Next Group Plc Unsp/Adr

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

Thank you very much. Morning, everybody. It's lovely to see you all in person, looking thinner, a little bit older than before. And I have to say, from a personal point of view, much as these presentations are quite nerve-wracking in a way, they are so much better than doing a video presentation. It's five hours of recording for just one hour, or one and a bit hours of recording. of presentation, and all sanitized. You can't make a single gaff, a joke, it all gets cut out. Even worse than that, some of you will have noticed that occasionally, before I was taking too long on something, my voice was artificially speeded up. So those of you who remember Pinky and Perky, I sounded a little bit like that through some of the presentation. You'll be perhaps sad to know that there isn't such a button available today. And we have a lot to get through, so I will press on. The first thing to say overall is that throughout the vast majority of this presentation, with the exception of the finance section, I will be focusing on the three-year comparatives. One-year comparatives are so dominated by the closure of our shops and various subsidies and... um grants that we got through covid and abnormal returns rates that i would have spent the whole presentation re-explaining what happened during the pandemic so we're going to focus on the three-year numbers and actually having done that i think there's a lot that it tells us about about the business it is actually informative in itself. The second thing, just to remind everybody, is that this year, as with last year, the numbers are IFRS 16 compliant, reported on that basis. They weren't three years ago, so we've restated the numbers from three years ago to be like-for-like in IFRS 16. The second thing to say is that despite the news today, actually it was a good first half, a much better first half than we were expecting. Sales up 24% on three years ago, 22% on full price sales, 46% of that growth has come from online, so you can see the lion's share of growth coming online. from online, and compound annual growth rates of just under 7% over the three-year period. That compares to a compound annual growth rate of 3% that we gave in our stress test. So the last three years taken as a whole have been significantly better than the stress test scenario that we presented to you three or four years ago. In terms of operating profit, operating profit up 14%. As a result of the wonderful IFRS 16, those profit numbers are actually overstated because they don't include a lot of our lease costs because they are classed as interest. If we take the operational lease interest and include that in the operating part of the business, the true operating profit, is reduced and what you see growth there around 18%. Margins, the group margins have moved from 16.9% to 16.1%. In terms of the main drivers of that margin decline, and all of this will be covered in more detail as we go through, the two big negatives are overseas margin decline and what is euphemistically referred to here as investment in technology, but of course actually spending in technology. The positives are an improvement in retail margin and the online business has got a significant boost from the fact that three years ago we were still printing catalogues and doing all the photography for them. We're not now. Interest significant decline on three years ago. This is all about the step change in debt levels the company did during the pandemic. It's about 300 million off our debt in that time. And a little bit of interest income, about £2 million of interest income from loans to TP clients. Profit before tax up 22%. Profit after tax up 23%. Earnings per share, as well as the share buybacks, up 28%. Moving on to cash flow. CapEx up 42 million on three years ago. Two things going on here. Slightly less being spent on stores, a lot more being spent on warehousing, and more on technology CapEx as well. In terms of capex, the biggest single item of expenditure over the last two years has been our new boxed warehouse in MSL3. We have already started using the floor space in that warehouse, but we're using it for conventional picking. In essence, it's no more automated than what we have at the moment. We're using the floor space. That's taken a lot of pressure off capacity. Towards the back end of this year, we will have a new sorter that will increase our packing capacity. giving total increase in capacity around 15%. As we move through next year, we will begin to commission the highly automated picking systems and high-based storage in Elmstall 3 that will come on stream into the third, fourth quarter. That'll add another 35% to capacity. And then in the following year, we'll move to the mechanised packing system. It's much more efficient and it's also extremely useful for things like total platform because it allows you to have lots of different types of packaging going to the same courier. In terms of working capital, big outflow into working capital compared to three years ago. two big ticket items here stock of 90 million we'll talk about that in a second and staff incentives this is the bonus we paid to our general staff last year that goes in last year's accounts but is paid in cash terms in this year also big swing into the ESOT 40 million pounds This year we expect the ESOT to cost us in cash terms £40 million more than last year. The reason for that is that we expect fewer redemptions with the share price where it is. So we're not issuing more options, but we are expecting fewer redemptions. Buyback is £228 million. We did those all at the front end of the year, partly in order to get the maximum benefit of earnings per share in this year, partly because we thought the stock price was good at the time, which is proof that you are much better at your job than we would be. So you can take some comfort from that. In terms of year-end debt, broadly where we expected it to be, operating cash flow, £664 million is what we're expecting this year. That compares to £740 million estimates at the beginning of the year. There's about £10 million less cash flow from profits because we started the year at £850 million. The next biggest ticket item is the outflow into ESOT as a result of non-redemptions this year. capex and investments much as expected. In terms of investments, the number itself looks low at 3 million. This is because... Although we invested in more assets, we also leased back a warehouse that gave us a big inflow. So those two things pretty much netted off. In terms of customer receivables, 90 million increase. This is the rebuilding of our customer data book. Shared buybacks at 228 million as well. discussed earlier, and £240 million of dividends expected in the year. That's the August dividend we've paid