Next Aktie

Good morning to everybody, and welcome to the half year results. Thank you for being here, and a special welcome to anybody who's here for the first time. It's certainly a pleasure for me to kick off the proceedings given that the NEXT results continue to be very positive. The first half has been a strong period for the company with continued sales and profit growth, especially in the International area. Now this performance doesn't come by accident, and it certainly reflects the hard work and courageous decision-making of all our employees worldwide. And I want to thank them. And I'm going to leave all the details of what has happened in the first half to our Chief Executive. So over to Simon.

Right. Thank you, Chairman. Good morning, everybody. Total group sales up 9%. Full price sales up 7.7%. The difference is not the subsidiary companies growing much faster. It's all about markdown. Last year, we had a very small end-of-season sale because we exceeded our targets by a significant amount. This year, sale stock returned to more normal levels. In terms of our expectations, we thought we were going to be up 4%. You can see that we exceeded those expectations in the U.K. and Overseas, Much more so in Overseas. And I'll be talking about both of those in more detail as we go through. Profit up more than sales, up 10.5% Net interest significantly higher than last year. That's all about the fact that last year, we had a lot of cash on deposit because we weren't able to buy back shares. This year, we bought a lot of shares back at the beginning of the year, which means we didn't get the interest income that we had this time last year.

Profit margins short by 0.3%. Profit after tax, pretty much the same, no change in tax rate and earnings per share up around 2% more than underlying earnings, and that's as a result of the -- mainly as a result of the buybacks that we did very early on in the current financial year. Interim dividend, we're planning to increase in line with earnings per share, up 12.6% to 98p.

Moving on to cash flow. And just to reemphasize the cash flow and balance sheet, I'm going to talk here, unlike the P&L and all the other numbers I'll talk about, this is done on a consolidated basis. So this is done on the basis that we own all of the subsidiaries, most of which we only partly. So good cash flow from operations and profit, GBP 54 million. CapEx, up GBP 44 million on last year as expected. What you can see here, we showed you this graph at the beginning of the year hasn't changed much. The big increase came in warehousing, where we spent much more than last year and less on stores. This time last year, we spent a lot on Thurrock and a new concept store, which we didn't have again this year.

In terms of CapEx going forward, we're expecting roughly the same amount of capital expenditure for the next 3 years. And at the end of last year's -- sorry, the presentation 6 months ago, we talked about how that corresponded to capital consumption pretty much in line with our 20-year average. In terms of working capital, working capital up pretty much in line with sales in the first half, which is what we expect because a lot of that is stock. Corporation tax, a bigger increase than you'd expect. It has gone up more than profits. That's all about timing because we pay tax on account. And last year, we were consistently increasing our profit expectations, which means that our tax didn't quite keep up with the result that we delivered at the year-end.

Surplus cash down GBP 26 million on last year, still its a GBP 180 million of positive cash flow and the difference in this year and last year, mainly about CapEx. This is where the big change came. Last year, we pretty much locked out of the market, and we thought we'd take a slower steady approach to buying back shares. This year, when we had the opportunity, we bought as many shares as we could. So we've done GBP 355 million of share buybacks in the first half. That means net cash outflow in the first half is GBP 177 million. For the full year, we're expecting that to reduce to around GBP 100 million, which is the amount we plan -- the cash outflow from the business that we're planning for the full year. All of that is funded by a planned increase in debt. And just to explain that in a bit more detail, we started the year with leverage at 0.6x, [ GBP 713 million ]. Now these numbers are -- where we target is fairly arbitrary, but we had targeted 0.63x. The reason it was lower than our target was because we generated a lot more cash in January than we expected as a result of better sales.

We aim this year to push that back up, the leverage back up to 0.63x, which will push our year-end debt to GBP 815 million, and that accounts for GBP 102 million net outflow. In terms of how we get there, we think we'll have very strong operating cash flow income, around GBP 996 million cash inflow from operations, GBP 245 million of CapEx GBP 319 million of ordinary dividends. And that leaves around GBP 500 million to distribute, of which we spent GBP 355 million. The GBP 180 million balance, we will either give back a special dividend, buybacks or some other form of capital distribution.

In terms of our cash resources, we're very comfortable with cash resources. We started the year with GBP 1.2 billion of cash resources. We have increased our RCF by GBP 200 million. And the lion's share of that increase, about half of it will be used in October to pay off the 2026 bond. And that will leave us with GBP 1.3 billion of resources. And if you compare that to our peak cash requirements, we've got about GBP 300 million of headroom, which we think is comfortable. We have increased our net debt partly to account for making sure that not only does NEXT have sensible of headroom, but so do all the subsidiaries that we lend money to that have headroom sufficient to get them through a blip as well.

In terms of [ bad ] debt, it is much more than balanced by the financial assets that is our customer receivables. So we've got GBP 1.36 billion of customer receivables, which is much more than our peak headroom and broadly equal to our cash resources.

Moving on to the balance sheet. Balance sheet investments went down in value by GBP 42 million. This is a wonderful piece of accounting where one of the reasons that the balance has gone down is because they've become more valuable. Amortization takes GBP 19 million off. GBP 10 million is because joint ventures have paid a dividend to us. And final thing, the provision for minority acquisition. This is because a lot of the minority shareholders and management teams have options to sell their shares in their business on a fixed multiple of profits back to NEXT. Those options vest over the next sort of 4 or 5 years across various different businesses. Because those businesses are doing much better than expected, we have to provide a higher number, which has the ironic effect of reducing the value of the more valuable businesses that we want to buy.

Stock, up 5.8%, pretty much in line with our sales expectations for the second half. Customer receivables, up 2.5%. Now these are sort of the beginnings of an important story, which we're going to elaborate at the end of the year here because what you can see is that unlike the last 10 years, our credit sales are beginning to grow much faster. So we would normally expect that number to be plus or minus 1% or 2%. Our credit sales are now growing at 6.8%. The reason it's growing so strongly is partly because we're offering a new product, which is our Pay in 3 offer. Pay in 3 offer allows customers to -- it's a very similar [indiscernible] type offer, allows customers to buy the goods. And if they pay off in 3 installments and pay all on time, they pay no interest. If they don't pay those installments on time, if they choose not to, they can do that, but they then incur interest on the balance that they haven't paid. Because those Pay in 3 accounts by design, pay down much faster, it means that our credit -- our receivables don't grow by as much as sales. And we expect that to be a sort of continuing trend as we move forward.

These balances are n-- incur less overall debt, and we think are likely to be to incur less bad debt as well. So I think going forward, you'll see credit sales rising faster than balances with perhaps some benefit on bad debt. I'd say perhaps, we've yet to prove that. Other debt is up GBP 53 million. Our biggest number here is international aggregators. This is the fact that on websites like Zalando, they sell our product, take a commission and then pass us the balancing proceeds a month later. That month as we've grown so fast, that month that they owe us of net sales is growing. So that's a good thing. Cash in transit, I think I mentioned this last time, one of the very few accounting standard changes over the last 20 years that I can remember that makes a lot of sense. And this is because the -- we are no longer able to count the cash that we've taken on credit cards that we haven't yet received. We're no longer able to count that as our cash. And that change on last year cost us GBP 31 million. And then the subsidiaries have been better at collecting in their debt as well.

Credit is moving in the opposite direction to what you'd expect. We'd expect creditors to grow in line with sales. What's happened here is that the 53rd week puts a large payment week into the first half that wasn't there last year. So that's all about the timing of payments rather than any underlying significant change in the creditor base. That leaves net debt, GBP 890 million, all driven by the -- and the increase is all driven pretty much by the timing of buybacks. In fact, the GBP 352 million is only GBP 3 million of what we spent on buybacks.

Moving on to the detail of the business. And just to remind you, we don't -- we're treating the U.K. Online business separately from the International business because they have very different moving parts. Starting with U.K. Online. U.K. Online was up 7.4% the full. The total sales up 8%. And what you'll see on all the Online businesses is that the markdown sales grew faster than full price sales, which didn't happen in Retail, and that was a conscious decision for us to push more of the changing balance of markdown into our Online channel rather than Retail. Full price sales accounted for GBP 83 million of growth. And just looking at how that breaks down between the different types of brands we sell on NEXT. So GBP 14 million came from NEXT, which grew at just 2.1%, on wholly owned brands and licenses by a really strong 33.5%. I'll be saying more about that later and continued growth of our third-party Branded business, driven largely by better selection of existing brands rather than new brands.

In terms of margin, margin up just 0.1%, but a lot going on underneath the surface here. Bought-in gross margin down 0.2%. We've got two things pulling in opposite directions here. First of all, the underlying bought-in gross margin on NEXT stock went up. And we consciously did that in the U.K. to pay for inflationary wage costs and overseas, the change in prices, which we'll see later on, driving up margins to pay for increased fuel surcharges. But underlying NEXT product, 0.5% up. The impact of mix because we're growing our [ wobble business ] and third-party business much faster than NEXT pushed net margins down because you make lower bought-in gross margins on those. And just to give you a flavor for the different net profitability of those 3 businesses in the U.K., NEXT makes around 21% net margins. That's net margins after accounting for the allocation of all fixed overheads. WOBL lower than that at 18%, still very respectable, but 3% lower. And third party, as you'd expect, because we don't put effort into building the brand, we make lower margins on that at 12%. And it was the growth of WOBL and third party that offset the growth in the underlying margin of NEXT.

Markdown adverse movement, we had more stock going into the end of season sale and our clearance rates online, which dropped a little bit against last year. Warehouse and distribution, a significant gain here, but again, lots of different things going on, wage inflation and fuel inflation between them adding 0.8% to costs. We've got big productivity gains, 0.6% on productivity and 0.3% leverage over fixed overheads. And really, you need to take the productivity and fixed overheads together because the fixed overheads include all the depreciation on the money we've been spending on mechanization. And both of those numbers put together a testament to the efficiencies that we're now getting out of the mechanization and investment that we've made in our new Elmsall 3 warehouse.

And then returns on average selling prices meant that we handled fewer units to achieve the same sales, and that pushed warehousing costs down by 0.5%. Again, that's partly as a result of mix on the whole third-party and WOBL business is more expensive than NEXT branded stock. But also it's that continued effort to weed out the high-returning low-priced stock, particularly within brands that pulls our profitability down.

Getting leverage over technology. And you can see that warehousing and technology contributed 0.7% towards margin, and then we pretty much spent all of that on marketing. I should stress that it's not that we build up a pot of money and then spend it on marketing come whatever. The marketing -- the returns justify us spending that much money. But you can see in terms of the shape of the business, what you're getting to is a business that spends less on facilitating and serving the customer and more on telling the customer about the service. So the shift out of technology and warehousing into marketing. So longer term, I think that is a theme that you'll see continuing in the U.K., but we'll see more strongly overseas.

And just to remind you that the return per pound spent on marketing and the way we measure our marketing is we look at each campaign, measure what we think of the incremental sales, which is not an exact science, look at the incremental profit on those incremental sales, depending on the mix of that particular campaign in terms of product mix and returns rates and then compare it to what we spend. We have to spend at least -- we have to make at least GBP 1.50 of incremental profit before fixed overheads, every pound spent on marketing. And basically, as long as we can do that, we'll spend as much as we can.

Central costs, a big gain here. This is mainly about last year's exceptional performance leading to an exceptional staff incentive payments at the end of the year. So that normalizes this year. Looking forward, if full price sales were up 5.2% in the U.K. Online, we expect our margins to nudge forward by around 0.2% with a very similar story for the full year that we've had for the half.

Moving on to International. This is a little bit more exciting. Full price sales up 24% total sales, including markdown up 26%. That number really only tells half the story because the first quarter was adversely impacted by disruption in the Middle East. So you see that the second quarter was much more exciting. Don't get too excited by that second quarter number because there was definitely -- we could see this in the Middle East. There was definitely pent-up demand in the Middle East that contributed towards that 37%. So don't assume the underlying growth would have been 37%, all things being equal. Full price sales were GBP 133 million Overseas.

In terms of how that breaks down by region, lion's share of the growth, nearly GBP 100 million coming from Europe, which grew very strongly at 28%, partly driven by the step change in our sales on Zalando as a result of the [indiscernible] integration. Middle East, 14%. But again, you'd have seen an even bigger swing first quarter to second quarter in the Middle East. We've mentioned the United States for the first time. We've never really talked about the U.S. before because we've really had no traction. We have a very small business in the United States. But we have just managed to find -- this year, we've really managed to find productive ways, profitable ways of marketing the business, and we're seeing very significant growth in the United States. Still small numbers, nothing to get excited about today because the numbers are so small, but it does bode well for the future of the business in the States.

I should say actually, Rest of World, if you that 3% growth, that is 2 countries have pulled that back, and we're not sure why. Kazakhstan and Australia. If you know why those 2 businesses underperformed, please let us know because we're racking our brains. In terms of the breakdown between the different brands, what you can see here, much stronger showing from the NEXT brand, up 16% overseas. WOBL, astonishing growth, 82%. Part of that is that we have put more options of our WOBL brands on our overseas sites and customers are beginning to find them and get used to them. And then third party, very respectable as well, but much, much smaller overseas because most third parties will go to a local aggregator rather than to NEXT.

Profit margin down 0.4%. And as with all businesses, when you've got a bad number, the good thing is to blame it all on one thing that you hope will go away. So we'll start with that. We think the Middle East conflict in the first half cost us 0.8% and that is the balance of the increased surcharges, which would have cost us 1.3% and the price increases that we put through, which because we wanted to see how the war would pan out before we put prices up, we only managed to put prices up sort of half the season. So that's why we didn't quite cover the cost or didn't cover the cost of those surcharges. As we move into the second half, those things will balance out, and the Middle East will be cost neutral. In terms of conflict, we will be cost neutral because the price increases were put through.

[indiscernible] gross margin up 0.4%. The same but different story here. Underlying NEXT margin up 0.5% impact of mix, not nearly as adverse as it was. And the reason for that in simple terms is because we make -- relatively, we make a lot more margin on our WOBL brands overseas, where they appear to have much more pricing power than they do in the U.K. WOBL brands make 20% compared to NEXT at 14%. Now you would -- you're looking at that and thinking, well, if WOBL brands have grown by 82%, that should be pushing margin up, not marginally reducing it. The reason is -- the reason it doesn't is because actually there are 2 competing factors. Yes, Wobble grew by more, and it does make more margin than NEXT. But last year, it was at 24% net margins. And we consciously took the decision to lower prices to become more competitive in our wobble brands last year. So those 2 effects pretty much offset each other.

Aggregator commission, we're getting better rates of commission from our partners. Warehousing, technology central costs, I could go through all of those in detail, but I would just be repeating the sorts of changes, the movements that we've had in the U.K. because the story is pretty much the same. And again, all of those gains invested -- more than all of those gains invested in marketing at 1.5%. That leaves sort of overall margin movement of minus 0.4%. And we think a very respectable margin for the business to make full year. We anticipate margins around 15.1%, flat on last year. So that is because the price increases will pay for the surcharge in the second half in a way that they didn't in the first.

