Next Retail Limited, Dresden BranchLiquidiert

Next Retail Limited, Dresden Branch

Dresden

Jahresabschluss zum Geschäftsjahr vom 30.01.2011 bis zum 28.01.2012

Directors' Report and Business Review

The directors present their annual report and audited accounts for the year ended 28 January 2012.

Results and dividends

The profit for the year, after taxation, amounted to £335.8m (2011: £279.9m). No dividend was paid during the year (2011: £nil). The directors do not propose payment of a final dividend.

Principal activities and review of the business

The principal activities of the Company during the year comprised the supply of NEXT brand merchandise including Womenswear, Menswear, Childrenswear, Lingerie, Shoes, Sportswear, Accessories, Fashion Jewellery, Cosmetics and Home Furnishings, through a chain of retail shops in the UK, Eire, Scandinavia and Germany (NEXT Retail), a home shopping catalogue and website (NEXT Directory) and a franchise network with overseas partners.

Business strategies and objectives

The Company's principal objective is to provide exciting, beautifully designed, excellent quality clothing, footwear, accessories and home products, presented in collections that reflect the aspirations and means of NEXT customers. The directors aim to achieve this objective by implementing the following strategies:

Review of the year

2011 presented the Retail Sector with the perfect economic storm. Consumer demand was anaemic, held back by a combination of high inflation, low growth in wages and limited growth in consumer credit. Our own input costs rose as soaring cotton prices and overseas wage inflation were passed on by our manufacturers. This, along with the higher VAT, placed upward pressure on our selling prices. Taken in this context, NEXT has performed remarkably well.

NEXT RETAIL

Retail performed in line with our budgets. VAT exclusive sales were down -1.4%, although the cash taken through the till (including VAT) remained in line with last year. Negative like for like sales were offset by sales from new space. Profit margins were maintained with profits down broadly in line with sales at -1.6%.

Retail sales

Retail like for like sales

NEXT defines like for like stores as those that have traded for at least one full year and have not benefited from significant capital expenditure. Sales from these stores for the current year are then compared to the same period in the previous year to calculate like for like sales figures. Underlying like for like sales applies the same calculation to only those stores which were unaffected by new store openings.

New space

We increased total trading space by 402,000 square feet in the year, increasing our portfolio by 11 stores to 536 stores. The net increase in stores is entirely as a result of adding 14 new Home stand-alone stores and although the trading space of clothing increased by around 200,000 sq. feet the number of trading locations reduced by 3.

Selling space is defined as the trading floor area of a store, excluding stockroom, administration and other non-trading areas.

The payback on net capital invested in new space is forecast to be 20 months and net store contribution is forecast to be 21%. These forecasts are comfortably ahead of our financial hurdles of 24 months payback and 15% contribution.

In August we opened a new large concept store in Shoreham which has proven extremely successful. The store consists of a Fashion and a Home shop, sitting side-by-side, on one stand-alone site with its own car park. The Home part of the shop carries an extended range which includes light DIY products and a small garden centre. We have identified 19 other sites around the UK where we would ideally like to open similar stores. However we expect progress to be slow as almost all of these sites require planning permission. We will open at least two more in the year ahead, one near Ipswich the other near Warrington.

We expect to open around a further 270,000 sq. feet in the year ahead and that sales from new space will contribute around 4% to retail sales during the year. This projection has reduced since September as a number of complex projects, many of which require planning permission, have slipped into the following year.

Home Stand-Alone Stores

There is a question as to whether it is wise to be opening Home shops in a market which is so obviously having a difficult time. There are two reasons why we are confident to carry on opening stores in the current environment. The first is that they are extremely profitable and provide an efficient return on capital invested. The Home stand-alone portfolio makes a 21% net branch profit.

The second is that we do not believe that the current rate of decline in the home furnishings market will continue forever, though admittedly it may take a few years to recover.

Retail Stores in the Internet Age

There is a lot of speculation about the future of retail stores given the rapid growth of online trade generally. We remain convinced that there is a continued place for fashion retail stores and that increasingly customers will see stores and online as part of a single service. We continue to see more and more Directory customers using our shops to receive and return our products.

The table below shows the percentage of Directory orders collected and returned in store compared to the same time six months ago.

Store portfolio profitability

Even though there is undoubtedly a future for retail stores, we remain mindful of the need to aggressively manage profitability in an environment where there is increasing divergence of performance between good and poor locations. We rarely take on leases of more than 10 years. All lease renewals are reviewed, and we continue to monitor underperforming stores with a view to disposing of them before they become loss making. This year we closed 14 underperforming stores which collectively traded 79,000 sq. feet and whose combined profitability was 7.9%.

The table below sets out the percentage of our turnover taken from mainline stores in different profitability bands; our portfolio of stores remains extremely profitable with very little space making less than 5% profit and 90% of our stores making more than 15% profit contribution.

Retail profit analysis

Retail profitability remained flat as achieved gross margins moved forward offset by increases in occupancy and overhead costs. The table below details the margin movement in the major heads of costs.

Gross margin is the difference between the cost of stock and the initial selling price. Net operating margin is the residual profit after deducting markdowns and all direct and indirect trading costs. Both are expressed as a percentage of the achieved VAT exclusive selling price.

The Company's decision to order stock earlier, and increase stock-holding throughout the year, meant that we were able to reduce the amount of air freight required to transport stock last minute. This increased our bought-in margin by 0.3%. Improved clearance rates in the End of Season Sale and reduced markdowns added a further 0.4% to achieved gross margin, although some of this gain has been offset by increased handling charges as noted below.

Productivity savings in the stores more than offset the cost-of-living increase in branch wage rates and additional Boxing Day premium pay. The net savings in wages added 0.3% to margin.

