years. And we had been -- during the pandemic, we were renewing on shorter leases. There is a reason for that. If you take the stores that have got a straight fixed rent, we've only renewed those on 4 years. If you take the stores where we've done a total occupancy cost, this is at the other end of the extreme, where we agree with the landlord to pay them a fixed percentage of sales to cover rent, rate and service charge. On average, we're paying much longer. We are agreeing to much longer lease terms. So there is a trade-off here for landlords between the amount of risk they're prepared to accept and the length of lease that they get. If anything, that number slightly understates the reality because there are a few stores on very short leases where we're in effect holding over on our turnover lease and some very big stores where we've agreed to very long leases, 8 to 10 years on a turnover -- a total turnover basis. Achieved gross margin down 1.4%. Two things going on there. Freight cost, this is on costed freight that we've incurred in the current year where we're expecting freight prices to be lower than they turned out and increased surplus costs in retail. The stock in retail for sale at the end of the summer was 22% up on 3 years ago. And the cash recovery was down. So that's what's -- the combination of those 2 things has contributed to the reduction in margin there. Logistics, the 1% here, the vast majority of that increase in logistics costs in retail is about inflation in wage rates and fuel costs, both in the warehouse itself but also in our distribution network. Full year operating margin in retail, we expect to be 10.5%. You would expect margins in the second half of the retail business to be higher than the first because of leverage over fixed costs. So that's the retail business. Moving on to the online business. Online sales up 42%, full price up 46%. Compound annual growth rates around 13.5%. Getting significantly better than the long-term rate we put into our stress test, but sort of in line with the first 3 or 4 years of the stress test. Again, a similar effect to what we saw in retail is that if you just take this year and take our estimates for the full year, we anticipate that sales in online will be down 5%. Again, you could look at that and think is the online thing coming to the end of its -- is the balance between retail and online beginning to stabilize. We think to some extent, it is, but not to the extent it looks. So we take the compound annual growth rate, pre-pandemic, it was 13.1% from 2017. If you add on where we are -- where we expect to be at the end of this year, compound annual growth rate has moderated, but it's still double digit. And our view for what it's worth is that over the next 3 years, we will continue to see the attrition of retail sales into online. In terms of the divisional performance of our online business. NEXT brand in the U.K., up 24%. The lion's share of the growth you've got has come from LABEL, up 105%. If we look at the LABEL growth that we've got, this has taken 105% and breaking it into the 2 contributing factors: 50% of that growth has come from expanding the offer of brands we were already trading within 2019. 55% of it has come from bringing on new brands, in particular, actually brands like GAP and Reiss, where we've also got a total platform arrangement with them. Overseas growth up 41%. This growth is slightly misleading because if you reverse out Russia and Ukraine, the number is around 55%. So like-for-like growth in our overseas business, up 55%. In terms of where that growth has come from, you can see around half of the growth has come from the growth in sales on aggregators. The other half has come from like-for-like growth on our own websites. And it's just worth talking briefly about aggregators because this is one of the areas where we've slipped on margin. If we look back to where we were in 2019 in terms of participation, aggregators were 9% of our turnover. They've grown 274% and now 22% of our turnover. And that has had an impact on margin in 2 ways. In terms of cash versus credit customers, these are the numbers of customers that are trading with us using an account. What you see is lion's share of the growth in customer numbers has come from cash customers, but we have also continued to grow our credit customer base, which I think is the surprise. And I think what I should say here is that this is the continuation of a long-term trend. If you look at the participation of our total customer base from cash customers, you can see that from long before the pandemic, we were seeing a consistent increase in the number of customers choosing to trade with us on a credit card or through PayPal or through some other payment method. However, the credit business is still very important to us because it accounts for -- estimate that it accounts -- that it accounts for 2/3 of our trade this year. The good thing is that the best cash customers are the ones most likely to convert to credit customers. And if you look at the growth in credit customers that we have achieved, the vast majority of that has come from the conversion of people who started as cash customers. There are very few people who come straight onto the website into their first order trade on credit. In terms of sales per customer, and this looks like it's rather unremarkable at 6%. But if you look at the growth in sales per customer for cash and sales per customer for credit customers. Both of them have gone up by 19%. But because cash customers on average spend less, the total growth in sales per customer is only 6%. The underlying growth in both credit and cash customers, we believe is the result of the additional choice that people have on our website through LABEL, and you can see that both in the LABEL numbers and in the sales per customer number. Overseas, a decline of 8% in sales per customer. That number is actually slightly worse than it looks because if you break that down and say, well, how much of that is about country mix. Actually, if anything, the countries that have a higher spend per customer have grown faster than the ones having a lower growth spend per customer. So all things being equal, when our average sales per customer should have gone up. The reason they haven't is because we have dramatically accelerated the rate at which we take on new customers through advertising. That does 2 things. First of all, it increases the participation of new customers as a percentage of our overall sales base. And secondly, the new customers themselves because they've been persuaded to come to the website by advertising rather than come through just seeking out the brand, on average, tend to spend less. What I should stress here is that we're not planning on cutting back our marketing overseas -- and it's still extremely profitable to do the marketing that we do. So it's not that the marketing is unsuccessful. It's just that the nature of those customers that we're getting is that they initially at a rate only spend less but are still profitable. The other interesting thing that's happened over the last 3 years is the change in our returns rates. And that, again, needs a little bit of explanation because there's a lot of chatter about returns rates. Returns rates 3 years ago on average for the company were 41.1%. If we apply the weighted returns rate of cash versus credit customers because cash customers return less than credit customers because they have to pay for it at the point they order. You would have expected our returns rates to have gone down by 2.2%. 2 things -- 3 things to push that the other way. The first is the mix of aggregators, aggregators have, on the whole, very high returns rates, we incur the cost of sending out and bringing back that stock. And the countries that have done best overseas are the countries that have the higher levels of returns. Secondly, product mix. This -- the last half on the half 3 years ago, relatively, we're selling more high returning product, things like in particular, dresses. And then the final thing is there is an underlying change in sort of consumer behavior of 0.9%. What we think that is down to is the increase in the average spend per customer. What you tend to find is that as customers spend more and their habit of using online increases, they tend to over order more and return more. Still very profitable because obviously not having to market to those customers, you recruited them already. But what you gain by way of saving on marketing by having the customer, you lose a little bit of through the fact that they tend to return more. So in terms of margins online versus 3 years ago, a decline of 2.9%. Just again, walking that through. Unplanned freight costs as with retail, minus 0.6% impact and the fact that our LABEL stock, because we don't buy it, we're buying it wholesale or it's on commission, both of which, the percentage margin on wholesale and the percentage commission is significantly below our own [ boat ] in gross margin. That mix has reduced the online profitability. Markdown, unlike retail, very little attrition from markdown in terms of our online business. And that is mainly because although we did see a deterioration in clearance rates online, the sales stock that we had online grew significantly less than the growth in sales. Sales stock was up about 22% on 3 years ago. I think its full price sales are up 46%. Warehouse and distribution, adverse movement to 1.4%. Three things happening here, 2 costs and one benefit. The cost is U.K. cost inflation, this is fuel and labor, particular things like HGV drivers. Overseas has a much higher percentage of its costs are distribution and warehousing in the U.K. mainly because of airfreight. And increase in average selling price has moved it the other way. Because average selling prices have moved up, the number of units we're pushing through our warehouse relative to sales has not risen as fast, and that gives us economies of scale. In terms of other costs, what you can see here is that the rising cost of technology has pretty much, well, has more than been paid for by the savings that we've had on print. Margins for the full year are expected to be 15.3%, marginally below the first half year. And this is the result of depreciation and rent beginning to kick in on the Elmsall 3 warehouse where we're beginning to use the floor space. In terms