Earnings Call: H1 2022

Sep 29, 2021

Morning, everybody. Before I get into the meat of the presentation, two things to remind you of. The first is that these accounts are 100% IFRS 16 compliant as are all the comparisons for the last 1 2 years. The second is throughout this presentation, unless we say otherwise, every number is given on a 2 year comparison. Now I should start this presentation by saying that the numbers are an awful lot better than we were expecting they were in the first half and they have continued that way into August ANSEPTember. And although the numbers are good, the one thing I'd like to stress is that they are probably not quite as good as they look and that there are a number of factors that we feel are artificially boosting sales at the moment that could mislead you as to how strong the rest of the year will be. And that basically comes down to pent up demand clothing and we're seeing that very strongly on items like suits and women's formal wear. Secondly is the amount of savings that consumers have saved over lock in which they are beginning to unwind. And the third is the fact that in August September far fewer people went overseas. Not only does that mean that they saved the money they would have spent on travel but they were here to spend their money in UK retailers. Those factors we believe will slowly work their way out of the system as we go through to the rest of the year. That said, although things may not be as good as they currently appear, we do think that the outlook is much, much better than we thought it was going to be a year ago and actually much better than we thought it was going to be 2, 2.5 years ago. So the first half of this presentation is really going to be on the numbers and our forecast for this year. And the second is going to be the second part is going to be on how we see the future going forward sort of over the next 5 years and why we feel the outlook is potentially a lot brighter than we thought it was maybe 2 or 5 years ago. So moving on to the numbers. Sales were up 8% in the first half. Full price sales were up 9%. If we look at that between the periods that we were locked down and the periods that we weren't, in the lockdown period. Online was up 70%, obviously retail 0. Once England came out of lockdown, looking at that period of time, online sales fell back to around 46% up on last year. That was much higher than we thought. We thought we would lose an awful lot more of that online trade than we did once the shops had opened and the shops did much better than we were expecting as well, down 8% in total, but on a like for like basis only down 4% on 2 years ago. We were expecting compound annual decline of 6% in our retail store sales. So that would have given us around 12% decline. So that just gives you a measure of the difference between what happened and our expectations and we think is evidence of this pent up demand. Moving on to profit. The profit was up 3%. The difference between the growth in sales and the growth in profit is largely we believe down to the £20,000,000 or so we lost as a result of lockdown. In terms of interest. Our interest was down significantly on 2 years ago. Two reasons for that. The real reason was the 2,000,000 drop in external interest and that's all about the fact that we have less debt than we had 2 years ago. The other factor is the lease interest. This is an IFRS 16 accounting measure that is the interest that we don't actually pay on the stores that we don't actually own with the money that we haven't actually borrowed to buy the stores that we don't own. Profit before tax up 6%, tax charge down on 2 years ago. That's partly super deductions partly the revaluation of our deferred tax asset, which has increased in value and the full amount of that increase in value is taken in this half and that's because future corporation taxes are going up. Profit after tax up 8%, earnings per share on 2 years ago up 11% as a result of the buybacks we did 2.5 years ago. Moving on to cash flow. I'm not going to talk about capital expenditure because the outlook and history of capital expenditure is exactly the same as we set out in March. So there's no new news there. There's quite a lot to say about working capital. Seeing a big swing in working capital, a £4,000,000 inflow as opposed to £35,000,000 outflow 2 years ago. Lots of things going on there. First of all, less outflow because we'd paid for less stock and that's all about the fact that 2 years ago, we would have been increasing our stock as we went into the autumn season. This year, as a result of stock delays, our stock is actually slightly down. We sold the land upon which our new Aemstle three warehouse is being built. We have charged £21,000,000 in our accounts for the repayment of business rates for the period of time our shops have been and will be open, we haven't yet paid that money. So that comes as cash inflow. And finally, credit has gone up mainly VAT and staff incentives we plan to pay but haven't yet paid. The flip side of that outflows. We're beginning to build back customer receivables that cost around £45,000,000 and we invested £43,000,000 in REIS. It looks like we've had a big increase in employee share option trust costs. This is all about in this year. We've done this year's amount and last year's and that gives cash flow before distribution up on 2 years ago by about £11,000,000 And you can see the difference between the £20,000,000 of profit and £11,000,000 of cash flow is all about increasing CapEx. Once you move all the noise, underlying cash consumption of the business has been marginally impacted by an increase in CapEx, which in turn is all about the increase in the new warehouse that we're building in Amsel 3. In terms