Store occupancy costs increased as a percentage of sales, mainly because like for like sales declined. Underlying rent and rates increased by 1.8% and 4.7% respectively. Rent increases incurred in any one year are the result of five yearly rent reviews, so this number represents the compound annual growth over the last five years. We anticipate that rental inflation will fall further in the year ahead.

Distribution and warehousing costs rose due to wage rate inflation, additional costs incurred re-balancing stock between stores, and as a result of the growth in furniture sales requiring two-man Home deliveries.

Central overheads costs also included additional amounts for employee incentives, Carbon Tax and NEXT's commercial arrangements for the 2012 Olympics.

NEXT DIRECTORY

The NEXT Directory has had another very good year with sales growing 16.4% and profits up 18.3%.

Directory sales

Directory sales were driven by a combination of growth in UK full price sales, additional End of Season markdown sales, the new "Offers" tab (which is the equivalent of an online version of our Retail Clearance stores) and international sales. The table below sets out the different components of growth:

Directory stock for the Sale was up 26% on last year, whereas markdown stock across the brand was up only 10.7%. The disproportionate growth in Directory was mainly the result of transferring less surplus stock from Directory to Retail.

The "Offers" tab sells prior season stock that has already been written down to one third of cost in exactly the same way as our Clearance stores operate in Retail. These sales do not therefore adversely affect margin in the season they are sold because the obsolescence cost of the stock has already been taken in the previous season.

Directory active customers increased by 9.6% to just under three million, only 3.4% of the growth in customers came from traditional credit customers and 6.2% from new cash-only customers. Although credit customers only grew by 3.4%, sales to credit customers grew by 12%, as existing customers increased their average annual spend.

Active customers are defined as those who have placed an order or made a payment in the last 20 weeks. The average for the year is calculated as a weighted average of each week's figure. Average sales per customer are calculated as statutory sales divided by the average number of active customers.

Improving Service

Whilst much of the growth in our internet business has come as a result of the underlying growth in the use of the internet generally, we believe that our service improvements have made a significant difference to sales. In particular, the fact that we now deliver next day as standard to customers who order any time up till 9pm at night. We intend to continue to improve our delivery services in the year ahead with the introduction of Sunday and evening deliveries (both of which will be charged at a premium rate).

The key to our ability to improve our service offer lies in the £236m of capital we have invested over the last ten years in new warehousing capacity and automation. This means that most stocked items can be cost effectively picked, packed, sorted and ready for despatch from our warehouses within 90 minutes of an order being taken.

Directory Overseas

Directory continues to make good progress overseas with annual sales reaching £33m last year against only £10m the previous year. We now trade online in 48 countries overseas with sales being particularly strong in Germany, USA, Australia, Eire, Poland and Russia (the last of which only commenced trading in September last year). We are budgeting for international online sales of £50m in the year ahead, at a profitability of circa 20%.

We now trade in most of the major consumer markets, but there is still the opportunity to open in a further 15 new markets during 2012, the most important of which are likely to be Middle Eastern countries in which we already have successful franchises. We anticipate a Chinese language site will be operational in mainland China during the year, though this has proven harder to get up and running than initially anticipated.

Directory profit

Over the course of 2011, margins in NEXT Directory have improved by +0.4%, the reasons for which are detailed below.

The achieved gross margin increased by 0.8%. As in Retail, Directory bought-in gross margin increased as a result of lower air freight costs. In addition, higher margin clothing sales grew faster than Home sales, which were restrained by the opening of new stand-alone Retail Home stores. Markdown costs reduced, as improved clearance rates more than offset the 26% increase in stock for the Directory Sale.

We continued to see an improvement in bad debt rates, a trend which we have seen for over two years now. Bad debt rates are now the lowest we have ever known them. We believe that this is a result of the credit crunch, which reduced credit availability generally, thus reducing consumers' ability to take on debt they could not afford.

Overall service charge income increased in value but decreased as a percentage of sales. Service charge income grew by 8% whilst total sales were up 16%, so net margins were reduced by -0.9%.

An increase in warehousing and distribution costs reduced margin by -0.7%. Most of this cost increase came from warehousing and was the result of additional labour used to improve stock distribution between Retail and Directory. It was this exercise that allowed us to improve the efficiency of our clearance online. In addition, staffing costs were inflated by the increased use of agency staff, the annual cost of living wage award and increased management cover.

There were significant inflationary rises in the underlying costs of parcel distribution but these were offset by greater use of our stores for deliveries and returns, along with a reduction in free post and packaging promotions throughout the year.

Increases in central overheads, including the payment of higher staff incentives, were more than offset by marketing and call centre savings. These costs were reduced by increased use of the internet and a reduction in the number of customers requesting printed catalogues.

INTERNATIONAL RETAIL

The majority of this business is conducted through our franchise partners. In total, they operate 164 NEXT stores in 30 countries. Reported partner sales increased by 9% in total and 5% on a like for like basis.

OUTLOOK

The outlook for the year ahead is very uncertain, and in this environment we think it is sensible to again be cautious in our budgeting.

Outlook for the consumer

There is some important good news for the consumer. As expected, inflation has begun to fall and looks set to ease further. So by the third quarter consumers should see their incomes rising broadly in line with prices a welcome end to deflation in real earnings. Inflation in our own prices has also evaporated and selling prices going forward will be in line with those last year.

However, in 2012 there remain two important constraints to growth in consumer spending:

In addition any worsening in the Eurozone sovereign debt crisis would further undermine UK employment and put additional pressure on banks' balance sheets. So this possibility remains a significant downside risk to the UK consumer.

On balance we believe that these on-going constraints outweigh much of the upside potential for 2012 and accordingly we are budgeting conservatively.

