Half Year 2026 Next PLC Earnings Call

Speaker #1: And, special welcome to anybody who's here for the first time.

Speaker #2: it's certainly a pleasure for me to kick off the proceedings, given that the next results continue to be very positive. The first half has been a strong period for the company, with continued sales and profit growth, especially in the international area.

Speaker #2: Now, this performance doesn't come by accident, and it certainly reflects the hard work and courageous decision-making of all our employees worldwide. And I want to thank them and I'm going to leave all the details of what has happened in the first half to our Chief Executive, so over to Simon.

Speaker #3: Hi, thank you, Chairman. Good morning, everybody. Total group sales up 9%, full price sales up 7.7%. The difference is not the subsidiary company's growing much faster next; it's all about markdown.

Speaker #3: Last year we had a very small end-of-season sale because we exceeded our targets by a significant amount. This year the sale stock returned to more normal levels.

Speaker #3: In terms of our expectations, we thought we were going to be up 4%. You can see that we exceeded those expectations in the UK.

Speaker #3: And overseas, much more so, in overseas. And I'll be talking about both of those in more detail as we go through. Profit up more than sales, up 10.5%.

Speaker #3: Net interest significantly higher than last year. That's all about the fact that last year we had a lot of cash on deposit because we weren't able to buy back shares.

Speaker #3: This year we bought a lot of shares back at the beginning of the year, which means we didn't get the interest income that we had this time last year.

Speaker #3: Profit margins, nudged forward by 0.3%. Profit after tax pretty much the same. No change in tax rate. And earnings per share up around 2%, more than underlying earnings, and that's as a result of mainly as a result of the buybacks that we did, very early on in the current financial year.

Speaker #3: Interim dividend, we're planning to increase in line with earnings per share, up 12.6% to 98p. Moving on to cash flow, and just to re-emphasize the cash flow and balance sheet I'm going to talk here, unlike the P&L and all the other numbers I'll talk about, this is done on a consolidated basis, so on the this is done on the basis that we own all of the subsidiaries, most of which we only partly own.

Speaker #3: So good cash flow from operations and profit, 54 million. Capex up 44 million on last year as expected. What you can see here, we showed you this graph at the beginning of the year, it hasn't changed much.

Speaker #3: The big increase came in warehousing, where we spent much more than last year, and less on stores. This time last year we spent a lot on thorough and new and a new concept store, which we didn't have again this year.

Speaker #3: In terms of capex going forward, we're expecting roughly the same amount of capital expenditure for the next 3 years. And at the end of last year's present sorry, the presentation 6 months ago, we talked about how that corresponded to capital consumption pretty much in line with our 20-year average.

Speaker #3: In terms of working capital, working capital up pretty much in line with sales in the first half, which is what you expect because a lot of that is stock.

Speaker #3: Corporation tax, a bigger increase than you'd expect, has gone up more than profits. That's all about timing. We because we pay tax on account, and last year we were consistently increasing our profit expectations, which means that our tax didn't quite keep up with the result that we delivered at the year-end.

Speaker #3: Surplus cash down 26 million on last year, still 200 180 million of positive cash flow. And the difference in this year and last year mainly about capex.

Speaker #3: This is where the big change came. Last year we were pretty much locked out of the market, and we thought we'd take a slower, steady approach to buying back shares.

Speaker #3: This year when we had the opportunity, we bought as many shares as we could, so we've done 350 5 million of share buybacks in the first half.

Speaker #3: That means net cash outflow in the first half is 177 million. For the full year, we're expecting that to reduce to around 100 million, which is the amount we plan.

Speaker #3: The cash outflow from the business that we're planning for the full year. All of that is funded by a planned increase in debt, and just to explain that in a bit more detail, we started the year with leverage at 0.6, 713.

Speaker #3: Now, these numbers are, you know, where we target is fairly arbitrary, but we had targeted 0.63. The reason it was lower than our target was because we generated a lot more cash in January than we expected, as a result of better sales.

Speaker #3: We aim this year to push that back up, the leverage back up to 0.63, which will push our year-end debt to 815 million. And that accounts for the 102 million net outflow.

Speaker #3: In terms of how we get there, we think we'll have a very strong operating cash flow income, around 996 million of cash inflow from operations.

Speaker #3: 245 million of capex, 319 million of ordinary dividends. And that leaves around 500 million to distribute, of which we spent 355 million. The 180 balance, we will either give back a special dividend, buybacks, or some other form of capital distribution.

Speaker #3: In terms of the our cash resources, we're very comfortable for cash resources. We started the year with 1.2 billion of cash resources. We have increased our RCF by 200 million.

Speaker #3: And the lion's share of that increase, well, about half of it, will be used in October to pay off the 2026 bond. That will leave us with 1.3 billion of resources.

Speaker #3: And if you compare that to our peak cash requirements, we've got about 300 million of HEDRA, which we think is comfortable. We're having we have increased our net debt, partly to account for making sure that not only does NEXT have sensible amount of HEDRA, but so do all the subsidiaries that we lend money to, have that have HEDRA sufficient to get them through a blip as well.

Speaker #3: In terms of that debt, it is much more than balanced by the financial assets that is that does our customer receivables. So we've got about 1.36 billion of customer receivables, which is much more than our peak HEDRA, and broadly equal to our cash resources.

Speaker #3: Moving on to the balance sheet. Balance sheet, investments went down in value by 42 million. This is in one wonderful piece of accounting where one of the reasons that the balance has gone down is because they've become more valuable.

Speaker #3: Amortization takes 19 million off. 10 million is because joint ventures have paid a dividend. To us. And final thing, the provision for minority acquisition.

Speaker #3: This is because a lot of the minority shareholders and management teams have options to sell their shares in their business on a fixed multiple of profits back to NEXT.

Speaker #3: Those options vest over, you know, the next sort of 4 or 5 years across various different businesses. Because those businesses are doing much better than expected, we have to provide a higher number, which has the ironic effect of reducing the value of the more valuable businesses that we want to buy.

Speaker #3: Stock up 5.8%, pretty much in line with our sales expectations for the second half. Customer receivables up 2.5%. Now, there is a sort of the beginnings of important an important story, which we're going to elaborate at the end of the year here.

Speaker #3: Because what you can see is that unlike the last 10 years, our credit sales are beginning to grow much faster. So we would normally expect that number to be plus or minus 1 or 2%.

Speaker #3: Our credit sales are now growing at 6.8%. The reason it's growing so strongly is partly because we're offering a new product, which is our Pay in 3 offer.

Speaker #3: Pay in 3 offer allows customers to it's very similar to Klarna type offer, allows customers to buy the goods, and if they pay off in 3 installments and pay it all on time, they pay no interest.

Speaker #3: If they don't pay those installments on time, if they choose not to, they can do that, but they then incur interest on the balance that they haven't paid.

Speaker #3: Because those Pay in 3 accounts by design pay down much faster, it means that our credit our receivables don't grow by as much as sales.

Speaker #3: And we expect that to be a sort of continuing trend as we move forward. These these balances are incur less overall debt, and we think are likely to be to incur less bad debt as well.

Speaker #3: So I think going forward you'll see credit sales riding rising faster than balances, with perhaps some benefit on bad debt. I say perhaps, or we we've yet to prove that.

Speaker #3: Other debtors up 53 million. Biggest number here is international aggregators. This is the fact that on websites like Zalando, they sell our product, take a commission, and then pass us the balancing proceeds a month later.

Speaker #3: That month, as we've grown so fast, that month that they owe us of net sales is growing. So that's a good thing. Cash in transit, I think I mentioned this last time, one of the very few accounting standard changes over the last 20 years that I can remember that makes a lot of sense.

Speaker #3: And this is because the we are no longer able to count the cash that we've taken on credit cards that we haven't yet received.

Speaker #3: We're no longer able to count able to count that as our cash. And that change on last year cost us 31 million. And then the subsidiaries have been better at collecting in their debt as opposite direction to what you'd expect.

Speaker #3: We'd expect creditors to grow in line with sales. What's happened here is that the 53rd week put a large payment week into the first half that wasn't there last year.

Speaker #3: So that's that's all about the timing of payments, rather than any underlying significant change in the creditor base. That leaves net debt 890 million, all driven by the time and that increase is all driven pretty much by the timing of buybacks.

Speaker #3: In fact, the 352 is only 3 million off what we spent on buybacks. Moving on to the detail of the business and just to remind you, we don't treat we're treating the UK online business separately from the international business because they have very different moving parts.

Speaker #3: Starting with UK online, UK online was up 7.4%. The full product the total sales are up 8%. And what you'll see on all the online businesses is that the markdown sales grew faster than full price sales, which didn't happen in retail, and that was a conscious decision for us to push more of the changing balance of markdown into our online channel rather than retail.

Speaker #3: Full price sales accounted for 83 million of of growth. And just looking at how that breaks down between the different types of brands we sell on NEXT, see 14 million came from NEXT, which grew at just 2.1%.

