Richard, do not worry, you can just speak. There are microphones in the ceilings, apparently.
Oh, okay. All right. I'll try and speak clearly. I guess one for me then to kick off, Simon, if that's all right. You touched on the enhanced partnership with Zalando that's getting going in the second half. What have you built in in terms of H2 guidance, in terms of sort of sales uplift from the single inventory view or better service options for customers? I suppose following on from that, where do you see the biggest geographic and sort of convenience opportunities coming from that partnership? Is it possibly broadening scale in Eastern Europe, or is it, I think you called out parcel shops, lockers, those sort of convenience options? Are there sort of some things that Zalando does very well that Next could benefit from in time?
The answer to that question is yes. Obviously, they have parcel shops pretty much everywhere, and they have parcel shops in lots of locations that we do not have them. There are other services and customer bases that they effectively talk to, particularly as a result of their recent acquisition as well in Eastern Europe. We are excited about that. Have we built it into our forecasts? No. Nor should we, by the way, because no. It would be a big mistake, by the way, because—this is a conversation I have had many times with our operations teams—I cannot think of a single warehouse transition. You look at Elmsall 3, you look at the Middle East, we just talked about those, where the transition itself has not caused some degree of sales disruption.
I think it would be we haven't built any disruption into our sales numbers for the period of the transition, which is sort of July, August, September, but also we haven't built in any uplift from the possible benefits. I think that is the right place to be at the moment on that. Yeah.
I'd love to ask a question on AI, but it's a bit more mundane or on stores. You talked about a new store format in Stratford.
Thurrock.
Thurrock. With the new stores that you're opening, are they all going to be in this new format going forwards? Do you have to refit many of your existing estates over maybe a 10-year period for that new format? The buzzword you did not get in is RFID today. Is there any hope that you could use RFID in terms of your increasing the efficiency in those stores with higher cost of personnel to get the RFID in the garment so that you can do your returns to store, you can recycle things much more effectively? Is that things that you're thinking about in terms of the new store format?
Yeah, it's two good questions. I'll start with the first one, which is the new format. First of all, the new format is not a new religion. You don't have to go around forcing conversion on everyone. That doesn't work either for religion or in stock, shop fit, time. We will absolutely not go back and be refitting our old stores with the new format, but we will be using it going forward in any new openings that we have. In terms of RFID, we already use RFID in our stores. We don't put it on the garments. We put it on the security tag, and then we associate that garment with the security tag when it goes into the store.
That gives us, we think, 95% of the benefit of RFID without the cost of having to put RFID tags into all of our clothes, the vast majority of which, because they're online, wouldn't use it. In terms of cost-effectiveness, at the moment, we think it's much more effective to use security tags as RFID gives us quick stock counts, shop floor availability, all sorts of exciting things, but we're not looking at RFID for company-wide at the moment unless it drops in costs dramatically. Good.
Yeah. Yeah, hi. Geoff Lowery , Redburn. Just fascinated by your disclosure and conversation around new customer growth. Pre-COVID, you put up a slide talking about maturity curve of customers from sort of year zero up to year five. I wondered if that had changed very much over the years and whether you were seeing anything very different internationally to the U.K. in terms of that build after year one of acquisition.
Yeah, so I think it's too early to say is the honest answer. If you look at the rate at which we're growing our business overseas, there are so many new customers that trying to use the customers we had four years ago to predict what the customers we're recruiting today, many of whom are in different countries from the ones we recruited four years ago, I could give you numbers, but they would be completely meaningless. So.
Is there a curve at all?
There is definitely a curve. There always is. It does depend very much what product group they come in to buy. It's a very different maturity curve if someone comes to buy children's wear than if they come in to buy women's wear. We have got no meaningful information on that. Yeah.
William Woods from Bernstein. When you look at the 25% increase in the marketing spend internationally, I think on the map you highlighted new countries that you were going to spend money in. What is the rough split between investing in the countries you are already spending in versus the new ones? I suppose to link to the previous question, are you seeing good repeat purchasing behavior from those that you have acquired? I suppose does that, if you talked about their lifetime value or something like that, are you seeing a good return on that, not just on the ad spend?
Yeah, I think in answer to the first question, the vast majority of the increase in spend, of the spend, full stop, will come in existing territories where we've already got most territories. The biggest percentage increases in spend will come in the newer territories, but it'll still be relative to the, because the sales are so much smaller, it will be a smaller number and therefore a smaller amount of that 25% increase. In terms of sort of long-term value of customers, I think there are two points I make. One is kind of similar to Geoff's answer. We don't yet know. I suppose the other answer is not that we don't care. It's that the important thing is that we get the return on the sales that we can see within the 18 months.
