13th Sep 2006 07:02
Next PLC13 September 2006 Date: Embargoed until 07.00am, Wednesday 13 September 2006 Contacts: Simon Wolfson, Chief Executive David Keens, Group Finance Director NEXT PLC Tel: 020 7796 4133 (13/09/06) Tel: 08454 567 777 Alistair Mackinnon-Musson Nicola Savage Hudson Sandler Tel: 020 7796 4133 Email: [email protected] Photographs available: http://www.next.co.uk/press/ NEXT PLC Results for the Half Year Ended July 2006 * Group turnover up 8.1% to £1,510.5m * Group operating profit up 5.8% to £191.7m * Earnings per share up 11.3% * Interim dividend up 10.7% to 15.5p * Buyback 6.9% of share capital for £283.5m Chairman's Statement NEXT has made further progress in a turbulent retail market with earnings pershare moving forward by 11.3% in the first half. This has been achieved by thecontinued development of the NEXT Brand, efficiency improvements within thegroup and increasing financial leverage through reducing the number of shares inissue. We believe that a clear focus on the design, value and efficient delivery of ourproducts, both through our stores and the NEXT Directory, continues to be thestrategy which will deliver the best returns to our shareholders. I have been impressed by the resilience NEXT has shown in producing theseresults. I am confident that the management team is well prepared to face thechallenging market conditions which lie ahead. John BartonChairman Chief Executive's Review INTRODUCTION NEXT increased operating profits in the first half by 5.8% despite verydifficult trading conditions. An excellent performance in NEXT Directorycombined with good cost control across the group more than compensated for adisappointing performance in NEXT Retail. Earnings per share have moved forward by more than operating profits as a resultof share buybacks and are 11.3% ahead of last year. Turnover Profit and excluding VAT earnings per share Six months to July Six months to July 2006 2005 2006 2005 £m £m £m £m NEXT Retail 1,029.7 989.4 111.1 120.6NEXT Directory 359.4 311.8 59.6 41.3 _________ _________ _________ _________The NEXT Brand 1,389.1 1,301.2 170.7 161.9 +5.5% NEXT Franchise 22.0 16.5 2.5 3.3NEXT Sourcing 2.9 5.3 15.6 13.6Ventura 92.7 70.1 9.7 3.7Other activities 3.8 3.7 (2.2) 0.4Share option charge - - (4.1) (2.9)Unrealised exchange (loss)/gain - - (0.5) 1.2 _________ _________ _________ _________Turnover and operating profit 1,510.5 1,396.8 191.7 181.2 +5.8% _________ _________Interest expense (12.8) (8.6) _________ _________Profit before tax 178.9 172.6 +3.6%Taxation (54.9) (52.7) _________ _________Profit after tax 124.0 119.9 +3.4% _________ _________Earnings per share 53.3p 47.9p +11.3% NEXT RETAIL Retail Sales Sales in NEXT Retail were 4.1% ahead of last year. Like for like sales instores that traded continuously and were not affected by the opening of newspace were -7.5% down on last year. Weak full price like for like sales of-6.6% in the first half were exacerbated by a particularly poor first week ofSale. The Sale was at the same time as last year, which in the current retailenvironment may have been too late, and initial markdowns may not have beenaggressive enough. For next year we will review both the timing of the SummerSale and the level of markdowns. All residual Sale stock has been written down,current stocks are clean and in line with our Autumn/Winter requirements. New Space In the first half we added a net 230,000 square feet and increased the number ofstores by 18 to a total of 457. July 2006 Jan 2006 July 2005 Annual changeStore numbers 457 439 411 +11.2%Square footage 4,539,000 4,309,000 3,764,000 +20.6% We estimate that payback of the net capital invested in new space will be 17months, which will be well within our investment criteria of 24 months. Whenappraising a new store we account for the loss of sales and profit from nearbystores that we expect to suffer a downturn as a result of the new opening. Salesfrom new space, net of this deflection, are now forecast to be 0.2% ahead of ouroriginal target. We now expect the net selling space increase for the full year will be around500,000 square feet, taking the total to approximately 4.8 million square feetby January 2007. New Shop Fit In May we launched a new shop fit concept in our Oxford Circus branch. This hasbeen well received by our customers and we estimate that sales have benefited byabout 8% in the three shops that have been updated. However, we expect thesesales increases to be short term and it