23rd Mar 2006 07:02
Next PLC23 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: [email protected] 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 atough 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 inmany areas. Sales have almost doubled, accompanied by a doubling of profit andan even greater increase in earnings per share. During that time we havereturned £1.4 billion to shareholders through dividends and share buybacks. Wehave also succeeded in delivering excellent levels of capital growth through arising share price. These financial results have been achieved through the continued focus on ourproducts - offering style, quality and value for money to our customers. Thedevelopment of our store portfolio to over 4 million square feet and ourDirectory customer base to over 2 million active customers have been the maindrivers of growth. Our infrastructure, which supports these objectives,provides the platform from which we can continue to grow the business anddeliver value to our customers and shareholders. It has already been announced that I will retire from the Board at the AGM inMay 2006. I have been at NEXT for 20 years and I will be sad to no longer bepart of a great team, but I am a great believer in well planned and timelysuccession. I will be succeeded as Chairman by John Barton. We appointed John as anon-executive director in 2002 and he was appointed Deputy Chairman in 2004. Hehas shown that he has all the qualities that are necessary in a good Chairmanand I am confident that John and Simon will be a formidable partnership inpromoting the continued success of NEXT. I would like to thank our suppliers, many of whom have supported NEXT so wellover my 20 years. I would particularly thank the three Chairmen that I workedwith during my time as Chief Executive - Michael Stoddart, Lord David Wolfsonand Sir Brian Pitman. They all brought their own individual style and knowledgewhich helped me enormously. And finally, thank you to everyone who has workedwith me at NEXT, it has been a great adventure. David Jones CBEChairman 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 beforetax 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 morethan profits and were 9.2% ahead of last year. An increase in the tax rate to30.2% 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 2,057.6 319.9 301.1NEXT 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 6.0NEXT Sourcing 8.7 20.2 32.9 32.8Ventura 149.2 131.8 13.6 13.4Other activities 7.3 12.8 (3.7) 3.6Share 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. Wehave succeeded in mitigating the effects of a tough consumer environment byprofitably growing our selling space, improving gross margins, controlling costsand managing stock levels. NEXT Directory delivered strong growth in both salesand profits. NEXT RETAIL Sales in NEXT Retail grew by 7.7%, with like-for-like sales in the 224 storesthat were not planned to be affected by new openings down -2.9%. Despitenegative like-for-like sales the operating profit was up 6.3% on last year. Theanalysis below explains how the operating margin has been defended and how themajor 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 sellingprice) increased by 1% through improved sourcing and better control ofairfreight, but without any compromise in either quality or value. In fact wealso managed to reduce average selling prices by around 5%. Markdowns rose as aresult of increased Sale activity in our clearance operation and slightly lowercash recovery rates in the end of season Summer Sale. Labour efficiency gainswere made in the stores through improved stock processing methods and reducedlevels of premium pay. Occupancy costs rose as the effects of underlying increases in rates, energycosts and rents were exacerbated by negative like-for-like sales. Centraloverheads increased slightly, mainly as a result of the step change in warehousefixed costs arising from the opening of two new warehouses and additionaldistribution costs. New space In the year we increased our net selling space by 980,000 square feet to4,300,000 square feet. Despite difficult trading conditions we are forecastingthat the sales performance of our portfolio of new stores will be in line withtheir 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 overthe last three years: Profile of new space Store Size Number of Stores % of Selling Space(square feet) 2006 2005 2004 2006 2005 2004Less 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 feetin the year ahead. Manchester store In the Autumn we opened our largest store, trading from 82,000 square feet inthe centre of Manchester. Sales to date are comfortably ahead of target and weexpect 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 thiswill be in six new stores and two existing stores that are being converted tothe new format. If the trial is successful we will then roll out elements of itinto key stores. NEXT DIRECTORY NEXT Directory had a good year with sales up 13.7% and profits up 18.5%. Salescontinue to benefit from increased use of the Internet, whilst improved grossmargins and tight control of costs moved profit ahead faster than sales. Themargin analysis below explains how the major costs varied as a percentage ofsales. 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 inmarkdown, which resulted from a planned reduction in the quantity of stocktransferred from Directory to Retail for the end of season Sales. Therefore thequantity of stock in the Directory Sales was significantly higher than lastyear. Increased bad debt provisions were offset by increased service chargeincome. Significant economies of scale were made over central overheads with Directorycatalogue production, marketing and call centre costs all declining as apercentage 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 newproduct more often. New ranges will now be introduced into stores every sixweeks. The effects of the new buying process will begin to be seen in Aprilthis year. Going forward we need to be more focused in controlling the number of differentstyles in our ranges. We need fewer styles with more colour-ways of the betterselling lines, which have been understocked from the start of this season. Weexpect 