Speaker #3: Wholly owned brands and licenses by a really strong 33.5%. I'll be saying more of that about that later. And continued growth of our third-party branded business driven largely by better selection of existing brands rather than new brands.

Speaker #3: In terms of margin, margin up just 0.1%, but a lot going on underneath the the surface here. Bought in gross margin down 0.2. We've got two things pulling in opposite directions here.

Speaker #3: First of all, the underlying bought in gross margin on NEXT stock went up. And we we consciously did that in the UK to pay for inflationary wage costs and overseas.

Speaker #3: The change in prices, which we'll see later on, driving up margins to pay for increased fuel surcharges. But so underlying NEXT product 0.5% up.

Speaker #3: The impact of mix because we're growing our wobble business and third-party business much faster than NEXT pushed net margins down because we make lower bought in gross margins on those.

Speaker #3: And just to give you a flavor for the different net profitability of those three businesses in the UK, NEXT makes around 21% net margins.

Speaker #3: That that's net margins after accounting for allocation of all fixed overheads. See, wobble lower than that, 18%. Still very respectable, but 3% lower. And third-party, as you'd expect because we don't put effort into building the brand, we make lower margins on that at 12%.

Speaker #3: And it was the growth of wobble and third-party that offset the growth in the underlying margin of NEXT. Markdown adverse movement. We had more stock going into the end of season sale and our clearance rates online dropped a little bit against last year.

Speaker #3: Warehouse and distribution. A significant gain here, but again, lots of different things going on. Wage inflation and fuel inflation between them adding 0.8% to costs.

Speaker #3: We've got big productivity gains 0.6% on productivity and 0.3% leverage over fixed overheads. And really, you need to take the productivity and fixed overheads together, because the fixed overheads include all the depreciation on the money we've been spending on mechanization.

Speaker #3: And both of those numbers put together are testament to the efficiencies that we're now getting out of the mechanization and investment that we've made in our new MSO3 warehouse.

Speaker #3: And then returns and average selling prices meant that we handled fewer units to achieve the same sales. And that pushed warehousing costs down by 0.5%.

Speaker #3: Again, that's partly as a result of mix on the whole third-party and wobble businesses more expensive. Then NEXT the next branded stock, but also it's that continued effort to weed out the high returning and low priced stock, particularly within brands that pulls our profitability down.

Speaker #3: Getting leverage over technology and you can see that warehousing and technology contribute to 0.7 towards margin and then we pretty much spent all of that on marketing.

Speaker #3: I should stress that it's not that we build up a pot of money and then spend it on marketing come whatever. The marketing the returns justify our spending that much money.

Speaker #3: But you can see in terms of the shape of the business, what you're what you're getting to as a business that spends less on facilitating and serving the customer and more on telling the customer about the service.

Speaker #3: So a shift out of technology and warehousing into marketing. So longer term, I think that that is a a theme that you'll see continuing in the UK, but we'll see more strongly overseas.

Speaker #3: And just to remind you, the the return per pound spent on marketing and the way we measure our marketing is we look at each campaign, measure what we think of the incremental sales, which is not an exact science, look at the incremental profit on those incremental sales, depending on the mix of that particular campaign in terms of product mix and returns rates, and then compare it to what we spent.

Speaker #3: And we have to spend at least we have to make at least £1.50 of incremental profit before fixed overheads for every pound spent on marketing.

Speaker #3: And basically, as long as we can do that, we'll spend as much as we we can. Central costs, a big gain here. This this is mainly about last year's exceptional performance leading to an exceptional staff incentive payments at the end of the year.

Speaker #3: So that's that that that normalizes this year. Looking forward, if full price sales are up 5.2% in the UK online, we expect our margins to nudge forward by around 0.2%.

Speaker #3: We're very similar story for the full year that we've had for the half. Moving on to international, this is a little bit more exciting.

Speaker #3: Full price sales up 24%, total sales including markdown up 26. That number really only tells half the story because the first quarter was adversely impacted by disruption in the Middle East.

Speaker #3: So you can see the the the second quarter was, you know, much more exciting. Don't get too excited by that second quarter number because there was definitely we we could see this in the Middle East.

Speaker #3: There was definitely pent-up demand in the Middle East that that contributed towards that 37%. So don't assume the underlying growth would have been 37 all things being equal.

Speaker #3: Full price sales are 133 million overseas. In terms of how that breaks down by region, lion's share of the growth nearly 100 million coming from Europe, which grew very strongly at 28%, partly driven by the step change in our sales on Zalando as a result of the Zeos integration.

Speaker #3: Middle East 14%, but again, you'd have seen an even bigger swing first quarter to second quarter in the Middle East. We've mentioned United States for the first time.

Speaker #3: We've never really talked about the US before because we've really had no traction and we have a very small business in the United States.

Speaker #3: But we we have just managed to find this year we've really managed to find productive ways, profitable ways of of marketing the business. And we're seeing very significant growth in the United States.

Speaker #3: Still small numbers, nothing to get excited about today because the numbers are so small, but it does bode well for the future of the business in the States.

Speaker #3: Oh, I should say actually rest of world, if you that that three that 3% growth, that is too two countries have pulled that back and we're not sure why.

Speaker #3: Kazakhstan and Australia if you know why those two businesses have underperformed, please let us know because we we we're racking our brains. In terms of the breakdown between the different brands, what you can see here, much stronger showing from the next brand, up 16% overseas.

Speaker #3: Wobble astonishing growth, 82%. Part of that is that we we have put more options of our wobble brands on our overseas sites and customers are beginning to to find them and get used to them.

Speaker #3: And then third party very respectable as well. But much much smaller overseas because most third parties will go to a local aggregator rather than to NEXT.

Speaker #3: Profit margin down 0.4%. And as with, you know, all businesses, when you've got a bad number, the good thing is to blame it all on one thing that you hope will go away.

Speaker #3: So we'll start with that. We think the Middle East conflict in the first half cost us 0.8%. And that is the balance of the increased surcharges, which would have cost us 1.3%, and the price increases that we put through, which because we wanted to see how the war would pan out before we put prices up, we only managed to put prices up sort of half the season.

Speaker #3: So that's why we didn't quite cover the cost. Well, didn't cover the cost of those surcharges. As we move into the second half, those things will balance out and we will we the the the Middle East will be cost neutral in terms of conflict.

Speaker #3: We will be cost neutral because the price increases were put through. Forcing gross margin up but different story here. Underlying next margin up 0.5%.

Speaker #3: Impact of mix not nearly as adverse as it was. And the reason for that in simple terms is because we make a relatively we make a lot more margin on our wobble brands overseas.

Speaker #3: Where they appear to have much more pricing power than they do in the UK. Wobble brands make 20% compared to NEXT at 14. Now you would you're looking at that and thinking, well, if wobble brands have grown by 82%, that should be pushing margin up, not not marginally reducing it.

Speaker #3: The reason is the reason it doesn't is because actually there are two competing factors. Yes, wobble grew by more and it does take make more margin than NEXT, but last year it was at 24% net margins.

Speaker #3: And we consciously took the decision to lower prices to become more competitive in our wobble brands. Last year. So those two effects pretty much offset each other.

Speaker #3: Aggregator commission. We're getting we we're getting better rates of commission from our partners. Warehousing technology central costs I could go through all of those in detail, but I would just be repeating the sorts of changes the the movements that we've had in the UK because the story is pretty much the same.

Speaker #3: And again, all of those gains invested more than all of those gains invested in marketing at 1.5%. That leaves sort of overall margin movement of minus 0.4.

Speaker #3: And we think a very respectable margin for the business to make full year we anticipate margins around 15.1% flat on last year. So that's that is because the price increases will pay for the surcharges in the second half in a way that they didn't in the first.

Speaker #3: In terms of customer base, some interesting things going on here. UK credit and cash. For years you'll have looked at this and seen cash growing much faster than credit.

Speaker #3: The reason that that's changed is because of the pay in three product I talked about earlier. And some of that the reason the cash number isn't up by more is because a lot of the the credit customers will trade with the first on cash and then after they transacted a few times will convert to pay in three.

Speaker #3: So that that is that net reduces the cash customers. But total UK up 7% pretty much in line with sales. International. Sales up 29%.

Speaker #3: Total excluding aggregators up 14%. In terms of sales per customer, there's no real story here. Other than the fact that there isn't a story is important because overseas given the level of growth we've had in sales, you would expect to see our sales per customer moving backwards because new customers tend to spend less than established ones.

Speaker #3: If you fill up with a lot of new customers that will push the sales per customer down. The reason we think it hasn't is because of the increase of the increasing choice of product on the website particularly the wobble brands which have we think pushed sales per customer up.

Speaker #3: Moving on to retail. This is our new store in in Bluewater. And you might be thinking sort of, oh, here's another one of those stores.

Speaker #3: And you know, physically it does look the same, but financially it's much much better because when you look at I know what a lot of you will be thinking, oh yes, white elephants.