As long as we're getting our 50% return on the investment, it would be a lovely thing if those customers then went on to deliver far greater return than that beyond it. Actually, that's not the point, is that we're not banking on that. Our hope is that it will, but we don't yet know.
Oh, hi. Monique Pollard from Citi. I just had a question on the use of the third-party aggregators. When you look internationally, as you mentioned, the growth from the third-party aggregators is actually higher than what you're driving on your own website. Just wondering what learnings you've taken from yourselves being on the third-party aggregators that you can use with your third-party brands on your website to drive that faster sales growth.
No, it's a good question. I think stock, it comes down to things that are really not rocket science. Ultimately, stock availability. Selecting the right stock to put on the aggregator site and then making sure you're properly stocked of it. Because unlike our own websites, we don't have the fail-safe of being able to deliver the stock from the U.K. Getting stock levels right is super important. That kind of leads into what I was alluding to about the provision of third-party services on warehousing logistics. If the trial is successful this year and if we're able to genuinely add value and cost savings and improve service for clients through the warehousing logistics business, we think there is a further benefit for them and ultimately us as well through consolidating their stock in one place because that will improve availability on our website.
Could that theoretically then, your pathway to increasing the utilization of your new warehousing, could that be far quicker if, for instance, these trials work and you end up with a lot of utilization?
Theoretically is the key word in your question. The answer is yes, theoretically, but there is a huge amount of hard work and reality between the theory and practice. I do not think we will have any news on that, meaningful news, for 18 months to two years, because I think it will take us that long to get a trial up and running, establish the systems, get the controls that need to be in place to look after other people's stock for them, integrate, cost, make sure we are making money out of it, and then roll it out. Theoretically, it is true, but it will take time.
Thank you. Hi, it's Georgina Johanan from J.P. Morgan. Just a question on AI stage. In terms of how you're using it within your tech in particular and with the conversations that you're having with the providers of that AI, do you think that you are ahead of peers in terms of using it or just at a comparative level? Also in terms of the cost of that AI, and excuse my ignorance here, but is it prohibitive for a smaller player or not so? Going forward over time, do you expect this to be able to sort of widen your differential, being a scale player already, or actually will that differential narrow because AI can be used as kind of incremental support from smaller and growing?
Yeah, honest answer to that is I don't know because one of our kind of one of the ways that we run Next is we stay in our lane and we focus on where we're going. We don't spend too much time looking over our shoulders at what other people are doing unless there's something to learn from it. I've got no idea how far we are down the journey compared to major competitors. All I'm interested in is what can it do for us and can we make the best use of it rather than getting too hung up on whether it provides a moat or a USP or an advantage. Even if it does provide those things, they won't last. The important thing is what we are doing for our customers and our business, not whether we're ahead or behind the pack.
I'd be very disappointed if we were behind the pack, but it's possible. Yeah.
John Stevenson, Peel Hunt. Quick question on the consumer. You've talked a peak about people sort of choosing to spend more on products and sort of buy less. Is that still continuing? To what extent is that sort of informing how consumers are feeling at the moment?
Yeah. I mean, first of all, I think the buying fewer, better garments is nothing to do with economics. I think it would be a huge mistake to regard that as being something to do with levels of affluence. Because ultimately, we're not saying that customers are spending any more money. In fact, you can see there on average are spending 1% more in the U.K. It's about what they're choosing to spend their money on. I think there's been a slight reversion from buying lots of throwaway type stuff to buying fewer, more considered investment garments. That has nothing to do with how the consumer's feeling. It's all to do with sort of macro fashion trends rather than any economic trends.
Does that feed through into sort of how you think about sort of good, better, best and the sort of structure of the range going forward?
Yes. I mean, we do not think about it in a global sense because we have literally tens of thousands of garments on our range. It is not my job to think about the balance between better and best because it is the job of the dress buyer and the socks buyer and the baby grow buyer. It is their job to work out what is the best balance between their mid-entry and exit price points and whether they should push those price points further or lower. All I am really doing is taking the credit for their hard work and not directing it. Yeah.
I'm Anne Critchlow from Berenberg. Could you talk a bit about the trend through the current trading period? Because I imagine March was probably stronger than February and whether March informed your upgrading guidance. Secondly, if you could talk in broad terms about the performance of home relative to clothing. I know you don't normally comment. Sorry, a third one as well, if that's all right.
Because we're not going to get an answer to the first two, let's go for one I can answer.
If you could comment a bit on the London office space you're taking, what that's for and where it's going.