In terms of customer base, some interesting things going on here. U.K. credit and cash, for years, you'll have looked at this and seen cash growing much faster than credit. The reason that, that's changed is because of the Pay in 3 product I talked about earlier. And some of that -- the reason the cash number isn't up by more is because a lot of the credit customers will trade with us first on cash. And then after they've transacted a few times, we'll convert to Pay in 3. So that net reduces the cash customers. But total U.K. up 7%, pretty much in line with sales. International sales up 29% total excluding aggregator is up 14%. In terms of sales per customer, there's no real story here other than the fact that there isn't a story is important because overseas, given the level of growth we've had in sales, you would expect to see our sales per customer moving backwards because new customers tend to spend less than established ones. If you fill up with a lot of new customers, that will push the sales per customer down. The reason we think it hasn't is because of the increasing choice of product on the website, particularly the WOBL brands, which have, we think pushed sales per customer up.

Moving on to Retail. This is our new store in Bluewater. And you might be thinking sort of, oh, here's another one of those Thurrock. And physically, it doesn't look the same, but financially, it's much, much better. Because when you look at -- I know a lot of you are thinking, oh, yes, white elephant. Good joke. It's actually -- the economics of the Bluewater store were much better than they were in Thurrock and they still make a very healthy return on the capital that we invested in. It's already open and delivering sales ahead of our expectations. In terms of space for the full year, we expect space to grow by around 1.3% as a result of opening 8 new stores, 6 of them are open. And if we look at the 6 that we've opened and the forecast that we've got since opening, we think the internal rate of return on the investment will be around 30%. So much healthier than the portfolio we opened last year.

Retail sales down 0.4%, full price down 1.7%. We didn't put more stock into the end of season sale in retail, not significantly, but actually, we did have better clearance rates. New space was 1.6% and like-for-likes minus 3.3%. That number, although it's bad, is better than we're expecting. I know that's no constellation, but we're expecting it to be around minus 5%. Margin up by 0.4%, it's a bit of a story here. Bought-in gross margin, this was the planned increase in bought in gross margin to help pay for national insurance and national living wage inflation. Markdown was flat. Payroll at all of the gross margin gains and that -- the increased costs of themselves would have eroded margin by 1%, but lots of productivity measures that we've taken in our stores have contributed to around a 0.4% gain in productivity in shops.

Store occupancy -- the new space is more expensive than our existing space. That's partly because on the whole, it's slightly higher rent, but mainly because none of its assets have been depreciated. So that when we open a new store, you've got a full depreciation charge. A lot of our existing stores have low or no depreciation charge. And you can see the expenditure on depreciation on new stores is largely offset by the stores that are now fully depreciated, which gives us a 0.5% gain in the opposite direction. Warehousing and distribution, wage inflation and fuel, but a relatively modest impact because warehouse and distribution is a much smaller percentage of retail sales than it is of online sales. Technology costs, there's again here slightly higher than in online. And I'd love to say that, that was because we've had a big review of all of our tools and communications networks. It's not -- it's really because we've rebalanced the allocation of stock between retail and online to get -- to make that allocation more accurate. So Online gained about 0.1%, Retail 0.2 between the 2 of them, it's about halfway between the 2 of them.

[indiscernible] central overhead, same story there about staff incentives. And that's what gives us our sort of net margin movement up 0.4%. If we look forward to the full year, assuming that sales for the full year are down 0.9%, our margins will -- we think will come in at around 10.2%, so just over 10%. If you would look at that 0.9% and think that I would look at it and go, that looks ridiculously optimistic because it's much, much better than the first half -- to give you some comfort on that, if you look at the difference in quarter 1 and quarter 2, you can see that quarter 1 was where we took the big hit, and this is because last year, the summer came early. So you got a big benefit in Q1 last year. Q2, we had the same warm weather as last year, but we also had the competitive disruption last year, which we think benefited the stores. And so we think if we take the Q2 number and flow it forward into H2, that is a sensible guess. But if you were to ask me, what is the one number that has -- that you're most worried about is that number. I think that might be optimistic.

Moving on to Total Platform. Total Platform has had a really good -- the subsidiaries had a really good half year. Profits up 40%. You need to discount half of that GBP 8 million growth because it was all about provisions that we took in the first half of last year. But underlying profit growth in the subsidiaries of 18%. And what we're finding is that the businesses that were doing well last year are doing better this year and the businesses that were doing badly last year or were struggling are doing much better and one in particular has gone from loss to profit this year. The services on Total Platform profit is up by 23%. That looks high, but it corresponds to the growth in our partners' Online businesses, which is what we charge them for.

In terms of the margin on our services, we make around just under 20% on what we charge our clients, which amounts to around 6% of their online sales. Looking forward to the year-end, we expect another GBP 15 million of additional profit in the full year from our Subsidiary businesses. And we -- if that comes through, then the return on capital on all the investment we've made, both in buying those businesses, funding them and also on the CapEx for Total Platform is around 26%. So it's looking like a very good -- as a portfolio, it's been a very good investment.

Moving on to full year guidance. These are the H1 numbers. 3.6% in the U.K. We are anticipating H2 relative to our expectations, we have lowered our expectations for the U.K. And obviously, part of my assumption at this meeting is to depress everyone a little bit. I've seen too many people smiling. So I just want to explain what -- why we are cautious about the U.K. And it's a combination of the fact that fuel inflation, in particular, but other forms of inflation as well, look like they will begin to bite harder in the second half than they have done in the first, and that's going to put pressure on the consumer. And unlike past squeezes where government has been able to intervene, we think that there is really no room for government to move. In fact, worse than that, we think that they may have to -- the problem is going to be for them funding GBP 100 billion deficit that they've got. And if you look at these three graphs, they kind of tell the whole story, spending as a percentage of GDP has not been as high as it is today for the last 65 years other than in the oil crisis, the financial crisis and COVID.

So it doesn't look like there's a lot of room to increase spending. In terms of debt to GDP, we haven't seen debt levels in the U.K. this high since we were in the shadow of the second war. And tax as a percentage of GDP is higher than it has been for the whole of the last 65 years. And we think that's important because, again, potentially unlike in the past, we think any attempt to increase any taxes is likely to have some negative knock-on effect on the economy. And we've gone into a little bit of detail about that in the tax. So I think tax increases will be self-defeating if they're used to fund stimulus. And if they used to fund a government deficit, then they will place a further drag on growth. And all those things put together mean that we think it's wise to trim our expectations for the second half.

In terms of International, we were at 14%. We've gone to 20.5%. You might look at that and go, oh, well, they're still being a bit cautious because they're up 24% in the first half, and that was with the Middle East war. There is one factor that I just need to remind you of, and that is that this time last year, as we went into the second half of the season, we got a huge boost in our aggregation business from Zalando. So aggregator business in the first half of last year was up 33%. In the second half, that jumped to 61%. As we begin to annualize that number, that growth will begin to reverse out. And you'll see the beginnings of that as we move through the presentation. So that's why we are more optimistic about our International business, but not as optimistic as the numbers that we delivered in the first half.

And that gives us 6.7% for the full year. In terms of what that means in terms of profit, the growth in online sales, we think, will deliver GBP 116 million worth of additional margin. We will lose -- assuming we hit our targets, we'll lose GBP 6 million from a slight decline in Retail sales. That gives us GBP 110 million, add GBP 15 million for subsidiaries. Then in terms of cost increases, there's lots going on here. And it's important, I think, to separate them out. So the GBP 44 million increase in marketing, it's not -- this is a willful act of cost increase, and we consider it to be an investment because all of that GBP 44 million has a return attached to it. Not all of it will come in the current year. So obviously, the customers we recruit this year, their second order and a lot of the profit is only made next year. Then true underlying inflation that we can't do anything about is around GBP 70 million of fuel and wages. And then the higher interest costs are really about the capital returns. We're paying higher interest costs because we don't have the interest income from the money that we had on deposit this year -- sorry, last year, but this year, we have given back to shareholders.

In terms of cost savings, stroke margin gains, you can see GBP 37 million of margin gains, which go a long way towards paying for the wage inflation, lower employee incentives because last year was so high and the warehouse and distribution efficiencies coming through at around GBP 22 million. And that number is -- that estimate is higher than it was at the beginning of the year. That gives us about GBP 1.255 billion of profit, up 8.4%. In terms of what that means for shareholder returns, post-tax EPS, we're expecting to be in the order of up 10%. And if we add dividend on top of that to look at TSR, which is what we ourselves measure as a measure of the sort of total return to shareholders, we think that will come in at around 12.6%, which we think for old-fashioned sleepy retailer is quite a good number, but particularly exciting given that last year, the equivalent number was more than 20%. So we weren't expecting to deliver as strong returns this year.

So that's all I've got to say about numbers and guidance. Moving on to what is the more interesting, but not necessarily interesting part of the presentation. I'm going to talk about two things, a little bit more insight into the numbers, in particular, focus on our Online customers and then three areas of the business where we've got, we think, exciting things going on. I just want to share with you sort of some of the things we're doing. In terms of the insight into our numbers, if you take the total GBP 203 million of growth we've got, there's a brilliant page on Page 6, which tells you pretty much everything you need to know about NEXT. It gives you by product category and territory, the growth of all of our businesses and the percentage of our business that each one of those segments provides. When you look at that, I think there are some things that need to sort of calling out. The first is that in the first half, more than 2/3 of our growth came from non-NEXT brands, WOBL and third party. When you break that down, it's the wobble that has performed best. And that's really important because although they're non-NEXT brands, the WOBL brands are owned by NEXT. We buy the stock in on licenses, although we pay a royalty, we own the stock, we develop it, we buy the stock, we take the stock risk. So when you look at the net margins of the WOBL business, and this is the net margins balance blend of overseas and U.K. and compare the 3 businesses, you can see that NEXT is at 18.3%, WOBL at 18.8% and non-NEXT at 12%. So I guess that whilst the -- it might look worrying from a margin perspective that it's non-NEXT brands that are growing the fastest because the lion's share of that growth is delivered by brands that are owned by NEXT, it's actually good news for margin.

Incidentally, we had a very exciting conversation about acronyms because we thought we've got NEXT owned brands, which we thought we could call Novel. But I was banned from doing that. So there we are. It's next owned brands. The WOBL brands have done exceptionally well. And you might expect me to talk a lot about them. I'm not going to because for those of you who had to sit through the last 6 of these presentations, I've done -- talked a great deal about WOBL brands and what we're doing to develop new licenses, new brands that are either starting or buying, creating an environment that is a brilliant place to incubate and build brands. I've talked about the fashion price mix of the different brands and how we're trying to make sure that they don't compete -- that they add something new to the NEXT customer's wardrobe. So I'm not going to talk about that. But what I want to show you is it doesn't mean that it isn't an area of the business that we're working really hard on. We still think there's lots and lots of opportunity to grow our WOBL brands.

Focusing the Other number that I think is the number that sort of sticks out is the NEXT brand in the U.K. was down, around GBP 7 million, but it was down. And that number looks worrying because I think the question that it poses is, well, is there something fundamental about the NEXT brand that is on the way. We don't think there is. And in fact, we think the NEXT brand overall is in better shape than it was this time last year, but that number does need some explanation in the U.K. First thing to say is Online, obviously, we were up, but only slightly. That number of the GBP 14 million increase needs to be taken in the context of the GBP 70 million increase in the sales of non-NEXT brands. we work very, very hard to ensure that the brands we have are offering something different. But inevitably, there must be an overlap. So the fact that those -- the fact that we've parked so many powerful competitors on NEXT front lawn means that we think that some of -- that NEXT wouldn't -- would have grown by more had those brands not been there. So we think that 2% is not a fair reflection of how much better or worse the NEXT brand is than last year.

And in Retail, the -- this time last year, we think that we got a big gain from competitive disruption in the second quarter. and that obviously reverses out. And if you look at the 2-year number for Retail, it's up around 2.3% for the NEXT brand. So we think taking those two things together, we think that we're not concerned about the NEXT brand, particularly as when you look at the International business, the NEXT brand is still growing very strongly, 16%, delivering the lion's share of growth or more than half the growth overseas.

If we just sort of break the overseas growth down into aggregators and NEXT Direct. What you can see here, I think, straight away is I think this is the first time for many years that we've reported the NEXT Direct business growing much faster than aggregator -- or not much faster, growing as fast as the aggregator business. And you can also see that aggregator business at 23% is lower than the 33% and 61% that we reported that we told you about for [indiscernible] in the second half. So you can see that our aggregator business is -- the growth there is beginning to moderate as we begin to annualize some of the gains that we made last year.

Focusing on the NEXT Direct business and breaking that down into the sales that were driven by marketing and those that came naturally from underlying growth, 23% of our growth in the half came from marketing. And the surprising thing here is that having grown our spend by 63%, we haven't seen any erosion in the rates of return we're seeing on the advertising. I mean they've nudged forward, but we would have expected those to move back not to below the GBP 150 million, but we expect them to be below last year's number. And if there's one thing that is driving the exceptional growth of our Overseas business, it is the maintenance of these returns because we don't start with a fixed budget for marketing. We spend as much as we can as long as we're getting the returns. The things that we think are driving those returns are improving technology. This is not our technology, improved technology of the media partners we work with the Googles and Metas of this world, partly their better technology, better targeting of customers and partly us learning to use their technology more effectively.

Secondly, and I can't understate the importance of this. All the work that we've done to improve the website functionality and delivery services serves to reinforce the marketing. If every customer who comes to our website through an advert has a higher probability of a sale because we've improved the functionality or the payment type or the way the basket works or the delivery service makes them more likely to come back, that marketing pound becomes more effective. So our websites and services have driven marketing growth.

E-media costs have come down. We can't take the credit for this. This is all about the de minimis tax and GBP 3 levy in Europe, which has dissuaded some of the companies who import very cheap stock at very low prices under the -- were importing under the tax radar. It has dissuaded them from spending as much on advertising in Europe. And finally, there are lots of countries where we had virtually no advertising last year. So it was sort of virgin territory, and we were able to spend more money in those territories without eroding overall margins. And the final thing, and again, I will stress this much more when I present this to my colleagues back at [indiscernible], but cost control and maintaining the right margins by getting our pricing right is absolutely central to delivering the profitability required to drive the marketing.

All that sounds fantastic, but that doesn't mean that 1% number looks a bit anemic. It's not as bad as it looks. And this is all about the war in the Middle East. First quarter, our underlying growth was down 8%. In the second quarter, it was up 11%. The 11% isn't a good number because of the pent-up demand. But if we look at the last 15 weeks of trade, our underlying trade, the trade that isn't driven by marketing was up around 8%. And that begs an interesting question about the nature of our overseas customers versus U.K. And what I'm going to talk about, first of all, on this is the customer spend. What this graph shows is for the U.K., the spend by tenure of customers. So customers who have been with us 3 years, on average spend GBP 203 a year. Those who have been with us for just a year, spend GBP 101. If we look at the shape of that maturity curve overseas, we were surprised to see that it was pretty much identical, a little bit lower, but it's pretty much identical. And that is not what we thought we'd see. We thought we would see far more occasional customers and customers not coming back or extending their portfolio of products overseas nearly as much as they have done in the U.K. And that number, in fact, is a little bit understated from the mathematical number because the Middle East takes so much per customer. So these numbers are basically for all of our international customers, excluding the Middle East. The Middle East customers, this slide just shows what the Middle East customers spend per customer, and it's much, much higher.