Speaker #3: Good joke. It's actually the the economics of Bluewater store were much better than they were in Thoruck. And this store will make a a very healthy return on the capital that we invested in.

Speaker #3: It's already open. And delivering sales in ahead of our expectations. In terms of space for the full year, we expect space to grow by around 1.3% as a result of opening eight new stores.

Speaker #3: Six of them are open. And if we look at the six that we've opened and the forecast that we've got, since opening, we think the internal rate of return on the investment will be around 30%.

Speaker #3: So much healthier than the portfolio we opened last year. Retail sales down 0.4%. Full price down 1.7%. We didn't put more stock into the end of season sale in retail.

Speaker #3: Not significantly, but actually we did have better clearance rates. New space was 1.6%. And light flights minus 3.3. That number, although it's bad, is better than we were expecting.

Speaker #3: I know that's no constellation, but we're expecting it to be around minus five. Margin up by 0.4%. It's a bit of a story here.

Speaker #3: Bought in gross margin this was the planned increase in bought in gross margin to help pay for national insurance and national living wage wage inflation.

Speaker #3: Markdown was flat. Payroll S up all of them up gross margin gains. And that the increased costs of themselves would have eroded margin by 1%, but lots of productivity measures that we've taken in our stores have contributed to around a 0.4% gain in productivity in shops.

Speaker #3: Store occupancy. The new space is more expensive than our existing space. That's partly because on the whole it's slightly higher rent, but mainly because none of its assets have been depreciated.

Speaker #3: So that when we open a new store, you've got full depreciation charge. A lot of our existing stores have low or no depreciation charge.

Speaker #3: And you can see the expenditure on depreciation on new stores is largely offset by the stores that are now fully depreciated, which gives us a 0.5 gain in the opposite direction.

Speaker #3: Warehousing distribution. Wage inflation and fuel, but relatively modest impact because warehouse and distributions are much smaller percentage of retail sales than it sales. Technology cost.

Speaker #3: There's a gain here slightly higher than in online. And I'd love to say that that was because we've had a big review of all of our tills and communications networks.

Speaker #3: It's not it's really because we've rebalanced the allocation of stock between retail and online to get to make that allocation more accurate. So online gained about 0.1.

Speaker #3: Retail 0.2. Between the two of them it's it's about halfway between the two of them. A central overhead same story there about staff incentives.

Speaker #3: And that sort of gives us our sort of net margin movement up 4% 0.4%. If we look forward to the full year, assuming that sales for the full year are down 0.9, our margins will cut we think will come in at around 10.2.

Speaker #3: So just over 10%. You would look at that 0.9% and think that I would look at it and go that looks ridiculously optimistic. Because it's much much better than the first half.

Speaker #3: To give you some comfort on that, if you look at the difference in quarter one and quarter two, you can see that quarter one was where we took the big hit.

Speaker #3: And this is because last year the summer came early. So you got a big benefit in Q1 last year. Q2 we had the same warm weather as last year, but we also had the competitive disruption last year, which we think benefited the stores.

Speaker #3: And so we think if we take the Q2 number and throw throw it forward into H2, that is a sensible guess. But if you were to ask me what is the one number that has this that you're most worried about is that number.

Speaker #3: I think that might be optimistic. Moving on to total platform. Total platform has had a really good the subsidiaries have had a really good half year.

Speaker #3: Profits up 40%. You need to discount half of that 8 million growth because it was all about provisions that we took in the first half of last year.

Speaker #3: But underlying profit growth in the subsidiaries of 18%. And what we're finding is that the businesses that were doing well last year are doing better this year.

Speaker #3: And the businesses that were doing badly last year or were struggling are doing much better. And and one in particular has gone from loss to profit this year.

Speaker #3: The services on total platform profit is up by 23%. That looks high, but and it but it corresponds to the growth in our partners online businesses.

Speaker #3: Which is what we charged them for. In terms of the margin on our services, we make around just under 20% on what we charge our clients, which amounts to around 6% of their online sales.

Speaker #3: Looking forward to the year end, we expect another 15 million of additional profit in the full year from our subsidiaries. So our businesses. And we if if that comes through, then the return on capital on all the investment we've made both in buying those businesses funding them and also on the capex for total platform is around 26%.

Speaker #3: So it's looking like a very good that you know as a portfolio it's it's been a very good investment. Moving on to full year guidance.

Speaker #3: These are the H1 numbers. 3.6% in the UK. We are anticipating H2 relative to our expectations we have lowered. Our expectations for the UK.

Speaker #3: And obviously part of my function at this meeting is to depress everyone a little bit. I've seen too many people smiling. So just want to explain what it why we are cautious about the UK.

Speaker #3: And it's a combination of the fact that fuel inflation in particular but other forms of inflation as well look like they will begin to bite harder in the second half than they have done in the first.

Speaker #3: And that's going to put pressure on the consumer. And unlike past squeezes where government has been able to intervene, we think that there is really no room for government to move.

Speaker #3: In fact, worse than that, we think that they may have to that that the problem is going to be for them funding 100 billion pound deficit that they've got.

Speaker #3: And if you look at these three graphs, they kind of tell the whole story. Spending as a percentage of GDP has not been as high as high as it is today for the last 65 years, other than in the oil crisis, the financial crisis and COVID.

Speaker #3: So it doesn't look like there's a lot of room to increase spending in terms of debt to GDP. We haven't seen debt levels in the UK this high since we were in the shadow of the of the Second World War.

Speaker #3: And tax as a percentage of GDP is higher than it has been for the whole of the last 65 years. And we think that's important because again potentially unlike in the past, we think any attempt to increase any taxes is likely to have some negative knock on effect on the economy.

Speaker #3: And we've gone into a little bit of detail about that in the in the pack. So I think tax increases will be self-defeating if they're used to fund stimulus.

Speaker #3: And if they're used to fund a government deficit, then they will place a further drag on growth. And all those things put together mean that we think it's wise to trim our expectations for the second half.

Speaker #3: In terms of international, we were at 14%. We've gone to 20.5%. You might look at that and go oh well they're still being a bit cautious because they're up 24% in the first half and that was with the Middle East war.

Speaker #3: There is one factor that you that I just need to remind you of and that is that this time last year as we went into the second half of the season, we got a huge boost in our aggregation business from Zalando.

Speaker #3: So aggregator business in the first half of last year was up 33%. In the second half that jumped to 60. 1%. As we begin to annualize that number, that growth will begin to reverse out.

Speaker #3: And you'll see the beginnings of that as we as we move through the presentation. So that's why we we we are more optimistic about our international business, but not as optimistic as the numbers that we delivered in the first half.

Speaker #3: And that gives us 6.7% for the full year. In terms of what that means in terms of profit, the growth in online sales we think will deliver 116 million pounds worth of additional margin.

Speaker #3: We will lose assuming we hit our targets we'll lose 6 million from a slight decline in retail sales. That gives us 110 million add 15 million for subsidiaries.

Speaker #3: Then in terms of cost increases, there's lots going on here. And it's important I think to separate them out. So the 44 million pounds increase in marketing it.

Speaker #3: It's not it's this is a willful act of cost increase. And we consider it to be an investment because all of that 44 million pounds has a return attached to it.

Speaker #3: Not all of it will come in the current year. Because obviously the customers who recruit this year their second order and a lot of the profit is only made next year.

Speaker #3: Then true underlying inflation that we can't do anything about is around 70 million of fuel and wages. And then the higher interest costs are really about capital returns.

Speaker #3: We're paying higher interest costs because we don't have the interest income from the money that we had on deposit this year sorry last year that this year we have given back to shareholders.

Speaker #3: In terms of cost savings stroke margin gains you can see 37 million of margin gains which go a long way towards paying for the wage inflation.

Speaker #3: Lower employee incentives because last year was so high. And the warehouse distribution efficiencies coming through at around 22 million. And that number is that estimate is higher than it was at the beginning of the year.

Speaker #3: That gives us about 1.255 billion of profit. Up 8.4%. In terms of what that means for shareholder returns, post-tax EPS we're expecting to be in the order up 10%.

Speaker #3: And if we add dividend on top of that to look at TSR which is what we we ourselves measure as a as a measure of the sort of total return to shareholders, we think that will come in at around 12.6% which we think for you know old-fashioned sleepy retailer is quite a good number.

Speaker #3: But particularly exciting given that last year the equivalent number was more than 20%. So we weren't we weren't expecting to live as strong returns this year.

Speaker #3: So that's all I've got to say about numbers and guidance. Moving on to what is the more interesting but not necessarily interesting part of the presentation I'm going to talk about two things.

Speaker #3: A little bit more insight into the numbers in particular focused on our online customers. And then three areas of the business where we've got we've got we think exciting things going on.

Speaker #3: I just want to share with you sort of some of the things we're doing. In terms of the insight into our numbers, if you take the total 203 million of growth we've got, there's a brilliant page on page six which tells you pretty much everything you need to know about NEXT.

Speaker #3: It gives you by product category and territory the growth of all of our businesses and the percentage of our business of each one of those segments provides.

