Next plc - RESULTS FOR THE HALF YEAR TO JULY 2012

RESULTS FOR THE HALF YEAR TO JULY 2012

NEXT has made a better than expected start to the year, with Group revenue up 4.8% and profit 10.2% ahead of last year. We returned a further £112m to shareholders through share buybacks which, together with lower tax rates, boosted the increase in earnings per share to 18.7%. We are increasing the interim dividend by 12.7% to 31p per share.

Financial highlights are as follows:

August and early September sales have been disappointing during what has been an unusually quiet period. We remain cautious about the economic outlook whilst maintaining full year guidance that our sales, profits and earnings per share will all move forward on last year.

OVERVIEW

NEXT has made a better than expected start to the year. In the first half sales were 4.8% ahead of last year and underlying profit was up 10.2%. Growth in our online business, the addition of profitable new space and good cost control more than offset the negative impact of the decline in retail like for like sales.

Earnings per share were up 18.7% and rose faster than profit, mainly as a result of continued share buybacks and lower tax rates. In the first half we returned £112m to shareholders through buybacks, financed by strong operational cash flow. We anticipate further purchases of around £70m in the second half, although quantities and timing will, as always, be subject to market conditions and the prevailing share price.

Our interim dividend will be increased by 12.7% to 31p and we again expect to increase the full year amount broadly in line with our growth in underlying earnings per share.

We remain cautious about the economic outlook. Disappointing sales in an unusual August and early September reinforce the wisdom of this conservative approach. We are on track to meet market expectations and maintain the full year financial guidance given in our August trading statement, with sales, profits and earnings per share all moving forward on last year.

THE CONSUMER ECONOMY

If the economy had a weather forecast the outlook would be overcast - patchy rain for the foreseeable future. In the run up to the credit crunch individuals, businesses and government lived beyond their means. It will take some time to work our way back to affording the lifestyle to which we became accustomed.

Wage increases remain lower than inflation and the cost of living is rising by almost 1% more than average earnings. This is a significant improvement on the same time last year and likely to improve further but, in the meantime, real earnings continue to modestly decline.

UK Real Earnings Graph

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On the surface the UK economy appears stationary, with little or no change. But this apparent inactivity masks powerful and necessary restructuring, with some parts of our economy growing and others in significant decline. The UK is working very hard to stay in the same place, with all the disruption and uncertainty that entails.

Employment figures reflect this theme. On the surface employment is moderately growing. The reality behind the numbers is a different story: over the year to March, Public Sector employment fell by 278,000 whilst the Private Sector more than managed to take up the slack, creating 374,000 new jobs.

NEXT PLC ECONOMICS

The experience of NEXT is strikingly similar to the economy at large: what appear to be modest growth in sales and profits mask far larger forces at work. As expected, the decline in like for like sales cost the company £18m of profit, but new profitable space added £14m and growth in online sales added a further £26m.

In addition to investing in those parts of the business that were able to grow, we have also focussed on controlling costs. This remains a vital task as without like for like sales growth, natural inflation in our cost base would erode profits. In the first half, cost savings and an improvement to gross margin exceeded cost increases by £1m.

The table below gives a simple view of how we manage the business and shows how profits and costs behaved in the first half. The right hand column is our central scenario for the possible change in full year Group profit, which is at the mid-point of our guidance range.

2012/2013 Central Profit Scenario Illustration

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THE PLAN IN SHORT

Our approach to managing the business through these difficult times remains unchanged. Our priorities are set out below:

OUTLOOK AND PROFIT GUIDANCE RANGES

We maintain the guidance we gave in August, which is set out in the table below.

For all the reasons outlined in the economy section above, we remain cautious in our outlook for the rest of the year. August is often an unusual month, and this year both August and early September have been unusually quiet. Although Brand sales finished the first half up 4.5%, cumulative sales for the year are now back in the middle of our guidance range.

RETAIL

Retail sales were slightly ahead of plan, with VAT exclusive sales up 0.2% on last year. New space added 3.7% to Retail sales and 2.5% to total Brand sales. Operating margins were maintained and profit remained level with last year at £122.7m.