RISKS & UNCERTAINTIES

The Board has a policy of continuous identification and review of key business risks and oversees the development of processes to ensure that these risks are managed appropriately. Executive directors and operational management are delegated with the task of implementing these processes and reporting to the Board on their outcomes. The key risks identified by the Board are summarised below.

Business strategy development & implementation

If the Board adopts the wrong business strategy or does not implement its strategies effectively, the business may suffer. The Board needs to understand and properly manage strategic risk in order to deliver long term growth for the benefit of NEXT's stakeholders. The Board reviews business strategy on a regular basis to determine how sales and profit budgets can be achieved or bettered and business operations made more efficient. This process involves the setting of annual budgets and longer term financial models to identify ways in which the Company can increase shareholder value. Critical to these processes is the consideration of wider economic and industry specific trends that affect the Company's businesses, the competitive position of its product offer and the financial structure of the Company.

Credit risk & liquidity

The Company is exposed to credit risk in respect of its Directory and other business customers. Rigorous procedures are in place with regard to the Company's credit customers and these procedures are regularly reviewed and updated as required. Key suppliers whose services are essential to the successful running of the business also face credit risk. These include the supply and printing of the Directory, provision of core IT systems and certain systems and suppliers in the Company's delivery and distribution network. The Company's risk assessment procedures for key suppliers enable it to identify alternatives and develop contingency plans in the event any of these suppliers fail.

Management team

The success of NEXT relies on the continued service of its senior management and technical personnel and on its ability to continue to attract, motivate and retain highly qualified employees. The retail sector is very competitive and NEXT staff are frequently targeted by other companies for recruitment. The NEXT plc Remuneration Committee identifies senior personnel, reviews their remuneration at least annually and formulates packages that are structured to retain and motivate these employees. In addition, the Board considers the development of senior managers to ensure that there are adequate career development opportunities for key personnel and an orderly succession and promotion to all important management positions within the business.

Product design & selection

The success of NEXT depends on providing exciting, beautifully designed, excellent quality clothing and homeware. Success also depends upon its ability to anticipate and respond to changing consumer preferences and trends. Many of NEXT's products represent discretionary purchases and demand for these products can decline in periods in which consumer confidence is negatively affected. As a consequence, NEXT may be faced with surplus stocks that cannot be sold at full price and have to be disposed of at a loss. Executive directors and senior management continually review the design and selection of NEXT's product ranges. This ensures, so far as possible, that there is a well-balanced product mix on offer, that is good value for money and in sufficient quantities at the right time to meet customer demand.

Key suppliers & supply chain management

NEXT relies on its supplier base to deliver products on time and to the quality standards it specifies. It continually seeks ways to develop and extend its supplier base so as to reduce any over-reliance on particular suppliers of product and services, and to improve the competitiveness of its product offer. If input costs rise, for example raw materials or manufacturing labour costs, NEXT will work with existing suppliers to mitigate the inflationary impact. When necessary, new sources of supply will be developed in conjunction with NEXT Sourcing (its affiliated sourcing operation), as well as through external agents and existing direct suppliers.

Key suppliers & supply chain management (continued)

Non-compliance by suppliers with the NEXT Code of Practice may increase reputational risk. Therefore, NEXT carries out regular inspections of its suppliers' operations to ensure compliance with the standards set out in this code, covering production methods, employee working conditions, quality control and inspection processes. NEXT also monitors and reviews the financial, political and geographical aspects of its supplier base to identify any factors that may affect the continuity or quality of supply of its products.

Retail store network

Growth of NEXT's retail business is dependent upon increasing the floor space within its store network and customers spending more. NEXT will continue to invest in new stores where its financial criteria are met and refurbish its existing portfolio when appropriate. The anticipated effect of sales deflection is factored into new store appraisals, but there can be no assurance that the impact of new openings will not result in a greater deflection of sales from existing stores.

Successful development of new stores is dependent upon a number of factors including the identification of suitable properties, obtaining planning permissions and the negotiation of acceptable purchase or lease terms. Notwithstanding there have been a number of retail failures in recent years, prime sites will generally be in great demand. In such circumstances, increased competition can result in higher rents going forwards.

Directory customer base

Growth of the NEXT Directory business depends upon the recruitment and retention of its customer base and increasing the average spend per customer. NEXT will continue to recruit new customers where they satisfy its credit score requirements. However, there can be no assurance that new customers will result in higher sales per customer or lower incidence of bad debts, compared with the existing customer base.

In addition, NEXT requires its internet website to attract new customers and encourage its existing customers to continue ordering from the Directory. Management continually reviews the configuration, content and functionality of the NEXT website to ensure it enhances the customer shopping experience. Service levels and response times are also monitored to ensure that the website is both resilient and secure at all times.

Warehousing & distribution

NEXT regularly reviews its warehouses and the related logistics operations that support its businesses. Risks include business interruption due to physical property damage, access restrictions, breakdowns in warehouse systems, capacity shortages, inefficient processes and delivery service failures. Planning processes are in place to ensure there is sufficient warehouse handling capacity for expected future business volumes over the short and longer terms. In addition, service levels, warehouse handling and delivery costs are monitored continuously to ensure goods are delivered to Retail stores, Directory customers and third party clients in a timely and cost-efficient manner.

IT systems & business continuity

NEXT is dependent upon the continued availability and integrity of its computer systems. The business must record and process a substantial volume of data and conduct inventory management accurately and quickly. The Company expects that its systems will require continuous enhancements and ongoing investment to prevent obsolescence and maintain responsiveness to business needs. Back up facilities and business continuity plans are in place and are tested regularly to ensure that business interruptions are minimised and data is protected from corruption or unauthorised access or use.