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 NEXTbrand. These products will, if successful, add to our business in the yearsahead and provide new avenues of growth as our core product areas approachmaturity. In particular we will aim to leverage our two million Directory home shoppingcustomer base. To this end we are trialling an electrical brochure(NEXTelectric) with 300,000 customers and if this is successful we can rapidlyroll 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 thisbusiness through the introduction of a sub-brand which will consist of productbought 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 storescompared with 80 the previous year. The Middle East continues to be our largestregion 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 thecoming year, including several in Russia. NEXT SOURCING (NSL) NSL has operations in mainland China, Hong Kong, Romania, Sri Lanka, Turkey, theUK and other locations which are engaged in the design, sourcing, buying,merchandising and quality control of NEXT products. In Sri Lanka NSL also ownsgarment manufacturing facilities which employ 2,000 people. NSL is a profit centre and competes with other agents and factories. It chargescommission on the product it sources and bears its own operating costs. Thereported turnover is only the small amount of business it does with thirdparties; it excludes intercompany sales. Profits amounted to £32.9m comparedwith £32.8m last year. VENTURA After a slow start to the year, Ventura had an excellent second half. Turnoverincreased by 13% to £149m. Business volumes remained high through to the end ofthe year and, as a result, profits of £13.6m were better than our expectationsand slightly ahead of last year's £13.4m. Several existing contracts were renewed during the year and three significantnew customers have been added to the client list. Ventura employs in excess of7,000 people and its UK call centres are operating close to full capacity. Itscall centre in Pune, India opened during the year and handles business on behalfof NEXT Directory and two other clients. OTHER ACTIVITIES The Other Activities charge was £3.7m. Other Activities include profits fromour Property Management Division, Choice (an associated company which operatesfourteen discount stores) and Cotton Traders (an associated company which sellsits own brand products). Central Costs were £6.0m plus a further £5.9m inrespect of additional defined benefit pension scheme funding. The charge for the Group's pension schemes increased to £22m from £19m lastyear. During the year the Group made cash contributions of £30m into theschemes, 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 previousyear. The increase is due to the phasing in of option grants as prescribed bythe new accounting standard. We estimate that the charge will increase byapproximately £1m in each of the next three years. Over 10,000 of our employees hold options over 10.6 million shares in NEXT. Ouremployee share ownership trust (ESOT) purchases shares in the market and issuesthem to employees when options are exercised. At the year end it held 8.2million shares. We are continuing with our policy of issuing options to our employees andmanagement of the resulting exposure by purchasing and holding shares in theESOT. We believe this is the best way to minimise the true cost of shareoptions and avoids the dilution of shareholders' interests that would otherwiseoccur from the issue of new shares. SHARE BUYBACKS During the year we purchased a further 15 million shares for cancellation at anaverage price of 1449p and a cash cost of £218m. This was 5.7% of the shares inissue at the beginning of the year. We intend to continue with our strategy ofbuying 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; wealso spent a record amount on capital expenditure. The primary use of capitalwill 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 sharebuybacks we generated a cash inflow of £106m. The net cash outflow after sharebuybacks was £112m. Borrowings at the year end were £360m and are financedthrough a £300m 5.25% 10 year bond, which was issued in June 2003, and mediumterm bank facilities. Capital expenditure included £124m on stores and £37m on warehousing. We expectthis year's expenditure will be in the region of £125m. Year end stock levelsat £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 customersused their account to make purchases in NEXT Retail stores. DIVIDEND The Directors recommend a final dividend of 30p against 28p last year, bringingthe 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 periodfrom 29 January to 18 March 2006 were up 5.6% compared to the same period lastyear. NEXT Retail sales were up 3.9% in the period. Net sales growth from new spaceafter deducting deflection was 12.8%. Like-for-like sales in the 246 storesthat 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 thisyear'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 affectedby a similar amount as a result of the later distribution of our Summerbrochure. OUTLOOK We believe the competitive and economic environment will remain very challengingin the year ahead. Whilst we think we have the opportunity to make improvementsto some of our ranges, we are still budgeting on the basis of negativelike-for-like retail sales for the year. We will focus on the followingactivities: • Improving our core product offer, in particular simplifying some ofour ranges to deliver better stock availability and clearer in-storemerchandising • Growing top line sales through the addition of profitable new space inNEXT Retail • Adding more customers and product ranges to NEXT Directory • Defending the bottom line through the continued management of costsand improving gross margin • Developing new product areas NEXT remains highly cash flow generative and we will continue with our policy ofbuying back shares when it is earnings enhancing and in the interests ofshareholders generally. Simon Wolfson23 March 2006 CONSOLIDATED INCOME STATEMENT Year Year to January to January 2006 2005 £m £m Revenue 3,106.2 2,858.5 _________ _________Trading profit 468.9 440.3Share of results of associates 1.8 2.2 _________ _________Operating profit before