Final Results

Next PLC 23 March 2006 Date: Embargoed until 07.00am, Thursday 23 March 2006 Contacts: Simon Wolfson, Chief Executive David Keens, Group Finance Director NEXT PLC Tel: 08454 567 777 Alistair Mackinnon-Musson Philip Dennis Hudson Sandler Tel: 020 7796 4133 Email: next@hspr.com Photographs available: http://www.next.co.uk/press/ NEXT PLC Results for the Year Ended January 2006 • Group turnover up 8.7% to £3.1 billion • Group profit before tax up 5.8% to £449.1m • Buyback 5.7% of share capital for £217.5m • Earnings per share up 6% to 127.4p • Total dividend up 7.3% to 44p Chairman's Statement I am pleased to report that NEXT has had another satisfactory year, despite a tough trading environment throughout 2005. Profit before tax increased by 6% to £449m, on sales of £3.1 billion which were 9% ahead of last year. Over the past five years, there have been significant achievements by NEXT in many areas. Sales have almost doubled, accompanied by a doubling of profit and an even greater increase in earnings per share. During that time we have returned £1.4 billion to shareholders through dividends and share buybacks. We have also succeeded in delivering excellent levels of capital growth through a rising share price. These financial results have been achieved through the continued focus on our products - offering style, quality and value for money to our customers. The development of our store portfolio to over 4 million square feet and our Directory customer base to over 2 million active customers have been the main drivers of growth. Our infrastructure, which supports these objectives, provides the platform from which we can continue to grow the business and deliver value to our customers and shareholders. It has already been announced that I will retire from the Board at the AGM in May 2006. I have been at NEXT for 20 years and I will be sad to no longer be part of a great team, but I am a great believer in well planned and timely succession. I will be succeeded as Chairman by John Barton. We appointed John as a non-executive director in 2002 and he was appointed Deputy Chairman in 2004. He has shown that he has all the qualities that are necessary in a good Chairman and I am confident that John and Simon will be a formidable partnership in promoting the continued success of NEXT. I would like to thank our suppliers, many of whom have supported NEXT so well over my 20 years. I would particularly thank the three Chairmen that I worked with during my time as Chief Executive - Michael Stoddart, Lord David Wolfson and Sir Brian Pitman. They all brought their own individual style and knowledge which helped me enormously. And finally, thank you to everyone who has worked with me at NEXT, it has been a great adventure. David Jones CBE Chairman Chief Executive's Review INTRODUCTION NEXT has delivered solid growth in sales and profits in a challenging year. NEXT Brand sales increased by 9.1% against last year, while group profit before tax increased by 5.8% to £449m, at the top end of market expectations. As a result of share buybacks the pre-tax earnings per share increased by more than profits and were 9.2% ahead of last year. An increase in the tax rate to 30.2% brought post-tax earnings per share growth back to 6.0%. PROFIT AND LOSS ACCOUNT Turnover Profit & Excluding VAT Earnings per share 2006 2005 2006 2005 £m £m £m £m Restated NEXT Retail 2,216.8 2,057.6 319.9 301.1 NEXT Directory 685.0 602.6 106.1 89.5 _________ __________ _________ _______ The NEXT Brand 2,901.8 2,660.2 426.0 390.6 +9.1% NEXT Franchise 39.2 33.5 7.9 6.0 NEXT Sourcing 8.7 20.2 32.9 32.8 Ventura 149.2 131.8 13.6 13.4 Other activities 7.3 12.8 (3.7) 3.6 Share option charge - - (8.1) (3.9) Unrealised exchange gain - - 2.1 - _________ __________ _________ _______ Turnover & operating profit 3,106.2 2,858.5 470.7 442.5 +6.4% _________ __________ Interest expense (21.6) (18.2) _________ _______ Profit before tax 449.1 424.3 +5.8% Taxation (135.6) (118.9) _________ _______ Profit after tax 313.5 305.4 +2.7% Earnings per share 127.4p 120.2p +6.0% _________ _______ CHANGED TACTICS FOR TOUGHER TIMES At the beginning of last year we said that we expected a challenging year. We have succeeded in mitigating the effects of a tough consumer environment by profitably growing our selling space, improving gross margins, controlling costs and managing stock levels. NEXT Directory delivered strong growth in both sales and profits. NEXT RETAIL Sales in NEXT Retail grew by 7.7%, with like-for-like sales in the 224 stores that were not planned to be affected by new openings down -2.9%. Despite negative like-for-like