Call centre capacity & service levels

The Company is dependent on the efficient operation of its own and third party call centres to receive and respond to customer orders and enquiries. Insufficient manpower, supplier failures and interruption in the availability of telephony systems to meet customer service requirements are the principal risks. The Company continuously monitors call centre operations that support the NEXT Directory business to ensure that there is sufficient capacity to handle call volumes and satisfy clients' customer service level requirements. Capacity forecasting is used to manage peak demands and growth in business volumes and customer and customer satisfaction is measured on a regular basis. Business continuity plans ensure the risk of business interruption is minimised.

EMPLOYEES

People are key to achieving the Company's business objectives. NEXT has established policies for recruitment, training and development of personnel and is committed to achieving excellence in the areas of health, safety, welfare and protection of employees and their working environment.

Equal opportunities

NEXT is an equal opportunities employer and will continue to ensure it offers career opportunities without discrimination. Full consideration is given to application for employment from disabled persons, having regard to their particular aptitudes and abilities. The Company has continued the employment wherever possible of any person who becomes disabled during their employment. Opportunities for training, career development and promotion do not operate to the detriment of disabled employees.

Training & development

NEXT aims to realise the potential of its employees by supporting their career progression and promotion wherever possible. It makes significant investment in the training and development of staff and in training and education programmes which contribute to the internal promotion prospects of employees.

Employee communication

NEXT has a policy of providing employees with financial and other information about the business and ensures that the suggestions and views of employees are taken into account. NEXT has an employee forum made up of a network of elected representatives from throughout the business who attend meetings at least twice a year with directors and senior managers. This forum enables and encourages open discussion on key business issues, policies and the working environment.

Employees of the Company participate in management and sharesave option schemes offered by NEXT plc. The NEXT Group Pension Plan, also operated by NEXT plc, provides a valuable pension benefit to the Company's participating employees, details of which are set out in the NEXT plc annual report and accounts.

SOCIAL & ENVIRONMENTAL MATTERS

NEXT is committed to the principles of responsible business. For NEXT, this means addressing key business related social, ethical and environmental matters in a way that aims to bring value to all of its stakeholders, including customers and shareholders. Continuous improvement lies at the heart of NEXT's approach and this is achieved by acting in an ethical manner, developing positive relationships with suppliers, recruiting and retaining successful and responsible employees, taking responsibility for our impact on the environment and delivering support through contributions to charities and community organisations.

NEXT has a Corporate Responsibility ("CR") forum of 15 senior managers and directors representing key areas of the business, co-ordinated by a CR Manager, to develop and implement its strategy. The forum identifies potential issues and opportunities and evaluates the success of NEXT's response. The CR Manager holds regular updates with the executive director responsible for CR matters.

Suppliers

NEXT is a member of the Ethical Trading Initiative and operates its Code of Practice ("COP"), an established set of ethical trading standards, as an integral part of the Company's operations. The NEXT COP has ten key principles that stipulate the minimum standards with which suppliers are required to comply in relation to workers rights and conditions of work including working hours, minimum age of employment, health, safety, welfare and environmental issues. Through its COP, NEXT seeks to ensure all products bearing the NEXT brand are produced in a clean and safe environment and in accordance with all relevant laws.

NEXT is committed to its internal supplier audit and management programme and has a COP audit team of 45 staff (2011: 44). The COP team works directly with suppliers to identify and address causes of non-compliance. Each audited factory is measured against the COP and is graded against its six tier rating system. The supplier is made aware of its rating and what is required to improve that rating via a corrective action plan. This direct approach also allows NEXT to build knowledge and understanding in the local communities, as well as monitoring suppliers through its auditing process.

Supplier payment policy

NEXT's policy for the payment of suppliers is either to agree terms of payment at the start of business or to ensure that the supplier is aware of the Company's payment terms. Payment is made in accordance with contractual and other legal obligations.

Trade creditor days of the Company at 28 January 2012 were 29 days (2011: 30 days) based on the ratio of the trade creditors at the end of the year to the amounts paid during the year to trade creditors.

Customers

NEXT is committed to offering stylish, excellent quality products to its customers. It aims to ensure they are well made, functional, safe and are sourced in a responsible manner. Its team of technologists works closely with buyers, designers and suppliers to ensure NEXT products comply with all relevant legislation, and its own internal standards where these are higher. The expertise of independent safety specialists for clothing, footwear, accessories, beauty and home products is used where required.

NEXT endeavours to provide an inclusive, high quality service to all customers, whether they are shopping through its stores, catalogues or website. The different methods of shopping must be easily accessible for all customers and be responsive to their particular needs.

NEXT Customer Services interacts with Retail and Directory customers to resolve enquiries and issues. Findings are documented and the information is used by other areas of the business to review how a product or service can be improved.

Health & safety

NEXT recognises the importance of health and safety at work and its management is designed to contribute to improving business performance. Policies and procedures are reviewed and audited regularly to make safety management more robust and fully up to date.

The Company's objective is to manage all aspects of its business in a safe manner and take practical measures to ensure that its activities and products do not harm customers, employees, contractors, sites or equipment. Procedures are in place to enable effective two way communication and consultation about health, safety and welfare issues in order to achieve a high level of safety awareness.

Environment

NEXT recognises that it has a responsibility to manage the impact of its business on the environment both now and in the future. Key areas of focus continue to be:

NEXT is committed to reducing its carbon footprint by reducing energy consumption throughout its operations, minimising and recycling waste, cutting transport emissions and reducing the packaging in our products.

Community

NEXT supports a wide range of charities and organisations in ways that most benefit them and their particular cause. NEXT works with a number of charities both in the UK and overseas to raise funds through the sale of specific products where a donation from their sale is passed to the charity. In addition, NEXT makes donations of surplus stocks to charities.

No donations were made for political purposes (2011: nil).

DIRECTORS

The directors who served the Company during the period were as follows:

D W Keens S A Wolfson A J Varley

No director had any interest in the share capital of the Company or of any subsidiary company of NEXT plc. The directors are also directors of NEXT plc, and their own and their families' interests in the ordinary shares of NEXT plc are shown in that accounts of that company.