of the balance sheet, stock down 2%. This number actually flatters the reality of the situation. A lot of the stock that we have on our balance sheet at that time was actually in transit. So stock in the UK was down 12% and actually next stock was down 18% and some of the differences things like beauty where we didn't have any stock 2 years ago. So the reduction in the next stock levels is indicative of how short the business was of stock at that point. Since that time, our stock position has got worse. Actually at one stage we were at minus 25% and has now rebuilt itself back up to the levels that it's currently at. So we're currently about minus 18% on next stock. Each week that we move on, we can see our stock position improving. We expect the stock to end the year around flat. In terms of debtors, unusually there is quite a big difference between the reduction in our debtors and the reduction in our customer receivables. That £50,000,000 difference is money that we're owed by partners like Zalando and money that were owed by companies that we've invested in like Reece and Victoria's Secret where we have lent those companies money. In terms of the reduction in receivables, receivables are down 11%. Now that compares to credit sales in the last 6 months up 13%. The apparent contradiction between those two numbers is all about the amount of money that was paid down last year during the pandemic as customer savings increased and they used that money to reduce the amount that they owed us. That was accounted for about 22% of the difference. Further 2% was the fact that we have got additional provisions that we took last year that further reduce the receivables. Moving on to dividends. There were no dividends in the first half, but since then we have paid £140,000,000 special dividend, so in line with 2 years ago. And then in terms of our right of use assets and lease debt, these are again the stores that we don't actually own and the debt that we haven't borrowed to buy those stores that we don't own. Both of those numbers have moved down. That is partially about the fact that as we're renegotiating our leases, the amount of rent we're paying in each store is reducing and the terms we're negotiating are shorter than they were 2 years ago. Moving on to online. Online's had a fantastic half, up 52% in total, 55% on a full price basis. And what you can see here from this graph is that August September have continued as strongly as May, June July. Looking at how those numbers break down between brand, label and overseas. UK up 46%, label up 70%, overseas up 62%. If we take the total amount that sales have gone up by online, the 55%, what you can see is that the story isn't quite as simple as it appears to be. It will be very easy for people to say, oh, well, what they lost in stores, they gained online, I. E. The blouse that someone didn't buy in a shop, they decided to buy on the internet. That didn't really happen. What really happened is that the money that people were saving on, for example, adult formal wear, they were spending on kids wear and home. So there was an enormous change in mix of the product we were selling during lockdown. That had a profound impact on our returns rate. So what the blue line shows on this graph is our returns rate in 2019 hovering at around 40%. This year you can see we started the year with much lower returns rate on average during lockdown down 16%. Of that difference, the vast majority of it, 11% can be explained through just the change in product mix if you take the return, the low returns rate on home and kids before the pandemic and use those to calculate what the returns would have been during the pandemic, you'll get 11% drop as a result of mix. The balance was consumer behavior and this was phenomena where customers reduced the total size of their orders because they were being more careful about only ordering the things that they really wanted to keep. That gave a further benefit about 5%. What you can see is that since the pandemic ended, our returns rate has come back to where it was broadly 2 years ago. And you can see that the customer behavior changed pretty much overnight and the mix has more slowly moved back to a more normal level. And I think that's indicative of the fact that we are expecting product mixes to return to pre pandemic levels slowly as the rest of this year and next year progresses. Moving on to growth by customer type. What you see is that all areas grew strongly. U. K. Cash customers grew the most mainly driven by new customers. If we look at the overseas number, that overseas number at 62% could be misleading taken on its own. If we look at the growth on sales on our own websites overseas, they were up 49%. How we're getting an increasingly important contribution from 3rd party websites, people like Zalando in Europe. And are those grew at 2 10% during the pandemic. Looking at sales per customer, what you can see in the UK is that we saw a significant increase in both credit and cash sales per customer. That phenomena, we believe, is down to lockdown. And you can see that, the average sales by month and how once the lockdown finished in April, they return to levels of 2 years ago. Moving on to profit. Profit up 74%. So a significant improvement in achieved margin, just over 2.5%. Bought in margin was down 1.4%. Two things going on there. The first is increased costs of freight. As the season progressed, freight prices went up and we didn't have time in many cases to incorporate that into our prices. What that meant is that we took around an £8,000,000 hit to our P and L in the first half absorbing those price increases. In the second half, all but £7,000,000 of those have been incorporated into prices. The balance of the