and a 66p interim dividend that we're declaring in respect that we're declaring today. That leaves us with 700 million of debt. That's about 60, 70 million more than we're anticipating at the beginning of the year. I should stress we are very comfortable with that level of debt. We won't work too hard to reduce that back to the 630 that we expected at the beginning of the year. To put it in context, we've got financing of 1.25 billion. The earliest bond we have to refinance, in case, having looked at the bond markets, you're worried about that. The earliest bond, we've got to refinance this in 2025, when hopefully the funding games will be in one way or another over. And in terms of the actual debt of the business, what we are owed by our consumers is almost double the money that we owe in financial debt. So the business starts with very solid foundations in terms of its debt. Moving on to the balance sheet. Fixed assets, £134 million increase on three years ago. £109 million of that is the investments that we've made. Another £25 million of increase in capex. Although we've reduced expenditure on our stores, we've spent a lot more on our warehouse. So our capex has run around £25 million ahead of our depreciation. Goodwill and intangibles, the increase here is largely about capitalised software. We depreciate software on average over three years, so this will be quite a rapid impact through our P&L as time goes on. Stock is where we've got the really big increase, and this requires a little bit of explanation. Stock on paper in July was 38% up. It isn't anywhere near there today. Part of that increase was the increase in the amount of stock that we had on the water. That's all about the fact that we were having to place orders much earlier, between 12 months ago and 6 months ago, in order to account for longer freight times. So as lead times on freight went out, we placed orders earlier. That means at July we had an awful lot more on the water than we did at the same time three years ago. I should stress that that is about buying stock and taking delivery of it early. It's not about being hugely overstocked. If we look at our forecast for the end of the year, we're anticipating that stock at the end of the year will be around 4% up on the previous year. So broadly in line with where we were Jan 22. And in Jan 22, if anything, we were a little bit understocked. So stocks, and we're already beginning to see the value of the stock in the business decline as we begin to sell stock and delivery slow up a little bit. In terms of debt, that's the 331 million reduction that we did, partly as a result of investing the cash that we made during the pandemic in reducing debt, partly as a result of selling these backup warehouses. In terms of our right of use assets and lease debt, have both come down by roughly the same amount. So there you are, it all does add up in the end. Moving on to retail, total sales. Up 1% on three years ago. Full price sales down 1%. Larger result of store closures in that period of time. Like for likes up half a percent. In terms of the first half versus three years ago, you can see two very different performance in the first quarter and the second quarter of the first half. We think that the poor performance in the first quarter was partly as a result of low stock levels. We think the much better performance in the second quarter is partly as a result of very good weather in May, June and July. Very good summer weather in May, June and July. And that had a significant effect. And the reason I say that is because it's important for you to remember next year when it comes to Q2 trading statements. One of the depressing things about being in retail a very long time is that whenever you have a good quarter, there's a big part of you that worries about next year's trading statement rather than taking pleasure in the good numbers. But just look out for that. In terms of long-term retail trends... I think it's too early to call what is actually going on in retail. If you look at the four previous years to the pandemic, sales declined at around 6.2%. That compares to our stress test number around minus 10%, like for like. If we look at where we've been over the last three years, including the estimate for the second half of this year, then the CAGR in the last three years will be about minus 1.7%. Now you could look at that and think that actually retail is beginning to reach an equilibrium with online and ultimately that's a question of judgement. Our sense is that it probably isn't and that although the future decline in retail is unlikely, we think, to be as aggressive as the minus 6.2% like for likes, The 1.7% is flattered by the fact that our sales today, and indeed everyone who's trading on the high street, are benefiting from the fact that a lot of people who were trading in 2019 are not trading today. A lot of those were very direct competitors of Next, so we think that our store sales, to a degree, are being supported by that. Operating profit after lease interest up 34%, giving margins of 9.3 as against 7.0 three years ago. 2.3% improvement in margin. All of that and more is a result of declining occupancy costs. A number of things going on there. The most important thing is the underlying reduction in the actual cash cost of rent rates and service charge as a result of the various renegotiations that we've had with landlords over that three-year period that accounts for around half of it. The other changes are accounting changes. So an increase in fully depreciated assets. That is a real cash saving because it reflects the fact that we are investing less capex in our stores than we were three years ago. And then there's the impact of IRS 16 timing, which means you pay less interest at the end of the lease than you do at the beginning, even though the actual rent you pay may be higher. And the utilization of the onerous lease provisions, the various onerous lease provisions that we've made over the last few years. In terms of lease renewals, we're still seeing an environment that is very benign in terms of lease renewals. On average, the leases that we either have already agreed or that we expect to agree in the current year, where we're a long way down the path of the negotiation, the 74 stores, we expect on average a reduction of 33% in occupancy costs, annualised saving of £12.5 million. I mean, an average lease term of 4.7 years. The number that looks odd there or at odds with previous years is the 4.7 years. During the pandemic, we were renewing on shorter leases. There is a reason for that. If you take the stores that have got a straight fixed rent, we've only renewed those on four years old. If you take the stores where we've done a total occupancy cost, this is at the other end of the extreme where we agree with the landlord to pay them a