Next PLC

LSE:NXT

Earnings Call Transcript 2020-Q2

[Michael J. Roney, Non]

Welcome and good morning. Welcome to the interim financial results for NEXT plc. We, as a board and management team, continue to keep our eyes on building shareholder value, and building shareholder value, certainly, is more of a marathon than a sprint. A lot of positive steps in the right direction, and you look at the power of compounding, those positive steps over a period of time have a significant impact on the results.In all the presentations that we make here, you all see some of the things that we're doing to build value and make these positive steps. You will hear about continued progress today.In the 2 previous presentations that Simon made in March and September of last year, there were 2 predominant themes. One was the way through the woods, the 15-year scenario, that Simon talked about in March. It wasn't a forecast, but it was looking at the future and saying, this -- there is a way forward for retail in spite of all the turbulence and change in the world today. And we want to give everybody a positive vision of what we felt how things could develop going forward. And a year ago, in September, we talked about the impact of a hard Brexit and what it would be at those current tariff rates on the next financial results going forward. Obviously, things have changed. Tariff rates have changed. I don't know if the country has moved on, but certainly, we tried to give everybody a vision of what the impact would be. At that time, the impact was GBP 22 million on our financial results.Not worth of an impact but not a catastrophe. Today, and I don't want to delve into too much detail, but Simon's going to talk about choice and why choice is so important for the consumer, and why choice is driving significant growth in one of our major segments of our business, our Online segment.And when I think about choice, I think back to the most famous businessman that came from my native city, which is Detroit, this businessman was Henry Ford. And back in 1915, he famously said that the consumer, with respect to the Model T, could have any choice, any choice as long as it's black.Obviously, the world has moved on from then. The markets have moved on. And while it would be great for our inventory SKUs, it wouldn't be good for the consumer.So before I turn it over to Simon, I'd like to recognize the hard work and dedication of our 40,000-plus employees. They surely are our face to the customer. They've put in a lot of hard work and make a big difference, and I'd like to recognize and thank all of them. Over to Simon.

[Simon A. Wolfson, CEO & Executive Director]

Thank you, Mike. Morning, everybody. When I sought feedback from our incredibly experienced and debonair broker on what more I could put into the presentation, the answer came back very quickly: brevity. So I will try not to be as long as I usually am. But I'm going to start with the numbers as usual. Total sales in the half, up 3.7%. Full price sales, up 4.3%. That compares to our initial guidance, around 1.7%. So we have done significantly better in the first half mainly due to an outperformance in the second quarter.Operating profit, up 3.1%. That number is slightly misleading in that it looks as though we've broken the back of this problem of when turnover moves from Retail to Online, we see an erosion of margin. We're still seeing the same levels of erosion of margin, 6p or 7p, in every pound that we transfer of NEXT merchandise sold in-stores to NEXT merchandise sold online. The big swing in profit, I think, that's stopped the erosion of margin in the first half is really all about bad debt, and that's a little bit of a distortion that will work its way out in the second half.So don't get too excited about the smaller difference between sales growth and profit growth in the first half.Profit before tax, up 2.7%. The interest charges have gone up relative to sales as a result of us issuing a new bond. That means we have more relatively expensive fixed rate debt as compared to cheaper floating rate debt.Earnings per share, up 7.5%. For the full year, we're expecting earnings per share, if we come in at our forecast, to be up around 5%, and we're aiming for the full year dividend to be up around 5%. Interim dividend, up 4.5%.Moving on to the cash flow. Cash flow, overall, up GBP 43 million before distributions. Capital expenditure, where we expected in the first half. But for the full year, we've trimmed that by GBP 10 million. That GBP 10 million -- we said GBP 150 million for the full year in March, we're now saying GBP 140 million. The GBP 10 million has come out of stores. That's not because we plan to invest more in stores overall. It's because some of the CapEx that we're planning for the end of this year will now slip into next year. But the main point about this graph is that it's the switch from Retail CapEx into warehouse CapEx. And that is something that we expect to continue over the next 5 years, albeit that our overall level of capital expenditure in the group, we are not expecting to rise materially over the next 5 years as an average. It would be in the order of GBP 125 to GBP 150 million a year.Working capital, up GBP 47 million, and that accounts for the entire increase in the cash flow. This is a technicality. What would normally happen in a spring/summer season is that you would see the consumer receivables drop between January and July. And that's because people take on more debt in the route to Christmas and pay down their accounts in the summer season. So in a normal summer, you'd see the consumer receivables drop, which is what they've done this year by around GBP 21 million. Last year, we loosened some of our credit controls in the early half of the year, and that meant that we saw an unusual increase around GBP 24 million, I mean, in the first half of last year. And that swing of around GBP 45 million accounts for the entire amount of the swing in working capital.In terms of distributions, pretty much in line with last year. Average share -- but we've now completed the buyback, average share price of GBP 55.59. And for those of you who can cast your mind back and remember when we used to talk about equivalent rates of return, the equivalent rates of return on this, i.e., that is the profit into the capital value of the company at the price we bought the shares, is around 10%. So we're very comfortable