So if I had included that, it would have given an artificial view of what our International customers are spending. But underlying international customers seem to behaving in a way that isn't dissimilar from our U.K. customers. We were, I said, surprised by that, by all of you because you're so much clever, won't be surprised because, of course, in the U.K., it doesn't mean that the NEXT brand is as attractive overseas as it is in the U.K. because in the U.K., we've got stores, and most of our online customers also spend in stores. So it doesn't mean that we're going to -- the NEXT brand will be -- is as powerful overseas because we don't have the store sales, but it is nonetheless very encouraging for the economics and development of our Online business.

In terms of retention rates, again, we were pleasantly surprised by this. We thought these are the U.K. numbers. So if we have 100 customers in who we recruit this year, 35 of them will reorder next year. These numbers are sort of the normal numbers we'd see in an online world. If we look at the overseas numbers, again, remarkably similar. We thought they'd be a lot lower because of we think stores, both acting as collection and returns points and our credit offer would make the U.K. customers far more retentive than overseas customers. The balancing factor is the amount we spend on marketing. So in the U.K., we spend 3.8% on marketing. And in effect, overseas, the part of the 10% we spend on marketing isn't about just gaining new customers. It's about doing the hard work that the stores are doing in the U.K. to retain customers. And all of that filters through into the economics of the 2 businesses.

So actually, I should say on that -- sorry, that the -- if you look at the difference, part of that is paid for by NEXT by making lower margins overseas online than we do in the U.K. and part of it is paid for by the customer by us making higher gross margins. If we look at the three areas of focus, starting with product. we've talked -- again, I've talked what many of you will consider to be and certainly my colleagues consider to be [ nauseam ] about newness, quality and choice driving our ranges forward. And I do think that we have made a step change over the last 2 or 3 years in terms of the newness in some of our ranges. What I want to talk about today is just some of the work that we've done on quality and choice because it could sound like this was just an active will that, yes, the board save more newness and everyone rushes off and gets more newness, but it's much, much harder than that in terms of giving customers real choice, because it involves a whole lot of work that if you don't do it, you won't get the choice and quality that you would if you put the hard legwork into inspiration.

And I think, again, there's a bit of a myth here that people think, well, in an AI world, all you've got to do is ask ChatGPT what the latest trends are, and it will tell you. But of course, all ChatGPT can do and all our numbers can do is tell us what has been. It can't get those flashes of inspiration that our buyers and designers get when they go on inspiration trips to overseas capitals to new fabric fairs in Shanghai to new mills to new suppliers, exhibitions, art galleries, all of the things that give people that little spark of inspiration that actually you need a human being in our experience, you need a human being to drive. And you then need to spend the time designing it. And again, here, I think there is a trap because when AI first came along, people who -- I did actually sit down with one of our designers at NEXT been to St. Martins college, and she was saying what I've got to do is put these prompts into AI and it generates this wonderful graphic. And what -- that was exciting at first. What we found is those graphics didn't sell. It was pretty much universal. AI-generated graphics didn't sell. And the ones that -- it seems to be going the other way, the graphics and stripes and designs that really work, the color balances are the ones that are down with human hand, human eye and sort of have an emotional response. And we're putting more time into the work we put into painting, drawing, screen printing, wood block design, shape design.

And finally, you can get the inspiration and the design, but you then got to do the development to really elevate particularly fabrics and washes and dyes. And that involves not going to the supplier and say, can you give us a fabric that looks roughly like that. It involves going to the mill often long before you've decided what garment is going to go into and develop fabrics with mills. We're not doing that universally. Others do it more than us, but it is something that the more we do it, the better fabrics we get. And it's not just about the base fabric. It's also about the wash techniques and dying and spinning and yarn manufacture that drive or materials that go into home. The more we can do further upstream of the development does two things. First of all, it means we get better quality. And secondly, it means we're exposed to some of the new trends in materials that ultimately drive the trends in fashion.

All of that takes a huge amount of time. And so whilst technology and warehousing, we have reduced their cost as a percentage of sales, actually, in product, we've increased product costs as a percentage of sales, partly to do this and partly to seed new WOBL brands. And so our question, is this just a question of us throwing more money at it? Or can we be clever? And we think there is a -- we think there's a big pot of gold here basically. And that is the amount of time that we spend our product teams, this is not an admin team in product. These are the product people themselves. The amount of time they spend on admin is around 25% of their time. And I checked with one of our product because the sort of O&M people came back and said, "Oh, it's 25%. And I print one of our directors, is it really 25%? It can't be. And she actually said to me, no, no, it's more than that. And so the feeling is that it's actually taking more of their time. It's a bit like kids homework, things you really hate doing, things take a lot longer than the things you enjoy doing.

But nonetheless, those admin tasks are because there is more and more data that only the designer, the buyer, the merchandiser can put into the system, whether it be information that the fabric mills need, the regulators need, the imports team, export team, the whole management of data for the websites. If you don't put in a feature of a garment, if the buyer doesn't tell you that this is a super soft touch, whatever it is, then when the customer searches for Spersoft, it won't appear in search results. So buyers have to do far more in terms of managing website attributes, admin and store planning, warehouse warehouse management, all of those things require an enormous amount of data and only the product people can do it. And our systems at NEXT, when we have new people come to NEXT, the product people say these are brilliant systems. Your systems do in an integrated way what other companies do with a whole load of spreadsheets that are sort of loosely held together. And that's great.

But that integrated system is one that we haven't fundamentally changed since 2003. We just added the amount of data people put into it. And it works like a spreadsheet. It's incredibly arduous and difficult to put in the data and it's slow. So we're introducing three new product systems this year, Production Management System. This is -- production management. This is where we -- our merchandisers need to check that when the mill says they're going to produce the fabric on the 14th of September, they really have done that. And there's an interesting lesson for life here in that if you don't ring them and say, have you done it, it will run late. So you've got to do that. The squeaky door gets the oil and at every step of the production process, if we are not monitoring it and managing it step by step, things run late. So that's -- it's a very arduous task at the moment, the production management system, which to a degree allows our suppliers to link in and tell us when they've done things rather than us have to chase them or save a lot of time, got an online imagery and attribution system and the data entry system.

And then the last one of those, of all the systems at NEXT, that is the one that I get the most [indiscernible] complaints about. You could argue that's because product people are naturally more [indiscernible] than those who are prepared to take in other parts of the business, but it is a really important thing. We think those systems altogether can save at least half the time that we're spending on admin. And that is time that we can spend on doing the things that the product people are employed to do, which is produce brilliant product.

In terms of productivity, the other area we're getting good gains in productivity is our warehousing. We've talked about the GBP 500 million that we are planning to spend on Elmsall 3. We spent about half of that so far. And the good news is that is beginning to pay dividends in terms of costs. So we can see warehousing costs coming down as a percentage of sales. And I should stress that this includes the cost of the depreciation and rent of the new warehouses. So this is fully costed, still coming down as a percentage of sales. A lot of that growth, but not all of it is driven by people productivity. And what this shows is the pence per unit dispatched per customer, the amount we spend on wages divided by the amount that we send to customers in a given month. That varies month by month naturally. That's what it was in 2024. What you can see is that when we -- when we introduced new mechanization last year, we got a big dividend. And we thought that, that was it. The exciting thing is that partly as a result of fine-tuning the mechanization and getting it working better and partly as a result of a whole raft of things we've done to improve warehouse productivity.

We're still seeing gains. And I think there's further to go on that versus last year. I think that will continue. And part of that GBP 7 million upgrade today is the gains that we've got from the sort of unexpected improvement in productivity in our warehouses. In terms of service level, there's a sort of good news, bad news story here. Good news is this is our what we call NDOTIF, not delivered in full and on time. And this is a potential parcels that are not delivered on time and in full. I should stress this looks like a very bad number. This is the 2024 numbers. It looks like a very bad number. It's not as bad as it looks because the vast majority of failures are parcels where we deliver 4 of the 5 items today, but one of them is late and it delivered tomorrow. So this is not -- we're not saying 10% of everything feels late to customers, it doesn't.

2025, when we -- as we got the new mechanization working and new capacity, you can see that improved, still off our target of below 6%. This year, we started really well. We were below our target of 6% for 2 months. So we thought we were on to our winner here. But as volumes begun to increase and the warehouse begun to run hot, -- you can see that still better than last year, but we have seen a significant uptick. And what that is all about is it's about the glitches in the system and the mechanization. When you're not that busy, you can rectify and correct in day. When you're running up to the wire at volume, you can't afford to have those glitches and errors and some of the mechanization failures and system errors that are corrected very quickly, and we would tolerate in quiet times, we cannot tolerate at busy times of year. So we have got -- I think we've got a big job of work to do to go back and say, actually, we kind of -- we need to move towards a sort of zero tolerance approach to glitches. And it's not enough just to say we fixed them -- we need to do much more root cause analysis. We need to do much more volume testing to actually generate those errors in advance of them happening in simulation so that we can correct them before they happen. And that's a big job of work for our systems team. It is a lower job. It won't be as burdensome as it was with the help of AI. And that is my slightly clumsy segue into the next section.

Last time, we talked about AI across the board about how all the different departments were developing AI. I just want to focus on what is by far the most exciting part of AI development in the group, and that's how our technology team are developing AI. We started to introduce Assistive AI that I get told off for this, but to me, this looks a bit like a sort of a spell check on a predictive taxes for coders. So this helps you write code, and that's -- we introduced that in 2024, and it did affect both our headcount and our cost as a percentage of sales. So we think that was very positive. What we're looking at now is how we deploy Agentic AI. And where Assistive AI does it says it assists. Agentic AI really does the work. It actually does it. And when you see it, it is is astonishing. And only comparison I can think of is like the difference in a calculator and a spreadsheet. Obviously, you're all far, far too young to remember the first calculate. But I remember the first time age 7, I saw a calculator, and I was owed by it because I could work out whether my parents pivot the right amount of pocket money. I could adjust for inflation, all of those sorts of things. And I thought that was wonderful until the spreadsheet came along and then you realize the calculator is like a toy.

And that's what Agentic AI is compared to Assistive AI. And just to sort of put that in context of what we're doing about it. This is our total development life cycle. And a lot of businesses will use the same development life cycle. It's called Agile, starts with ideas and concepts, specification, coding and deployment and support. And those are the stages you have to go through. In terms of the people required to do that, you have lots of different roles. And they don't all do one -- they overlap in terms of those elements of the total development life cycle that they look after. And what we're doing is we are developing agents to sit alongside all of those roles and to do those functions. And the people managing those functions will move from sort of doers to managing the agents doing the task. That is kind of the vision. There is a lot of work to do here. And you can't buy an agent out of the box and stick it up and say, well, you get on with it, do my business specification. You need to put in the time to give the business context, the business rules apply guardrails, very importantly, apply security. It's a bit of a thing at the moment, but security is a big part of designing agents. You need to train the agents. You need to design them in such a way as that they're LLM independent so that they consist -- it doesn't matter whether they're using as a sort of underlying imagine, whether they're using Claude or ChatGPT or another provider of AI because if you don't do that, you end up overpaying for the underlying AI.

And you need to ensure that they are cost effective in terms of the way that they use processing power. So where we are up to with this is we've developed and piloted 3 of the agents, and we've [indiscernible] to deploy those 3 agents across some areas in the business. In terms of the total plan, we anticipate that we will have piloted all of these agents by February next year and be well on the way to deploying them by June, July next year. Now to me, this -- when you talk about systems project, normally, it's measured in years, not months. So I was surprised at the speed with which the systems team came to me and said they can do this. But so far, we have managed to pilot and deploy agents much faster than I thought would have been possible. And just to sort of give you a sense of the power of these agents, we -- on some of our websites and some of our apps, we don't have a share function. And we've always looked at it, and it's just been too expensive to develop and considered not worthwhile. And traditionally, in terms of development time, it would have taken 11 days to develop using traditional coding.

With Assistive AI, we've have got a good gain, maybe between 10% and 20%, it might have taken 10 days. When we gave the specifications to a coding agent to write, it took them -- it took it 24 minutes and 29 seconds to do what one of our coders with assistive AI would have taken 10 days to deliver. That's sort of 10 working days. It took about half a day, obviously, to manage the agent and then get the coding right and to make sure that to weed out the errors, but still a very dramatic reduction in time and a huge increase in productivity. There's a caveat here because it's a bit like that sort of demonstrated that works brilliantly. But then when you look at the whole thing, we actually -- and this whole project ends when we only saved 17% of the time. And that was partly because we had to put a lot of effort into developing the agent as we went along, and some of that will be reusable and partly because these agents will only really work really effectively when you stitch them all together. And that makes it looks like it was a sort of a rugby line with the ball being passed down actually, because there are lots of functions where different agents have to talk to 3 other agents. So the work to stitch these all together means that the huge gains that we think are possible will take time to deliver, but we're targeting 30% improvement in productivity by February '28.

Now you'll know that we spent GBP 200 million on software. So instantly, you'll go back to your spreadsheets and type in GBP 200 million, that GBP 60 million saving. Don't do that, partly because nearly half of the cost of what we spend on systems is infrastructure and software. And obviously, the cost of that with agent will go up. But also don't assume it's GBP 35 million saving on people because if we -- if that were to be the case, it would be a huge failure because the really exciting thing about this in the context of a company turning over GBP 6 billion, the GBP 35 million isn't what matters. What matters is the ability to deliver projects so much faster. There isn't a single project in the business, single new project that doesn't, in one way or another, involve a system change, and it's normally the rate determining step. So our hope is that the speed at which we can write software will accelerate the speed at which we can develop the whole business.

I think the other point to make is that it's not just about speeding up projects we would have done. It's about doing projects that in the past just wouldn't have been conceivable. We have a mainframe that sits at the heart of all of our stock and price processing. It's incredibly effective machine doing huge amounts of data in a very short period of time. And -- but the coding for it, I said in the report hundreds of thousands. I checked with the hundreds and thousands of lines of code. But the person who knows about these things said, actually, it was millions, but I didn't want to put that because you think I was exaggerated. It's millions of lines worth of code that is -- have been built over time and desperately needs to be modernized in order to speed up the rate at which we can improve and modernize the rest of our software. When we last looked at this, the cost was GBP 50 million. We still would have done it, but it wasn't the cost that held us back. It was the fact that actually the business with the ground to halt, -- because so many other projects would need mainframe development time that we just couldn't afford the time.

We now think and are planning to start modernizing our mainframe coding, and we think the cost will be GBP 10 million, and that we'll be able to do it in a modular way that allows the rest of the business to continue moving forward. That does beg the question like what are people going to do? And there's -- I think as well as producing far more volume and developing ideas we wouldn't have been able to do before. I do think the nature of systems work is going to change. Solving business problems, advising new applications, making the business aware of what this new technology can do, training and managing our agents [indiscernible] agents, building new agents, maintaining the security of the system, integrating with third parties and controlling costs are going to be a big job of work. So my hope is that we don't see a big reduction in people. I think over time, we will see less cost, but the real drive is to generate more productivity and more production.

Just as a final note on costs, we spent GBP 200,000 last year on AI, GBP 1.2 million this year. We'll spend at least GBP 3 million next year. And unless we design our agents very, very rigorously to use costs carefully, we could end up spending more on AI than we did on the original people, not quite, but we could end up spending a lot of that productivity gain. So there is still a big job of work to do, albeit a very different type of job.

And on that note, we're going to finish and go to questions. I think the summary is we haven't done what we often do is go through every area of the business and say what we're doing. We just -- we picked three areas where we think there are really exciting projects, product, warehousing systems. What I want to assure you is that pretty much every area of the business has exciting projects. The -- this is not the three things we're working on. These are three of the things we're working on. But what I hope they can do is give you a flavor of the sort of depth of thought and energy that is going into different parts of the business to move it forward. And on that almost motivational note, I'll throw to sorry, -- remember to use the microphones, everybody.