of the breakdown of margin between the businesses, this is the profit. These are the margins that we made 3 years ago. They are different from the ones that we showed you 3 years ago for 2 reasons, and I want to explain both reasons. The first is that we have looked much more carefully at the profits in our LABEL business and the costs to our LABEL business. Because relative -- one of the main reasons here is because relatively, we hold a lot more of our clients' stock than we do our own, it turns slower, we had underallocated warehousing costs to LABEL and various other central costs where they were getting a little bit of a free ride when they were small and now they've got to pay their fair share. So that has served to increase the reported profit on our next brand and reduce the labor margins to 13.3%. Moving the other way, the way we have accounted traditionally for our Lipsy profit. In order to motivate and manage that business, which is run as a separate business, we have taken half the profit they make online and put it into the Lipsy division. This works very well in terms of managing that business and motivating them and keep making sure they're looking at their profits. But because all of their sales go into our online business and always have, but only half of their profits, as they get bigger, that begins to artificially lower the margin in our online business. So what we've done now is put all of the Lipsy profit where it belongs in overseas and LABEL both for this year and 3 years ago and you get an opposite movement of 1% improvement in labor margin and 0.2% movement in overseas margins. So that's all of the adjustments. But we think those numbers are now -- are much better numbers. I think the other thing that's important to say is on the 13.3% margin on label, although it's lower than we thought it was and we think we can improve it. We're not anxious to get back to 15%. We think looking at the general aggregator market, both in the U.K. and worldwide, our margins at 13%, double-digit margins are unusual for aggregators. So we're not -- we're certainly not going to punish our clients or our consumers in order to rebuild that margin back to what we thought it was 3 years ago. In terms of the 3-year change, you can see LABEL and NEXT U.K., on a like-for-like basis, pretty much in line with 3 years ago. And then overseas, now one of the things that people used to say to us in the old days, 3 years ago, a lot of our investors, indeed, even some of the analyst community were saying, why are you making so much profit overseas. Surely, you're over profiting and that's a mistake. You'll be pleased to hear that we have corrected that mistake. Analyst joke. The -- we always plan for our overseas margin to be 10% in the first half. We underachieved on that by 7.4%. And what I want to do is just talk through where we -- where margin has eroded by design and where it's eroded by mistake and what we think we can do about it this year and going forward. So in terms of where we've eroded it by design, we used to make very high margins, significantly north of 25% in a lot of our Middle Eastern territories when there was no duty. When the duty -- when duty came in, in those countries and we decided that we would take the hit of that rather than pass it on to our consumers because we're already making very healthy margins and still do in most of our Middle Eastern territory. So that is a hit that we consciously took. Technology, as with the rest of the business, our overseas business needs to take its fair share of the increase in costs of our technology base. The areas that were less planned were on delivery and logistics. Now some of this is the increase in -- inflation increases that we've seen in the U.K. just being reflected in our overseas business. But the lion's share of it is down to what started as surcharges. And during the pandemic, a lot of the air freight costs that we incurred, delivering to our customers went up dramatically because airfreight was so expensive. At that time, we thought that we would take the hit of that cost, we keep our prices where they were because it was only temporary. As time has gone on, we've realized that a lot of those surcharges have now just translated into higher fuel costs and air freight costs. So we need to look to our pricing in some territories to recover some of those now permanent delivery costs. Aggregator, participation and margin. Aggregator margins quite rightly are lower than our own. So aggregator target margins would be 9%, 10%. Our own sites overseas will be 13%, 14%. The aggregator -- the increase in participation naturally brought down our overseas margin. That was planned and acceptable. However, the aggregators themselves made much less profit than expected. And that is mainly about returns rates. But unlike the U.K., where we planned for a dramatic increase in returns rates, a return to normal this year, because we had so little experience of our aggregators going into the pandemic, pre-pandemic returns rates. We didn't anticipate the increase in returns rates that our aggregators would experience. That was a mistake. It was an oversight, and that has cost us in the first half. Because the returns rates are high, there are some products with low average selling price that we just shouldn't have on those aggregators at all. So basically, low average selling price, high returns rates items are not profitable to sell in aggregation sites, and they should come off. We sold on our own sites where we get much better consolidation costs and low returns rates. So again, that is an erosion where we can correct some of that. And then finally, we had a higher surplus overseas as we did with the rest of the business. But overseas, again, we weren't careful enough about which outlets we put it through. And again, we put too much of that markdown stock into high-returning countries, where we cleared a lot of it, but because you've got high returns, the cost of clearing actually wasn't worth it, and we should have put it into the lower returning countries. So the 3 areas in green are areas where we think we can and should recover some profitability. In terms of what we're expecting, we're expecting H2 to recover marginally to 9%. Long term, we're expecting next year, year after for price increases largely to drive profitability back to 12% along with the removal of some items where we shouldn't be selling the low-ticket items in high returns countries. That on the face of it looks very bad because it means that we're going to have to raise our prices in some territories. I should stress, and there are very, very few silver linings, but one very small silver lining to the weakness of the pound is that actually we -- in local currency terms, we will not have to raise our prices at all in order to achieve higher margins next year and the year after because the local currencies are so much more valuable than they were to us. So in terms of consumer impact, we're not expecting any consumer impact from the margin recovery over the next year or so, it will be paid for by the currency decline. Moving on to finance. Finance had a good season. Total credit sales were up 3%. But as a result of the recovery post-pandemic in the debtor book, we saw a 13% increase in average balances. By the end of the year, we expect that increase to be around 8%. So we're expecting the growth in the interest income to slow as the debtor book begins to stabilize as we've go on through the year. Interest income up broadly in line with receivables. Bad debt charge significantly lower than 3 years ago, partly as a result of COVID provision release. We took it, you'll remember that we took a GBP 20 million COVID provision release. Most of that, we have rebatched. We haven't just hold on to it because COVID is now truly we think. We haven't just hung on to it. We have reallocated a lot of it to account for potential cost of living prices increases going forward, but GBP 3 million of it we've released. We had a debt sale of defaulted debt that gave us GBP 3 million in income. So that's a one-off. And we have reduced our provision rate back to the levels that it was at sort of 2014, '15 and '16. And just to remind you all, in 2019, we saw a significant increase in default rates. That was largely, we think, as a result of internal measures that we took, but we increased our provision rates to account for that. What we've seen over the last -- over the pandemic and continuing into this year, is default rates returning to levels that they were at pre-pandemic. So we brought our provisioning rate down to those levels. In terms of our overall provisions, we still, I think, have a prudent but right provision for bad debt. So our total provision for bad debt is about 8.8% as compared to the default rate around 3.4%. So we think a very sort of conservative debtor book, but not too conservative. That was especially for our auditors. The -- just in terms of the current performance of the debtor book, this is one of the remarkable things about the time we're going through at the moment is that if you look at the percentage of our accounts that customers pay off month by month, running into the pandemic, that was running around 12.5%. During the pandemic, of course, we saw significant paydown of debt as consumers cut their expenditure elsewhere. But what's interesting is since the end of the pandemic and right up into the weeks we're experiencing at the moment, we're still seeing the payment rates remain higher than they were running into the pandemic. So everything that we can see on our consumer receivables book as yet would not give us any indication that there is -- that there are strong levels of distress in our customer base. That doesn't mean that it won't happen going forward, but as yet, we're not seeing any evidence of that. Net profit up 23%. We did the same thing on the interest profit on Lipsy sales as we did in LABEL. We do the Lipsy business, half of the interest profit we allocated to Lipsy. If we add that back into the finance business as we will going forward, the increase was 27% on 3 years ago. Okay. So that is all we've got to say about the performance of last year. Looking forward at the outlook, you can all read the wonderful quotes that I've put for your benefit that there are 2 types of forecasters: Those who don't know and those who don't know they don't