with the levels of return that we're getting on our share buybacks.In terms of the balance sheet. Stock, up 7.5%. This is not because we plan to sell 7.5% more in the year. It's not because we're overstocked. It's all about basically the timing of Eid, which meant that we shipped more stock earlier from Bangladesh in order to avoid the Eid peak or the Eid shutdown in Bangladesh. And the fact that we bought Fabled, and Fabled came with around GBP 6 million worth of stock, so about -- that would add about 1%. Underlying, our stocks are up around 4%, and that's -- as we stand today, our stock levels are up 4% on last year.Debtors and receivables, up GBP 27 million. The debtor book, as we've mentioned, is up around GBP 44 million on the same point last year. The difference is to do with the timing of rates payments. This year, we've paid rates earlier than last year.Net debt, at around GBP 1.2 billion. Just to put that in the context of the full year, in July, GBP 1.2 billion. We're expecting that to drop to about GBP 1.14 billion at the end of the year and our peak to be about GBP 1.4 billion. That is very comfortably covered by our bank facilities and bonds, and we've issued a new bond at GBP 250 million, which was issued in April. The coupon on that when we issued it was 3%. We subsequently tapped -- some of those bonds we retained for us, so we kept in treasury and sold, and the yield we got from that was around 2.5%. So we are seeing very low or historically low yields on our bonds. One of the things that I wanted to do during this presentation is to put the company's debt in context. Over the last 5 years, we've increased the company's financial debt by around GBP 290 million. That has been more than matched by an increase in our consumer receivables at around GBP 325 million. The reason I mention this is because there is a completely legitimate question about, well, if you -- if the business carries on growing as it has done in the last 2 or 3 years, growing its financial debt by the same amount as its consumer receivables and the profits of the company don't go up, then at some point, the investment-grade rating of the company will come under threat. And the first thing I wanted to say is that we are absolutely committed to maintaining our investment-grade status.If you -- and that we will -- going forward, we will make sure that we take on such debt to match the consumer receivables that allow us to continue to maintain that, at least that will be our ambition.To give some reassurance on this, our EBITDA-to-net-debt ratio is still at the level which is investment-grade, at 1.3, although it has risen significantly over the last 5 years. However, there is another effect, which is our -- concerns our lease liabilities. If you look at our lease liabilities and add them to the net debt, what you can see is that a 26% drop in our lease liabilities. This is the sum total of all the rent that we owe were leases to run to the near of the end of the lease or break, and you can see a dramatic drop in that. That is a reflection of how much the property market has changed. And the fact that as and when we're renewing leases, we're renewing them on much shorter terms than we have done historically and at lower levels of rent.So if you look at the EBITDAR, with rent on the end, ratio, that actually is moving in the right direction. Now we do recognize that financial debt is more onerous than lease debt for many reasons, not least that you can -- you always show you've got the shop to hand back at the end, you might not have the cash. So we're not reliant on this number, but it is moving in the right direction.The final observation to make in terms of the increase in our debt over the last year or rather the use of debt to finance the increase in the debtor book over the last 5 years is about the relative cost of debt. This is -- we think this is interesting and important. What this line shows is the ratio between the yield on the FTSE 100 and a proxy for investment-grade corporate bonds, an index, where you can see is that, that has dropped from level in 2016 to about 0.6 today. So that means that corporate bonds on average are yielding 60% of FTSE 100 dividend yields, which means that when it comes to the choice between funding increased receivables through debt or equity, the argument for using debt has become much more powerful in the last 5 years.If you take it in the context of the last 20 or so years, 17 years, what you can see is that normally, corporate debt, in the past, historically, has been at around 1.5 to 2x the yield of dividends. So that -- as we have considered our -- the levels of debt in our company, we have looked at not only maintaining our investment-grade status but also the relative cost of debt, the cash cost of debt. And actually, it's at the stage now where the cash outflow from debt is significantly lower than the cash outflow from dividends, particularly once you account for corporate tax.That said, we recognize that going forward, we need to fund our debt in such a way that it won't materially impact our credit rating. What we aim to do going forward is for every GBP 1 of consumer receivables, we will take on 85p of debt and fund the balance, 15p, with notional equity. That will marginally reduce the amount we have available for share buybacks in the order of, sort of, GBP 7 million to GBP 10 million, depending on how much our consumer debt grows by. But we think at that level of 85p and GBP 1, and remember, that is 85p of net debt, that net debt already has within it a 7p provision for bad debt. So it's really 85p funding a 107p of lending.So that is that. Just moving back to the detail of the business. In terms of Online, good half for Online. Full price sales, up nearly 12%. In terms of where those sales came from, total U.K. sales were up 9%. Of that GBP 58 million of growth, GBP 41 million of it came from the growth in our LABEL business. U.K. Next-branded business Online grew by 4%. On the face of it, that 4% looks disappointing. We kind of take the opposite view. Given the significant increase in competition on our own website, we have been surprised that our own brand has continued to grow. And I think it reinforces our belief that competing with ourselves is the right thing to do on our platform.In terms of overseas growth, another strong half of overseas growth at 21%, customer base growing strongly in both. At the U.K. customer