Yeah, okay. I'll start with a question I can answer or am prepared to answer. The London office space is mainly for the WOB brands, wholly owned brands and licenses. The vast majority of that is to accommodate the growth of those new and developing businesses. We don't ever discuss the relative performance of our different product areas other than at a very high level, like between WOB and Next, we'll talk about it, but otherwise we don't discuss home versus other areas. I think the only thing that might be useful to say is I think in general, if you look at the home market generally, it has been through, had a fantastic 18 months in COVID, has had a sort of two and a half year, two-year hangover. It appears to be out of that hangover now. More encouraged by what we've seen on home sales.
Will we give a week-by-week, blow-by-blow detail of what we took in February and March? No. Sorry.
Hi. Can I ask on third-party platforms where you sell?
Third-party.
The third-party aggregators where you sell the Next brand. Do you sell the ranges that you're selling on them, are they any different to what you're selling on the Next direct websites? The same in reverse on the third-party brands that are sold on the Next platform. How much are those exclusive to Next? Are you actively working with these brands to develop exclusive ranges?
In terms of difference in performance, we do see significant difference in performance, not necessarily on a garment-by-garment basis. It's not that kind of the red dress sells well in Denmark and the blue one sells well in Spain. It's more that the product mix by territory is very different. Some countries are dominated by kids' wear sales, others aren't dominated in the same way by kids. It's those sorts of mix changes that we see both on our own websites and with aggregators. In terms of third-party brands, the vast majority of our third-party branded business on aggregators are the brands that we own. Because obviously the ones that we don't own tend to be trading already on their own accounts on those aggregators. If you're Nike, you go straight to Zalando or About You, you don't come to Next to put that on.
The third-party business is much smaller on overseas business and the growth is focused on the WOB brands. Yeah.
Thank you, Sam. Sridhar Mahamkali from UBS. Three questions, if I may.
Two questions. We're not having any inflation here. There's a war against inflation in this country.
Overseas margins, nearly 200 basis points last couple of years. Can you talk through on the mid-term potential here? Because this year you're talking about operating leverage, driving margins, leveraging the fixed overheads. Is there a sort of philosophical point where you say you don't want these margins to be going up further into mid to high teens and so on and so forth? Secondly, I think on surplus cash flow, given you've accumulated what you need to with a GBP 250 million bond, then potentially no need to retain any of the surplus cash going forward. Should we be assuming all of it to be returned to shareholders steadily or subject to an M&A, of course but is there anything else we should be thinking about?
Yes, it's a really good question. As are all the questions today, obviously. First of all, on margin, don't assume that margins will go much higher than where we intend to get them to this year. We want to get the right balance in having a healthy business that can fund its marketing and being over-profiting. I wouldn't expect margins on our overseas businesses to increase faster than to go above where they get to this year. That certainly wouldn't be the plan. If anything, they're more likely to come down solely because of the mix between aggregators where we make less margin and our own sites where we make more. Because aggregators are going faster than our own, I would actually expect the net effect of those two things to push down the margin.
In terms of the margins of the aggregation business and the Next business, I think we've got both of those to where we're comfortable with at the moment. In terms of surplus cash, I think I don't want to talk too much about sort of beyond this year. I think this year we said if we can get extra cash resources, we will return full amount of surplus cash. I think there is then an argument to say that in order to maintain our investment grade, we don't need to have, we could take on more debt. I think if we do that, we will do it slowly and gradually over a four or five-year period rather than go out and borrow a great big slug of money and return all to shareholders.
Because if we do the latter, the chances are we'll get the timing horribly wrong. I think the most important thing, because there is an underlying reality to it, is that we're not prepared to put in jeopardy our investment-grade credit rating. That is a sort of red line for us. Yeah, one more.
Warwick Okines, BNP Paribas, Exane. Simon, is there any level of critical mass in overseas markets where you'd consider opening physical stores to build the brand more broadly?
Yeah, it's a good question. It's not about critical mass. It's about does that store in that country make a profit? I think our experience has been the experience, you know, like those flies you see flying into a window pane. It doesn't matter how many times they do it, they just keep trying to do it again. Our experience of opening stores overseas has been like that. The only time the window has been open is where somebody else has done it on our behalf through a franchise. Currently, we are looking with our partner Myntra. They are looking at opening stores on our behalf in India.
I think to try and do that, I think to try and open your own stores in territories where you do not understand pitch, you do not have a relationship with the landlords, you are unlikely to take the same GBP per sq ft as local competitors whose brands are 100% locally appropriate, I think is slim for a brand at Next's position in the market.
Reiss makes a profit trading some stores overseas, but it has been tough there as well. They do make a profit. It is not a, I would not say never, but we certainly have no plans to do it at the moment. I would much rather do it through a licensee, even if it means taking a smaller percentage of the profit. I would much rather do it through a franchise or license than directly. I think on that note, we have exhausted all the questions.
Thank you very much.