change was down to the fact that we sold a lot more label, which has a lower bought in gross margin. And within the mix, the home and kids wear has a lower bought in gross margin than the high fashion items in adult clothing. Surplus. We saw a significant improvement. This wasn't that we cleared the stock that we had any better than 2 years ago. It was the fact that our stock for surplus grew by only 12% whereas our full price sales were up by over 50%. So it was all about the amount of sales that we had rather than the effectiveness with which we sold it. You can see that actually clearance rates were down very marginally on 2 years ago, stock up 12% and markdown sales only up 10%. In terms of other costs, the big saving here is the fact that we're no longer printing our catalog and that is net of any increase in digital marketing costs. In terms of warehousing and distribution 0.6 percent positive contribution from warehouses, leverage over our fixed overheads and lower returns rate driving the gains there. And on the earlier slide, you'll have seen that lower returns rates gave us a £20,000,000 benefit in the first half. That was partially offset by the fact that when we're delivering to customers overseas, the vast majority of those deliveries done by airfreight and we're seeing big surcharges on airfreight prices throughout the first half. And we think those will continue by the way into the second half and into some extent into next year. And you see that cost us 0.8% of margin. Leverage over systems and central costs gave us a further 0.6% advantage and that gives this huge swing in the first half. In the second half, we're not expecting the benefit from returns to filter through into the accounts in the same way. And you should expect in the order of 20% net margins online. That compares to around 19% 2 years ago. So moving on to the finance division. The finance accounts relatively straightforward with profits moving in line with receivables. The only marginal complication is the fact that the credit sales are up, as we mentioned before, but the receivables are down. This graph explains why that happened. What you can see here is our average balances for the last two and a half years and the gray blocks are the blocks last year. And you can see that if I put monthly sales on this, you can see that where we saw the big drop in sales just as the pandemic starts and that's when we closed our warehouses and when consumers reined in their spending, you can see the balance is dropping. And conversely, where we saw sales rise at the back end of last year, credit sales rise, we didn't see an increase, anything like the same increase in balances. And that's because for the whole of last 6 months of that year and the beginning of this year, consumers were paying down their accounts faster than the previous years. Net profit down 13% in line with receivables return on capital 12.9 percent this year compared to 13% 2 years ago. So not much change there either. As we look into next year, we are expecting our finance profits to continue to grow in line with the credit business. Moving on to the retail business. Retail had a tougher half, sales down 38%. As we mentioned before, like for like down 4%. In terms of how the shape of sales when we reopen the shops, what you can see is in April May, plus 2 and minus 1, these are like for like sales. You can see that we really did get a significant bounce when the shops reopened and we've got a bit of pent up demand. And then steadily that fell away to sort of more normal or expected levels of sales at minus 12% in July. We believe that the sales in August and to a certain extent the front end of September and those are these are estimates that we put on here. We believe that that is a result of people not going away on holiday. For the rest of the year, we're anticipating that retail sales will be more in line with July. In terms of the performance between the different types of stores that we own, we saw exactly the same pattern that we saw during the lockdowns last year with retail parks bouncing back much faster and in fact growing as against city centers and regional shopping centers both have fared much worse. And although that trend was the same as last year, if you look at the difference in performance last year, you can see that it was much greater. And we think that what will happen is that as the city centers begin to come back to life. We'll see the difference in performance between city centers and retail parks beginning to narrow over the next 6 months to a year. As you can see, we were fortunate in that when we went into lockdown, 62% of our sales were already coming from retail parks, which helped sales when we came out of lockdown. Operating loss of £18,000,000 in the first half, that number is significantly flattered by the protocols of IFRS 16 accounting. If you add in the lease interest, which in our accounts has to appear in the interest section. The loss in retail would have been around 30 €9,000,000 And going forward, when we talk about our retail profit, we will include for the purposes of our management accounts, the lease interest within the retail numbers. So a loss of €39,000,000 in the first half. We're expecting for the full year a profit on the same basis including lease interest of around £60,000,000 In terms of rent, and this is the rent payable rather than lease interests. What you can see is that against 2 years ago, we've made around a £40,000,000 saving. €20,000,000 of that is as a result of closures and the other €20,000,000 is as a result of the renegotiation of lower rents with landlords. If we look at the leases that we've renegotiated this year and the ones we expect to complete this year, we will negotiate 73 shops