base, it's being driven by what we call cash customers. These are the customers who are not spending on accounts. So our credit customers have only grown by 2%, cash customers by 25%. What we're seeing more and more is that very, very few customers will place their first order on credit. The vast majority of our credit customers now are people who try the website using their credit card or debit card and then switch into a credit account. So we anticipate that the pool from which we are recruiting new credit customers will increase as time goes by as we continue to increase our cash customer base.Profits. Bought-in gross margin, down 0.1%. Margin mix on NEXT-branded product would have pushed -- I'm sorry, margin on NEXT-branded product would have pushed this up by about 0.2%. So the underlying NEXT-branded stock may point to an increase in margin. That's mainly as a result of more favorable currency rates than we were expecting. Although we -- although rather that we'd cost it out. The degradation from plus 0.2% to minus 0.1%, it's all about the growth in LABEL product, which is -- also lowered bought-in gross margin.Markdown, adverse movement of 0.1%. This is because we put more stock into our sale online and significantly more than last year, and the clearance rates were not as high as last year. Achieved gross margin, down 0.2%. Warehouse and distribution, a big margin erosion here. Two things going on: First is the growth in international. International sales have a much higher percentage of their costs come from warehousing and, in particular, distribution. Just the cost to get it to customers is much higher.So the faster that the international business grows relative to our U.K. business, the higher warehousing cost and warehousing and distribution will be as a percentage of sales.Capacity and ASP. Average selling price has dropped. That's not because the price of like-for-like garments has fallen. It's because the -- our mix has moved us to selling more lower-priced garments, in particular, the increase in the participation of Childrenswear. And within Childrenswear, we've broken up some of our pack sizes to offer customers more individual items, which has reduced average selling price. That pushes up picking costs and of course, cost of living, wages in the warehouse. And we will talk more about warehousing and capacity constraints later on.In terms of marketing, the increase in digital marketing spend and systems has been paid for by reduction in spend on catalogs and photography. And we're getting some small amount of leverage over our central overheads.Moving on to Retail. Retail, down 3.9%. Bought-in gross margin, because it is all NEXT stock, you're seeing that 0.2% increase in bought-in gross margin coming through in the bought-in line. Markdown level, that's not because our clearance rates improved. It's because we put less stock into our end -- our Retail end-of-season sale and tried to spread more to Online.Stock loss, adverse movement of 0.1%. We think that is because much as our normal-paying consumers are, their footfall is declining on the High Street. For those consumers who regularly make a habit of forgetting to pay, their footfall doesn't seem to have abated at all. Here we go. Store payroll level. We have moved heaven and earth to control our payroll costs, and there's a lot of detail about this in the pack. But broadly, the measures we've taken to improve productivity in stores have paid for -- have allowed us to reduce payroll in line with sales. That is all the more of an achievement given the fact that our cost of living and National Living Wage would have pushed wages up as a percentage of sales even if we'd managed ours down in line with sales. Part of our ability to control wage costs comes down to the fact that we are able to move people from retail tasks into the increasing number of online tasks they're doing, involved in terms of handing collections in store and returns through store.Occupancy costs, adverse movement of 1.2%, and that's all about negative like-for-likes, as is the warehouse and distribution. These are fixed costs that are increasing as a percentage of sales as the top line moves backwards.In terms of new space, we are still taking on new space, and that contributed to 1% to sales in the first half. All of the new space, 0.25 million square feet, came from relocating smaller, less-profitable shops to bigger, more profitable ones. We closed 6 stores. The total growth in space of 100,000 square feet was less than we were expecting of around 50,000 square feet. That is because a number of stores where we expected to close remained opened -- remained open because we were able to negotiate much better rents on those shops than we were expecting. So -- and that is quite encouraging. Of the shops that we shut, we're seeing in the order of 25% transfer of trade to stores and around or nearby on average. And that figure is encouraging. And mathematically, that is very important number because what -- if you say that the marginal profit on sales -- or VAT-inclusive sales, the marginal profit on goods that we transfer from one store to another without any increase in the fixed costs is in the order 45%, less the little bit of wage cost, might take it down to 40%. It means that if a store is making less than 10% profit, i.e., 40% of the 25% we would transfer, then at that point, a 10% profit, if there are nearby stores to pick up the trade, it's breakeven closure. That's very important. It means that we will be shutting shops. If a shop's making 2% or 3% net branch contribution, those shops, it actually becomes profitable to close if we can transfer 25% of the trade.In terms of rent, again, sort of slightly better news than we were expecting here. Of the 37 -- on the 37 stores that we expect the leases to be renegotiated this year, and this is where we have the pretty much already agreed terms or signed a new deal, the average rent reduction, accounting for any unspent capital contribution, is around about -- is down around 28%. The average term of those leases is 4.2 years, and the average profit before central overheads or distribution costs is 26%. You've got to look at the 26% in the context of the 4.2 years. We think that if we're opening a store and it's making 26% branch contribution, if sales declined by up to 10%, that store will still be making a profit after 4.2 years. So we're opening shops and looking