Going concern

The Company's business activities, together with the factors likely to affect its future development, performance and position, are set out above. The Company participates in the NEXT group's centralised treasury arrangements and so shares banking arrangements with its parent and fellow subsidiary companies. The Company has net current liabilities of £1,536m and is reliant on the continued financial support of the parent company which has been confirmed in writing to the Directors for a period of at least 12 moths from the date of approval of these financial statements.

The directors, having assessed the responses of the directors of the Company's parent, NEXT plc, to their enquiries have no reason to believe that a material uncertainty exists that may cast doubt about the ability of the NEXT group to continue as a going concern or its ability to continue with the current banking arrangements. On the basis of these enquiries, and their review of current performance and forecasts, the directors have a reasonable expectation that the Company has adequate resources to continue its operations for the foreseeable future. For this reason, they have continued to adopt the going concern basis in preparing the financial statements.

AUDITORS

Ernst & Young LLP have expressed their willingness to continue in office as auditors of the Company and their reappointment will be proposed at the AGM.

Disclosure of information to auditors

In accordance with the provisions of section 418 of the Companies Act 2006, each of the persons who is a director at the date of approval of this report confirms that;

By order of the board

Balance sheet at 28 January 2012

Income statement for the year ended 28 January 2012

Notes to the Financial Statements at 28 January 2012

1. Accounting policies

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") adopted for use in the European Union and the Companies Act 2006.

The financial statements have been prepared on the historical cost basis except for certain financial instruments and share based payment liabilities which are measured at fair value. The principal accounting policies adopted are set out below.

The financial statements are presented in sterling and all values are rounded to the nearest thousand pounds except where otherwise indicated.

After making enquiries, the directors have a reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Goodwill

Goodwill arising on acquisition is initially measured at cost, being the excess of the cost of the acquisition over the Company's interest in the net fair value of the acquired entity's identifiable assets and liabilities at the date of acquisition.

Goodwill is not amortised, but is reviewed for impairment at least annually; any impairment is recognised immediately in the income statement and is not subsequently reversed.

On disposal of a subsidiary or associate, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Goodwill arising before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and reviewed annually for impairment.

Depreciation is provided to write down the cost of plant, property and equipment to their estimated residual values, based on current prices at the balance sheet date, over their remaining useful lives by equal annual instalments. Useful lives are also reviewed annually.

The useful lives generally applicable are summarised as follows:

Investments

Investments in subsidiary companies and equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are stated at cost, subject to review for impairment.

Impairment

The carrying values of non-financial assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated. Where the asset does not generate cash flows which are independent from other assets, the recoverable amount of the cash-generating unit to which the asset belongs is estimated.

The recoverable amount of a non-financial asset is the higher of its fair value less costs to sell, and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

An impairment loss is recognised in the income statement whenever the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

Goodwill is tested for impairment annually and whenever there is an indication that the asset may be impaired.

1. Accounting policies (continued)

Financial assets

Financial assets are classified in the following categories: at fair value through profit or loss, loans and receivables, and available-for-sale.

Financial assets at fair value through profit or loss are financial assets held for trading. Derivatives are also categorised as held for trading unless they are designated as hedges. Gains or losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are included in the income statement in the period in which they arise.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are carried at amortised cost. Available-for-sale financial assets are carried at fair value and are non-derivatives that are either specifically designated as such or which are not classified in any of the other categories.

Inventories

Inventories are valued at the lower of standard cost or net realisable value. Net realisable value is based on estimated selling prices less further costs to be incurred to disposal.

Trade and other receivables

Trade receivables are stated at original invoice amount plus any accrued service charge (in the case of Directory customer receivables). Where there is objective evidence that there is an impairment loss, the amount of the loss is measured as the difference between the carrying amount and the present value of the estimated future cash flows discounted at the effective interest rate. Amounts charged to the allowance account are written off when there is no expectation of further recovery.

Share based payments

The fair value of employee share options granted on or after 7 November 2002 is calculated using the Black-Scholes model. The resulting cost is charged in the income statement over the vesting period of the option, and is adjusted for the expected and actual number of options vesting.

For cash-settled share based payments (including the long term incentive plan), the fair value of the liability is determined at each balance sheet date and the charge recognised through the income statement over the period in which the related services are received by the Company.

Taxation

Current tax liabilities are measured at the amount expected to be paid, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.

Deferred tax expected to be payable or recoverable on differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are only recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax is calculated at the rates of taxation that are expected to apply when the asset or liability is settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date, and is not discounted.

Taxation is charged or credited directly to equity if it relates to items that are credited or charged to equity; otherwise it is recognised in the income statement.

Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents consist of cash and short term deposits, less bank overdrafts which are repayable on demand. Cash and short term deposits comprise cash at bank and in hand and short term deposits with an original maturity of three months or less.

1. Accounting policies (continued)

Bank loans and overdrafts

Bank loans and overdrafts are initially recognised at fair value less directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest rate method.

Revenue

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided to customers outside of the Company, stated net of returns and value added and other sales taxes.

Sales of goods are recognised when goods are delivered and title has passed. Interest income, including Directory service charge, is accrued on a time basis, by reference to the principal outstanding and the applicable effective interest rate. Income from rendering of services is recognised when the services have been performed. Royalty income is recognised in line with sales reported by the Company's franchise partners.

Foreign currencies

The financial statements are presented in pounds sterling, which is the Company's functional and presentation currency. Transactions in foreign currencies, which are those other than the functional currency of an entity, are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated at the rates ruling at the balance sheet date. Resulting exchange gains or losses are recognised in the income statement for the period.