sales the operating profit was up 6.3% on last year. The analysis below explains how the operating margin has been defended and how the major costs varied as a percentage of sales. Margin analysis Increase in gross margin +1.0% Higher markdowns -0.4% Improvement in branch payroll +0.1% Increase in occupancy costs -0.8% Increase in central overheads -0.1% Operating margin reduction -0.2% Gross margin (the difference between the cost of stock and the initial selling price) increased by 1% through improved sourcing and better control of airfreight, but without any compromise in either quality or value. In fact we also managed to reduce average selling prices by around 5%. Markdowns rose as a result of increased Sale activity in our clearance operation and slightly lower cash recovery rates in the end of season Summer Sale. Labour efficiency gains were made in the stores through improved stock processing methods and reduced levels of premium pay. Occupancy costs rose as the effects of underlying increases in rates, energy costs and rents were exacerbated by negative like-for-like sales. Central overheads increased slightly, mainly as a result of the step change in warehouse fixed costs arising from the opening of two new warehouses and additional distribution costs. New space In the year we increased our net selling space by 980,000 square feet to 4,300,000 square feet. Despite difficult trading conditions we are forecasting that the sales performance of our portfolio of new stores will be in line with their appraised target, giving payback of the net capital invested in 18 months. The table below shows how the profile of our stores and space has changed over the last three years: Profile of new space Store Size Number of Stores % of Selling Space (square feet) 2006 2005 2004 2006 2005 2004 Less than 5,000 133 152 166 9% 14% 18% 5,000-10,000 132 112 99 23% 25% 26% 10,000-15,000 99 61 45 28% 22% 19% 15,000-20,000 35 29 25 14% 15% 15% Greater than 20,000 40 30 23 26% 24% 22% TOTAL 439 384 358 New space in the year ahead We currently expect to increase net selling space by around 450,000 square feet in the year ahead. Manchester store In the Autumn we opened our largest store, trading from 82,000 square feet in the centre of Manchester. Sales to date are comfortably ahead of target and we expect to achieve payback of the net capital invested in 17 months. New shop fit concept In May of this year we will be trialling a new shop fit concept. By August this will be in six new stores and two existing stores that are being converted to the new format. If the trial is successful we will then roll out elements of it into key stores. NEXT DIRECTORY NEXT Directory had a good year with sales up 13.7% and profits up 18.5%. Sales continue to benefit from increased use of the Internet, whilst improved gross margins and tight control of costs moved profit ahead faster than sales. The margin analysis below explains how the major costs varied as a percentage of sales. Margin analysis Increase in gross margin 1.1% Higher markdowns -1.4% Service charge/bad debt -0.1% Improvement in central overheads 1.0% Operating margin increase 0.6% The improvement in gross margin was offset by the significant increase in markdown, which resulted from a planned reduction in the quantity of stock transferred from Directory to Retail for the end of season Sales. Therefore the quantity of stock in the Directory Sales was significantly higher than last year. Increased bad debt provisions were offset by increased service charge income. Significant economies of scale were made over central overheads with Directory catalogue production, marketing and call centre costs all declining as a percentage of sales. Customer base The number of active customers grew by 11% to 2.1 million as at January 2006. PRODUCT DEVELOPMENT Fashion is moving faster and we have reorganised our buying cycle to deliver new product more often. New ranges will now be introduced into stores every six weeks. The effects of the new buying process will begin to be seen in April this year. Going forward we need to be more focused in controlling the number of different styles in our ranges. We need fewer styles with more colour-ways of the better selling lines, which have been understocked from the start of this season. We expect to make further progress through the course of the year. BUSINESS DEVELOPMENT This year we will be conducting a number of trials to extend and add to the NEXT brand. These products will, if successful, add to our business in the years ahead and provide new avenues of growth as our core product areas approach maturity. In