very carefully at them and saying, "What will this shop make in the final year of its lease, given what we consider to be worst-case scenario of minus 10% like-for-like?" That is what we do in every new shop. But the -- what's interesting is that the market is such that we are getting some really exceptional deals. And I thought I'd just give you an example. This is our glorious Fargate, Sheffield store, 4,200 square feet, of which a lot of it is on the -- in the basement. For confidence -- confidentiality, I'm not going to say what we were paying as rent. But if you take the rent index as a 100, we moved to this shop, which is 18,700 square feet, and the rent was indexed to the same level, a 100. So we're paying the same rent for a shop that is 4x the size with a significant capital contribution. Once you take into account the concession income that we're getting from the café and one other concession in the store, that rent drops to around 60% of what we were paying in the old store. So although Retail is extremely tough, there are -- and this is the best opportunity. They're not all like this but I think it's quite impressive picture. But there are good opportunities to increase space in a way that continues to contribute to the Online profit of the business.In terms of NEXT Finance, we're going to give a little bit more detail on this, this time. Interest income was up 9.9%. That's -- 5.2% of that came from the increase in average balances. The rest came from the fact that we increased our APR by 1% last November. That APR increase-driven growth will obviously annualize in November. So you shouldn't expect the second half interest income to grow at anything like the rate of the first. In terms of bad debt, we saw a big reduction in bad debt. And just to explain that, this is all to do with the anomaly that I explained at the beginning that I could see you're all absolutely fascinated by as how this year, the rent between January and July drops as usual and last year rate, it went up. Last year, the increase in the total level of debt means that we increase provisions against that debt. This year, the reduction in the total level of debt results in a decrease in provisions. That provision swing accounts for GBP 3 million of the change in bad debt. The balancing GBP 4 million is about underlying improvement in recovery of defaulted debt. This is where we're either selling the debt or sending it out to collection agencies. We are seeing better recovery rates or better -- higher payment rates for distressed debt.Profit, up 24.6%. Return on capital employed is 15.3% before accounting for the cost of funding. In terms of just giving a little bit more insight into our credit business, want to talk first of all about the maturity profile of our customer. This is how long they've been trading with us, not how old they are. What you can see is that 70 -- around 3/4 of the customers that we have trading with us online are -- have traded with us for 5 years or more -- in fact now more than 5 years, apologies. Only 8% have traded with us for less than a year. That 8% figure might sound low to you. We would recruit new customers around 15% a year. The difference is that where we recruit a customer who isn't active but has traded with us, let's say, 2 years ago, we put them into the 2-year pot rather than the new pot. But what you could see is that the customers we are dealing with online are customers that, on the whole, we have experience dealing with and who are experienced in dealing with us. That's important when it comes to the risk levels within our book. If you look at the risk level by maturity band, what this shows is levels of very low, low, medium risk at different levels of length of trading. So what you could see instantly is that pretty much all the risk is taken in the first 5 years. And of that, the lion's share is taken in the first year. And because the customers in the first year are a relatively small percentage of our total customers, the risk we're taking on sales is very low. 88% of our sales are to customers with a very low risk of default. And we have put the levels of default in the pack. There's 2.5 -- very low risk, we -- is less than 2.5% risk of default.In terms of the growth in the customer base, January 2016, we had a problem. And actually, it's one of the very useful things about doing these presentations. That problem was made abundantly clear to us by one of your number who highlighted just how bad this number was. And as a result -- partly as a result of that, we actually took more action than we would otherwise have done. So you see, you have a beneficial effect on the running of the businesses that you analyze.We have done a huge amount of work on the retention and recruitment of new credit customers. The initial fall was caused by regulatory changes that made it harder to recruit new customers. Since then, we have improved the numbers of new recruits we got but only marginally. The big improvement has come in the retention of existing customers. And what this graph shows, the red graph shows the change in the retention numbers or the attrition rates within the customer base. And 6 years ago, we would have said absolutely normal attrition rate was somewhere between 17% and 20%. And we're now experiencing attrition rates of 12.6%. We expect -- this is what we're expecting this year. Three reasons for that: Those customers who take out NextUnlimited are much less likely to stop trading with us. And there's a degree of self-selection there. But even reversing out that effect, we think that NextUnlimited is having a positive effect on retention. Improved digital marketing and targeting of those customers who are at risk of going inactive. And probably most importantly, the increase in the breadth of our ranges means that there's just more reasons to come back to our website.Which sort of leads on to our nice, sort of, riff on choice. When you asked -- when you're asked the question, "What is the online revolution about," most people assume that it's to do with either home delivery or price or a combination of both. Our view is that, that is true up to a point. Home delivery's definitely an enormous factor in the growth of the -- of Online. For some -- for a lot of people, it is just simply much more convenient to do it at home than it is to go to stores, particularly as they can order by midnight for next-day delivery, try before you