fixed percentage of sales to cover rent, rate and service charge. On average, we are agreeing to much longer lease terms. So there is a trade-off here for landlords between the amount of risk they're prepared to accept and the length of lease. that they get. If anything that number slightly understates reality because there are a few stores on very short leases where we're in effect holding over on a turnover rate lease and some very big stores where we've agreed to very long leases eight to ten years on a turnover, on a turnover, a total turnover basis. Achieved gross margin down 1.4%, two things going on there. Freight costs, this is uncosted freight that we've incurred in the current year where we're expecting freight prices to be lower than they turned out. And increased surplus costs in retail. The stock... in retail for sale at the end of the summer was 22% up on three years ago, and the cash recovery was down. So the combination of those two things has contributed to the reduction in margin there. Logistics. The 1% here, the vast majority of that increase in logistics costs in retail is about inflation in wage rates and fuel costs, both in the warehouse itself but also in our distribution network. Full year operating margin in retail we expect to be 10.5%. You would expect margins in the second half of a retail business to be higher than the first because of leverage over fixed costs. So that's the retail business. Moving on to the online business. Online, sales up 42%, full price up 46%, compound annual growth rates around 13.5%. Again, significantly better than the long-term rate we put into our stress test, but sort of in line with the first three or four years of the stress test. Again, similar effect to what we saw in retail is if you just take... this year and our take our estimates for the full year we anticipate that sales in online will be down five percent again you could look at that and think is the online thing coming to the end of its is that is the balance between retail online beginning to um stabilize we think to some extent it is but not the extent it looks so take the compound annual growth rate pre-pandemic it was 13.1 from 2017 If you add on where we are, where we expect to be at the end of this year, compound annual growth rate has moderated, but it's still double digit. And our view, for what it's worth, is that over the next three years, we will continue to see the attrition of retail sales into online. In terms of the divisional performance of our online business, Next brand, in the UK, up 24%. The lion's share of the growth we've got has come from label, up 105%. If we look at the label growth that we've got, this is taking 105% and breaking it into the two contributing factors. 50% of that growth has come from expanding the offer of brands we were already trading with in 2019. 55% of it has come from bringing on new brands, in particular, actually, brands like Gap and Reese, where we've also got a total platform arrangement with them. Overseas growth up 41%. This growth is slightly misleading, because if you reverse out Russia and Ukraine, the number's around 55%. So, like-for-like growth, and our overseas business up 55%. In terms of where that growth has come from, You can see around half of the growth has come from the growth in sales on aggregators. The other half has come from light flight growth on our own websites. And it's just worth talking briefly about aggregators, because this is one of the areas where we've slipped on margin. If we look back to where we were in 2019, in terms of participation, aggregators were 9% of our turnover. They've grown 274%, and now 22% of our turnover. And that has had an impact on margin in two ways. In terms of cash versus credit customers, these are the numbers of customers that are trading with us using an account. What you see is lion's share of the growth in customer numbers has come from cash customers, but we have also continued to grow our credit customer base, which I think is the surprise. And I think what I should say here is that this is the continuation of a long-term trend. at the participation of our total customer base from cash customers. You can see that from long before the pandemic, we were seeing a consistent increase in the numbers of customers choosing to trade with us on a credit card or through PayPal or through some other payment method. However, the credit business is still very important to us because it accounts for, we estimate that it will still account for two-thirds of our trade this year. The other thing is that the best cash customers are the ones most likely to convert to credit customers. And if you look at the growth in credit customers that we have achieved, the vast majority of that has come from the conversion of people who started as cash customers. There are very few people who come straight onto the website and for their first order trade on credit. In terms of sales per customer, and this looks like it's rather unremarkable at 6%, but if you look at the growth in sales per customer for cash and sales per customer for credit customers, both of them have gone up by 19%. But because cash customers on average spend less, the total growth in sales per customer is only six. The underlying growth in both credit and cash customers, we believe, is the result of the additional choice that people have on our website through label. And you can see that both in the label numbers and in the sales per customer number. Overseas, a decline of 8% in sales per customer. That number is actually slightly worse than it looks because if you break that down and say, well, how much of that is about country mix? Actually, if anything, the countries that have a higher spend per customer have grown faster than the ones that have a lower spend per customer. So all things being equal, our average sales per customer should have gone up. The reason they haven't is because we have... dramatically accelerated the rate at which we take on new customers through advertising. That does two things. First of all, it increases the participation of new customers as a percentage of our overall sales base. And secondly, the new customers themselves, because they've been persuaded to come to the website by advertising rather than come through just seeking out the brand, on average tend to spend less. What I should stress here is that we're not planning on cutting back our marketing overseas and it's still extremely profitable to do the marketing that we do so it's not that the marketing is unsuccessful it's just that the nature of those customers that we're getting is that they initially at any rate spend less but are still profitable. The other interesting thing that's happened over the last three years is the change in our returns rates and that again needs a little bit of explanation because there's