NEXT H1 2027 Earnings Report

NEXT EPS Results

• Actual EPS: GBX 364.30
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

NEXT Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

NEXT Announcement Details

• Quarter: H1 2027
• Date: 9/17/2026
• Time: Before Market Opens
• Conference Call Date: Thursday, September 17, 2026
• Conference Call Time: 2:00AM ET

Founded as a tailoring business in Leeds in 1864 by Joseph Hepworth and Son, today, the company offers clothing, footwear, accessories, beauty and home products to our UK and International customers. NEXT (LON:NXT) has over 500 stores in the United Kingdom and Eire, and over 180 franchise branches across Europe, Asia and the Middle East. The company's main divisions are NEXT Online, NEXT Retail and NEXT Finance. We also launched Total Platform, an online, distribution, tech and logistics solution, in 2020. Total Platform aims to leverage NEXT’s Online infrastructure and provide partners with a comprehensive solution to trading online. As a multinational fashion and homeware business, we seek always to conduct our business in a fair and responsible way. We continuously look for ways to improve what we do and how we do it in order to limit impact on the people and the environment around us.

NEXT H1 2027 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: First-half performance exceeded expectations: group sales rose 9%, full-price sales increased 7.7%, and profit before tax grew 10.5%, while EPS benefited from early-year share buybacks. The interim dividend will rise 12.6% to 98p.
• Positive Sentiment: International sales were particularly strong, with full-price sales up 24% and total sales up 26%, led by Europe and rapid growth in NEXT-owned brands. Management raised its full-year international sales-growth expectation to 20.5%, although it cautioned that prior Zalando-related growth will create a tougher comparison.
• Negative Sentiment: NEXT lowered its U.K. second-half sales expectations amid anticipated pressure from fuel, wage and other inflation on consumers, forecasting full-year U.K. sales growth of 6.7% overall. Retail remains the main weak spot, with first-half like-for-like sales down 3.3%, and management acknowledged that its full-year retail outlook may be optimistic.
• Positive Sentiment: The company completed £355 million of share buybacks in the first half and expects approximately £500 million of distributable cash for the full year, leaving scope for further buybacks, a special dividend or other capital returns. Management plans to increase leverage modestly while retaining about £300 million of liquidity headroom.
• Neutral Sentiment: Management highlighted ongoing productivity investments in warehouses, stores and technology, including agentic AI that could eventually improve development productivity by 30% by February 2028. However, warehouse automation still has service-level glitches at peak volumes, and the AI benefits remain longer-term targets requiring additional investment.

Presentation

[Michael Roney, Chairman at NEXT]

Good morning to everybody, and welcome to the half year results. Thank you for being here, and special welcome to anybody who is here for the first time. It is 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. This performance does not come by accident, and it certainly reflects the hard work and courageous decision-making of all our employees worldwide. I want to thank them, and I am going to leave all the details of what has happened in the first half to our chief executive. So over to Simon.

[Simon Wolfson, CEO at NEXT]

All right. Thank you, Chairman. Morning, everybody. Total group sales up 9%, full price sales up 7.7%. The difference is not the subsidiary companies growing much faster than NEXT. It is 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, the sale stock returned to more normal levels. In terms of our expectations, we thought we were going to be up 4%.

[Simon Wolfson, CEO at NEXT]

You can see that we exceeded those expectations in the U.K. and overseas, much more so in overseas. I will 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 is all about the fact that last year we had a lot of cash on deposit because we were not able to buy back shares. This year we bought a lot of shares back at the beginning of the year, which means we did not get the interest income that we had this time last year.

[Simon Wolfson, CEO at NEXT]

Profit margins nudged forward by 0.3%. Profit after tax pretty much the same, no change in tax rate. Earnings per share up around 2% more than underlying earnings, and that is mainly as a result of the buybacks that we did very early on in the current financial year. Interim dividend, we are 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 am going to talk here.

[Simon Wolfson, CEO at NEXT]

Unlike the P&L and all the other numbers I will talk about, this is done on a consolidated basis on the. This is done on the basis that we own all of the subsidiaries, most of which we only partly own. 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. It has not 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, a new concept store, which we did not have again this year. In terms of CapEx going forward, we are expecting roughly the same amount of capital expenditure for the next three years.

[Simon Wolfson, CEO at NEXT]

At the end of last year's present. 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 you 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 is 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 GBP 180 million of positive cash flow. The difference in this year and last year, mainly about CapEx. This is where the big change came.

[Simon Wolfson, CEO at NEXT]

Last year we were pretty much locked out of the market, and we thought we'd take a slow and 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. Just to explain that in a bit more detail, we started the year with leverage at 0.6, 713. These numbers are-- where we target is fairly arbitrary, but we had targeted 0.63.

[Simon Wolfson, CEO at NEXT]

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 0.63, which will push our year-end debt to GBP 815 million, and that accounts for the GBP 102 million net outflow. In terms of how we get there, we think we'll have a very strong operating cash flow income, around GBP 996 million of cash inflow from operations, GBP 245 million of CapEx, GBP 319 million of ordinary dividends.

[Simon Wolfson, CEO at NEXT]

That leaves around GBP 500 million to distribute, of which we spent GBP 355 million. The GBP 180 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 for 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, or about half of it, will be used in October to pay off the 2026 bond.