would be unwise to assume any long termuplift in sales as a result of the refit programme. By the end of this financial year we anticipate that we will have refitted364,000 square feet of our existing portfolio and opened 336,000 square feet ofnew space in the new format. Retail Profit Profit in NEXT Retail decreased by -7.9% compared with the 4.1% increase intotal sales. Net operating margin was down from 12.2% to 10.8%. The erosion inmargin is detailed in the table below, the figures show the change as apercentage of sales for each of our major heads of cost. Net operating margin last year 12.2% Increase in bought in gross margin +1.4% Higher markdowns and obsolescence - 0.6% Increase in branch occupancy costs - 1.9% Increase in branch wage costs - 0.5% Reduction in central overheads +0.2% _________Net operating margin this year 10.8% _________ The improved bought in gross margin was a result of better sourcing, inachieving this we have neither compromised quality nor increased prices to ourcustomers. Markdown and obsolescence worsened by -0.6% as a result of morestock going into the end of season Sale. Branch occupancy costs increased as a percentage of sales due to the impact oflower like for like sales on fixed expenses, such as rent. Energy prices andrates also rose significantly. Branch wages increased as a result of cost ofliving wage rises but otherwise reflect a good level of control. Some storeswith negative like for like sales experienced diseconomies as they were alreadyoperating on minimum levels of staffing. NEXT DIRECTORY Directory Sales NEXT Directory has performed well. Sales were 15.3% ahead of last year mainlydriven by increased numbers of active customers. The average number of activecustomers during the period was 8.6% ahead of last year. Improved stockavailability meant that sales were also ahead of the underlying demand which was9.7% up on last year. The internet has become a significant part of NEXTDirectory's business and we now take 45% of its sales on-line. New Customers Over the half year we increased the active customer base by 35,000 taking thetotal number to 2,149,000. As a result we begin the second half with 5.7% morecustomers than the same time last year. We expect that growth in customernumbers will be in the order of 5% throughout the second half. Directory Profit NEXT Directory profit was up 44.7% on last year, an exceptional performance,which was significantly ahead of the growth in sales. The improvement in netoperating margin is detailed in the table below, the figures show the change asa percentage of sales for each of our major heads of cost. Net operating margin last year 13.2%Increase in bought in gross margin +1.0%Higher markdowns and obsolescence - 1.8%Bad debt and service charge - 0.4%Reduction in central overheads +4.6% _________Net operating margin this year 16.6% _________ The bought in gross margin in NEXT Directory was up 1%. We retained much moreof the Sale stock in NEXT Directory this year, rather than transfer it to NEXTRetail, so the markdown charge in NEXT Directory increased by 1.8%. Bad debtprovisions increased as levels of customer default continued to rise faster thanservice charge income. We made very considerable savings to operational costs in the half year andbenefited from further economies of scale. Warehouse and distribution costsreduced as a percentage of sales by 3.3% due to revised operating methods andnew warehousing. Increased use of the internet and the benefit of our own callcentre in India delivered a 1.0% margin improvement. Last year we investigated developing our own distribution network for NEXTDirectory. We concluded that the best solution in terms of cost and quality ofservice was to renew the contract with our current provider, which we have done. RETAIL AND DIRECTORY COST ALLOCATION As NEXT Directory has continued to grow faster than NEXT Retail we have reviewedthe allocation of costs between the two businesses. NEXT Directory has notpreviously received a charge for the customer collection and return servicesprovided in store, nor for preparation of Sale stock moved into NEXT Retail.This year NEXT Retail has charged £4.7m to NEXT Directory. In order tofacilitate comparisons we have adjusted last year's figures for the comparablecharge of £4.3m. There is no change to the total NEXT Brand profit as aconsequence. PRODUCT Over the last year we have changed our working practices and broadened oursupplier base in order to be more responsive