buy, easy returns means that for those people who prefer to shop at home, it is more convenient.However, 50% of our orders are being delivered to store, partly because it's cheaper for the customer, partly because for a lot of customers, it is simply more convenient. And in Northern Ireland, where, for a long time, we've been running basically a permanent trial where we offer free delivery in Northern Ireland to home, so it's a permanent control on the effect of free delivery. What we can see there is that deliveries to home are around 30%. So of the 50% deliveries to store, we think 20% is about cost, 30% is about convenience. So it's not just about home delivery. As far as NEXT is concerned, it's definitely not about price. It's actually more expensive to have goods delivered to home than it is to go and pick up in a store. The items have the same price, but you have to pay a delivery charge if it's sent to home. We think it is much more about choice. And I kind of wanted to bring alive the scale of the change in choice to customers that the Internet has bought. Compare 4 different routes to market: Small store, we've used Newark as an example; that's not a small store, an average store, Newark; Manchester Arndale, our biggest store; NEXT Online; and the NEXT Online plus LABEL, and compare the choice available on those three. What you can see is that the choice builds twice as much choice in Arndale as you get in Newark, 5x as much choice of different items on our website to what you get in the shop, put LABEL into the account into the mix and 10x the choice, 11x the choice online that you get in store. If you add to that the fact that online, because you are able to hold all your stock in one place, you can hold relatively small quantities of stock and offer it to everybody in a way that you can't in store. What that means is that online, we have far more choice of sizes than we do in stores. If you look at the change in SKUs of different styles in different sizes, the effect is much greater than just the style effect. That should get more like 21x the choice online that you get in store. And to put that in context, in Newark, if you were looking for a men's formal shoe, you might get a choice of 5 different men's formal shoes to wear to work. And they come in the standard sizes: 7, 8, 9, 10, 11, 5 sizes. Online, you get 50 men's formal shoes at the same time. These are not -- this is not actually what happens to men's formal shoes. Just to give you a sense of the scale of the change, you get the choice of 50 different shoes, and every one of those would come in half sizes. So not only do you have 10x the choice, but the chances of the shoe fitting you properly are increased by 50% as well. And when you think about that customer sitting outside the shop in Newark or in the café in Newark, I think that they can get 50x the choice -- sorry, 10x the choice in sizes, 20x times the choice overall on their phone sitting in the café than they can in the shop. You can see why the Internet is so powerful and why we think this change is not just a blip that soon has suddenly reached equilibrium. We think that this is a powerful long-term trend driven by the fact that today, consumers sitting in Newark can get a much better choice than they would have got 20 years ago if they got on a bus and gone to Oxford Street. That has -- much the growth in choice has been wonderful for our customers, wonderful for our sales. For those responsible for managing our warehouses, it has been somewhat tricky. So increasing the number of SKUs since 2016 has been around 150%, and that has had a very significant impact on our ability to operate within our existing warehouse infrastructure. And I'd just like to explain that. Before I do, I should say that the effects we have managed, so I don't believe that this has an impact on our ability to sell stock but it has impacted on our costs and reliability to a degree.To explain that, our warehouses -- basically, all of the warehouses operate in a similar way. The vast majority of stock is held in automated dock storage, which can only be picked at box level. When the item is -- when the item needs to be picked, it comes forward to a much bigger space where we hold each individual item option. And that gets picked by a human being. We then sort the stock by customer, by van round, by store. And when it comes back, we store it as a single in returns rates.Most of these areas of the warehouse, the returns, the sortation and the high bay are impacted just by the total units. The area where we've experienced the problems are in our forward locations.The way we've coped with that is mainly through remote forward picking. This is where we take the items out of high bay, move it to another warehouse 10 minutes away, pick it in a forward location and then ship it back, try and sort it and marry it with its partners on the day it's ordered. And we've had to have much more movement from the high bay to the forward picking on the day that item -- on the days that items are needed by customers. Both of those things increase costs and threaten the service level because if an item is coming from another warehouse for same-day delivery, the chance of it not making it to the sorter on time are increased. So we have really struggled with this. It hasn't affected sales, but it has affected costs and service. In terms of our solutions, we've increased the physical size of our forward-picking phase in the main warehouse. This is partly being through moving retail stock out of that and are using the decline in retail sales to create space for Online, partly as a result of software development to improve the way in which items are bought forward, the algorithms that decide which stock is bought forward. Overall, we think we've given ourselves, in the year, a 25% increase in forward locations, and that will slowly begin to benefit the business as we move through autumn/winter '19. Next year, we have a very significant capital project that will deliver an 80% improvement in returns capability. We don't need anything like an 80% increase in returns capability because that's driven by units rather than SKUs. But because this is an automated storage and retrieval system, it will allow us to take items where we're only selling small amounts. And rather than put them in very expensive forward locations, where you need to have 20 items of each size, we'll be able to