London Jul 23, 2020 (Thomson StreetEvents) — Edited Transcript of Next PLC earnings conference call or presentation Thursday, March 19, 2020 at 8:45:00am GMT
* Simon A. Wolfson
Simon A. Wolfson, NEXT plc – CEO & Executive Director 
Well, good morning, everybody. Thank you very much for joining the conference call this morning. Today’s presentation is broken down into 3 sections. The first section is the section that you will be familiar with. It will take around 22, 23 minutes, and it goes through all the numbers from last year. So for those of you who aren’t interested in last year’s numbers, you can get out and make yourself a cup of tea, but make sure you’re back in 22 minutes’ time.
The second section deals with coronavirus. We’re going to deal with the impact that it may have on the business’ sales, its cash flow and what we can do to manage within our cash resources. And what I’d like to reassure you right upfront is that, at the moment, we believe that even in what we consider to be the worst imaginable situation, we can manage the business within our own cash resources and that we will not need to seek assistance from any government lending. We think we are in a very strong position to weather a very significant downturn in sales, largely because of 2 things: the strength of our balance sheet and the depth of our operating margins in both our retail and online businesses.
The third section is the section that deals with the development of the business. And it will be easy for me to talk about coronavirus and nothing else, and for that to be the entire focus of your endeavors today. And whilst it is obviously incredibly important that we deal effectively with the coronavirus challenge, it is also important that we continue to develop the business. And there are a number of things that we are doing with our platform to develop and move it on that we will not cease. Our view is that the retail market is changing and continues to change, and coronavirus does not put that change on hold. The transition from retail to online-dominated retail will not be slowed down by coronavirus, and indeed, there is a possibility it may be accelerated. And to that end, we think that in a year’s time, 2 years’ time, 3 years’ time, it’s what we said at the back end of this presentation that will really make the difference to the long-term value of the company, not the methods we have for dealing with the coronavirus, which, whilst an unprecedented challenge, is not something that we think represents an existential threat to the business.
So starting with the numbers for last year, and I suppose the important thing, which seems almost irrelevant today, is that last year was a good year. Sales were up 3.3%, full price sales were up 4%. At the beginning of the year, we had expected sales to be up just 1.7%. So we did better than we expected on the sales front, we delivered growth in sales and profit. And this is the first time for 4 years that the growth of our online business and the profit it generates has outweighed the effect of the retreat of our retail business.
Profit was up 1.3%. That is somewhat distorted by a swing in property profits. If I strip out property profits, this year, there was a GBP 2 million provision; last year, that was a GBP 6 million profits, so an GBP 8 million swing. If I strip that out, underlying profits were up 2.6%. And you can — what you can see is that the effect of the structural shift is beginning to diminish as our online business increases in relative size to the retail business.
Interest costs were up around GBP 4 million. This is about 2 things. First of all, the average amount of debt the company had throughout the year was 7% up on last year, and the rate was slightly higher than last year as a result of us issuing a bond and switching low interest floating debt for slightly higher interest rate fixed debt.
Profit before tax, up 0.8%. The company is still very cash generative, so the surplus cash used to buy back shares and earnings per share finished the year up 5.6%.
Cash flow before distribution to shareholders was up GBP 51 million on the previous year. Only GBP 6 million of that came from increased operating profit. We spent GBP 10 million more on CapEx than last year. And what you can see from the chart is that all of that increased, in fact, more than all of that increased, came as a result of increased investment in our online warehousing facilities. And this is part of an ongoing program that we have been through with you before in terms of increasing our spend on warehouse infrastructure.
At the same time, we significantly reduced the amount of CapEx on stores, and you can see that, that drop, all comes from the fact that we’ve opened less space. We haven’t reduced the amount that we spend on cosmetic refits. We think it’s still very important to keep the stores looking good as we continue to trade them.
Looking forward to next year, we had intended to spend GBP 145 million on CapEx. We will defer some of that in light of the current pandemic. We think we will reduce that to around GBP 100 million of CapEx. We are cutting out the maintenance and refit CapEx that we’re planning for our stores in the current year. That stays around GBP 10 million. And we will also defer some of the CapEx that we were intending to spend on our third warehouse at Elmsall Way, which is not due for completion until ’22, ’23. So that might be 2 or 3 months late, but it does push the cash spend this year into next year.