to new trends. The success of theranges in NEXT Directory is testament to the effectiveness of theseimprovements. In NEXT Retail our womenswear had far too many different items inthe range. This resulted in confusing instore presentation and lack of stockdepth on key lines. The number of lines for Autumn/Winter has been reduced bymore than 10% compared to last year, and this is reflected in clearer instorepresentation. New product trials in the NEXT Directory of precious jewellery and electricalshave been successful and we will continue to develop these ranges in Autumn/Winter. LIME At the beginning of the year we announced that we would be launching a valuesub-brand in our clearance stores called Lime. This range has started betterthan originally anticipated and we will be opening several trial stand alonestores in the second half to gauge whether Lime could operate as an independentbrand. These trial stores are all existing NEXT stores that were due to bevacated as part of our ongoing store expansion programme. NEXT FRANCHISE Sales to franchise partners increased by 33.8% to £22.0m. Underlying profitsincreased by 8.2% prior to allocating £1.1m of fixed overheads previouslytreated as a cost of the NEXT Brand. We will continue to see turnover andprofits growing at different rates due to the timing of new store openings andproduct shipments, and due to the later recognition of royalty income on sales.During the period 9 additional stores were opened in countries where we alreadyoperate and 7 stores were opened in Russia. There are now 112 franchise storesand a further 20 are scheduled to open in the second half of this year. NEXT SOURCING NEXT Sourcing profit for the half year was £15.6m compared to £13.6m last year.We anticipate that profit in the second half will be similar to the £19mreported last year. We have opened our own sourcing office in southern Indiato complement our existing arrangements in the northern region. VENTURA A strong performance by Ventura in the first half resulted in profits of £9.7magainst £3.7m last year, which had a very poor first quarter. Our own callcentre in Pune, India has been open for one year and we shall be opening anothercall centre in Leeds later this year to accommodate new business. We anticipatethat sales and profit in the second half will be similar to that achieved in thefirst half. OTHER ACTIVITIES Other activities were a loss of £2.2m in the first half compared with a profitof £0.4m last year. Our property management division contributed £3.0m, down on last year whichincluded profits from the disposal of freehold properties. Associatescontributed £0.7m, down on last year which included a capital profit of £1.2m.Net Central Costs were £5.9m, including an additional pension charge of £2.8m. EMPLOYEE SHARE OPTIONS The charge increased to £4.1m from £2.9m due to the phased calculation underIFRS. We estimate that the full year charge will be £9m. At the end of Julythe ESOT held 7.7 million shares which were purchased at a cost of £91.5m, therewere 10.3 million share options outstanding. BALANCE SHEET AND CASH FLOW At the end of July net borrowings were £660m, financed by the £300m bond whichmatures in 2013 and £700m of medium term bank facilities. It is intended torefinance part of the bank facilities through the issue of another long termbond in the near future, subject to market conditions. The net cash outflow for the period of £296m was predominantly £279m in respectof shares purchased for cancellation. Capital expenditure of £71m included £44mon retail stores and we anticipate that the full year spend will beapproximately £140m in total. Stock levels for the Autumn season are 3.8% aheadof last year. SHARE BUYBACKS During the first half we purchased for cancellation 6.9% of our shares in issueat an average price of 1665p. We are committed to purchase a further 2.8% inthe second half under contingent purchase contracts at an average price of1617p; the July 2006 balance sheet includes a liability of £113m in respect ofthese contracts. DIVIDEND The Directors are declaring an interim dividend of 15.5p, an increase of 10.7%over last year. This will be paid on 2 January 2007 to shareholders on theregister at 24 November 2006. The shares will trade ex-dividend from 22November. CURRENT TRADING The combined sales of NEXT Retail and NEXT Directory for the six week periodfrom 30 July to 9 September were up 10.6% compared to the same period last year. NEXT Retail sales were