put smaller amounts into returns locations and pick those items directly from returns locations. So it will allow us to, in effect, have an overflow for our forward locations for the slowest-selling lines, and we think that will have a more significant effect as we begin to move through next year.So that is the NEXT platform schematic: Warehouses, depos, stores, all with the ability to have stock ordered from any point within the network and distribute it either to a customer's home or to any other store within the network.In terms of increasing the choice, we have trialed 3 stores in the last 6 months where we have, with partner brands, allowed our customers to go onto our website, order items that are stocked in our partners' warehouses and deliver those to the customers. The way that works is that if they order them on a Monday, the -- on Tuesday, the item is transferred from the partner warehouse to our warehouse. We will pick it up. We will pick those items up every day at a fixed time of day from the partner warehouse, bring them back to our warehouse, have them put away, ready to pick by midnight, which means that they can be with the customer on Wednesday. So that -- those items come on a 48-hour delivery. I should stress that with no partner, will we do this on everything? So this is really about adding to the range of our partners rather than moving them out of our warehouse into their own warehouse. We don't want to suffer a material decline in our service level on stock that we're already stocking. But one way of giving increased choice is to offer lower volume stocks directly from our partners' warehouses because we will never hold more than 60% or 70% of any partners' entire range.In terms of the effect that, that has had on sales, in those, there were 3 partners we trialed it with, 2 of them were successful. Those 2, we succeeded in offering 48 hours. The third party was coming from actually Europe, and it was on a 5-day delay, and that definitely didn't increase sales. But on the 2 trials that worked, we saw a significant increase in sales on those lines. I should say before that, there was a question as to whether we should deliver direct from the warehouse to the customer. And whilst with some partners on very high ticket priced items that might be a good option, we think by far, the best way of dealing with this is to do it through our network. Three reasons: First is because the moment we pick that item up from our partners' warehouse, it is within our network. So if anything goes wrong with that delivery, we know exactly where the item is, so we can control the levels of service that we offer on our platform.Secondly, it gives access to our store network, which accounts for 50% of our orders and 30% of our sales. So in terms of the scale of the opportunity, the ability to distribute through our stores increases the customer audience. Finally and most importantly is that if this model is to be successful, it has to be profitable. And the way to make it profitable is to consolidate those items with other items that the customer has ordered. When you look at the math of it, the average number of items in a customer's order is around -- is between 4 and 5. So the chances of the customer only ordering something from a Platform Plus third-party remote warehouse on its own without also ordering stocked items is very, very low. So the chances are, the customer will have other items that, that customer -- available for delivery. For those customers, what we do is we say, "You've ordered these things, one is due on Wednesday, the other is due tomorrow, on Tuesday. You can if you want to consolidate and both arriving on Wednesday." At the moment, 50% of the customers are opting to do that. That makes a dramatic difference to the profitability of this way of doing trade.In terms of the sales, with what we've observed is a 15% increase in the rate of growth, we -- that those 2 brands were experiencing after they switched on Platform Plus. This bit is a little bit -- we've had difficulty how we explain this internally. But just in terms of the incrementality of the Platform Plus stock, if we were taking GBP 100 million, and we're now taking GBP 115 million, of that GBP 115 million, GBP 30 million, around 25%, is fulfilled through Platform Plus stock, i.e., half of the stock that we're fulfilling through Platform Plus is incremental trade. The other is substitutional. Platform Plus is less profitable than distributing from our own store -- sorry, from our own warehouses, and that's because of the additional distribution costs caused by the customers who don't choose to consolidate their order. And what that means is that the margin on the incremental trade isn't the 16% as you would expect from LABEL but more like 15%. We're going to be rolling this out over the next 18 months and expect to have another 10 partners live on Platform Plus within the next 6 months.In terms of LABEL, still seeing very strong growth, much stronger growth in the first half than we expected. Second half, we are not expecting anything like the growth we got in the first half. The 19% we are expecting for the full year is still 4% higher than what we had forecast at the beginning of the year but significantly lower than the 26% we experienced in the first half. The main reason for that -- in fact, the only reason for that is the -- we have had a fashion miss in -- on our own brand, Lipsy. And as is often the case with fashion misses, where we miss the fashion, we try and change the range. And in changing the range, we have changed it too late, and that's resulted in significant stock shortages. We think that will adversely impact labor in the second half. So we're expecting around a 13% growth in the second half.We think that is a short-term issue, which will be corrected by next year, but it is going to impact LABEL sales in the second half. Underlying the other brands, we're expecting to grow in the order of 20% in the second half.In terms of where the growth has come from, slightly less than half the growth -- if the growth is GBP 41 million in LABEL, of that, GBP 24 million of it, new minus discontinued, has come from new brands. The balance has come from continuous brands. We have been very pleased with the growth in the continuous brands, given that we've introduced a lot of new competition for those brands on our website. You wouldn't necessarily expect to see any growth