[Simon Wolfson, CEO at NEXT]

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-- to making sure that not only does NEXT have a sensible amount of headroom, but so do all the subsidiaries that we lend money to have headroom sufficient to get them through a blip as well. In terms of that debt, it is much more than balanced by the financial asset that is our customer receivable.

[Simon Wolfson, CEO at NEXT]

We've got about 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 one 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. 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 four or five years across various different businesses.

[Simon Wolfson, CEO at NEXT]

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. Our stock up 5.8%, pretty much in line with our sales expectations for the second half. Customer receivables up 2.5%. That is 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. 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.

[Simon Wolfson, CEO at NEXT]

Pay in 3 offer allows customers to it's very similar to the Klarna type offer, allows customers to buy the goods, and if they pay off in three installments and pay it 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 receivables don't grow by as much as sales. We expect that to be a continuing trend as we move forward. These balances incur less overall debt, and we think are likely to incur less bad debt as well. I think going forward, you'll see credit sales rising faster than balances, with perhaps some benefit on bad debt.

[Simon Wolfson, CEO at NEXT]

I say perhaps, but we're 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 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. That change on last year cost us GBP 31 million.

[Simon Wolfson, CEO at NEXT]

And then the subsidiaries have been better at collecting in their debt as well. Creditors moving 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 put a large payment week into the first half that wasn't there last year. 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, and that increase is all driven pretty much by the timing of buybacks. In fact, the 352 is only GBP 3 million off what we spent on buybacks. Moving on to the detail of the business. Just to remind you, 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 total sales up 8%.

[Simon Wolfson, CEO at NEXT]

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%. Wholly-owned brands and licences by a really strong 33.5%, and I'll be saying more about that later. Continued growth of our third-party branded business, driven largely by better selection of existing brands rather than new brands. In terms of margin up just 0.1%, but a lot going on underneath the surface here. Bought-in gross margin down 0.2.

[Simon Wolfson, CEO at NEXT]

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 inflation in wage costs and overseas, the change in prices, which we'll see later on, driving up margins to pay for increased fuel surcharges. But so underlying NEXT product, half percent up. The impact of mix, because we're growing our WOBL business and third-party business much faster than NEXT, pushed net margins down because we make lower bought-in gross margins on those. Just to give you a flavor for the different net profitability of those three businesses in the U.K., NEXT makes around 21% net margins. That's net margins after accounting for allocation of all fixed overheads. So WOBL lower than that at 18%. Still very respectable, but 3% lower.

[Simon Wolfson, CEO at NEXT]

Third party, as you'd expect because we don't put the effort into building the brand, we make lower margins on that at 12%. 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 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. 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.

[Simon Wolfson, CEO at NEXT]

Both of those numbers put together are testament to the efficiencies that we're now getting out of the mechanization and investment that we've made in our new Elmswell 3 warehouse. 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. 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 contribute 0.7 towards margin, and then we pretty much spent all of that on marketing.

[Simon Wolfson, CEO at NEXT]

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 a shift out of technology and warehousing into marketing. Longer term, I think that is a theme that you'll see continuing in the U.K., but we'll see more strongly overseas. Just to remind you, the return per GBP spent on marketing and the way we measure our marketing is we look at each campaign, measure what we think are the incremental sales, which is not an exact science.

[Simon Wolfson, CEO at NEXT]

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 spent. We have to make at least GBP 1.50 of incremental profit before fixed overheads for every GBP spent on marketing. 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 exceptional staff incentive payments at the end of the year. So that normalizes this year. Looking forward, if full price sales are up 5.2% in the U.K. online, we expect our margins to nudge forward by around 0.2% with 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.

[Simon Wolfson, CEO at NEXT]

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 can see 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 ZEOS integration.

[Simon Wolfson, CEO at NEXT]

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 U.S. for the first time. We've never really talked about U.S. before because we've really had no traction, and 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, that 3% growth, that is two countries have pulled that back, and we're not sure why. Kazakhstan and Australia.

[Simon Wolfson, CEO at NEXT]

If you know why those two businesses underperformed, please let us know, because we're wracking 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%. 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.

[Simon Wolfson, CEO at NEXT]

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 for sort of half the season. So that's why we didn't quite 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 we've put through. Operating 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.

[Simon Wolfson, CEO at NEXT]

The reason for that, in simple terms, is because we make a, 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'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 it doesn't is because actually there are two competing factors. Yes, WOBL 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 WOBL brands last year. So those two effects pretty much offset each other. Aggregator commission, we're getting better rates of commission from our partners.

[Simon Wolfson, CEO at NEXT]

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. 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. We think a very respectable margin for the business to make full year. We anticipate margins around 15.1% flat on last year. That is because the price increases will pay for the surcharges 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.

[Simon Wolfson, CEO at NEXT]

The reason that that's changed is because of the Pay in 3 product I talked about earlier. 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 transacted a few times, will 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 aggregators 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.

[Simon Wolfson, CEO at NEXT]

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 increase in choice of product on the website, particularly the WOBL brands, which we think pushed sales per customer up. Moving on to retail. This is our new store in Bluewater. You might be thinking sort of, oh, here's another one of those Thurrocks. Physically it does look the same, but financially it's much, much better. Because when you look at it, I know what a lot of you will be thinking, oh, yes, white elephant. It's actually, the economics of Bluewater store were much better than they were in Thurrock, and this store will make a very healthy return on the capital that we invested in. It's already open, and delivering sales ahead of our expectations.