Moving on to working capital. We had GBP 28 million less outflow into working capital this year. More than all of that was because the increase in lending to our Directory customers was GBP 63 million less than last year. The previous year, we increased our lending by a significant amount. This year, we have tightened our credit limits a little bit, and that reduced the outflow of cash into receivables. We received fewer landlord incentives, which is what you would expect because we have much less space. And the rest of the difference was down to the timing of payments of the stock. This year, Chinese New Year fell early than last year, so we paid for more stock in January in order to get less stock into the business.
In terms of our employee share option scheme, we spent GBP 19 million less on employee share option scheme this year than last year. The reason for that is because last year was an exceptionally large year. A normal year for the employee option scheme is around GBP 25 million.
In terms of buybacks, we spent GBP 25 million less on buybacks this year than last year. We spent broadly the amount of our operating cash flow after dividends or surplus cash flow after dividends. Net increase in debt at the end of the year, very marginally up at GBP 16 million.
So moving on to the balance sheet. The balance sheet remains extremely strong. Stock was up 4.8% at the beginning of the year-end. That increases ahead of our sales target of 3%. The reason for the difference is because we have bought stock in early because of Chinese New Year. As it stands today, our stock is 3% up, which is in line with the forecast that we originally gave in January.
Debtors are up GBP 28 million. This is all driven by an increase in our online receivables, our customer receivables, which were up 2.2%. That increase was driven by growth in credit sales. Credit sales were up more than online receivables. They were up 3.5%. The reason that there is a difference between the growth in credit sales and online receivables is because consumers paid down their debt slightly faster in the last 6 months of the year than they had done the previous year. There are 2 reasons for that. One is our credit controls were slightly tighter. But we think that there is more to it than that. We think that there was a change in consumer behavior. And towards the back end of last year, some consumers started to pay down their debt a little faster than they had been in the first half of the year.
Moving on to net debt. We started the year with GBP 1.1 billion of debt. We had GBP 307 million worth of cash generated after paying taxes, interest and ordinary dividends. We used GBP 300 million of that to buy back shares. Over and above that, we created GBP 27 million worth of customer receivables. And as stated 6 months ago, we are now funding that 85% with debt, 15% with equity. So if we take 85% of that online, we get to GBP 23 million, and that number pushed our year-end debt up to GBP 1.112 billion, an increase of just GBP 16 million.
Moving on to the divisional analysis, and we’re going to cover online, retail and the finance business in turn. The online business had a good year and a better year than we were expecting. Full price sales were up 11.9% as were total sales. So markdown sales increased in line with full price sales. In terms of where those sales came from, we had an 8.9% increase in total sales in the United Kingdom. Of that, the lion’s share came from growth in LABEL, but we still got growth in our Next Brand sales in the U.K. of around GBP 41 million. Our overseas business continued to grow very strongly at 23%, slightly ahead of our expectations to give us — and that made up the total increase of GBP 200 million.
Both the U.K. business and overseas business were driven by strong growth in customers. And if we take the U.K. growth in customers around 10%, what you can see is that the biggest increase was in our U.K. cash customers. These are basically customers who use credit cards or debit cards and don’t pay on account. The credit customers increased by 2.3%, and we’re going to cover that in more detail in the finance section.
In terms of margin and profit, bought-in gross margin for our online business were down 0.2%. There is a combination of 2 things going on here. The margin that we made on the NEXT-branded product was up 0.2%, largely as a result of slightly better currency rates than we had budgeted for. That was reduced by 0.4% as a result of selling more LABEL stock. The increase in the sale of third-party brands was faster than the increase in our own stock. And of course, that stock is at lower margins.
There was a positive contribution from markdown, and that came as a result of improved clearance rates online. Achieved gross margin was therefore flat. Warehousing and distribution increased as a percentage of sales for 3 reasons. Firstly, our international business grew faster than our U.K. business, and distribution costs are a larger percentage of our international sales than they are of the U.K. business. So that naturally led to an increase in the participation of our distribution costs. Cost of living award in the warehouse pushed up costs by 0.1%. And finally, operational costs in the warehouses, as we began to hit capacity at the end of the year and had trouble coping with the scale of throughput, we began to hit operational constraints, and that cost us around 0.2%, around GBP 4 million. Most of those operational constraints, we have already or we’ll be putting in place measures to counter within the current year. So we’re not expecting those issues to recur towards the back end of this year.
In terms of catalogs, photography and marketing, what you can see here is that we saved a lot more on catalogs and photography than we increased our spending in marketing and systems. We continue to invest an awful lot more in digital marketing and the systems to support our online business. But this is all been paid for by reductions in the numbers of catalogs that our customers are requesting.