Retail Space

There continue to be good opportunities to profitably increase UK retail selling space. Our space expansion programme is built bottom up, on a location by location basis and there remain many towns and cities where we believe that we have the potential to offer wider ranges in larger stores.

Trading space increased by 89,000 square feet in the first half, most of which came from moving or extending existing stores. The table below sets out the change in store numbers and space since January 2012.

Large Concept Stores

In June we opened another large concept store in Ipswich, the second such store following Shoreham last year. Both Ipswich and Shoreham have so far proven successful and have comfortably beaten their targets. The opening of a third store in Warrington has been delayed due to a fire and will now open in February 2013. A further 17 similar sites have been identified and, depending on planning consents (by no means certain), could open over the next three to five years. This represents around one third of the total expansion opportunities we have identified.

Progress slower than expected

Space growth has been slower than expected in the current year, with some of our larger projects taking longer than anticipated to obtain necessary planning consents. We expect to add around 250,000 sq. ft. of trading space (net of closures) in the current year. It is too early to give an accurate forecast for space growth next year, but we expect it to be at least another 250,000 sq. ft.

Healthy Returns on Capital Invested and Profitability

New store profitability and payback on net capital invested are both comfortably within company targets. Forecasts for stores opened in the last 12 months shown in the table are based on sales since their dates of opening.

Store Profitability

We continue to manage closely the profitability of our store portfolio. Underperforming stores are actively managed with a view to possible closure before they become uneconomic. On average our store leases have 7 years to run before expiry or a break clause.

Our portfolio remains extremely profitable, with 89% of our sales coming from stores delivering more than 15% profit contribution on sales.

Sunday Trading

Our experience of opening extended hours on Sunday was generally positive. Given the unusual trading patterns during the Olympics the data is very hard to interpret. On balance, our view is that additional trading hours will be most beneficial on the busiest Sundays. It was notable that we had no difficulty in finding volunteers for the additional hours of work, which were appreciated by many as an opportunity to increase earnings.

We would welcome some relaxation of Sunday trading laws, particularly in the run up to Christmas when shoppers are most pressed for time.

Retail Profit Analysis

Operating margin was in line with last year, as improvements in gross margin were offset by increases in store payroll and occupancy costs. The table below details the margin movement by the major heads of costs.

DIRECTORY

The NEXT Directory performed well. Sales were up 13.3% and 3% ahead of our budget. Profit increased by 22.1%.

Sales Analysis

Sales increases came from four sources. The core UK full price business added 8.0% to Directory sales. Our new "Offers Tab", which is the online equivalent of our clearance stores and sells the previous season's stock, added 2.4%. The mid and end-of-season Sales were larger than last year and contributed 1% to sales.

Our overseas internet business, which grew from £15m to £24m, added a further 1.9% to Directory sales. By the end of the year we expect to be in 61 countries, including South America, and are forecasting sales of £52m and profits of £10m.

New Customers

Directory active customers increased year on year by 11.7% to 3.3 million. The growth of credit and cash customers is shown in the table below.

Directory Profit Analysis

Operating margin improved by 1.8% to 25.0%. Gross margin benefits were further enhanced by sales leverage over costs.

INTERNATIONAL RETAIL

Our international franchise partners operate 160 NEXT stores in 31 countries. We also have 23 wholly owned and joint venture stores in 7 countries.

Revenue and profit for our International Retail business is set out below. The franchise revenue is the product at cost sold to our partners, plus either a wholesale mark-up or royalty on sale.

We continue to forecast that International Retail will contribute profits of £8m for the full year.

NEXT SOURCING

NEXT Sourcing has an extensive international network of offices and suppliers, through which it procures over 40% of the product bought by NEXT Retail and Directory.

Last January NEXT Sourcing took a one off provision relating to faulty stock, we now forecast that profits will recover to around £27m for the full year.

LIPSY

Lipsy continued to improve on what was a very difficult first half last year. Total sales increased by 18.7% to £26.9m. We now have 51 stores, 17 are stand-alone and 34 are part of or within NEXT Retail properties. Online sales increased by over 200% to £7.7m, with over 60% of these sales coming through the NEXT Directory website on a commission basis.

