Next Regulatory News (NXT)

Contacts:

Alistair Mackinnon-Musson

Rowbell PR

Email: next@rowbellpr.com

Tel: 020 7717 5239

Photographs:

Photographs available at:

http://press.next.co.uk/media/company-images/campaignimages.aspx

Description of principal risk or uncertainty

How the risk or uncertainty is managed or mitigated

Business strategy development and implementation

If the Board adopts the wrong business strategy or does not implement its strategies effectively, the business may suffer. The Board therefore needs to understand and properly manage strategic risk, taking into account specific retail sector 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. Seasonal and annual budgets together with longer term financial objectives and cash flow forecasts are produced.

The Board and senior management consider strategic risk factors, wider economic and industry specific trends that affect the Group's businesses, the competitive position of its product offer and the financial structure of the Group.

In common with other retailers we continue to experience a significant shift by customers from shopping in retail stores to shopping online. Longer term financial forecasts for our Retail business have therefore been prepared and stress tested during the year (see page 31). These forecasts provide a mechanism for ensuring that business profitability is reviewed and managed and agreed actions are in place to take into account changing behaviours and trends.

The Audit Committee monitors strategic and operational risk regularly and any significant matters are reported to the Board.

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's staff may be targeted by other companies.

The Remuneration and Nomination Committees identify senior personnel, review remuneration at least annually and formulate packages to retain and motivate these employees, including long term incentive schemes.

The Board considers the development of senior managers to ensure adequate career development opportunities for key personnel, with orderly succession and promotion to important management positions.

Product design and selection

NEXT's success depends on designing and selecting products that customers want to buy, at appropriate price points and in the right quantities. In the short term, a failure to properly manage this area may mean that NEXT is faced with surplus stocks that cannot be sold at full price and may have to be disposed of at a loss. In the longer term, the reputation of the NEXT Brand may suffer. Product design and selection is therefore at the heart of the business.

Executive directors and senior management continually review the design, selection and performance of NEXT's own product ranges and those of other brands sold by NEXT. To some extent, product risk is also mitigated by the diversity of NEXT's ranges.

In addition, executive directors and senior management regularly review product range trends to assess and correct any key selection or product issues. Corrections to significant missed trends or poorer performing ranges are targeted for amendment, with alternative products being sourced within six months where deemed necessary.

Key suppliers and supply chain management

NEXT relies on its supplier base to deliver products on time and to the quality standards it specifies. Failure to do so may result in an inability to service customer demand or adversely affect NEXT's reputation.

Changes in global manufacturing capacity and costs may impact on profit margins.

Non-compliance by suppliers with the NEXT Code of Practice may increase reputational risk.

NEXT continually seeks ways to develop its supplier base so as to reduce over reliance on individual suppliers of products and services, and maintain the quality and competitiveness of its offer. The Group's risk assessment procedures for key suppliers identify alternatives and develop contingency plans in the event of key supplier failure.

Existing and new sources of product supply are developed in conjunction with NEXT Sourcing, external agents and/or direct suppliers.

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. Further details can be found on page 49.

NEXT 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.

NEXT also monitors and reviews stock availability on an ongoing basis to ensure that issues are identified and appropriate action is taken where any issues are impacting service delivery to customers.

Warehousing and distribution

NEXT regularly reviews the warehousing and distribution operations that support the business. Risks include business interruption due to physical damage, access restrictions, breakdowns, capacity shortages, IT systems failure (see next page), inefficient processes and third-party 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.

Service levels, warehouse handling, inbound logistics and delivery costs are monitored continuously to ensure goods are delivered to our warehouses, Retail stores and Online customers in a timely and cost efficient manner.

During the year we reviewed our warehousing and logistics operations to ensure that we proactively manage changes in our customer demand between Retail stores and Online customers.

Business continuity plans and insurance are in place to mitigate the impact of business interruption.

Customer experience

NEXT's performance depends on the recruitment and retention of customers, and on its ability to drive and service customer demand. This includes having an attractive, functional and reliable website, effective call centres, operating successful marketing strategies, and providing both Retail and Online customers with service levels that meet or exceed their expectations.

Market research and customer feedback is used to assess customer opinions and satisfaction levels to help to ensure that staff remain focused on delivering excellent customer service.