It's Anne Critchlow from Berenberg. I wonder if you could talk, please, about input costs, so polyester, cotton freight and any sort of price increases that you might expect to put through for spring/summer on the back of those? And then secondly, could you talk about your thoughts on whether it's more attractive at this moment to create new WOBL brands organically or perhaps look for acquisition opportunities?

Yes. So I think the answer to the first question is that we're not seeing nearly as much of the costs filter through to factory gate prices as we thought. So if I look at what our current -- the contracts we have placed so far for spring/summer, we haven't placed a massive amount, but the amounts we have placed for spring/summer, we're looking at like-for-like price increases around 1% to 2% -- so not much.

And I think there are two different things going on here. There is an increase in input prices, but part of that has been papered by an increase in productivity in our supply base. And there all this technology, they're getting smarter as well. And I wouldn't also underestimate the impact of the reduction in duty on goods from India. We get a meaningful percentage of product from India. If all of that -- if -- and I'm not saying we do, but let's say we get 10% from India and duties come by 12%, that reduces our total prices by 1%. But it's not the effect on India that is the most dramatic thing. It's the effect it's had on all the markets competing with India. They have had to sharpen their pencil as a result of that.

So 1% to 2% is the short answer. And in terms of WOBL, are we getting more productivity from buying in a brand or from developing a new one? There is no rule of thumb. Some of the brands that we bought in have been amazing and some have been average. And some of the brands we started from scratch have been phenomenal. I mean -- but some of them have failed. So I think what it comes down to ultimately in both the ones we buy in and the ones that we develop is the quality of the idea behind them rather than whether they are bought or devised.

It's Freddie Wild from Jefferies here. A couple, if I may. So first of all, possibly the slightly more boring obvious question on this U.K. slightly downgraded outlook for half 2. Is that anything you're seeing now? Or is this more just you looking ahead at the various input costs people are facing and the extent to which that could carry through to FY '28 as well, please?

Second question is around the competitive landscape in Europe. Obviously, big changes to [indiscernible]. You flagged the impact on the media spend there. Are there any broader impacts you're seeing in terms of pricing, competitive behavior, stuff like that? And if I could squeeze one very final one in.

If we had time at the end, we will definitely come back. Otherwise, you get inflation. We've got to fight inflation in all things, especially analyst question. So in terms of your boring obvious question, are we seeing the numbers now? I think the boring -- giving you a boring obvious answer is that I have to tell you what our trade was. And that will be a trading statement, that would be new information that will be coming to the market, which I don't think is appropriate in an environment even as August as this one.

I think we have definitely seen some softer weeks in the -- I'm not going to give you an average for the last 7 weeks. We have seen some softer weeks. I think there are signs. But I think what we said in the book is that this is more about our anticipation than what we've seen.

And the next question, which is much more exciting is the competitive landscape in Europe, which is such a big subject that I wouldn't want to sort of get into the nitty-gritty of it. I think we're not seeing any significant change that we can discern. But I think the other thing is, to be honest, is we don't spend a huge amount of time looking at it because the most important thing that we look at is what response are we getting to the product that we are selling in the various countries that we sell it. And we're constantly experimenting with prices and services in order to get that balance right. So we're kind of trying to feel our way to what is the right level of price for us and how much we can spend on marketing rather than looking at market data and then trying to tell you what we do to that because actually, much better to be responsive and look at your own numbers and you are to try and impute what's going on and then respond to phantoms that may or may not exist.

Matt Clements from Barclays. First question on -- you mentioned the shifting spend from cost to serve to marketing. I just wonder what the market implications of that are? Is it going to drive an acceleration in market consolidation, do you think? Or is it net neutral? And the second one on international margins. You mentioned what having more pricing power. Any color on that relative to NEXT brand? That would be very helpful.

Yes. So I think just starting with the pricing power. I think, again, this is very much test and trial. It's that's not that we started with the assumption we can get more pricing power. It's that we put it on at a certain price. We've got very good traction. And it was only when we stopped and looking at actually at 24%, we are over profiting and leaving these businesses vulnerable to competition that we lowered it to 20%.

So I suppose I think if you say to me -- put the question slightly different, do you think you've got room to increase your prices in Europe without affecting sales? My guess to that would be probably yes. But I wouldn't want to do that because we wouldn't want to risk it. We're making a very healthy profit. So -- and it would be quite a big risk to take. In terms of market consolidation, again, I think that's way above my pay grade. I think that is something that you and your big economics departments will do far better than I can guide you on, Richard?

Richard Chamberlain from RBC. Simon, I think you mentioned that the U.K. retail stores, you've seen some quite significant productivity improvements in the first half. I wonder if you can give a little bit more color on which ones had the most impact on margin?

And then second, in the U.S., which you're now breaking out in terms of disclosure or giving a little bit more, I guess, given the dominance of Amazon in that market, particularly in areas like kidswear online and so on, should we assume that the U.S. sort of structurally will be a lower margin market on the sort of medium- to long-term view for NEXT, given Amazon sort of customer focus likely presumably higher take rate and so on. Yes, they are the two questions.

Yes. So U.S., I think it's a good question. I think it will have a lower profitability than our other businesses, mainly because at the moment, we're shipping stock from the U.K. to the U.S. and that is much more expensive than shipping it to Germany or even the Middle East. So I think that structurally, the question do we pay for that to be the customer, well, we're paying for most of it. So the margins are low, but still more than 10% so still comfortable margin in the U.S.

In terms of productivity in stores, but just sort of coming back to sort of your question on pricing, we didn't start by looking at the market and saying what prices can we afford to charge. We started with the prices that gives us a respectable margin and then see if we can sell that.

In terms of stores, there is no one measure that was introduced. It's not like we suddenly introduced self-serve [indiscernible], although we are trialing that at the moment, but we have not introduced any new technology. What we have done that is making a big difference is we have lots of different productivity measures in stores. So we can see how productive each member of staff is on, say, TIL transactions, the average time and TIL transaction, a store pickup for collection for a directory online customer, replenishment from Stockholm and shop floor. We can measure all of those things. And what we were doing is we were measuring -- in the past, we were measuring those in silos going, well, let's look at our delivery productivity and focus on improving the productivity of the people at West. What we're now doing is looking at it horizontally. So we're saying, for you, Richard, how do you do on all these different areas because that is a much more effective way of finding people who've got the opportunity to be more productive than it is by trying to do it. Your delivery manager doing deliveries and your TL manager doing TILs. So I think that's the biggest change.

Richard Trainor from Bernstein. First question on AI. You contrasted its inapplicability to the inspiration and design process in clothing with its applicability in the technology function. I was wondering if there are other areas of the business where you think AI will be very helpful?

And secondly, I was wondering about the impact of peer-to-peer marketplaces and whether you see them having an impact on markets in the U.K. or abroad? And if so, in which types of product?

Peer-to-peer...

Yes, peer-to-peer reselling marketplaces. I'm thinking of [indiscernible].

Right. So nothing about the House of Lords. Just checking Okay. Just right. In terms of AI, we -- at the half year, we did talk a lot about all the different departments. I won't go through it all again. But if you're interested to go back to the half -- the full year report in March. AI is applicable to every single department. And it's still applicable, by the way, to product. One of the new product systems from data entry thing, not in Phase 1, but Phase 2 of that on the data entry, the -- our product people will be able to take an e-mail from a supplier with say the fabric content of a fabric and just put it into AI who will then populate the data entry rather than having to transcribe it. So there are -- I wouldn't want to say that there's no applications for AI in product. There are. But it's everywhere. I mean the call center are pretty much as advanced in terms of their use of AI as as technology.

Warehousing and Retail, we haven't -- we're only scratching the surface, but there's huge opportunity in warehousing. In terms of warehouse management, the elimination of high-volume glitches, all of those things, I think AI can help us be much smarter at identifying root cause analysis on problems, better responses to those problems. You can see a sort of ever-watching eye that's bright and that can see work out consequences of one area in a warehouse and what effect it will have on the whole chain of events after it and where you need to boost production further down the line to compensate the blockage earlier on, that there is an enormous amount that the various departments can do with AI. But I don't want to sort of repeat what I said earlier on.

In terms of peer-to-peer market, it may well grow, and it's -- I think what it offers is something different from NEXT, and I don't think -- it may well have an impact on us. But as with past things where different models impact on us, our instinct is not necessarily to copy them because I think one of the things that we really -- that goes to the heart of NEXT service is reliability, fit, ease of return, pricing consistency. And none of those things can be offered on a peer-to-peer basis and just the quality of service, will it turn up on time, what do you do if it doesn't turn up on time. So it may be a fantastic market, but it's not one that we're actively looking at, at the moment because it would -- we would have to forgo so many other promises that we make in terms of our existing service.

Sreedhar Mahamkali from UBS. A couple of questions. Just to follow up on Richard's question on the U.S. earlier. You certainly sounded -- maybe it's just my read of it, sounded a bit more positive on or satisfied at least anyway on the U.S. performance here. Have you made any changes in terms of product or how you enter the market that's delivering perhaps better growth from a lower base, better engagement? If you could talk to that will be great.

And secondly, I think you've introduced this concept of underlying sales growth, 8% second half. What exactly is it? Is it the growth that you should expect to see if you don't spend any more on marketing or if you keep marketing flat line from here? And what would that look like in, I don't know, 2 years' time? How should we think about it?

Yes, you shouldn't. It would be my advice. I think because it's a remainder, -- it's not a thing. It is what's left over. So what we -- for each of these marketing campaigns, we identify incremental sales. And one of the [indiscernible] checks we do on whether the sales are really as incremental as we think we are is if we add up all of the sales that our marketing team tell us that we're generating, what does that give us in terms of growth?

Because if it gives us 50% of growth that's actually 20%, you know that they're overestimating it. So the underlying number is really a remainder number. It's the growth that we can't attribute to marketing, which you might assume was either people coming to the website naturally or existing customers unprompted buying again. But you'd be a lot braver than we are if you assume that, that will continue on adding for item. Was that it?

On U.S. You said a lot more excited about the numbers as well. 250%, it's hard not to be excited about. I would stress it's still a very small number. 250% on GBP 10 million a year is still not a lot, particularly at relatively low net margins. So we're not getting excited about it yet. In terms of what's triggered it, it's really all about different avenues of marketing and reaching the customer. We haven't changed the product offer or the pricing significantly.

It's Warwick Okines from BNP Paribas. Two questions. Firstly, you've talked, I know a lot in previous presentations about newness. But you did, I think, talk about the -- in your statement about menswear lacking a bit of newness. I wondered if you could just go into a bit more detail about that, maybe sort of why after all the progress you made in women's didn't quite come through in men's and what you're doing about it?

And then secondly, on the average spend per cohort data you showed, which is really interesting, you excluded the good stuff, the Middle East. Is there anything that you can learn from the Middle East? Or are there any attributes that you have in the Middle East that perhaps are applicable to Europe or any trend that you're seeing that Europe is moving more towards that Middle East and sort of cohort retention?

I think -- I'll answer the second question. I think the only thing you learn is if you sell to very wealthy customers, they like to buy more. So I think the -- I think it's about the mix of people who have chosen to shop with us rather than anything that we've done.

In terms of menswear, yes, we don't talk a great deal about different areas of the business and I'm definitely not going to go into sort of chapter and verse about what we're doing and all the rest of it. But I think it was important because the key there actually and when you read through it, is that the thing that drove the lack of newness was the extraordinary success our menswear teams have had over the previous 3 years. And there is a thing in fashion where success can lead to failure, can sow the seeds of failure because the more successful last season was the harder it is to let go of that [indiscernible] and to kid yourself that this year's [indiscernible] Chino and [indiscernible] Chino are fundamentally different and new from the Tope one that you did last year. And I think in essence, that's one. I think the other thing that's interesting about that is that it is a phenomena that when I look at the other businesses that we own that we've seen in menswear generally, I think the same criticisms could be made of some, but not all of our subsidiary menswear teams as well.

So I think that the reason I put it in wasn't in order to give shareholders more color about the business. It was in order to encourage the teams involved to sort of recognize that actually there's a big job of work to do. And what I would say is the only reason I put it in or the reason is because it's already started. I wouldn't want you to think that this is something that we've just noticed, and this is something we've been working on for months, but I thought it was worth mentioning partly to sort of encouragement to that whole market to sort of think about what we can do to develop it and what we can do on licenses and WOBL as well. I haven't really got any WONL or licenses on menswear. But also as an example that proof that things do work is provided by the evidence of people who are not doing it, not doing as well. And that was the real point to give more encouragement to people who are introducing newness and choice.

It's Monique Pollard from Citi. My first question was just you did a lot of detailed work on the customer cohorts for the International Online business. And given you have all that granular information now about how they're spending, how you're retaining them, et cetera, whether that then gave you more confidence in the returns you can make on the ad spend and gave you perhaps a bit more confidence to boost that marketing spend over time?

And then the second question I had was just on the U.K. Online business. You commented that the higher average selling prices and the lower returns rates had reduced your costs as a percentage of sales. So I just wondered how much the returns rates had lowered and why? And how different those U.K. returns rates were from the international business?

So starting with the second question. In terms of returns rates, generally, International returns rates are much lower than they are in the U.K. And that's not necessarily a good thing. It's because it's much harder to return in France where you don't have lots of shops to return as you go in the U.K. So generally, returns rates are lower overseas other than in Germany, which is a market where there are just traditionally very, very high returns. We get high returns in Germany. But pretty much everywhere else, returns are lower than they are in the U.K., but I don't think that's a good thing. I think it's a bad thing because we're not giving as good a service as we could do.

In terms of the sort of lower returns rate, I wouldn't want you to think that's because we've done something clever about sizing or virtual fitting rooms or anything like that. It is literally -- it's just a mix issue that it's going back to some brands and some parts of NEXT as well, but mainly brands who put on low-price, high-returning product is actually that item, you've either got to put the price up or we've got to take it off the website. So it's really by excluding high returning low average selling price items that the mix has changed, not to us doing something to make the same jump of return less.

On the marketing spend, -- the return on ad spend...

So a very good question. But again, I think it's not the way we look at it in that, yes, that data has been enormously important in driving the marketing forward, but not because at a high level, it's right. It's because the marketing team will look at each campaign they're doing in each country and look at how many customers for that type of campaign order a second time. and the third time. And if that campaign has high retention levels, that type of advert, let's say, advertising for women's shoes and the customers more likely to come back on women's shoes than they are on skirts, then we will do more advertising on shoes. So it's not that the sort of big picture drives me to say, come on marketing team spend more money. It's actually entirely the other way around. It's the adverts that produce returning customers are more likely to be increasing volume because they generate higher returns.

David Hughes at Shore Capital. Just a question on the U.K. Last year, obviously, you benefited from disruption at a competitor. I was wondering if you had any insights from retention data around those customers as to how much of that you were able to hold on to? Was it more or less than you expected? Or did you see a lot of that kind of go away and be a bit of a one-off benefit?

The answer is we don't know because when customers come to us, they don't say and just to let you know, I would have bought this somewhere else, but I didn't have bought it from you. So we honestly don't know. But looking at the fact that we -- if you look at the 2-year growth versus the 1-year growth in our stores, I think you've got to conclude that some of that must have gone back, which is what we expected.

