15th Sep 2005 07:01
Next PLC15 September 2005 Date: Embargoed until 07.00am, Thursday 15 September 2005 Contacts: Simon Wolfson, Chief Executive David Keens, Group Finance Director NEXT PLC Tel: 020 7796 4133 (15/09/05) Tel: 08454 567777 Alistair Mackinnon-Musson Philip Dennis Hudson Sandler Tel: 020 7796 4133 Email: [email protected] Photographs available: http://www.next.co.uk/press/ (or Hudson Sandler, as above) NEXT PLC Results for the Half Year Ended July 2005 * Group turnover up 8.0% * Group profit before tax up 6.1% to £172.6m * Buyback 1.8% of share capital for £71m * Earnings per share up 7.9% * Interim dividend up 7.7% to 14p Chairman's Statement NEXT has made solid progress in a very tough environment with earnings per sharemoving forward by 7.9% in the first half. This growth has been achieved as aresult of the addition of profitable new space, healthy growth in Home Shoppingthrough the NEXT Directory and prudent cost control. I have been impressed withthe way in which NEXT has responded to tougher times. We believe the next six months will see a continuation of these difficulttrading conditions. However, at NEXT we have always taken the long view and wewill continue to invest for the profitable development of the business. Chief Executive's Review Introduction Against a background of a tougher consumer environment NEXT has had a solidfirst half, with Brand sales up 8.2%, group profit before tax up 6.1% andearnings per share up by 7.9%. Our core strategy for growth remains unchanged - we continue to focus onimproving our product ranges, opening profitable new space for NEXT Retail,expanding our NEXT Directory customer base and using surplus cash to buy backshares. Inevitably the economic climate has placed a greater emphasis on costcontrol and here we have made some progress. Turnover Profit and earnings excluding VAT per share Six months to July Six months to July Restated 2005 2004 2005 2004 £m £m £m £m NEXT Retail 989.4 924.3 116.3 112.2NEXT Directory 311.8 278.2 45.6 38.6 _________ _________ _________ _________The NEXT Brand 1,301.2 1,202.5 161.9 150.8 +7.3% NEXT Franchise 16.5 14.2 3.3 2.5NEXT Sourcing 5.3 8.6 13.6 12.6Ventura 70.1 64.1 3.7 6.6Other activities 3.7 4.1 0.4 0.9Share option charge - - (2.9) (1.6)Unrealised exchange gain - - 1.2 - _________ _________ _________ _________ 1,396.8 1,293.5 181.2 171.8 +5.5% _________ _________Interest expense (8.6) (9.2) _________ _________Profit before tax 172.6 162.6 +6.1%Taxation (52.7) (49.2) _________ _________Profit after tax 119.9 113.4 +5.7% _________ _________Earnings per share 47.9p 44.4p +7.9% IFRS Accounting Standards The above results have been prepared under the new International FinancialReporting Standards (IFRS) and prior year figures have been restated. Witheffect from the current year only, a requirement of these standards is therecognition of unrealised gains and losses on outstanding foreign exchangecontracts. This has resulted in the unrealised gain reported above which, inour opinion, overstates profit by £1.2m. NEXT Retail Retail Sales Sales in NEXT Retail were 7.0% ahead of last year. Like-for-like sales instores that traded continuously and were not affected by the opening of newspace were -2.9% down on last year. New stores contributed 13% to sales ofwhich we believe 3.1% reduced the sales of existing outlets.Sales from new space 13.0%Deflection -3.1%Like-for-like -2.9%Total sales growth 7.0% New Space We have made good progress in developing profitable new selling space. In thefirst half we added a net 437,000 square feet and increased the number of storesby 27 to a total of 411. July 2005 Jan 2005 July 2004 Annual changeStore numbers 411 384 371 +10.8%Square footage 3,764,000 3,327,000 3,077,000 +22.3% The majority (87%) of new space came from opening stores in out of town retailparks where the combined offer of Womens, Mens, Childrens and Home gives us thecritical mass required to make these locations a success. All new stores are appraised on the basis that they must make a net store profitof at least 15% on sales before central overheads and pay back the net capitalinvested in less than 24 months. In assessing the payback we account for theloss of profit from nearby stores that we expect to suffer a downturn as aresult of the new opening. We are now forecasting that the new space opened inthe first half will beat our appraised sales targets by 3.5% and pay back thenet capital invested in 17 months. We now expect the net selling space increase for the full year to be around940,000 square feet, taking the total to approximately 4.25 million square feet. Retail Profit Profit in Retail increased by 3.6% compared with the 7% increase in sales. Netoperating margin was down from 12.1% to 11.7%. The erosion in margin isexplained in the table below, the figures show the change