Marks and Spencer Group Plc

Half Year Results for 26 Weeks Ended 2 October 2021

"Transformation and Covid Bounce Back Drives Strong Performance"

 

The impact of Covid in 2020/21 renders comparisons to the prior year less meaningful. To aid understanding, throughout this document we are showing the 26 weeks to 28 September 2019 as the comparative period for commentary and percentage changes.

 

Strong financial results

●     Profit before tax & adjusting items of £269.4m (2019/20, £176.3m)

●     Profit before tax of £187.3m (2019/20, £158.8m; 2020/21, loss of £87.6m)

●     Food sales¹ up 10.4%, sales ex hospitality and franchise² up 16.9%

●     Food operating profit before adjusting items of £143.7m (2019/20, £92.2m)

●     C&H sales¹ down 1%, full price sales¹ up 17.3%

●     C&H online sales¹ growth of 60.8%, now 34.4% of total C&H sales. Store sales down 17.6%

●     C&H operating profit before adjusting items of £156.2m (2019/20, £109.6m)

●     Net debt reduced to £3.15bn down 22.6% on 2019/20.

 

Underlying improvements in all main businesses

●     M&S Food growing market share with consistent strong quality and improved value perceptions

●     Ocado Retail opens 3 new CFCs. Planned capacity growth over 50% since M&S investment

●     C&H increased value and style perception. Market share growth across key categories and channels

●     MS2 driving strong online growth, record active customers and increased retention

●     UK pipeline includes 20 full line stores, enabling 3 full line closures in H1

●     International rebounding despite lockdowns, trading restrictions and EU border costs

 

Steve Rowe, Chief Executive commented:

"Given the history of M&S we've been clear that we won't overclaim our progress. Unpacking the numbers isn't a linear exercise and we've called out the Covid bounce back tailwinds, as well as the headwinds from the pandemic, supply chain and Brexit, some of which will continue into next year. But, thanks to the hard work of our colleagues, it is clear that underlying performance is improving, with our main businesses making important gains in market share and customer perception. The hard yards of driving long term change are beginning to be borne out in our performance."

 

Group Results (26 weeks ended)	2 Oct 21	26 Sep 20	28 Sep 19	Change vs 2019/20 (%)
Statutory revenue	£5,105.3m	£4,090.9m	£4,860.9m	5.0
Sales before adjusting items	£5,112.9m	£4,102.1m	£4,860.9m	5.2
Operating profit before adjusting items	£363.2m	£61.8m	£269.9m	34.6
Profit/(loss) before tax & adjusting items	£269.4m	£(17.4)m	£176.3m	52.8
Adjusting items	£(82.1)m	£(70.2)m	£(17.5)m	n/a
Profit/(loss) before tax	£187.3m	£(87.6)m	£158.8m	17.9
Profit/(loss) after tax	£159.9m	£(71.6)m	£122.4m	30.6
Basic earnings/(loss) per share	8.2p	(3.5)p	6.4p	28.1
Adjusted basic earnings/(loss) per share	12.1p	(0.4)p	7.1p	70.4
Free cash flow3	£287.6m	£88.1m	£(4.7)m	n/a
Net debt3	£3.15bn	£3.82bn	£4.07bn	-22.6
Net debt excluding lease liabilities3	£0.82bn	£1.31bn	£1.54bn	-46.8
Dividend per share	-	-	3.9p	n/a

 

There are a number of non-GAAP measures and alternative profit measures "APMs", discussed within this announcement and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of     performance. Refer to adjusting items table below for further details. 

¹All references to sales, a new APM, throughout this document are statutory revenue plus the gross value of consignment sales excluding VAT.

² The Food ex hospitality and franchise APM is based on total revenue rather than like-for-like revenue, as was presented at the 20/21 year-end results.

³ Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, the comparative amounts for net debt and free cashflow have been restated.

 

TRANSFORMATION DRIVING STRONG PERFORMANCE ACROSS M&S

 

The combined effects of reshaping the business and the bounce back from the pandemic have driven an encouraging performance across M&S. Profit before tax and adjusting items for the period was £269.4m. Better financial results and a strong focus on working capital management generated free cashflow and a further reduction in net debt. Results include £47.5m of UK business rates relief, and a net rates charge of £50.3m in the period.

 

A repositioned Food business delivering growth

 

Consistently strong growth in Food sales of 10.4% and an improving margin mix has helped to deliver a strong increase in operating profit before adjusting items compared to 2019/20. Whilst it is hard to unravel the residual effects of the pandemic, and the bounce back in spending, from the benefits of the reshaping of M&S Food, we are encouraged by the market share gains increasingly being generated in the core categories at the centre of our strategy. Alongside this, Ocado Retail benefited from a step change in the online grocery market and, following the opening of 3 CFCs (Customer Fulfilment Centres) and further planned capacity, will be well positioned to drive customer growth in the coming year.

 

Better product and omni-channel strategy deliver sharp uplift online in Clothing & Home

 

The Clothing & Home business delivered 17.3% growth in full price sales helping to drive a healthy improvement in operating profit before adjusting items. There are early indicators of renewed competitiveness in most categories, with increased market share overall and in both the online and store channels and improving style and value perception. The number of online customers continued to grow, and we have seen stronger retention levels of newer shoppers supported by the Sparks data and personalisation programme. In October, we relaunched the acquired Jaeger business as a digital-first brand, with an encouraging early customer response.

 

Good progress on rotation of the store estate

 

We are making good progress on the store rotation programme we set out in May. Initial results from new full line store openings have been encouraging. The pipeline of new full line stores has grown to 20 and now includes six former Debenhams sites, in addition to Leamington Spa which opened in the period. In all of these stores we expect to deliver high volume, enabling consolidation of nearby stores. Wherever possible we will accelerate this programme.

 

International focused on strong trading partnerships and global online

 

The International business has also grown online sales, both in markets with M&S stores and on marketplaces. In addition, we have seen a solid recovery in Clothing & Home sales while managing the headwinds of lockdown and restrictions in India plus the impact of EU border costs, primarily affecting Food. Despite these headwinds, International made a solid contribution to group results.

 

Outlook and path to growth

As we move from the 'fixing the basics' phase of the transformation, we are confident of our ability to drive shareholder value in the next phase. Trading for the first four weeks of H2 has been consistent with growth rates reported in Q2 and ahead of plan and we expect the strong demand relating both to the bounce back and improved customer perception to be sustained in the near term. However, well publicised cost pressures will become progressively steeper increasing the importance of our productivity plans, store rotation and technology investment in the coming year. Taking these factors into account and assuming there is no further acute pandemic related disruption, our central case is for profit before tax and adjusting items for the year to be ahead of expectations and in the region of £500m.

A REPOSITIONED FOOD BUSINESS DELIVERING GROWTH

 

M&S Food delivered strong sales growth of 10.4% on 2019/20 and exited the period as the best performing UK grocery chain (Source: Kantar 12 weeks to 3 October 2021). Sales grew 16.9% after adjusting for the adverse impact on the hospitality and franchise travel businesses which are still progressively recovering from the impacts of Covid consumer behaviour. This imbalance was also reflected in the geographical pattern of recovery: compared with 2 years ago M&S Food sales on retail parks were up 23.3%, while Food sales in city centre stores were down 18.4%.

 

% change to 19/20			% change to 19/20
M&S.com (flowers/hampers/wine)	137		Shopping centre	-
Simply Food	27		High street	-10
Retail parks	23		City centre	-18
Franchise fuel	13		Franchise travel (rail/air/roadside)	-49
Total	26		Total	-16

 

Operating profit before adjusting items of £143.7m, as compared to £92.2m in 2019/20, reflected strong sales growth and steady gross margin offset by modest cost growth.

 

Broadened appeal of the M&S Food range

 

The transformation of the M&S Food range over the last few years, previously obscured by pandemic distortions, has delivered an improvement in customer perception, strong core sales growth and market share gains.

 

·    Product development has been refocussed on the mainstream, improving choice in core product categories such as pasta, ready meals, bakery and wine, as well as seasonal family products and frozen ranges. Perception for quality and in critical areas such as farm standards is now market leading.

 

·    As part of the shift to trusted value, promotions have been substantially reduced and entry price points have been sharpened with the introduction of the 'Remarksable' range and 'Fresh Market Specials'. The iconic 'Dine In' programme has been relaunched and expanded to create more compelling offers for dinner for two, for families and for key events.