in the continuous brands but we have so. That's one of the things why the growth was -- one of the reasons why the growth in the first half was so much higher than we expected. The new brands did pretty much what we expected. The existing brands did better.Great excitement. A free warehouse tour is announced. This is the important -- even heads risen from the endless tapping and writing. This -- it's very exciting. We're going to do a warehouse tour for analysts. This will be free. There will be no charge. You will need to pay for your own transport there and back and that will be all. Food will be provided. That will be at some point at the end of January so that you can get a sense of what is happening in our warehouse infrastructure. And also, we wanted to explain and show you our plans going forward as to the capital and infrastructure that we intend to build over the next few years.Finally, I just wanted to talk about overseas and give a little bit more color in terms of where the trade is coming from and what is driving it. Overseas continues to grow very strongly, and we're expecting growth in the current year to be around 23%.In terms of the participation of sales around the world, you can see the lion's share of sales are coming from the Middle East, 46% from the Middle East, 33% from European Union, 12% from Europe outside the European Union. And I should stress at this point, I suppose, given the time that we're at is that doesn't include the U.K. Yes. I know I have to make a little reference. The only reference to Brexit I'm going to make in the entire presentation. That's basically Russia, actually. Most of lion's share of that European trade outside of Europe is Russia, a little bit of Poland -- oh, sorry, no, Poland isn't here, a little bit of the Ukraine.So in terms of the growth we're experiencing, we're experiencing the biggest growth in the biggest regions. And that's not a coincidence because that's where we're spending the marketing money. We're getting the maximum leverage over digital marketing in the areas where we sell the most, and that's partly why we're growing the fastest in those regions. And in terms of average spend, we have put a little bit of information in the pack actually about returns on marketing overseas. And we will be spending more money on marketing this year, significantly more money marketing our overseas business than we did last year. In terms of average spend per customer, what these 2 lines show is that average spend per customer by length of time the customers have been trading with us. The blue line is the U.K., the red line is overseas. And reassuringly, we're seeing similar levels of growth in average spends per customer per year as customers mature in overseas territories, which suggests that the business is going to be more like the U.K. than we initially anticipated, and we're encouraged by that. The reason why it's not as high is because we don't have a credit offer overseas. So it is cash-driven. So it will never be as big a business on a per customer basis, we don't believe, as the U.K.In terms of central guidance for the year ahead. These are the performance of the last 5 quarters. In terms of what we're expecting from the fourth quarter, we're expecting a 3% growth. These are the first 2 quarters, and this is what we're expecting for the next 2 quarters. Now I'm conscious and embarrassed by the fact that we guided you towards very poor second quarter. And you might look at this number -- and then we smashed it. And you might think, "Oh, NEXT is playing games." We -- that's what we genuinely expected. As you might think, "Oh, they're doing the same thing again. And there will be some puns about crying wolf and all the rest of it." I want to reassure you that our estimate for the third quarter, which, unlike the estimate for the second quarter, has been made 6 weeks into that quarter, is much more reliable. And what we are -- we think there are 2 reasons to that. We think that some of the overperformance in the second quarter was about sales being pulled forward from August. And also, the warmer -- the more volatile sales become, the more responsive customers become to the need to buy clothes. And more and more customers will only buy the clothes on the day before they need them or actually, in the case of most male customers, 3 days after they needed them. So we are literally seeing the sales going up and down with the temperature gauge. If we continue to see very warm weather for the third quarter all the way through, then that will have an adverse impact on the sales.I don't think you should worry too much about that in that as long as the fourth quarter have reasonable, normal weather, those sales should come back. We don't think there is a fundamental problem, but we did want to alert you in very real terms to the fact that the third quarter is likely to be poorer. The fourth quarter last year, remember, suffered from a very poor November. We got some pullback in December, but having lost those sales in November, it was very hard to pull that back. So we're expecting a much better fourth quarter. But that is the slightly [ jammed ] tomorrow forecast for the rest of the year.In terms of what that means by business division, we're expecting Retail, down 5%; Online, up 12%; Finance, up 8%. And in terms of full year profits, profit before tax just bumping around the level of last year; a 5.2% growth in earnings per share driven by share buybacks; ordinary dividend yield, around 3.5%. So if you add earnings per share growth to dividend yield, a total shareholder increase in value of somewhere around 8.7%, which, again, was -- we wouldn't necessarily be -- it won't be our proudest and best year, if it cut-falls, if it comes through that way, we think in the context of what's happening in the wider market and the costs of transitioning the business from retail to online, we think will not be an unreasonable performance.I thought it'd be just worth looking at the 5-year view. So really, the last 5 years have been dominated by this shift from retail to online. And in terms of what's happened to sales, you can see, sales have grown by around 8% in that 5-year period. Profits have declined by 7%. That's all about the cost of transition. Fixed costs in retail are not coming down as fast as the sales are rising, and fixed costs in retail remaining stubbornly fixed. Although, over time, they will come down