this year. Rents in those shops we think will come down around 52%. The weighted average term of the leases we're negotiating is 3 years and the annualized saving on this portfolio around £11,500,000 Importantly, of those 73 stores, 28 of them are on flexible rents. This is where the rents come down or go up as sales vary. And of those 28, 15 of them are total occupancy costs. And this in many ways is the ultimate flexibility where we pay landlords a percentage of sales to cover rent, rates and service charge. Just to give you one example of that, this is a shop in Kent that we've renegotiated recently that was turning over £1,600,000 That shop, the rent was 200 rates, £124, service charge of £88,000,000 We've negotiated with the landlord to renew for 3 years on the basis that we pay 14% for the lot. So that would give us 230,000 of rent with a 44% overall reduction in occupancy costs. One of the things that we're finding with landlords is, in essence, the more flexible they are prepared to be with the rent terms, the higher the amount we're prepared to pay in the short term and the longer lease we're prepared to sign. So if landlord will give us a total occupancy cost, we're happy to sign up to 5 years and we're happy for that number that we pay today as long as the store is profitable to be slightly higher than it would be if we were negotiating a fixed rent. Just going to talk about the estimated cost of the lockdown at the beginning of the year in the context of the whole company. So starting with retail, we estimate that during that 10 week period, we lost around €250,000,000 of sales. Now that estimate is based on the assumption that the stores would have been down 12% on 2 years previous, I. E, a compound annual decline of 6% on 2 years ago. We think we picked up £20,000,000 of those sales in the April May bounce giving us a net loss of £230,000,000 in retail. The marginal profit because all of that loss was pretty much full price with 54%. That cost us £125,000,000 of margin, but with rates relief in the period we were closed of £20,000,000 and some other cost savings, electricity, maintenance and recharges that went to online around €19,000,000 So the effect of lockdown on retail profit we think was around 86. If we then look what we picked up online, we think we picked up in the order of £155,000,000 around 67% of the sales we lost in retail. And just to quickly remind you that we don't think that was because people didn't buy blouse in store and bought it online. It's not as simple as that. Was more about the money that people were saving on buying clothing and restaurants and other things they spent on home and childrenswear. That gives us a slightly lower net margin, 39 €60,000,000 There were other costs of €40,000,000 mainly the share of central overheads that retail wasn't paying. And return savings are very important that will disappear in the second half of £20,000,000 That gave us total win online of £66,000,000 so total cost of lockdown to the current year of around £20,000,000 And if you're surprised that that number isn't bigger than that, it was also a surprise to us, but we have been through these numbers again and again and again and we think that's about as much as we can get to mainly because we picked up so much business online in home and childrenswear and that wasn't necessarily business that we were only picking up from the closure of our stores. So moving on to the outlook for the full year. In the first half, we were up 8.8%. Our guidance for the second half was that full price sales will be up 6% across the whole business. We've revised that today and we now estimate that sales full price sales in the second half will be up 12%. That's a combination of 2 things. First of all, season to date, we are up 20% and we are forecasting for the rest of the season that we will be up 10%. That corresponds to an increase online of around 32% and a decrease in retail of around 13% on 2 years ago. Gives us that would give us 11% for the full year, breaking that down between retail, online and finance focusing first of all on the £410,000,000 that we'll lose or we anticipate losing in retail. We think that will cost us in the region of £220,000,000 of marginal profit at a rate of 54%. Will win back some of that by next branded sales, 1 online, which we think will deliver around £156,000,000 of profit, slightly lower achieved margin than retail, around 48% marginal profit. Label, again, lower margin profit because we're working at lower margins, £77,000,000 and overseas £40,000,000 total platform we think will deliver £10,000,000 of profit in the current year. Of that, only £3,000,000 is the profit that we make on the commission on our partner sales. The balancing £7,000,000 is the anticipated share of profit that we will make in the equity investments that we've made in various partners. The lion's share of that profit we anticipate coming from the Victoria's Secret joint venture and some of it from Reece. In terms of finance, euros 17,000,000 move backwards on finance, which we've explained. And then in terms of cost increases and cost savings, both of them equaling each other out, £135,000,000 down at £140,000,000 gain. I'm not going to go through those in detail here, but they are detailed in your pack, which you can read at your pleasure. That will give us total profits if things pan out as expected around 800,000,000 at an earnings per share growth of around 9.4%. In terms of that €800,000,000 in terms of it translating into operational cash flow, we anticipate that it will translate into roughly €690,000,000 of operational cash flow. That's before CapEx of £185,000,000 investment in customer receivables around £116,000,000 and the investment that we've made in