 

·    With that, there has been a sharp improvement in customer value perception and recent market share increased 20bps on 2019/20 with strong growth in the categories that are important to family shoppers such as produce, meat and grocery. Average basket size on everyday shopping trips remains c.30% higher than pre-pandemic levels, even as the frequency of trips is recovering.

 

Our food-on-the-move and hospitality businesses continued to be impacted in the period. However, since schools and some offices returned to more normal working patterns, sales in city centre, high street and franchise - air and some rail locations - have also improved. Compared to 2019/20 levels, food-on-the-move sales were down 11.4% in September and higher margin hospitality sales were down 34.9%, improving on first half performance which is shown below.

 

% change to 19/20			% change to 19/20
Frozen	40		Hospitality	-53
Grocery & household	33		Food-on-the-move	-18
Beers, wines, spirits	30
Meat, fish, poultry, deli, dairy	20
Produce & flowers	14
Total	20		Total	-30

 

Our Food strategy is to shift to larger stores in the evolving 'renewal' innovation format which offer greater choice in core categories in a more operationally efficient way.  The format has now been implemented in 29 new and renewed stores including 14 since our full year results.  Sales in renewal stores opened in the current year have increased 15.7% in the period and 19.0% in September, compared to 2019/20.

 

Multi-year supply chain efficiency programme underway

The Food business has a multi-year programme to improve efficiency and availability and reduce waste. The Vangarde store process improvements have now been implemented across 75% of the estate. Comprehensive new forecasting, ordering, allocation and space planning systems are under development and commence roll out towards year-end. With our distribution partners, we are also working on plans to create a streamlined, modern, automated network.

As widely reported, there are growing issues of driver, warehouse and supplier labour shortages creating additional pressures for all retailers, including M&S. We have a number of recruitment initiatives which include targeted incentives for drivers. We are also increasing truck, cage and tray-fill, and resetting delivery schedules and depot picking processes to help manage the pressures. We are planning for significant supply chain cost increases in the second half of the year with further on-costs next financial year. However, because of our concentrated supplier base and much improved working relationship with our logistics partner Gist, the Food business is comparatively well placed for these challenges.

 

Ocado Retail set for rapid capacity growth

 

Compared to 2020/21, Ocado.com customer orders grew by c.19% and revenue declined 2.7% over the 26 weeks ended 29 August 2021, contributing a share of net income of £28.1m. M&S product sales on Ocado Retail were c.£309m, 27% of total sales.

 

As expected, revenue was lower compared to 2020/21 as trade annualised against strong performance during the first national lockdown and towards the end of the period was impacted by the fire at the Erith CFC. Average basket size was £124 compared with £151 last year as it returned to pre-Covid levels. The fire at Erith CFC on 16 July and the additional safety measures put in place impacted revenue, which declined 19% in the final 7 weeks of the period.

 

The pandemic has driven a substantial step up in the penetration of online grocery sales from c.7% of market demand pre-Covid to over 12% today. In the medium term this will create significant growth opportunities for Ocado Retail as it is able to use the superior service and range driven by the CFC model to attract customers newly familiar with online ordering.

 

Our objective for Ocado Retail is to drive long term growth and loyalty through better service, quality and more extensive range, underpinned by the M&S brand.

 

·    Ocado Retail has plans to reach capacity of c.700,000 orders per week based on pre-Covid basket sizes and will have invested in growing capacity when fully ramped by over 50% since the M&S investment.

·    The Erith site has reopened and is expected to return to pre-fire capacity by the end of November on release of temporary additional safety measures put in place at the site. New CFC capacity at Purfleet (85k OPW 'Orders Per Week') and Andover (60k OPW) is ramping up rapidly and ahead of plan, to be followed by the opening of Bicester (30k OPW) next summer and Luton (65k OPW) in 2023.

·    The Zoom rapid delivery service format will be expanded to a further 3 sites in Ocado Retail's FY 2021/22.

 

We continue to have a strong programme of capacity growth in Ocado Retail and we expect to deliver strong revenue growth in FY 2021/22. In the near term, margins will reflect the higher percentage of immature capacity as well as the resumption of normal peaks and troughs associated with trading pre-lockdown. In addition, Ocado Retail has been impacted by the industry wide labour market and logistics issues requiring investment in colleague development, retention and reward which will put pressure on costs in the remainder of our financial year.

 

BETTER PRODUCT AND OMNI-CHANNEL STRATEGY DELIVER SHARP UPLIFT ONLINE IN CLOTHING & HOME

 

Clothing & Home delivered a substantial improvement in profitability with sales down just 1.0% compared with 2019/20 despite lockdown extending into week one of the period. Sales grew in Q2 and overall full price sales were up 17.3% for the period. Operating profit before adjusting items was £156.2m as compared to £109.6m in 2019/20.

 

MS2 delivered strong online growth, with sales up 60.8% vs 2019/20 and 19.7% compared with last year. Online market share increased 1.1 percentage points compared to 2019/20 in the 12 weeks to 19 September. Online sales represented 34% of Clothing & Home sales in the period, well on the way to our target of over 40%. Online active customers have increased by 60.0% over two years to 9.6m and retention rates are higher than before the pandemic, creating an expanded opportunity for growth.

 

Store sales declined 17.6% compared with 2019/20. The 'legacy' store base meant that the business remained impacted by the enduring weakness of city centre and high street trade. Stores on retail parks were level on 2019/20, while our stores in city centres declined by 32.1%. Nevertheless, store market share was up 0.8 percentage points in the 12 weeks to 19 September.

 

% change to 19/20
Retail parks	-
Outlets	-5
Shopping centres	-21
High Street	-23
City centre	-32
Total C&H stores	-18

 

 

Re-engineering of the Clothing & Home product engine

 

The re-engineering of the Clothing & Home operating model is now demonstrating its potential to reverse years of decline in the business.

 

·    More focused category management has enabled total option count to be reduced by around one quarter compared with three years ago, resulting in substantially improved line-item rate of sale. For instance, in our 'hero' category of women's denim, sales per option are up 56% on 2019/20 from 29% fewer options.

·    Over 1,300 colleagues have been trained in efficient buying and merchandising in the 'Never the Same Again academy'. Combined with a test and repeat programme and new tools to accurately rank and plan product, this is having a positive impact on product appeal and finish.

·    Alongside the reduction in duplication and creation of a more focused core range, we have broadened choice in growth areas such as activewear, kids' daywear and home.  For instance, the Goodmove activewear brand has seen very rapid growth since its launch prior to the pandemic and our girls' daywear market share has grown by 160bps.

·    Nine weeks have been taken out of the womenswear 'critical path' resulting in orders being placed closer to the date of sale, speeding up the supply chain. This has helped support the business which has traded with three weeks less stock compared with 2019/20.

·    The combination of these changes has also enabled a significant shift towards 'every day low prices'. The intensive promotions of the past including the quarterly 'friends and family' discount events have been removed and only partially replaced by personalised discounts through Sparks. Overall, the volume of stock into the clearance sale has reduced by over 50%.

·    Product display has also been updated both in store and online with initiatives such as 'The Edit' in womenswear which seeks to create a more inspiring store environment backed by volume stock commitment in popular lines.

·    These changes have driven an improvement in customer perceptions of value for money with M&S Clothing now holding a leading position, alongside our continued lead on quality.

 

As illustrated in the tables below, overall performance in the first half remained skewed towards more casual categories. However, since the return to offices in September, performance in formal categories has improved with suits up 3% on 2019/20 and trousers up 8.7% in the month.

 

% change to 19/20	Online	Stores		% change to 19/20	Online	Stores
Lingerie & essentials	97	-16		Holiday	-27	-38
Casual	68	-7		Formal	-3	-42
Kids	70	-13		Shoes & accessories	-2	-41
Women's outerwear	60	8
Home & Beauty	52	-13
Total	69	-11		Total	-6	-41

 

MS2 beginning to prove the power of the omni-channel strategy

 

MS2 continues to progress and drive strong results for the online business. We have one of the largest active online customer bases in the UK and an opportunity to drive sales through increased frequency, recency and spend. We aim to achieve well over 40% of Clothing & Home sales through online in three years compared with 34% in H1.

 

MS2 was created to bring the online, digital and data teams together to improve the online offer and draw on the group's customer data and the relaunched Sparks loyalty programme to personalise selling. Our objective is to match the speed and flexibility of pure play competitors with the advantages of an omni-channel fulfilment strategy using the store base for click and collect, returns, and rapid fulfilment.

 

Sparks and the M&S App creating competitive advantage

 

·    We have seen continued improvement in website performance and useability with mobile now accounting for c.50% of orders, of which almost half are generated through the M&S App.