Central costs, we’ve got some economies of scale, some leverage over central costs, that gave us 0.1% improvement. So overall margin improvement in Directory of 0.2%.
Moving on to our retail business. Obviously, the retail picture is not nearly as good as the online picture, but it was better than we were expecting. Retail sales were down 5.3%. Full price sales were down about 4.3%. We were expecting full price sales to be down more than 5%. We think one of the main reasons that our sales performance was better than last year was because we improved stock availability in our shops, and that was all about increasing the speed with which we get replenishment stock from our warehouses to our stores and out onto the shop floor.
Operating profit down 22.8%. Margins of the business now sitting at 8.9%.
In terms of the margin movement, bought-in gross margin similar to Directory in terms of NEXT-branded stock, up 0.3%; an adverse movement of 0.2% in markdown. This contrasts with the improved clearance rates we experienced online. We think this is mainly down to the fact that the Boxing Day sale in our autumn/winter sale was extremely disappointing. It rained all day, and we think that deterred customers, and we never really caught that up.
In terms of stock loss, we lost the same value of stock as the previous year. But obviously, sales were lower. So as a percentage of sales, stock loss increased. And I guess the lesson here is that whilst — that fees are not moving online as fast as our customers. Store payroll, an adverse movement of 0.1%. That erosion of margin would have been a lot worse because, of course, that includes an increase driven by national minimum wage, which is rising significantly faster than inflation. Without mitigating action, store payroll would have eroded margin by around 0.4%. The difference, the 0.3%, was a huge number of small productivity initiatives that saved us a lot of money on store payroll.
Store occupancy, warehousing, distribution and central overheads all increased as a percentage of sales. This is not because any of those costs intrinsically increased. In fact, some of them reduced. It’s because the sales are moving backwards, and these costs are largely fixed.
In terms of new space, we continued to add new space last year. We relocated 10 stores, creating 190,000 square feet of additional retail space. So this is where we move shops in existing trading locations. We haven’t opened in any new trading locations. And we closed 7 stores, around 10,000 square feet each.
In terms of the sales from that new space, you can see that the net effect was GBP 12.3 million. In the stores that closed, although those stores were turning over GBP 11.9 million, the sales we think we lost after accounting for transfer to other stores was GBP 9.6 million. So we experienced, on average, a transfer of trade around 19%. That number is a little bit distorted by Gatwick. Obviously, when we closed Gatwick, we didn’t experience any transfer of trade from that store. If you take Gatwick out of the equation, the transfer of trade was 22%. That is the sort of number that we would be expecting. And in our long-term 15-year scenario that we gave last year, we used a number of 20%. So transfer of trade is still running in line with our expectations. The profit gained from the new space was GBP 6.5 million. The profit loss from closures was GBP 0.2 million.
Moving on to the space that we anticipate opening and closing next year. In the year ahead, we anticipate that we will close more space than we open, to leave a net reduction in space of 70,000 square feet. In terms of the sales from the new space and the sales lost, I should stress that both of these numbers are calculated on a pre-coronavirus basis. So this is what we anticipated would happen in the new space we opened before accounting for coronavirus and in a more normal year. Clearly, these numbers are not going to materialize now as the coronavirus will hit not only our new space, but also all of our existing space. If we look at the space we plan to close, a 21% transfer of trade, which is what we’re expecting, would result in breakeven, i.e., the sales from transfer of trade, the profit on those sales, will equal the net profit in the stores that we’ve closed. And the reason for this is that once a store begins to make less than 6% net branch contribution, at that point, if you can transfer 20% of the trade, the net margins on the 20% transferred is going to roughly equal the 6% profitability of the closed store.
Total profits anticipated from net new space and closures was anticipated to be GBP 4 million in the year ahead, again, just stressing that’s pre-coronavirus.
In terms of rent, last year, we renegotiated 44 of our leases. The average rent reduction agreed with landlords was a 30% reduction. The average term agreed was 3.6 years. Average profitability of those stores was 24%. So what you can see from that is that if a store is making 24% net branch contribution and only has 3.6 years to run the lease, the chances are very high that, that store will remain profitable for the term of the lease. And that’s really what we’re aiming for in these negotiations.