as a percentage ofsales for each of our major heads of cost. Net operating margin last year 12.1%Net achieved buying margin +0.2%Branch occupancy costs - 0.8%Branch wage costs +0.2%Central overheads -Net operating margin this year 11.7% The net achieved margin is up slightly as increased markdown costs have beenmore than offset by improved buying margins. Branch occupancy costs rosesignificantly due to declining like-for-like sales and step changes in rates andelectricity. Branch wages have reduced as a percentage of sales as a result of asignificant effort to improve efficiency of stock handling in the branches. Wehave not achieved any leverage over central overheads, where increases inwarehousing costs offset economies of scale elsewhere. NEXT Directory Directory Sales Directory has performed well despite the tough consumer environment. Sales were12.1% ahead of last year. The increase in underlying demand (the goodsrequested by customers) was 9.6% and lower returns rates resulted in a highersales increase. An increase in our customer base has been the main driver of sales growth. Theaverage number of active customers throughout the season was 14.0% ahead of lastyear. However sales per customer were down -1.7% which we believe is indicativeof the general consumer environment. New Customers The recruitment of new customers went well. Over the half year we increased theactive customer base by 128,000 taking the total number to 2,033,000. As aresult we begin the second half with 15.6% more customers than the same timelast year. Recruitment over the internet and from stores continues to becomemore important as traditional direct mail and advertising become less effective.Whilst we expect to grow our customer base through the Autumn Winter season wedo not envisage maintaining the exceptional levels of growth experienced in thefirst half. Directory Profit Directory profit was up 18.1% on last year, which was significantly ahead of thegrowth in sales. The improvement in net operating margin is explained in thetable below, the figures show the change as a percentage of sales for each ofour major heads of cost. Net operating margin last year 13.9%Net achieved buying margin +0.5%Bad debt provisions - 0.6%Central overheads +0.8%Net operating margin this year 14.6% Improved buying margins and good cost control were the main reasons for theimprovement in profitability. The move to lower cost methods of recruitment hasbeen particularly important in reducing overheads. On the negative side we haveseen a significant rise in bad debt rates, we believe this is due to the pooreconomic environment and underlying levels of bad debt may well rise further inthe months ahead. Directory Services We continue to investigate ways to improve the cost effectiveness of ourservice. As part of this initiative we intend to develop our own Home Deliverydistribution network when the current contract expires with our existingproviders in 2008. Product Development Delivering great product to our customers remains the main focus of ourbusiness. We have continued to re-invest the benefits of better buying intoimproving quality and lowering prices. Generally we have been happy with our product ranges and believe that poor saleshave mainly been the result of the consumer environment. However, we haveidentified the opportunity to improve the speed at which we incorporate newtrends into our Womenswear ranges. We currently add new design themes(collections) into our stores every 12 weeks. Going forward we have increasedthe frequency of our design workshops in order to add new collections every sixweeks. Whilst there will be some benefits from this change in the season ahead,the full advantages will not be felt until the Spring of next year. Warehousing and Distribution In my last annual review I gave details of the very significant investmentsbeing made in warehousing this year and in the years ahead. There are two majorprojects in the current year. We have successfully opened, on schedule, a525,000 square feet palletised warehouse mainly for Home product, which cost£3.7m to fit out. In September we plan to open a 656,000 square feet extensionto our boxed warehouse. This highly mechanised warehouse has cost £40m to fitout and will add £5.4m to the annual rent and depreciation charge. It is onschedule and the final stages of testing are currently being undertaken. Quota The sudden decision to re-impose quotas for exports from China was rapidlyfollowed by the total utilisation of all knitwear quota. This left retailers inthe position of owning stock (some of which had actually been shipped) for whichthey did not have an import licence. NEXT owned £1.5m of stock falling intothis category. We now believe that we will be able to import most of this stockinto the UK as a result of the recent agreement between