·    The relaunched Sparks loyalty and personalisation programme now has over 13m members, and the M&S App user base has grown to over 3m. The combination of Sparks and the App user base creates powerful advantages in online marketing as well as better service for customers.

·    The App also gives access to digital services such as bra fit appointments, 'scan and shop' in Food and easy online collection and returns.

 

Investment in fulfilment providing resilience

 

·    Capacity and productivity at our Castle Donington fulfilment centre has proved resilient and we expect to extend output to handle continued growth alongside an investment in online fulfilment capacity at Bradford.

·    To develop our omni-channel approach, systems changes have enabled rapid growth of low-cost store-based online fulfilment. This enables stock to be picked in a customer's preferred store of collection and paves the way to a rapid same day fulfilment service as well as reducing 'trapped stock' in stores.

·    In the first half, store-based fulfilment was 57% up on 2019/20 and accounted for 9% of click and collect sales.

 

M&S brand platform extending customer reach

 

·    In October we relaunched the acquired Jaeger business and have generated an encouraging customer response. Jaeger stands for effortless elegance, styled in an inclusive, modern, British way. The brand is built as digital first but ultimately with an omni-channel vision and is able to capitalise on the advantages that the M&S infrastructure and platform can bring.

·    The emerging platform strategy has produced encouraging results with strong initial sales from our newly launched brands. M&S now trades with over 30 partners from Sloggi lingerie to Ghost dresses to Clarks school shoes. The majority of the brands will be online-only but we plan a limited presence of leading brands such as Jaeger and Clarks in our largest high-footfall shops during H2. 

·    The average online basket size for brands is more than twice the average for M&S.com with brands contributing c.3.5% of total online sales in H1.

 

GOOD PROGRESS ON ROTATION OF THE STORE ESTATE

 

At the year-end we set out our goal of achieving a modernised full line estate of c.180 stores through store rotation, reflecting the accelerated channel shift post pandemic. Rotation means closing at least 110 locations and relocating to either a new full line or food-only store and in many cases consolidating multiple stores into one.

 

The pandemic has further polarised store performance with very significant decline in sales in some locations and improved performance in others. At the same time, some of the older M&S stores are high cost to operate with multi-floor facilities and stock rooms which are too expensive to modernise.

 

Promising early results from rotation

 

·    Store rotation allows us to break the paradox of short-term profit considerations and lease exit costs which have previously inhibited the pace of change.

 

·    As a result of accelerated channel shift, we have been able to generate over 30% Clothing & Home sales recapture in nearby stores or online from many store closures to date, offsetting much of the contribution lost from closure.

 

·    We have also generated encouraging initial results from new full line store openings such as Nottingham Giltbrook, Sears Solihull, and Maidstone Eclipse with a very good customer reaction and paybacks in line with plan.

 

Good progress on renewing the full line estate

 

·    The pipeline of new full line stores is showing encouraging growth with 20 already identified over the next three financial years. These include six former Debenhams sites, in addition to Leamington Spa which opened during the period, all of which we expect to deliver high volume allowing consolidation of nearby stores.

 

·    All new stores are opened with our renewal format in Food and emerging new approach to Clothing & Home layout, décor and display. We intend to incorporate our 'digital store' initiatives providing for rapid fulfilment and returns.

 

·    We now have around 20 asset management projects under consideration for feasibility which will free up cash to help finance the store rotation. We are engaged in constructive discussions with multiple landlords about initiatives such as repurposing buildings and joint development programmes helping to release 'hidden value' in the M&S estate.

 

In addition, in stores which are well located but have surplus Clothing & Home space, we have a programme to fallow, reallocate to Food or repurpose space for in-store fulfilment.  

 

Good examples of store rotation and consolidation acted upon in the period

 

Paisley

 

During the first half we relocated the aged Paisley town centre Clothing & Home outlet and Food store, which had sharply declining sales, to a modern Foodhall on the adjacent retail park with good access and parking. The cash closure costs of the legacy site have been partially funded with a freehold disposal, and the new site is trading ahead of plan.

 

	Paisley Outlet		Paisley Retail Park
	Actuals		Business Case
Sales ex VAT (£m)	9.9		10.5
LFL (%)	-5.7		n/a
Cash profit (£m)	0.6		1.4
Net cash relocation costs (£m)	-		-2.4

 

 

Leamington Spa

 

In Leamington Spa we have recently consolidated two units into one, by closing a clothing site in the Royal Priors shopping centre and the Warwick Simply Food and extending a new Food site at Leamington Shopping Park into the former Debenhams next door to create a new prime full line store. The incremental cash contribution net of closure costs is expected to generate payback on the net capital invested in under four years.

 

	Leamington Town Centre		Warwick Simply Food		Leamington Shopping Park
	Actuals		Actuals		Business Case
Sales ex VAT (£m)	5.5		4.0		21.7
LFL (%)	-6.1		-2.1		n/a
Cash profit (£m)	1.3		0.3		4.0
Net cash relocation costs (£m)					-7.9

 

 

INTERNATIONAL FOCUSED ON STRONG TRADING PARTNERSHIPS AND GLOBAL ONLINE

 

Our objective is to create a growing International business through strong partnerships and a multi-platform online business with global reach. International sales in H1 reflected the strong rebound of activity in the Republic of Ireland upon reopening and in India in Q2 following lockdown.  International online sales grew strongly, both in markets with an M&S store presence and through marketplace growth led by Zalando.

 

Operating profit before adjusting items of £35.9m included operating costs of c.£13m due to ongoing EU border issues, largely relating to our Republic of Ireland business following Brexit.

 

·    We have an ambition to double the International online business over the next three years. In the first half, sales increased 142% on 2019/20 and grew 29% against the prior year. Growth has been driven by the Republic of Ireland and India, broadening the number of markets with an online presence and rapid scaling of our wholesale relationship with Zalando marketplace.

·    The Clothing & Home store business in the Republic of Ireland has seen rapid recovery following reopening. However, we are working to mitigate the very substantial headwinds relating to the impact of EU border issues on the Irish Food business, including restructuring the cost base and a planned step up in local sourcing. During the first half we also announced a restructuring of our Food operations in continental Europe, as a result of EU border costs.

·    The joint venture in India is now well embarked on an omni-channel strategy and will launch an M&S App later this year which will enable us to create a single view of the customer and drive an experience similar to the UK. With our joint venture partner, Reliance Retail, we now operate 93 stores in India.

·    We continued the renewal of the International store estate despite lockdowns and restricted trading conditions. For instance, during H1 we modernised stores in Singapore with the expansion of Wheelock Place and Vivo City and opened digital stores at Yas Mall in Abu Dhabi and Phoenix High Street in India.

·    To reduce lead times, improve stock presentation and order visibility for International partners we opened a new UK hub which enables deliveries to bypass the UK network. To address EU border issues and improve speed to market, we also plan to open an EU hub in Croatia in 2022.

 

OUTLOOK AND PATH TO GROWTH

 

As we move from the 'fixing the basics' phase of the transformation, we are confident of our ability to drive shareholder value in the next phase. In the main businesses there is demonstrable scope for further improvement and the customer response to the transformation has been encouraging.

Trading for the first four weeks of the second half has remained consistent with growth rates reported in Q2 and ahead of plan. In the near term we expect the strong demand relating both to the bounce back and improved customer perception to be sustained in the second half.

However, well publicised supply chain pressure, combined with pandemic supply interruptions, rising labour costs, EU border challenges and tax increases means the cost incline becomes steeper in the second half and steeper again in the 2022/23 year. That will increase the importance of our productivity plans, store rotation and technology investment.

Taking these factors into account and assuming there is no further acute pandemic related disruption, our central case is for profit before tax and adjusting items for the year to be ahead of expectations and in the region of £500m.

Capital expenditure, partly as a result of supply chain delays is running behind plan at around £250m. As a result, net debt is likely to reduce more than previously anticipated, and we are strengthening the balance sheet in anticipation of the growth opportunities ahead.

As we enter the new phase, we expect to bring forward our plans for continued far-reaching changes in the shape of the business. Financially, our objectives over the next three years remain; progressive growth in sales, market share and profit in Food, Clothing & Home online sales to exceed 40% of total sales, and delivering an overall Clothing & Home profit margin in excess of 2019/20 levels.

Our capital allocation priorities also remain unchanged. Firstly, we will invest in the transformation of the business to return to sustainable profit growth. Alongside this, we will prioritise the recovery of balance sheet metrics consistent with an investment grade rating. We will assess the reintroduction of dividend payments in this context although this remains unlikely in the current year.