Reece, £10,000,000 debt, £33,000,000 of equity. We have declared and paid a special dividend of £140,000,000 and if we left it there, the company's gearing would drop to around 400,000,000 which we think is lower than it needs to be or should be. And so that we anticipate pushing debt to the year end back up to around 600,000,000 and to do that we will be able to distribute in the order of 208,000,000 special dividend. So what we'll do is as we approach the end of the year when we have a more accurate picture of how much surplus cash we'll generate, we will declare a special dividend compared in the current year to get us to around €600,000,000 of year end debt. In terms of why we're comfortable with that CHF 600,000,000 as a level of debt for the business. The main reason is because nearly twice as much matched by custom receivables. If we were only a customer receivables business, actually that level of gearing would be low. In terms of financing that debt, it's very comfortable, €130,000,000 of financing. This is after accounting for the bond that we will repay in October and we think that will give us around €500,000,000 of headroom over our peak cash requirements next year. Taking a slightly longer view of the company, at the beginning I said that we felt that the outlook for the company was not just brighter than 18 months ago, but a lot brighter than it was 2 years 5 years ago. And it's worth just reflecting that 5 years ago in 2017. We at that point stopped buying back our shares not because the share price was too high but because we weren't sure that there was a lot to invest the money in in the company and the best thing we could do with the levels of uncertainty we had at that time was to pay money out to shareholders. 2 years later the situation had got significantly better. We ran our 15 year stress test. Our online business was beginning to motor. And we at that point we established that the economics of the business was such that as long as our online business could go slightly faster that our retail business was declining, there was a way through to a profitable business and that we were generating the order of £12,000,000,000 of cash over that 15 year stress test cycle. As we stand today, things feel significantly better than they did 2 years ago really for two reasons. The first is that the threat to our finances from our retail business has declined significantly. And the second is that the opportunities we have online seem more numerous and bigger today than they did 2 years ago. And just in terms of the retail threat really there's nothing clever about that. That is just pure maths. 5 years ago retail took 60% of our trade. This year we think it will take in the order of 30% and pretty much the same again next year, certainly no more as our online business continues to grow. So moving on to the opportunities online. There are 4 areas of focus. The first is within our own brand. Over the last 5 years, we've more than doubled the amount of choice within our ranges. And in essence, what has happened is that our buyers have ceased to be constrained by the 4 walls of our stores and that's allowed them to experiment and push into new fabrics, price architectures, fits, sizes and designs that they simply couldn't have fit into our store portfolio. They've also pushed into new areas, everything from performance trainers through to garden furniture, extending the boundaries of the next brand with the one caveat being they have to be adding something to the product by way of design because if they're not doing that, they were just producing copycats. So as long what we said to our buying teams is that as long as you can create value and give something our customers will appreciate, something that's new to them, then try it and online allows us to do that. In addition to the additional products that we've got within our own ranges, we've also dramatically increased the amount of 3rd party branded stock that we're selling on our website. To the extent the business this year we think will take over £700,000,000 that is partly about the addition of new brands. And this year, our growth over 2 years ago, about onethree of that will come from new brands. But much more importantly, we have deepened and broadened the products in the brands that we already partner. And an important part of that has been our Platform Plus system, I think we first talked to you about, about 2.5, 3 years ago, this has allowed us to have visibility of stock that is available in our partners' warehouses that we don't stock, that we can sell online. And what we do is that if the order is taken on a Monday, we'll pick it up from our partners on a Tuesday and deliver it to our customers on a Wednesday. So we're offering Platform Plus stock on a 48 hour promise. And importantly, we have taken ownership of the service. So the moment that that stock leaves our partner's warehouse, we have visibility all the way through to when it's delivered to our customers to when it's returned to our warehouses. So what we've developed here is not a marketplace in the traditional sense of the word because our partners aren't delivering it to the customers, we are. So it's additional choice without degradation of service. We've increased our customer base. And of course, the vast majority of the increase in our customer base over the last year was down to lockdown. But behind that, something else is going on. We have significantly improved over the last 3 or 4 years the software techniques and the skills of the people who are placing online advertising to the extent that we are getting much, much higher returns on the investments that we're making in all forms of digital advertising. And that means that in the current year we'll spend