know. Obviously, we realize we apologize for stealing the equity analysts' motto. I actually got a laugh. That is the first time in any analyst meeting, I got a laugh. But thank you very much. We are trying to make a serious point here is the forecast -- over the last 3 or 4 weeks, as we've been beginning to write this document, we have changed our view of the outlook several times. When you ask a retailer how they feel about the next 10 years, most of the main reference point will be yesterday's sales. And for those of us with long memories, it will be the day before. And if we look at how the sales have panned out over the last 8 weeks, it has been very hard to read. Quarter 2, we already said, was very good at 5%. We always expected quarter 3 and quarter 4 to drop back. August was very poor, minus 3.1%. That was over 5 weeks. Now there are all sorts of excuses that we love to make when bad things happen. It was very -- there was a heat wave, a lot more people were on holiday. I should stress, by the way, I'm now talking -- confusingly, I'm talking about last year, which rather than 3 years ago, but we think that's a better reference point for our sales going forward. So against last year at 5% in quarter 2 when all the shops were open, a 3.1% decline in August, we think that there was more going on there than just weather and holidays. Very difficult to prove that, but we think the anticipation of very high energy bills and cost of living -- costs beginning to go up, including the cost of travel and holidays themselves were beginning to affect consumer behavior. We did see a very strong -- we have seen a very strong bounce back. It's only 3 weeks and the weather has turned earlier than it turned last year, but we have seen a strong bounce back in September. If we look at the average sales, over the last 8 or so weeks, then sales were down 0.3%. So you can see -- however you look at that, there is a marked slowdown from Q2. Previously, we had thought the rest of the year will be up 1%. So we had -- after Q2, we [ shaved ] 4% off our growth, Q2 growth rates. We think that's probably not enough. A lot of the bills that people are worried about won't actually hit down until October energy bills in particular. And we know that a lot of our consumers, a lot of people are only affected when they actually get the bill and it actually hits them. So we think the right thing to do is to moderate our sales forecast for the rest of the year, down 2%, which is what -- how we've adjusted our forecast. We may be wrong about that. We may have been too pessimistic, we may not have been pessimistic enough. There is, however, One, shall I say, joker in the pack and that is that we don't yet know what the effects of government stimulus packages will have on consumer spending. So if there's anything that might [indiscernible] for this forecast, it's that the effect of tax reductions, energy price caps, actually have a more positive effect than we're expecting. But it is, at the moment, it's anyone's guess. So if we take a minus 2%, and I should stress here because we've all made this mistake. It's minus 2% for the rest of the season, which when you factor in the season at the August and September sales we had already is minus 1.5% in the second half. But if we take the minus 2%, we're expecting going forward from this point, that breaks down plus 3% in retail, minus 5% online. And what you can see there is that we -- in terms of how we've broken that down, we are expecting a bigger falloff in online sales versus last year than we are in our retail sales. That's because we think that last year, particularly in the run-up to Christmas, a lot of people because -- you believe it, right? It was only less than a year ago, we all worked about Omicron. There were people who didn't go to -- there were still people not going to shops because they're worried about COVID. So we think it's right to take the money out of the online business rather than the retail business. Just to give a complete picture in terms of what that means for the full year, that gives you a full year picture by division, 4.8% in total. And just so that it's there for your records, what we've also given you is added the finance numbers to that. So the slide has now got performance in the first half, performance to date in this half and rest of year with the total. In terms of the effect that, that has on our profits, we had guided to GBP 860 million, when we euphorically raised our forecast just 8 weeks ago by GBP 10 million. The sales reduction -- the reduction in full price sales we've now put in versus our forecast, GBP 24 million loss of profit, GBP 3 million we've anticipated that our clearance rates will be worse as more stock going in with assumed lower clearance rates. And we've got various costs and provisions that we now think will be slightly higher in the second half than we anticipated when we issued the GBP 860 million guidance. So that's our new guidance and earnings per share up 2.7%. And if you're wondering why the increase isn't as great as you might expect. There's something funny going on with the change in corporation tax rates that Amanda can explain in great detail, which means although corporation taxes are now expected not to go up, that means some credits that we had that we were releasing, we won't. But Amanda can explain that in great detail because it's exciting and interesting. Moving on to the year after next. If you say to me, Simon, what are you worried about? It isn't the run up to Christmas and the rest of this year. That actually is the least of our worries, our big worries next year and the cost of goods. If we look, and just to sort of give you a sense of where we stand at the moment. If we look at our costing rates for this summer, the half we just reported, we costed at $1.37. So each dollar was costing us 73p. If we look at where we are for next year, there is an 8% erosion in the value of the dollar for next year. Those are -- that $1.27 we have locked into. So we won't feel the worst of it in spring/summer. As we move into autumn/winter, that's when the problems really begin. The equivalent number this year is 74p. As we stand today, well, it moves every day. So this slide is already out of date. Who knows what it is this morning. The -- we've covered 30% of this partly through natural hedging our own income, partly through cover that we've taken. But the rate -- we've covered at is obviously significantly lower than this year. And we've still got 70% to cover. If we were to cover out at $1.07, then the increase in the value of the dollar will be 26%. Now what I wouldn't want you to do is to take that number and assume that, that cost of goods increase, which is a factory gate increase all goes straight through into price. Some of it will have to, but there is an awful lot we can do or that will naturally mitigate those cost increases. First and probably most important is that a lot of the pound's weakness is dollar strength. The dollar had already dropped to $1.15 before the various announcements made over the last 2 weeks. And local currencies have appreciated, if you take the Bangladeshi taka or the renminbi or the Sri Lankan rupee, all of those have appreciated much less against the pound than the dollar. So there will be some of the local costs that don't rise by as much. Factory capacities are in much better shape than they were this time last year. So there is capacity both to negotiate with existing suppliers and to move to new suppliers. Freight costs have already come down, and we think will continue to come down. Commodity prices have come down. We think they may continue to come down. And obviously, we have our overseas revenue where in effect, we can set the exchange rate that, that revenue has come out. And we may choose to some of our increase in overseas profits, although we'll still want the margins to recover, we may choose to use some of that profit to reduce our costing rate for the rest of the business. The final thing is to say that the U.K., the cost of stock is around only 60% of our total costs. So anything we can do to contain our U.K. cost base and profitability will serve to reduce the amount we need to put products up by. We won't just take the cost of goods and pass them straight on to customer. We'll look at our cost base in the round. We will, and as always, aim to maintain our margins, but we've yet to take view on that. And it's before anyone asks the question, it is much too early to say what we will do next autumn/winter because we haven't yet bought a single garment. It's probably an saturation. We haven't yet bought any material amounts of stock for autumn/winter next year. So I think it's way too early to begin to make forecasts. But there's an awful lot we can do to mitigate the costs. Of course, the other thing that this doesn't include is our ability to resource. And for 3 years, really, we haven't done very much, if any, overseas travel and our supply base has remained pretty static. There are still new parts of the world coming on stream. Now the reliability, quality, ethics of those places all needs to be tested, but we will redouble our efforts as a business to push into new territories and to make up for some of this increasing costs through resourcing, which is -- again, we've paid for many years in terms of new suppliers, but it's not something we've done really over the last 3 years during COVID. Looking ahead, I think the first thing, and obviously, this is self-evident, but in terms -- it's very important to remind ourselves that as we go into next year, that the company is a financially strong company. So whatever we need to do, we have got the capacity to do. I say it's not our plan to take a hit on margin, but if we have to -- this year, we look like we'll be operating on 16% margins. We're highly cash generative. Our debt is only just over half of what we're owed. So we are in a position of strength and it's important for you and our shareholders to know that although times will be getting difficult, we won't cut expenditure and investment in the areas of the business where we think we will benefit the most. And those really come down to 2 areas. Our products, continuing to push investment in the design and breadth of our offer both in our own products through licenses, collaborations and through other brands. And we will continue to invest in our