particular we will aim to leverage our two million Directory home shopping customer base. To this end we are trialling an electrical brochure (NEXTelectric) with 300,000 customers and if this is successful we can rapidly roll it out to the rest of the customer base in the Autumn. NEXT Clearance has 30 stores and a turnover of £78m. We aim to develop this business through the introduction of a sub-brand which will consist of product bought specifically for these stores. NEXT FRANCHISE Our overseas franchise operation continues to grow, with sales increasing by 17% and profit by 30% to £7.9m. At the year end there were 96 franchise stores compared with 80 the previous year. The Middle East continues to be our largest region with 41 stores. Our partner in Japan has 25 stores. During the year franchise stores were opened in Gibraltar, Hungary and Turkey. We anticipate that at least 20 new franchise stores will be opened during the coming year, including several in Russia. NEXT SOURCING (NSL) NSL has operations in mainland China, Hong Kong, Romania, Sri Lanka, Turkey, the UK and other locations which are engaged in the design, sourcing, buying, merchandising and quality control of NEXT products. In Sri Lanka NSL also owns garment manufacturing facilities which employ 2,000 people. NSL is a profit centre and competes with other agents and factories. It charges commission on the product it sources and bears its own operating costs. The reported turnover is only the small amount of business it does with third parties; it excludes intercompany sales. Profits amounted to £32.9m compared with £32.8m last year. VENTURA After a slow start to the year, Ventura had an excellent second half. Turnover increased by 13% to £149m. Business volumes remained high through to the end of the year and, as a result, profits of £13.6m were better than our expectations and slightly ahead of last year's £13.4m. Several existing contracts were renewed during the year and three significant new customers have been added to the client list. Ventura employs in excess of 7,000 people and its UK call centres are operating close to full capacity. Its call centre in Pune, India opened during the year and handles business on behalf of NEXT Directory and two other clients. OTHER ACTIVITIES The Other Activities charge was £3.7m. Other Activities include profits from our Property Management Division, Choice (an associated company which operates fourteen discount stores) and Cotton Traders (an associated company which sells its own brand products). Central Costs were £6.0m plus a further £5.9m in respect of additional defined benefit pension scheme funding. The charge for the Group's pension schemes increased to £22m from £19m last year. During the year the Group made cash contributions of £30m into the schemes, which included £17m in respect of the past service deficit. SHARE OPTIONS The £8.1m charge for the year compares with a restated £3.9m for the previous year. The increase is due to the phasing in of option grants as prescribed by the new accounting standard. We estimate that the charge will increase by approximately £1m in each of the next three years. Over 10,000 of our employees hold options over 10.6 million shares in NEXT. Our employee share ownership trust (ESOT) purchases shares in the market and issues them to employees when options are exercised. At the year end it held 8.2 million shares. We are continuing with our policy of issuing options to our employees and management of the resulting exposure by purchasing and holding shares in the ESOT. We believe this is the best way to minimise the true cost of share options and avoids the dilution of shareholders' interests that would otherwise occur from the issue of new shares. SHARE BUYBACKS During the year we purchased a further 15 million shares for cancellation at an average price of 1449p and a cash cost of £218m. This was 5.7% of the shares in issue at the beginning of the year. We intend to continue with our strategy of buying back shares as and when it is in the interests of shareholders generally. These buybacks were not made at the expense of investment in the NEXT Brand; we also spent a record amount on capital expenditure. The primary use of capital will continue to be the development of the core businesses. BALANCE SHEET AND CASH FLOW Cash flow remains strong, after capital expenditure of £179m and before share buybacks we generated a cash inflow of £106m. The net cash outflow after share buybacks was £112m. Borrowings at the year end were £360m and are financed through a £300m 5.25% 10 year bond, which was issued in June 2003, and medium term