around €100,000,000 on online marketing and we expect to push that further next year because I think in some ways we're at the beginning of this not the end of it. What we're also doing is that in the past we have struggled to make a success or get the returns from adverts we place in 3rd party media to sell 3rd party brands on our website. So for example, where in the past we placed adverts for Adidas or Nike or any of the other partners that we work for in 3rd party media, it's worked, but not enough to pay for the investment. And that's because we're only making half the profit or less than half the profit on the sale of those goods. The other half goes to our partners quite rightly. What we've experimented with recently is partnering with brands where they pay for half the advert and we pay for half the advert. We've had a very successful collaboration with Adidas in the past year and that has proved extremely successful. So a situation where it wasn't worth either of us advertising on other sites for their product on our website means that combined both of us make a profit doing it. And we think we spend about £4,000,000 on that this year and we expect that budget to more than double in the year ahead. Moving on to Total Platform. Total Platform this time last year was literally a glint in our eyes. We didn't have a single operation live. Today, we have 4 clients live. We expect Reece to go live in February next year and GAAP to go live in the summer, towards the end of the summer next year. The partners that we've got are up and running, operational. The operations are working well. The sales that we're getting through those partners are overall in line with expectations and the profitability is coming through in line with our target margin for total platform of between 5% 8%. You can see this year will make around £3,000,000 profit on £50,000,000 of gross transaction value for the partners on their websites. As mentioned earlier on, we also make £7,000,000 on our equity investments. And just in case you're thinking that that £7,000,000 looks like too big a slug of the £50,000,000 gross transaction value. You're right because a lot of that profit, particularly in Rees and Victoria's Secret, relates to their retail turnover in which we have a stake but which doesn't go towards the gross transaction value on total platform. So those are the opportunities. And we are quite excited about what we can achieve over the next 5 years on these communities and more. But I think there are 3 really tough questions that the business needs to answer if we're to make a success of the next few years. The first one is, are the customers that we've recruited through lockdown here to stay. Are they just people who came on our site for lockdown and will disappear or will they behave more like normal customers? The second is can our warehouses cope and in particular in or before we open our new big automated warehouse at the end of 2023. And the third is whether our technology, our IT systems are really ready to deliver the sorts of applications we need to deliver to make a success of our online business. I'm going to start with an analysis of the customers. And what I'll start by saying is that although the evidence we have looks good, it's by no means conclusive. What you can see, this chart just shows the customers we started the last 3 years with. And you can see that the big growth in customers has come in new customers. These are customers who at the beginning of the year had not traded with us for more than 20 weeks and placed more than one order. And so there is a question mark over those customers. And what I'm going to share with you now is the evidence we've got of their behavior since we've recruited them. So if we take the cohort that we recruited in the run up to January in 2019. So those were customers recruited November, December, January 2019 and compare them to the customers that we recruited in the same months in the run up to January 2021. If we look at their retention rate, the 806,000 customers, the retention rate there was around 18%. If we look at the 1,400,000 recruited this year, despite the fact that it's a much bigger number, their retention rate over the last 9 months is slightly better than it was on the 2 years ago. So there's nothing there that would suggest that these customers are going to leave us any more quickly than the customers recruited before lockdown. In terms of average spend, the average spend is up. That's what you'd expect because remember, earlier on, we were saying that during lockdown, customers spent more. But the amount that the sales have increased for these customers is broadly the same as the amount of the rest of our customer base, around 23%. If we look at another cohort, and these are the customers that were recruited in February, March, April 2020. And traditionally, the customers recruited outside the Christmas period retained much better. Those customers are retained at 23%. Looking back to before then to the customers recruited in 2018, they retained at 18%. So if anything we're seeing better retention rates. And the same on and the same in terms of average spend, we're seeing an increase in average spend of the new customers versus those we were recruiting 2 years ago. It's too much to say that it looks positive, but it certainly doesn't look negative. It's early days. There's lots that still hasn't really worked its way through the system. There are a lot of people still working from home who may return to the office. Stores have only been open 5 months and retention may have been significantly improved in August September as a result of people not being away. But where we stand today, the stability of the customer base that we've recruited