Speaker #3: When you look at that I think there are some things that need to sort of calling out. The first is that in the first half more than two-thirds of our growth came from non-NEXT brands.

Speaker #3: Wobble and third party. When you break that down it's the Wobble that has performed best. And that's really important because although they're non-NEXT brands the Wobble brands are owned by NEXT.

Speaker #3: We buy the stock even on the licenses although we pay a royalty we own the stock. We develop it. We buy the stock. We take the stock risk.

Speaker #3: So when you look at the net margins of the Wobble business and this is the net margins balance you know blend of overseas and UK and compare the three businesses you can see that NEXT is at 18.3.

Speaker #3: Wobble at 18.8 and non-NEXT at 12. So I guess that whilst the it might look worrying from a margin perspective that it's non-NEXT brands that are growing the fastest because the lion's share of that growth is delivered by brands that are owned by NEXT.

Speaker #3: It's actually good news for margin. Incidentally we had a very exciting conversation about acronyms because we thought you know we've got NEXT owned brands which we thought we could call Noble.

Speaker #3: But I was I was banned from doing that. So there we are. It's NEXT owned brands. The the the Wobble brands have done exceptionally well.

Speaker #3: And I'm and you might expect me to talk a lot about them. I'm not going to because you know for those of you who've had to sit through the last six of these presentations I have done talked to a great deal about Wobble brands and what we're doing to develop new licenses, new brands that either starting or buying creating an environment that is a brilliant place to incubate and build brands.

Speaker #3: I've talked about their fashion price mix of the different brands and how we're trying to make sure that they don't compete that they add something new to the next customer's wardrobe.

Speaker #3: So I'm I'm not going to talk about that. But what I want to assure you is it doesn't mean that it isn't an area of the business that we're working really hard on.

Speaker #3: We still think there's lots and lots of opportunity to grow our Wobble brands. Focusing the other other number that I think is this is the number that sort of sticks out is the next brand in the UK was down around 7 million pounds but it was down.

Speaker #3: And that number looks worrying because I think the question that it poses is well is there something fundamental about the next brand that is on the way?

Speaker #3: We don't think there is. And in fact we think the next brand overall is in better shape than it was this time last year.

Speaker #3: But that number does need some explanation in the UK. First thing to say is online obviously we were up but only slightly. That number of the 14 million increase needs to be taken in the context of the 70 million increase in the sales of non-NEXT brands.

Speaker #3: Now we work very very hard to ensure that the the brands we have are offering something different. But inevitably there must be an overlap.

Speaker #3: So the fact that those fact that we've parked so many powerful competitors on NEXT's front lawn means that we think that some of you know that NEXT wouldn't would have grown by more had those brands not been there.

Speaker #3: So we we think that 2% is not a fair reflection of how much better or worse the next brand is. Than last year. And in retail there this time last year we think that we got a big gain from competitive disruption in the second quarter.

Speaker #3: And that obviously reverses out. And if you look at the two-year number for retail it's up around 2.3% for the next brand. So we think you know taking those two things together we think that we're not concerned about the next brand.

Speaker #3: Particularly as when you look at the international business the next brand is still growing very strongly. 16% delivering the lion's share of growth. Well more than half the growth overseas.

Speaker #3: If we just sort of break the overseas growth down into aggregators and NEXT direct what you can see here I think straight away is I think this is the first time for many years that we've reported the NEXT direct business growing much faster than aggregator.

Speaker #3: Well not much faster growing as fast as the aggregator business. And you can also see that aggregator business at 23% is lower than the 33 and 61% that we reported that we told you about for Zeos in the second half.

Speaker #3: So you can see that our aggregator business is the growth there is beginning to moderate as we begin to annualize some of the gains that we made last year.

Speaker #3: Focusing on the next direct business and breaking that down into the sales that were driven by marketing and those that came naturally from underlying growth 23% of our growth in the half came from marketing.

Speaker #3: And the the surprising thing here is that having grown our spend by 63% we haven't seen any erosion in the rates of return we're seeing on the advertising.

Speaker #3: I mean they've they've nudged forward. But we would expected those to move back. Not below the 150 but we'd expect them to be below last year's number.

Speaker #3: And if there's one thing that is driving the exceptional growth of our overseas business it is the maintenance of these returns. Because we don't start with a fixed budget for marketing.

Speaker #3: We spend as much as we can as long as we're getting the returns. The things that we think are driving those returns are improving technology.

Speaker #3: You know this is not our technology. Improved technology of the media partners we work with the Googles and Metas of this world. Partly their better technology.

Speaker #3: Better targeting of customers and partly us learning to use their technology more effectively. Secondly and I can't understate the importance of this. All the work that we've done to improve the website functionality and delivery services serves to reinforce the marketing.

Speaker #3: If every customer who comes to our website through an advert has a higher probability of a sale because we've improved the functionality or the payment type or the way the basket works or the delivery service makes them more likely to come back that marketing pound becomes more effective.

Speaker #3: So our our websites and services have driven marketing growth. EU media costs have come down. We can't take the credit for this. This is all about the de minimis tax and three pound levy in Europe which has dissuaded some of the companies who import very cheap stock at very low prices under the were importing under the tax rate.

Speaker #3: It has dissuaded them from spending as much on advertising in Europe. And finally there are lots of countries where we had virtually no advertising last year.

Speaker #3: So they were sort of virgin territory. And we were able to spend more money in those in those territories without eroding overall margins. And the final thing and again I'll I will stress this much more when I present this to our my colleagues back at NDB.

Speaker #3: But cost control and maintaining the right margins by getting our pricing right is absolutely central to delivering the profitability required to drive the marketing.

Speaker #3: All that sounds fantastic. But that does mean that 1% number looks a bit anemic it's not as bad as it looks. And it's all this is all about the war in the Middle East.

Speaker #3: First quarter of underlying growth was down 8%. In the second quarter it was up 11. The 11% isn't a good number because of the pent up demand.

Speaker #3: But if we look at the last 15 weeks of trade our underlying trade the trade that isn't driven by marketing was up around 8%.

Speaker #3: And that and that begs an interesting question about the nature of our overseas customers versus UK. And what I'm going to talk about first of all on this is the customer spend.

Speaker #3: What this graph shows is for the UK the spend by tenure of customers. So customers who've been with us three years on average spend 203 pounds.

Speaker #3: A year those who've been with us for just a year spend 101. If we look at the shape of that maturity curve overseas we were surprised to see that it was pretty much identical.

Speaker #3: It's a a little bit lower but it's pretty much identical. And that is not what we thought we'd see. We thought we would see far more occasional customers and that customers not coming back or extending their portfolio products overseas nearly as much as they have done in the UK.

Speaker #3: That number in fact is a little bit understated from the mathematical number because the Middle East takes so much per customer. So these numbers are basically for all of our international customers excluding the Middle East.

Speaker #3: The Middle East customers this line just shows what the Middle East customers spend per per customer. And it's much much higher. So if I'd included that it would have given an artificial view of what our international customers spending.

Speaker #3: But underlying international customers seem to be behaving in a way that isn't dissimilar from our UK customers. We were I said surprised by that.

Speaker #3: But all of you because you're so much cleverer won't be surprised because of course in the UK it doesn't mean that the next brand is as attractive overseas as it is in the UK.

Speaker #3: Because in the UK we've got stores and most of our online customers also spend in stores. So it it doesn't mean that we're going to the next brand will be is as powerful overseas because we don't have the store sales.

Speaker #3: But it is nonetheless very encouraging for the economics and development of our online business. In terms of retention rates again we were pleasantly surprised by this.

Speaker #3: We thought these are the UK numbers. So if we have 100 customers in who we recruit this year 35 of them will reorder next year.

Speaker #3: These these numbers are sort of the normal numbers we'd see in an online world. If we look at the overseas numbers again remarkably similar.

Speaker #3: We thought there'd be a lot lower. Because of we think stores both acting as collection and returns points and our credit offer would make the UK customers far more attentive than overseas customers.

Speaker #3: The balancing factor is the amount we spend on marketing. So in the UK we spend 3.8% on marketing and in effect overseas the 10 part of the 10% we spend on marketing isn't about just gaining new customers.

Speaker #3: It's about doing the hard work that the stores are doing in the UK to retain customers. And all of that filters through sort of into the economics of the two businesses.

Speaker #3: I I I should say on that sorry that the that if you look at the difference part of that is paid for by next by making lower margins overseas online than we do in the UK.

Speaker #3: And part of it's paid for by the customer by us making higher gross margins. If we look at the three areas of of of focus starting with product we've talked I've again I've talked what many of you will consider to be and certainly my colleagues consider to be ad nauseam about newness quality and choice driving our ranges forward.

Speaker #3: And I do think that we have made a step change over the last two or three years in terms of the newness in in in some of our ranges.

Speaker #3: What I want to talk about today is just some of the work that we've we've done on quality and choice because it could sound like this was just an act of will.