bank facilities. Capital expenditure included £124m on stores and £37m on warehousing. We expect this year's expenditure will be in the region of £125m. Year end stock levels at £324m were 7% up on last year and were consistent with our requirements. Debtors of £514m included the £385m account balances of our Directory customers, which continued to rise faster than Directory sales as more of these customers used their account to make purchases in NEXT Retail stores. DIVIDEND The Directors recommend a final dividend of 30p against 28p last year, bringing the total for the year to 44p compared with 41p last year, an increase of 7.3%. The dividend is covered 2.9 times by earnings per share of 127.4p. CURRENT TRADING The combined sales of NEXT Retail and NEXT Directory for the seven week period from 29 January to 18 March 2006 were up 5.6% compared to the same period last year. NEXT Retail sales were up 3.9% in the period. Net sales growth from new space after deducting deflection was 12.8%. Like-for-like sales in the 246 stores that were unaffected by new openings were down -8.9%. NEXT Directory sales were up 10.2% in the period. These figures for the seven week period need to be treated with some caution. Last year included Mother's Day and some pre-Easter spending, whereas this year's do not. We estimate that NEXT Retail has been adversely affected by 1.5% or 2% due to these factors. We estimate that NEXT Directory has been affected by a similar amount as a result of the later distribution of our Summer brochure. OUTLOOK We believe the competitive and economic environment will remain very challenging in the year ahead. Whilst we think we have the opportunity to make improvements to some of our ranges, we are still budgeting on the basis of negative like-for-like retail sales for the year. We will focus on the following activities: • Improving our core product offer, in particular simplifying some of our ranges to deliver better stock availability and clearer in-store merchandising • Growing top line sales through the addition of profitable new space in NEXT Retail • Adding more customers and product ranges to NEXT Directory • Defending the bottom line through the continued management of costs and improving gross margin • Developing new product areas NEXT remains highly cash flow generative and we will continue with our policy of buying back shares when it is earnings enhancing and in the interests of shareholders generally. Simon Wolfson 23 March 2006 CONSOLIDATED INCOME STATEMENT Year Year to January to January 2006 2005 £m £m Revenue 3,106.2 2,858.5 _________ _________ Trading profit 468.9 440.3 Share of results of associates 1.8 2.2 _________ _________ Operating profit before interest 470.7 442.5 Finance income 1.1 1.6 Finance costs (22.7) (19.8) _________ _________ Profit before taxation 449.1 424.3 Taxation (135.6) (118.9) _________ _________ Profit attributable to equity holders of the parent 313.5 305.4 company _________ _________ Earnings per share p 127.4 120.2 Diluted earnings per share p 125.9 118.4 Dividend per share p 44.0 41.0 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Year Year to January to January 2006 2005 £m £m Income and expenses recognised directly in equity Exchange differences on translation of foreign operations 2.4 0.6 Gains on cash flow hedges 18.5 - Actuarial losses on defined benefit pension schemes (34.8) (10.5) Tax on items recognised directly in equity 10.4 3.2 _________ _________ (3.5) (6.7) Transfers Transferred to income statement on cash flow hedges (1.5) - Transferred to carrying amount of hedged items on cash flow hedges (8.6) - _________ _________ Net expense recognised directly in equity (13.6) (6.7) Profit for the year 313.5 305.4 _________ _________ Total recognised income and expense for the period 299.9 298.7 _________ _________ Opening balance sheet adjustment for adoption of IAS 32 and IAS 39 (Note 6) (43.7) - _________ _________ Notes Gains on cash flow hedges relate to unrealised mark to market movements on foreign exchange derivative contracts which are designated and effective as hedges of future cash flows. Fair value adjustments relate to the transfer to the income statement and balance sheet of gains and losses on cash flow hedges previously recognised in equity. CONSOLIDATED BALANCE SHEET January January 2006 2005 £m £m ASSETS AND LIABILITIES Non-current assets Property, plant & equipment 514.1 424.0 Intangible assets 36.2 36.2 Interests in associates 1.8 1.5 Other investments 1.0 - Other financial assets 1.4 - Deferred tax assets 7.8 24.0 ________ _________ 562.3 485.7 Current assets Inventories 323.9 301.6 Trade