technology. We're not going to suddenly say, well, it's times are tough so let's cut back on our systems expenditure because we think that is absolutely central to the future of both our core business to our aggregation business and, of course, the total platform, which we still think will be a useful source of revenue once the [ Elms 3 ] warehouses is open. So I want to kind of reassure you that we're not in panic mode over costs because next year cost of goods are going to go up. There is, however, more we can do to manage costs. The biggest single leaf we've got in our operations is really to get better operating efficiencies in our warehousing, distribution and store networks as average selling prices go up, unit volumes come down. We will begin to reverse some of the inefficiency we've had -- inefficiencies that we have had to endure during the pandemic when we have been working right up against the limits to our capacity. As a warehouse begins to get to capacity, you begin to get lots of inefficiencies that begin to pull back -- sorry, they begin to increase your costs. Not least, if you're taking a huge numbers of new colleagues, those new colleagues take at least 3 months to get up to the efficiency of their new colleagues. So a reduction in the units that we have to handle and the rate at which we have to take on new people ought to move efficiencies forward. And the other thing is that over the last 3 years, and I think we explained this during the pandemic, 1 of the levers that we've been able to pull in order to take the pressure off capacities is to compromise our service level, whether that means pulling forward the cutoff on any given evening to early in the evening to move some of the volume picking into the following day or the efforts that we go to, to get stock from our stores and through LABEL plus to our customers. So for example, going into the pandemic, any stock that came out of stores or from our partners' warehouses delivered to customers went -- got there in 2 days, that we had a 48-hour promise. Today, that's 3 days. So we've got an awful lot of work to do to get our efficiencies and service levels back to where they were pre-pandemic. We've already talked about this, but it is just to sort of reemphasize the rebuilding of margin in our overseas business and the fine-tuning of the margin in LABEL will become all the more important as we move through the rest of the year and into next year. And managing choice. Now this is a tricky one because this could be an enormous pendulum swing, and we could score and own gold. The increased choice on our warehouse has been a significant driver of growth for the last 5, 6 years. However, there are some areas where we've gone over the top. I'm just going to use 1 example, which actually the example I'm going to give you is not as bad as it is in real life, but nonetheless. This is a men's blue chino. If you want this blue chino, you can get it in any number of 6 different blues. Some of those blues actually if you change the contrast on your monitor, you actually change it by more than the actual difference in the chino, and we've got it in 4 different fits. Most of those come in 22 different sizes, longs, shorts and that has 2 problems. The first is that it takes up an awful lot of warehouse capacity forward-making location. And what -- if you've got lots of items in your forward picking locations, that means people have to walk further to pick it, and that reduces your efficiencies. It also means you fill up forward locations, which makes it much harder to manage returns and get them back on sale. The other problem is that if you spread the jam too thinly, you begin to run out of stock of lines. So I've got 6 different blues and I buy a little bit of each, the chances of the customer landing on the 1 that's fully stocked becomes lower and lower and lower. So there is a job of work to do to take the areas where we are over-optioned and cut those back. That needs to be done with great care. And I'm saying this is what we're going to be saying to our colleagues in our presentations this afternoon and tomorrow. But that doesn't mean that we stop doing choice. We don't want to do this, but we do still think there is a big opportunity to push the boundaries of our design. And so if you take this blouse, this blouse is same fabric same style. But actually, on this one, each of those items does a different job. And if you were to add a plain white or a cream or both, but if you add to 1 of those, it would add to the choice, if you were to do a paisley, it would add, genuinely add to choice. So we've got to do something very difficult, which is cut back on unnecessary duplication, but continue to add genuine choice and diversity of design. If we can achieve that, not only will it, we think, reduce costs and increase our efficiencies and stock availability, but it will also make it much easier to navigate our website. And that is the second big objective we're setting ourselves going forward. Over the last 5 years, as we've increased the amount of choice on our website, it's become harder and harder to find the item you're actually looking for like it's 1 because there's more on the website. Now on balance, we know that adding that choice because we've trialed it, we're now adding the choice on balance is definitely the right thing to do. But we think there's an awful lot we can do to improve the effectiveness with which we help customers search and select items. So we're looking at attribution, our filtering, both on the mobile site and the desktop. We're looking at -- we have just started a trial actually where we're personalizing our sort order. And that doesn't mean you as an individual, will get your own special sorts because that would be incredibly slow. But it does mean, for example, that we may have some success if we give people who tend to buy items at the top end of our price range, a different sort order from those who tend to buy at the value end of our price range. So we think there's a lot of opportunity there. And on the product page itself, we can do a much better job of offering complementary and alternative items. So here, you can say you want to buy the lovely wardrobe, but if you want the bed or the chest or dresser at the moment, you've got to search the whole website to find it, put it on tabs and it makes it much easier. And this is something we're beginning to roll out at the moment and where we're having good success in what we've done so far. The final task that we'll be talking to our teams about and have already started talking about is what I've already mentioned in terms of managing the cost of goods. We need to get back on those airplanes, go out into the territories, and we need to push very hard on our supply base. Again, there's risk here, this is not risk-free. There is still opportunity within our supply list, we can push further into existing countries where we trade and into new countries, but mainly the further into cheaper areas or countries where we're already trading, and that has to be done ethically. We've made mistakes in the past where we've put big orders with people who had very good prices where they just either didn't deliver it or where the quality wasn't up to scratch. And pushing into a new source of supply, we must not compromise our design. So this is not straightforward, but it is 1 of the big tasks that will be undertaking over the next 6 months. So that's it. And I have to say, I've done it in under an hour, which is much better than any pre-pandemic record. So I have been practicing very hard. I think to sum up, I realize on our first meeting together, I'm not delivering you a bundle of joyous news and that we are looking at not just another 6 months of difficulty, but really another 18 months of difficulty in the sort of cost of living crisis, it looks as though we're going to have to enjoy that, as a business, we're going to have to do that twice. Once as a constraint on supply and secondly, as a currency crisis. Whilst that is extremely challenging. We will take the approach to this crisis that we've taken to all the other crises that we have talked about together over the last 20 years, would that be the credit crunch or the pandemic or various times we've messed up our own ranges. And we will -- there are sort of a few things that features of what we will do. The first is we will be completely open and honest and transparent with ourselves and with you about the nature and scale of the challenges. And secondly, we will, as we have always tried to do, boil down our response to the simple clear things we can do to make things better. Ultimately, what -- we are a business that is constantly looking at a 5-year horizon. And however difficult things may be for us over the next 18 months and no one -- we don't yet know what prices will look like in autumn. However difficult they are, the overriding priority of the business is that in 3 years' time, we are a better business with better products, better services, better technology than we are today. And it is keeping our eyes very firmly on that horizon that will ultimately make the difference to whether or not we are successful in the long run. And that has always been our philosophy, and it will be our philosophy going into the next 18 months. So that's where we stand. I don't -- Alistair was desperate for me to say, we've done it all before, you've seen these crises before. Actually, every crisis is different, and we don't know that we will be successful but at least you will know exactly the attitude with which we tackle it and the values that will continue to underpin our business whatever. And those will be to make sure that we're delivering great value to our customers, as good a value as we can to our customers, our clients, our partners to make sure that we continue to play to our strengths. You're not going to see us suddenly wearing off into doing insurance or some weird and wacky business in order to plug any gap that might be left by cost of goods price going up. We will continue to be very disciplined about the margins we make in the business, and we will continue to get a good return on capital. If we stick to those 4 things, we think we can emerge in better shape. So there we are. That is the -- a preview of the speech, I'll be giving all of my colleagues later on. And with that, we will move on to questions.

