Interim Results

Next PLC 14 September 2004 Date: Embargoed until 07.00am, Tuesday 14 September 2004 Contacts: Simon Wolfson, Chief Executive David Keens, Group Finance Director NEXT PLC Tel: 020 7796 4133 (14/09/2004) Tel: 08454 567777 (thereafter) Alistair Mackinnon-Musson Philip Dennis Hudson Sandler Tel: 020 7796 4133 Email: next@hspr.co.uk Photographs available: http://www.next.co.uk/press/ (or Hudson Sandler, as above) NEXT PLC Results for the Half Year Ended July 2004 * NEXT Retail turnover up 16% * NEXT Directory turnover up 13% * Group profit before tax up 30% to £163m * Earnings per share up 36% * Interim dividend increased 18% to 13p Chairman's Statement I am pleased to report that NEXT has had a very satisfactory first half for 2004. We achieved a 15% increase in turnover and a 30% increase in pre-tax profit. Earnings per share increased by 36%. The interim dividend is being increased by 2p to 13p per share. At the Annual General Meeting on 13 May 2004 two of our non-executive directors retired from the Board and at the same time Jonathan Dawson was appointed. We intend to make another non-executive appointment in due course. We continue to put all of our energy into providing well styled, good quality, value for money products to our customers in the core markets of the UK and Eire. Whilst the trading environment may become more difficult I am confident that NEXT has the strategy and the people to continue to take the company forward. David Jones C.B.E. Chairman Chief Executive's Review In the six months to July 2004 the NEXT Group performed very well, albeit in a relatively benign competitive environment. Our primary financial objective is to deliver sustainable long term growth in Earnings Per Share. In the first half EPS increased by 35.7%, whilst operating profit increased by 29.8%. EPS continued to rise faster than operating profit as a result of share buybacks. Group turnover was up 15.4% on the previous year. Turnover excluding Profit and earnings VAT per share Six months to July Six months to July Restated 2004 2003 2004 2003 £m £m £m £m NEXT Retail 924.3 797.4 114.9 85.8 NEXT Directory 278.2 247.1 38.6 30.2 _________ _________ _________ _________ The NEXT Brand 1,202.5 1,044.5 153.5 116.0 +32.4% NEXT Franchise 14.2 13.2 2.5 2.4 Ventura 64.1 52.9 6.4 5.9 Other activities 12.7 10.4 10.1 8.6 Share option charge - - (0.6) (0.4) _________ _________ _________ _________ 1,293.5 1,121.0 171.9 132.5 +29.8% _________ _________ Interest expense (9.2) (7.2) _________ _________ Profit before tax 162.7 125.3 +29.8% Taxation (50.2) (37.5) _________ _________ Profit after tax 112.5 87.8 +28.1% _________ _________ Earnings per share 44.1p 32.5p +35.7% The interest charge has risen on last year as a result of increased levels of debt arising from the buybacks. Our interest rates are largely fixed and recent rises in base rate will not have a material effect on our charge. A change in accounting standards in respect of employee share options requires that we restate the prior year charge, which was £2.5m, down to the £0.4m stated above. Further details are given in the section headed employee share ownership plan. Overview NEXT's strategy remains simple. We aim to provide great product ranges for our customers in areas where we can add something to the design of the product. We continue to improve access and choice through the expansion of our retail selling space and have again increased the number of customers shopping with us through the NEXT Directory. We will maintain strict discipline in the application of capital and the control of costs. NEXT Retail Sales Total sales in NEXT Retail were 15.9% ahead of last year. Sales from new space contributed 13.3% whilst sales from the 320 stores that traded continuously without any significant capital expenditure grew by 2.6%. We believe it is important to measure the performance of the stores that were unaffected by planned deflection from new openings, as this gives an indication of the true like-for-like performance of our ranges. Underlying sales in the 285 stores that were unaffected by new openings were 4.7% ahead of last year. Space The combined effect of improved values and broader product ranges has allowed us to profitably increase our selling space. We made good progress in the first half, adding a net 233,000 square feet and increasing the number of