[Simon Wolfson, CEO at NEXT]

In terms of space for the full year, we expect space to grow by around 1.3% as a result of opening eight new stores. Six of them are open. If we look at the six 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-like's minus 3.3. That number, although it's bad, is better than we were expecting. I know that's no consolation, 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.

[Simon Wolfson, CEO at NEXT]

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 ate up all of the gross margin gains and 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.

[Simon Wolfson, CEO at NEXT]

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 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, those are, again, slightly higher than in online. 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 make the allocation more accurate. So online gained about 0.1, retail 0.2. Between the two of them, it's about halfway between the two of them.

[Simon Wolfson, CEO at NEXT]

Essential overheads, same story there about staff incentives. That's what gives us our 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 we think will come in at around 10.2, so just over 10%. 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 between quarter one and quarter two, you can see that quarter one was where we took the big hit, and this is because last year the summer came early. So we got a big benefit in Q1 last year.

[Simon Wolfson, CEO at NEXT]

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. 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 you're most worried about, it's that number. I think that might be optimistic. Moving on to Total Platform. Total Platform, the subsidiaries had a really good half year. Profit's 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%.

[Simon Wolfson, CEO at NEXT]

What we are 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 a 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 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.

[Simon Wolfson, CEO at NEXT]

If that comes through, then the return on capital on all the investment we have made, both in buying those businesses, funding them, and also on the CapEx for Total Platform is around 26%. So it is looking like a very good. As a portfolio, it has 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. Obviously, part of my function at this meeting is to depress everyone a little bit. I have seen too many people smiling. So just want to explain why we are cautious about the U.K.

[Simon Wolfson, CEO at NEXT]

It is 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 is going to put pressure on the consumer. 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 the problem is going to be for them funding a GBP 100 billion deficit that they have got. 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.

[Simon Wolfson, CEO at NEXT]

So it does not look like there is a lot of room to increase spending. In terms of debt to GDP, we have not seen debt levels in the U.K. this high since we were in the shadow of the Second World War. Tax as a percentage of GDP is higher than it has been for the whole of the last 65 years. We think that is 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. We have gone into a little bit of detail about that in the. So I think tax increases will be self-defeating if they are used to fund stimulus. If they are used to fund a government deficit, then they will place a further drag on growth.

[Simon Wolfson, CEO at NEXT]

All those things put together mean that we think it is wise to trim our expectations for the second half. In terms of international, we were at 14%, we have gone to 20.5%. You might look at that and go, "Oh, well, they are still being a bit cautious because they are 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%.

[Simon Wolfson, CEO at NEXT]

As we begin to annualize that number, that growth will begin to reverse out, and you will see the beginnings of that as we move through the presentation. So that is why we are more optimistic about our international business, but not as optimistic as the numbers that we delivered in the first half. 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 will lose GBP 6 million from a slight decline in retail sales. That gives GBP 110 million. Add GBP 15 million for subsidiaries. Then in terms of cost increases, there is lots going on here. It is important, I think, to separate them out.

[Simon Wolfson, CEO at NEXT]

The GBP 44 million increase in marketing, 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 cannot do anything about, around GBP 70 million of fuel and wages. Then the higher interest costs are really about the capital returns. We are paying higher interest costs because we do not have the interest income from the money that we had on deposit last year, that this year we have given back to shareholders.

[Simon Wolfson, CEO at NEXT]

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. 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 are expecting to be in the order up 10%. If we add dividend on top of that to look at TSR, which is what we ourselves measure as a measure of the 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.

[Simon Wolfson, CEO at NEXT]

But particularly exciting given that last year the equivalent number was more than 20%. We weren't expecting to deliver as strong returns this year. 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 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 you've got, there's a brilliant page on page 6 which tells you pretty much everything you need to know about NEXT.

[Simon Wolfson, CEO at 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 calling out. The first is that in the first half, more than two-thirds of our growth came from non-NEXT brands, WOBL and third party. When you break that down, it's the WOBL 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. Even on the licenses, although we pay a royalty, we own the stock, we develop it, we buy the stock, we take the stock risk.

[Simon Wolfson, CEO at NEXT]

So when you look at the net margins of the WOBL business, and this is the net margins blend of overseas and U.K., and compare the three businesses, you can see that NEXT is at 18.3%, WOBL at 18.8%, and non-NEXT at 12%. So I guess that whilst 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 NOBBL. 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.

[Simon Wolfson, CEO at NEXT]

I'm not going to because, for those of you who've had to sit through the last six of these presentations, I have talked a great deal about WOBL brands and what we're doing to develop new licenses, new brands that we're 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.

[Simon Wolfson, CEO at NEXT]

The other number that I think is the number that sticks out is the NEXT brand in the U.K. was down around GBP 7 million, but it was down. 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 wane? We don't think there is. 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 hard to ensure that the brands we have are offering something different.

[Simon Wolfson, CEO at NEXT]

Inevitably, there must be an overlap. So the fact that we've parked so many powerful competitors on NEXT's front lawn means that we think that NEXT 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. In retail, this time last year, we think that we got a big gain from competitive disruption in the second quarter, and that obviously reverses out. If you look at the two-year number for retail, it's up around 2.3% for the NEXT brand.