Looking to the year ahead. There are 45 stores where we have agreed or in the process of agreeing a lease of 2 or more years. The average rent reduction in those stores is very similar to last year, minus 29%. Average term a little bit longer, 4.3 years. The reason that the term is longer is because on average, those stores are more profitable. Net branch contribution of 26%. And as a sort of rule of thumb, when we are renegotiating a store, the more profitable a store is, the longer we will commit to that store with the landlord. So there is a degree — to a degree, there was a trade-off between the term of the lease and the extent of the rent reduction that the landlord is prepared to agree to.
Those 45 stores are only part of the story. There were a further 8 stores where we agreed very short-term leases. So these are leases for less than 2 years. If we include those in the total pot, what you can see is that the average rent reduction is considerably more. And the average rent reduction, including short-term leases, was 40%. Of course, the term comes down and the average profitability of the total portfolio remains the same at 26%.
Looking at the annualized effect of all those renegotiations, it comes to GBP 7.5 million of rent reduction.
Moving on to the finance business. The finance business had a good year. Credit sales were up 3.5%, as we mentioned earlier. That was driven by a combination of 2.3% increase in customer numbers and a 1.2% increase in sales per customer. The sales per customer as a result of 2 things. The first thing is that tighter credit controls towards the back end of the year would have acted to reduce sales per customer. On the other hand, we believe that the increased product ranges, particularly in our branded — third-party branded business label, served to increase sales per customer.
In terms of customer numbers, we grew by 2.5%. Were it not for coronavirus, we anticipated that we would have grown the customer base by 3.5% in the year ahead. The reason we thought we were going to have a better year than last year was that, last year, for most of the year, our 3-step credit product, which enables customers to divide their payments into 3 equal slices, and if they paid all 3 slices on time, they don’t pay any interest, that product was not available for most of the year. We know that the availability of that product increases the rate at which we recruit new customers. And we thought that, that would add about 1% to the growth rate during the year. Clearly, if online sales are down as a result of coronavirus, then the customer numbers are very likely to be down as well.
Average nextpay receivables were up 4%. This is a result of starting at the beginning of the year, average balances were up 7%, and at the end of the year, they were up around 2%. And the 4% is a measure of the declining average.
Income up 7.3%, combination of higher balances and the tail end effect of the increase in interest rate that we effected in November 2018. A much lower bad debt charge than last year, part of this is as a result of a swing in provisions. Last year, we think we overprovided for bad debt by GBP 3 million, and we released that GBP 3 million this year. Having said that, there was an underlying reduction in the bad debt rate of about 0.2%. And here, we’ve expressed bad debt as a percentage of credit sales. You can see that slightly improving bad debt rate. That was what we expected and came as a direct result of the improvements we made to our credit controls throughout the year.
Overheads are up 15%. Two things going on here. Direct costs did increase mainly as a result of increased investment in systems, both to comply with regulation and to control fraud. In addition to that, we looked at our cost allocation between finance, retail and online and reallocated some costs, and that made a small difference to the cost base as well.
Moving on to the cost of funding. Cost of funding was up 6.4%. That was driven by average net receivables that were up 4%. Just to remind you of how we calculate that GBP 36 million charge, we take 85% of the net receivables and we assume that, that has been funded by a loan from group. We then charge the average interest rate that the group experiences in its borrowings we charge through to the finance business. That rate was slightly higher last year than it was in the previous year. And the combination of a rising balance and slightly higher interest rate, the cost of funding went up by 6.4%.
Profit was up 15.3%, and the average return on capital employed was 12.4%, slightly up on last year’s $11.2 million.
Right. So moving on to guidance for the year ahead. And it’s worth starting by saying, of course, that we can’t give you anything like accurate guidance this year. No one has any real understanding of how long the pandemic will last, or indeed what the short- and medium-term effects will be on our trade. What we do know is that it will have a very significant and negative effect on our sales for at least 3 and potentially 6 months. What we have attempted to do is to model the effects that the coronavirus could have on the business through different levels of sales declines. We have looked at the cash flow effect of those different scenarios, and we’ve then looked at what cash resources the company could deploy in order to make sure that we remain within our cash resources.
So the starting point is going to be the forecast we gave in January. And what we’re going to do is we’re going to compare different sales scenarios to our base case. Just to remind you that the base case for this year was a 3% increase in sales, generating a GBP 734 million profit. Over the last few weeks, and in particular, actually, the back end of last week and the last few days of this week, we have seen a very significant falloff in sales, and all the evidence we’ve got is that, that falloff is going to get worse as time progresses and the restrictions on people’s movements increases.