a lot of chatter about returns rates Returns rates three years ago, on average for the company, were 41.1%. If we apply the weighted returns rate of cash versus credit customers, because cash customers return less than credit customers because they're having to pay for it at the point they order, you would have expected our returns rates to have gone down by 2.2%. Two things, three things have pushed that the other way. The first is the mix of aggregators. Aggregators have, on the whole, very high returns rates. We incur the cost of sending out and bringing back that stock. And the countries that have done best overseas are the countries that have the higher levels of returns. Secondly, product mix. The last half on the half three years ago, relatively, we're selling more high-returning product, things like in particular dresses. And then the final thing is there is an underlying change in sort of consumer behavior of 0.9%. What we think that is down to is the increase in the average spend per customer. What you tend to find is that as customers spend more and their habit of using online increases, they tend to over-order more and return more. Still very profitable because obviously you're not having to market to those customers. You've recruited them already. But what you gain by way of saving on marketing by having the customer, you lose a little bit of through the fact that they tend to return more. So in terms of margins online versus three years ago, decline of 2.9%. Just again, walking that through. Unplanned freight costs, as with retail, minus 0.6% impact. And the fact that our label stock, because we don't buy it, we're buying it wholesale or it's on commission, both of which the percentage margin on wholesale and the percentage commission is significantly below our own bought in gross margin. That mix has reduced the online profitability. Markdown. Unlike retail, very little attrition from Markdown in terms of our online business. And that is mainly because although we did see a deterioration in clearance rates online, the sales stock that we had online grew significantly less than the growth in sales. Sales stock was up about 22% on three years ago, as against full price sales, they were up 46%. Warehouse and distribution, adverse movement of 1.4%. Three things happening here, two costs and one benefit. The costs is UK cost inflation, this is fuel and labour, particularly things like HTV drivers. Overseas has a much higher percentage of its costs are distribution and warehousing than the UK. mainly because of air freight, and increase in average selling price has moved it the other way. Because average selling prices have moved up, the number of units we're pushing through our warehouse relative to sales has not risen as fast, and that gives us economies of scale. In terms of other costs, what you can see here is that the rising cost of technology has pretty much, well, has more than been paid for by the savings that we've had on print. Margins for the full year are expected to be 15.3%, marginally below the first half year, and this is the result of depreciation and rent beginning to kick in on the Elmstall 3 warehouse where we're beginning to use the floor space. In terms of the breakdown of margin between the businesses, this is the profit that these are the margins that we made three years ago they are different from the ones that we showed you three years ago for two reasons and i want to explain both reasons um the first is that we have looked much more carefully at the profits in our label business and the costs of our label business. One of the main reasons here is because, relatively, we hold a lot more of our clients' stock than we do our own. It turns slower. We have under-allocated warehousing costs to label and various other central costs where they were getting a little bit of a free ride when they were small and now they've got to pay their fair share. So that has served to increase... the reported profit on our next brand and reduce the label margins to 13.3. Moving the other way, the way we have accounted traditionally for our LIPSY profit, in order to motivate and manage that business, which is run as a separate business, we have taken half the profit they make online and put it into the LIPSY division. This works very well in terms of managing that business and motivating them and making sure they're looking at their profits But because all of their sales go into our online business and always have, but only half of their profits, as they get bigger, that begins to artificially lower the margin in our online business. So what we've done now is put all of the Lipsy profit where it belongs in overseas and label. both for this year and three years ago, and you get an opposite movement of 1% improvement in labour margin and 0.2% movement in overseas margins. So that's all of the adjustments, but we think those numbers are now much better numbers. I think the other thing that's important to say is on the 13.3 margin on labour, although it's lower than we thought it was, and we think we can improve it, We're not anxious to get back to 15%. We think looking at the general aggregator market, both in the UK and worldwide, our margins at 13%, double-digit margins, are unusual for aggregators. So we're certainly not going to punish our clients or our consumers in order to rebuild that margin back to what we thought it was three years ago. In terms of three-year change, you can see Label and Next UK on a light flight basis pretty much in line with three years ago. And then overseas, now one of the things that people used to say to us in the old days, three years ago, a lot of our investors, indeed even some of the analyst community were saying, why are you making so much profit overseas? Surely you're over-profiting and that's a mistake. You'll be pleased to hear that we have corrected that mistake. analyst joke. We always plan for our overseas margin to be 10% in the first half. We underachieved on that by 7.4% and what I want to do is just talk through where margin has eroded by design and where it's eroded by mistake and what we think we can do about it this year and going forward. So in terms of where we've eroded it by design, we used to make very high margins, significantly north of 25% in a lot of our Middle Eastern territories when there was no duty. When duty came in in those countries, we decided that we would take the hit of that rather than pass it on to our consumers because we were already making very healthy margins and still do in most of our Middle Eastern territories. So that is a hit that we consciously took. Technology, as with the rest of the business, our overseas business needs to take its fair share of the increasing costs of our technology base. The areas that were less planned were on delivery and logistics. Now, some of