[Simon Wolfson, CEO at NEXT]

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, well, more than half the growth overseas. If we just 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. Not much faster, growing as fast as the aggregator business. You can also see that aggregator business at 23% is lower than the 33% and 61% that we told you about for ZEOS in the second half.

[Simon Wolfson, CEO at NEXT]

You can see that our aggregator business, 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. 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. They've nudged forward, but we would expected those to move back, not to below the 150, but we'd expect them to be below last year's number. If there's one thing that is driving the exceptional growth of our overseas business, it is the maintenance of these returns.

[Simon Wolfson, CEO at NEXT]

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, 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.

[Simon Wolfson, CEO at NEXT]

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 GBP pound becomes more effective. Our websites and services have driven marketing growth. EU 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, were importing under the tax radar. It has dissuaded them from spending as much on advertising in Europe.

[Simon Wolfson, CEO at NEXT]

Finally, there are lots of countries where we had virtually no advertising last year, so they were sort of virgin territory, and we were able to spend more money in those territories without eroding overall margins. The final thing, again, I will stress this much more when I present this to my colleagues back at Endeavour, 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 does mean that 1% number looks a bit anemic. It's not as bad as it looks. This is all about the war in the Middle East and the first quarter of underlying growth was down 8%. In the second quarter, it was up 11%.

[Simon Wolfson, CEO at NEXT]

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%. 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 customer spend. What this graph shows is for the U.K., the spend by tenure of customers. So customers who've been with us 3 years on average spend GBP 203 a year. Those who've 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.

[Simon Wolfson, CEO at NEXT]

We thought we would see far more occasional customers and customers not coming back or extending their portfolio products overseas nearly as much as they have done in the U.K. 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 line just shows what the Middle East customers spend per customer, and it is much, much higher. If I had included that, it would have given an artificial view of what our international customers' spending were. Underlying international customers seem to be behaving in a way that is not dissimilar from our U.K. customers. We were, as I said, surprised by that.

[Simon Wolfson, CEO at NEXT]

All of you, because you are so much cleverer, will not be surprised because, of course, in the U.K., it does not mean that the NEXT brand is as attractive overseas as it is in the U.K. because in the U.K. we have got stores. Most of our online customers also spend in stores. So it does not mean that the NEXT brand is as powerful overseas because we do not 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.

[Simon Wolfson, CEO at NEXT]

These are the U.K. numbers, so if we have 100 customers who we recruit this year, 35 of them will reorder next year. These numbers are sort of the normal numbers we would see in an online world. If we look at the overseas numbers, again, remarkably similar. We thought they would 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.

[Simon Wolfson, CEO at NEXT]

The balancing factor is the amount we spend on marketing. In the U.K. we spend 3.8% on marketing and in effect, overseas, part of the 10% we spend on marketing is not about just gaining new customers, it is about doing the hard work that the stores are doing in the U.K. to retain customers. All of that filters through into the economics of the two businesses. I should say on that, sorry, that 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.

[Simon Wolfson, CEO at NEXT]

If you look at the three areas of focus, starting with product, again, I have talked what many of you will consider to be, and certainly my colleagues consider to be, ad nauseam about newness, quality and choice driving our ranges forward. I do think that we have made a step change over the last two or three 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 have done on quality and choice because it could sound like this was just an act of will. That oh, yes, the board say more newness and everyone rushes off and gets more newness.

[Simon Wolfson, CEO at NEXT]

But it is much, much harder than that in terms of giving customers real choice because it involves a whole load of work that if you do not do it, you will not get the choice and quality that you would if you put the hard legwork into inspiration. I think, again, there is a bit of a myth here that people think, well, in an AI world, all you have 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.

[Simon Wolfson, CEO at NEXT]

It cannot get those flashes of inspiration that our buyers and designers get when they go on inspiration trips to overseas capitals, to 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. You then need to spend the time designing it. Again, here I think there is a trap because when AI first came along, I did actually sit down with one of our designers at NEXT who had been to Central Saint Martins College literally and he was saying, "Oh, look, what I have got to do is put these prompts into AI and it generates this wonderful graphic." That was exciting at first, but what we found is those graphics did not sell.

[Simon Wolfson, CEO at NEXT]

It was pretty much universal. The AI-generated graphics did not sell and 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 done with human hand, human eye until they have an emotional response. We are putting more time into the work we put into painting, drawing, screen printing, woodblock design, shape design.

[Simon Wolfson, CEO at NEXT]

Finally, you can get the inspiration and the design, but you have then got to do the development to really elevate particularly fabrics and washes and dyes. 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 have decided what garment it is going to go into and develop fabrics with mills. We are not doing that universally. Others do it more than us.

[Simon Wolfson, CEO at NEXT]

But it is something that the more we do it, the better fabrics we get. It is not just about the base fabric. It is also about the wash techniques and dyeing, and spinning, and yarn manufacture, 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 are 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. So whilst technology and warehousing, we have reduced their cost as a percentage of sales, actually, in product, we have increased product costs as a percentage of sales, partly to do this and partly to seed new WOBL brands.