There has been some talk that online sales wouldn’t be affected as much as retail. I have to say, in our clothing sector, what we’re experiencing at the moment is that both retail and online are being severely affected. And what you can see now from the chart is that whilst there is still a differential between retail and online, online is still suffering. We think that particularly in adult clothing categories, we will see a very significant reduction in online sales alongside the retail sales reduction. And that’s because if people are staying at home, then a lot of the stimuli that they would normally experience to make them buy clothes or to encourage them to buy clothes won’t be there. They won’t be going on holiday, they won’t be going out. So we are anticipating that our online sales fall significantly as well. We have some evidence from our overseas business that if retail stores shut altogether, then online performance is improved a little bit by some sales deflecting to online. But that evidence is not mature at the moment.
In terms of how we think this will pan out, we had started with a sales scenario, which involved us losing GBP 445 million over 12 weeks. That equates to a loss of 10% of our entire year sales. As I go through this presentation, I will be talking about different scenarios of minus 10%, minus 20%, minus 25%. For clarity, in each case, I will be referring to the percentage of our year sales, not to the decline during the affected period, which will obviously be far greater than that. What you can see is that we are expecting the declines to be front-ended and very extreme, and for some weeks, for us to be taken very little at all. Now we think that this scenario is too optimistic and that the crisis will last for more than 12 weeks. If we model 24 weeks, you can see that there’s GBP 820 million lost here, the equivalent of 20% of a year sales. That would involve 4 weeks where we had a 90% reduction in sales. We think that this production is realistic and enough. We don’t think it will be any worse than this. But what I should stress is that these models are anybody’s guesses. We have a little bit of evidence from our overseas websites of other countries that have gone into the crisis earlier, but that guidance is not particularly helpful or reliable. It could be worse than this. We’ve modeled minus 25% of the year sales. And remember, that will be the equivalent of our entire shop business and our online business being completely shut for 3 months. So we think that this is too extreme. But nonetheless, we have modeled it for completeness and to give you some assurance that even in what we consider to be an overly pessimistic scenario, the company can still live within its cash resources.
The model that you will see us develop here is all based on the minus 20% scenario. What we have done is we have taken our normal cash required versus cash resources in a normal year. Now this model assumes that we would be doing share buybacks. And what you can see is that in a normal year, we would expect to end the year with the same sort of cash sources that we start the year with and any surplus we generate return to shareholders. In a normal year, you would see a peak in cash requirements coming through in sort of late August, early September. And we would normally would like to maintain around GBP 210 million of headroom between our cash requirements and our cash resources.
If we take the minus 20% scenario of GBP 820 million lost sales and look at what the cash impact of that would be, this is the way that we’ve modeled it. We’ve assumed that the surplus stock rate, the GBP 820 million of stock we don’t sell, does not increase our markdown sales. We think that’s probably a conservative estimate. We have assumed that we sell our normal amount of markdown stock, but we haven’t assumed any increased markdown sales from the surplus created. We’ve assumed cost savings of around GBP 80 million. Those split broadly into 3 equal parts: wages, which will be wages in stores, warehouses, and to a much, much lesser extent, head office, but mainly stores and warehouses. And these will be volume-related savings. And we think that we can achieve these savings through the normal process of not replacing vacancies or not extending people’s contract hours. In the event our stores or warehouses were shut for a long period of time, prolonged period of time, we could take more extreme measures, but those are not in these plans. Then there are other savings like photography and books, where, clearly, we won’t need as many books if no one’s trading online.
In terms of stock, we think we can save GBP 50 million worth of purchases. We may have been conservative in terms of stock cancellation. If we are selling less online, then we will also be lending less online. And as the online business slows, so the lending to customers decreases. And that would result in a cash inflow against our expectations of around GBP 120 million.
Within here, we have accounted for 2 tax savings. First of all is corporation tax savings, because we obviously anticipate to make less profits in this scenario. And secondly, we have factored in the rate saving that has already been announced by the chancellor. That gives us a net cash loss of around GBP 390 million. So what you can see is that for every pound of sales, we’re losing around 50p of cash. What that means in terms of our cash flow without mitigating actions is that our cash requirements would exceed our resources by around GBP 245 million at peak in sort of late August, early September.
What I’m now going to do is layer on the mitigating actions we can take. The first and most obvious one is there will be no surplus cash generated, so we won’t be doing buybacks. A combination of not doing buybacks and also not replenishing our employee share option trust would save GBP 165 million at peak and GBP 300 million in the full year. The line now reflects those changes. And what you can see is that we will still require additional cash resources at peak. We’ve layered on top of that 2 things: first of all, cutting out all nonessential CapEx; and secondly, leasing back some of the freehold assets that the group has, in particular, one of our warehouse complexes we own freehold, and we think we could lease that back at good rates and we could also lease back some other assets. So we think we can raise at least GBP 100 million from that.