Speaker #3: You know that oh yes you know the boards say more newness and everyone rushes off and gets more newness. But it's much much harder than that in terms of giving customers real choice.

Speaker #3: Because it involves a whole load of work that if you don't do it you won't get the choice and quality that you would if you you put the the hard leg work into inspiration.

Speaker #3: And I think again there's a bit of a myth here that sort of people think well in an AI world all you've got to do is ask ChatGPT what the latest trends are.

Speaker #3: And it will tell you. But of course all ChatGPT can do and all of our all our numbers can do is tell us what has been it it can't get those flashes of inspiration that our buyers and designers get when they go on inspiration trips to overseas capitals to new fab to fabric fairs in Shanghai to new mills to new suppliers.

Speaker #3: Exhibitions art art galleries all of the things that give people that little spark of inspiration that actually you you you need a human being in our experience.

Speaker #3: You need a human being to drive. And you then need to spend the time designing it. And again here I think there is a trap because when AI first came along people who'd you know I I did actually sit down with a one of our designers at NEXT who sort of he'd been to St Martin's College literally and he was saying oh look what I've got to do is put these prompts into AI and it generates the this wonderful graphic.

Speaker #3: And what you know that was exciting at first but what we found is those graphics didn't sell. It was pretty much universal. AI generated graphics didn't sell.

Speaker #3: And the ones that it seems to be going the other way. The graphics and stripes and designs that really work the back color balances are the ones that are done with human hand human eye and so they get have an emotional response.

Speaker #3: And we're putting more time into the work we put into painting drawing screen printing wood blocks design shape design. And finally you can get the inspiration and the design but you then got to do the development to really elevate particularly fabrics and washes and dyes.

Speaker #3: And that involves not going to the supplier and say can you give us a fabric that looks roughly like that. It involves going to the mill often long before you've you've decided what garment it's going to go into and develop fabrics with mills.

Speaker #3: We're not doing that universally. Others do it more than us. But it is something that the more we do it the better fabrics we get.

Speaker #3: And it's not just about the base fabric. It is also about the wash techniques and dyeing and spinning and yarn manufacture that drive or materials that go into home.

Speaker #3: The more we can do further upstream of the development does two things. First of all it means we get better quality. And secondly it means we're exposed to some of the new trends in materials that ultimately drive the trends in fashion.

Speaker #3: All of that takes a huge amount of time. And so whilst technology and warehousing have we have reduced their cost as potential sales actually in product we've increased product costs as a percentage of sales.

Speaker #3: Partly to do this and partly to seed new wobble brands. And so there are questions like is this just a question of us throwing more money at it or can we be cleverer.

Speaker #3: And we think there is a we think there's a big pot of gold here basically. And that is the amount of time that we spend our product teams this is not an admin team in product.

Speaker #3: These are the product people themselves the amount of time they spend on admin. Is around 25% of their time. And I I checked with one of our product directors you know because the the sort of O&M people came back and said oh it's 25%.

Speaker #3: And I went to one of our directors said is it really 25%. It can't be. And she actually said to me no no it's it's it's more than that.

Speaker #3: And so the the the feeling is that it's actually taking more of their time. It's a bit like kids homework things you really hate doing seems to take a lot longer than the things you enjoy doing.

Speaker #3: But nonetheless those admin tasks are because there is more and more data that only the designer the buyer the merchandiser can put into the the the system whether it be information that the fabric mills need that regulators need that imports team export team the whole management of data for the websites if you don't put in that a feature of a garment if the buyer doesn't tell you that this is a super soft touch whatever it is then when the customer searches for super soft it won't appear in the search results.

Speaker #3: So buyers have to do far more in terms of managing website attributes admin and store planning warehouse warehouse management all of those things require an enormous amount of data and only the product people can do it.

Speaker #3: And our systems at NEXT when we have new people come to NEXT they the the product people say these are brilliant systems. Your systems doing an integrated way what other companies do with a whole load of spreadsheets that are sort of loosely held together.

Speaker #3: And that's great but that that integrated system is one that we haven't fundamentally changed since 2003. We've just added the amount of data people put into it.

Speaker #3: And it works like a spreadsheet. It's incredibly arduous and difficult. And And our to put in the data and it's slow. So we're introducing three new product systems this this year production management system this is production management this is where we we our merchandisers need to check that the when the mill says they're going to produce the fabric on the 14th of September they really have done that.

Speaker #3: And there's an interesting lesson for life here. In that if you don't ring them and say have you done it it will run late.

Speaker #3: So you've got to do that. You know the squeaky door gets the oil and at every step of the production process if we are not monitoring it and managing it step by step things run late.

Speaker #3: So that that's it's a very arduous task at the moment the production management system which to a degree allows our suppliers to link in and tell us when they've done things rather than us have to chase them or save a lot of time.

Speaker #3: Got an online imagery and attributes fusion system and a data entry system. And the last one of those of all the systems at NEXT that is the one that I get the most vociferous complaints about.

Speaker #3: You could argue that's because product people are naturally more vociferous than those who are prepared to take it in other parts of the business.

Speaker #3: But it is a really important thing. We think those systems altogether can save at least half the time that we're spending on admin. And that is time that we can spend on doing the things that the product people are employed to do which is produce brilliant product.

Speaker #3: In terms of productivity the other area we're getting good gains in productivity is our warehousing. We've talked about the 500 million pounds that we are planning to spend on ounce or three.

Speaker #3: We spent about half of that so far. And the good news is that is beginning to pay dividends in terms of costs. So we can see warehousing costs coming down as a percentage of sales.

Speaker #3: And I should stress that this includes the cost of the depreciation and rent of the new warehouses. So this is fully costed still coming down as a percentage of sales.

Speaker #3: A lot of that growth but not all of it is driven by people productivity. And what this shows is the pence per unit dispatched per customer.

Speaker #3: The amount we spend on wages divided by the amount of that we send to customers in a given month. That varies month by month naturally.

Speaker #3: That's what it was in 2024. What you can see is that when we introduced the new when we introduced new mechanization last year we we got a big dividend.

Speaker #3: And we thought that that was it. The exciting thing is that partly as a result of fine tuning the mechanization and getting it working better and partly as a result of a whole raft of things we've done to improve warehouse productivity.

Speaker #3: We're still seeing gains. And I think there's further to go on that versus last year. I think that will continue. And part of that 7 million upgrade today is are the gains that we've got from the sort of unexpected improvement in productivity in our warehouses.

Speaker #3: In terms of service level there's a sort of good news bad news story here. Good news is this is our what we call notif not delivered in full and on time.

Speaker #3: This is a potential parcels that aren't delivered on time and in full. I should stress this looks like a very bad number. This is the 2024 numbers.

Speaker #3: It looks like a very bad number. It's not as bad as it looks because the vast majority of failures are parcels where we deliver four four of the five items today but one of them is late and is delivered tomorrow.

Speaker #3: So this is not you know we're not saying 10% of everything feels late to customers. It doesn't. 2025 when we as we got the new mechanization working and new capacity up and running you can see that improved.

Speaker #3: Still off our target of below 6%. This year we started really well. We were below our target of 6% for two months. So we thought we were onto a winner here.

Speaker #3: But as volumes begin to began to increase and the warehouse began to run hot you can see that still better than last year but we have seen a significant uptick.

Speaker #3: And what what that is all about is it's about the the glitches in the system and the mechanization. When you're not that busy you can rectify and correct in day.

Speaker #3: When you're running up to the wire at volume you can't afford to have those glitches and and errors. And some of the mechanization failures and system errors that are corrected very quickly and we would tolerate in quiet times we cannot tolerate at busy times of year.

Speaker #3: So we have got I think we've got a big job of work to do to go back and say actually we kind of we we need to move towards a sort of zero tolerance approach to glitches.

Speaker #3: And it's not enough just to say we fixed them. We need to do much more root cause analysis. We do need to do much more volume testing to actually generate those errors in advance of them happening in simulation so that we can correct them before we happen.

Speaker #3: And that's a big job of work for our systems team. It is a it is a lower job. It won't be as burdensome as it was with the help of AI.

Speaker #3: And that is my slightly clumsy segue into the next section. Last time we talked about AI across the board about how all the different departments were developing AI.

Speaker #3: I just want to focus on what is by far the most exciting part of AI development in the group. And that's how our technology team are developing AI.

Speaker #3: We started to introduce assistive AI that I get told off for this. But to me this looks a bit like a sort of a spell checker and a predictive text is for coders.

Speaker #3: So this you know helps you write code. And that's been introduced that in 2024. And it did affect both our headcount and our cost as a percentage of sales.

Speaker #3: So we think you know that that was very positive. What we're looking at now is how we deploy agentic AI. And you know whereas assistive AI does what it says it assists agentic AI really does the work.

Speaker #3: It actually does it. And when you see it it is it is astonishing. And it only comparison I can think of is that it's like you know the difference in a calculator and a spreadsheet.