during lockdown looks encouraging. In terms of whether our warehouses can cope or not. What this graph shows is the capacity, the weekly picking capacity of our main box warehouse and that is where we do 80% of our picking and it's where all the capacity constraints of the business are. 2 years ago, we could pick 3,400,000 units a week. Over the last 2 years, we've increased capacity by around 15% 3,900,000 units a week. If we compare that 3,900,000 units to the profile of demand over the last 6 months and project it forward. What you can see is that at several points already we've bussed that capacity. It's not as bad as it looks for two reasons. The first is that what I'm going to now shown on the graph are full price sales and you can see that where we've bussed capacity it's normally because of a sale event in particular the mid season sale in March, April, earlier this year. The reason that's not a problem is because sales stock is not promised for next day delivery. So we give ourselves 2 weeks to deliver most of our sales stock, if not longer. And that's the promise the customer gets upfront, which allows us to smooth that markdown sale picking into quieter times. It does beg the question though as you look at the end of the graph towards December as to whether capacity will constrain our ability to deliver sales at Christmas. It also begs the other question is that if we beat our demand target, will we have the capacity to serve that demand or will the constraints of our warehouse stop the business in its tracks? The answer to that question we believe is that the capacity won't stop us and that we can deliver significantly more than the apparent capacity of our warehouses, but that will come at the expense of service level. And I just want to spend a little bit of time explaining that. What this graph shows is the amount of stock we pick unpack by hour throughout a 24 hour period. And what you can see is that at 2 am, there's a dramatic drop in packing. And the reason for that is that 2 am is the last time we can get stock out of our warehouses in order to get it to the customer that day. So if we stop taking orders at 11 p. M. For next day delivery, we've got then got 3 hours to get the order we take out at 1 minute to 11, got 3 hours to get out the warehouse at 2 a. M. And that gives us a lot of spare capacity the following day. If we hit a problem where we can't fulfill, where we bust that capacity. What we can do is pull forward the cutoff. So in this example, we've pulled the cutoff for next day delivery forward to 8 p. M. That gives us 6 hours to pick and pack the last item promised for next day delivery. But much more importantly, it allows us to take the picking that we would have done before 2 am on the orders taken after 8, 9, 10, 11 o'clock at night and move those into the following day. So we can smooth our orders into times of the day where we have the capacity to pick and pack. Now that does come at a cost because it's more expensive for people to be working through the early hours of the morning than it is during daytime. And obviously there is a degradation in service. Some of the customers ordering stock at 9 might think, well, if I can't have it tomorrow, I won't order it at all. Our experiences, particularly at the busiest times of the year, that most customers will tolerate a some of the demand that will be way in excess of our forecasts anyway. So we're not overly concerned about this and we believe that we do have the capacity to get through Christmas and to beat our targets if necessary, albeit that, that may come at the expense of the service we offer our customers. Just looking slightly further ahead into next year and the following year in the run up to the opening of our big warehouse. Next year, we think we can deliver another 15% capacity in around about July. This is partly the use of picking space in the shell building of the new warehouse and partly the addition of a new automated packing sorter which will come online around February, March next year. Once we're into 2023, in October, we'll begin to commission the new automated Almsaw 3 warehouse and that as we go into the following year should give us a 45% increase in capacity. So the pinch point is going to come next year where we'll be up against this 15% increase. But on our forecast today, we think that we will get through next year okay. And again, we've still got that same ultimate safety valve that we can pull forward the cutoff in order to give ourselves more capacity. Just to put the 45% capacity in context. The graphic that you're about to see is of our Elmsil 3 warehouse. The buildings behind are our existing warehouses. They're outlined in red. And this new building in the front, half of it will give us the 45% we mentioned on the graph. Within 18 months of us deciding to mechanize the second half, we can give the company a further 45% in capacity to take that increase to 90. So once we've got Elmsford 3 up and running, we think not only do we have more than enough capacity to cope with what we can reasonably expect by way of online growth in our own business, but also the capacity to take on a significant number an amount of business on total platform. And in case you're wondering about what we're planning to do once the 90% is bust, we have acquired land next to the warehouse and we'll be looking to get planning permission on that to build an ounce of 4 to cope with the growth that we may get in 4 or 5, 10 years' time. Final question is whether our technology, our IT systems are ready. And the answer to that is we think they are ready, but getting them in the state that they need to be in, in order to move our business forward is going to be expensive and take a lot of hard work. And just