Over and above that, we have 2 other levers we can pull. Within the terms of our bonds and bank facilities, we can securitize up to GBP 100 million of our consumer receivables. And again, we think we could do that at very reasonable rates. One further action we could take, though, this wouldn’t be first on our list because it is earnings dilutive, is our employee share option trust owns a lot of shares. Some of those shares are for options that are currently underwater. The group has lent our employee share option trust the money to buy those shares that, at present, it doesn’t need. The employee share option trust could sell those shares and repay some of that loan. We have estimated that we could raise at least GBP 70 million in that way, though, as I say, at these prices, it is earnings dilutive and it wouldn’t necessarily be the first lever that we would pull.
Over and above these measures, we then have the flexibility over the payment of dividends. And just to stress that because the first dividend the company will pay will be in August, this is not something that we would need to use to cope with the peak, which you can see has now moved to May. It’s something that we would need to use in the event that we felt that the pandemic effects were going to last right through into the back end of the year. The ability to delay our August dividend would eliminate the peak between August and October. And you can see that’s very clearly marked on the graph. It is about another GBP 150 million of headroom at what would have been our peak in the autumn/winter season.
In order to give us that flexibility, we have decided not to propose a final dividend today, which would commit us to paying it, but to announce our intention to declare a further interim dividend in June, depending on how the pandemic has progressed. And the reason we have done that is not because we anticipate that we won’t pay the dividend, we think we will, but we anticipate that we may need to delay it. And just to stress that what you can see within this graph is that the company is comfortably within its finances, having delayed but paid the August dividend in October and paid the January dividend at the normal time. In the event the crisis was to last much longer, we could suspend those dividends. And what the graph now shows is the effect that, that would have on our cash flow going into year-end. And what you can see is that leaves us in a very comfortable position.
What this now shows is that all of those measures added together could generate additional cash resources of GBP 835 million in the full year. I haven’t totaled down the August figures because, as I mentioned earlier, the peak will have moved forward to May. For information, in this scenario, we estimate that profit before tax would be around GBP 200 million. So the company would still be profitable, and EBITDA would be in the order of GBP 375 million. We’ve also modeled 25% sales reduction scenario. And in that circumstance, we still have headroom of GBP 110 million.
One thing I should stress is this is without taking any measures that we could take to smooth that peak. And there are 2 very important things that we could do that we haven’t yet modeled. The first and most obvious is that we could pull forward our end of season sale, which is still assumed to be at the beginning of July. If we were facing these peaks and needed the cash, we would pull that forward into the middle to end of May. The second thing we could do is we could push back supplier deliveries at that point in time. Both of those would save a significant amount of cash and serve to make that peak more manageable.
Over and above all of these measures, we are currently in discussions with our bank to create an additional GBP 200 million of facilities. And we have every reason to assume that we will be able to secure those. I should stress that none of these scenarios involve us drawing on the government’s GBP 330 billion loan fund. So all of this is from within our own resources. What you can see from this is that the company is in a very strong position. It has been our practice for many years to maintain a very strong balance sheet and to maintain relatively high operating margins. Those 2 things stand us in very good stead in the current environment.
So this is not an existential issue for NEXT. And given that it isn’t, we can’t spend all of our time focusing on just dealing with the crisis. Because one thing is absolutely for certain. At some point, this pandemic will pass. And when it does, and when you look back in a year’s time and in 2 years’ time at NEXT and its profits and its operations and what it does, what will matter is not coronavirus. What will matter are the things that we’ve done during this year to continue to move the business forward. And we are not going to stop that. The coronavirus has not put the development of our business on hold. We will continue to evolve the business, and in particular, we will evolve the way in which we’re working with third-party brands.
I’m going to begin by talking about Platform Plus. We started the service last season. And just to remind you, this is where our customers have visibility of stock that is available in our partners’ warehouses. They can order that stock, we pick it up each day, it’s delivered through our warehouses and our distribution networks either directly to home or to one of our stores. We’re taking this concept further in the current year by working with one partner to offer 24-hour Platform Plus, and that will allow customers who order before 3:00 or 4:00 in the afternoon to have those items that are available in our partner’s warehouse delivered to them the next day.