the EU and China. The longer term problem relates to stock that has not been manufactured but hasbeen contracted for. We believe that we can re-source most of this futurecommitment through alternative routes. The short term risk of using alternativeroutes is that stock is delayed in arriving in the UK, the longer term risk isthat these routes are more expensive and therefore inflationary. Ironically, although unsurprisingly, almost all of the commitment prevented fromcoming out of China will still be sourced from countries outside of the EuropeanUnion. So whilst the restrictions will cause inconvenience and may prove costlyto UK consumers they will have little or no benefits for European manufacturing. NEXT Franchise Sales to our franchise partners increased by 15.7% to £16.5m and profit grew by30.8% to £3.3m. There are now 87 stores and a further 6 are scheduled to openin the second half of this year. The unusually high percentage growth inprofits is a result of last year being held back by a move towards royalty onsales rather than commission on shipping. For the full year, growth infranchise profits will be more in line with growth in sales. NEXT Sourcing The merging of our Near East and Far East sourcing operations has been completedand our major overseas offices now operate under one management team. NEXTSourcing profit for the half year was £13.6m compared to £12.6m last year. Wecontinue to anticipate that the full year profit will be similar to last year's,as restated under IFRS with no amortisation of goodwill. Ventura In the first half profits were £3.7m as against £6.6m last year. There are tworeasons why Ventura's profits are disappointing. Firstly Ventura had a verypoor first quarter as business volumes from some of its major clients were belowexpectations. This trend did not continue into the second quarter which wassignificantly better and ahead of last year. The second reason was that lastyear's first half benefited from the tail end of two very profitable contractswhich did not continue into the second half. We have now opened our own call centre in India and are in the process oftransferring some of the activities that are currently handled in India througha subcontractor, including some of the NEXT Directory processes. In March Ireported that we expected Ventura's profit for the year to be in the order of£10m and, despite the slow start, we still believe that this is achievable. Other Activities Net income from other activities in the first half was £0.4m compared with £0.9mlast year. Our property management division contributed £3.8m which included £2.8m profitfrom the disposal of two freehold properties. In the future there will be fewerproperties to sell, so this source of profit will decline and the underlying netannual contribution from rental income will be in the region of £3m. During theperiod an associated company, Cotton Traders, purchased for cancellation part ofour shareholding in it and this resulted in a provision release of £1.2m. Net Central Costs were £5.1m compared with £5.2m last year, including additionalpension charges of £3.4m and £2.7m respectively. Employee Share Options The way we calculate the annual charge for employee share options has changed asa result of IFRS 2. The new method only applies to options issued afterNovember 2002 and uses a mathematical formula rather than actual cash cost. Weestimate that the full year charge will be £7m, rising to £10m over the next twoyears. Despite the rise in the accounting cost of share options we will not change ourpolicy of issuing options to our employees, nor our management of the resultingexposure by purchasing and holding shares in the Employee Share Ownership Trust(ESOT). We believe this method is the best way to minimise the true cash costof the options. At the end of July the ESOT held 8.5 million shares, purchasedat a cost of £91m, and there were 10.7 million share options outstanding. Risk Reward Plan 2005-2009 In July shareholders voted overwhelmingly in favour of NEXT's Risk Reward plan.The aim of this plan is that the company, by matching investments made by senioremployees, enables key individuals to make an exceptional return on theirinvestment, but only if the company makes exceptional returns for shareholders.In order to participate employees must risk their own money, which will be lostunless very challenging targets are met. Senior employees made investments of £0.5 million. A contribution of £1.2m wasmade by the Company to the ESOT to purchase similar investments. Theseinvestments will have no value unless the share price exceeds £20.50 in July2009, equivalent to compound growth of 8.2%. In order to achieve the maximumvalue our shares must reach £25.00, compound growth of 13.7%. There is noadditional future liability for NEXT in respect of these