We will report trading for the third quarter on 13 January 2022.

 

For further information, please contact:

Investor Relations:                                                             

Fraser Ramzan:                     +44 (0)20 3884 7080

Jack Cook:                             +44 (0)20 3882 5535 

 

Media enquiries:

Corporate Press Office:      +44 (0)20 8718 1919

 

 

Investor & Analyst presentation and Q&A:

A pre-recorded investor and analyst presentation will be available on the Marks and Spencer Group plc website from 7:30am on 10 November 2021.

 

Steve Rowe and Eoin Tonge will host a Q&A session at 9.30am on 10 November 2021:

Dial in number: +44 (0)800 279 7204/+44 (0)330 336 9424                     Confirmation code: 2955677

 

Please join 5 minutes prior to the scheduled start time.

 

Link to skip the virtual queue here

 

A recording of this call will be available until 11am 17 November 2021.

 

Dial in number: +44 (0)20 3859 5407                                                             Confirmation code: 2955677

 

Fixed Income Investor Conference Call:

This will be hosted by Eoin Tonge, Chief Finance Officer, at 2pm on 10 November 2021:

Dial in number: +44 (0)800 279 7209/+44 (0)330 336 9434                     Confirmation code: 7732156

 

A recording of this call will be available until 11am 17 November 2021.

 

Dial in number: +44 (0)20 3859 5407                                                             Confirmation code: 7732156

 

 

 

 

 

FULL YEAR FINANCIAL REVIEW

 

Financial Summary

 

	26 weeks ended					52 weeks ended1
	2 Oct 21 £m	26 Sep 20 £m	28 Sep 19 £m	Change vs 20/21 %	Change vs 19/20 %	27 Mar 21 £m
Group statutory revenue	5,105.3	4,090.9	4,860.9	24.8	5.0	8,961.5
Group sales before adjusting items	5,112.9	4,102.1	4,860.9	24.6	5.2	8,972.7
UK Food	3,143.0	2,838.6	2,845.8	10.7	10.4	5,994.8
UK Clothing & Home	1,534.6	917.2	1,550.4	67.3	-1.0	2,198.6
International	435.3	346.3	464.7	25.7	-6.3	779.3
Group operating profit/(loss) before adjusting items	363.2	61.8	269.9	487.7	34.6	209.7
UK Food	143.7	109.7	92.2	31.0	55.9	213.6
UK Clothing & Home	156.2	(107.5)	109.6	n/a	42.5	(129.4)
International	35.9	19.7	55.8	82.2	-35.7	45.1
M&S Bank and Services	(0.7)	1.1	12.9	n/a	n/a	2.0
Share of result in associates and joint ventures	28.1	38.8	(0.6)	-27.6	n/a	78.4
Interest payable on lease liabilities	(58.9)	(62.2)	(68.3)	-5.3	-13.8	(122.5)
Net financial interest	(34.9)	(17.0)	(25.3)	105.3	37.9	(45.6)
Profit/(loss) before tax & adjusting items	269.4	(17.4)	176.3	n/a	52.8	41.6
Adjusting items	(82.1)	(70.2)	(17.5)	-17.0	369.1	(242.8)
Profit/(loss) before tax	187.3	(87.6)	158.8	n/a	17.9	(201.2)
Profit/(loss) after tax	159.9	(71.6)	122.4	n/a	30.6	(194.4)
Basic earnings/(loss) per share	8.2p	(3.5)p	6.4p	n/a	28.1	(9.8p)
Adjusted basic earnings/(loss) per share	12.1p	(0.4)p	7.1p	n/a	70.4	1.1p
Dividend per share	-	-	3.9p	n/a	n/a	-
Net debt	£3.15bn	£3.82bn	£4.07bn	-17.5	-22.6	£3.52bn

 

Notes:

There are a number of non-GAAP measures and alternative profit measures ("APMs") discussed within this announcement and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to the adjusting items table below for further details.

 

Given the exceptional nature of financial results last year due to the impact of Covid, all comparatives within this financial review are given against 2019/20 unless otherwise stated.

 

Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, the comparative amounts for net debt and free cashflow have been restated.

In the current period, we have introduced a new APM: 'sales'. All references to sales throughout this document are statutory revenue plus the gross value of consignment sales excluding VAT. Where third-party branded goods are sold on a consignment basis, only the commission receivable is included in statutory revenue. This new measure has been introduced given the Group's focus on launching and growing third-party brands and is consistent with how the business performance is reported and assessed by the Board and the Executive Committee.

 

¹ 2020/21 was a 53 week year and comparative periods are on a 52 week basis. To aid understanding, we have presented the unaudited 52 weeks to 27 March 2021, however net debt is given on a 53 week basis.

 

Group results

 

Group sales before adjusting items were £5,112.9m. Sales increased 5.2% versus 2019/20, driven by Food sales up 10.4%, with Clothing & Home sales down 1.0% and International sales down 6.3%. Statutory revenue in the period was £5,105.3m, an increase of 5.0% versus 19/20. The Group generated an adjusted profit before tax of £269.4m and a statutory profit before tax of £187.3m.

 

Within Group profit, we incurred a number of direct Covid costs such as door hosts, hygiene and increased absence from the pandemic totalling £12.1m (2020/21: £41.4m; 2019/20: nil).

 

In addition, UK business rates relief of £47.5m helped to compensate for the continuing loss of trade from lower footfall to Clothing & Home stores in the UK, as well as the Food hospitality business which was closed until mid-May. A net rates charge of £50.3m for UK business rates was recognised in the period.

 

Statutory profit before tax includes total charges for adjusting items of £82.1m.

 

For full details on adjusting items and the Group's related policy see notes 1 and 3 to the financial information.

 

UK: Food

 

UK Food sales increased 10.4% driven by the strong performance of core categories, partly offset by reduced sales from the franchise and hospitality businesses which are still recovering from the pandemic. Excluding franchise and hospitality, sales grew 16.9%.

Change vs 19/20 %		Q1	Q2	H1
Food		9.4	11.5	10.4
Food ex franchise and hospitality		17.0	16.8	16.9

 

M&S Food reported sales do not benefit from a direct online grocery presence, with these sales instead reported through Ocado Retail.

 

26 weeks ended	2 Oct 21		26 Sep 20	28 Sep 19	Change vs 19/20 %
Footfall, m (average/week)		9.5	7.4	11.6	-18.1
Transactions, m (average/week)		7.4	5.1	9.3	-20.4
Basket value inc VAT (£)		15.9	20.6	11.7	35.9
Total sales ex VAT £m (inc. M&S.com)		3,143.0	2,838.6	2,845.8	10.4

 

Whilst footfall is recovering, on average it has remained 18.1% below pre-pandemic levels, with a similar trend echoed in the average number of transactions, down 20.4%. Basket value remains 35.9% above pre-pandemic levels at an average of £15.90 over the period and has declined compared to 2020/21 driven by the gradual recovery of our hospitality and food-on-the-move businesses which typically have smaller baskets.

 

26 weeks ended	2 Oct 21 £m	26 Sep 20 £m	28 Sep 19 £m	Change vs 19/20 %
Sales	3,143.0	2,838.6	2,845.8	10.4
Operating profit before adjusting items	143.7	109.7	92.2	55.9
Operating margin	4.6%	3.9%	3.2%	c.+140bps

The Food business in total generated operating profit before adjusting items of £143.7m compared with £92.2m in 2019/20.

 

The table below sets out the drivers of the movement in operating profit margin before adjusting items over two years.

 

Operating profit margin before adjusting items	%
2019/20	3.2
Gross margin	(0.4)
Store staffing	1.5
Other store costs	1.0
Distribution and warehousing	(0.8)
Central costs	0.1
2021/22	4.6

 

·      Gross margin decreased c.40bps. The decrease in margin rate was primarily as a result of lower sales from the higher margin hospitality business and additional warehousing and freight charges, partly offset by strong growth in core categories and cost saving programmes including Ocado synergies. Food waste and stock loss were broadly level.

·      Store staffing costs improved c.150bps, primarily driven by retail restructuring efficiencies enabled by technology improvements in store and ongoing efficiency programmes, partly offset by pay inflation and ongoing Covid related costs.

·      The c.100bps improvement in other store costs relates to government business rates relief of £19.7m and lower depreciation charges as legacy store modernisations come to the end of their useful economic lives, partly offset by increased maintenance costs.