It's Simon Irwin from Credit Suisse. 3 for you.

We're going to limit it to 2 questions. We have all sorts of inflation going on here. So Simon, we're not going to have any question inflation as well.

We'll stick with 2 then. How should we think about OpEx next year? Is there a kind of nice number you can give us on elasticity? So volumes, say, are down 10%. How should we think about unit OpEx down 5%? Or just give us some kind of color around that? And secondly, on LABEL, you're obviously buying a lot of product in sterling. The brands presumably are going to be taking a bit of a hit on not passing through costs. Are there going to be constraints on you being able to pass through effectively sterling costs on label product into euros and dollars?

Yes. Look, I mean, the second question is a very important question. And Yes. I think when people always say it's like, are you going to be able to pass it on. At the end of the day, there is no going to be no law as yet. You never know what this government is going to do, but there is no law dictating what we can and can't put our price base. So of course, we can pass on. The real question for us will be -- and when we'll take this on a brand-by-brand and product-by-product basis is what is the margin sales equation mix from not taking a hit. And whenever we looked at this in the past, actually, the sales you gain by not passing on the increase in costs, it's very hard to ever get to a sensible number for sales to make up for that. So I can't say what we will decide to do because as yet, we haven't done our budgets for next year. We don't know what our prices are going to look like in autumn/winter. But what I can tell you is that the method we will use is to say very simply, if we don't pass on this price increase, what do our sales need to go up by or not go down by in order to pay for that. The answer we've always come back to in the end in the past is actually you've got to pass it on. I think the 1 exception to that would be, and I am hypothesizing now, which is very dangerous, but I'll do it anyway, [indiscernible]. If we got to the stage where the dollar -- the rate at which we bought autumn/winter next year was much worse than the rate we got for the following spring/summer. In order to keep our prices the same from summer to winter to autumn the next year, we may choose then to take a hit on margin because you're not just then talking about the sales you achieve in that. Yes, you're also talking about hanging on to customers that you'll have next year and putting your prices up in order to bring them down. It's never a sensible thing to do. But again, I'm sort of straying into the hypothetical, but hopefully it gives you a flavor of how we will handle those questions as and when they arise. In terms of OpEx, what I would hope is that the cost -- the -- our manual labor costs would come down pretty much in line with any unit reduction we get in sales. And you can already see in our accounts, we've got some benefit from that this year. In terms of the actual unit cost for handling, one of our big objectives is to reduce that as you get the luxury of more capacity. Whether that will be enough to offset the increase in fixed costs from that new capacity and any top line erosion is very difficult to know, and particularly as we haven't done our budgets yet. So really, I think the time for me to answer that question in detail is next March when we will have proper budgets for next year.