and other receivables 513.8 437.4 Other financial assets 4.1 - Cash and short term deposits 69.8 72.3 ________ _________ 911.6 811.3 ________ _________ Total assets 1,473.9 1,297.0 ________ _________ Current liabilities Bank overdrafts (31.4) (22.3) Unsecured bank loans (100.3) - Trade and other payables (568.8) (506.3) Other financial liabilities (1.8) - Current tax liability (53.2) (59.8) ________ _________ (755.5) (588.4) Non-current liabilities Corporate bond (298.1) (300.0) Net retirement benefit obligation (115.6) (92.6) Provisions (10.0) (10.0) Other financial liabilities (4.5) - Other liabilities (34.0) (29.5) ________ _________ (462.2) (432.1) Total liabilities (1,217.7) (1,020.5) ________ _________ Net assets 256.2 276.5 ________ _________ EQUITY Share capital 24.6 26.1 Share premium account 0.7 0.6 Capital redemption reserve 5.3 3.8 ESOT reserve (89.3) (93.3) Fair value reserve 2.8 - Foreign currency translation reserve 3.0 0.6 Other reserves (1,441.7) (1,439.5) Retained earnings 1,750.8 1,778.2 ________ _________ Total equity 256.2 276.5 ________ _________ CONSOLIDATED CASH FLOW STATEMENT Year Year to January to January 2006 2005 £m £m Cash flows from operating activities Profit before interest 470.7 442.5 Depreciation 81.2 69.0 Profit on disposal of property, plant and equipment (0.2) (0.9) Share option charge 8.1 3.9 Unrealised exchange gain (2.1) - Share of profit of associate companies (0.3) 0.5 Exchange movement 1.6 1.2 Increase in inventories (22.3) (33.0) Increase in trade and other receivables (76.3) (57.7) Increase in trade and other payables 62.8 84.6 Pension contributions less income statement charge (11.8) (3.1) ________ ________ Cash generated from operations 511.4 507.0 Corporation taxes paid (113.2) (117.1) ________ ________ Net cash from operating activities 398.2 389.9 ________ ________ Cash flows from investing activities Proceeds from sale of property, plant and equipment 8.4 7.7 Acquisition of property, plant and equipment (177.2) (144.0) Purchase of investment in associate company - (1.2) Purchase of other investments (1.0) - ________ ________ Net cash from investing activities (169.8) (137.5) ________ ________ Cash flows from financing activities Proceeds from issue of share capital 0.1 - Repurchase of own shares (217.5) (57.3) Purchase of own shares by ESOT (14.9) (41.1) Proceeds from disposal of shares by ESOT 15.7 16.0 Proceeds/(repayment) of unsecured bank loans 100.3 (60.0) Interest paid (21.4) (20.4) Interest received 1.2 1.4 Payment of finance lease liabilities (0.2) (0.2) Dividends paid (103.7) (94.2) ________ ________ Net cash from financing activities (240.4) (255.8) ________ ________ Net decrease in cash and cash equivalents (12.0) (3.4) Opening cash and cash equivalents 50.0 53.9 Effect of exchange rate fluctuations on cash held 0.4 (0.5) ________ ________ Closing cash and cash equivalents (Note 5) 38.4 50.0 ________ ________ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Preparation The Group's results for the year ended 28 January 2006 are the first to be prepared in accordance with International Financial Reporting Standards (' IFRS'). Details of the changes in accounting policies arising from the adoption of IFRS, together with restated financial information for the six months ended 31 July 2004 and the year ended 29 January 2005, have previously been published on the Group's website, www.next.co.uk. With the exception of financial instruments, as detailed below, the accounting policies set out in that document have been consistently applied to all periods presented in these condensed consolidated financial statements. Financial Instruments In accordance with IFRS 1 First Time Adoption of International Financial Reporting Standards, the Group has elected not to restate comparative information for the impact of IAS 32 and IAS 39 Financial Instruments. The opening balance sheet at 30 January 2005 has been adjusted to reflect the adoption of these standards from that date and details of these adjustments are set out in Note 6 below. 2. Statement of Compliance The Group has prepared its condensed consolidated financial statements in accordance with the IFRS accounting policies it has applied in its first IFRS compliant full year financial statements, and the provisions of IFRS 1. The condensed consolidated financial statements are unaudited and do not include all of the information required for full annual financial statements. The financial information for the year to January 2005 does not represent full accounts within the meaning of Section 240 of the Companies Act 1985. Full accounts for that period incorporating an unqualified audit report have been delivered to the Registrar of Companies. 