Anubhav Malhotra from Panmure Liberum. Just one on stores. You mentioned in the presentation that new stores are delivering better returns than your internal targets. Just a bit more color on what is driving that? Is it better locations that you are selecting, lower CapEx or better rent deals that you're getting?

Yes. So the biggest single change is more realistic targets. I think -- as I said, I think it was a year ago, because we hadn't opened stores for a long time, when people are estimating stores, they're going, "Oh, I know what we'll take in Chester because I remember what we used to take 10 years ago, and that was the mistake. What a new retail park should take is X, but that was what a new retail park took 10 years ago, and it's different today. So I think we've reined in our expectations.

The reason we still managed to open stores is because we are also being much clever about what we spend on new stores. So the big problem with new stores is a huge inflation, GBP 125 a square foot 10 years ago to GBP 200 a square foot today. And when we're looking particularly where we're going into other people's stores, saying, actually, we don't need to refit all the stock room and the floor isn't our brand floor, but it's still a very nice floor, so we're going to keep it. I think sort of really managing shop fit costs and getting targets right are the two things that I think have changed.

Good. And on that, bombshell, we will finish. Thank you very much for your time.

Good morning to everybody. Before I hand it over to Simon, just a few comments. Two long-serving Board members, Jane Shields and Jonathan Bewes will be stepping down from our Board of Directors in May. Jane has worked for NEXT more than 40 years. You don't see that much anymore, do you? More than 40 years and been on the Board of Directors since 2013. Jane's contribution to the success of the company has been substantial, both at the operational level and certainly at the Board level. And I would just say, I think Jane represents the best qualities of what we have at NEXT plc. Jonathan Bewes has been a Board member for 9.5 years, and he has been Senior Independent Director and Chairman of the Audit Committee, and he's made significant contribution. So I'd say, Jonathan, many thanks for your work and your service on the Board.

I would like to welcome two new Board members, Annette Court and Jeni Mundy, who will be joining the Board. Annette started on March 1, and Jeni will be starting on April 1, and both will stand for election at the May AGM. As you've seen, the results for the year ended 2026 are very good, and it certainly reflects the broad strength of the group as we outperform in all areas, be it retail or online U.K. and certainly in the international markets. Before I turn over to Simon, I would like to recognize and thank our more than 40,000 employees globally for their daily decision-making and basically making things happen for NEXT throughout the world. Simon?

Thank you very much, Chairman. All right. Good morning, everybody. Slight change of order to things today because I know some people like to slip away early, so I'm going to give you the punchline at the beginning. Punchline is about next year rather than all the stuff that last year. And in terms of next year, the big news today was that there was no news. We've held our targets. And you could look at that 4.5%. In fact, I think most people did look at it in January and think that it was pessimistic. And if you had only looked at our U.K. sales in the 8 weeks in the run-up to our announcement, then you would definitely agree that, that was a pessimistic assessment. However, if you were to look at what's going on in the Middle East and the potential knock-on effects in the U.K., you could argue that it was optimistic.

And just in terms of the Middle East, I suppose first thing to say in terms of the U.K., the numbers, we had -- those first 8 weeks did not include the really big numbers we hit as the weather improved this time last year. We got some significant benefit from an early summer, and we're just about to hit those numbers now. In terms of the Middle East, it represents 6% of our total sales. We lost -- for the first week of the conflict, we lost virtually all the sales because it was our operations stopped working. We are now serving all of the territories in the Middle East. A few of them are on slightly longer lead times. But because we've got a hub in the Middle East, we are able to service them directly from stock based in the Middle East, which means we're not dependent on airfreight for anything other than replenishment.

And we are shipping stock to the Middle East and replenishment runs at the moment, but that comes at a cost. And in terms of the cost of the conflict, we have quantified that at GBP 15 million, and that's GBP 15 million for 3 months, assuming the current levels of surcharges, disruption oil prices last for 3 months. That could be wildly optimistic or it could be pessimistic. We don't know. In terms of the breakdown of that cost, GBP 8 million of it comes from the outbound stock from the U.K. to our customers overseas. Of the GBP 8 million, GBP 5 million of it is Middle East costs. The rest of air freight surcharges to the rest of the world. We then got inbound costs. This is mainly the surcharge on container rates as a result of fuel price increases. That's around GBP 4 million.

And then U.K. energy costs we anticipate incurring additional costs of around GBP 3 million. And what I should stress is that those numbers are very volatile, first of all. They're just throwing forward the costs we have today. And the second thing I should say is that we've offset all of them by cost savings or margin gains that we've identified since January, around GBP 8 million to GBP 9 million from margin gains and the balance from lower revenue expenditure, mainly systems. The biggest difference between now and January is that we brought our systems budget down by around GBP 6 million. In terms of -- don't take that number and multiply it by 3 to get to the cost for the rest of the year because if it looks like this is going to persist, we will begin to pass through those costs to consumers, specifically in the affected regions, but also in the U.K. In terms of U.K. prices, that would mean prices going up between 1% and 2% from where they are today in probably June, July if things persist.

The much bigger worry, if you want things to worry about, which obviously you do, is the cost of goods because things like polyester and energy costs are a huge percentage. Energy costs are a big percentage of fabric as is obviously polyester. So I think you could see significantly larger increases in cost of goods coming through probably October, November is when those will begin to hit down again if the conflict persists. So that's sort of business affected costs and the potential impact on selling prices covered. The one thing I should say about that 4.5% is just a reminder that at this time last year, we were -- our guidance was at 5%. So the 4.5% guidance does not limit our ability to outperform that number.

Now I think with things in the world as they are, I think that's unlikely. But what I want to stress is a cautious approach to a sales budget because we always buy markdown stock and we can eat into it. A cautious approach to sales budget always leaves us with the potential to beat budget if the demand is there.

Moving on to last year and starting with the P&L. And just to remind you, this is all on a 52-week basis and not consolidated. Total group sales up 10.8%. Total full price net sales up 10.9%. In terms of the breakdown, retail stores up 3.5%. In many ways, that's the most remarkable number here. And we think that number is the one that is most flattered by the good weather in summer and the disruption to a major competitor. And we'll talk about each one of those as we go through.

In terms of profit, profit up 13.9%. And the vast majority of the difference between the growth in sales and the growth in profit is about leverage over fixed overheads and some margin gains as a result of improved clearance of upstock through directory online. Profit before tax, up 14.5%. The drop in interest charge here is all about the fact that we didn't buy back shares during the year. So the cash that we accumulated during the year had interest on it that came to around GBP 8 million. So that reverses out in the year ahead. And obviously, you get back in earnings enhancement what you lose by way of P&L more than what you lose from the P&L cost.

In terms of the quality of earnings, good quality of earnings. There was a very big noncash gain from GBP 20 million release of bad debt provision. That meant that our finance department worked even harder than usual to find looking every little nook and cranny of the business to check that all of our provisions were where they should be and that we had enough impairments for our small businesses. And we've -- so we've taken another GBP 14 million of impairment costs there to offset that GBP 20 million has offset it, not to offset it, obviously.

And then some foreign exchange gains just on the instruments that carry over from one side of the year to the other. Earnings per share up 17%. The main difference between last year's profit before tax and EPS is the boost from the previous year's share buybacks. We didn't buy many shares back last year. Ordinary dividend up by 15%. That gets us back to cover of around 2.8x, which is where we want to be and GBP 3.60 return to shareholders by way of capital by B share scheme, and that is in place of the buyback because we were out of the market. We're now back in the market. Thank you very much for your help with that. And all of the numbers that we'll tell you today will be on the basis that we can continue to buy shares throughout the year.

In terms of the cash flow on a consolidated basis, and this is looking at a 53-week year, GBP 147 million from profits, another GBP 24 million from the 53rd week of cash. In terms -- not much change in depreciation, that's gone up much less than sales. CapEx up by GBP 17 million, slightly less than the forecast in the half year, and that's all about the timing of store CapEx. So GBP 168 million last year. The really interesting number is the number this year because we've gone back and we've significantly increased our estimate of what we'll spend this year. And all of the increase is in warehousing. So I think we'll spend GBP 237 million this year. It's all about our Elmsall 3 warehouse. I'm going to go into a lot of detail later on, which is something to look forward to. But just to say this is a good thing. This is because we're growing our sales faster than we expected.

In terms of throwing that forward because this is a sort of 3-year investment program in warehousing, we're looking at CapEx at around the GBP 250 million level for the next 3 years, we think. You might look at that and worry that NEXT has become fundamentally more capital consumptive. The business is entering a phase of strong capital consumption. Actually, this is our history of CapEx over the last 20 years. If you look at CapEx as a percentage of profit, which is the right measure, what you can see is that the 19.6% we're at this year is just below the last 20-year average. So fundamentally, the business is not more capital consumptive. It's just that in periods of strong growth, you have to invest more. In the periods fellow years, you invest less.

And I think the other really important thing that this graph demonstrates is that if you look at the data for long enough and hard enough, you can always find the number you want. Working capital up GBP 46 million. The real difference here is the GBP 19 million increase that our aggregator partners owe us. That is all as a result of our sales increasing on their website. They keep -- they take the sales, take their commission hand on a month later the sales. So there is a debt there. The faster that grows, the bigger that debt grows. All the other movements in working capital were one-off. There was a one-off movement in the timing of aggregator payments. We got a benefit last year from that. We get this benefit this year.

Cash in transit, this is a new accounting standard that we have rushed to embrace, and it's actually very sensible. It means in previous accounts, we had accounted for credit card sales as if they were cash and not accounted for 3 days that the credit card companies take to pay us. So this accounts for that conforms with new accounting standards. And also, I think for me, in the last 25 years, a bit of a landmark moment as well because this is the first change in accounting standards that I really agree with. In terms of surplus cash, GBP 129 million of surplus cash distribution to shareholders, GBP 221 million. The difference between that, the GBP 93 million difference is that last year or previous -- year before last, we were accumulating cash on the balance sheet, GBP 40 million of cash accumulation in anticipation of paying down the bond. This year, we got the bond away, and we've returned our leverage to its historic norms at around 0.63. And so there is a cash about GBP 53 million more of debt funding that difference.

In terms of stock, stock up 8.8%. The NEXT stock as at week 52 was up 7%, so broadly in line with our sales increase. You'll note for the last, I think, 3 or 4 sets of results, we've shown stock increases much greater than sales. And what you can see from this is that those increases have stopped, but we haven't reversed them out. We're going to keep a little bit of extra cover in the business in anticipation of the sort of disruptions that we've seen over the last few years potentially happening again. We think it's better to have a little bit more cover, we didn't suffer from it last year.

In terms of customer receivables, customer receivables up 2%. You would expect those to be up much more than 2% given the growth in our credit sales at 5.8%. The reason that we haven't got that growth is because our debtor days continue to reduce. They reduced by about 3.6%, which accounts for the difference in those 2 numbers. The reduction in debtor days is reflected in much lower rates of default. And what you can see, if you take a sort of pre-COVID to now view, you can see that our default rates have dropped to 2.2%. That is lower than the company ever has certainly as long as I worked for the business. We've never seen default rates that low. That 51% reduction is a little bit deceptive. It's not because 51% fewer customers are defaulting. Actually, the numbers of customers defaulting is around 8%. The -- what's the big difference is the balance they're defaulting at and this is the result of much tighter and better credit controls that we've implemented over the last few years. And one of the sort of advantages of some of the machine learning algorithms we've had and just greater vigilance.

In terms of provisions, we're still comfortably but not over provided 6.9% as against default rate of 2.2%. So we've still got room for that to move the other way if it does. In terms of other debtors, I've talked about international aggregators, talked about cash in transit. The GBP 20 million of interest-free credit is because last year, we switched to funding our own interest-free credit for furniture in stores. That hadn't -- for the previous year, that didn't fully annualize until last year. So the tail end of that cash outflow is what you're seeing in that GBP 20 million.

In terms of creditors, up 9%, broadly in line with sales, what you'd expect. In terms of net debt, net debt up 8%, I'm going to talk in a lot more detail about that in a moment. And then in terms of net assets, increase of GBP 26 million. It's only GBP 26 million, and that's what you'd expect because the vast majority of surplus cash we have rightly given back to shareholders. In terms of debt, the GBP 713 million was lower than where we targeted year-end debt. That's all about timing of payments. So we targeted GBP 739 million of year-end debt and leverage of 0.63, which is where we think is a good place for a retailer of our type to be.

In terms of inflows in the year, we expect GBP 978 million of cash inflow, CapEx and dividends of GBP 237 million, GBP 300 million, respectively, GBP 500 million returned to shareholders through buybacks or other means. And that would get us back to the 0.63 leverage of GBP 790 million. In terms of buybacks, we've bought GBP 196 million to date, and our plan is to continue that evenly through the rest of the year. In terms of funding, started the year with GBP 1.2 billion of funding. This year, GBP 114 million of 2026 bond is repaid. That leaves us at peak with GBP 205 million of headroom. We think that's sufficient for the business. But if market conditions are right, which they're not at the moment, but if market conditions are right, we will almost certainly issue another bond between GBP 200 million and GBP 300 million or look to increase our RCF to give us a little bit more headroom.

Moving on to retail. We had a good year. Total sales up 2.4%, full price sales up 3.5%. The difference was the fact that we pushed more of our clearance sales through online and out of retail. New space gave us 1.2% underlying like-for-likes of 2.3% up, which is in the context of the last 10 years, a very good number. Profit down 5%, which is given how strong the sales were a very disappointing number. When you look at the change in margin of 0.8%, that all is down to one factor and one factor alone. if you look at the cost of national insurance and the increase in national living wage and the numbers of the young people who moved on to the higher rate, the total cost of that was 1.4%. So had wages risen in line with sales, then we would have seen flat margins, positive margins actually.

In terms of new space, and there's a little bit of a story here. I softened you up for this 6 months ago. So this should be no surprise. We missed our sales targets on the stores that we opened by 12%. And this is not because we had one big store that missed it. This was, I think, 12 out of 15 stores missed their target. What that meant was that although we were comfortably within our profitability target, we weren't, we missed our payback target. I don't think the miss in target and the 24 -- the missing 24 months are entirely unrelated. I think in reality, our sales team who put the estimates on the stores pushed the sales as far as they felt comfortable in order to hit those criteria to get the shops open.

And in hindsight, that was a mistake. But as it turns out, it was a very profitable mistake because if we look at the amount of profit those stores are making, it's GBP 6 million of profit. over 30% internal rate of return. And if the landlords came back to us and said, I'll tell you what, you can have the shops back and we'll give you all your capital back, do you want it? My answer to that would be, no. So I think we've come to a bit of a big decision is that either we say, look, we're just in an environment where like-for-likes per square foot over the last 10 years down 30% and shop costs up 70%. We either have to say we won't take advantage of any opportunities to open new space or we'll change our criteria. And we've opted to move the goalposts. We don't think these are crazy levels of risk. We said internal rates of return at 27%, which equates to a payback around 30 months. And we think that's enough to be -- to get the sort of returns you need from stores to pay for the risk, but not so much to prevent us opening any shops going forward.