this is the inflationary increases that we've seen in the UK just being reflected in our overseas business. But the lion's share of it is down to what started as surcharges. And during the pandemic, a lot of the air freight costs that we incurred delivering to our customers went up dramatically. because air freight was so expensive. At that time, we thought that we would take the hit of that cost, we'd keep our prices where they were because it was only temporary. As time has gone on, we've realised that a lot of those surcharges have now just translated into higher fuel costs and air freight costs. So we need to look to our pricing in some territories to recover some of those now permanent delivery costs. aggregator participation and margin aggregator margins quite rightly are lower than our own so aggregator target margins would be 9-10% our own sites overseas would be 13-14% the aggregator the increase in participation naturally brought down our overseas margin. That was planned and acceptable. However, the aggregators themselves made much less profit than expected. And that is mainly about returns rates. That unlike the UK, where we planned for a dramatic increase in returns rates, a return to normal this year, because we had so little experience of our... aggregators going into the pandemic, pre-pandemic returns rates, we didn't anticipate the increase in returns rates that our aggregators would experience. That was a mistake, it was an oversight, and that has cost us in the first half. Because the returns rates are high, there are some products with low average selling price that we just shouldn't have on those aggregators at all. So basically, low average selling price, high returns rates items are not profitable selling aggregation sites and they should come off. be sold on our own sites where we get much better consolidation costs and low returns rates. So, again, that is an erosion where we can correct some of that. And then finally, we had a higher surplus overseas, as we did with the rest of the business, but... overseas again we weren't careful enough about which outlets we put it through and again we put too much of that markdown stock into high returning countries where we cleared a lot of it but because you've got high returns the cost of clearing actually wasn't worth it and we should have put it into the lower returning countries so The three areas in green are areas where we think we can and should recover some profitability. In terms of what we're expecting, we're expecting H2 to recover marginally to 9%. Long-term, we're expecting next year, year after, for price increases largely to drive profitability back to 12%, along with the removal of some items where we shouldn't be selling the low-ticket items in high-return countries. That, on the face of it, looks very bad because it means that we're going to have to raise our prices in some territories. I should stress, and there are very, very few silver linings, but one very small silver lining to the weakness of the pound is that actually in local currency terms, we will not have to raise our prices at all. in order to achieve higher margins next year and the year after, because the local currencies are so much more valuable than they were to us. So in terms of consumer impact, we're not expecting any consumer impact from the margin recovery over the next year or so. It will be paid for by the currency decline. Moving on to finance. Finance... had a good season. Total credit sales were up 3%. But as a result of the recovery post-pandemic in the data book, we saw a 13% increase in average balances. By the end of the year, we expect that increase to be around 8%. So we're expecting the growth in the interest income to slow as the debtor book begins to stabilise as we've gone through the year. Interest income up broadly in line with receivables. Bad debt charge significantly lower than three years ago, partly as a result of COVID provision release. We took, you'll remember, that we took a £20 million COVID provision release. Most of that we have rebadged. We haven't just hung on to it because COVID is now truly over, we think. We haven't just hung on to it. We have reallocated a lot of it to account for potential cost of living crisis increases going forward. About £3 million of it we've released. We had a debt sale of defaulted debt that gave us £3 million income. That's a one-off. and we have reduced our provision rate back to the levels that it was at, so 2014, 15 and 16, and just... to remind you all, in 2019, we saw a significant increase in default rates. That was largely, we think, as a result of internal measures that we took, but we increased our provision rates to account for that. What we've seen over the last, over the pandemic and continuing into this year is default rates returning to levels that they were at pre-pandemic. So we've brought our provisioning rate down to those levels. In terms of our overall provisions, we still, I think, have a very Prudent but, you know, right provision for a bad debt. So our total provision for bad debt is about 8.8 as compared to the default rate around 3.4. So we think a very sort of conservative debtor book, but not too conservative. That was especially for our auditors. Just in terms of the current performance of Dettabook, this is one of the remarkable things about the time we're going through at the moment, is that if you look at the percentage of our account that customers pay off month by month, running into the pandemic, that was running around 12.5%. During the pandemic, of course, we saw significant pay down of debt as consumers cut their expenditure elsewhere. But what's interesting is since the end of the pandemic and right up into the weeks we're experiencing at the moment, we're still seeing the payment rates drop. remain higher than they were running into the pandemic. So everything that we can see on our consumer receivables book as yet would not give us any indication that there are strong levels of distress in our customer base. That doesn't mean that won't happen going forward, but as yet we're not seeing any evidence of that. Net profit up 23%. We did the same thing on the interest profit on Lipsy sales as we did in Label. We gave the Lipsy business half of the interest profit we allocated to Lipsy. If we add that back into the finance business, as we will going forward, the increase was 27% on three years ago. Good. Okay, so that is all we've got to say about the performance of last year. Looking forward at the outlook, you can all read the wonderful quotes that I've put for your benefit, that there are two types of forecasters, those who don't know and those who don't know they don't know. Obviously, we apologise for stealing the equity analyst's motto. I actually got a laugh. That is the first time in any analyst meeting I've got a