If we look at the sales from that, last year, we took GBP 7 million for 11 brands. By the end of this year, we’ll be live with 36 brands. And we anticipated that, that would generate around GBP 18 million of sales. Obviously, coronavirus changes that, and we’re not actually expecting to take GBP 18 million now, but it gives you a sense of what we would take in a more normal year. Over and above that, we also have developed a system that allows us to direct dispatch to the customer from partners’ warehouses. This is particularly relevant for heavy goods such as furniture, gym equipment, anything that wouldn’t go through our normal courier system. And that product, at the moment, half of it goes through our partners’ distribution network and half of it goes through our own heavy goods furniture delivery network. Our aim is to increase that 50% as much as possible, partly because we believe we can deliver it — the goods more cost effectively and partly, and more importantly, because we have control over the customer service element of those deliveries, and we can track it from the moment it’s left our partner to the moment the customer gets it. If we add those numbers across last year, we took GBP 32 million on Platform Plus and anticipated that, that would increase to GBP 50 million in the current year.
I’m now going to talk about our website. Now we haven’t spoken about our website or the developments on it for some time. But in the year ahead, we have a very important project planned. We’re actually 6 months into this project, and it will last 2.5 years, and cost the company around GBP 12 million. Just to explain what this is. At the moment, our website has a lot of individual services on it: homepage, search, checkout, delivery, account management and various other functions. All of those functions, whilst they appear separate to the user, the code is interlinked, which means that if we make any changes, for example, to our homepage, it can affect the operation of all the other parts of our website. What that means is that as our website becomes more sophisticated, we have 2 problems. The first is that the development of any new functionality requires us to retest and relaunch the entire site. The second is the more code there is that can affect other functions, the less resilient the site becomes. And as our volumes grow and the amount of items that we sell on our website grows, this has become an increasing problem. Now it’s not a problem that, as yet, our customers will have seen, but it’s a problem that we’re anticipating and we’re going to fix. This isn’t going to be a big bang development. So don’t worry that this is some sort of a huge relaunch of our site. We are going to do this incrementally. The first step, which we’ve done, is to build a communication there. The second step is function by function to recode and redevelop each function within the website, get it working, launch it and then operate the new code alongside the old code. So at no point do we have the big bang risks that you will be familiar with the grand systems projects. Within 2.5 years, we will have rewritten all of our functions, which means that they can be changed individually without affecting each other. The effect of that is that our site will be easier to modify, it will be more robust, it will be higher performance, and most importantly, it will be much more scalable than it is at the moment. We’ll be able to develop faster, and we’ll be able to replicate the functionality within our own website on other websites. That is going to be increasingly important or it could be increasingly important if a trial that we are undertaking this year is successful.
I’m now going to talk about a new business idea, total platform. Our website, at the moment, is integrated with all the other functions within the platform: warehouses, distribution, online marketing, customer service, credit and international sites. Recently, we launched a site with a separate URL called Little Label. This site is dedicated to selling very top end children’s brands that wouldn’t want to sit on the next website. So we created a separate website to the customer. It looks and feels like a separate website. In order to get to it, you go to a different URL. But importantly, it is still linked in to all the other services on our platform in exactly the same way as our own website is. So it still has the 24-hour delivery, it still has the call center, it still has the credit, and everything else that goes with being part of the NEXT platform.
This year, we intend to take that concept one step further. We’ve agreed heads of terms with a business turning over in the order of GBP 25 million, GBP 30 million. So in the context of NEXT not a big company, but a very fast growing company, and we are going to run their website for them. So the website will have their URL, it will look and feel like their website, they will design it, they will have creative control over it, but it will link into all the other elements of our platform in exactly the same way as our own website does. What that means is that not only will we run their website, but we will also do all their warehousing, distribution, returns, call center work, customer credit, international sites. We will do absolutely everything that is involved with selling to customers and servicing those customers, and we will do that for them.
In essence, what this does is it leaves the brand to do the bits of running a retail business or running a brand that brands really enjoy. The design and sourcing of the product, the buying, the marketing, the photography, the web look and feel. It will look and feel and is their business. But all the back end part of the business, everything that involves large CapEx, anything that involves complex systems, negotiations or development, all of that we will take care of.