In terms of the year ahead, we're expecting the one-off gain that we got in stores from a very good summer and competitive disruption to reverse out in the first half. We're expecting so total retail sales to be down 1.5% with 1.5% coming from space. Profit down 6%, that's around GBP 12 million hit to profit margins at 9.7%. So still comfortable retail margins. In terms of U.K. online, and just to remind you, I'm going to show you our U.K. online sales separately from international sales because the dynamics of the business are very different.

In terms of U.K. sales, total sales were up 10.2% full price sales were up 8.7%. The difference was all driven by the increased warehouse capacity. Because we had more warehouse capacity, we were able to put more of our clearance stock online, both in the U.K. and overseas. That was more profitable than putting it through the retail stores, but that's what accounts for the difference. In terms of the balance of trade, just over half our business online is now NEXT brands and wholly owned brands, which are a full margin at another 9% and then third parties around 1/3. In terms of the growth of those areas, what you can see is wholly owned brands and licenses had an exceptional year. I'm going to talk a lot more about that later.

I think the exciting thing for us was the fact that the NEXT brand, despite the increased competition from brands that we own, the NEXT brand still managed to move forward, which for us is confirmation to some degree that we're not just competing with ourselves as we add new brands to the website. In terms of margin, margin moved forward to 18.2%. In terms of where the margin gain was made, what these lines show is the difference between what's happened to the NEXT brand margin and the non-NEXT brand margin. You can see pretty much all the gain has come in the non-NEXT brands. So doing mental gymnastics where we sort of changed the axis and just walk forward the U.K. online NEXT brand profitability. You can see there's a no score draw on gross margin.

Warehouse and distribution is flat, but there are a lot of things going on there. Wage inflation eroded and would have eroded margin by 0.8%, but leverage over fixed overheads and some of the efficiencies that we're seeing from the new warehouse pay for that. And then marketing and technology, slight leverage here. Technology, we're now beginning to get to the point where our sales -- our costs are not rising anything like as fast as sales. That's good news. And marketing is a surprise there. We have significantly increased our marketing budget, but not by as much as sales.

In terms of the non-NEXT brands, two things, a gain of 0.5% on gross margin, two things going on there. The elimination of unprofitable brands where the commission rate was too low and weeding out some of the less profitable lines. And there, we said to our partners, basically the choice, either we can't sell a product or we might have to put commission up a bit. On the whole, they opt for the latter. And then because our wholly owned brands are growing much faster than third-party brands and we make more margin on them, that pushes the mix, the margin mix up.

Big gain on warehousing and distribution here. And that's because wage inflation loss is lower on the branded goods because they're more expensive, so the labor content is lower. They're growing faster, so leverage over fixed overheads and the efficiencies are higher. And because we've weeded out some of the high returning low average selling price items, as a result of that, we see another 0.4% improvement in margin. So non-NEXT brand is still a long way behind NEXT brand in terms of profitability, but they have moved forward significantly.

In terms of the year ahead, we expect U.K. online growth to be 4.6%. Margin nudge forward to 18.8%. That's mainly about reversing out large staff incentive payments for this year as a result of having such a good year. So it's not an operational saving. In terms of international business, international sales up 35% at full price, 39% in total. Again, that's a reflection of increased capacity to sell markdown through the online channel. I'm going to do a bit of a Grand Old Duke of York story here and talk you up the hill and then back down. So what I would have said before the Middle East conflict is be aware of the first half numbers because the first half numbers are likely to be much better than the second half in the year ahead because last year, we dramatically increased the amount of particularly wobble brands we were selling on our overseas websites.

And we got a big step change increase in sales through Zalando as a result of consolidating our warehouse there. That reverses out, that annualizes in the second half. So all things being equal, you would expect the first half to be stronger than the second, but obviously, we've been hit by Middle East disruption just before ED, so that pretty much wipes that out, which you'll see later. In terms of third-party versus NEXT websites, third party is around 1/3 of the business. In terms of the growth, on the NEXT direct business, that was 29%, of which we estimate 22% was driven by increased marketing. Third-party aggregation, up 46%, of which 10% came from the addition of new aggregators and existing aggregator business boosted by the consolidation in Zalando.

In terms of distribution of the business across the world, Middle East still around 28%. That distribution hasn't changed dramatically. What is encouraging is that pre-conflict, we were growing pretty much in every territory. In terms of profit, dramatic increase in profit, partly driven by the sales and also an improvement in margin. In terms of bought-in margin, the increase here is about product mix and duty savings. Surprisingly, although we put a lot more markdown on our website, we actually improved the rate at which we cleared it. But I think that is testament to the improvement that we've made in our online operations in terms of how we handle the clearance sites and the number of countries that we have pushed clearance stock to.

A lot going on in warehousing, the same erosion of margin from wage inflation, although because overseas selling prices are on average higher than the U.K., not as much as the 0.8% erosion we saw in the U.K. Then we get leverage over fixed overheads from sales growth, a slight increase in handling charge income, where in some countries where we weren't making enough margin, we pushed that handling charge up a little bit. And the same benefit on average selling price and returns rate through sort of forensically going through and removing high returning low average selling price items.

Marketing, a big adverse movement here, but that is kind of the whole point. And then leverage over technology, cost centers and central overheads. The central overhead gain is a little bit of a one-off. It's not a one-off this year. It was a one-off cost last year, and that was the cost of closing the German hubs. I think the exciting thing about the margin walk forward is the fact that the significant increase in marketing has been paid for by the cost savings we've achieved elsewhere.

In terms of the year ahead, we're anticipating sales of 14.3% on a marketing spend increase of 25%. Margin forecast, broadly flat. In terms of customer analysis, and this is across all of our channels, U.K. and overseas, U.K. credit customers were up 6%. That number should be a surprise because that number has for the last 10, 15 years, been 1% or 2%. The big difference here has been the growth in the uptake of our Pay in 3 offer. Pay in 3 is where, it's a credit type offer where if you pay off all of the balance in 3 installments, you pay no interest. If you don't pay it off and you choose to extend it, then you pay a higher interest than you would have done on a revolving credit. That means the credit is growing much faster. It's not as profitable in terms of interest income as a traditional credit account, but it does significantly improve the amount of sales that we can make for those customers. So that's more of a sales benefit. That's rather more of a sales benefit than it is a credit income benefit.

U.K. cash up 10% and then overseas, 31%. I should say that this doesn't include any customers that we get from aggregator businesses because obviously, we don't have visibility of that. I think the other surprising number here is the growth in the average sales per customer overseas. You would normally expect with so many new customers coming in, you would expect that number to move backwards. That's what we expected at the beginning of the year. It hasn't. Largely, we think, as a result of the improvements we've made on our website in terms of improving conversion and average order value, which I'll come on to later.

In terms of total platform and equity partners, total profit, GBP 90 million, up GBP 13 million on last year. At the beginning of the year, I think we estimated that would be GBP 5 million or GBP 6 million. So we have done significantly better in pretty much all the partner businesses than we were expecting. Equity profit up GBP 9 million, service profit up GBP 4 million. The big increase in service profit comes from the fact that the previous year, we hadn't fully annualized the onboarding of FatFace from whom we get a big service income. In terms of that service income from Total Platform, very healthy margins, just around 20% profit on what we charge the clients and around 6% profit on their sales and their online sales, which is kind of where we set out to be.

And although Total Platform is looking very exciting at the moment in terms of its numbers, you shouldn't expect any big acquisitions or transactions this year for simple reason we haven't got the warehouse space to accommodate a big transaction this year, which I'll talk about later.

In terms of return on capital, very healthy return on capital, move forward from 17% to 23%, largely there is a result of the return to profitability of Joules and growth elsewhere. So Tom Joule, there in the audience, so thank you, Tom, for that. GBP 94 million profit -- GBP 95 million profit forecast for the year ahead, an increase of GBP 5 million. Moving on to guidance for the full year. We've already talked about the 4.5%. I won't talk more about that. Retail sales, we're expecting all the pain in the first half because that was the period where we had the exceptional weather and gained the most from competitive disruption.

U.K. online, we think will be a more even performance throughout the year. That's largely as a result of the performance. The reason we are as confident on the H1 number is because of the sales we've seen to date online in the U.K. In terms of total U.K., 1.3% in the first half, 2.9% in the second. International, 14.7% in the first half, 14% in the second. If we look at the 2-year growth, which removes any distortion from the timing of the Zalando transaction and the increase in wobble brands on the website, what you can see there is that we're anticipating 47% in the first half, and that is a reflection of the significant disruption we're getting in our Middle Eastern trade and then a return to more normality in the second half. Obviously, a big health warning there. If the war carries on at its current rate, we won't see the recovery in those sales that we're -- in the Middle East that we're expecting.

So total full price sales up 4.5%. In terms of what that means for profit in the year ahead, online profit driving GBP 76 million of profit increase, GBP 11 million decline in retail profit as a result of negative like-for-likes. Total platform and partners adding GBP 5 million. Cost increases. Wage inflation is still the biggest cost increase here, but around 2/3 of what it was this time last year. The reason that is quite as high as these actually, it would be around -- if it was just wage inflation, it would be nearer GBP 35 million. There's still 2 months of the NIC that haven't annualized in the current year. Middle East conflict, GBP 15 million of costs coming in there. Higher interest costs, which I mentioned earlier, that's all about the accumulation of cash last year in lieu of share buybacks, and we're anticipating that our marketing spend grows GBP 8 million faster than sales.

In terms of cost savings, employee incentives, that's reversing out of large incentive payment this year for a great year. And then the margin gains are where we have already in our -- in the costings we've got, we already can see around 0.2% gain in margin for both spring/summer and autumn/winter. Normally, we'd give that back and reinvest it, but given the circumstances, we're not going to do that. So that would be GBP 10 million. And then versus last year, the difference of GBP 8 million is warehousing and distribution efficiencies and stores versus our January estimate, the GBP 7 million, GBP 8 million is technology. That's what it is. That gives us GBP 1.2 million of profit at year-end.

In terms of earnings per share, we're expecting a smaller enhancement than last year, dividend yield of 2.2%. If you compare this year's expectations to last year's expectations, whilst the biggest difference is the delta in profit, you can see that the enhancement is significantly lower. The enhancement from dividends and buybacks is significant this year than last year. And that's because last year, in effect, we got a double benefit. The shares that we would have bought back last year would have enhanced earnings this year. We didn't buy back shares and we gave all the money back last year. So actually, dividends and share buybacks together, we would expect to be to give returns of around 5% to 5.5% in a normal year. And that's what we expect it to be sort of going forward next year and beyond. So that's all to say on the sort of the numbers and guidance.

In terms of the business itself, it's difficult to keep a handle on this because with everything going on in the world, everyone is worried about more and worried about Middle East than they are about the business. But when you look at the business itself, it's actually very exciting because all the avenues of growth we had last year, we think are still there for the year ahead. There's more to do.

And if we look at the GBP 550 million of growth and divide it U.K. overseas, what you can see is that actually, despite all the excitement coming from overseas, the U.K. delivered not a lot less in terms of actual growth. Same is true between NEXT products and non-NEXT branded products. You can see there exactly the same pattern in reverse is that NEXT, although the growth percentages are very exciting on non-NEXT brands, the NEXT brand still delivered the lion's share of growth. And if you divide that into sort of 4 different businesses, NEXT, non-NEXT, U.K. and overseas, you can see that those numbers are remarkably similar. And I think the message here is that the low growth in the big established businesses is delivering pretty much the same amount of growth as the very dramatic growth, 79% in our smallest non-NEXT brands overseas. We think that each one of those quadrants will be positive in the year ahead, and there's more to do.

And in terms of what's driving that growth, it comes down to two things. Overseas, it's about improved functionality, services and most importantly, marketing. And across the whole business, non-NEXT and NEXT, it's about better product ranges and broader product ranges. I'm going to start by talking about what we're doing to improve the most important part of the business, which is the NEXT brand. And that comes down to what I've mentioned before in terms of newness, quality and choice. And this is a drive that we've talked to you about, I think, now for 2 years. And it's one of those things that I'm reluctant to talk to analysts about because there are no numbers and graphs that I can give you percentage newness and all that stuff because if I ask the product teams for what percentage of their age is new, they will give me whatever percentage I ask for because who's to say what's really new and what's not.

But I think the key here is that where the buying teams have scoured the world, found the best trends and then most importantly, back to those trends with conviction and in depth, that is where we've seen by far the biggest sales growth. And where we haven't done that, where we led on last year's best sellers, a little bit of a tweak here and there, change the neck line, change the color. Those areas are the ones that have done worse. And that's pretty much universally true across not just the NEXT brand, but other brands as well. The customer wants newness and gone are the days where you can say, we'll trial this new style this year. And then next year, we might do it in 3 colorways and really maximize the opportunity. If you wait and see, you've waited too long, you're dead in the water. So that's sort of newness.

In terms of quality, there's a lot going on here. And the big thrust on quality is about fabric. That is the thing that in terms of customer perception, actually upgrading of the fabric and the base materials, the yarns in knitwear, that is where we've had the most success in putting -- increasing our fabric. And this is a -- represents a change in the way we work. in the -- not all areas, but more and more of the areas at NEXT are now pushing further upstream and talking to mills, spinners, wash houses and developing yarns and techniques and fabrics long before they decide which garments they go into and what those garments will look like. And that process of pushing further upstream, I think it's got a long way to go at NEXT. I think it's very exciting for us. Other retailers too do it. It's not rocket science, but I think it's exciting for us.

I think the other sort of unintended benefit of this is that, obviously, the mills have to see the fashion trends first because if they don't produce the fabric, you can't produce the trend. So the mills and the print houses are often also a good indicator of which trends are coming and which ones are going to be strongest. I think this is also a very good time for us to be investing in quality because we can see a distinct trend over the last 3 years, and this is a gradual thing. It's not dramatic of customers buying slightly fewer, slightly better things. It's not that they're spending more on clothing. It's that they are choosing to spend that money on better products. And this bit, I can give you some numbers. So this is analyst delight here. What the numbers -- what these numbers show is the underlying inflation in like-for-like goods. So if you produce the same T-shirt last year as this year. And obviously, we're doing less of that because of all about units. But if you look at those garments, then the price inflation we've seen over the last 3 years is negative or very modest.

If you look at the sold mix, the total amount of cash we've taken versus the units that we've sold, the sold mix actually has moved forward. And we think that the difference represents the shift in consumer preference. And if you -- any 1 year, that doesn't look like very much. And I should say that the estimate for the year ahead is based on what we've bought, obviously, not what we sold because we haven't sold it yet. But if you add those all together, you get to numbers that do show a meaningful shift.

And there are two things I should stress here. This isn't about just adding more expensive product to our ranges, although we have increased -- we have looked to stretch our price architecture and to sell some more expensive garments. But this is -- that's not been the main driver on this. And in fact, the biggest success we've had on improved quality is where we've significantly upgraded entry-level products to make them much better yarns or fabrics, and that's where we've had the most success without increasing price or by increasing price, just a modest amount.

In terms of non-NEXT product, first of all, same messages about newness, choice, quality are coming through in all the brands that we can see that coming through in all the brands that we manage. The bigger increase was the less exciting percentage. Our third-party branded profit was up, and that is all about one thing, which is better ranges of our best brands. This is not about adding brands to the website. It's about getting much better selection and better depth on bestsellers from the top 20 or 30 brands that we sell. In terms of the wholly owned brands and licenses, very exciting numbers at nearly 50% growth in the year.