laugh, but thank you very much. You know, we are trying to make a serious point here, is that the forecast over the last three or four weeks, as we've been beginning to write this document, we have changed our view of the outlook several times. When you ask a retailer how they feel about the next 10 years, most of them, the main reference point will be yesterday's sales, and for those of us with long memories, it'll be the day before. And if we look at how the sales have panned out over the last eight weeks, it has been very hard to read. Quarter two, we already said, was very good, up 5%. We always expected quarter three and quarter four to drop back. August was very poor, minus 3.1%. That was over five weeks. Now, there are all sorts of excuses that we love to make when bad things happen. There was a heat wave, a lot more people were on holiday. I should stress, by the way, I'm now talking, confusingly, I'm talking about last year, rather than three years ago, but we think that's a better reference point for our sales going forward. So against last year, 5%, quarter two, when all the shops were open, 3.1%. decline in August, we think that there was more going on there than just weather and holidays. Very difficult to prove that, but we think the anticipation of very high energy bills and costs of living, costs beginning to go up, including the cost of travel and holidays themselves, were beginning to affect consumer behaviour. We have seen a very strong bounce back. It's only three weeks, and the weather has turned earlier than it turned last year. But we have seen a strong bounce back in September. If we look at the average sales over the last eight or so weeks, then sales were down 0.3%. So you can see, however you look at that, there is a marked slowdown from Q2. Previously, we had thought the rest of the year would be up 1%. So we had, after Q2, we'd shaved 4% off our Q2 growth rates. We think that's probably not enough. A lot of the bills that people are worried about won't actually hit down until October, energy bills in particular. And we know that a lot of our consumers, a lot of people, are only affected when they actually get the bill, when it actually hits them. So we think the right thing to do is to moderate our sales forecast for the rest of the year down 2%, which is how we've adjusted our forecast. We may be wrong about that. We may have been too pessimistic. We may not have been pessimistic enough. There is, however... one, shall I say, joker in the pack, and that is that we don't yet know what the effect of government stimulus packages will have on consumer spending. So if there's anything that might wrong-foot this forecast, it's that the effect of tax reductions, energy price caps, actually have a more positive effect than we're expecting. But it is, at the moment, it's anyone's guess. So if we take a minus 2%, and I should stress here, because we've all made this mistake, it's minus 2% for the rest of the season, which when you factor in the season, the August and September sales we had already, is minus 1.5% in the second half. But if we take the minus 2% we're expecting going forward from this point... that breaks down plus three in retail, minus five online. And what you can see there is that in terms of how we've broken that down, we are expecting a bigger fall off in online sales versus last year than we are in our retail sales. That's because we think that last year, particularly in the run up to Christmas, a lot of people, because you believe it or not, it was only less than a year ago we all worried about Omicron. There were people who didn't go to, there were still people not going to shops because they were worried about COVID. So we think it's right to take the money out of the online business rather than the retail business. just to give a complete picture in terms of what that means for the full year. That gives you a full year picture by division, 4.8% in total. And just so that it's there for your records, what we've also given you is added the finance numbers to there. So the slide has now got performance in the first half, performance to date in this half, and rest of year with the total. In terms of the effect that that has on our profits, we had... Guided to 860 when we euphorically raised our forecast just eight weeks ago by 10 million. The sales reduction, the reduction in full price sales we've now put in versus our forecast, 24 million loss of profit. 3 million, we've anticipated that our clearance rates will be worse with more stock going in with lower clearance rates. And we've got various costs and provisions that we now think will be slightly higher in the second half than we anticipated when we issued the £860 million guidance. So that's our new guidance and earnings per share up 2.7%. And if you're wondering why the increase isn't as great as you might expect, there's something funny going on with a... with the change in corporation tax rates that Amanda can explain in great detail which means although corporation taxes are now expected not to go up that means some credits that we had that we were releasing we won't but Amanda can explain that in great detail because it's exciting and interesting moving on to the year after next if you say to me Simon what are you worried about it isn't the run up to Christmas and the rest of this year. That actually is the least of our worries, our big worries next year and the cost of goods. If we look, and that's just to sort of give you a sense of where we stand at the moment, if we look at our costing rate for this summer, the half we just reported, we costed at 137, so each dollar was costing 73p. If we look at where we are for next year, there is an 8% erosion in the value of the dollar for next year. That 127 we have locked into. So we won't feel the worst of it in spring, summer. As we move into autumn, winter, that's when the problems really begin. The equivalent number this year is 74p. As we stand today, well, it moves every day, so this slide is already out of date. Who knows what it is this morning? We've covered 30% of this, partly through natural hedging, our own income, partly through cover that we've taken. But the rate we've covered out is obviously significantly lower than this year. And we've still got 70% to cover. If we were to cover out at 107, then the increase in the value of the dollar will be 26%. Now, what I wouldn't want you to do is to take that number and assume that that cost of goods increase, which is a factory gate increase, all goes straight through into price. Some of it will have to, but there is an awful lot we can do or that will naturally mitigate those cost increases. First, and probably most important, is that a lot of the pound's weakness is dollar strength. The dollar had already dropped to 1.15 before the various announcements made over the