stores by 13. All new stores are appraised against two financial hurdles; they must make at least 15% branch profit before central overheads and must pay back the net capital invested in less than 24 months. July 2004 Jan 2004 July 2003 Annual Change Store numbers 371 358 352 +5.4% Square footage 3,077,000 2,844,000 2,570,000 +19.7% We are now forecasting that the new space opened in the first half will beat our appraised sales targets by 19% and payback the net capital invested in 13 months. We expect the net selling space increase for the full year to be around 480,000 square feet, taking our total to approximately 3.3 million square feet. We now believe that we will add at least the same amount of space in the year to January 2006. Retail Profit Profit in NEXT Retail was up more than sales at 33.9% above last year. This exceptional performance was as a result of economies of scale over our fixed costs and an improvement in net margin from an improved clearance rate in the Sale. For the second half we are budgeting for profit growth to be broadly in line with sales growth. NEXT Directory Sales Sales in NEXT Directory were 12.6% ahead of last year; this increase was higher than we planned for. However, much of the increase was as a result of improved stock availability, reduced returns rates and increased service charge revenues (despite a reduction in APR). We do not expect to see the same levels of improvement in these areas in the second half. Active Customers Over the half year we increased the active customer base by 99,000 taking the total number to 1,759,000. As a result we begin the second half with 11.6% more customers than last year. Recruitment has increasingly been focused on direct contact with the customers through our stores and internet site. The traditional methods of advertising and direct mail have proven significantly less cost effective than last year. We believe this may be a long term trend as these media become more saturated. Directory Profit Profit in Directory was up 28.0% on last year, which was significantly ahead of the growth in sales. This is largely due to comparing against the disappointing first half profits we delivered last year. In the second half of last year profitability dramatically improved so we will be up against much more demanding comparatives going forward. We are budgeting for an increase in second half Directory profit more in line with its increase in sales. Product Development Delivering great product to our customers is the main focus of our business. We are product led and believe that the product makes the brand, not vice versa. NEXT has invested significant time and energy into developing its sourcing base. This has enabled us to offer improved product at the same price and the same product at lower prices. We have achieved a 6% reduction in average selling prices without any sacrifice in margin or compromise to quality. We envisage that this process will continue though perhaps not at the rate we have seen in the Spring Summer season. Warehousing and Distribution One of the consequences of broader product ranges, higher sales and lower average selling prices is the additional demands it places on our unit handling capacity in warehousing and distribution. We will need to make significant investment over the next few years if we are to succeed in delivering further growth in sales. To this end we have successfully opened a new Home furnishings warehouse of 600,000 square feet this season. We are constructing a major extension to our boxed garment warehouse for 2005, plan to extend our hanging garment high bay warehouse in 2006 and open new boxed and Home warehouses in 2007/8. The capital expenditure of £110m and related fixed costs in warehousing anticipated over the next four to five years is set out in the table below. Anticipated Warehouse Capital Depreciation Rental costs Increase in completion expenditure fixed costs £m £m £m £m 2004 (Open) Home Products 10 1.0 2.0 3.0 - New Site 2005 Boxed Garment 40 4.0 1.5 5.5 - Extension 2006 Hanging Garment - 10 1.0 - 1.0 Extension 2007 Boxed Garment 40 4.0 1.5 5.5 - New Site 2008 Home Products 10 1.0 2.0 3.0 - New Site We believe that these facilities will give us the capacity to grow sales over the coming years by up to 50% and our units by more than that. There is little scope to gain further economies of scale