Speaker #3: Obviously you're all far far too young to remember the first calculator. But I remember the first time age seven I saw a calculator. And I was awed by it because I could work out whether my parents had paid me the right amount of pocket money.

Speaker #3: And it was 70 so I could adjust for inflation. All of those sorts of things. And I thought that was wondrous. Until the spreadsheet came along and then you realized the calculator is like a toy.

Speaker #3: And that's what agentic AI is compared to assistive AI. And just to sort of put that in context of what we're doing about it this is our total development life cycle.

Speaker #3: So and you know a lot of a lot of businesses will use the same development life cycle. It's called agile starts with ideas and concepts specification coding deployment.

Speaker #3: And support. And those are the stages you have to go through. In terms of the people required to do that you have lots of different roles.

Speaker #3: And they don't all do one. They overlap. In terms of those elements of the total development life cycle that they look after. And what we're doing is we are developing agents to sit alongside all of those roles and to do those functions.

Speaker #3: And the people managing those functions will move from the sort of doers to manage to managing the agents doing the task. That is kind of the vision.

Speaker #3: There is a lot of work to do here. And you know you can't buy an agent out of the box and stick it up and say well you get on with it.

Speaker #3: Do you do my do my business specification. You need to put in the time to give it the business context the business rules apply guardrails very importantly apply security.

Speaker #3: It's a bit of a you know thing at the moment. But security is a big part of designing agents. You need to train the agents.

Speaker #3: You need to design them in such a way so that their LLM independent so that they can sit it doesn't matter whether they're using as a sort of underlying engine whether they're using Claude or ChatGPT or another provider.

Speaker #3: Of of AI. Because if you don't do that you'll end up overpaying for the underlying AI. And you need to ensure that they are cost effective in terms of the way that they use processing power.

Speaker #3: So where we are up to with this is we've developed and piloted three of the agents. And we've been gunned to deploy those three agents across some areas in the business.

Speaker #3: In terms of the total plan we anticipate that we will have piloted all of these agents by February next year. And be well on the way to deploying them by June July next year.

Speaker #3: Now to me this look you know when you talk about systems project normally it's measured in years not months. So I was surprised at the speed with said they can do this.

Speaker #3: But so far we have we have managed to pilot and deploy agents much faster than I thought would have been possible. And just to sort of give you a sense of the power of these agents we we on some of our websites and some of our apps we don't have a share function.

Speaker #3: And we've always looked at it and it's just been too expensive to develop and not and considered not worthwhile. And traditionally in terms of development time it would have taken 11 days to develop using traditional coding with assistive AI.

Speaker #3: We'd have got a you know a good gain maybe between 10 and 20 percent. It might have taken 10 days. When we gave the specifications to a coding agent to write it took them 20 it took it 24 minutes and 29 seconds.

Speaker #3: To do what one of our coders with assistive AI would have taken 10 days to deliver. That's sort of 10 working days. It took about half a day.

Speaker #3: Obviously to manage the agent and then get the coding right and to make sure that you know to read out the errors. But still a very dramatic reduction in time and a huge increase in productivity.

Speaker #3: There's a caveat here. Because it's a bit like that sort of demonstrator that works brilliantly. But then when you look at the whole thing we actually and this whole project ends when we only saved 17 percent of the time.

Speaker #3: And that was partly because we had to put a lot of effort into to developing the agent as we went along. And some of that will be reusable.

Speaker #3: And partly because these agents will only really work really effectively when you stitch them all together. And that makes it look like it's a sort of you know a rugby line with a ball being passed down.

Speaker #3: Actually because there there are lots of functions where different agents will have to talk to three other agents. So the work to stitch these all together means that the huge gains that we think are possible will take time to deliver.

Speaker #3: But we're targeting 30 percent improvement in productivity by February 28. Now you'll know that we spent 200 million on software. So instantly you'll go back to your spreadsheets and type in 30 percent 200 million that's 60 million saving.

Speaker #3: Don't do that. Partly because nearly half of the cost of what we spend on systems is infrastructure and software. And obviously the cost of that with agentic AI will go up.

Speaker #3: But also don't assume it's 35 million. Saving on people. Because if we if that were to be the case it would be a huge failure.

Speaker #3: Because the really exciting thing about this in the context of a company turning over 6 billion the 35 million isn't what matters. What matters is the ability to deliver projects so much faster.

Speaker #3: There isn't a single project in the business single new project that doesn't in one way or another involve a system change. And it's normally the rate determining step.

Speaker #3: So our hope is that the speed at which we can write software will accelerate the speed at which we can develop the whole business.

Speaker #3: I think the other the other point to make is that it's not just about speeding up projects we would have done. It's about doing projects that in the past just wouldn't have been conceivable.

Speaker #3: We have a mainframe that sits at the heart of all of our stock and price processing. It's incredibly effective machine at doing huge amounts of data.

Speaker #3: In very short period of time. And but the coding for it I've said in the report hundreds of thousands. I checked with the hundreds of thousands of lines of code that the person who who knows about these things I asked said actually it was millions.

Speaker #3: But I didn't want to put that because you'd think I was exaggerating. It's millions of lines worth of code. That is have been built over time and desperately needs to be modernized in order to speed up the rate at which we can improve and modernize the rest of our software.

Speaker #3: When we last looked at this the cost was 50 million. We still would have done it. But it wasn't the cost that held us back.

Speaker #3: It was the fact that actually the business would have ground to halt because so many so many other projects would have need mainframe development time that we just couldn't afford the time.

Speaker #3: We now think and our planning to start modernizing our mainframe coding and we think the cost will be 10 million. And that we'll be able to do it in a modular way that allows the rest of the business to continue moving forward.

Speaker #3: That does beg the question like what are people going to do. And there's a as I think as well as producing far more volume and developing ideas we wouldn't have been able to do before.

Speaker #3: I do think the nature of systems work is going to change. You know solving business problems despising new applications making the business aware of what this new technology can do.

Speaker #3: Training and managing our agents that the agents building new agents maintaining the security of the system. Integrating with third parties and controlling costs are going to be a big job of work.

Speaker #3: So I. My hope is that we don't see a big reduction in people. I think over time we will see less cost. But the real prize is to generate more productivity.

Speaker #3: And more production. Just as a final note on costs we spent 200,000 last year on AI. 1.2 million this year. We'll spend at least 3 million next year.

Speaker #3: And unless we design our agents very very rigorously to use costs carefully we could end up spending more on AI than we did on the original people.

Speaker #3: Not quite. But we could end up spending a lot of that productivity gain. So that there is a a still a big job of work to do.

Speaker #3: Albeit a very different type of job. And on that note we're going to finish and go to questions. I think the summary is well we haven't done what we often do is go through every area of the business and say what we're doing.

Speaker #3: We've just we've picked three areas where we think is there are really exciting projects. Product warehousing systems. What I want to assure you is that pretty much every area of the business has exciting projects.

Speaker #3: These are this is not the three things we're working on. These are three of the things we're working on. But what I hope they can they do is give you a flavor of the sort of depth of thought and energy that is going into different parts of the business to move it forward.

Speaker #3: And on that almost motivational note I'll throw in this guess. Sorry Anne. Yeah. Yeah you're next. Remember to use the microphones everybody. You've got these.

Speaker #1: Thanks it's Anne Critchlow from Berenberg. I wonder if you could talk please about input costs. So polyester cotton freight and any sort of price increases that you might expect to put through for spring summer on the back of those.

Speaker #1: And then secondly could you talk about your thoughts on whether it's more attractive at this moment to create new wobble brands organically or perhaps look for acquisition opportunities.

Speaker #1: Thank you.

Speaker #2: Yeah. So I think the answer to the first question is that we're not seeing nearly as much of the costs filtering through to factory gate prices as we thought.

Speaker #2: So if I look at what our current the the contracts we have placed so far for spring summer. And you know we haven't placed massive amount.

Speaker #2: But the the amounts we have placed for spring summer we're looking at light for light price increases around 1 to 2 percent. So not much.

Speaker #2: And I think there are two different things going on here. There is an increase in input prices. But part of that has been paid for by an increase in productivity in our supply base.

Speaker #2: And there are you know all this technology they're getting smarter as well. And I wouldn't also underestimate the impact of the reduction in duty on goods from India.

Speaker #2: We get a meaningful percentage of product from India. If all of that you know if and I'm not saying we do. But let's say we get 10 percent from India.

Speaker #2: You know and and duties come by by 12 percent. That reduces our total prices by 1 percent. But it's not the effect on India that is the most dramatic thing.

Speaker #2: It's the the effect it's had on all the markets competing with India. That have had to sharpen their pencil as a result of that.

Speaker #2: So 1 to 2 percent is the is the short answer. And in terms of wobble you know are we getting more productivity from buying in a brand or from developing a new one.

Speaker #2: There is no rule of thumb. You know some of the brands that we've brought in have been amazing. And some have been average. And some of the brands we started from scratch have been phenomenal.