Financial instruments

Derivative financial instruments

Derivative financial instruments ("derivatives") are used to manage risks arising from changes in foreign currency exchange rates relating to the purchase of overseas sourced products. In accordance with its treasury policy, the Company does not enter into derivatives for speculative purposes.

Derivatives are stated at their fair value. The fair value of foreign currency derivative contracts is their market value at the balance sheet date. Market values are calculated using mathematical models and are based on the duration of the derivative instrument together with quoted market data including interest rates, foreign exchange rates and market volatility at the balance sheet date.

Hedge accounting

Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and any ineffective portion is recognised immediately in the income statement. When the asset or liability for the hedged transaction is recognised in the balance sheet, the associated gain or loss on maturity of the hedging instrument previously recognised in equity is included in the carrying amount of the hedged asset or liability. Gains or losses realised on cash flow hedges are then recognised in the income statement in the same period as the hedged item.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument previously recognised in equity is retained in equity until the hedged transaction occurs. If the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is then transferred to the income statement.

Changes in the fair value of derivatives which do not qualify for hedge accounting are recognised in the income statement as they arise.

1. Accounting policies (continued)

Employee benefits

Employees of the Company are eligible for membership of pension plans operated by NEXT Plc (the "Group"). The Group operates a pension plan in the UK which consists of defined benefit and defined contribution sections.

The Group reports its pension costs, assets and liabilities in accordance with IAS 19 Employee Benefits and full details are given in the consolidated financial statements of the Group. There is no consistent and reliable basis for allocating the plan assets, liabilities and cost between the participating entities since it is not possible to determine from the terms of the plan the extent to which the surplus or deficit in the plan will affect the future contributions of the Company. Accordingly, as an unlisted wholly-owned subsidiary of NEXT plc, the Company accounts for its participation in the plan as if it were a defined contribution plan, with pension costs charged to the income statement as incurred.

Provisions

A provision is recognised where the Company has a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are discounted where the impact is material.

Leasing commitments

Leases are classified as finance leases where the terms of the lease transfer substantially all the risks and rewards of ownership to the Company. All other leases are classified as operating leases.

Rentals payable under operating leases are charged to income on a straight line basis over the period of the lease.

Premiums payable, rent free periods and capital contributions receivable on entering an operating lease are released to income on a straight line basis over the lease term.

Significant areas of estimation and judgment

The preparation of the financial statements requires judgments, estimations and assumptions to be made that affect the reported values of assets, liabilities, revenues and expenses. The nature of estimation means that the actual outcomes could differ from those estimates. Significant areas of estimation for the Company include the expected future cash flows applied in measuring the impairment of trade receivables and property, plant & equipment, and estimated selling prices applied in determining the net realisable values of inventories.

Changes in accounting standards

Various new accounting standards and amendments have been issued during the year, none of which have had or are expected to have any significant impact on the Company's reported profits or equity.

2. Revenue

Rendering of services includes £126,109,000 (2011: £116,324,000) of service charge on Directory customer receivables.

3. Operating profit

This is stated after charging / (crediting):

4. Staff costs

The monthly average number of employees during the period was as follows:

If the number of hours worked were converted on the basis of a full working week, the equivalent average number of full-time employees would have been 20,038 (2011: 20,505).

5. Directors' emoluments

None of the directors received any remuneration from the Company for the year ended 28 January 2012 (2011: £nil). All of the directors were also directors of the ultimate parent company, NEXT plc, and their emoluments for services to the group are disclosed in the report and accounts of that company. The directors believe that it is not practicable to apportion their remuneration between qualifying services for this company and other group companies in which they hold office.

6. Finance income and costs

7. Taxation

The tax rate for the current year varied from the standard rate of corporation tax in the UK due to the following factors:

In addition to the amounts charged to the income statement, tax movements recognised directly through equity were as follows:

7. Taxation (continued)

Deferred taxation

The movement in the year is as follows:

A reduction in the rate of corporation tax to 24% with effect from 1 April 2012 was substantively enacted on 26 March 2012. As this was after the balance sheet date, the impact on the Company's deferred tax balance has not been recognised, but is not expected to be significant.

8. Property, plant and equipment

At 28 January 2012 the Company had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £8,708,000 (2011: £18,188,000).

9. Intangible assets: goodwill £000 Carrying amount:

Goodwill relates entirely to the acquisition of the business and net assets of NEXT Near East Limited on 1 February 2003 and is tested for impairment at the balance sheet date. The recoverable amount of goodwill at 28 January 2012 was measured on the basis of value in use. As this exceeded carrying value, no impairment loss was recognised.

The key assumptions in the calculation are the growth in NEXT Brand sales and expected net margins achieved. In assessing value in use the most recent financial results and internal budgets for the next year were used and extrapolated in perpetuity with no growth assumed, and discounted at 8%.

10. Inventories

11. Trade and other receivables

Amounts due from group undertakings are repayable on demand.

The credit quality of trade receivables that are neither past due nor impaired can be assessed by reference to the historical default rate for the preceding 365 days of 1.0% (2011: 1.5%), although default rates over shorter periods may show significant variations.

No interest is charged on Directory customer receivables if the statement balance is paid in full; otherwise balances bear interest at a variable annual percentage rate of 25.99% (2011: 25.99%). Expected irrecoverable amounts on balances between 30 and 120 days overdue are provided for based on past default experience. Customer receivables which are impaired otherwise than by age of default are separately identified and provided for in full.

The other classes within trade and other receivables do not include impaired assets. The maximum exposure to credit risk at the reporting date is the carrying value of each class of asset above. The Company does not hold any collateral over these balances.

11. Trade and other receivables (continued)

Ageing of trade receivables:

Movement in the allowance for doubtful debts:

12. Other financial assets

Foreign exchange contracts comprise forward contracts which are used to hedge exchange risk arising from the Company's overseas purchases. The instruments purchased are denominated in US Dollars and Euros.