And I think there are a number of encouraging things that I kind of would like to share with you today about this relatively new business. What this shows, this bar shows is the brands that we were already trading, the wholly owned brands that we had in 2022, '23. It's about GBP 177 million at that point. If we look at just those brands today, they are 53% up. That is an encouraging number in itself. But the really encouraging number is the fact that last year, those brands, those existing brands that we've owned for more than 5 years grew by 24%. And I think they'll grow again in the year ahead.

And for us, this was the acid test because relatively easy to come up with a new label and stick it in a clothing and give it a bit of marketing, but actually having brands that are not flashes in the pan that can be developed and continue to grow in the long term is kind of what we're trying to achieve. And that looks like what we've delivered. And that number, in a way, is all the more impressive when you bear in mind that over the last 5 years, we've added another 29 wholly owned brands and licenses, which have themselves last year delivered GBP 116 million of margin on top.

Again, the fact that those are growing in parallel with the NEXT brand, evidence, we think that the brands we are providing are genuinely giving our customers something different and new. We're estimating that the wholly owned brands and licensed business grows by 22% in the year ahead. And what this all comes down to is -- apologies for the cheesy analogy. We use these slides for staff later as well, so it's multipurpose.

But we really think that NEXT is an amazing place to start a new brand or to take an old brand and relaunch it because when you look at it, what you need to start a new brand on NEXT is very different from what you needed to start new brands 20, 30, even 10 years ago in terms of resources. What you need is a great product team, a good idea and a sourcing base. And the investment, the total cost that you need to invest to launch a brand is around GBP 3 million, and that's the cost of the people and the stock that you have to buy before you put anything on sale. So the sort of money at risk is around GBP 3 million. And the reason that, that is so low is because those brands can straightaway take advantage of the billions of pounds that we've invested over the last 20 or 30 years in building 16 million customer base that those brands have instant access to all the websites, technology, data security, product systems, warehousing, contact centers and relatively inexpensive funding.

So in terms of an environment in which we can begin to develop new fashion brands, we think this is very exciting. All the more exciting if we can sell those brands overseas. And what you can see from the international numbers is that we are getting good traction now with those brands overseas. We're launching 3 new brands. I say new Russell & Bromley, obviously isn't a new brand, but it's new to us. Bhoem, which is more of a sort of continental style of brand, and we'll be launching another womenswear brand, top-end womenswear brand towards the end of the year.

In terms of overseas, 35% growth. And the driver here is functionality and marketing. I start with functionality. Now there's a detailed table with lots of complex numbers that are hard to understand, so you can read through that at your leisure. But the overall message is that we have significantly improved pretty much every part of the customer experience, both on the website when they pay and delivery and returns in most of the areas. There's still more to do. And the results, again, here, we've got some numbers. If you look at the organic conversion rate, that's the conversion rate of non -- of customers coming to the website, not through marketing. The average order value and the frequency of orders, those numbers have significantly increased year-on-year last year, and we think that's as a result of the improvements that we're making.

The nice thing about those numbers is that they are cumulative that if you get -- if every person lands on the website, if 9% more of them order, they each order 3% more in that order and they then visit you 17% more times, the individual value of that customer visit significantly increases. And that is what has driven the growth in marketing. The fact that these two things work hand in hand. It's not just about spending more money, but the more effective you can make your website, the more effective your marketing becomes. And one of the things that has driven the marketing and one of the things that has allowed our returns to remain constant despite the dramatic increase in the amount we're spending is the fact that the website and services are so much better.

And just to sort of dwell on those numbers a little bit, the return that we measure here, and just to be clear, we don't talk about growth, this is not sales, this is profit. This is the incremental profit on the incremental sales that we think we deliver from each and every campaign. They have to hit at least GBP 1.50. And you can see the returns last year actually, despite the enormous increase in spend, were slightly higher than the previous year. That's not just about functionality and services. It's also about the improvements we've made to our marketing and we continue to make to the marketing. And there's a long list, and you can read it in the report. But we have invested a lot of time, money and people in improving the way in which we market, and we can see that paying dividends.

Next year, I've mentioned already, we plan to grow marketing overseas by 25%. Now you might look at that number at GBP 1.50 and say, well, why do they need to be next to being very greedy, 50% return. And you'd be right, if we believe that number, we would being greedy. But there are two reasons to be cautious about it. The first is that it is based on incrementality, the incremental sales, and that requires an estimate. We've got to estimate how many of the customers who saw the advert who then bought actually were stimulated by the advert and wouldn't have bought anyway. And what you'll find when you look at these incrementality tests that we do is that the incrementality is surprisingly low. So it's a very important thing that we're unsure of. We think we need fat margins to absorb that risk.

The second and more important reason is that the profit we're talking about here is the marginal profit, we assume that if we spend the marketing that the increase in sales doesn't result in any increase in HR costs, finance costs, product costs, it all goes into profit. If you said, well, actually, our fixed overheads are going to grow as fast as sales, that GBP 1.50 drops to GBP 1.01. And I think what this does is it brings home a fundamental truth about -- which will affect our growth going forward. And that is our ability to control our costs and our fixed costs to make sure that they don't rise that they actually fall as a percentage of sales. It doesn't fall in absolute terms, but they fall as a percentage of sales. Our ability to control those costs will drive our ability to do marketing, which will drive growth.

And that actually, as a message for people in the business is very positive. Normally, cost control is seen as a bit of a side. Cost control meeting that we have with all of our directors once every quarter is not their favorite meeting. But because people think it's all just about squeezing more out of the sponge. But once people see that, actually, this is not just about squeezing more profit out of the business. This is about driving growth. It's much easier to get that message across because people are more excited about growth than they are about cost saving. And the assumption that you might make about fixed overheads, by the way, being fixed is not necessarily correct.

I do -- I remember my dad saying to me years and years and years ago that fixed cost to only have a fixed on the way down. And there's a little bit of truth there. If you look at technology, product, finance, legal, HR, add them all together as a percentage of sales in 2006, and look at them today, not only have they not declined as a percentage of sales, they've actually overperformed. They have grown faster than sales. Now don't panic about that. The overall business, the margins of the business have moved forward by 2% in that time. So -- and there is none of that investment, I say investment spending, none of that spending that I would regret. If we hadn't spent much more on technology, we wouldn't have websites, call centers, marketing campaigns. Our technology spend meant that we could stop producing GBP 65 million worth of catalog every year if we're going to grow our product ranges.

And next, in terms of the ranges we offer online today, they're probably about 5 or 6x the size of the ranges we offer just in stores. You need more product people for that. We're going to have new wobble. We need new people. We're going to have extra third-party brands to need someone to manage those relationships. So it's not that those investments were wrong. It's that going forward, we need to grow them by less than sales if our marketing is going to be successful.

And fortunately, we are at, I think, the perfect time for saving money in those areas because the combination of the fact that we've modernized pretty much all of our software platforms with the exception of finance over the last 6 years. The fact that we have transformed the way the company handles data, we've made sure that it's sort of universally accessible across the group, that it's consistent across the group. So the combination of modern software, high-quality data means that we are well placed to adopt AI. And I know that there's going to be a grown. I can't actually hear it, but a grown when chief executives start talking about AI because -- so I'm going to apologize in advance, but I am going to talk about AI a little bit and our approach to what we're doing with AI. And I think the first thing to say is that the degree of adoption that we're getting across the business is very different. The areas that have adopted it the most aggressively are technology, contact centers and e-commerce.

Product on the sort of use of AI to envisage product and forecasting has made some progress. And the other areas really, I put a little blue bar here, but that blue bar could be smaller if I wasn't so generous. Where we have invested, we are definitely seeing AI resulting in productivity gains that is translating directly into not just better software and better service in the call centers, but also lower costs. And these are -- what they show -- this graph shows is the percentage of sales represented by technology and call centers. And I think in both these areas, there's further to go, and I've written about that.

In terms of our approach to AI, I think I thought it would be useful to share a little bit as to how we're approaching the whole issue of AI. And I think the most important thing for us is what we're not doing. We don't have a central AI department or a Chief AI Officer, a CAIO, I think it would be called. It sounds like goodbye and Italian. We don't have that. And the reason we don't have that is because the nature of what we do across the different functions of the business is so different that to have one department trying to service all of those would be extremely unproductive because ultimately, the value of AI is not in the technology, it's in the applications it supports. And the design of those applications, what it does for the business can only be understood by the people who are running the business, not people who have access to the technology.

And the best comparison I've heard is that it will be like having a central spreadsheet department. And Chief Spreadsheet Officer. Spreadsheets are used by everyone in very different ways across the business. Same with AI. It's got to be application led. That's not to say we're doing nothing centrally. We do talk a lot about it. We encourage people help them. Our IT department provides access to technologies. It ensures that the technologies we use are secure, most importantly. And it also monitors the cost of the AI tools that various departments are adopting. But we haven't adopted a one-size-fits-all approach to this. And each director is very much going to have to be their own Chief AI Officer if they want their part of the business to succeed. What I wouldn't underestimate here is the power of collaboration. And it's just the way that NEXT works is that all -- pretty much all of our directors see each other every week at our trading meeting, at least once a week, if not more.

And the people who -- the directors who are most advanced are actively working not just in their department, but to help the other departments and show them the sort of things that AI can do for them and share people and technology providers with them. In terms of how far ahead we are in this, that graph looked quite impressive. But even in the areas that we are the furthest ahead, my guess is that we haven't, we're scratching the surface. There is so much more to go at, not just in terms of cost effectiveness, but also productivity in terms of what people can do. So I think this is a huge opportunity.

In terms of the areas that really haven't move forward much. I'm not singing out warehouse because they've done anything wrong and all because AI isn't applicable to warehousing. Actually, I think AI could be brilliant to warehousing in terms of handling all the operational management of the warehouse, reforecasting, scenario planning, optimization, lots of variables that AI could really turbocharge the management of our warehouses. But they haven't had time quite rightly to worry about AI because the thing they'd be most worried about is ensuring that we've got the capacity in warehousing that we need to grow.

And that provides a slightly artificial but neat segue into the next subject, which is the last subject you'll be pleased to hear, the investments in our warehousing. This is where we were 2 years ago when we started to invest in Elmsall 3. We were at 94% full in our old warehouses in 2023, where we thought we would be on 5% compound growth in sales was 80% full of the new extended complex. Sales have actually grown by, sorry, 28%. we're expecting 10%. We've actually grown at 28%.

In addition to that, we've put more clearance into our online operation, and we've increased our cover. That pushes up the stock in peak week, and he was only talking peak weeks here to 84%. And we've decommissioned some of the oldest picking that actually turned out when we decommissioned it, we realized just how inaccurate and expensive it was. So we don't want to recommission it. We've had a slight drop in box drop, which means that last year, we got to 87% full. If we look at this year, with the 8% planned growth in online business overall, we'll be at 94%. Now 94% sounds okay, it's not. 94% at 94%, you begin to get a lot of congestion, things slow down. One small breakage, conveyor belt breaking can hold up the whole operation. So that's uncomfortable. We're going to manage this year by taking some of our reserve stock. This is the high bay stock that can't be picked out of high bay and Elmsall 3 and move it into other warehouses owned by the groups. That will be replenished in day, so it shouldn't affect stock availability for customers.

There will be a slight increase in costs as a result of that, but that will be more than offset by leverage over the fixed overheads from using so much of the capacity. In terms of the year after, that's where we really get into trouble. If we grow at another 8% next year online, then we wouldn't have the capacity to do that. So we need to invest and we need to start investing now.

In terms of what we're doing, those of you who've been to the warehouse, you remember that we only occupy half of the new Elmsall 3 complex, Chamber 1, and we don't occupy all of it -- all of Chamber 1. There's a little bit left. So Phase 1, which will be on stream in 2027, will give us 10% more capacity at a cost of GBP 48 million. Phase 2, which is the first half of the second chamber, that's more expensive because that chamber is a shell. So it's more expensive per percentage of capacity. It's GBP 134 million. And the final chamber, which will come on the following year, 2029, is another 17% capacity at GBP 125 million.

In terms of the P&L impact to that, you could look at that and begin to worry about is are we going to see a big P&L impact as all this CapEx goes through? And the answer is you shouldn't because although the additional depreciation in year-end Jan 2028 and overheads will be in the order of GBP 5.4 million, we think the cost savings from moving from the old to new capacity will give us at least GBP 5.1 million of savings. So there should be -- that's broadly cost neutral in that year.

In terms of the full program, the GBP 307 million of CapEx, that will add around GBP 30 million of operating costs, but we get GBP 22.6 million, it's too precise, about GBP 22 million of savings, we think, from using that new capacity. That means that the net cost of all that new capacity is around GBP 7.3 million. And that's obviously, if sales don't grow at all.

If sales -- the capacity that all of those projects together will give us is around GBP 1.5 billion worth of turnover. So what you can see is that the cost of the increased space, once it's at full capacity or even once it gets to 3/4 full or even half full, the cost of that capacity is very small as a percentage of sales. So over time, these investments should result in our fixed cost and warehousing coming down as a percentage of sales.

In terms of where it leaves us in terms of capacity for growth, that's the 8% trajectory with the new space added on. The maximum we could get to is compound growth of around 12% online. I think, yes, if we have that problem, I'll be delighted, but I don't think we will. So we think that this program gives us comfortable capacity for the next 3 to 5 years.

Next question you're going to say, I can see it instantly on your minds is like what do you do next? Here's the field. We've bought the field. The field, that's the warehouse that we have already got planning permission for. We have contracted for the land. We'll complete, I think, in 2 or 3 days. And we'll start work on that, getting foundations laid. We'll start work on that sometime over the next 18 months. So we could have floor space available if needed, maybe early '28 -- late '28. So we've got contingency.

I think the important point there is that our model of centralized stockholding for the U.K. has got legs beyond Elmsall 3. And that mercifully is it almost. And just in terms of summary, hopefully, what you can see is that the avenues of growth that we had last year, all of them still have legs in terms of overseas, in terms of NEXT product, in terms of non-NEXT product, we still got an awful lot that we can do and that the business feels can push sales forward.

We have got the means to control costs through the introduction of new software AI mechanization. We got the means that doesn't mean guarantee that we will, but we have got the means to do it. And we've got the capacity available planned to accommodate the growth if and when it comes. So if things go well, I think the business is really well positioned.

What is, I think, really interesting when you kind of stand back from -- when we stand back from what we do day-to-day, and I think about the sorts of things that cross my days, desk and my colleagues' desks in terms of overseas new brands, new AI-driven marketing technologies with Google.

All the things that are driving the business are completely different to the sort of things I was doing 25 years ago. 25 years ago, it was still very exciting, but it was about stores and believe it or not, catalogs. Getting more catalogs printed and printing those catalogs was central. And so what the business does today is unrecognizably different from what it was doing 25 years ago.

The thing that really has not changed at all are the principles upon which that growth and the ethos of the business. And those 2 things are, first of all, absolutely everything we do, everything we do, we have to hand on heart, believe that it is giving good value to our customers. We have -- and the test there is, would you recommend this products to your customers.

Now not everybody is in the market for a mesh dress, I'm not. But if you wanted a mesh dress, could you recommend one from the next website and say, yes, that is the service you want. It's fantastic, delivered next day, return to any store. You have to hand on heart believe that. And if you genuinely believe all of that and you're delivering something that's great for the customers, then you can't go too far wrong, whether you're doing with NEXT brands or others.