It's Adam Cochrane from Deutsche Bank. I'm very pleased that you didn't have any storm clouds or data escalators or nothing.

Yes. No. We thought about it, honestly, and we thought they've done that.

But when you sort of think about the utility costs, we can obviously have a view on the consumer, how is it as an impact for your own business in addition to wage inflation? I don't know if you have a view on that for next year at this stage. But is there sort of OpEx pressures coming through as well? So any work you have to do to offset any cost of goods sold? There are some competing pressures on OpEx as well. And then secondly, when you think about you're passing through your prices or not passing them through, historically, at least, I think you've always tried to talk about maintaining percentage margin rather than the cash margin. Does it get to a stage where you're uncertain because the number is so big, it's going into a different environment rather than the policy of how you would think about it has changed.

Yes, it's a great question. And we have discussed it. We haven't come to conclusion. And my gut feeling today is that we will focus on the cash, we will focus on the cash margin next year in the middle of the crisis. I think it would be pedantic of us to focus on maintaining a percentage, which already by industry standards at 16% for the for the group is high. So I think that, that -- I think cash margin and cash profit has to be the overriding priority for next year. I think would you agree with that, man? Yes. Okay. You see there we are. So Finance Director agrees, it's great. The -- but no, we definitely see that. And it comes down to the fact that the strength of our margins allow us to do that. I don't think if our margins are out to 14%, 15%, and we maintain our cash profit. I don't think the business becomes markedly more risky through that. The -- secondly, in terms of OpEx pressures that we can see next year, the biggest single pressure is going to be what happens in annual wage, and we don't yet know that. I think whatever happens, though, it's likely to be less than the cost of goods. You may never know with this government, but yes, it is likely to be less in cost of goods. So whilst we still foresee OpEx pressures, we think the one that we've most got to worry about is cost of goods in the second half. It may not be the same in first half. In terms of electricity. This year, our electricity bill has gone up, correct me if I'm wrong, that's GBP 27 million on GBP 30 million. So we have electric and gas together, Apologies. Thank you, has gone up by GBP 27 million on GBP 30 million. We're capped until March. After the cap comes off, it's anyone's guess, and it will depend on market prices as and when that cap comes off and indeed whether it is continued. But it could be as much as another GBP 25 million, GBP 30 million.

It's Anne Critchlow from SocGen. Two questions from me, please. Could you comment a bit on how Home has performed relative to clothing, both in the half and in current trading? And then secondly, on price inflation, I think previously you said you expect 6.5% for clothing and 13% for Home for Autumn/Winter. Is that still your view?

Yes. So yes, is the answer to the second question. No change in our outlook on inflation, either fashion or Home for the current season. In terms of Home's performance, against last year, Home has performed much, much, much worse than fashion and clothing. In the first half, it performed worse than fashion against both last year and 3 years ago. We have seen a moderation of the decline in the last 2 months. So both against last year and I think I'm right saying 3 years ago. So it looks like sort of a peak decline in homeware both against 3 years ago and last year is behind us. But I would hate for anyone to think I was an optimist on that, but it does look vaguely encouraging.

It's Simon Bowler from Numis. I'll stick to 2. First one, you haven't referenced Total Platform in any kind of meaningful way. So just wondering if you probably have a little bit of an update on how you're seeing that part of the business and development there? And then secondly, you made reference to kind of product mix within the presentation and kind of more going, some of the higher returning categories because I think it was where I picked it up from. What do you think that is? Do you think you've made more progress in those sorts of categories? Or do you think that's kind of a release of some kind of pent-up demand? But again, to reference your point about good quarter being a worry for next year, we need to be thinking about in terms of next year.

Yes, very good. I agree. I think the product mix, I think, is partly driven by fashion. Fashion has definitely, the -- we have seen a return to more formal fashion. Fewer people with open NEXT shirts, more people with ties and jackets. And actually, to the extent that people with open NEXT shirts is now being slightly uncomfortable when they look at their sharper colleagues -- sharper dressed colleagues, I should say. So we're definitely seeing both on men's and women's a return to formal dressing. I think part of that fashion trend is pent-up demand. But because people haven't bought a new suit or a new dress for 3 years, they're buying new one. But the 2 things become self-fueling because the act of everyone going out and buying one means that people begin to notice their friends and see new designs and you sort of get a virtuous circle. So I think it's difficult to see which is which. But I think where you're right to be cautious is next Q2, part of what we saw, so part of that exceptional performance was people going to a party or a race course or wedding for the first time in 3 years. The other question you asked about Total Platform. In terms of Total Platform, there are 2 things -- 2 important things about that. The first is that we are in the process of making the system far more adaptable, so that if -- the time taken to take on a new client in terms of IT time has come down from over a year to significantly less than 6 months. So in terms of the ability of -- our ability to take on new clients, we are in a much, much better position than we have been in terms of recent launches, the GAP launch was the best launch we've ever had. Reiss launch went extremely well. So we're very pleased with what we've done. But the rate determining step on Total Platform and the reason that there's no news about it is because really until we've got the automation open in our warehouse back end of next year, we would be uncomfortable taking on new clients. It's not to say that we couldn't. And if we wanted to gamble, we could say, well, let's look at our own declining units as we've got increasing selling price. We could gamble and take on a new client on. We -- at this stage in the business development. And indeed, I think any sort of responsible value there. The worst thing we could do is take on a client and make [indiscernible] of it. So really, we're not looking at taking on any new clients or actually going operational within new clients until the very early, it's the fourth quarter of next year when we've got the pit -- automation picking open and the beginning of next year. In the interim time, we will go live with a client we've already run, which is the Jojo Bebe Maman business. So I'm really expecting Total Platform to come into its own 2024, but we will begin to start negotiating and recruiting new customers in earnest next year. There's no point in talking to people now if we say we've got to wait 18 months, 2 years before we can go live.

Caroline Gulliver from Stifel. We've talked a lot about rising costs this morning. But in the change in guidance, I think you alluded to a GBP 6 million increase in cost since you last gave guidance in August. I just wondered if you could give us a bit more detail specifically on that? And my second question is, in your customer segmentation analysis, I just wondered if you had a view on how many of your customers have a mortgage.