INTEREST AND TAXATION

The interest charge was £14.5m and we expect a similar charge in the second half. Net debt averaged £553m and our mix of fixed and floating rate interest currently gives an average rate of 4.3% on our £623m of bond debt.

We expect our tax rate this year will reduce to 24%, due to lower UK corporation tax rates, and be no higher than that for the next two years.

PENSION SCHEME

The pension variation credit was £1m compared with £3.5m last time, we expect a full year credit of £2m against £6.7m last year. We completed a further insurance backed buy-in to hedge the future liability of pensions that are currently being paid, the £6.3m accounting charge for this is shown as exceptional. There will also be an exceptional pension credit in the second half and further detail can be found in Note 4 to these accounts. Our triennial actuarial valuation will take place as of March 2013.

BALANCE SHEET AND CASH FLOW

Capital expenditure amounted to £38m and we expect £105m for the year. Stock was managed at levels consistent with last year. Directory customer account balances rose £61m year on year to £553m, up 12%, rising slightly less than Directory sales.

Cash flow was again strong, though comparison with last year is flattered by the later payment of our final dividend, which is now paid at the beginning of August rather than July. Net debt decreased by £56m in the period to £519m and will fluctuate around £600m during the second half, finishing the year closer to £500m.

SHARE BUYBACKS

During the period we purchased 3.9 million shares at a cost of £112m, representing 2.3% of those in issue at the start of the year. We anticipate returning up to £200m to shareholders through share buybacks this year, although quantities and timing will, as always, be subject to market conditions and the prevailing share price.

DIVIDEND

The interim dividend is being increased by 3.5p to 31p, an increase of 12.7%. This will be paid on 2 January 2013 to shareholders on the register at 23 November 2012. The shares will trade ex-dividend from 21 November. We intend raising the total of dividends payable for the year by a similar percentage to the growth in underlying earnings per share.

INTERIM MANAGEMENT STATEMENT

Our next statement will cover the third quarter and is provisionally scheduled for Wednesday 31 October 2012.

Lord Wolfson of Aspley GuiseChief Executive 13 September 2012

UNAUDITED CONSOLIDATED INCOME STATEMENT

UNAUDITED CONSOLIDATED

STATEMENT OF COMPREHENSIVE INCOME

UNAUDITED CONSOLIDATED

STATEMENT OF CHANGES IN EQUITY

UNAUDITED CONSOLIDATED BALANCE SHEET

UNAUDITED CONSOLIDATED CASH FLOW STATEMENT

NOTES TO THE UNAUDITED CONSOLIDATED

INTERIM FINANCIAL STATEMENTS

1. Basis of preparation

The Group's interim results for the six months ended 28 July 2012 were approved by the Board of Directors on 13 September 2012, and have been prepared in accordance with IAS 34 Interim Financial Reporting.

The accounting policies adopted in the preparation of the interim financial statements are the same as those set out in the Group's annual financial statements for the year ended 28 January 2012. The financial statements have been prepared on the historical cost basis except for certain financial instruments, pension assets and liabilities and share based payment liabilities which are measured at fair value.

The interim financial statements have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on 'Review of Interim Financial Information' and do not include all of the information required for full annual financial statements.

The financial information contained in this report does not constitute statutory accounts of the Company within the meaning of Section 434(3) of the Companies Act 2006. Statutory accounts for the year to January 2012 have been delivered to the Registrar of Companies. The audit report for those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under 498(2) or (3) of the Companies Act 2006.

Going concern

The Directors report that, having reviewed current performance and forecasts, they have a reasonable expectation that the Group has adequate resources to continue its operations for the foreseeable future. For this reason, they have continued to adopt the going concern basis in preparing the financial statements.

2. Risks & uncertainties

The challenging consumer environment and its potential impact on the Group's sales performance remains a major variable, and therefore risk, to the Group's financial performance. The Chief Executive's Review in this Interim Management Report comments on this and other uncertainties affecting the Group's businesses for the remaining six months of the financial year.