13. Cash and short term deposits

Cash at bank earns interest at floating rates based on daily bank deposit rates. Short term deposits are made for varying periods of between one day and three months depending on the cash requirements of the Company, and earn interest at market short term deposit rates.

14. Bank loans and overdrafts

Bank overdrafts and overnight borrowings are repayable on demand and bear interest at a margin over bank base rates.

15. Trade and other payables 2012

Trade payables are not interest-bearing and are generally settled on 30 day terms. Other creditors and accruals are not interest-bearing. Amounts due to group undertakings are repayable on demand.

16. Other financial liabilities 2012

Foreign exchange contracts comprise forward contracts which are used to hedge exchange risk arising from the Company's overseas purchases. The instruments purchased are denominated in US Dollars and Euros.

17. Retirement benefit schemes

Employees of the Company are eligible in the UK for membership of the NEXT Group Pension Plan, which consists of defined benefit and defined contribution sections. The defined benefit section is a funded arrangement which provides benefits based on final pensionable earnings and was closed to new members in 2000. For all current plan members, pensions earnings are comprised of salaries, overtime and, prior to 1 October 2006, annual performance bonuses. From 1 October 2006, sales and profit related bonuses ceased to be part of pensionable earnings.

The Group reports its pension costs, assets and liabilities in accordance with IAS 19 Employee Benefits and full details are given in the consolidated financial statements of the Group. There is no consistent and reliable basis for allocating the plan assets, liabilities and cost between the participating entities since it is not possible to determine from the terms of the plan the extent to which the surplus or deficit in the plan will affect the future contributions of the Company. Accordingly, as an unlisted wholly-owned subsidiary of NEXT plc, the Company accounts for its participation in the plan as if it were a defined contribution plan.

The IAS 19 valuation of the defined benefit section was undertaken by an independent qualified actuary as at 28 January 2012 using the projected unit credit method. The net surplus in the plan on an IAS 19 basis at that date was £35.1m (2011: net surplus £55.7m).

In 2010, as part of the Group's risk management strategy for the liabilities arising under the Plan, most pensioner liabilities were subject to a buy-in arrangement. Under the terms of this arrangement, the Plan paid £124m to an insurance company and receives annuity payments equal to the monthly pensions then in payment. This eliminates the Plan's exposure to the interest, inflation and longevity risks associated with these pensioner members.

After the balance sheet date, on 27 June 2012, a further buy-in arrangement was put in place for pensions in payment at that date at a cost of approximately £24m. To facilitate this, the Group made a special contribution of £11m to the Plan.

17. Retirement benefit schemes (continued)

During the current year, no special contributions were made by the Company in addition to the regular contributions to the plan (2011: £29.0m). The most recent full actuarial valuation of the defined benefit section's financial position was undertaken as at 31 March 2010. Adjusting these results for the subsequent buy-in transaction (described above) resulted in a fully funded position on an actuarial basis. The Group and the Trustees of the Plan have agreed that no further special contributions are required.

The defined contribution section is for all members who joined after September 2000 and benefits are based on each individual member's personal account which is invested in an independently administered fund. The plan has equal pension rights with respect to members of either sex and complies with the Employment Equality Regulations (2006). The assets of the plan are held in a separate trustee administered fund. The Group also provides further unfunded retirement benefits to plan members who would otherwise be restricted by the lifetime allowance.

18. Commitments under operating leases

Future minimum rentals payable under non-cancellable operating leases where the Company is the lessee:

The Company has entered into operating leases in respect of vehicles, equipment and retail stores. These non-cancellable leases have remaining terms of between 1 month and 9 years.

19. Contingent liability

The Company has given a guarantee to Barclays Bank plc in respect of a bank set-off arrangement with its parent undertaking NEXT plc, its fellow subsidiary undertakings and associates. The guarantee dated 9 September 2003 is limited to the credit balance held on the Company's bank account.

On 19 March 2012, the Company provided a guarantee in favour of Next Pension Trustees Limited, guaranteeing jointly and severally with Next Group plc all present and future obligations and liabilities of Next Distribution Limited and NEXT plc to the Next Group Pension Plan, up to a maximum amount of £120 million.

20. Share capital

21. Equity settled share based payments

Employees of the Company participate in management and sharesave option schemes offered by NEXT plc. Management share options are granted annually at the prevailing market price at the time of grant and are exercisable between three and ten years following their grant. The sharesave option scheme operates on a save-as-you-earn principle, and offers options at a discount of 20% to the prevailing market rate at the time of grant, exercisable three, five or seven years after the date of grant. A share matching plan is also offered to senior executives, who may receive conditional awards of shares in exchange for the investment of part or all of their annual bonus in NEXT shares. Further details of these schemes are provided in the Group's consolidated financial statements. The fair value of management and sharesave options granted is calculated at the date of grants using a Black-Scholes option pricing model.

Management and sharesave options

The following table illustrates the number and weighted average exercise prices of, and movements in, share options during the year.

Options were exercised on a regular basis throughout the year and the weighted average share price during this period was 2407p (2011: 2176p). Options outstanding at 28 January 2012 are exercisable at prices ranging between 889p and 2189p (2011: 889p to 2189p), and have a weighted average remaining contractual life of 6.5 years (2011: 6.3 years), further analysed in the table below.

Included in the above balances were 3,000 options (2011: 51,000) that were granted prior to 7 November 2002 and which have not been subsequently modified and are, therefore, not required to be recognised in accordance with IFRS 2.

21. Equity settled share based payments (continued)

Share Matching Plan

There have been two awards of nil cost options under the Share Matching Plan (June 2010 and April 2011). During the current year, 114,418 (2011: 181,290) nil cost options were granted under this Plan, and 18,632 options lapsed (2011: nil). At 28 January 2012, there were a total of 277,076 options outstanding (2011: 181,290). None were exercisable at the end of the current or prior year. The remaining contractual life for these option is 8.8 years (2011: 9.4 years).