as rents get negotiated.In terms of earnings per share, because the company has been very strict about returning surplus capital to shareholders and because we have been extremely cash-generative, the earnings per share in that period are up -- actually up 9%. And this is our key measure of success. That is our -- our sole objective is the long-term sustainable growth in earnings per share, in the naive belief that if earnings per share rise over a long period of time, at some point, the share price will catch up. What has driven our ability to maintain our profits where they are to grow our sales at all has been the restructuring of all the assets that we had in the business into a coherent online platform, a platform that weaves into itself all of our stores and where our stores have become an intrinsic, an important part of our online platform. A platform that's begun to not only take on third-party brands but also -- and is now beginning to access third-party brands along with all the economies of scale and leverage we get over our digital marketing and websites, 4.4 million U.K. customers, GBP 1.2 billion credit book and 1.4 million overseas customers.Our objective is to create an asset that within the U.K. as an aggregator is unique. And for our customers, the objective is very clear. We want to be their first choice for clothing and homeware. Equally important, if we are going to be a successful third party -- a seller of third-party brands, we have to be their most profitable route to market. And that means rigorous control of our costs. So whilst we are -- we spend a lot of time talking about cost control and we're very boring about it, for us, it is an intrinsic part of our ability to trade successfully going forward. If we're going to be a good aggregator, we have to be a good controller of costs and service. And the final thing is, we have to have a level of service that both we and all of our partner brands are proud of. It's not enough that it's just, "Oh, that's fine for NEXT." Every single brand that we sell, the service in terms of the reliability of our delivery service, how the stock turns up, the ease of returns, the account management, all of that has to be something that not just we are happy with but that our partners are happy with, too.In terms of how we built this, I would love to pretend that it was a grand strategy dreamt up 6 years ago by geniuses in the boardroom. Obviously, it wasn't that. The reality is this, the welding together of all our assets has been the sum total of lots and lots of small ideas that people have had as to how they can make more money within the context of what we have. And the sum total of those ideas has built this platform. What I think as a group we have done is we have been very clear in terms of the sources of opportunities that we want to pursue and those that we don't. And there are really 5 principles. And the most important one is a very simple one, and that is add value. That whatever we're doing, we should never be at the situation where we say, "Well, this is easy money or money for old rope, we can just stick that on the website and we'll make money out of it." If we're not genuinely adding value for our customers, either giving them something in a way they couldn't get it, something they could get elsewhere but in a way they couldn't get it before or something that they can't get elsewhere, if we're not genuinely adding value for our customers through our service offer or our product offer, then in one way or another, people don't buy old rope for long and money for old rope disappears. So we have to be sure that every new venture we undertake is genuinely good for our customers.Second -- and that really means playing to our strengths. We won't -- we will not be going into insurance or holidays or any other number of brilliant ideas that people think that we could do because we will stick to the things where we believe -- that we believe play to our core strengths of being retailers and service providers and designers of product.Underpinning those 2 sort of consumer-facing values, we are insistent that every business makes a margin. Now I know that makes it sound obvious, but one of the things that our finance department is meticulous about is it doesn't matter which stream of business it is, which brand it is within our label business. Every single stream of business has to make a healthy margin. We're not winning business at low margins in order to try and increase those margins later on. Everything makes a margin. And we think that's really important because the -- any consumer-facing business is volatile and the volatility is only going to increase.So if we don't maintain good margins, healthy margins, commensurate with the risk we're taking, then a small decrease in turnover could result in a big drop in profit. So we're rigorous about maintaining margin in every business stream, whether they be new or old. We have to make a return on capital. Ultimately, that is what we're here to do. Capital is the fuel that pays for any growth that we'll get. If you don't have a good return on capital, at some point, your growth is going to run out.And finally, ruthlessly focused on delivering growth in earnings per share. It's not about sales, it's not about profits. Ultimately, it's got to be about earnings per share. And that's important when it comes to decisions about how to invest capital because if you fail at the fourth hurdle and you can't make a great return on capital, there is an enormous temptation encouraged by all sorts of high-powered deal fixers to go off and spend that money on something that doesn't make quite as high a return as you're used to or something that is more risky than you're used to.Our view is, no, if we can't get our return on capital, return it to shareholders either through buybacks or special dividends. If the share price is low enough, return it through buybacks because ultimately, that will drive earnings per share.Either way, if we can't get a return on the capital in the business, hand it back to shareholders. And sort of that is the principles by which we run the business, and that is the glue that holds together all these different initiatives. Everyone in the business understands that if they come up with an idea, the idea has to fulfill the first 4. The Board looks after the fifth. But the idea has to deliver those 4 -- the first 4 principles.[Audio Gap]