Now you could look at this and make the mistake thinking this is an outsourcing contract or a joint venture. It is not an outsourcing contract and it’s not a joint venture, and it doesn’t come with all the legal complications and potential conflicts of interest inherent in both of those structures. Instead, this is a very simple commission contract. It’s a long-term commission contract. Basically, the client pays a fixed percentage of sales for all of the services that we provide. There are no extra charges, there’s no discount. It’s one commission rate on their sales. What that means are 2 things. First of all, it is a contract and a way of operating that we are very used to. It is the way that we operate with most of our label customers and have done for many years. Secondly, it aligns our interests with those of our clients, 100%. If they sell more, we get more commission. If they sell less, we get less commission. It is in our interest to maximize their sales, and it’s in their interest to maximize their sales.
The development of their business is CapEx free. It requires no systems investment and, and potentially most importantly, it provides them with a 100% variable cost base. As you hit capacity, as you run close to your maximum throughput, your costs go up very quickly. For a business that is maybe 1% the size of NEXT, their turnover can double without, in any way, impacting on our total capacity or ability to operate. So we can accommodate for them huge rates of growth without any of the normal growing pains associated with very rapidly growing businesses.
Equally in the difficult years, and everyone has the odd difficult year, in those difficult years, their costs will go down in line with their sales, which means that their cost base in the years that they most need it to go down, will go down exactly in line with our sales. So we think that for some businesses, this may be a very, very powerful offer.
Now in 5 years’ time, you may look back and go, oh, my gosh, I remember that total platform business, and it may have come to nothing other than provide one client with a great business. On the other hand, this could be one of those ideas that in 5 years’ time, people will look back and go, “Oh, my gosh, that was an important moment.” Everyone was worrying about coronavirus and no one noticed the launch of this service. But actually, this is a groundbreaking operation in the U.K. and could be important to the group.
The final thing I want to talk about is our licensing business. As we have already told you, we have agreed a license arrangement with Ted Baker. The key to these license arrangements is that they are a genuine partnership, but they genuinely create value for our customers by combining the design ethos, the prints, the inspiration and all the design skills of the licensor with our skills, quality control, sourcing and manufacturing. And as long as the combination of those 2 skills produce something that neither one could produce on their own, we believe that this gives the customer a great value and could develop a great business. We have signed with 4 more brands to produce, in one case, more childrenswear, but we’re also branching out into other areas of specialist manufacturing: swimwear, men’s formal work, which is basically suits and shirts, and some home textiles as well. We envisage that the license business is one that potentially we could grow going forward. In terms of the annualized sales, pre-coronavirus, we had estimated that the sales from these products will be around GBP 20 million.
It’s important to stress that the margin we make, the price includes the license fee that we pay our partners. So for NEXT, the gross margin we make, it’s not as high as our normal gross margin, but it is very close to our normal gross margin. What that means is that not only can we sell it online and not only is it profitable online, but also we can select in our stores. And with Ted Baker, we are looking at inserting around 10 departments into our stores. There will be Ted Baker childrenswear within our own shops.
The stock is at — our risk. It’s our stock. We make it. And the licensor gets a simple license fee based on sales. In some ways, what we are doing is we are adding another layer to the platform that we used to work with third-party brands. Our product sourcing is becoming another part of our platform. And we think it’s quite a powerful platform in terms of the factories that it operates with. We operate with 1,700 factories around the world. We have 9 overseas offices that are our own through NEXT Sourcing. And we have over 1,000 overseas sourcing professionals based in-country, doing tasks like merchandising, quality control, ethical trading standards, all the things that you need to do in order to have a strong supply base. We think that this can become part of our platform going forward.
It’s really the final piece in the jigsaw that we’ve been building for some time. And what I’d like to finish by is emphasizing the purpose of our platform. The purpose of our platform is to make our own website the first choice for clothing and homeware for our customers. The second is to make it the most profitable third-party route to market for our clients. And the third is to make sure that the service we provide is one that not only we are proud of but that our partners are proud of as well.
So that’s the end of the presentation. I know that many of you will have logged out as soon as I finish the coronavirus part of the presentation. But thanks for those of you who have hanged on. What I hope is that in addition to being reassured by the coronavirus section of our presentation, that you can also see that we haven’t given up developing our business and that we have got lots of ideas to move the business forward.
In summary, we are facing unprecedented challenges through coronavirus, but all of our modeling, all of our forecasts and all of the work we’ve done, the strength of our balance sheet, the depth of our margins, suggest to us that we are financially resilient and that we will get through this. And in those circumstances, our objective is not just to get through the year. Our objective is to get through the year and to move the business forward.
Thank you very much for your time and attention today. I will now take questions.