last two weeks. And local currencies have appreciated. Take the Bangladeshi taka or the renminbi or the Sri Lankan rupee. All of those have appreciated much less against the pound than the dollar. So there will be some of the local costs that don't rise by as much. Factory capacities are in much better shape than they were this time last year. So there is capacity both... to negotiate with existing suppliers and to move to new suppliers. Freight costs have already come down and we think will continue to come down. Commodity prices have come down. I think they may continue to come down. And obviously we have our overseas revenue. Well, in effect, we can set the exchange rate that... revenue is covered at. And we may choose to use some of our increase in overseas profits, although we'll still want the margins to recover, we may choose to use some of that profit to reduce our costing rate for the rest of the business. The final thing is to say that the UK, the cost of stock is around only 60% of our total costs. So anything we can do to reduce contain our UK cost base and profitability will serve to reduce the amount we need to put products up by. We won't just take the cost of goods and pass them straight to the customer. We'll look at our cost base in the round. We will, as always, aim to maintain our margins, but we've yet to take a view on that. And before anyone asks a question, it is much too early to say what we will do next autumn, winter, because we haven't yet bought a single garment yet. It's probably an exaggeration. We haven't yet bought any material amounts of stock for autumn, winter next year. So I think it is way too early to begin to make forecasts. But there's an awful lot we can do to mitigate the costs. Of course, the other thing that this doesn't include is our ability to resource. For three years, really, we haven't done very much, if any, overseas travel and our supply bases remain pretty static. There are still new parts of the world coming on stream. Now, the reliability, quality, ethics of those places all needs to be tested. But we will redouble our efforts as a business to push into new territories and to make up for some of this increasing costs through resourcing, which is a game we've played for many years in terms of new suppliers, but it's not something that we've done really over the last three years during COVID. So looking ahead, I think the first thing, and obviously this is self-evident, but in terms, it's very important to remind ourselves that as we go into next year, that the company is a financially strong company. So whatever we need to do, we have got the capacity to do. I say, not our plan to take a hit on margin, but if we have to, this year we look like we'll be operating on 16% margins. We're highly cash generative. Our debt is only just over half of what we're owed. So we are in a position of strength. And it's important for you and our shareholders to know that although times will be getting difficult, we won't cut expenditure and investment in the areas of the business where we think we will benefit the most. And those really come down to two areas. Our product, continuing to push investment in the design and breadth of our offer, both in our own products, through licenses, collaborations, and through other brands. And we will continue to invest in our technology. We're not going to suddenly say, well, times are tough, so let's cut back on our systems expenditure, because we think that is absolutely central to the future of both our core business to our aggregation business and, of course, to Total Platform, which we still think will be a useful source of revenue once the Amazon 3 warehouse is open. So I want to kind of reassure you that we're not in panic mode over costs because next year, cost of goods are going to go up. There is, however, more we can do to manage costs. The biggest single leave we've got in our operations is really to get better operating efficiencies in our warehousing, distribution, store networks. As average selling prices go up, unit volumes come down. we will begin to reverse some of the inefficiencies that we have had to endure during the pandemic when we have been working right up against the limits of our capacity. As a warehouse begins to get to capacity, you begin to get lots of inefficiencies. that begin to increase your costs, not least if you're taking on huge numbers of new colleagues. Those new colleagues take at least three months to get up to the efficiency of their new colleagues. a reduction in the units that we have to handle and the rate at which we have to take on new people ought to move efficiencies forward. And the other thing is that over the last three years, and I think we explained this during the pandemic, one of the levers that we've been able to pull in order to take the pressure off capacities is to compromise our service level, whether that means pulling forward the cut-off on any given evening to early in the evening to move some of the volume picking into the following day, or the efforts that we go to to get stock from our stores and through Label Plus to our customers. So, for example, going into the pandemic, any stock that came out of stores or from our partners' warehouses delivered to customers got there in two days. We had a 48-hour promise. Today, that's three days. So we've got an awful lot of work to do to get our efficiencies and service levels back to where they were pre-pandemic. We've already talked about this, but it is, just to re-emphasise, the rebuilding of margin in our overseas business and the fine-tuning of the margin in labour will become all the more important as we move through the rest of the year and into next year. Managing choice. Now, this is a tricky one because this could be an enormous pendulum swing and we could score an own goal. The increased choice on our warehouse has been a significant driver of growth for the last five, six years. However, there are some areas where we've gone over the top. I'm just going to use one example, which actually the example I'm going to give you is not as bad as it is in real life, but nonetheless. This is a men's blue Chino. If you want this blue Chino, you can get it in any number of six different blues. Some of those booths actually, if you change the contrast on your monitor, you actually change it by more than the actual difference in the Chino. And we've got it in four different fits. Most of those come in 22 different sizes, longs, shorts, and that has two problems. The first is that it takes up an awful lot of warehouse capacity forward picking location. If you've got lots of items in your forward picking locations that means people have to walk further to pick it and that reduces your efficiencies. It also means you fill up forward locations which makes it much harder to manage returns and get