over our existing fixed overheads. NEXT Franchise Our 75 overseas franchise stores increased sales by 7.5% to £14.2m. Like-for-like sales in the 51 stores that traded continuously were 13.8% ahead of last year in local currency. Franchise profit grew by 6.9% to £2.5m. Profit growth continues to lag sales growth as a result of us moving away from a commission on the cost of merchandise to a royalty on sales. The royalty is paid after the stock is sold whereas commission is paid at the time of shipping. Ventura Ventura has exceeded our expectations both in terms of profit and sales. In the first half profits were £6.4m as against £5.9m last year. Ventura has remained focused on delivering excellent prices to new and existing customers and as a result has continued to win new business. We have increased capacity by taking on a call centre in Cardiff and next year we plan to open a wholly owned call centre in India. This new call centre will handle activities that we currently sub-contract in India and provide additional capacity for new business; it will not replace any of the facilities we operate in the UK. We expect Ventura to achieve profits in the second half of not less than those achieved in the first half. Other Activities Profits from other activities in the first half were £10.1m compared with £8.6m last year. The main contributors were our product sourcing companies NEXT Asia and NEXT Near East, which together made a profit of £10.4m compared with £9.6m last year. The operations of these companies will become more integrated over time and will be combined into one profit centre, NEXT Sourcing. Our property management division contributed £3.7m which included £1.6m profit from the disposal of freehold properties. Employee Share Ownership Plan Trust (ESOP) The NEXT ESOP purchased a further 2.3 million shares at an average price of 1421p and holds 9.3 million shares purchased at a cost of £93m. The total number of share options outstanding is 9.6 million. Due to a change in accounting standards we are required to recalculate the charge for share options. This results in reducing last year's first half charge of £2.5m down to £0.4m and a charge for this half year of £0.6m. The second effect is to move the shares held by the ESOP from net assets into reserves, reducing the stated July 2004 net assets by £83m. Risk Reward Plan In July we announced that the executive directors and senior employees had made personal investments totalling £1.5 million in financial contracts based on the market price of NEXT shares in four years' time. Special bonuses totalling £2.0 million gross were granted to the participants (excluding myself), with the net proceeds also being invested. The success of these contracts will depend on the NEXT share price exceeding £20 in July 2008, equivalent to a minimum annual compound growth rate of 8.8% over the period. In order to achieve the maximum value the annual growth rate has to be 14.5%. There is no present or future liability for NEXT in respect of these contracts. Balance Sheet and Cash Flow At the end of July NEXT had net borrowings of £340m, which included the £300m ten year bond issued last year. The net cash outflow of £33m was after expenditure of £44m on shares purchased for cancellation and £22m on increasing the number of shares held in the ESOP. Capital expenditure of £60m included £42m on retail stores and we anticipate that the full year spend will be approximately £135m. Merchandise stock levels for the Autumn season are 16.6% ahead of last year and in line with our requirements. Dividend The Directors are pleased to declare an interim dividend of 13p, an increase of 18% over last year. This will be paid on 4 January 2005 to shareholders on the register at 26 November 2004. The shares will trade ex-dividend from 24 November. Share Buyback During the first half we purchased for cancellation 1.2% of our shares in issue at an average price of 1404p. Current Trading In the six weeks since 1 August sales in NEXT Retail are 14.9% ahead of last year. These figures were undoubtedly increased by around 1% due to our improved performance during the Sale. Like-for-like sales in the 323 stores that have been trading continuously for at least one year and have not benefited from significant capital expenditure are 2.1% ahead of last year. Included in these stores are 37 stores that