contracts. Balance Sheet and Cash Flow At the end of July NEXT had net borrowings of £354m, financed primarily by the£300m bond which matures in 2013. The net cash outflow of £100m was afterexpenditure of £71m on shares purchased for cancellation. Capital expenditureof £94m included £65m on retail stores and we anticipate that the full yearspend will be approximately £200m. Merchandise stock levels for the Autumnseason are 16% ahead of last year, this increase is higher than our budgetedincrease in sales as a result of the timing of deliveries into our warehouses. Share Buybacks During the first half we purchased for cancellation 1.8% of our shares in issueat an average price of 1544p. Dividend The Directors are declaring an interim dividend of 14p, an increase of 7.7% overlast year. This will be paid on 3 January 2006 to shareholders on the registerat 25 November 2005. The shares will trade ex-dividend from 23 November. Current Trading For the six weeks to 10 September, NEXT Retail sales are 4.6% ahead of theprevious year. Like-for-like sales in the 276 stores which have been tradingfor at least one year and have not been affected by the opening of new space aredown -6.0%. We believe the effect of deflection from the opening of new spaceis running at -3.1%. Sales from new space 13.7%Deflection - 3.1%Like-for-like - 6.0%Retail sales growth 4.6% Directory sales for the six weeks are 13.3% ahead of the previous year. Taken together, sales for the NEXT Brand are 6.9% ahead. Outlook We are very cautious about the outlook for the consumer environment in thesecond half. We believe that a return to underlying growth will come with asignificant reduction in interest rates and that inflationary pressures, mostnotably from oil and services, may delay that event. It would therefore seemunlikely that there will be any significant improvement in market conditions inthe second half of this year. We do not expect the rest of the season will be as poor as the last six weeks inNEXT Retail, but we are anticipating negative underlying like-for-like sales inthe second half. We anticipate that NEXT Directory will continue to grow. Simon WolfsonChief Executive15 September 2005 UNAUDITED CONSOLIDATED INCOME STATEMENT Six months Six months Year to July to July to January 2005 2004 2005 £m £m £m Restated Restated Revenue 1,396.8 1,293.5 2,858.5 _________ _________ _________Trading profit 181.3 172.7 444.2Share option charge (2.9) (1.6) (3.9)Unrealised exchange gain 1.2 - -Share of results of associates 1.6 0.7 2.2 _________ _________ _________Operating profit before interest 181.2 171.8 442.5Finance income 0.7 0.5 1.6Finance costs (9.3) (9.7) (19.8) _________ _________ _________Profit before taxation 172.6 162.6 424.3Taxation (52.7) (49.2) (118.9) _________ _________ _________Profit attributable to equity holders ofthe parent 119.9 113.4 305.4 _________ _________ _________ Earnings per share p 47.9 44.4 120.2 Diluted earnings per share p 47.3 43.7 118.4 Dividend per share p 14.0 13.0 41.0 UNAUDITED CONSOLIDATED STATEMENT OFRECOGNISED INCOME AND EXPENSE Six months Six months Year to July to July to January 2005 2004 2005 £m £m £m Restated RestatedExchange differences on translation of foreignoperations 2.5 0.9 0.6Gains on cash flow hedges 21.0 - -Actuarial gains/(losses) on defined benefit pensionschemes 2.4 5.2 (10.5)Tax on items recognised directly in equity (3.4) 0.4 3.2 _________ _________ _________Net income recognised directly in equity 22.5 6.5 (6.7) Fair value adjustmentsTransferred to profit on cash flow hedges 5.5 - -Transferred to carrying amount of hedged items on cashflow hedges (3.3) - - Profit for the year 119.9 113.4 305.4 _________ _________ _________Total recognised income and expense for the period 144.6 119.9 298.7 Opening balance sheet adjustment for adoption of IAS 32and IAS 39 (Note 6) (43.7) - - _________ _________ _________ 100.9 119.9 298.7 _________ _________ _________ 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. UNAUDITED CONSOLIDATED BALANCE SHEET July 2005 July 2004 January 2005 £m £m £m Restated RestatedNon-current assetsProperty, plant & equipment 473.7 378.5 424.0Intangible assets 36.2 36.2 36.2Interests in associates 1.5 1.1 1.5Deferred tax assets 17.6 22.9 24.0 _________ _________ _________ 529.0 438.7 485.7Current assetsInventories 326.5 281.8 301.6Trade and other receivables 448.5 370.2 437.4Other financial assets 21.6 - -Cash and short term deposits 77.0 61.6 72.3 _________ _________ _________ 873.6 713.6 811.3 _________ _________ _________Total assets 1,402.6 1,152.3 1,297.0 _________ _________ _________Current liabilitiesBank overdrafts (5.9) (10.8) (22.3)Unsecured bank loans (120.3) (90.0) -Trade and other payables (509.1) (428.3) (506.3)Other financial liabilities (29.8) - -Current tax liability (54.7) (56.1) (59.8) _________ _________ _________ (719.8) (585.2) (588.4) Net current assets 153.8 128.4 222.9 Non-current liabilitiesCorporate bond (304.6) (300.0) (300.0)Net retirement benefit obligation (91.0) (81.4) (92.6)Provisions (10.0) (10.0) (10.0)Other liabilities (30.0) (31.1) (29.5) _________ _________ _________ (435.6) (422.5) (432.1) Total liabilities (1,155.4) (1,007.7) (1,020.5) _________ _________ _________Net assets 247.2 144.6 276.5 _________ _________ _________EquityShare capital 25.7 26.2 26.1Share premium account 0.7 0.6 0.6Capital redemption reserve 4.2 3.7 3.8ESOT reserve (91.1) (93.5) (93.3)Share based payment reserve 8.4 3.2 5.5Fair value reserve 17.6 - -Foreign currency translation reserve 3.1 0.9 0.6Other reserves (1,441.4) (1,437.1) (1,439.5)Retained earnings 1,720.0 1,640.6 1,772.7 _________ _________ _________Total equity 247.2 144.6 276.5 _________ _________ _________ UNAUDITED CONSOLIDATED CASH FLOW STATEMENT Six months Six months Year to to July 2005 to July 2004 Jan 2005 £m £m £m Restated Restated Cash flows from operating activitiesProfit before interest 181.2 171.8 442.5Adjustments for:Depreciation 36.9 32.3 69.0Profit on disposal of property, plant and equipment (0.6) (0.8) (0.9)Share option charge 2.9 1.6 3.9Unrealised exchange gain (1.2) - -Share of profit of associate companies - (0.2) 0.5Exchange movement 1.0 0.9 1.2 ________ ________ ________Operating profit before changes in working capital and 220.2 205.6 516.2provisionsIncrease in inventories (24.9) (13.2) (33.0)Increase in trade and other receivables (11.3) 9.4 (57.7)Increase in trade and other payables 2.1 9.7 84.6Pension obligation adjustment 0.8 (0.3) (3.1) ________ ________ ________Cash generated from operations 186.9 211.2 507.0Corporation taxes paid (52.5) (53.1) (117.1) ________ ________ ________Net cash flows from operating activities 134.4 158.1 389.9 ________ ________ ________Cash flows from investing activitiesProceeds from sale of property, plant and equipment 8.1 5.8 7.7Acquisition of property, plant and equipment (93.8) (60.1) (144.0)Purchase of investment in associate company - - (1.2)Purchase of other financial assets (1.3) - - ________ ________ ________Net cash flows from investing activities (87.0) (54.3) (137.5) ________ ________ ________Cash flows from financing activitiesProceeds from the issue of share capital 0.1 - -Repurchase of own shares (70.8) (43.8) (57.3)Purchase of own shares by ESOT (8.0) (32.9) (41.1)Proceeds from disposal of shares by ESOT 8.9 10.4 16.0Proceeds/(repayment) of unsecured bank loans 120.3 30.0 (60.0)Interest paid (8.9) (9.9) (20.4)Interest received 0.9 0.5 1.4Payment of finance lease liabilities (0.1) (0.1) (0.2)Dividends paid (70.1) (61.1) (94.2) ________ ________ ________Net cash flows from financing activities (27.7) (106.9) (255.8) ________ ________ ________Net increase/(decrease) in cash and cash equivalents 19.7 (3.1) (3.4)Opening cash and cash equivalents 50.0 53.9 53.9Effect of exchange rate fluctuations on cash held 1.4 - (0.5) ________ ________ ________Closing cash and cash equivalents (Note 5) 71.1 50.8 50.0 ________ ________ ________ NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. Basis of Preparation The Group's interim results for the six months ended 30 July 2005 are the firstto be prepared in accordance with International Financial Reporting Standards ('IFRS'). Consequently, a number of the accounting policies adopted in thepreparation of these condensed consolidated interim financial statements aredifferent to those adopted in the financial statements for the year to 29January 2005 which were prepared under UK Generally Accepted AccountingPractice. 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 andthe revised accounting policies are set out in Note 6 below. 2. Statement of Compliance The Group has prepared its condensed consolidated interim financial statementsin accordance with the IFRS accounting policies the Group expects to apply inits first IFRS compliant full year financial statements and the provisions ofIFRS 1. The condensed consolidated interim financial statements are unauditedand do not include all of the information required for full annual financialstatements. 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 £119.9m (2004: restated£113.4m) being the profit for the six months after taxation and 250.3m ordinaryshares of 10p each (2004: 255.2m), being the weighted average number of sharesranking for dividend less the weighted average number of shares held by the ESOTduring the year. Diluted earnings per share is based on £119.9m (2004: restated £113.4m) beingthe profit for the six months after taxation and 253.7m ordinary shares of 10peach (2004: 259.1m) being the weighted average number of shares used for thecalculation of earnings per share above increased by the dilutive effect ofpotential ordinary shares from employee share option schemes of 3.4m shares(2004: 3.9m shares). 