them back on sale. The other problem is that if you spread the jam too thinly, you begin to run out of stock of lines. If I've got six different blues and I buy a little bit of each, the chances of the customer landing on the one that's fully stocked becomes lower and lower and lower. So there is a job of work to do to take the areas where we are over-optioned and cut those back. That needs to be done with great care. And I'm saying this is what we're going to be saying to our colleagues in our presentations this afternoon and tomorrow. But... that doesn't mean that we stop doing choice. We don't want to do this, But we do still think there is a big opportunity to push the boundaries of our design. So if you take this blouse, this blouse is same fabric, same style. But actually, on this one, each of those items does a different job. And if you were to add a plain white or a cream, not both, but if you add to one of those, it would add to the choice. If you were to do a paisley, it would genuinely add to choice. So we've got to do something very difficult, which is cut back on unnecessary duplication, but... continue to add genuine choice and diversity of design. If we can achieve that, not only will it reduce costs and increase our efficiencies and stock availability, but it will also make it much easier to navigate our website. And that is the second big objective we're setting ourselves going forward. Over the last five years, as we've increased the amount of choice on our website, it's become... harder and harder to find the item you're actually looking for like it's one because there's more on the website now on balance we know that adding that choice because we've trialed it we're not adding the choice on balance is definitely the right thing to do but we think there's an awful lot we can do to improve the effectiveness with which we um with which we um help customers search and select items so we're looking at attribution our filtering both on the mobile site and the desktop we're looking up we have just started a trial actually where we're personalizing our sort order and that doesn't mean you as an individual will get your own special sort because that would be incredibly slow but it does mean for example that we may have some success if we give people who tend to buy items at the top end of our price range a different sort order from those who tend to buy at the value end of our price range so we think there's a lot of opportunity there and on the product page itself we can do a much better job of offering complimentary and alternative items so here you can see you want to buy the lovely wardrobe but if you want the bed or the chest or the dresser at the moment you've got to search the whole website to find it put it on tabs and it makes it much easier and this is something we're beginning to realize at the moment and where we're having good success on what we've done so far the final that we'll be talking to our teams about, and have already started talking about, is what I've already mentioned in terms of managing the cost of goods. We need to get back on those aeroplanes, go out into the territories, and we need to push very hard at our supply base. Again, there's risk here. This is not risk-free. There is still opportunity. within our supply list, we can push further into existing countries where we trade and into new countries, but mainly further into cheaper areas of countries where we're already trading. And that has to be done ethically. We've made mistakes in the past where we've put big orders with people who had very good prices where they just either didn't deliver it or where the quality wasn't up to scratch. And in pushing into new sources of supply, we mustn't compromise our design. So this is not straightforward, but it is one of the big tasks that we'll be undertaking over the next six months. So that's it. And I have to say, I've done it in under an hour, which is much better than any pre-pandemic record. So I have been practicing very hard. I think to sum up, I realise on our first meeting together, I'm not delivering you a bundle of joyous news, and that we are looking at not just another six months of difficulty, but really another 18 months of difficulty. And the sort of cost of living crisis, it looks as though we're going to have to endure that. As a business, we're going to have to endure that twice. Once as a constraint on supply, and secondly as a currency crisis. Whilst. That is extremely challenging. We will take the approach to this crisis that we've taken to all the other crises that we have talked about together over the last 20 years, whether that be the credit crunch or the pandemic or various times we've messed up our own ranges. And there are sort of a few things, features of what we will do. The first is we'll be completely open and honest and transparent with ourselves and with you about the nature and scale of the challenges. And secondly, we will, as we have always tried to do, boil down our response to the simple, clear things we can do to make things better. Ultimately, we are a business that is constantly looking at a five-year horizon. And however difficult things may be for us over the next 18 months, and we don't yet know what prices will look like in autumn, however difficult they are, the overriding priority of the business is that in three years' time we are a better business with better products, better services, better technology than we are today. keeping our eyes very firmly on that horizon that will ultimately make the difference to whether or not we're successful in the long run. And that has always been our philosophy, and it will be our philosophy going into the next 18 months. So that's where we stand. Alistair was desperate for me to say, well, you've done it all before, you've seen these crises before. Actually, every crisis is different, and we don't know that we will be successful, but... At least you will know exactly the attitude with which we tackle it and the values that will continue to underpin our business, whatever. And those will be to make sure that we're delivering great value to our customers, as good a value as we can to our customers, our clients, our partners, to make sure that we continue to play to our strengths. You're not going to see us suddenly veering off into doing insurance or some weird and wacky business in order to plug any gap that might be left by cost of goods going up. We will continue to be very disciplined about the margins we make in the business. And we will continue to get a good return on capital. If we stick to those four things, we think we can emerge in better shape. So there we are. That is a preview of the speech I will be giving all of my colleagues later on. And with that, we will move on to questions.

Hi, it's Simon Owen from Credit Suisse. Three for you.