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 and Audit Committee on their outcomes. The principal risks and uncertainties are described below:

Description of risk or uncertaintyHow the risk or uncertainty is managed or mitigated

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 therefore 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 includes the setting of seasonal and annual budgets and longer term financial objectives to identify ways to increase shareholder value. Critical to these processes are the consideration of 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 addition, 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 share incentive schemes. In addition, 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 & selection

NEXT's success depends on designing and selecting products that customers want to buy, at appropriate price points and in the right quantities. This includes anticipating and responding to changing consumer preferences and trends, as well as taking into account the wider consumer and economic environment. 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 product ranges. This ensures, so far as possible, that there is a well-balanced product mix that is good value for money, and available in sufficient quantities and at the right time to meet customer demand. To some extent, product risk is also mitigated by the diversity of NEXT's ranges.

Key suppliers & 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.

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 product offer. The Group's risk assessment procedures for key suppliers identify alternatives and develop contingency plans in the event of key supplier failure.

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

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

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

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 in Social, community and human rights. 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.

Warehousing & 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, 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. In addition, service levels, warehouse handling, inbound logistics and delivery costs are monitored continuously to ensure goods are delivered to our warehouses, Retail stores and Directory customers in a timely and cost-efficient manner. 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 and effective call centres, operating successful marketing strategies, and providing both Retail and Directory customers with service levels that meet or exceed their expectations.

The Group continuously monitors website and call centre operations that support the business to ensure that there is sufficient capacity to handle volumes. Capacity forecasting is used to manage peak demands and growth in business volumes.

Market research is used to assess customer opinions and satisfaction levels, and regular customer experience visits to our stores help to ensure that our staff remain focussed on delivering excellent customer service.

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.

NEXT will continue to invest in new space where its financial criteria are met, and will renew and refurbish its existing portfolio when appropriate. New store appraisals include the estimated effects of sales deflection from existing stores, but there remains a risk that actual performance may differ from those estimates.

Information security, business
continuity & 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 on-going risk, the nature of which is constantly evolving.

Systems' vulnerability and penetration testing, business continuity plans and back up facilities 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. 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 received regular briefings on cyber risk during the year (see Audit Committee Report).

Financial, treasury, liquidity &
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 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 counter-party 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 27 to the financial statements.

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 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.

NEXT is also exposed to credit risk, particularly in respect of its Directory customer receivables, which at £712m represents the largest item on the Group balance sheet.

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