Fair value calculation

The following table lists the inputs to the model used for options granted in the years ended 29 January 2011 and 28 January 2012 based on information at the date of grant:

Expected volatility was determined by calculating the historical volatility of the NEXT plc share price over a period equivalent to the expected life of the option. The expected life applied in the model is based on historical analyses of exercise patterns, taking into account any early exercises.

22. Financial instruments: risk management

NEXT operates a centralised treasury function which is responsible for managing the liquidity, interest and foreign currency risks associated with the Group's activities, including the Company. Treasury policy is reviewed and approved by the NEXT plc Board and specifies the parameters within which treasury operations must be conducted, including authorised counterparties, instrument types and transaction limits, and principles governing the management of liquidity, interest and foreign currency risks.

The Company's principal financial instruments, other than derivatives, are cash, bank overdrafts and various other financial assets and liabilities such as trade receivables and trade payables arising directly from its operations.

Liquidity risk

The Company's cash and borrowing requirements are managed centrally by the NEXT Group treasury function to minimise net interest expense within risk parameters agreed by the NEXT plc Board, whilst ensuring that the Company has sufficient liquid resources to meet the operating needs of its business.

The undiscounted remaining contractual cash flows of the Company's financial liabilities at 28 January 2012 and 29 January 2011 all mature within one year of the balance sheet date.

Interest rate risk

Interest is payable on loan balances with other group companies; no derivatives are used to manage this exposure.

Foreign currency risk

The Company's principal foreign currency exposures arise from the purchase of overseas sourced products. The Company enters into foreign exchange derivative transactions with other group companies in order to manage these exposures by fixing the cost in sterling for up to 18 months ahead. Derivatives are not entered into for speculative purposes.

The carrying amounts of the Company's foreign currency denominated monetary assets and liabilities at the balance sheet date are detailed in the table below. The Company's net exposure to foreign currencies, taking hedging activities into account is illustrated by the sensitivity analysis in Note 26.

Credit risk

All customers who wish to trade on credit terms are subject to credit verification procedures. Receivable balances are monitored on an ongoing basis and provision is made for estimated irrecoverable amounts. The concentration of credit risk is limited due to the Directory customer base being large and diverse.

The Company's outstanding receivables balances are detailed in Note 11.

Capital risk

The capital structure of the Company consists of equity attributable to the equity holders of the parent company, comprising issued capital, reserves and retained earnings as shown in the statement of changes in equity. The Company manages its capital with the objective of continuing as a going concern while maintaining an efficient structure to minimise the cost of capital. The Company is not subject to any externally imposed capital requirements.

23. Financial instruments: hedging activities

Cash flow hedges

The Company uses derivative instruments in order to manage foreign currency exchange risk arising on expected future purchases of overseas sourced products during the next 18 months. These derivatives comprise forward currency contracts, the terms of which match the terms of the expected purchases. Fair values of derivatives which qualify for hedge accounting under IAS 39 are as follows:

24. Financial instruments: fair values

The fair values of each category of the Company's financial instruments are the same as their carrying values in the Company's balance sheet.

All derivatives are categorised as Level 2 under the requirements of IFRS 7, as they are valued using techniques based significantly on observed market data.

25. Financial instruments:

26. Financial instruments: sensitivity analysis

Foreign currency sensitivity analysis

The Company's principal foreign currency exposures are to US Dollars and the Euro. The table below illustrates the hypothetical sensitivity of the Company's reported profit and closing equity to a 10% increase and decrease in the US Dollar/Sterling and Euro/Sterling exchange rates at the year end date, assuming all other variables remain unchanged. The sensitivity rate of 10% represents the directors' assessment of a reasonably possible change, based on historic volatility.

The analysis assumes that exchange rate fluctuations on currency derivatives that form part of an effective cash flow hedge relationship affect the fair value reserve in equity and the fair value of the hedging derivatives. For foreign exchange derivatives which are not designated hedges, movements in exchange rates impact the income statement.

Positive figures represent an increase in profit or equity.

26. Financial instruments: sensitivity analysis (continued)

Interest rate sensitivity analysis

The table below illustrates the hypothetical sensitivity of the Company's reported profit and closing equity to a 0.5% (2011: 0.5%) increase or decrease in interest rates, assuming all other variables were unchanged. The sensitivity rate of 0.5% (2011: 0.5%) represents the directors' assessment of a reasonably possible change, based on historical volatility.

The analysis has been prepared using the following assumptions:

Positive figures represent an increase in profit or equity.

27. Analysis of net funds

28. Related party transactions

During the year the Company entered into transactions in the ordinary course of business with related parties as follows:

29. Ultimate parent company and controlling party

The Company's immediate parent is NEXT Group Plc. The Company's ultimate parent company and controlling party is NEXT plc, a company registered in England & Wales. NEXT plc is the only group preparing accounts which include NEXT Retail Limited. Copies of its group accounts are available from its Company Secretary at its registered office, Desford Road, Enderby, Leicester, LE19 4AT.

Independent Auditors' Report to the members of NEXT Retail Limited

We have audited the financial statements of Next Retail Limited for the year ended 28 January 2012 which comprise the Income Statement, Statement of Comprehensive Income, Statement of Changes in Equity, Balance Sheet, Cash Flow Statement and the related Notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards ("IFRS") as adopted by the European Union.

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibility Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Directors' Report and Business Review to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion the financial statements:

Opinion on other matters prescribed by the Companies Act 2006

In our opinion the information given in the Directors' Report and Business Review for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

Statement of comprehensive income for the year ended 28 January 2012