3. Earnings per Share The calculation of earnings per share is based on £313.5m (2005: £305.4m) being the profit for the year after taxation and 246.2m ordinary shares of 10p each (2005: 254.1m), being the weighted average number of shares ranking for dividend less the weighted average number of shares held by the ESOT during the year. Diluted earnings per share is based on £313.5m (2005: £305.4m) being the profit for the year after taxation and 249.1m ordinary shares of 10p each (2005: 257.9m) being the weighted average number of shares used for the calculation of earnings per share above increased by the dilutive effect of potential ordinary shares from employee share option schemes of 2.9m shares (2005: 3.8m shares). 4. Reconciliation of Equity Year Year to January to January 2006 2005 £m £m Total recognised income and expense 299.9 298.7 Equity dividends paid (104.4) (94.2) Shares purchased for cancellation (181.1) (57.3) Issue of new shares 0.1 - Shares purchased by ESOT (14.9) (41.1) Shares issued by ESOT 15.7 16.0 Share option charge 8.1 3.9 ________ ________ Total movement during the period 23.4 126.0 Opening total equity as restated (Note 6) 232.8 150.5 ________ ________ Closing total equity 256.2 276.5 ________ ________ 5. Analysis of Net Debt Other January Cash non-cash January 2005 flow changes 2006 £m £m £m £m Cash and short term deposits 72.3 69.8 Overdrafts (22.3) (31.4) ________ ________ Cash and cash equivalents 50.0 (12.0) 0.4 38.4 Unsecured bank loans - (100.3) - (100.3) Corporate bond (300.0) - 1.9 (298.1) Finance leases (0.8) 0.2 (2.0) (2.6) ________ ________ ________ ________ Total net debt (250.8) (112.1) 0.3 (362.6) ________ ________ ________ ________ 6. Adoption of IAS 32 and IAS 39 Reconciliation of total equity at 30 January 2005 £m £m Current assets: other financial assets Recognition of foreign exchange derivatives at fair value 2.4 Current liabilities: other financial liabilities Recognition of interest rate swaps at fair value (9.0) Recognition of foreign exchange derivatives at fair value (10.6) Recognition of contingent share purchase contracts (36.4) ________ (56.0) Restatement of corporate bond to fair value 7.4 Deferred tax adjustment on recognition of derivatives 2.5 ________ Opening balance sheet adjustment for adoption of IAS 32 & 39 (43.7) Total equity at January 2005 under IFRS as previously stated 276.5 ________ Total equity at January 2005 after adoption of IAS 32 & 39 232.8 ________ It is intended that the recommended dividend will be paid on 3 July 2006 to shareholders registered on 26 May 2006. The Annual General Meeting will be held at the Ramada Jarvis Hotel, 73 Granby Street, Leicester, LE1 6ES on Wednesday 17 May 2006. The Annual Report and Accounts will be sent to shareholders by 13 April 2006 and copies will be available from the Company's registered office: Desford Road, Enderby, Leicester, LE19 4AT and on the Company's website at www.next.co.uk. This statement, the full text of the Stock Exchange announcement and the results presentation can be found on the Company's website at www.next.co.uk. Statements made in this announcement that look forward in time or that express management's beliefs, expectations or estimates regarding future occurrences and prospects are 'forward-looking statements' within the meaning of the United States federal securities laws. These forward-looking statements reflect NEXT's current expectations concerning future events and actual results may differ materially from current expectations or historical results. Any such forward-looking statements are subject to various risks and uncertainties, including but not limited to failure by NEXT to predict accurately customer fashion preferences; decline in the demand for merchandise offered by NEXT; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of NEXT's brand awareness and marketing programmes; general economic conditions or a downturn in the retail industry; the inability of NEXT to successfully implement relocation or expansion of existing stores; lack of sufficient consumer interest in NEXT Directory; acts of war or terrorism worldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets. Forward-looking statements only speak as of the date on which they are made, and the events discussed herein may not occur. NEXT do not undertake any obligation to update publicly or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. This information is provided by RNS The company news service from the London Stock Exchange

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