The second principle is that it's fine to be doing things that are great for the customer, but they've got to make money. And the two things there is, first of all, we have to get a return on capital. Capital is the fuel that drives the business forward. And the better return we get on the capital we have in the business, the faster we can grow, the more benefit we can share with our shareholders.

And the second thing is margin. And this is the easy one to overlook, particularly when things are good, but every single business we do, it doesn't matter if we're selling Love & Roses brand in Peru, that brand in that country has to make a margin, that is commensurate with the sort of risks involved in a fast-moving consumer and fashion business.

And as long as we stick to those principles of do great stuff for your customers, get high return on capital and make healthy margins, then regardless of the environment you're in, you're going to be well placed to handle it. And we're making a trading statement in 6 weeks' time. The one thing I'm pretty sure is that it's going to move. The guidance is going to move. I just don't know which way.

And -- but I think the point is that whichever way it moves, if the war peters out and things become more positive, then we are really well positioned to take advantage of continued growth in the U.K. economy, continued growth overseas. And if things don't turn out, and this will not be our first gig when things going wrong, COVID, financial crisis, cost of living crisis. If things don't turn out as we expect, then actually the business is well placed to cope with that it's well placed to cope with it because of those margins because kind of there are 2 lessons about retail that are enduring.

And you can -- this is sharing wisdom. There are 2 lessons. One is like in the good years, don't get cocky. And in the bad years, don't go bust. And I think those 2 principles are really important. And that's the reason why when we've had a great year, we're not going into the next year with a huge estimate of what we can achieve going with conservative budgets. But whichever way things go, we've set the business up to cope with it. And on that cliff hanger, I think that leaves you just waiting for the next trading statement. We'll go over to questions.

It's Anne Critchlow from Berenberg. I've got 2 questions, please. The first one is about the store payback target and extension of that. Have you considered taking into account the benefit of a new store in terms of providing a free pickup and returns point for online customers? And then secondly, on aggregator website, you say you don't have visibility on the customer numbers there. But what insights do you receive from aggregators to help you make decisions about marketing, for example?

Yes. So first of all, on the store benefits to online, we don't account for that. We don't, in any way, put any benefit in the online business on stores. And there's actually a good reason for that. And that is that although the store does definitely help the online business, it also hinders it because it's a competitor.

And so where we've only -- there's only one store where we've shut and had no other stores anywhere near to pick up the business. And there, we actually saw the online business move forward because GBP 2 million or so that we lost in the store, some of that went online. So we don't and we shouldn't account for online benefit of stores.

In terms of customer insights into aggregation sites, we don't get very much insight. And quite rightly, they don't share that with us, and we don't share it with our brands either. So what they do share with us is the returns on the marketing we do on their sites. And on somewhere like Zalando, we'll spend around 2% of our sales on marketing. We still have the same hurdles. We still have to get a return on that money, but we can profitably spend money on aggregation sites, and we do. And the insights we get are not about who's buying it, but the returns we get on the marketing that we spend with them.

Richard Chamberlain from RBC. A couple more related to the Middle East, if that's right. The cost savings you talked about that you've identified since the start of the year, GBP 15 million, how many of those or how much of that do you think might come back if demand is a little bit better or the war ends earlier than you're budgeting for? And the second one, can you just give us an idea of how the franchise stores in the Middle East have been holding up or not compared to the online offer there? Has there been any sort of big difference in trends?

Yes. Two good questions. So first of all, how much of the GBP 15 million will come back? I think very little. In all honesty, I think there's a much bigger downside risk to that number than there is an upside risk. So yes, it could come back. It might be that GBP 7 million of it doesn't materialize. We haven't yet incurred it. But I wouldn't -- I'm not getting excited about that. I think the downsides are much bigger, and they will have to go into cost. In terms of franchise business, I don't want to talk about that because it's not our business, but they have definitely been impacted.

Adam Cochrane from Deutsche Bank. First of all, on the Middle East. Just a question in terms of logistically, how is it working? Are you able to fly your products to your warehouse in Dubai?

In terms of the Dubai hub, so the Dubai hub, traditionally, we would have air freight out of Dubai to other countries like Saudi Arabia and Oman. At the moment, we're going by truck, and that's what's increasing the lead times to places like Saudi Arabia, Oman and Kuwait. Intermittently, we have seen that service come back on.

And I think things are changing daily, but we're hoping to airfreight back on available for Saudi Arabia soon, but it does depend what happens in all. So the answer is to Dubai from the U.K., we are shipping by air, and we're getting replenishment in at the moment, albeit at a very high premium. That's a big chunk of that increased operating costs. And then from Dubai hub to territory, we've switched from air to trucks, which is adding 2 to 3 days to the lead time in most territories.

And the second question, in terms of international, are you progressing with -- or how are you progressing with other non-wobble brands, so third-party brands on your international site? Is that an area that you're still seeing more growth and more opportunity as brands would like to sell via the NEXT platform?

Yes, we have. And actually, it's detailed -- there is detail on that in the pack in that. There's one page with brilliant tables on it, which does show you that I think the overseas -- the growth in third-party brands overseas is around 22%. Most of that is driven by what's driving the growth in third-party brands anyway, which is a better selection of our key brands. But in some areas, partner brands have agreed to allow us to put their product on our overseas websites where they haven't in the past, and that's driven some growth as well.

It's Freddie Wild from Jefferies. So apologies, it's going to be quite a broad question, but it was on a reasonably important topic was important until about 3 weeks ago. You seem on AI to be talking a lot about cost savings and the ability to run the business more efficiently. I suspect where the debate has been in the market is more about the risks of disintermediation versus the potential benefits to your consumer proposition. So I'd love to get your sort of thoughts on outlook on almost the demand side of the AI proposition.

It's a big question. I think the first thing to say is rightly or wrongly, it's not something that we're overly concerned about at the moment. And I think the disintermediation that we're talking about would be the disintermediation of the website, rather than any other cost at the moment, unless -- it will be relatively they could switch just a fraction of their data centers into beautiful clothing warehouses and ChatGPT would have the infrastructure. But at the moment, they don't. So you're really talking about the disintermediation of the shopping bag and the selection process.

And there is an economic and just -- there's an economic and operational problem with that, that is yet to be solved. And the economic problem is that if you look at our average order value, net of returns, be around GBP 70. Cost of delivery to the consumer is around GBP 5. If -- that's about 6%. If your virtual shopping bag takes things from 5 different retailers, wherever the shopping -- wherever that intermediate website goes, it's got to go to a number of retailers. If it comes to us, then fine, it's just another form of advertising.

If it goes to more than 1 retailer, then -- let's say it go to 4 retailers rather than 1, you end up with that 6% being multiplied by 4. So the economics, someone somewhere has got to pay for that additional 18% of cost that you'll get from splitting the order across multiple websites. I think the operational problem, which in many ways is more of a challenge and applies specifically to clothing is how you handle returns because you've got -- if you buy your -- or all of your online order goes to John Lewis or to Marks & Spencer or to NEXT or to Very, you know, exactly you can take the whole order back to any one of their shops, scan the items and you're credited instantly in the way in which you paid.

For an intermediary to do that, you've got to know where to take the item back to, which is a Nike Train or which of the sub-vendors do I take it back to? How do I return it to them? And then how do they communicate with the intermediary, that the intermediary has got to repay me. So there are big customer service issues with it. So at the moment, it doesn't look -- it feels to me very much like what people were saying about marketplaces versus stocked retailers because the real asset in trading online clothing is the logistics infrastructure and the product, not the website.

So I think is -- I think that is a direction they're unlikely to go in. And certainly, if you look at the difference in Google approach and ChatGPT approach, Google is still taking the approach of passing the consumer straight through from their AI engine to one or other retailer. So it becomes an enhanced form of advertising. And I think to that extent, it's very exciting. I think basically, the better search engines can find what customers are looking for, the more they'll buy, which has got to be good for the industry overall. So it was a long answer to a broad question, but I hope it covers.

Geoff Lowery, Rothschild & Co Redburn. You had a great year for customer acquisition in the U.K., both credit and cash. There was obviously some competitor disruption, et cetera, sitting behind that, weather, all of those things. But can you talk a little bit about the behavior? Is this gross adds? Is this better retention of existing? What is actually driving that? And what measures do you have to sort of keep them active as some of your competitors normalize, et cetera, around you?

I suppose, look, the reality is, and this comes back to this philosophy that everything has got to make a profit. And I think the risk here is saying the objective is to hold on to those customers not to make sure that all of our retention programs are profitable. And the amount we invest in a retention program is -- makes a good return on the money we invest. So our objective is not to hang on to customers. It's to continue to invest profitably in retention.

And our retention programs are performing in line with last year. There's no significant -- I can't see any significant difference at this point, although we've yet to annualize the very strong weather last year, which may affect it and the competitive disruption. So we -- the answer is we don't really know how they will perform. I think the key takeaway for shareholders is that we're not going to throw money at trying to hang on to customers that aren't profitable to keep.

Warwick Okines from BNP Paribas. Two questions about warehouse capacity, please, Simon. Firstly, does the level of utilization that you're sort of running up against reduce the ability for the business to reduce the proportion of products not delivered in full and on time, which is something that you've been bringing down? And secondly, are there any options to reduce the proportion of products that are shipped from the U.K. out to international that could reduce the amount of capacity that you might need for the U.K. business?

Yes, really good questions. In terms of not on-time delivered in full statistics, they have -- I didn't put it in the slide because I'm superstitious because it only just got better. But basically, since Christmas, we have seen that dropping from around 8% to around 6%, which is sort of -- I think the lowest we got to was around 5%. So warehouse have made significant progress in terms of reducing the not delivered in full on time rates, and we are happy with that for the moment.

But I'm going to talk about it in 6 months' time if we can hold it because it's only been a few weeks, but the signs on that are encouraging. I don't think there's anything I can see in this year's numbers to suggest that we won't be able to hold that, but it will depend on the effectiveness with which we fill the new mechanization and the effectiveness with which we can serve the main forward locations in the warehouse from the off-site reserve warehouses, which again, we haven't started doing earnings. But obviously, the risk there is that you've got something in reserve that you don't have in forward if you don't get it exactly right.

So I think there is a small risk to that, but it's not something that I'm hugely concerned about. And I'm pretty sure that we'll see year-on-year improvements. Certainly, that's what we're seeing at the moment. In terms of delivery to hub direct, we're not doing that to Germany. And the main reason for that is that actually, it's -- because it's third party, it's very expensive. So we try to keep that on 6 weeks cover. We would normally have 12 to 14 weeks cover.

So at the moment, we're not delivering direct to Germany, but it will be an option if we begin to hit capacity issues. I think the other issue with direct delivery is it's very hard to deliver much more than 20% to 25% of anticipated demand without getting it wrong because you never quite know what's going to sell in which territory.

We are delivering direct to the Middle East, which obviously looks like a brilliant plan. And our first tanker -- our first cargo ships set off from the Middle East about, I think, from the Far East 4 or 5 weeks ago and have recently been turned back from Dubai. So that turned out to be a great plan implemented at exactly the wrong time. But going forward, we would plan to deliver, I think it's around 20%. I'm looking at Richard, about 20% of Middle East requirement direct from manufacturer.

It's Andrew Hollingworth from Holland Advisors. NEXT historically has been very, very good at the whole sort of mentality of sort of try stuff and do more of what works. So Costa Coffee is and all the rest of it. And wholly owned brands is obviously working extremely well. And I think in the statement or your presentation, you described it as sort of small business.

What you've done up to now is sort of buy -- I don't want to say the wrong thing, but sort of troubled U.K. businesses and you've sort of reenergized them and helped them and all the rest of it. But you've wanted them, I think, in past Q&A to sort of prove their worth in terms of return on capital in the U.K. alone. We've now got a really powerful sort of wholly owned business internationally. What could this look like 3, 4, 5 years from now in terms of could we be buying Spanish brands or French brands or Italian brands? Or is it just going to be U.K. homegrown and see what we can do with it globally?

Yes. You know what, looking even a year ahead is difficult in fashion; 3, 4 years out is absolutely impossible. Would we buy a French, Italian brand? I don't think -- at the moment, no, because our business in those territories just isn't anywhere big enough. In Southern Europe generally isn't big enough to warrant the investment.

The big advantage we provide for Northern European and U.K. brands is that we can give instant access to a huge market. Actually, our penetration in Southern Europe is very low. So I think those countries that you mentioned and France, although sort of in the middle, sort of fashion-wise is quite sudden, I think is unlikely. But I would never say no because even just access through Zalando to those countries might one day give us enough volume to justify.

Just a follow-up. So do you think with obviously not mentioning any names in terms of how you think about this part of the business that there's still lots of brands that can be added to the portfolio within the sort of your sweet spot of the sort of things you want to buy?

Yes. Well, what we're looking for is great brands, preferably with good management or our ability to provide good management for it to it. We're looking for things that we can add value to through our customer base and platform and at the right price. And I can't predict the fourth one. So I think there are lots of brands that I would buy for GBP 1, that I wouldn't buy for GBP 100 million. And where the price is in between will depend -- will drive pretty much what we do, I think.

It's Georgina Johanan from JPMorgan. Two for me as well, please. Just first of all, sorry if I missed it, but what actually is the Middle East trading at the moment -- like down at the moment, please?

Good spot. We didn't miss it.

And then the second one was just a bit of a broader question on GLP-1s. If you could share anything that you're seeing in terms of how like the sizing mix is changing in the business or not as the case may be? And also just thinking about it longer term, like any insights where from particular customer cohorts, if they are sort of materially changing the sizes of what they're buying, like is their spend increasing? Or is it steady? Just really any insights you can share would be great.

Yes. So on the Middle East numbers, the reality is it's very, very hard to read. So -- and the reason it's hard to read is because of the timing of it, because we are still in a period now where last year, people were ordering on their Ei'd. So it was on Sunday this time last year. This year, it was last Friday.

So if we take the same days post-Eid that we are today, that number is changing every day in terms of growth. In terms of GLP-1s, we have seen some subtle change in mix in sizing on womenswear. And -- but where we've seen the most dramatic change is actually on the very large outsized. That's where you can see a change in terms of reduction in participation, these participations are tiny, but participations on the sort of 22-plus are definitely falling. I would say -- sorry, one last one.

I had 2. Marketing expenses, you're still talking to plus 25% or more. Are you repurposing some of the Middle East marketing into faster-growing Europe or rest of the world? Is something like that an option for you? And the second one, again, international, within the rest of the world, are there a couple of markets that you really are excited about and you see significant potential for them to be meaningful for next...

Within the -- Within where?

Within the rest of the world in international?

Okay. So the second -- the answer to the second question is yes. The answer to the first question, I think the premise of the question is that we've got a marketing pot. And if it doesn't work in the Middle East, we'll move it somewhere else. And that's just not how we work. We don't have a marketing pot. We have a hurdle rate of GBP 1.50 return and whichever territories give us more return than that we will continue to invest money in, and those that don't, will reduce.

And so the answer to your question is, if I sort of stood back from it, do I think we will still be 25% up on what I've seen so far in marketing? Yes. But I think a lot will depend on the cost of air freight to some of our most expensive territories because if the price of airfreight goes up, the return on the marketing comes down, which constricts our ability to spend it. But overall, we brought down our sales by around 2% overseas at the moment. So that's our best guess as the full impact, but who knows. And we've kept the marketing budget where it is.

And on that note, we really well finished. Thank you very much.