·      Distribution and warehousing costs increased c.80 bps reflecting investment in our Milton Keynes ambient depot to support volume growth, increased pay and incentives related to warehouses and haulage, the higher cost to serve of online orders, and inefficiencies from EU border-related processes for serving Northern Ireland.

·      Central costs improved c.10bps, with a reduction in depreciation of technology assets as they reach the end of their useful lives offset by increased technology operating expenditure, including in forecasting, ordering and allocation systems and projects to enable retail restructuring efficiencies.

 

Ocado Retail Ltd

The Group holds a 50% interest in Ocado Retail Ltd ("Ocado Retail"). The remaining 50% interest is held by Ocado Group plc ("Ocado Group"). Half year results are consistent with the quarterly results reported by Ocado Group on behalf of Ocado Retail for the quarterly periods ended 30 May 2021 and 29 August 2021.

 

All commentary in this section is against 2020/21 comparatives as the acquisition of the investment in Ocado Retail Ltd by M&S was made part-way through 2019/20.

 

Group share of consolidated results of Ocado Retail Ltd

£m	26 weeks ended 29 Aug 21	26 weeks ended 30 Aug 20	Change %
Revenue	1,136.3	1,167.7	-2.7
EBITDA before exceptional items	80.7	89.1	-9.4
Exceptional items	3.4	28.5	-88.1
Operating profit	64.8	100.5	-35.5
Profit after tax	56.3	77.6	-27.4
M&S 50% share of profit after tax	28.1	38.8	-27.6

 

Ocado Retail Ltd is reported as an associate of M&S as certain rights are conferred on Ocado Group plc for an initial period of at least five years from acquisition. Exceptional items are defined within the Ocado Group plc Annual Report and Accounts 2021. A 2019/20 comparative is not provided here as the investment in Ocado Retail Ltd was made part-way through 2019/20.

Revenue declined 2.7% compared to 2020/21 as trade annualised against strong performance during the first national lockdown in 2020 and towards the end of the period was impacted by the fire at the Erith CFC on 16 July. These impacts were partly offset by an increase in capacity to just over 600k orders per week in the period. M&S products continue to account for over 25% of the average Ocado basket.

Ocado Retail EBITDA before exceptional items was down 9.4% reflecting the revenue and cost impacts of the Erith CFC fire, and the normalisation of basket size and shape of week.

In addition, Ocado Retail has recognised £3.4m of exceptional income before tax, largely related to insurance receipts for business interruption received in the period up to 29 August 2021 arising from the Andover fire in 2019 offset by £5.1m exceptional costs relating to the fire at Erith CFC. Exceptional items in the prior period also relate to the Andover fire insurance receipts. Further insurance receipts are anticipated in the second half.

As a result of reduced EBITDA and insurance receipts, Group share of Ocado Retail profit after tax was £28.1m.

 

UK: Clothing & Home

 

Clothing & Home sales decreased 1.0% as a result of the impact on store sales of lower footfall, offset by continued strong performance of the online business. Performance in Q1 was partly impacted by store closures during the third national lockdown, which were in place until 12 April, with Q2 performance improving as footfall increased. The online business remained robust throughout the period. 

 

Change vs 19/20 %	Q1	Q2	H1
Clothing & Home sales	-4.2	2.0	-1.0
Clothing & Home stores sales	-21.2	-14.3	-17.6
Clothing & Home online sales	59.2	62.3	60.8
Clothing & Home statutory revenue	-4.6	1.4	-1.5

 

To enable greater insight into these movements, we are providing further detail on the performance of each channel.

 

Online

 

26 weeks ended	2 Oct 21		26 Sep 20	28 Sep 19	Change vs 19/20 %
Traffic (m)		182.9	173.7	142.4	28.4
Active customers (m)		9.6	6.9	6.0	60.0
Conversion (%)		7.3	7.0	6.3	1.0 pts
Average order value inc VAT pre returns (£)		55.6	49.3	51.3	8.4
Returns rate (%)		25.6	18.6	28.7	-3.1 pts
Sales ex VAT £m		528.4	441.4	328.6	60.8

 

UK Clothing & Home online sales increased 60.8%. Following strong performance in 2020/21, online sales remained robust, with consistent growth throughout the period. Online customer traffic increased 28.4%, with traffic through the app up over 200% on 2019/20 following the relaunch of Sparks in July 2020, which has helped to drive 60.0% growth in active customers to 9.6m. Increased app usage has driven better conversion and encouragingly app conversion itself has improved to over 9%.

 

As anticipated, returns rates have started to normalise towards pre-pandemic levels, but remain 3.1 percentage points lower than 2019/20 due to continuing trends in customer behaviour and product mix. Average order value (AOV) was ahead of 2019/20 levels.

 

Stores

 

26 weeks ended	2 Oct 21		26 Sep 20	28 Sep 19	Change vs 19/20 %
Footfall, m (average/week)		3.7	1.6	5.8	-36.2
Transactions, m (average/week)		1.6	0.7	2.1	-23.8
Average basket value inc VAT pre returns (£)		35.0	29.9	32.4	8.0
Sales ex VAT £m		1,006.2	475.8	1,221.8	-17.6

 

UK Clothing & Home store sales decreased 17.6%: Average weekly footfall was 36.2% below pre-pandemic levels in the period, with the business adversely impacted by the shape of the store estate: Whilst sales in high streets and city centres were down c.27%, sales in retail parks were level on 2019/20 levels. Overall, store transactions were down 23.8%, with basket value up 8.0%.

 

Total Clothing & Home

 

The Clothing & Home business in total generated an operating profit before adjusting items for the six months of £156.2m compared with £109.6m in 2019/20.

 

26 weeks ended	2 Oct 21 £m		26 Sep 20 £m	28 Sep 19 £m	Change vs 19/20 %
Statutory revenue before adjusting items	1,527.0		917.2	1,550.4	-1.5
Sales	1,534.6		917.2	1,550.4	-1.0
Operating profit/(loss) before adjusting items		156.2	(107.5)	109.6	42.5
Operating margin	10.2%		-11.7%	7.1%	+310bps

 

The table below sets out the drivers of the movement in Clothing & Home operating profit before adjusting items over two years.

 

Operating profit margin before adjusting items		%
2019/20		7.1
Gross margin		0.9
Store staffing		2.7
Other store costs		2.2
Distribution and warehousing		(2.4)
Central costs		(0.3)
2021/22		10.2

·      Gross margin improved c.90bps. The benefit of strong full price trading and lower stock into sale more than offset cost headwinds of adverse currency movements and additional freight costs.

·      Store staffing costs decreased c.270bps, primarily driven by retail restructuring efficiencies enabled by technology improvements in store and ongoing efficiency programmes. Pay inflation largely offset the benefit of lower variable staffing costs.

·      The movement in other store costs of c.220bps largely relates to government business rates relief of £27m and lower depreciation charges relating to legacy store modernisations.

·      Distribution and warehousing increased c.240bps reflecting the higher costs to serve online demand and increased pay and incentives related to haulage.

·      The increase in central costs of c.30bps was largely driven by investments in technology, data and digital initiatives and higher pay-per-click marketing activity to drive online growth, offset by a reduction in depreciation of technology assets as they reach the end of their useful lives.

 

Clothing & Home online generated an operating profit margin of c.10%, with the reversion towards pre-Covid returns rates reducing margin year-on-year as anticipated. The operating profit in stores also represented a margin on sales of c.10%.

 

International

 

International sales decreased 3.2% at constant currency ("CC") due to the continued impact of Covid on Asian markets, in particular in India during Q1, and the disruption and complexity arising from new EU border processes in Food supply chains, predominantly in France and the Republic of Ireland. Online sales continued to grow on both a one- and two-year basis, with both our own websites and marketplaces driving growth of 142.2%.

 

Change vs 19/20 %	Q1 CC	Q2 CC	H1 CC	H1 Reported
Total sales	-6.1	-0.3	-3.2	-6.3

 

 

26 weeks ended   Sales	2 Oct 21 £m	26 Sep 20 £m	28 Sep 19 £m	Change vs 19/20 %	Change vs 19/20 CC %
Clothing & Home	296.9	202.1	308.0	-3.6	0.8
Food	138.4	144.2	156.7	-11.7	-10.7
Total	435.3	346.3	464.7	-6.3	-3.2
Memo: Online sales	84.6	66.7	35.8	136.3	142.2

 

Clothing & Home sales recovered to pre-Covid levels driven by the strong growth in online sales. Performance in India was heavily impacted in Q1 by Covid (c.-61% vs 2019/20) but recovery has been stronger than anticipated in Q2 (c.+17% vs 2019/20). Covid trading restrictions remained in place at the start of Q1 in many of our European owned markets, with sales performance upon reopening recovering strongly as customers returned to stores.