In June 2012 the Financial Reporting Council issued an update titled "Responding to Heightened Country and Currency Risk in Interim Financial Reports". The Board recognises that there are global, country and currency risks that it cannot influence but can seek to mitigate. Over 90% of the Group's revenues, total assets and total liabilities are denominated in or hedged into Sterling. No single country other than the UK accounts for more than 5% of group sales, total assets or total liabilities. Outside of the UK, the following countries each supply over 5% of group product purchases: China, India, Sri Lanka, Bangladesh and Turkey. Products from the Eurozone combined account for less than 10%.

The Board has considered the principal risks and uncertainties for the remaining six months of the financial year and determined that the risks presented in the 2012 Annual Report, described as follows, also remain relevant to the rest of the financial year: Business strategy development & implementation; Credit risk & liquidity; Management team; Product design & selection; Key suppliers & supply chain management; Retail store network; Directory customer base; Warehousing & distribution; IT systems & business continuity; Call centre capacity & service levels; Treasury & financial risk management. These are detailed on pages 14 to 15 of the 2012 Annual Report, a copy of which is available on the Company's website at www.nextplc.co.uk.

3. Segmental analysis

The Group's operating segments under IFRS 8 have been determined based on the management accounts reviewed by the Board of Directors. The Board assesses the performance of the operating segments based on profits before interest and tax, excluding equity settled share option charges recognised under IFRS 2 and unrealised foreign exchange gains or losses on derivative instruments.

4. Exceptional items

As part of the Group's continued risk management strategy for the defined benefit section of its pension plan, in June 2012 most remaining pensions in payment were subject to a buy-in arrangement. This was similar to, but significantly smaller than, the buy-in transaction which was completed in 2010.

Under the terms of the additional 2012 buy-in, the Plan paid £24.3m to an insurance company and in return will receive annuity payments equal to the related pension payments. This eliminates the Plan's exposure to the interest, inflation and longevity risks of those pensions. This arrangement also allows for the transaction to be converted to a buy-out, following which the insurance company would become directly responsible for those pension payments, and it is the intention of the Group and the Trustee to proceed on this basis. Accordingly, the arrangement has been accounted for under IAS 19 as a settlement, with the resulting accounting charge of £6.3m (being the difference between the insurance cost and the IAS 19 value of the liabilities) presented in the income statement as an exceptional item. In order to mitigate the effect of the transaction on scheme funding, the Group made a special cash contribution of £11m to the Plan.

The defined benefit section was closed to new members in October 2000 and the Group has recently reviewed the operation of this section for its remaining employee members. Following a consultation process with those employees it is expected that, from 31st October 2012, the future accrual of their pension benefits will be based on pensionable salary frozen at that date, together with additional contributions to a defined contribution scheme. The change is expected to give rise to a significant IAS 19 accounting credit to the income statement in the second half of the current year. This accounting credit will not have any immediate effect on the Group's cash flows. The next full triennial valuation of the Plan will be carried out as at March 2013, following which its future funding requirements will be determined.

5. Discontinued operations

In the previous year the Group sold its customer services management business, Ventura, for £65m on a cash and debt free basis. Profit from discontinued operations last year was comprised of Ventura's post-tax profit of £2.6m for the five months prior to sale, and an exceptional gain on disposal of £38.0m.

In the cash flow statement, net cash from operating activities in the previous year included an outflow of £9.9m in respect of Ventura for the five months prior to disposal.

6. Earnings per share

Basic earnings per share is based on the profit for the period attributable to the equity holders of the parent company, and the weighted average number of shares ranking for dividend less the weighted average number of shares held by the ESOT during the period.

Diluted earnings per share is based on the weighted average number of shares used for the calculation of basic earnings per share as increased by the dilutive effect of potential ordinary shares. Dilutive shares arise from employee share option schemes where the exercise price is less than the average market price of the Company's ordinary shares during the period.

Fully diluted earnings per share is used for the purposes of the Share Matching Plan and is based on total underlying profit and the weighted average number of shares used for the calculation of basic earnings per share increased by the weighted average total employee share options outstanding during the period.

Underlying earnings per share is based on post-tax profits before the exceptional items described in Note 4 and calculated as follows.

The table below shows the key variables used in the earnings per share calculations: