TIDMNXT
RNS Number : 2399L
Next PLC
29 April 2020
Date: Embargoed until 07.00hrs, Wednesday 29 April 2020
Contacts: Amanda James, Group Finance Director (analyst calls)
NEXT PLC Tel: 0333 777 8888
Alistair Mackinnon-Musson Email: next@rowbellpr.com
Rowbell PR Tel: 020 7717 5239
Photographs: http://www.nextplc.co.uk/media/image-gallery/campaign-images
NEXT plc
Trading Statement - 29 April 2020
OVERVIEW
At a time of unprecedented uncertainty, we are using this
trading statement to give shareholders a comprehensive, and much
longer than normal, update on our trading and operational
environment. We include a revised stress test of the Company's
sales, costs, cash flows and finances for the current year. The
headlines are as follows:
Sales The fall off in sales to date has been faster and
steeper than anticipated in our March stress test
and we are now modelling lower sales for both the
first and second half of the year.
Costs We believe that we can achieve higher cost savings
and stock cancellations than we originally anticipated.
Cash We have increased the Company's cash resources
through asset sales, and through suspending share
buybacks and dividends.
Facilities We have taken further steps to secure our debt
finances by agreeing with our banks to waive the
financial covenants in our Revolving Credit Facility
(RCF) for the coming year. We have also secured
additional borrowing facilities through the Government's
Covid Corporate Financing Facility (CCFF) though,
at this time, we think it is unlikely that we will
need to draw on these additional funds.
The conclusion is that we now believe that the finances of the
Company are as secure as when we announced in March, if not more
so.
Much will depend on our ability to continue increasing the
capacity of our Online operations within the constraints of new
safe working practices and on the timing of store re-openings.
Nonetheless we believe that, even in our worst scenario, with full
year full price sales down -40%, the mitigation we have put in
place means that: (1) the Company can operate comfortably within
its cash resources and (2) we will end the year with less net
financial debt than at the end of last year.
SALES UPDATE AND OUTLOOK
SALES TO DATE
The retail sector, along with the wider economy, has slowed
faster and more steeply than we expected in March. The table below
sets out the full price sales performance by division for the
period from 26 January to 25 April.
Full price sales (VAT exclusive) Year to 25 April
================================================== =================
Retail - 52%
Online - 32%
Product full price sales - 41%
=================
Finance interest income +2%
Total full price sales including interest income - 38%
=================
The chart below shows the full price sales by week for Retail
(in green), Online product sales (in blue) and interest income (in
grey). The total last year is shown for comparison as a dotted
line. We have also included an estimate for the current week, which
is not included in our first quarter reporting period.
Full Price Sales by Week chart: Click or paste the following
link into your web browser to view the PDF document. Refer to page
2 for the relevant chart.
http://www.rns-pdf.londonstockexchange.com/rns/2399L_1-2020-4-28.pdf
ONLINE SALES TO DATE - CLOSURE, RE-ORGANISATION AND START UP
Closure and Re-organisation
On Thursday 26 March, we temporarily closed our UK warehouses
and distribution networks in order to adapt our operations to
working safely in a coronavirus world.
During the 18 days of closure we re-organised all aspects of our
warehousing to ensure social distancing and improved sanitation. We
re-organised the flow of pedestrians, adapted exits, entrances,
congregation areas, rest areas and workstations. In addition, we
changed our picking routines and delivery promise to smooth
workflow during the day and eliminated the peaks in activity most
likely to result in close contact between operatives.
A copy of our staff training video can be found on our website
and gives a flavour of the extent and nature of the changes we have
made ( https://www.next.co.uk/our-employee-safety-video ). We are
now very confident that our colleagues in the warehouses can return
to work safely, with social distancing and sanitation procedures in
place and rigorously monitored.
Start Up
We re-opened our warehouse picking operation on Tuesday 14
April, the ramp-up of operations is necessarily slow; staff
inductions need to be conducted in small numbers to ensure that
colleagues are completely familiar with new ways of working.
To limit volumes, we are only enabling customers to order the
number of items that we can pick safely on any given day. At that
point we then stop taking orders, switch to browse-only mode, and
re-open the following morning. Given the initial capacity
limitations, we first opened with only Childrenswear products
available. Since then, we have steadily increased the products
available for sale and we now offer around 70% of our ranges.
As each day goes by, we have steadily increased the numbers of
people working in our operations and the capacity at which we are
able to operate. We hope to increase capacity to around 70% of
normal levels within the next two weeks.
The graph below shows how order capacity in our main warehouse
has increased over the last two weeks and how it is expected to
develop in the coming days, as more colleagues return to work.
Daily Capacity as % of Normal Capacity - Main Boxed Warehouse
graph: Click or paste the following link into your web browser to
view the PDF document. Refer to page 3 for the relevant graph.
http://www.rns-pdf.londonstockexchange.com/rns/2399L_1-2020-4-28.pdf
Any further improvement in capacity will depend on how many of
our colleagues are able to work (see below) and, of course, whether
higher capacities remain compatible with safe operations.
Staff Availability for Work
In anticipation of increased volumes, we have surveyed our
warehouse colleagues to assess their potential ability to return to
work. The table below sets out (1) those who are able to work, (2)
those who are limited by childcare responsibilities and (3) those
that are required to stay at home either because they are
vulnerable or because they are living with someone officially
classified as vulnerable.
TOTAL ABLE TO WORK 6,641 76%
TOTAL LIMITED BY CHILDCARE 919 10%
of which sole carers 298 3%
===================================== ======================== ====
VULNERABLE OR LIVING WITH VULNERABLE 1,234 14%
of which vulnerable 341 4%
===================================== ======================== ====
TOTAL RESPONDING 8,794 100%
Awaiting response 268
Managing Storage Capacity
The reduction in sales volumes has meant that we have a lot more
stock in our warehouses than anticipated. This excess stock would
have prevented the intake of new stock and inhibited ongoing
operations. This problem has been addressed through the addition of
third-party storage facilities in the UK and, in some cases, by
holding stock in source countries. We estimate that the additional
cost of these facilities in the current year will be in the region
of GBP2m.
RETAIL SALES TO DATE
We believe that the threat of a pandemic did not significantly
affect retail sales until the beginning of March, we saw a material
impact in the second week of March and declines accelerated as each
day went by. In the three days before stores closed on Monday
23(rd) March, Retail sales were down -86%. In reality, the majority
of our customers had decided to stop shopping in retail stores
before the order came to close them.
Plans for Re-opening
We have plans in place for the re-purposing of our stores ready
to re-open in a socially distanced world. Measures include
screening of tills, distance marking walkways, sanitisation
stations, exit and entry management systems and other measures.
We will prioritise the opening of our larger out-of-town stores
first for the following reasons:
l We will be better able to adapt the layout of our large
stores to ensure that social distancing measures are
implemented effectively
l Out-of-town retail parks have large car parks, and outside
space available to manage those waiting to get into stores
l Larger stores tend to trade longer hours reducing the
numbers of people at any one time
l Large stores have larger and more senior management teams,
and are thus better able to supervise social distancing
and other safety measures
l Area and regional management teams will be better able
to manage and monitor safety measures in a small number
of large stores, than a large number of small stores.
We anticipate that it will take some time for customers to
return to their normal shopping habits and that sales will be very
subdued when trade commences.
REVISED STRESS TEST
This stress test looks at different scenarios for sales, costs
and cash flows for different levels of sales decline versus last
year. The cost savings and measures to conserve and generate cash
are given relative to the pre-coronavirus guidance we issued in
January. At that time we expected sales to grow by +3%, profit
before tax of GBP734m[1], and for year end debt to increase by
+GBP50m on the previous year. We refer to our January guidance as
the Base Case in the rest of this document.
[1] The financial information throughout this document does not
reflect the impact of IFRS 16, Leases.
The following sections detail:
1. Revised sales scenarios
2. Current expectations for stock and other costs savings relative to the Base Case
3. The net cash cost of lost sales minus cost reductions
4. Measures we can take to generate cash and secure debt facilities
5. Stress test summary of cash flow, year end net debt and
financial headroom throughout the year.
1. FULL PRICE SALES SCENARIOS
We believe that the effects of the coronavirus will be felt for
longer than we first anticipated. The economic consequences and
continued social distancing will mean that both Retail sales and
Online sales will be disrupted even after full lockdown measures
have been lifted.
The table below sets out our revised full price sales scenarios
by quarter and for the full year.
Full price sales versus last Scenario Scenario Scenario
year - 30% - 35% - 40%
============================= ======== ======== ========
Quarter 1 - 38% - 38% - 38%
Quarter 2 - 50% - 56% - 62%
Quarter 3 - 19% - 26% - 33%
Quarter 4 - 17% - 22% - 28%
======== ======== ========
Full year - 30% - 35% - 40%
Full Price Sales Scenarios by Quarter graph: Click or paste the
following link into your web browser to view the PDF document.
Refer to page 5 for the relevant graph.
http://www.rns-pdf.londonstockexchange.com/rns/2399L_1-2020-4-28.pdf
CLEARANCE SALES
Although our main July and January End of Season Sales are
likely to fall outside lockdown, we believe clearing our surplus
stock will prove challenging if social distancing restrictions are
in force. We are forecasting for clearance sales to decline by -11%
on last year, on a balance of stock to clear which is expected to
be between +15% and +45% up on last year. In each scenario we have
assumed the loss of GBP50m of clearance sales (VAT ex).
2. STOCK, COSTS AND ONLINE LING
The cash cost of lost sales can be partially mitigated by (1)
the cancellation of stock, (2) operational cost savings and (3)
reduced lending for Online sales. Each is explained and quantified
in the following sections.
STOCK CANCELLATIONS
Our product teams have cancelled stock that we no longer need
and identified stock that we can carry over to future seasons. We
have made good progress and saved around GBP290m on stock
purchases.
We have endeavoured to be fair to our suppliers. In a letter to
our suppliers in late March 2020, NEXT committed to honour and pay
them in full, on normal payment terms, for orders that were due to
leave supplier factories up to and including 10 April 2020. Orders
due to leave supplier factories after this date that are no longer
required, have been cancelled and compensation payments made
towards the raw materials that suppliers have acquired.
We are still selecting ranges and continue to order stock for
later in the year. There is no point in not buying coats because we
have too many t-shirts!
The table below sets out the value of stock, at retail selling
value, that we have either cancelled or deducted from our original
buy budget. This has saved the cost value of the stock, less
compensation paid to suppliers and NEXT Sourcing (our internal
sourcing agent) commission.
GBPm (e)
======================================================== ========
Cancelled stock at retail selling value 450
Reduced future buy at retail selling value 510
========
Total reduction in stock at retail selling value versus
Base Case 960
Cost of stock saved, less supplier compensation and
NEXT Sourcing commission 290
Stock Carried into Spring Summer 2021
In addition to cancelling stock, we have identified GBP330m (at
retail selling value) of Spring Summer 2020 stock that can be
carried forward into Spring Summer 2021. This will represent around
15% of the total Spring Summer 2021 buy. This product is generally
basic products, for example summer t-shirts and chinos.
COST REDUCTIONS
The paragraphs below set out our estimates of the cost
reductions that can be achieved. In each case the cost reductions
relate to the mid-case (-35% scenario). The savings are given
relative to our January Base Case.
OPERATIONAL COST SAVINGS EXCLUDING WAGES (GBP120m)
We have reviewed all our operating costs and now anticipate
operational costs savings of GBP120m.
Savings are forecast across the board with the most significant
cost reductions coming from:
l Online and Retail marketing, catalogues and photography
(GBP40m)
l Online distribution costs, many of which are contracted
out to third-parties (GBP35m)
l Store occupancy costs (GBP18m). We are paying our contractual
rent in full and on time but can make significant savings
in repairs and cosmetic maintenance costs. We also expect
significant savings in service charges from shopping
centres and retail parks where we are closed.
The balance of savings comes from a large number of small
savings: from overseas travel, credit card commissions and air
freight through to the cost of consumables such as hangers and
bags.
WAGES (GBP135m)
We now estimate that wages costs will be GBP135m lower than
originally forecast. Around GBP40m of these savings relate to the
lower sales we anticipate from July onwards.
We initially furloughed 88% of our staff across the business,
the vast majority coming from stores and warehouses that were
closed. This figure has now reduced to 84% following the reopening
of our Online business. Colleagues on furlough continue to be paid
80% of their contractual wages, mainly through the Government's Job
Retention Scheme, a measure we believe has been hugely successful
in preventing widespread redundancies and hardship.
BUSINESS RATES and CORPORATION TAX (GBP250m)
The business rates holiday will reduce the cost of our rates in
the year by GBP85m and, in the event the Company breaks even, there
will not be a corporation tax liability - a saving of GBP165m.
REDUCTION IN NEXTPAY LING
As a result of lower credit sales, we would expect to lend
GBP325m less to our customers. However, we believe that customers
will take longer to pay off their balance and, as a result, defer
GBP20m of payments into next year. In addition, we expect higher
defaults to reduce payments by a further GBP5m in the year. The net
effect of these changes will reduce net lending to nextpay
customers by GBP300m.
3. IMPACT ON NET CASH
The table below sets out the cash flow impact of lost sales
after cost saving measures but without the Company taking any
further corporate action to conserve or generate cash (such as
cancelling buybacks). The impact is relative to our January Base
Case.
Scenario Scenario Scenario
GBPm (e) - 30% - 35% - 40%
================================ ======== ======== ========
Lost full price sales (VAT
ex) - 1,255 - 1,430 - 1,605
Lost clearance sales (VAT ex) - 50 - 50 - 50
======== ======== ========
TOTAL LOST SALES (VAT ex) - 1,305 - 1,480 - 1,655
Reduce stock purchases +290 +290 +290
Operational cost savings (exc.
wages) +115 +120 +125
Wages +130 +135 +140
Business rates +85 +85 +85
Corporation tax reduction +140 +165 +165
======== ======== ========
NET CASH FROM LOST SALES - 545 - 685 - 850
Inflow from reduction in Online
lending +265 +300 +345
======== ======== ========
NET CASH AFTER REDUCED LING - 280 - 385 - 505
4. MEASURES TO GENERATE AND SECURE CASH RESOURCES
SECURING FINANCE FACILITIES
NEXT is currently financed by GBP1,575m of bonds and bank
facilities.
Revolving Credit Facility Covenants
We have now received agreement from all our banks to waive the
covenant compliance tests until January 2021. There are no
financial covenants within the terms of our bonds.
Covid Corporate Financing Facility (CCFF) Application
Our application to draw on the Bank of England's Covid Corporate
Financing Facility (CCFF) was approved on 3 April, with funding
being available from Monday 6 April. Under all the sales scenarios
modelled above, we would not need to draw on this facility. However
the availability of additional financing means that, if sales were
lower than our worst case, we still have significant cash resources
to draw on.
The terms of the Government loan scheme mean we are not
permitted to disclose the size of our facility. For information,
the Bank of England's guidance published on their website, states
that companies with NEXT's pre-crisis credit rating are permitted
up to GBP600m.
GENERATING ADDITIONAL CASH RESOURCES
The following table sets out the measures we are taking to
generate and conserve the Company's cash resources.
Year end
Action Description value GBPm
================== ============================================= ===========
We expected to spend GBP280m on buybacks,
we spent c.GBP20m in January, the balance
Suspend buybacks will now be retained. +260
We will suspend shareholder distributions
Suspend dividends until the situation stabilises. +220
================== ============================================= ===========
SUB TOTAL Total reduction in shareholder distributions +480
We have completed the sale and leaseback
of some of our warehouses (GBP107m) and
are in advanced stages of agreeing the
sale and leaseback of our Head Office
Asset sales in Enderby (GBP48m). +155
We had originally planned to spend GBP145m
this year. GBP45m of this expenditure
was uncommitted and not essential (for
Defer capex example, store cosmetic refit capex). +45
This involves our Employee Share Option
Trust (ESOT) selling shares they do not
currently need to cover employee options
(at today's share price) and repaying
part of the loan from the NEXT Group
ESOT loan used to buy these shares. To date we
recall have sold shares to a value of GBP87m. +87
We have suspended purchases of shares
Suspend ESOT into our ESOT. We had originally planned
purchases to spend GBP40m in the current year. +40
================== ============================================= ===========
Total increase in cash resources versus
TOTAL Base Case +807
5. CASH FLOW, IMPLIED YEAR END NET DEBT & HEADROOM
MONTHLY NET CASH FLOW
Based on the sales, costs and cash generation measures set out
in the previous sections, the chart below sets out our operational
cash flow in blue and assets sales in green. Our cash resources
were significantly boosted in April when we completed our ESOT loan
recall and in May we expect to receive the funds from the sale and
lease back of a warehouse complex and our Head Office.
Net Cash Flow by Month chart: Click or paste the following link
into your web browser to view the PDF document. Refer to page 10
for the relevant chart.
http://www.rns-pdf.londonstockexchange.com/rns/2399L_1-2020-4-28.pdf
NET DEBT, FINANCING AND HEADROOM
Based on our three sales scenarios, our net debt will have
peaked in February at GBP1.15bn. It has since fallen mainly as a
result of the sale of ESOT shares (GBP87m). We expect net debt to
fall further in May when we receive the lion's share of the
proceeds from the sale and leaseback deals (GBP146m). Under the
-35% scenario we expect net debt to close the year at GBP740m.
As can be seen the Company remains at least GBP400m within its
debt and bond facilities of GBP1,575m and this is before accounting
for any funds that might be drawn from the Government CCFF.
Net Debt and Financing graph: Click or paste the following link
into your web browser to view the PDF document. Refer to page 10
for the relevant graph.
http://www.rns-pdf.londonstockexchange.com/rns/2399L_1-2020-4-28.pdf
CASH FLOW, YEAR END DEBT, EBITDA AND PROFIT
Cash flow relative to Base Case
The table below summarises the changes to our cash flow
resulting from the lost sales, cost savings and cash generation
detailed in the previous sections. All numbers are given relative
to our January Base Case.
Scenario Scenario Scenario
GBPm (e) - 30% - 35% - 40%
================================ ======== ======== ========
Lost full price sales (VAT ex) - 1,255 - 1,430 - 1,605
Lost clearance sales (VAT ex) - 50 - 50 - 50
======== ======== ========
TOTAL LOST SALES (VAT ex) - 1,305 - 1,480 - 1,655
Cost savings 760 795 805
Inflow from reduction in Online
lending 265 300 345
======== ======== ========
Net cash cost of lost sales - 280 - 385 - 505
Measures to generate and retain
cash 807 807 807
======== ======== ========
Reduction in year end net debt
vs Base Case 527 422 302
Implied EBITDA, Profit and Net Debt versus Last year
The January Base Case resulted in profit of GBP734m, EBITDA of
GBP900m and anticipated that our year end net debt would increase
by +GBP50m on the previous year. The table below shows the implied
profit before tax, EBITDA and the change in year end debt for each
of our three scenarios. Importantly, in all three scenarios, our
EBITDA is positive and year end net debt reduces.
Scenario Scenario Scenario
GBPm (e) - 30% - 35% - 40%
=============================== ======== ======== ========
Implied EBITDA 320 170 20
Implied Profit 150 0 - 150
Reduction in year end net debt
vs last year 477 372 252
======== ======== ========
DIVIDENDS AND DIRECTORS' REMUNERATION
Given the scale of uncertainty caused by the coronavirus,
distributions to shareholders will be suspended until such time
that we see the situation stabilise and our sales improve. We will
not pay a dividend in August 2020 and do not anticipate paying one
in January 2021.
As previously announced, all main board directors have agreed to
waive 20% of their salaries and fees during this challenging
period. In addition, the Annual Bonus for the Executive Directors
has been cancelled for the current year so there will be no bonus
payable to them in respect of the Company's performance in the
2020/21 financial year.
SUMMARY
It is hard to think of a time when the outlook for sales and
profit has been more difficult to predict. A pandemic of this scale
has simply not been experienced by a modern global economy. No
amount of information about the past can accurately guide us in our
deliberations on the future. Our job is not to guess exactly how
things will pan out but to prepare the Company for all outcomes
that seem reasonably possible.
So, the scenarios we set out are just that, scenarios, not
guidance, not a forecast. Their purpose is to demonstrate how the
business is likely to perform under different levels of stress,
without seeking to predict which outcome is most likely.
But these stress tests are more than an academic exercise. They
serve to inform the decisions we take about the costs we should
save, the cash we need to generate and investments we can afford to
make.
The stress test also serves to demonstrate the financial
stability of the Group. NEXT's historic maintenance of healthy
margins and high returns on capital have built a strong base from
which to weather the storm: even in our worst case scenario of
sales down -40% the Group still is likely to deliver positive
EBITDA and reduce year end financial net debt.
Much has changed since we last reported in March, it seems
likely that much will change again in the next three months! We
will give another full update in our trading statement in July. In
the meantime, our focus remains clear:
-- Maintain the financial stability of the Group through saving costs and generating cash
-- Adapt to safely trading through the pandemic
-- Continue to invest in the products, systems, infrastructure
and new business ideas that will enable us to take the business
forward once the storm has passed.
NEXT TRADING STATEMENT
Our next sales update will cover the first 26 weeks of the year,
to 25 July 2020, and is scheduled for Wednesday 29 July 2020.
Forward Looking Statements
Certain statements in this Trading Update are forward looking
statements. These statements may contain the words "anticipate",
"believe", "intend", "aim", "expects", "will", or words of similar
meaning. By their nature, forward looking statements involve risks,
uncertainties or assumptions that could cause actual results or
events to differ materially from those expressed or implied by
those statements. As such, undue reliance should not be placed on
forward looking statements. Except as required by applicable law or
regulation, NEXT plc disclaims any obligation or undertaking to
update these statements to reflect events occurring after the date
these statements were published.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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