 

Food sales declined due to disruption caused by EU border-related processes in European markets. Supply chain complexities have heavily restricted our ability to provide a chilled catalogue in Europe. This has resulted in significant cost and complexity in servicing the Republic of Ireland and a restructuring of our Food operations in continental Europe.

 

Operating profit before adjusting items was down 35.7% driven principally by the additional operating costs of new EU border processes and tariffs of £13.0m, and associated trade impacts such as higher waste.

 

The table below sets out the drivers of the movement in International operating profit before adjusting items over two years.

 

Operating profit margin before adjusting items		%
2019/20		12.0
Gross margin		(0.8)
Store staffing		(0.3)
Other store costs		1.3
Distribution and warehousing		(2.2)
Central costs		(1.8)
2021/22		8.2

 

·      Gross margin declined c.80bps primarily as a result of additional tariffs and waste due to inefficiencies from EU border-related processes for serving the Republic of Ireland. This was partly offset by growth of the online business.

·      Store staffing as a percentage of sales increased c.30bps primarily as a result of reduced store sales, offset by efficiency savings from retail restructuring in the Republic of Ireland.

·      The movement in other store costs largely relates to government relief in owned markets and rent concessions in India which resulted in one-off savings in the period.

·      Distribution and warehousing reflects higher costs to serve online demand, and EU border-related processes.

·      Central costs includes higher marketing spend associated with the growth of the online channel.

 

M&S Bank and Services

 

M&S Bank & Services profit before adjusting items was down £13.6m to a loss of £(0.7)m.  M&S Bank & Services profit after adjusting items relating to PPI decreased £3.9m to a loss of £(1.7)m. The lower profit reflects reduced demand for credit during the pandemic impacting the profitability of the bank lending portfolio.

 

Net finance cost

 

	26 weeks ended				53 weeks ended
	2 Oct 21 £m	26 Sep 20 £m	28 Sep 19 £m	Change vs 19/20 £m	3 Apr 21 £m
Interest payable	(44.7)	(38.0)	(42.6)	(2.1)	(91.3)
Interest income	6.9	1.9	11.9	(5.0)	4.7
Net interest payable	(37.8)	(36.1)	(30.7)	(7.1)	(86.6)
Pension net finance income	6.4	22.8	11.3	(4.9)	47.2
Unwind of discount on Scottish Limited Partnership liability	(1.7)	(2.4)	(3.4)	1.7	(4.9)
Unwind of discount on provisions	(1.8)	(1.3)	(2.5)	0.7	(2.7)
Net financial interest	(34.9)	(17.0)	(25.3)	(9.6)	(47.0)
Net interest payable on lease liabilities	(58.9)	(62.2)	(68.3)	9.4	(124.9)
Net finance costs before adjusting items	(93.8)	(79.2)	(93.6)	(0.2)	(171.9)

 

Net finance costs increased £0.2m to £93.8m. This was driven by lower pension income due to the reduced IAS19 pension surplus compared with 2019/20 and the reversal of ineffectiveness on a currency swap in 2019/20, offset by a reduction in the net interest payable on lease liabilities.

 

Group profit before tax and adjusting items

Group profit before tax and adjusting items was £269.4m, up £93.1m on 2019/20. The profit increase was driven by strong full-price performance in Clothing & Home, robust sales growth in Food and the additional profit from the Ocado joint venture, offset by a reduction in International and M&S Bank operating profits.

 

Group profit before tax

Group profit before tax was £187.3m, up £28.5m on 2019/20. This includes adjusting items of £82.1m (2019/20: £17.5m).

 

Adjusting items

The Group makes certain adjustments to statutory profit measures in order to derive alternative performance measures (APMs) that provide stakeholders with additional helpful information and to aid comparability of the performance of the business. For further detail on these charges/gains and the Group's policy for adjusting items, please see notes 1 and 3 to the financial information.

 

	26 weeks ended				53 weeks ended
	2 Oct 21   £m	26 Sep 20   £m	28 Sep 19   £m	Change vs 19/20 £m	3 Apr 21   £m
Strategic programmes - UK store estate	(58.1)	(2.9)	(9.9)	(48.2)	(95.3)
Strategic programmes - Organisation	1.9	(92.1)	(11.3)	13.2	(133.7)
Amortisation and fair value adjustments arising as part of the investment in Ocado Retail Ltd	(25.4)	(7.1)	-	(25.4)	(14.2)
Directly attributable gains resulting from the Covid-19 pandemic	15.0	49.4	-	15.0	90.8
European restructure	(11.9)	-	-	(11.9)	-
M&S Bank charges	(1.0)	(1.4)	(10.7)	9.7	(2.4)
Sparks loyalty programme transition	-	(15.3)	-	-	(16.6)
Other	(2.6)	(0.8)	14.4	(17.0)	(88.3)
Adjusting items	(82.1)	(70.2)	(17.5)	(64.6)	(259.7)

 

Adjusting items charges incurred in the period were £82.1m.

 

A charge of £58.1m has been recognised in relation to store closures identified as part of UK Store Estate rotation plans. The charge reflets a revised view of latest store exit routes and assumptions underlying estimated store closure costs, as well as charges relating to the impairment of buildings and fixtures and fittings, and depreciation as a result of shortening the useful economic life of stores. Further material charges relating to the closure and rotation of the UK store estate are anticipated as the programme progresses, with total future charges of up to c.£227m, bringing anticipated total programme costs since 2016 to c.£943m.

 

A credit of £1.9m has been recognised in relation to organisational change. This credit is based on the latest estimate of redundancy costs associated with this programme.

 

A charge of £25.4m has been recognised with respect to the amortisation of intangible assets acquired on the purchase of our share in Ocado Retail and related deferred tax charges of £16.6m predominantly relating to the substantive enactment of the Finance Act 2021 during the period increasing the UK's main corporation tax rate from 19% to 25% from 1 April 2023.

 

A gain of £15.0m has been recognised as being directly attributable to the Covid pandemic relating mostly to the release of a portion of the inventory provision made in 2019/20 compared to initial estimates. The sell-through of Clothing & Home stock has been stronger than anticipated.

A charge of £11.9m has been recognised in relation to the restructure of our European operations.

 

Charges of £1.0m have been incurred relating to M&S Bank, primarily due to the insurance mis-selling provision. The total charges recognised in adjusting items since September 2012 for PPI is £320.2m which exceeds the total offset against profit share of £238.5m to date and this deficit will be deducted from the Group's share of future profits from M&S Bank.

 

Taxation

The effective tax rate on profit before adjusting items was 12.4% (2019/20: 23.1%; 2020/21: 27.0%). In the 6 months to 2 October 2021, as part of cash optimisation measures, no payments were made to the Marks and Spencer Scottish Limited Partnership ("SLP"). As such, there has been no recapture of previous tax relief, resulting in a lower effective tax rate than prior years.

 

As well as there being no recapture of previous tax relief under the SLP structure in the period, future changes to the UK statutory corporation tax rate result in deferred tax assets being recognised at the higher substantively enacted rate of 25%. Restating these deferred tax assets from a rate of 19% to 25% results in a tax credit in the period, reducing the effective tax rate.

 

Subject to no significant other changes, we anticipate the full year effective tax rate on profit before adjusting items to be slightly higher than the H1 effective tax rate given the less pronounced impact of the change in rate against the expected full year profits.

 

The effective tax rate on statutory profit before tax was 14.6% (2019/20: 22.9%; 2020/21: 18.3%), which was higher than the effective tax rate on profit before adjusting items due to the impact of disallowable adjusting items.

 

Next year, we anticipate an effective tax rate on profit before adjusting items higher than the UK corporation tax rate of 19%, principally due to the recapture of previous tax relief as payments to the SLP resume.

 

Earnings/loss per share

Basic earnings per share was 8.2p (2019/20: 6.4p; 2020/21: loss of 3.5p), due to the increase in profit year on year. The weighted average number of shares in issue during the period was 1,957.6m (2019/20: 1,840.2m; 2020/21: 1,951.7m).

 

Adjusted basic earnings per share was 12.1p (2019/20: 7.1p; 2020/21: loss of 0.4p) due to higher adjusted profit year on year.