[Simon Wolfson, CEO at NEXT]

There are questions like, is this just a question of us throwing more money at it, or can we be clever? We think there is a big pot of gold here, basically. 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. I checked with one of our product directors, because the O&M people came back and said, "Oh, it's 25%." I pointed to one of our directors, said, "Is it really 25%? It can't be." She actually said to me, "No, no, it's more than that." The feeling is that it's actually taking more of their time. It's a bit like kids' homework.

[Simon Wolfson, CEO at NEXT]

Things you really hate doing seem to take a lot longer than the things you enjoy doing. 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, that 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 super soft, it won't appear in the search results. So buyers have to do far more in terms of managing website attributes, admin, and store planning, warehouse management. All of those things require an enormous amount of data, and only the product people can do it.

[Simon Wolfson, CEO at NEXT]

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 loosely held together." That's great, but that integrated system is one that we haven't fundamentally changed since 2003. We've just added the amount of data people put into it. 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. Production management, this is where 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.

[Simon Wolfson, CEO at NEXT]

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 it's a very arduous task at the moment, and 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, will save a lot of time. Got an online imagery and attribution system and a data entry system. The last one of those, of all the systems at NEXT, that is the one that I get the most vociferous complaints about.

[Simon Wolfson, CEO at NEXT]

You could argue that's because product people are naturally more vociferous than those who are prepared to take it in other parts of the business, but it is a really important thing. We think those systems all together can save at least half the time that we're spending on admin. That is time that we can spend on doing the things that 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 Elmswell 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.

[Simon Wolfson, CEO at NEXT]

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. 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 introduced new mechanization last year, we got a big dividend, and we thought that that was it.

[Simon Wolfson, CEO at NEXT]

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. Part of that GBP 7 million upgrade today are the gains that we've got from this 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 NOTIF, not delivered in full and on time. This is the percentage of parcels that aren't 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.

[Simon Wolfson, CEO at NEXT]

It's not as bad as it looks because the vast majority of failures are parcels where we deliver four of the five items today, but one of them is late and it's delivered tomorrow. So we're not saying 10% of everything feels late to customers. It doesn't. 2025, as we got the new mechanization working and the new capacity up and running, 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 two months, so we thought we were onto a 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. What that is all about is, it's about the glitches in the system and the mechanization.

[Simon Wolfson, CEO at NEXT]

When you are not that busy, you can rectify and correct in day. When you are running up to the wire at volume, you cannot afford to have those glitches and errors. 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. I think we have got a big job of work to do to go back and say, "Actually, we need to move towards a sort of zero tolerance approach to glitches." It is not enough just to say we fixed them. We need to do much more root cause analysis. We do 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.

[Simon Wolfson, CEO at NEXT]

That is a big job of work for our systems team. It is a lower job. It will not be as burdensome as it was with the help of AI. 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 is 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 spellchecker and a predictive text for coders. This helps you write code, and we introduced that in 2024, and it did affect both our head count and our cost as a percentage of sales.

[Simon Wolfson, CEO at NEXT]

We think that was very positive. What we are looking at now is how we deploy agentic AI. Whereas assistive AI does what it says, it assists, agentic AI really does the work. It actually does it. When you see it is astonishing. The only comparison I can think of is that it is like the difference in a calculator and a spreadsheet. Obviously, you are all far, far too young to remember the first calculators, but I remember the first time, age seven, I saw a calculator, and I was awed by it because I could work out whether my parents had paid me the right amount of pocket money, and it was certainty so I could adjust for inflation, all of those sorts of things. I thought that was wondrous until the spreadsheet came along, and then you realize the calculator is like a toy.

[Simon Wolfson, CEO at NEXT]

That is what agentic AI is compared to assistive AI. Just to sort of put that in context of what we are doing about it, this is our total development life cycle. A lot of businesses will use the same development life cycle. It is called Agile. It starts with ideas and concepts, specification, coding, deployment, and support. 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 do not all do one. They overlap in terms of those elements of the total development life cycle that they will look after. What we are doing is we are developing agents to sit alongside all of those roles and to do those functions. The people managing those functions will move from the sort of doers to managing the agents doing the task.

[Simon Wolfson, CEO at NEXT]

That is kind of the vision. There is a lot of work to do here, and you cannot buy an agent out of the box and stick it up and say, "Well, get on with it. Do my business specification." You need to put in the time to give it the business context, the business rules, apply guardrails. Very importantly, apply security. It is 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 are LLM independent, so that they can sit. It does not matter whether they are using, as a sort of underlying engine, whether they are using Claude or ChatGPT or another provider of AI, because if you do not do that, you will end up overpaying for the underlying AI.

[Simon Wolfson, CEO at NEXT]

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 have developed and piloted three of the agents, and we have begun to deploy those three 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, when you talk about a systems project, normally it is 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.

[Simon Wolfson, CEO at NEXT]

Just to sort of give you a sense of the power of these agents, on some of our websites and some of our apps, we do not have a share function. We have always looked at it, and it has just been too expensive to develop and considered not worthwhile. Traditionally, in terms of development time, it would have taken 11 days to develop using traditional coding. With assistive AI, we would 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 it 24 minutes and 29 seconds. To do what one of our coders with assistive AI would have taken 10 days to deliver. That is 10 working days.

[Simon Wolfson, CEO at NEXT]

It took about half a day, obviously, to manage the agent and then get the coding right and to make sure to weed out the errors, but still, a very dramatic reduction in time and a huge increase in productivity. There is a caveat here. Because it is a bit like that demonstration that works brilliantly, but then when you look at the whole thing, and this whole project, end-to-end we only saved 17% of the time. 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. Partly because these agents will only really work, really effectively, when you stitch them all together. That makes it looks like it is a rugby line with a ball being passed around.

[Simon Wolfson, CEO at NEXT]

Actually, because there are lots of functions where different agents have to talk to three other agents. The work to stitch these all together means that the huge gains that we think are possible will take time to deliver, but we are targeting 30% improvement in productivity by February 2028. Now, you will know that we spent GBP 200 million on software, so instantly you will go back to your spreadsheets and type in 30% of GBP 200 million, that is GBP 60 million saving. Do not 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 agentic AI will go up. But also, do not assume it is GBP 35 million saving on people, because if that were to be the case, it would be a huge failure.

[Simon Wolfson, CEO at NEXT]

Because the really exciting thing about this, in the context of a company turning over GBP 6 billion, the GBP 35 million is not what matters. What matters is the ability to deliver projects so much faster. There is not a single project in the business, single new project, that does not, in one way or another, involve a system change, and it is 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 is not just about speeding up projects we would have done. It is about doing projects that, in the past, just would not have been conceivable.

[Simon Wolfson, CEO at NEXT]

We have a mainframe that sits at the heart of all of our stock and price processing, is incredibly effective machine at doing huge amounts of data in very short period of times. But the coding for it, I have said in the report, hundreds of thousands. I checked with the hundreds and thousands of lines of code. The person who knows about these things said, actually, it was millions, but I did not want to put that because you would think I was exaggerating. It is millions of lines worth of code that 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.

[Simon Wolfson, CEO at NEXT]

We still would have done it, but it was not the cost that held us back, it was the fact that actually, the business would have ground to halt because so many other projects would have need mainframe development time that we just could not 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 will 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, what are people going to do? I think as well as producing far more volume and developing ideas we would not have been able to do before, I do think the nature of systems work is going to change.

[Simon Wolfson, CEO at NEXT]

Solving business problems, devising new applications, making the business aware of what this new technology can do, training and managing our 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. 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 prize 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. Unless we design our agents very rigorously to use cost carefully, we could end up spending more on AI than we did on the original people.

[Simon Wolfson, CEO at NEXT]

Not quite, but we could end up spending a lot of that productivity gain. There is still a big job of work to do, albeit a very different type of job. 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've picked three areas where we think there are really exciting projects. Product, warehousing, systems.

[Simon Wolfson, CEO at NEXT]

What I want to show you is that pretty much every area of the business has exciting projects. These is not the three things we're working on. These are three of the things we're working on. What I hope they 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. On that almost motivational note, I'll throw it over to Kiss. Sorry, Anne, yeah. Remember to use the microphones everybody, as you've got these.

[Anne Critchlow, Analyst at Berenberg]

Thanks. 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. 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? Thank you.

[Simon Wolfson, CEO at NEXT]

Yeah. I think the answer to the first question is that we are not seeing nearly as much of the costs filtering through to factory gate prices as we thought. If I look at the contracts we have placed so far for spring-summer, we have not placed a massive amount, but the amounts we have placed for spring-summer, we are looking at like-for-like price increases around 1%-2%. Not much. I think there are two different things going on here. There is an increase in input prices. But part of that has been paid for by an increase in productivity in our supply base. All this technology, they are getting smarter as well. I would not also underestimate the impact of the reduction in duty on goods from India. We get a meaningful percentage of product from India.

[Simon Wolfson, CEO at NEXT]

If all of that, if, and I am not saying we do, but let us say we get 10% from India, and duties come by 12%, that reduces our total prices by 1%. But it is not the effect on India that is the most dramatic thing, it is the effect it has had on all the markets competing with India. They have had to sharpen their pencil, as a result of that. So, 1%-2% is the short answer. In terms of WOBL, are we getting more productivity from buying in a brand or from developing a new one?

[Simon Wolfson, CEO at NEXT]

There is no rule of thumb. Some of the brands that we have bought in have been amazing, and some have been average. Some of the brands we started from scratch have been phenomenal. But some of them have failed. 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.

[Frederick Wild, VP and and Equity Research Analyst at Jefferies]

Good morning. Thank you for taking my question. Is that working? Fabulous. Thank you. Good morning. It is Frederick Wild from Jefferies here. A couple if I may. First of all, possibly the slightly more boring, obvious question on this U.K. slightly downgraded outlook for half two, is that anything you are seeing now, or is this more just you looking ahead at the various input costs people are facing? The extent to which that could carry through to FY 2028 as well, please. Second question is around the competitive landscape in Europe. Obviously, big changes to de minimis. You flagged the impact on the media spend there. Are there any broader impacts you are seeing in terms of pricing, competitive behavior, stuff like that? If I could squeeze one very final one in.

[Simon Wolfson, CEO at NEXT]

It's too late.

[Frederick Wild, VP and and Equity Research Analyst at Jefferies]

Oh, it's strictly two.

[Simon Wolfson, CEO at NEXT]

But if there's time at the end, we will definitely come back because otherwise we-

[Frederick Wild, VP and and Equity Research Analyst at Jefferies]

Sorry, this is me being cheeky.