we anticipated would be affected by new store openings. Underlying sales in the 286 stores that have not been affected by new space are 4.5% ahead of last year. Directory sales for the six weeks are 14.8% ahead of last year but have benefited as a result of the later release of our Autumn Winter catalogue. Last year it was released in early July, this year it went out two weeks later. As a result, Directory sales in July were reduced whilst those in August were boosted. Taken together, sales for the NEXT Brand are 14.9% ahead of last year. Simon Wolfson Chief Executive 14 September 2004 CONSOLIDATED PROFIT AND LOSS ACCOUNT Unaudited Unaudited Six months Six months Year to to July 2004 to July 2003 Jan 2004 £m £m £m Restated Restated Turnover 1,293.5 1,121.0 2,516.0 ________ ________ ________ Operating profit 171.9 132.5 375.5 Net interest payable (9.2) (7.2) (17.3) ________ ________ ________ Profit on ordinary activities before taxation 162.7 125.3 358.2 Taxation on profit on ordinary activities (50.2) (37.5) (108.1) ________ ________ ________ Profit on ordinary activities after taxation 112.5 87.8 250.1 Dividends (32.3) (27.5) (89.3) ________ ________ ________ Profit for the period transferred to reserves 80.2 60.3 160.8 ________ ________ ________ Earnings per share p 44.1 32.5 93.9 Diluted earnings per share p 43.4 32.3 93.0 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Six months Six months Year to to July 2004 to July 2003 Jan 2004 £m £m £m Restated Restated Profit attributable to members of parent company 112.5 87.8 250.1 Exchange difference on translation of net assets of subsidiary undertakings 0.9 1.8 (1.6) ________ ________ ________ Total recognised gains and losses relating to the period 113.4 89.6 248.5 Prior period adjustment - 12.5 12.5 ________ ________ ________ Total gains and losses recognised since last report 113.4 102.1 261.0 ________ ________ ________ CONSOLIDATED BALANCE SHEET Unaudited Unaudited July 2004 July 2003 Jan 2004 £m £m £m Restated Restated Fixed assets Goodwill 34.0 29.6 36.2 Tangible assets 377.5 339.4 355.7 Investments 1.1 0.5 1.0 ________ ________ ________ 412.6 369.5 392.9 ________ ________ ________ Current assets Stocks 282.6 246.1 269.4 Debtors 369.0 340.1 378.5 Cash at bank and in hand 61.6 66.3 62.3 ________ ________ _______ 713.2 652.5 710.2 Current liabilities Creditors: amounts falling due within one year 583.1 503.0 576.6 ________ ________ ________ 130.1 149.5 133.6 ________ ________ ________ Total assets less current liabilities 542.7 519.0 526.5 Creditors: amounts falling due after more than one year 352.6 337.8 352.7 Provision for liabilities and charges 19.6 19.5 18.7 ________ ________ ________ Net assets 170.5 161.7 155.1 ________ ________ ________ Capital and reserves Called up share capital 26.2 27.4 26.5 Share premium account 0.6 0.5 0.6 Revaluation reserve 11.8 14.7 14.0 Capital redemption reserve 3.7 2.5 3.4 ESOP reserve (93.5) (71.1) (72.8) Other reserves (1,448.9) (1,448.9) (1,448.9) Profit and loss account 1,670.6 1,636.6 1,632.3 ________ ________ ________ Shareholders' funds 170.5 161.7 155.1 ________ ________ ________ CONSOLIDATED CASH FLOW STATEMENT Unaudited Unaudited Six months Six months Year to to July 2004 to July 2003 Jan 2004 £m £m £m Net cash inflow from operating activities 211.2 148.8 402.2 ________ ________ ________ Returns on investments and servicing of finance Interest paid (9.4) (2.1) (9.7) ________ ________ ________ Taxation UK corporation tax paid (52.4) (42.0) (91.8) Overseas tax paid (0.7) (1.2) (4.5) ________ ________ ________ (53.1) (43.2) (96.3) ________ ________ ________ Capital expenditure and financial investment Purchase of tangible fixed assets (60.1) (48.8) (99.8) Proceeds from disposal of fixed assets 5.8 0.1 4.2 Purchase of own shares by ESOP (32.9) (28.8) (40.2) Proceeds from issue of shares by ESOP 10.4 10.9 16.2 ________ ________ ________ (76.8) (66.6) (119.6) ________ ________ ________ Equity dividends paid (61.1) (56.3) (85.4) ________ ________ ________ Cash inflow/(outflow) before management of liquid resources and financing 10.8 (19.4) 91.2 Management of liquid resources 0.3 1.8 4.3 Financing Issue of new shares - 0.5 0.6 Company shares purchased for cancellation (43.8) (111.4) (209.0) Capital element of finance lease repayments (0.1) - (0.1) Unsecured bank loans 30.0 (150.0) (150.0) Issue of corporate bond - 