Yes. It's very -- on the mortgage side, it's very difficult to model. And I'm not going to give you a number because what matters is not the number of customers we've got to have a mortgage, it is the term for which they're fixed. So we don't have a number for that. What we do know is that in the long run, as more mortgages begin to unfix, that is going to begin to weigh on consumer expenditure. And again, it comes back to the same thing really in terms of prices. the benefit that we may or may not get this season we're going to pay for next year in prices, the year after that may be in mortgage rates. In terms of the GBP 6 million rising cost, some of that is a provision increase. Most of it is wages. Some of the -- about GBP 2 million of it are wages that we incurred in August where the sales were significantly below our expectations. And each week, we thought we would get there the next week. So things like our store staff and warehouse staff, we didn't moderate that fast enough. So GBP 2 million of that GBP 6 million cost is sort of in the bank, if you like, or not in the bank. And the other GBP 4 million is either provision or expectation that some of our wage costs will continue to rise throughout the rest of the year.

Richard Chamberlain, RBC. Can I just ask a couple, please? Can you just give us an update, please, Simon, on your sort of full price sales percentage or some maybe thoughts there versus where it was pre-pandemic? And then also the recent sort of summer trading period, particularly the weaker August, better September. To what extent was September affected by sort of debt and timing of sale activity versus last year?

Yes. Okay. Good. So first of all, I should stress that the numbers we've shown you on the week-by-week chart are all full price. So they are -- and this year's markdown wasn't significantly different to last year, slightly more actually would affect it to have more of a negative effect on full price. I think those numbers that you've -- I wouldn't factor in any significant effect of markdown on those full price sales that we've shown you over the last 8 weeks. In terms of the company's total markdown versus 3 years ago, it looks broadly comfortable. I think there are areas where we can tighten up, particularly on label wholesale, some areas, in particular, for example, sportswear where, although we cut our budget on various wholesale sports brands, we didn't cut it by enough. So there are definitely pockets where I can say, look, actually, we can do better on markdown. But if I'm looking at what's going to drive profitability going forward. It's really the management of the markdown rather than total markdown. I think will make the difference. Not, for example, putting it through aggregators and selling at a loss, would be a start.

It's Georgina Johanan from JPMorgan. Two is all for me, please. First of all, I appreciate you've given the difference in freight versus what you expected and therefore, the kind of headline drag within the margin. But is it possible to share the cumulative drag that you're seeing from freight so far, please? Just so we can get a sense as that eases from here, how much kind of offtake you've got against currency. And then the second one was just, I'm not sure if this is something you'll share, but given the price rises that you're kind of talking to -- is that a similar rate that's coming through in kids pricing as well, please? Or is that different?

Yes, very good. So in terms of freight, I think the best way of answering your question is to say that at the moment, freight costs around 6.5% of the cost of goods and the landed cost of goods. So there is definitely flexibility in the freight line. But it's not the best where we know it's not going to be much more than 1% or 2%, maybe 3%. Then in terms of kids' prices, we're seeing exactly the same sorts of pressure on kids that we're seeing elsewhere. We haven't lowered. This year, we've basically maintained our margins. We maintain our margin targets year-on-year. So no area is getting special treatment other than in Home, we did take it on some of the areas where the prices would have to go up by more than 15%. We took a view on some of those product areas.

It's James Grzinic from Jefferies. Just one ordinary questions, Simon. Can you explain what sort of situation going on with the government right now which suggests that we [indiscernible] and can you perhaps believe that [indiscernible].

I can't. I don't. I don't. I haven't had any conversations with government on any issue. I can't speak for the rest of industry. I can -- we have said we will continue to say what we think, which is that whether or not the stimulus package is a disaster or not will depend entirely on the supply side measures the government introduced combined with any savings they can make in their own expenditures. So our view as a business is what the government ought to be doing are 2 things being as aggressive on supply side reform as they have been on the demand side, and that means looking at things like planning, and energy markets, trade, administration tariffs, economic migration, all of which could provide significant boost to growth, if tackled quickly and aggressively enough. And then they should also look to their own budgets. And with -- I should stress, without prejudging it, as we have said in our document, look at very big capital projects that might provide no value at all such as HS2.

[indiscernible]. Two questions, please. On the current trading, you talked about in something more in [indiscernible], is there something the customer trading, in the way they're shopping which raises a red flag as coming September? And then secondly, through the pandemic the demographics picked up a lot of growth in the [indiscernible] customer demographics -- are those customers [indiscernible]?

Yes. The second is we've seen no significant difference that we -- there's no significant difference that we found or that I've seen in the various different demographics that we've recruited in terms of overall behaviors we've seen. Generally, we've see an increase in spend of the customer across the demographic base. And that's because in a lot of cases, they buy multi-generation anyway. Second is that in terms of what made us think there might be more to the downturn than we saw in August. I think it's really just experience that when you see the levels of decline we saw, there's always -- it's always an excuse. On any given day, there's always -- you can always say, well, the weather isn't right or the -- last year, it was particularly good or we didn't have the stock. But when you see the levels of decline, you think actually there is more to this than that. So it's really a sort of gut feeling based on experience rather than any scientific evidence.

Andrew Hollingworth from Holland Advisors. Just a couple of questions really. You're not known for hyperbole, but when you launched Total Platform. You did take some quite bullish things about an important moment and groundbreaking operation in the U.K. That's a little different useful source of revenue, which you -- what you said today, I'm not trying to pick you up on it. It's obviously, there's other things to talk about today. But my first question is, I know you can't sign clients yet, but do you still have the same optimism for Total Platform? And when you talk to people in the industry when people talk about what it could do for them, do you think there's a really strong pent-up demand when you can sell the product or the service rather?

Lots of people, there are more people talking to us than at the moment. We are accessing people actually not at the moment of the year. So it's a handful of people, but because there aren't that many clients, but we have got more clients than we're prepared to take -- more potential clients than we would be prepared to take on at this point in time. And we've limited ourselves at the moment to people we can take equity stakes in because we think that's where a lot of the upside is. Going forward, 2024, we've got more capacity, we won't limit ourselves in that way. I suppose the embarrassment for me is that I allowed anything like hyperbole to creep into my language before. And I thought at the time, when we said not to get carried away with it, and it was never going to be that it was related to part of the business. We are -- I think where I think we are consistent is that it's going to be some time before it makes a meaningful contribution towards the group's profit. I do think it is a very exciting service because I don't think anyone else can do it in terms of clothing and homeware, in terms of what it can do in joining up online service stores, warehouses, distribution networks. There's no one else in the market at the moment that can provide the service. So we're still very excited about the service, but we are as cautious as we were before about the economic outlook for it. We have, I should stress, we've made more money this year than we were anticipating when we started it.