[Simon Wolfson, CEO at NEXT]

otherwise we get inflation. We have got to fight inflation in all things, especially analyst questions. So, in terms of your boring, obvious question, are we seeing the numbers now? I think the trouble with giving you a boring, obvious answer is that I have to tell you what our trade was. That would be a trading statement. That would be new information that would be coming to the market, which I do not think is appropriate in an environment even as august as this one. I think we have definitely seen some softer weeks. I am not going to give you an average for the last seven weeks. We have seen some softer weeks, and I think there are signs.

[Simon Wolfson, CEO at NEXT]

But I think what we said in the book is that this is more about our anticipation than what we have seen. The next question, which is much more exciting, is the competitive landscape in Europe, which is such a big subject that I would not want to get into the nitty-gritty of it. I think we are not seeing any significant change that we can discern. But I think the other thing is, to be honest about it, is we do not 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.

[Simon Wolfson, CEO at NEXT]

We are constantly experimenting with prices and services in order to get that balance right. So we are 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 tailor what we do to that. Because actually, much better to be responsive and look at your own numbers than you are to try and impute what is going on and then respond to phantoms that may or may not exist. Yeah.

[Matt Clare, Analyst at Barclays]

Morning, Matt Clare 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? The second one on international margins. You mentioned WOBL having more pricing power. Any color on that relative to NEXT brand? That would be very helpful. Thank you.

[Simon Wolfson, CEO at NEXT]

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

[Simon Wolfson, CEO at NEXT]

I suppose, I think if you were to say to me, put the question a slightly different way and say, "Do you think you have got room to increase your prices in Europe without affecting sales?" My guess to that would be probably yes, but I would not want to do that because I would not want to risk it. We are making a very healthy profit, and it would be quite a big risk to take. In terms of market consolidation, again, I think that is 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, Analyst at RBC]

Thank you. Morning, Richard Chamberlain from RBC. Simon, I think you mentioned that the U.K. retail stores, you had seen some quite significant productivity improvements in the first half. I was wondering 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 are obviously 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. structurally will be a lower margin market on a medium to long-term view for NEXT, given Amazon's customer focus, likely presumably higher take rate and so on? Yeah, they are the two questions. Thanks.

[Simon Wolfson, CEO at NEXT]

Yeah, no. The U.S., I think it is a good question. I think it will have a lower profitability than our other businesses, mainly because at the moment, we are 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. I think that structurally, the question, do we pay for that or do the customer? Well, we are paying for most of it. The margin is low, but still more than 10%, so still comfortable margin in the U.S. In terms of productivity in stores. But just coming back to, sorry, your question on pricing. We did not 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 it.

[Simon Wolfson, CEO at NEXT]

In terms of stores, there is no one measure that we've introduced. It's not like we suddenly introduced self-serve tills, 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 store, so we can see how productive each member of staff is on, say, till transactions, the average time on a till transaction, a store pickup for a collection for a directory online customer, replenishment from stock room shop floor. We can measure all of those things.

[Simon Wolfson, CEO at NEXT]

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 who work there." 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 till manager doing tills. So I think that is the biggest change.

[Richard Trainor, European Food and General Retail Analyst at Bernstein]

Hello. Good morning. 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. 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?

[Simon Wolfson, CEO at NEXT]

Sorry, peer-to-peer?

[Richard Trainor, European Food and General Retail Analyst at Bernstein]

Yeah, peer-to-peer reselling marketplaces. I'm thinking of Vinted.

[Simon Wolfson, CEO at NEXT]

Right. I see. Sorry, nothing about the House of Lords, though. Just checking in. Okay, good. Right. In terms of AI, at the half year, we did talk a lot about all the different departments. I won't go through that all again. But if you're interested, go back to 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, remember, the data entry thing, not in phase one, but phase two of that, on the data entry, our product people will be able to take an email 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.

[Simon Wolfson, CEO at NEXT]

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 technology. Warehousing and retail, 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.

[Simon Wolfson, CEO at NEXT]

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 a blockage earlier on. There is an enormous amount that the various departments can do with AI. As I say, I don't want to repeat what I said earlier on.

[Simon Wolfson, CEO at NEXT]

In terms of peer-to-peer market, it may well grow, and 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 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?

[Simon Wolfson, CEO at NEXT]

What do you do if it doesn't turn up on time? It may be a fantastic market, but it is not one that we are actively looking at at the moment because we would have to forgo so many of the other promises that we make in terms of our existing service. Over.

[Sreedhar Mahamkali, Managing Director at UBS]

Yeah.

[Sreedhar Mahamkali, Managing Director at UBS]

Thank you, Simon. 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 is just my read of it, sounded a bit more positive or satisfied, at least, anyway, on the U.S. performance here. Have you made any changes in terms of product or how you are going to the market that is delivering perhaps better growth from a lower base, better engagement?

[Sreedhar Mahamkali, Managing Director at UBS]

If you could talk to it, that will be great. Secondly, I think you have 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 do not spend any more on marketing, or if you keep marketing flatline from here? What would that look like in, I do not know, 2 years' time? How should we think about it?

[Simon Wolfson, CEO at NEXT]

Yes. You shouldn't, would be my advice. I think because it is a remainder, it is not a thing. It is what is left over. For each of these marketing campaigns, we identify incremental sales. One of the sense 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 are generating, what does that give us in terms of growth?