up 10.0% in the period. Net sales growth from new spaceafter deducting deflection was 9.7%. Like for like sales in the 292 stores thatwere unaffected by new openings were up 0.3%. NEXT Directory sales were up 12.2% in the period. OUTLOOK Whilst current trade has been encouraging it is important not to read too muchinto such a short period. Sales remain volatile and have been positivelyaffected by the cooler weather. We are currently budgeting NEXT Retail like forlike sales in the second half to be down by between -2% and -5% but of courseexpect total sales to be up due to new store openings. We are budgeting forNEXT Directory product sales to be up by between 7% and 9%. Simon WolfsonChief Executive 13 September 2006 UNAUDITED CONSOLIDATED INCOME STATEMENT Six months Six months Year to July to July to January 2006 2005 2006 £m £m £m Revenue 1,510.5 1,396.8 3,106.2 _________ _________ _________Trading profit 191.0 179.6 468.9Share of results of associates 0.7 1.6 1.8 _________ _________ _________Operating profit before interest 191.7 181.2 470.7Finance income 0.7 0.7 1.1Finance costs (13.5) (9.3) (22.7) _________ _________ _________Profit before taxation 178.9 172.6 449.1Taxation (54.9) (52.7) (135.6) _________ _________ _________Profit attributable to equity holders of theparent company 124.0 119.9 313.5 _________ _________ _________ Earnings per share p 53.3 47.9 127.4 Diluted earnings per share p 52.6 47.3 125.9 Dividend per share p 15.5 14.0 44.0 UNAUDITED CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Six months Six months Year to July to July to January 2006 2005 2006 £m £m £m Income and expenses recognised directly in equityExchange differences on translation of foreign operations (2.4) 2.5 2.4(Losses)/gains on cash flow hedges (20.3) 21.0 18.5Actuarial gains/(losses) on defined benefit pension schemes 19.0 2.4 (34.8)Tax on items recognised directly in equity 0.1 (3.4) 10.4 _________ _________ _________ (3.6) 22.5 (3.5) TransfersTransferred to income statement on cash flow hedges (3.9) 5.5 (1.5)Transferred to the carrying amount of hedged items on cash flow hedges 2.7 (3.3) (8.6) Profit for the period 124.0 119.9 313.5 _________ _________ _________Total recognised income and expense for the period 119.2 144.6 299.9 _________ _________ _________ Opening balance sheet adjustment for adoption of IAS 32 and IAS 39 - (43.7) (43.7) _________ _________ _________ UNAUDITED CONSOLIDATED BALANCE SHEET July 2006 July 2005 January 2006 £m £m £m ASSETS AND LIABILITIESNon-current assetsProperty, plant & equipment 533.4 473.7 514.1Intangible assets 36.2 36.2 36.2Interests in associates 2.2 1.5 1.8Other investments 1.0 - 1.0Other financial assets 1.4 4.5 1.4Deferred tax assets 8.5 17.6 7.8 _________ _________ _________ 582.7 533.5 562.3Current assetsInventories 338.9 326.5 323.9Trade and other receivables 516.9 448.5 513.8Other financial assets 0.8 17.1 4.1Cash and short term deposits 86.9 77.0 69.8 _________ _________ _________ 943.5 869.1 911.6 _________ _________ _________Total assets 1,526.2 1,402.6 1,473.9 _________ _________ _________Current liabilitiesBank overdrafts (35.5) (5.9) (31.4)Unsecured bank loans (410.2) (120.3) (100.3)Trade and other payables (561.4) (509.1) (568.8)Other financial liabilities (133.4) (29.8) (1.8)Current tax liability (49.5) (54.7) (53.2) _________ _________ _________ (1,190.0) (719.8) (755.5)Non-current liabilitiesCorporate bond (299.0) (304.6) (298.1)Net retirement benefit obligation (84.9) (91.0) (115.6)Provisions (9.7) (10.0) (10.0)Other financial liabilities (3.7) - (4.5)Other liabilities (34.0) (30.0) (34.0) _________ ________ _________ (431.3) (435.6) (462.2) _________ ________ _________Total liabilities (1,621.3) (1,155.4) (1,217.7) _________ _________ _________Net (liabilities)/assets (95.1) 247.2 256.2 _________ _________ _________EQUITYShare capital 22.9 25.7 24.6Share premium account 0.7 0.7 0.7Capital redemption reserve 7.0 4.2 5.3ESOT reserve (91.5) (91.1) (89.3)Fair value reserve (18.7) 17.6 2.8Foreign currency translation 0.5 3.1 3.0Other reserves (1,441.8) (1,441.4) (1,441.7)Retained earnings 1,425.8 1,728.4 1,750.8 _________ _________ _________Total equity (95.1) 247.2 256.2 _________ _________ _________ UNAUDITED CONSOLIDATED CASH FLOW STATEMENT Six months Six months Year to to July 2006 to July 2005 January 2006 £m £m £m Cash flows from operating activitiesOperating profit before interest 191.7 181.2 470.7Depreciation 49.0 36.9 81.2Loss/(profit) on disposal of