to remind you where we're up to. We've talked about modernizing our systems before. At the moment, our systems are pretty much all developed in house. They are function rich. They're resilient and secure. But the code is written as a monolith. And what that means is that each application, say the login application, will reference lots of other applications within its code as it's being written. And what that means is that because we have a lot of interconnected code within all these different functions. When we develop one part of the website, let's say login, it can have an adverse effect on any of the other parts. So could knock over our delivery screens. What that means is that's not a problem as far as the operation of our technology is concerned and it's not a risk to our current operation. What it does mean is that developing our software takes a long time because we have to spend almost as much time testing it as we do developing it. The process we started 2 years ago takes all of these functions, divides them into discrete containerized applications and that each piece of code, each application only communicates with the others by passing data between them through a communication layer. That process is well underway. It means that all of these applications will be able to be developed alongside each other. The progress we've made so far is mainly on our e commerce site where we have modernized the header navigation, footer services, cloud infrastructure and the test and release system. Over the next 9 months, we'll deliver search and product testing, customer login, product display page and content personalization. What that will do is that will modernize the parts of our website that we change most frequently. And once we've done that, we should see a significant acceleration in our ability to develop the website. We're modernizing the back end of our website over the following 2 years. And at the same time, we've kicked off modernization process for all of our other major technology applications. So whilst everyone can see the need to modernize our systems, what I wouldn't want you to think is that because we're modernizing them, we're not developing them. Actually, we have to continue to develop our systems as fast as we would have done were we not modernizing them. The analogy that our IT director uses is that this is like it's like running a hotel where you've got to redecorate, rewire, replumb every room in the hotel whilst continuing to trade and only ever shutting 2 rooms at any one point in time. And we recognize that that is a big challenge, but it's what we've been doing for the last 18 months. It also means that every so often, we're going to have to write code in our legacy system and accept that we may have to rewrite that code when we modernize that particular application 9 months to a year later. But we've taken the view that we'd much rather move our systems forward and duplicate some of the efforts than we would to standstill because at this point in time, really our technology can't standstill. And what that means is we're going to spend a lot more money. These costs, these capital costs are already in the projections that we've given you. We anticipate that in the current year we'll spend at least £36,000,000 on technology capital. The vast majority of all of this expenditure is on software. At least 75% of it will be on software and that's really people costs. The balance will be on infrastructure, a lot of which will actually be code in the cloud. Putting that in the context of our revenue expenditure. What we anticipate is that over the next few years, our total spend on technology will get up to around £170,000,000 a year. And what is interesting about this number, apart from the size of it, is the fact that where we are today. We employ pretty much the same number of people in our technology teams as we do in our buying, design, merchandising and sourcing teams across the business. So what this shows is not only the amount we're prepared to invest in technology, but also the importance it will have in moving the business forward. In order to do that, as I've already mentioned, we're going to have to take on a lot of people. We have reorganized our entire technology department. And if you're interested in this sort of thing, there are, I think, 3 or 4 pages in our annual report that explain exactly what we're doing. We also regraded and recalibrated our wage rates within the business to make sure that we're competitive in terms of recruitment. So those are the 3 sort of challenges and uncertainties, I think the 3 biggest challenges and uncertainties facing the business. And what I think it will be very easy to do is to look at the success we've had over the last year and in the last few months and kid ourselves and our investors that it's plain sailing from here on in it. It is not going to be plain sailing. It's going to be really hard work. But we think all of these things are doable and we are on with them. And they need to be taken in context of the opportunities that are now the group is now presented with, which I think significantly more numerous and bigger in scale than we have had for the last 5 or 6 years. And the way that Nxt feels at the moment is it feels like a very different business from the one that we were managing 5 years ago. For the last 5 years, a lot of what we've done has been a rearguard action against the problems caused by the decline of our retail business. Where we stand today, those problems are far smaller in size and number and the opportunities far bigger. So that's all I've got to say today. I'm finishing on an unexpectedly optimistic note and hopefully in a time period that is slightly less than our new normal presentation.