The Group continuously monitors website and call centre operations that support the business to ensure that there is sufficient capacity to handle volumes.

Call centre employees receive comprehensive and relevant training on an ongoing basis, targeting our service to be at its highest possible levels.

The Company is continuing to invest in the development of our UK and overseas websites. These developments are formally appraised and are designed to further improve the online customer experience.

Retail store network

NEXT Retail's performance depends on profitably developing the trading space of the store network. The successful development of new stores depends on a number of factors including the identification of suitable properties, obtaining planning permissions and the negotiation of acceptable lease terms. Prime retail sites will generally remain in demand, and increased competition for these can result in higher future rents.

The predominantly leased store portfolio is actively managed by senior management, with openings, refits and closures based on store profitability and cash payback criteria.

Regular reviews of lease expiry and break clauses are undertaken to identify opportunities for exit or renegotiation of commitments. Profiling of the Group's lease commitments is also regularly reviewed by the Board.

NEXT will continue to invest in new space where its financial criteria are met, and will renew and refurbish its existing portfolio when appropriate.

Information security, business continuity and cyber risk

NEXT is dependent upon the continued availability and integrity of its IT systems, which must record and process substantial volumes of data and conduct inventory management accurately and quickly. The Group's systems require continuous enhancement and investment to prevent obsolescence and maintain responsiveness. The threat of unauthorised or malicious attack is an ongoing risk, the nature of which is constantly evolving and becoming increasingly sophisticated.

Systems' vulnerability and penetration testing is carried out regularly to ensure that data is protected from corruption or unauthorised access or use.

Critical systems are reviewed and tested periodically to ensure they have backup facilities and business continuity plans in place; these are updated on an ongoing basis to reflect business risk.

Major incident simulations and business continuity tests are carried out periodically.

IT risks are also managed through the application of internal policies and change management procedures, contractual service level agreements with third-party suppliers, and IT capacity management.

The Audit Committee and Board received updates and agreed appropriate actions relating to cyber risk and business continuity during the year (see page 42).

As the nature of cyber attack risk is constantly changing and becoming ever more sophisticated, NEXT continually works towards improving mitigating controls and supports significant resource and investment in this area, including employee data security awareness training (see page 42 regarding the independent cyber risk follow up review undertaken during the year).

Financial, treasury, liquidity and credit risks

The main financial risks are the availability of funds to meet business needs, default by counterparties to financial transactions, the effect of fluctuations in foreign exchange rates and interest rates, and compliance with regulation.

NEXT has a longstanding policy of returning surplus cash to shareholders through share buybacks and special dividends, whilst maintaining an appropriate level of debt. Adequate financing facilities are therefore required to support the operational needs of the business.

NEXT is also exposed to credit risk, particularly in respect of its Online customer receivables, which at £1.1bn represents the largest item on the Group Balance Sheet.

NEXT operates a centralised treasury function which is responsible for managing its liquidity, interest and foreign currency risks. The Group's treasury function operates under a Board approved policy. This includes approved counterparty and other limits which are designed to mitigate NEXT's exposure to financial risk. Further details of the Group's treasury operations are given in Note 24 of the financial statements.

NEXT has adequate medium and long term financing in place to support its business operations, and the Group's cash position and forecasts are regularly monitored and reported to the Board.

Rigorous procedures are in place with regard to the Group's credit account customers, including the use of external credit reference agencies and applying set risk criteria before acceptance. These procedures are regularly reviewed and updated.

The Audit Committee received a formal update regarding the customer credit business during the year.

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select suitable accounting policies and then apply them consistently;

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make judgements and estimates that are reasonable and prudent;

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present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

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in respect of the Group financial statements, provide additional disclosures when compliance with the specific requirements of IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and performance;

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state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements;

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in respect of the Parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

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prepare the financial statements on a going concern basis, unless they consider that to be inappropriate.

a.

the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and results of the Group;

b.

the Strategic Report contained in this Annual Report includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face;

c.

the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy; and

d.

the Parent Company financial statements, which have been prepared in accordance with UK Accounting Standard FRS 101 "Reduced disclosure framework", give a true and fair view of the assets, liabilities, financial position and results of the Company.

On behalf of the Board

Lord Wolfson of Aspley Guise

Chief Executive

23 March 2018

Amanda James

Group Finance Director