Speaker #2: I mean but some of them have failed. So I think what it comes down to ultimately in both the ones we buy in and the ones that we develop is the quality of the idea behind them rather than whether we're bought or devised.

Speaker #3: Is that working? Fabulous. Thank you. Good morning. It's really well from Jeffries here. A couple if I may. So first of all possibly the slightly more boring obvious question on this UK slightly downgraded outlook for half two.

Speaker #3: Is that anything you're seeing now or is this more just you looking ahead at the various input costs people are facing. And the extent to which that could carry through to FY28 as well please.

Speaker #3: Second question is around the competitive landscape in Europe obviously big changes to diminish you flagged the impact on the media spend there. Are there any broader impacts you're seeing in terms of pricing competitive behavior stuff like that.

Speaker #3: And if I could squeeze one very final one in.

Speaker #2: It's too limited. Time at the end we will definitely come back.

Speaker #3: Sorry this is me being cheeky.

Speaker #2: Otherwise you get inflation. We've got to fight inflation in all things. Especially Anne's question. So in terms of your boring obvious question are we seeing the numbers now.

Speaker #2: I think the trouble with your boring giving you a boring obvious answer is that they have to tell you what our trade was. And that would be a trading statement.

Speaker #2: That'd be new information that would be coming to the market which I don't think would be appropriate in a in an environment you know even as August as this one.

Speaker #2: Well well I think we have definitely seen some softer weeks. In the I'm not going to give you an average for the last seven weeks.

Speaker #2: We have seen some softer weeks. And I I think there are signs. But that what I think what we said in the in the in the book is that this is more about our anticipation than what we've seen.

Speaker #2: And the next question which was much more exciting is the competitive landscape in Europe. Which is such a big subject that I wouldn't want to sort of get into the nitty gritty of it.

Speaker #2: I think we're not seeing any significant change. In a that we can discern. But I I think the other thing is to to be honest about it is we don't spend a huge amount of time looking at it.

Speaker #2: Because we you know the most important thing that we look at is what response are we getting to the product that we're selling in the various countries that we sell it.

Speaker #2: And we're constantly experimenting with prices and services in order to get that balance right. So we're kind of trying to feel our way to what is the right level of price for us.

Speaker #2: And how much we can spend on marketing rather than looking at market data and then trying to tailor what we do to that. Because actually you're much better to be responsive and look at your own numbers than you are to try and impute what's going on and then respond to phantoms that may or may not exist.

Speaker #3: Morning. Matt Clementson Barclays. First question on you mentioned the shifting spend from cost to serve to marketing. I just wonder what the market implications of that are.

Speaker #3: Is it going to drive acceleration in market consolidation do you think. Or is it net neutral. And the second one on international margins. You mentioned wobble having more pricing power.

Speaker #3: Any color on that relative to next brand. That would be very helpful. Thank you.

Speaker #2: Yeah. So I think just starting with the pricing power and all that. I think again this is very much test and trial. It's not that we've it's not that we started with the assumption we can get more pricing power.

Speaker #2: It's that we put it on as a certain price. We got very good traction. And and it was only when we stopped and looked and went actually at 24 percent we are over profiting and leaving these businesses vulnerable to competition that we lowered it to to 20 percent.

Speaker #2: So I I suppose you know I think if you'd say to me put the question a slightly different way and say do you think you've got room to increase your prices in Europe without affecting sales.

Speaker #2: My guess to that would be probably yes. But I wouldn't want to do that. Because I wouldn't want to risk it. We're making a very healthy profit.

Speaker #2: So and it'd be quite a a big risk to to take. In terms of market consolidation again I think that's way above my pay grade.

Speaker #2: I think that is something that you know you and your big economics departments will do far better than I can guide you on. Richard.

Speaker #3: Thank you. Morning. Richard Chamberlain from RBC. Simon I think you mentioned that the UK retail stores you'd seen some quite significant productivity improvements in the first half.

Speaker #3: I wonder if you can give a little bit more color on which ones had the most impact on margin. And then second in the US which you're obviously now breaking out in terms of disclosure or giving a little bit more I guess given the dominance of Amazon in in that market particularly in areas like kids wear online and and so on.

Speaker #3: Should we assume that the US sort of structurally will be a lower margin market on a sort of medium to long term view for next given Amazon's sort of customer focus likely presumably higher take rate and so on.

Speaker #3: Yeah. They're the two questions. Thanks.

Speaker #2: Yeah. No. So the US I think it's a good question. So I think it will have a lower lower profitability than our other businesses.

Speaker #2: Mainly because at the moment we're shipping stock from the UK. To the to the US. And that you know that that is much more expensive than shipping it to Germany.

Speaker #2: Or even the Middle East. So I think that you know structurally the question do we pay for that or do the customer what we're paying for most of it.

Speaker #2: So the margins are lower. But it's still more than 10 percent. So you know still comfortable margin. In the US in terms of productivity in stores I I but but just sort of coming back to sort of your question on pricing.

Speaker #2: We didn't start by looking at the market and saying what price is coming forward to charge. We started by with the prices we that gives us a respectable margin and then see if we can sell it.

Speaker #2: In terms of stores there is no one measure that we've introduced. It's not like we suddenly introduced you know self serve tills. Although we we are trialing that at the moment.

Speaker #2: But we have not introduced any new technology. What we have done that is making a big difference is we've we have lots of different productivity measures in store.

Speaker #2: So we can see how productive each member of staff is our on say till transactions. The average time on a till transaction a store pick up for a collection for a directory online customer.

Speaker #2: Replenishment from stockroom shop floor. We can measure all of those things. And what we were doing is we were measuring in the past we were measuring those in silos going well let's look at our delivery productivity and focus on improving the productivity of the people who are there.

Speaker #2: What we're now doing is looking at it horizontally. So we're saying for you Richard how do you do on all these different areas. Because that is a much more effective way of finding people who've got the opportunity to be more productive than it is by trying to do it your delivery manager doing deliveries and your till manager doing tills.

Speaker #2: So I think that is the biggest change.

Speaker #3: Hello. Good morning. Richard Trainer from Bernstein. First question on AI. You contrasted its inapplicability to the inspiration and design process in clothing with its applicability in the technology function.

Speaker #3: I was wondering if there are other areas of the business where you think AI will be very helpful. And secondly I was wondering about the impact of peer to peer marketplaces.

Speaker #3: And whether you see them having an impact on markets in the UK or or abroad. And if so in which types of product.

Speaker #2: So peer to peer?

Speaker #3: Yeah. Peer to peer reselling marketplaces. I'm thinking of vinted.

Speaker #2: Right. I see. Sorry. Not you're nothing about the house of lords there. I was just checking. No. No. No. Okay. Good. It's just right.

Speaker #2: In terms of AI we we at the half year we did talk a lot about all the different departments. So I I won't go through it that all again.

Speaker #2: But if you're interested re you know go back to the the half the sort of full year report in March. It's AI is applicable to every single department.

Speaker #2: And it's still applicable by the way to to product. One of the new product systems we talk about data entry thing. Not in phase one but phase two of that on the data entry.

Speaker #2: The our product people will be able to take an email from a supplier with say the fabric content of a fabric and just put it into AI who will then populate the data entry.

Speaker #2: Rather than having to transcribe it. So there are you know I wouldn't want to say that there's no applications for AI in product. There are.

Speaker #2: But it it's everywhere. I mean the call center you know our pro our our pretty much as advanced in terms of their use of AI as as as as technology.

Speaker #2: Warehousing and retail we haven't we we're only scratching the surface. But there's huge opportunity in warehousing. In terms of warehouse management the elimination of high volume glitches.

Speaker #2: All of those things I think AI can help us be much smarter at identifying root cause analysis on problems. Better responses to those problems.

Speaker #2: You can see that you know a sort of ever watching eye that's bright and that can see work out consequences of one area in a warehouse and what effect it will have on you know the whole chain of events after it.

Speaker #2: And where you need to boost production further down the line to compensate a blockage early on. Or that there is an enormous amount that the various departments can do with AI.

Speaker #2: But say I don't want to sort of repeat what I said earlier on. In terms of peer to peer market it it it may well grow and it's you know I think what it offers is something different from next.

Speaker #2: And I don't think and you know it may well have an impact on us. But as with your past things were were different models impact on us.

Speaker #2: Our instinct is not necessarily to copy them. Because I think you know one of the things that we really that goes to the heart of next service is reliability fit ease of return.

Speaker #2: Pricing consistency. And none of those things can be offered on a peer to peer basis. And just the quality of service. You know will it turn up on time?

Speaker #2: What's it what do you do if it doesn't turn up on time? So it may be a fantastic market. But it's not one that we're actively looking at at the moment.

Speaker #2: Because it would we would have to forego so many other promises that we make. In terms of our existing service. We're done.

Speaker #3: Thank you Simon. Sridhar Ramkali from UBS. A couple of questions. Just to follow up on Richard's question on the US earlier. You've certainly sounded maybe it's just my read of it sounded a bit more positive on or satisfied at least anyway on the US performance here.