interest 470.7 442.5Finance income 1.1 1.6Finance costs (22.7) (19.8) _________ _________Profit before taxation 449.1 424.3Taxation (135.6) (118.9) _________ _________Profit attributable to equity holders of the parent 313.5 305.4company _________ _________ 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 £mIncome and expenses recognised directly in equityExchange differences on translation of foreign operations 2.4 0.6Gains 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)TransfersTransferred 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 onforeign exchange derivative contracts which are designated and effective ashedges of future cash flows. Fair value adjustments relate to the transfer to the income statement andbalance sheet of gains and losses on cash flow hedges previously recognised inequity. CONSOLIDATED BALANCE SHEET January January 2006 2005 £m £mASSETS AND LIABILITIESNon-current assetsProperty, plant & equipment 514.1 424.0Intangible assets 36.2 36.2Interests in associates 1.8 1.5Other investments 1.0 -Other financial assets 1.4 -Deferred tax assets 7.8 24.0 ________ _________ 562.3 485.7Current assetsInventories 323.9 301.6Trade and other receivables 513.8 437.4Other 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 liabilitiesBank 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 liabilitiesCorporate 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 ________ _________ EQUITYShare capital 24.6 26.1Share premium account 0.7 0.6Capital redemption reserve 5.3 3.8ESOT reserve (89.3) (93.3)Fair value reserve 2.8 -Foreign currency translation reserve 3.0 0.6Other 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 £mCash flows from operating activitiesProfit 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 53.9Effect 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 beprepared 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 July2004 and the year ended 29 January 2005, have previously been published on theGroup's website, www.next.co.uk. With the exception of financial instruments, as detailed below, the accountingpolicies set out in that document have been consistently applied to all periodspresented in these condensed consolidated financial statements. Financial Instruments In accordance with IFRS 1 First Time Adoption of International FinancialReporting Standards, the Group has elected not to restate comparativeinformation for the impact of IAS 32 and IAS 39 Financial Instruments. Theopening balance sheet at 30 January 2005 has been adjusted to reflect theadoption of these standards from that date and details of these adjustments areset out in Note 6 below. 2. Statement of Compliance The Group has prepared its condensed consolidated financial statements inaccordance with the IFRS accounting policies it has applied in its first IFRScompliant full year financial statements, and the provisions of IFRS 1. Thecondensed consolidated financial statements are unaudited and do not include allof the information required for full annual financial statements. The financial information for the year to January 2005 does not represent fullaccounts within the meaning of Section 240 of the Companies Act 1985. Fullaccounts for that period incorporating an unqualified audit report have beendelivered to the Registrar of Companies. 3. Earnings per Share The calculation of earnings per share is based on £313.5m (2005: £305.4m) beingthe 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 dividendless 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 profitfor 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 ofearnings per share above increased by the dilutive effect of potential ordinaryshares 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 299.9 298.7Equity 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 16.0Share option charge 8.1 3.9 ________ ________Total movement during the period 23.4 126.0Opening 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 69.8Overdrafts (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 £mCurrent assets: other financial assetsRecognition of foreign exchange derivatives at fair value 2.4 Current liabilities: other financial liabilitiesRecognition 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 toshareholders registered on 26 May 2006. The Annual General Meeting will be heldat the Ramada Jarvis Hotel, 73 Granby Street, Leicester, LE1 6ES on Wednesday 17May 2006. The Annual Report and Accounts will be sent to shareholders by 13April 2006 and copies will be available from the Company's registered office:Desford Road, Enderby, Leicester, LE19 4AT and on the Company's website atwww.next.co.uk. This statement, the full text of the Stock Exchange announcement and the resultspresentation 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 expressmanagement's beliefs, expectations or estimates regarding future occurrences andprospects are "forward-looking statements" within the meaning of the UnitedStates federal securities laws. These forward-looking statements reflect NEXT'scurrent expectations concerning future events and actual results may differmaterially from current expectations or historical results. Any suchforward-looking statements are subject to various risks and uncertainties,including but not limited to failure by NEXT to predict accurately customerfashion preferences; decline in the demand for merchandise offered by NEXT;competitive influences; changes in levels of store traffic or consumer spendinghabits; effectiveness of NEXT's brand awareness and marketing programmes;general economic conditions or a downturn in the retail industry; the inabilityof NEXT to successfully implement relocation or expansion of existing stores;lack of sufficient consumer interest in NEXT Directory; acts of war or terrorismworldwide; work stoppages, slowdowns or strikes; and changes in financial andequity markets. Forward-looking statements only speak as of the date on whichthey are made, and the events discussed herein may not occur. NEXT do notundertake any obligation to update publicly or revise forward-lookingstatements, 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 ExchangeRelated Shares:
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