 

Capital expenditure

 

		26 weeks ended 2 Oct 21 £m		26 weeks ended 26 Sep 20 £m	26 weeks ended 28 Sep 19 £m	Change vs 19/20 £m
UK store remodelling			27.5	3.6	22.8	4.7
New UK stores			19.3	9.0	15.6	3.7
International			5.0	2.3	4.2	0.8
Supply chain			14.9	10.4	18.6	(3.7)
IT & M&S.com			23.0	23.9	32.3	(9.3)
Property asset replacement			20.8	5.1	28.2	(7.4)
Capital expenditure before property acquisitions and disposals			110.5	54.3	121.7	(11.2)
Property acquisitions and disposals			(2.2)	1.1	(1.5)	(0.7)
Capital expenditure			108.3	55.4	120.2	(11.9)

 

Group capital expenditure before disposals decreased £11.9m to £108.3m compared to 2019/20, however was up on 2020/21 as we increased investment in the transformation.

 

UK store remodelling costs related principally to 7 Food renewal stores as well as upgrades to Clothing & Home space.

 

Spend on New UK stores primarily related to 3 new or extended Simply Foods and 6 new or extended full line stores in the current year, some of which have not opened yet.

 

Supply chain expenditure reflects investment in food equipment and the expansion of our Bradford warehouse to support online growth in Clothing & Home.

 

IT & M&S.com spend includes costs related to the development of the Food ordering and allocation system and buying portals, development of our 'BEAM' platform, website development and ongoing investment in digital capability and technology in stores.

 

Property asset replacement normalised towards pre-pandemic levels.

 

Cash flow

	26 weeks ended				53 weeks ended
	2 Oct 21     £m	26 Sep 20 restated £m	28 Sep 19 restated   £m	Change vs 19/20   £m	3 Apr 21     £m
Adjusted operating profit	363.2	61.8	269.9	93.3	222.2
Depreciation and amortisation before adjusting items	253.9	306.1	315.9	(62.0)	603.1
Cash lease payments	(173.1)	(129.1)	(159.2)	(13.9)	(316.6)
Working capital	111.5	85.5	(95.7)	207.2	268.1
Defined benefit scheme pension funding	(36.3)	(36.2)	(36.5)	0.2	(37.1)
Capex and disposals	(125.5)	(132.6)	(149.1)	23.6	(203.8)
Financial interest and taxation	(52.6)	(38.4)	(86.4)	33.8	(81.8)
Investment in associate Ocado Retail Ltd	(16.8)	11.5	(577.6)	560.8	11.2
Investment in joint venture	-	(2.5)	(2.9)	2.9	(2.5)
Investment in other non-current financial assets	(1.0)	-	-	(1.0)	-
Employee-related share transactions	18.7	6.9	1.8	16.9	18.5
Proceeds from rights issue net of costs	-	-	583.2	(583.2)	-
Share of (profit)/loss from associate	(28.1)	(38.8)	0.5	(28.6)	(78.4)
Cash received from settlement of derivatives	-	12.7	-	-	14.0
Adjusting items outflow	(26.3)	(18.8)	(68.6)	42.3	(120.5)
Free cash flow	287.6	88.1	(4.7)	292.3	296.4
Dividends paid	-	-	(115.1)	115.1	-
Free cash flow after shareholder returns	287.6	88.1	(119.8)	407.4	296.4
Opening net debt excluding lease liabilities	(1,110.0)	(1,388.6)	(1,404.9)	294.9	(1,388.6)
Free cash flow after shareholder returns	287.6	88.1	(119.8)	407.4	296.4
Exchange and other non-cash movements excluding leases	(1.6)	(13.2)	(18.5)	16.9	(17.8)
Closing net debt excluding lease liabilities	(824.0)	(1,313.7)	(1,543.2)	719.2	(1,110.0)
Opening net debt	(3,515.9)	(3,950.6)	(3,981.5)	465.6	(3,950.6)
Free cash flow after shareholder returns	287.6	88.1	(119.8)	407.4	296.4
Decrease in lease obligations	107.9	77.5	90.2	17.7	184.3
New lease commitments and remeasurements	(38.2)	(11.5)	(55.8)	17.6	(48.3)
Exchange and other non-cash movements	4.4	(25.1)	(5.6)	10.0	2.3
Closing net debt	(3,154.2)	(3,821.6)	(4,072.5)	918.3	(3,515.9)

 

2019/20 and 2020/21 net debt and free cash flow figures have been restated. Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, to more appropriately reflect the nature of these transactions, the comparative amounts have been restated.

 

The business generated free cash flow of £287.6m, largely driven by EBITDA growth, working capital inflow and reduced cash tax and capital expenditure.

 

Cash lease payments increased £13.9m partly as a result of rental payments which were deferred from last year into this year as part of our Covid cash conservation measures enacted at the start of the pandemic.  Prior half year cash lease payments were lower reflecting the timing of lease payments over half year end.

 

Strong trading and the timing of stock intake in advance of the peak Christmas period has resulted in trade payables increasing ahead of stock, leading to a working capital benefit in the period.

 

Lower capital expenditure compared to 2019/20 reflects a disciplined approach to investment and returns whilst investing in the transformation. It should be noted that 2020/21 H1 capital expenditure cashflow included c.£77m of accrued spend relating to 2019/20.

 

Reduced financial interest and tax payments of £52.6m are due to no UK corporation tax being paid in the period. This is driven by the utilisation of carried forward tax losses from 2020/21.

 

The investment in Ocado Retail Ltd in the period relates to payment of contingent consideration. As part of the investment in Ocado Retail Ltd, a contingent consideration arrangement was agreed. The arrangement comprises three separate elements which only become payable on the achievement of three separate financial and operational performance targets. In the period to 2 October 2021, £16.8m was settled, relating to the first of the three targets. On 8 October 2021, subsequent to the reporting period, £17.0m was settled, relating to the second target. The final target relates to Ocado Retail Ltd achieving a specified target level of earnings in the financial year ending November 2023. If achieved, the final element of contingent consideration of c.£156m plus interest would be paid in financial year 2024/25.

 

Defined benefit scheme pension funding of £36.3m reflects the second limited partnership interest distribution to the pension scheme.

 

Adjusting items cash outflow was £26.3m. This included £6.0m relating to the UK store estate strategy, £15.5m of organisational restructuring costs largely relating to the Republic of Ireland, and £3.4m relating to restructuring the UK Clothing & Home logistics network.

 

Net debt

 

Group net debt decreased £361.7m from the start of the year driven by free cashflow generation.

 

There was also a further reduction in the value of discounted lease obligations outstanding. New lease commitments and remeasurements in the period were £38.2m largely relating to new UK leases and UK liability remeasurements, which was more than offset by £107.9m of capital lease repayments.

 

The composition of Group net debt is as follows:

 

	26 weeks ended				53 weeks ended
	2 Oct 21   £m	26 Sep 20 restated £m	28 Sep 19 restated £m	vs 19/20   £m	3 Apr 21   £m
Cash and cash equivalents	951.9	308.8	378.2	573.7	674.4
Medium Term Notes	(1,680.6)	(1,531.1)	(1,956.9)	276.3	(1,682.1)
Current financial assets and other	92.6	94.1	238.2	(145.6)	83.2
Partnership liability	(187.9)	(185.5)	(202.7)	14.8	(185.5)
Net debt excluding lease liabilities	(824.0)	(1,313.7)	(1,543.2)	719.2	(1,110.0)
Lease liabilities	(2,330.2)	(2,507.9)	(2,529.3)	199.1	(2,405.9)
- Full line stores	(944.8)	(1,022.6)	(1,029.8)	85.0	(982.6)
- Simply Food stores	(719.4)	(745.6)	(757.7)	38.3	(727.0)
- Offices, warehouses and other	(466.9)	(518.1)	(508.0)	41.1	(494.5)
- International	(199.1)	(221.6)	(233.8)	34.7	(201.8)
Group net debt	(3,154.2)	(3,821.6)	(4,072.5)	918.3	(3,515.9)

 

2019/20 and 2020/21 net debt and free cash flow figures have been restated. Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, to more appropriately reflect the nature of these transactions, the comparative amounts have been restated.

 

Of the outstanding discounted lease commitment at period end, approximately c.41% related to full line stores and c.31% to Simply Food stores, with c.8.5% relating to International leases and the balance largely relating to warehousing and offices.

 

Liquidity

At 2 October 2021, the Group held cash balances of £951.9m (2019/20: £378.2m), with undrawn facilities of £1.1bn expiring April 2023. This strong liquidity position is as a result of free cashflow performance and a £300m bond issuance in November 2020, which was used to partly refinance the bond maturity due in December 2021.