property, plant and 1.4 (0.6) (0.2) equipmentShare option charge 4.1 2.9 8.1Share of undistributed profit of associate companies (0.4) - (0.3)Exchange movement (0.8) (0.2) (0.5)Increase in inventories (15.0) (24.9) (22.3)Increase in trade and other receivables (3.1) (12.6) (76.3)(Decrease)/increase in trade and other payables (13.7) 2.1 62.8Pension contributions less income statement charge (11.7) 0.8 (11.8) ________ ________ ________Cash generated from operations 201.5 185.6 511.4Corporation taxes paid (59.0) (52.5) (113.2) ________ ________ ________Net cash from operating activities 142.5 133.1 398.2 ________ ________ ________Cash flows from investing activitiesProceeds from sale of property, plant and equipment 0.2 8.1 8.4Acquisition of property, plant and equipment (70.8) (93.8) (177.2)Purchase of other investments - - (1.0) ________ ________ ________Net cash from investing activities (70.6) (85.7) (169.8) ________ ________ ________Cash flows from financing activitiesProceeds from issue of share capital - 0.1 0.1Repurchase of own shares (279.2) (70.8) (217.5)Purchase of own shares by ESOT (24.8) (8.0) (14.9)Proceeds from disposal of shares by ESOT 16.0 8.9 15.7Net proceeds of unsecured bank loans 309.9 120.3 100.3Interest paid (11.0) (8.9) (21.4)Interest received 0.6 0.9 1.2Payment of finance lease liabilities (0.3) (0.1) (0.2)Dividends paid (69.8) (70.1) (103.7) ________ ________ ________Net cash from financing activities (58.6) (27.7) (240.4) ________ ________ ________Net increase/(decrease) in cash and cash equivalents 13.3 19.7 (12.0)Opening cash and cash equivalents 38.4 50.0 50.0Effect of exchange rate fluctuations on cash held (0.3) 1.4 0.4 ________ ________ ________Closing cash and cash equivalents (Note 4) 51.4 71.1 38.4 ________ ________ ________ NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. Basis of Preparation The group's interim results for the six months ended 29 July 2006 were approvedby the Board of Directors on 13 September 2006. The accounting policies adopted in the preparation of the interim financialstatements are consistent with those set out in the group's annual financialstatements for the year ended 28 January 2006. The financial statements have been prepared on the historical cost basis exceptfor certain financial instruments, pension assets and liabilities and sharebased payment liabilities which are measured at fair value. The interim financial statements are unaudited and do not include all of theinformation required for full annual financial statements. The financial information for the year to January 2006 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. 2. Earnings per Share The calculation of earnings per share is based on £124.0m (2005: £119.9m) beingthe profit for the six months after taxation and 232.6m ordinary shares of 10peach (2005: 250.3m), being the weighted average number of shares ranking fordividend less the weighted average number of shares held by the ESOT during theyear. Diluted earnings per share is based on £124.0m (2005: £119.9m) being the profitfor the six months after taxation and 235.5m ordinary shares of 10p each (2005:253.7m) 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: 3.4m shares). 3. Reconciliation of Movements in Total Equity Six months Six months Year to to July 2006 to July 2005 January 2006 £m £m £m Opening total equity 256.2 276.5 276.5Adoption of IAS 32 and 39 - (43.7) (43.7) ________ ________ ________Opening total equity as restated 256.2 232.8 232.8 Total recognised income and expense 119.2 144.6 299.9Issue of shares - 0.1 0.1Shares purchased for cancellation (283.5) (70.8) (181.1)Contingent share purchase contracts (112.8) 7.5 -Shares purchased by ESOT (24.8) (8.0) (14.9)Shares issued by ESOT 16.0 8.9 15.7Share option charge 4.1 2.9 8.1Equity dividends paid (69.5) (70.8) (104.4) ________ ________ ________Closing total equity (95.1) 247.2 256.2 ________ ________ ________ 4. Analysis of Net Debt Other non-cash January Cash July 2006 flow changes 2006 £m £m £m £m Cash and short term deposits 69.8 86.9Overdrafts (31.4) (35.5) ________ ________Cash and cash equivalents 38.4 13.3 (0.3) 51.4 Unsecured bank loans (100.3) (309.9) - (410.2)Corporate bond (298.1) - (0.9) (299.0)Finance leases (2.6) 0.3 - (2.3) ________ ________ ________ ________Total net debt (362.6) (296.3) (1.2) (660.1) ________ ________ ________ ________ 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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