Speaker #3: Have you made any changes in terms of product or how you're going to the market? That's delivering perhaps better growth from a lower base better engagement.

Speaker #3: If you could talk to that'll be great. Secondly I think you've introduced this concept of underlying sales growth. Eight percent second half. What exactly is it?

Speaker #3: Is it the growth that you should expect to see if you don't spend any more on marketing? Or if you keep marketing flat line from here?

Speaker #3: What would that look like in I don't know two years time? How should we think about it?

Speaker #2: Yes. You shouldn't. It's it would be my advice. I think because it's a remainder. It's it's not a thing. It is it is what's left over.

Speaker #2: So what we what you know for each of these marketing campaigns we identify incremental sales. And one of the sense checks we do on whether the sales are really as incremental as we think we are is if we add up all of the sales that our marketing team tell us that we're generating.

Speaker #2: What does that give us in terms of growth? Because if it gives us fifty percent of twenty percent you know growth that's actually twenty percent you know that they're overestimating it.

Speaker #2: So or the the the underlying number is really a remainder number. It's the the growth that we can't attribute to marketing. Which you might assume was either people coming to the website naturally or existing customers unprompted buying again.

Speaker #2: But you'd be a lot braver than we are if you assume that that will continue on ad infinitum. Was that it? Oh. The US.

Speaker #2: You say a lot more excited about the number as well. Two hundred and fifty percent. It's hard not to be excited. Hard not to be excited about it.

Speaker #2: It is what I would stress. It's still a very small number. You know two hundred and fifty percent on ten million a year. It's still not a lot.

Speaker #2: Particularly at relatively low net margins. So we're not getting excited about it yet. In terms of what's triggered it is really all about different avenues of marketing reaching the customer.

Speaker #2: We haven't changed the product offer or the pricing significantly. Work.

Speaker #3: Morning. It's Worko Coins from BNP Paribas. Two questions firstly you've talked I know a lot in previous presentations about newness. But you did I think talk about the in your statements about menswear lacking a bit of newness.

Speaker #3: Wondered if you just go into a bit more detail about that. Maybe sort of why why after all the progress you've made in women's didn't quite come through in in men's and and what you're doing about it.

Speaker #3: And then secondly on on the average spend per cohort data you showed which was really interesting. You excluded the good stuff the the Middle East.

Speaker #3: Is there anything that you can learn from the Middle East or are there any attributes that you're that you have in the Middle East that perhaps are applicable to to Europe or or any trend that you're seeing that Europe is moving more towards that Middle East and sort of cohort retention?

Speaker #3: Thank you.

Speaker #2: No. I think I think no. I don't answer second question. I think the only thing you can learn is if you sell to very wealthy customers they'll like this buy more.

Speaker #2: So you know I think there's there's a I think it's it's about the mix of people who have chosen to shop with us rather than anything clever that we've done.

Speaker #2: In terms of menswear yeah. We don't we don't talk a great deal about different areas of the business and that. So I'm definitely not going to go into sort of chapter and verse about what we you know what we're doing and all the rest of it.

Speaker #2: But I think it was it was important because the key there actually and when you read through it is it the thing that drove the lack of newness was the six extraordinary success our menswear teams have had over the previous three years.

Speaker #2: And what you know there is a thing in fashion where success can lead to failure. Can sow the seeds of failure. Because the more successful last season was the harder it is to let go of that you know beige chino and to kid yourself that this year's taupe chino and sand chino are fundamentally different and new from the taupe one that you did last year.

Speaker #2: And I think in essence that will that's is you know it's one of this. And I think the other thing that's interesting about that is that it's a it is a phenomena that when I look at the other businesses that we own that we've seen in menswear generally you know that that I think that that that the same criticisms could be made of some.

Speaker #2: But not all of our subsidiary menswear teams as well. So I think that there the reason I put it in wasn't in order to give shareholders more color about the business.

Speaker #2: It was in order to encourage the teams involved to sort of recognize that actually there's a big job of of work to do. And what I would say is the only reason I put it in or the reason is because it's already started.

Speaker #2: I wouldn't want you to think that this is something that we've just noticed and this is something we're working on for months. But I thought it was it was worth mentioning partly to identify you know as a sort of encouragement to that whole market to sort of think about what we can do to develop it and what we can do on licenses and wobble as well.

Speaker #2: We haven't really got any wobble or licenses on menswear. But also as an example that proof that things do work is provided by the evidence of people who not are not doing it not doing as well.

Speaker #2: And that's that was the real point. It's to give more encouragement to the people who are introducing newness and choice. Yeah. Monique.

Speaker #5: Hi. It's Monique Pollard from City. My first question was just you did a lot of detailed work on the custom cohorts for the international online business.

Speaker #5: And given you have all that granular information now about how they're spending how you're retaining them et cetera whether that then gave you more confidence in the returns you could make on the ad spend and gave you perhaps a bit more confidence to boost that marketing spend over time?

Speaker #5: And then the second question I had was just on the UK online business. You commented that the higher average selling prices and the lower returns rates had reduced your costs as a percentage of sales.

Speaker #5: So just wondered how much the returns rates had lowered and why. And how different those UK returns rates were from the international business.

Speaker #2: So so starting the second question in terms of returns rates generally international returns rates are much lower than they are in the UK. And that's not necessarily a good thing.

Speaker #2: It's because it's much harder to return in France where you don't have you know lots of shops to return in as you do in the UK.

Speaker #2: So generally returns rates are lower overseas other than in Germany which is a market where there are just traditionally very very high returns. And we get higher returns in Germany pretty much everywhere else returns are lower than they are in the UK.

Speaker #2: But I don't think that's a good thing. I think it's a bad thing because we're not giving as good a service as we as we could do.

Speaker #2: In terms of the sort of lower returns rate I wouldn't want you to think that's because we've done something clever about sizing or you know virtual fitting rooms or anything like that.

Speaker #2: It is literally it's just a mix issue. That it's going back to some brands you know and some parts of next as well. But mainly brands who put on low price high returning products that actually that item you've either got to put the price up or we've got to take it off the website.

Speaker #2: So it's it's really by excluding high returning low average selling price items that the mix has changed. Not through us doing something to make the same jumper return less.

Speaker #5: On the marketing spend. The return on ad spend. Yeah.

Speaker #2: So very good question. But again I think the it's not the way we look at it. In that yes that data has been enormously important in driving the marketing forwards.

Speaker #2: But not because at a high level it's right. It's because the marketing team will look at each campaign they're doing in each country and look at how many customers for that type of campaign order a second time.

Speaker #2: Or and a third time. And if that campaign has high retention levels that type of advert let's say advertising for women's shoes and the customers more likely to come back on women's shoes than they are on skirts.

Speaker #2: Then we will do more advertising on shoes. So it's not that the sort of big picture drives me to say come on marketing team spend more money.

Speaker #2: It's actually entirely the other way around. It's that that that adverts that produce returning customers are more likely to be increasing volume because they generate higher returns.

Speaker #5: Hi. David Hughes at Shore Capital. Just a question on the UK. Last year obviously you benefited from disruption at a competitor. I was wondering if you had any insights from retention data around those customers as to how much of that you were able to hold on to.

Speaker #5: Was it more or less than you expected or did you see a lot of that kind of go go away and be a bit of a one off benefit?

Speaker #2: And well the answer is we don't know. Because when customers come to us they don't say and just to let you know I would have bought this somewhere else but I didn't.

Speaker #2: I bought it from you. So we honestly don't know. But looking at the fact that we you know if you look at the two year growth versus the one year growth in our stores I think you've got to conclude that some of that must have gone back.

Speaker #2: Which is what we what we expected. Yeah.

Speaker #5: Hi. Anubhav Malhotra from Palmyra Librem. Just one on stores. You mentioned in the presentation that new stores are delivering better returns than your internal targets.

Speaker #5: Just a bit more color on what is driving that. Is it better locations that you are selecting lower capex or better end deals that you're getting?

Speaker #5: Thank you.

Speaker #2: Yeah. So the the biggest single change is more realistic targets. You know I I think as I said I think it was a year ago.

Speaker #2: Because we hadn't opened stores for a long time. When people estimating stores they were going oh I know what we'll take in Chichester because I remember what we used to take ten years ago.

Speaker #2: And or and that that that was the mistake. Or you know what a new retail park should take is X. But that was what a real new retail park took ten years ago.

Speaker #2: And it's different today. So I think we've reined in our expectations. The reason that we still managed to open stores is as a we we've is because we are also being much cleverer about what we spend on new stores.

Speaker #2: So you know the the big problem with new stores is the amount is the huge inflation. 125 pounds a square foot ten years ago.

Speaker #2: To sort of 200 pounds a square foot today. And when we're looking particularly at where we're going into other people's stores saying actually we don't need to refit all the stockroom and the floor isn't our brand floor but you know it's still a very nice floor.

Speaker #2: So we're going to keep it. I think sort of really managing shop fit costs and getting targets right are the two things that I think have changed.

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