The refinancing of the Group's December 2021 bond maturity, along with the successful negotiations in March 2021 to extend the relaxation of covenant measures on the revolving credit facility up to and including March 2022, mean that the Group has liquidity headroom of £2.1bn.

Dividend

At the full-year results in May, the Board announced that payment of a dividend in the 2021/22 financial year would be unlikely as we focus on restoring sustainable profitability and recovering balance sheet metrics consistent with investment grade.

 

Consistent with that announcement, the Board does not expect to pay a dividend this financial year.

 

Pension

At 2 October 2021, the IAS 19 net retirement benefit surplus was £734.2m (2019/20: £890.0m).

 

The Trustee of the UK Defined Benefit Scheme has commenced a triennial actuarial valuation of the Scheme at 31 March 2021 as required by statute. The assumptions used are to be agreed between the Trustee and the Company. The Scheme surplus on a statutory basis was £652m at the last actuarial valuation in 2018.

 

With the pensioner buy-in policies purchased in September 2020, April 2019 and March 2018, the Scheme has now, in total, insured around 80% of the pensioner cash flow liabilities for pensions in payment. The buy-in policies cover specific pensioner liabilities and pass all risks to an insurer in exchange for a fixed premium payment, thus reducing the Group's exposure to changes in longevity, interest rates, inflation and other factors.

 

Statement of financial position

Net assets were £2,531.7m at the period end, an increase of 10.8% since the start of the year largely due to free cash generation.

 

Important Notice:

Statements made in this announcement that look forward in time or that express management's beliefs, expectations or estimates regarding future occurrences and prospects are "forward-looking statements" within the meaning of the United States federal securities laws. These forward-looking statements reflect Marks & Spencer's current expectations concerning future events and actual results may differ materially from current expectations or historical results. Any forward-looking statements are subject to various risks and uncertainties, including, but not limited to, failure by Marks & Spencer to predict accurately customer preferences; decline in the demand for products offered by Marks & Spencer; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of Marks & Spencer's brand awareness and marketing programmes; general economic conditions including, but not limited to, those related to the Covid-19 pandemic or a downturn in the retail or financial services industries; acts of war or terrorism worldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets. For further information regarding risks to Marks & Spencer's business, please consult the risk management section of the 2021 Annual Report (pages 47-57).

The forward-looking statements contained in this document speak only as of the date of this announcement, and Marks & Spencer does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

- Ends -

 

 

Principal risks and uncertainties

The principal risks and uncertainties which could impact the Group's long-term performance, along with additional information on the impact of Covid-19, were set out on pages 48-56 of the Group's 2021 Annual Report and Financial Statements. This disclosure also incorporated details of mitigating activities relevant to each risk. Information on financial risk management was also included on pages 164-169. A copy of the 2021 Annual Report and Financial Statements is available on the Group's website www.marksandspencer.com. An update on this disclosure is set out below.

The continued consequences of Covid-19 and related uncertainty

The Annual Report outlined the business response to changes to our risk profile linked to the Covid-19 pandemic. It also explained how Covid-19 had a pervasive impact across the suite of principal risks and uncertainties impacting the business and was not, therefore, presented as a single principal risk.

In the period since publication of the Annual Report and Financial Statements the consequences of Covid-19 have continued to evolve and combined with other external macro factors (in particular, the continued impact of Brexit) to contribute to ongoing uncertainty in the environment in which we operate.

Continued lockdown measures in a number of countries; labour shortages across transport, distribution, manufacturing and service industries; threats to supplier resilience and viability; on-going changes to customer behaviours; price inflation and the potential for interest rate rises; socio-political tensions; and disruption to the supply of natural, refined and manufactured resources have combined to create a challenging environment for our, and all businesses, to operate within. 

These challenges are not specific to M&S but have amplified many of the existing principal risks and uncertainties for our business. The risks related to Trading Performance Recovery; Ocado Retail; Talent, Culture & Capability; and Business Continuity & Resilience have, in particular, been impacted by this mix of global and national events. 

Linked to the factors described above, our risk relating to the consequences of the post-Brexit era also remains. While the business has taken measures to mitigate some of its impact (including the restructuring of our operations across the island of Ireland, ending the relationship with one of our French franchise partners and by adapting product ranges available in other European locations), the unspecified extension to the Northern Ireland easements and unstable regulatory environment continue to create uncertainty.

Principal risks & uncertainties

The Board of Directors have considered the principal risks and uncertainties disclosed in the Annual Report and Accounts for the year ended 3 April 2021 and, while recognising the additional impact of the factors discussed above, do not consider the fundamental principal risks and uncertainties to have changed. The order of the principal risks and uncertainties has, however, been amended to reflect the Board's assessment of priority. Our summary principal risk statements are set out below - the numbers in brackets show the risk order included in the 2021 Annual Report and Financial Statements.

1 (1)	Trading performance recovery: A failure of our Food and/or Clothing & Home business to effectively and rapidly respond to the pressures of an increasingly competitive and changing retail environment, including recovery from the pandemic, would adversely impact customer experience, operational efficiency and business performance. As indicated above, sustained disruption to our supply chain or logistics networks, (caused by labour, raw material or product shortages, supplier resilience, disruption to freight or other external factors), price inflation, further restrictions linked to the pandemic, Brexit requirements or changes in customer confidence could impact this risk.
2 (2)	Business transformation: A failure to execute our transformation and cultural change initiatives with pace, consistency and cross business buy-in would impede our ability to improve operational efficiency, competitiveness, and to restore the business to sustainable profitable growth.
3 (3)	Brexit: A failure to mitigate the continuing costs and friction arising from the complexities surrounding the border and further developments in the Trade and Cooperation Agreement may have a significant and long-term impact on our trading performance.
4 (4)	Ocado Retail: A failure to effectively manage the strategic and operational relationship with Ocado Retail would significantly impact the achievement of our multi-channel food strategy and our ability to deliver shareholder value.
5 (5)	Talent, culture and capability: An inability to evolve the culture of our business as well as attract, develop and retain the right talent and capabilities will influence our means to expand the business with agility and appropriate commercial acumen. This will also impede the execution of our transformation programme and impact our broader strategic objectives and performance.
6 (6)	Food safety and integrity: Failure to prevent or effectively respond to a food safety incident, or to maintain the integrity of our products, could impact business performance, customer confidence and our brand.
7 (10)	Business continuity and resilience: Failures or resilience issues at key business locations, such as at Castle Donington, our primary online Clothing & Home distribution centre, could result in significant business interruption. More broadly, an inability to effectively respond to global events, such as the pandemic or supply chain disruption, would also significantly impact business performance.
8 (8)	Social, ethical and environmental responsibility: An inability to maintain adequate oversight of our commitments, and respond to changes, in relation to ethical and environmental responsibilities (including supply chains) may result in a failure to meet the expectations of our customers, colleagues, investors and other stakeholders.
9 (9)	Technology and digital capability: A failure to simplify and improve our core technology, enhance our digital capabilities and reduce our dependency on legacy systems could limit our ability to keep pace with market competition and customer expectations, preventing successful transformation.
10 (11)	Information security: Failure to adequately prevent or respond to a data breach or cyber-attack could adversely impact our reputation, resulting in significant fines, business disruption, loss of information for our customers, employees or business and/or loss of stakeholder and customer confidence.
11 (7)	Liquidity and funding: An inability to maintain short- and long-term funding to meet business needs or to effectively manage associated risks may influence our ability to transform at pace, as well as have an adverse impact on business viability.
12 (12)	Corporate compliance: Failure to deliver against our legal and regulatory obligations, as well as related responsibility commitments, would undermine our reputation as a responsible retailer, may result in legal exposure or regulatory sanctions, and could negatively impact our ability to operate and/or remain relevant to our customers.

The business is also continuing to monitor the emerging risks disclosed at the year-end, namely:

§  The impact of climate change on our business activities, linked to the relaunch of Plan A in October 2021 and the achievement of our committed targets in the coming years; and

§  The implications of changes to UK corporate governance responsibilities in the UK.

 Statement of directors' responsibilities

The directors confirm that, to the best of their knowledge, this condensed consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.4R, DTR 4.2.7R and DTR 4.2.8R, namely:

- the condensed set of financial statements gives a true and fair view of the assets, liabilities, financial position, cash flows and profit or loss of the issuer, or undertakings included in the consolidation;

- an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

- material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.

 

There have been no changes to the directors of Marks and Spencer Group plc to those listed in the Group's 2021 Annual Report and Financial Statements. A list of current directors is maintained on the Group's website: www.marksandspencer.com.

By order of the Board

Steve Rowe

Chief Executive