Okay. That's very clear. If I could just follow up with 1 on LABEL.

I think you have had your 2 questions, haven't you? Okay, go ahead. Don't want anyone else try this, though.

I just separated them to make them easy. I'm sorry, on LABEL. I mean, obviously, LABEL is growing very strongly. It's becoming an important part of the group. You talked about the margin and how the margin is sort of flat, but there's pluses and minuses. Could you just talk about, obviously, during that period of time, it's become less risky in the sense that it's more commissions and less warehouse, which is what you put in the statement. So -- and maybe you could tell us how much you've reduced commissions to third-party suppliers during that time. And also just talk about just how big LABEL could be in the sense that as an aggregate, as a part of NEXT, it looks big, but as an aggregator, it doesn't look big. So where could LABEL be if you look forward to 5 or 10 years?

Yes, first of all, as -- and again, I'm hopefully I'll be consistent here. I don't want to deprive any retail analysts of their work. So I'm not going to make a prediction about 4 or 5 years' time. Our job is to grow it as fast as we can within the constraints of value, margin, return on capital. Your job is to guess where it could be in 5 years' time. And I wouldn't want to cloud your judgment with my over-optimistic views. As I obviously did on Total Platform. In terms of commission, we have lowered our commission consistently over the last 5 years. I can't remember where it was in 2019. I know we lowered it last year by 1%, and it's now running at 37% for normal brands. We do have a slightly higher rate for very high returning lower average selling price fashion brands, but the vast majority of commission brands are on 37%, and commission is still growing faster than wholesale.

I think it was 39%.

It was 39%. There we are.

Tony Shiret from Panmure Gordon. A small question for Amanda. Of course, she hasn't answered any so far. I wonder if you could just tell us what the IFRS 16 benefit overall was these figures and to last year.

In the half, it will be something like GBP 10 million, I think. Ian is nodding furiously in the back. So broadly GBP 10 million boost.

So what's your rent -- what's your rent for the half?

What's our rent bill for the half, actual rent or -- real rent, I think it's about GBP 150 million. GBP 150 million for the full year. Yes.

Okay. And secondly, a bit more of a question, I guess. I sort of get the feeling coming into this room, I was a bit more optimistic than having listened to you now. And I just wonder, it doesn't sound to me like you think sales are going to go up next year in pound terms. And I just wonder how -- at what point you decide you need to get a bit more defensive and what levers you've got in case it all goes a bit peer shaped?

Yes. I mean what we talked about is what we're going to do. And I think it's very -- first of all, there aren't any magic levers that aren't dangerous because the reality is if we could do something to boost sales and profit in tough times, we should be doing those things already. So there is no silver bullet to say, "well, if things get really tough, what would you do?" The answer is you can only stop doing things that you otherwise think are a good thing to do. And generally, we're committed to not doing that. So what could we do? We could slash our expenditure on technology. I think it would be the wrong thing to do, we could do it. That would be the most obviously [indiscernible]. We could stop the development of our new and so warehouse that will be the wrong thing to do. So there aren't any magic bullets. We haven't yet taken a view on what happens to nominal sales next year. And I think our view on nominal sales for next year will be very much driven by what we experienced in the run out to Christmas, wage inflation and really, I think the earliest sensible view we can have on that for the purposes of forecasting is going to be the January trading statement. We have a budget we're working to, but we just don't know. And it comes back to that [indiscernible] that it is not worth pretending that you know something you don't know and we don't know what normal sales will be.

But there's going to be some lead time on some of this stuff. So you, yourself, will have presumably scenario analysis and have some idea what you would do if sales were down 10% nominal or something like that or down 5%?

Yes. No, again, I should stress that what we would -- the key thing we would have to do in those -- in that situation. I think that's unlikely, but the key thing we would have to do is make sure that we pare back our variable wage costs. as fast and as efficiently as we possibly could. But I should stress again without damaging the company, there is no magic lever that we could pull if sales down 5% other than cutting costs that we think are generally in the interest of the company.

Rebecca McClellan, Santander. Just in that further on to Tony's question, can you talk about how reactive your sourcing is and your inventory flows, et cetera, in the case that revenues to start to sort of come under further pressure?

Yes. I mean I suppose that the key thing in managing our stock for next year is to start conservatively. As you can see from our numbers, we put between -- if we look at the stock that we sell at full price, we're buying between 25% and 30% of planned markdown -- planned and unplanned markdown. So our experience during the pandemic and at many times in the past is that if you start to beat your target, you can capture a lot of those sales by eating into your markdown. So we are taking a very conservative view of stock going into next year. We think it's a conservative view of stock and sales going into next year. We haven't finalized our budget yet. But our starting point is very conservative. And we do that in the knowledge that if we're wrong, and sales are much better than expected. But it won't be as good as it could have been, but it won't be a disaster, If we order too much, then it will be a real mistake. It's very expensive. And on that -- okay. Sorry, I thought it was a bit of a down at end on that, a slightly more optimistic question on there.

Does the government I don't like I just [indiscernible] if you've seen any change in the [indiscernible] the number of customers you will might now be later? And then on the payment schedule at the moment a lot more margin before other expected. Could you give your view on why that is? And if that's the lever that you can pull to accelerate the growth in this business where [indiscernible].

Yes. I mean, I think it all depends on what you're -- I'm doing the second question first. I think it all depends on what your ambition is. If your ambition is growth, then yes, of course, we could pull that lever. If your ambition is profit, then I don't think it is. And actually, I think the margins that we have in the business are its key strength going into next year. And it will be unwise of us to undermine those to fuel growth at the expense of profit. That doesn't mean that those margins don't give us the flexibility, for example, if there was a one-off hit on the pound and it came back, it doesn't -- it gives us the flexibility to fund that next year if we had to. But what I wouldn't do is permanently undermine the profitability of the company in order to grow to super-size because we've seen how that plays out elsewhere, it's not pretty, we think. The -- what was the other question -- buy now pay later. We don't have to buy now, pay later other than the credit offer that we have, which kind of all the numbers are in the presentation. And I think the key -- yes, the 3 step, but it's all within the credit numbers. The key number -- the key metric there is the one that we pointed to in terms of the average percentage of our customers' bills that they are paying off each month, and what you can see is that it's still higher than it was pre-pandemic. So that suggests at the moment, consumers aren't pulling that lever. And at that joyous note, we'll end the presentation, that's it. Amanda and I will be here to talk to you individually if you want to ask us questions outside of the gaze of each other. Otherwise, thank you very much for coming today, and I look forward to seeing you all again in 6 months' time.