[Simon Wolfson, CEO at NEXT]

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

[Sreedhar Mahamkali, Managing Director at UBS]

The U.S.

[Simon Wolfson, CEO at NEXT]

Oh, the U.S. You sound a lot more excited about the numbers. Well, 250%, it's hard not to be excited about it. What 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. We're not getting excited about it yet. In terms of what's triggered it's really all about different avenues of marketing and reaching the customer. We haven't changed the product offer or the pricing significantly. Warwick.

[Warwick Okines, Analyst at BNP Paribas]

Morning. 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 in your statement about menswear lacking a bit of newness. I wonder if you just go into a bit more detail about that, maybe sort of why, after all the progress you've made in women's, didn't quite come through in men's and what you're doing about it. Secondly, on the average spend per cohort data you showed, which was 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 Eastern sort of cohort retention? Thank you.

[Simon Wolfson, CEO at NEXT]

To answer the second question, I think the only thing you can learn is if you sell to very wealthy customers, they're likely to buy more. I think it's about the mix of people who have chosen to shop with us rather than anything clever that we've done. In terms of menswear. We don't talk a great deal about different areas of the business, and so I'm definitely not going to go into 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, when you read through it, is the thing that drove the lack of newness was the extraordinary success our menswear teams have had over the previous three years.

[Simon Wolfson, CEO at NEXT]

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 beige chino and to kid yourself that this year's taupe chino and sand chino are fundamentally different and new from the taupe one that you did last year. I think in essence, it's one of those. 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.

[Simon Wolfson, CEO at NEXT]

I think that the same criticisms could be made of some, but not all, of our subsidiary menswear teams as well. 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 recognize that actually there's a big job of work to do. What I would say is the only reason I put it in, or the reason, is because it's already started.

[Simon Wolfson, CEO at NEXT]

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 as a sort of encouragement to that whole market to 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 WOBL 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. That was the real point, was to give more encouragement to the people who are introducing newness and choice. Yeah, Monique.

[Monique Pollard, Managing Director at Citi]

Hi. It's Monique Pollard from Citi. My first question was just, you did a lot of detailed work on the custom 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 could make on the ad spend and gave you perhaps a bit more confidence to boost that marketing spend over time? 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 just wondered how much the returns rates had lowered and why, and how different those U.K. returns rates were from the international business?

[Simon Wolfson, CEO at NEXT]

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 is not necessarily a good thing. It is because it is much harder to return in France, where you do not have lots of shops to return in as you do 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, and we get high returns in Germany. But pretty much everywhere else, returns are lower than they are in the U.K. But I do not think that is a good thing. I think it is a bad thing because we are not giving as good a service as we could do.

[Simon Wolfson, CEO at NEXT]

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

[Monique Pollard, Managing Director at Citi]

On the marketing spend.

[Simon Wolfson, CEO at NEXT]

Oh, yes.

[Monique Pollard, Managing Director at Citi]

on the return on ad spend.

[Simon Wolfson, CEO at NEXT]

Yes, so very good question, but again, I think it is not the way we look at it, in that, yes, that data has been enormously important in driving the marketing forwards, but not because at a high level it is right. It is because the marketing team will look at each campaign they are doing in each country and look at how many customers for that type of campaign order a second time or, and a third time. If that campaign has high retention levels, that type of advert, let us say advertising for women's shoes and customers are more likely to come back on women's shoes than they are on skirts, then we will do more advertising on shoes.

[Simon Wolfson, CEO at NEXT]

So it is not that the sort of big picture drives me to say, "Come on, marketing team, spend more money." It is actually entirely the other way around. It is that adverts that produce returning customers are more likely to be increased in volume because they generate higher returns.

[David Hughes, Analyst at Shore Capital]

Hi, 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?

[Simon Wolfson, CEO at NEXT]

Well, the answer is we don't know. 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. I bought it from you." 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, Assistant Director of Equity Research in UK and European Consumer and Retail at Panmure Liberum]

Hi, 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 end deals that you're getting? Thank you.

[Simon Wolfson, CEO at NEXT]

Yeah. 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 estimating stores, they were going, "Oh, I know what we'll take in Chichester because I remember what we used to take 10 years ago." That was the mistake. Or, "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. I think we've reined in our expectations. The reason that we still managed to open stores is because we are also being much clever about what we spend on new stores. The big problem with new stores is the amount, is the huge inflation. GBP 125 a square foot 10 years ago to GBP 200 a square foot today.

[Simon Wolfson, CEO at NEXT]

When we're looking particularly at where we're going into other people's stores saying, "Actually, we don't need to refit all the stockroom," 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. On that bombshell, we will finish. Thank you very much for your time.

Participants

Executives

• Michael Roney, Chairman
• Simon Wolfson, CEO

Analysts

• Anne Critchlow, Analyst at Berenberg
• Frederick Wild, VP and and Equity Research Analyst at Jefferies
• Matt Clare, Analyst at Barclays
• Richard Chamberlain, Analyst at RBC
• Richard Trainor, European Food and General Retail Analyst at Bernstein
• Sreedhar Mahamkali, Managing Director at UBS
• Warwick Okines, Analyst at BNP Paribas
• Monique Pollard, Managing Director at Citi
• David Hughes, Analyst at Shore Capital
• Anubhav Malhotra, Assistant Director of Equity Research in UK and European Consumer and Retail at Panmure Liberum