300.0 300.0 ________ ________ ________ (13.9) 39.1 (58.5) ________ ________ ________ (Decrease)/increase in cash in the period (2.8) 21.5 37.0 ________ ________ ________ BASIS OF PREPARATION The report was approved by the Board of Directors on 14 September 2004. The accounts for the year to January 2004 are not 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. The results for the six months to July 2003 and the year to January 2004 have been restated following the implementation of UITF 38 Accounting for ESOP Trusts and the revision of UITF 17 Employee Share Schemes. All other accounting policies adopted are consistent with those set out in the accounts for the year ended January 2004. Registered in England 4412362. Registered Office, Desford Road, Enderby, Leicester LE19 4AT. EARNINGS PER SHARE The calculation of earnings per share is based on £112.5m (2003: restated £87.8m) being the profit for the six months after taxation and 255.2m ordinary shares of 10p each (2003: 270.2m), being the weighted average number of shares ranking for dividend less the weighted average number of shares held by the ESOP during the year. Diluted earnings per share is based on £112.5m (2003: restated £87.8m) being the profit for the six months after taxation and 259.1m ordinary shares of 10p each (2003: 272.2m) 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 3.9m shares (2003: 2.0m shares). RECONCILIATION OF SHAREHOLDERS' FUNDS Six months Six months Year to to July 2004 to July 2003 Jan 2004 £m £m £m Restated Restated Total recognised gains and losses 113.4 89.6 248.5 Dividends (32.3) (27.5) (89.3) Purchase of own shares for cancellation (43.8) (111.4) (209.0) Issue of new shares - 0.5 0.6 Purchase of own shares by ESOP (32.9) (28.8) (40.2) Proceeds from issue of shares by ESOP 10.4 10.8 16.2 Share option charge 0.6 0.4 0.2 ________ ________ ________ Total movement during the period 15.4 (66.4) (73.0) Opening shareholders' funds (as restated) 155.1 228.1 228.1 ________ ________ ________ Closing shareholders' funds 170.5 161.7 155.1 ________ ________ ________ CASH FLOW: RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOW Six months Six months Year to to July 2004 to July 2003 Jan 2004 £m £m Restated £m Restated Operating profit before interest 171.9 132.5 375.5 Depreciation 33.3 30.9 62.3 Amortisation of goodwill 2.1 1.6 4.4 (Profit)/loss on disposal of fixed assets (0.8) 1.5 1.4 Share option charge 0.6 0.4 0.2 Income from interest in associated undertakings (0.2) - (0.7) Increase in stock (13.2) (2.2) (25.6) Decrease/(increase) in debtors 9.5 (23.5) (61.9) Increase in creditors 7.0 6.1 48.3 Exchange movement 1.0 1.5 (1.7) ________ ________ ________ Net cash inflow from operating activities 211.2 148.8 402.2 ________ ________ ________ CASH FLOW: RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Six months Six months Year to to July 2004 to July 2003 Jan 2004 £m £m £m (Decrease)/increase in cash in the period (2.8) 21.5 37.0 Cash realised from liquid resources (0.3) (1.8) (4.3) (Increase)/decrease in cash from unsecured bank loans (30.0) 150.0 150.0 Increase in cash from corporate bonds - (300.0) (300.0) Capital element of finance lease repayments 0.1 - 0.1 ________ ________ ________ Changes in net debt resulting from cash flows (33.0) (130.3) (117.2) New finance leases (0.2) - (0.9) ________ ________ ________ Movement in net debt in the period (33.2) (130.3) (118.1) Net debt at January 2004 (306.9) (188.8) (188.8) ________ ________ ________ Net debt at July 2004 (340.1) (319.1) (306.9) ________ ________ ________ CASH FLOW: ANALYSIS OF NET DEBT January Cash Other non- July 2004 flow cash changes 2004 £m £m £m £m Cash in hand 57.3 1.6 - 58.9 Overnight deposits 2.0 (2.0) - - Overdrafts (8.4) (2.4) - (10.8) ________ ________ ________ ________ 50.9 (2.8) - 48.1 Short term deposits 3.0 (0.3) - 2.7 Unsecured bank loans (60.0) (30.0) - (90.0) Corporate bond (300.0) - - (300.0) Finance leases (0.8) 0.1 (0.2) (0.9) ________ ________ ________ ________ Total net debt (306.9) (33.0) (0.2) (340.1) ________ ________ ________ ________ This interim statement, the full text of the Stock Exchange announcement and the interim 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. - ENDS - This information is provided by RNS The company news service from the London Stock Exchange

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