4. Reconciliation of Net Assets Six months Six months Year to to July 2005 to July 2004 Jan 2005 £m £m £m Restated Restated Total recognised income and expense 144.6 119.9 298.7Equity dividends declared (70.8) (61.1) (94.2)Purchase of own shares for cancellation (70.8) (43.8) (57.3)Contingent share purchase contracts 7.5 - -Issue of new shares 0.1 - -Purchase of own shares by ESOT (8.0) (32.9) (41.1)Proceeds from issue of shares by ESOT 8.9 10.4 16.0Share option charge 2.9 1.6 3.9 ________ ________ ________Total movement during the period 14.4 (5.9) 126.0Opening net assets (as restated) 232.8 150.5 150.5 ________ ________ ________Closing net assets 247.2 144.6 276.5 ________ ________ ________ 5. Analysis of Net Debt Other January Cash non-cash July 2005 flow changes 2005 £m £m £m £m Cash and short term deposits 72.3 77.0Overdrafts (22.3) (5.9) ________ ________Cash and cash equivalents 50.0 19.7 1.4 71.1 Unsecured bank loans - (120.3) - (120.3)Corporate bond (300.0) - (4.6) (304.6)Finance leases (0.8) 0.1 - (0.7) ________ ________ ________ ________Total net debt (250.8) (100.5) (3.2) (354.5) ________ ________ ________ ________ 6. Adoption of IAS 32 and IAS 39 Derivative financial instruments The Group uses derivative financial instruments in order to manage risks arisingfrom changes in foreign currency exchange rates relating to the purchase ofoverseas sourced products, and changes in interest rates relating to the Group'sdebt. In accordance with the Group's treasury policy, the Group does not enterinto derivative financial instruments for speculative purposes. Derivative financial instruments are stated at their fair value. The fair valueof forward exchange contracts and currency options is their quoted market valueat the balance sheet date, being the present value of the quoted forward price.The fair value of interest rate swaps is the estimated amount that the Groupwould receive or pay to terminate the swap at the balance sheet date, takinginto account current interest rates. Hedge accounting Changes in the fair value of derivative financial instruments that aredesignated and effective as hedges of future cash flows are recognised directlyin equity and any ineffective portion is recognised immediately in the incomestatement. For these cash flow hedges, when the asset or liability for thehedged transaction is recognised in the balance sheet, the associated gains orlosses on the hedging instrument previously recognised in equity are included inthe carrying amount of the hedged asset or liability. Gains or losses realisedon cash flow hedges are therefore recognised in the income statement in the sameperiod as the hedged item. The Group uses interest rate derivatives as fair value hedges of the interestrate risk associated with the Company's £300m corporate bond. The carryingamount of the bond is adjusted only for changes in fair value attributable tointerest rate risk and this value adjustment is recognised in the incomestatement. Any gain or loss from restating the related interest ratederivatives at their market value is also recognised immediately in the incomestatement. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated or exercised, or no longer qualifies for hedge accounting. At thattime, any cumulative gain or loss on the hedging instrument previouslyrecognised in equity is retained in equity until the hedged transaction occurs.If the hedged transaction is no longer expected to occur, the net cumulativegain or loss recognised in equity is then transferred to the income statement. Changes in the fair value of derivative financial instruments which do notqualify for hedge accounting are recognised in the income statement as theyarise. Contingent purchase contracts The Group also makes use of contingent contracts for the purchase of its ownshares. These derivative contracts are accounted for as equity transactions andthe contracts not stated at their market values. The present value of theobligation to purchase the shares is recognised in full at the inception of thecontract, even where that obligation is conditional. Any subsequent reductionin the total obligation arising from the early termination of a contract iscredited back to equity at the time of termination. 6. Adoption of IAS 32 and IAS 39 (continued) Reconciliation of net assets 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) Net assets at January 2005 under IFRS as previously stated 276.5 ________Net assets at January 2005 after adoption of IAS 32 & 39 232.8 ________This interim statement, the full text of the Stock Exchange announcement and theinterim results presentation can be found on the Company's website atwww.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. 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