Issued: 22 May 2019

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.

 

Marks and Spencer Group Plc

Full Year Results For 52 Weeks Ended 30 March 2019

"Good progress in restoring the basics"

 

52 weeks ended	30 Mar 19		31 Mar 18	Change %
Group revenue		£10,377.3m	£10,698.2m	-3.0
Profit before tax & adjusting items1		£523.2m	£580.9m	-9.9
Free cash flow before adjusting items2		£729.4m	£582.4m	25.2
Adjusting items1,2		£(438.6)m	£(514.1)m	14.7
Profit before tax		£84.6m	£66.8m	26.6
Profit after tax		£37.3m	£29.1m	28.2
Basic earnings per share before adjusting items1		25.4p	27.8p	-8.6
Basic earnings per share		2.1p	1.6p	31.3
Net debt		£1.55bn	£1.83bn	-15.3
Ordinary dividend per share		13.9p	18.7p	-25.7

¹Adjusted results are consistent with how business performance is measured internally. ²Refer to adjusting items table below for further details.  See glossary for definitions and reconciliations to statutory measures.

 

Steve Rowe, Marks & Spencer CEO said:

"We are deep into the first phase of our transformation programme and continue to make good progress restoring the basics and fixing many of the legacy issues we face.  As I have said, at this stage we are judging ourselves as much by the pace of change as by the trading outcomes and change will accelerate in the year ahead.

 

"Whilst there are green shoots, we have not been consistent in our delivery in a number of areas of the business.  M&S is changing faster than at any time in my career - substantial changes across the business to our processes, ranges and operations and this has constrained this year's performance, particularly in Clothing & Home.  However, we remain on track with our transformation and are now well on the road to making M&S special again."

 

Transformation - good progress

·   Accountable businesses established with substantial changes in leadership

·   Food business on track with Q4 like-for-like revenue of 0.4% and volume growth of c.1.8% adjusted for Easter timing. Transition to trusted value and wider appeal underway

·   Underlying progress in Clothing in changing 'shape of buy', sizing, customer focus and style plus 14% reduction in stock into sale

·   Improving the basics of dotcom, download speeds, fulfilment; 22% of UK Clothing & Home revenue now online compared with 19% last year

·   UK store portfolio reshaping progressing with 26 full-line stores closed and 48 new store openings in the year. Programme expanded and larger store redevelopment planning initiated

·   Good progress on cost savings delivering c.£100m, in addition to the operating costs of stores which have closed

·   Transformational Joint Venture ("JV") with Ocado announced; a strategically compelling route to unlock profitable growth for M&S Food

·   Proactive steps taken to strengthen and secure the balance sheet for future growth; final dividend for 2018/19 of 7.1 pence

·   Announced terms of a 1 for 5 Rights Issue at 185 pence per New Ordinary Share to raise gross proceeds of approximately £601.3m

Financial performance held back by operating challenges

·   Profit before tax & adjusting items down 9.9% driven by headwinds on sales, partly offset by the operating costs transformation programme

·   Adjusting items of £438.6m, including £222.1m reflecting the costs of acceleration and extension of our UK store closure programme

·   UK Food revenue down 0.6%, with like-for-like revenue down 2.3% (1.5% adjusted for Easter) with improving underlying trend in Q4.  Gross margin down 15bps as investment in trusted value was largely offset by reduced promotional spend

·   UK Clothing & Home revenue down 3.6%, impacted by store closures, with like-for-like revenue down 1.6%. Gross margin up 20bps driven by 14% lower stock into sale.  Encouraging signs of progress in Q3, particularly online, constrained by weak availability in Q4 as we sold out of a number of fast selling lines

·   Net debt reduced to £1.5bn, as a result of working capital inflow and tight capital expenditure

Restoring the Basics

The objective of our transformation programme is to create a profitable, growing family of businesses under the M&S brand within three to five years, bound together not only by a common consumer brand but also by shared sites, employment values, technology and customer data. The first phase of the transformation programme is about restoring the basics; getting the organisation and infrastructure of the business fit for the future.

Protecting the magic and modernising the rest in Food

 

The Food business is showing good signs of progress in arresting the decline in like-for-like revenue. UK Food revenue declined 0.6%, with like-for-like revenue down 2.3% reflecting the adverse impact of Easter timing in both Q1 and Q4.  Adjusted for Easter timing, FY 18/19 like-for-like revenue declined 1.5% with an improving trend in the second half of the year, and like-for-like revenue and volume growth in Q4.

 

Our Food brand remains very strong and our strategy is to protect the magic which is based on our unique quality, freshness, and innovation credentials whilst reshaping our store estate, infrastructure, operating systems, cost management and supply relationships. The Ocado JV is a natural partner for the brand and combined with our Food transformation plan, opens up the possibility of substantially increasing our grocery market share in the medium term.

 

Phase 1 fixing the basics of this plan is about addressing the basic operating weaknesses in the business and broadening our appeal to attract a wider range of customers and be relevant to more shopping occasions.

 

Good progress has been made in restoring trust in our value at relatively little cost to margin. We have nearly halved our dependence on the short-term promotions and complex multi-buy offers, reducing promotional participation by over 10 percentage points as a percentage of sales by the year end, without significant loss of customers. This enabled us to invest in everyday prices including reductions in over 400 lines, narrowing our price differential to the lowest it has been for some years. 

 

We have strengthened the communication of value in stores and we began to see encouraging transaction and volume trends in Q4. In the current year a series of workstreams designed to simplify supply relationships, reduce costs and increase the pace of innovation will support our work to build trusted value.

 

Our food waste levels remain amongst the highest in the industry and availability has not significantly improved.  However, process changes in trial stores known as Project Fuse are illustrating the very significant financial opportunity in these areas.

 

Similarly, an improved working relationship with GIST, our logistics partner, has demonstrated the substantial opportunity in modernising and better integrating the supply chain.

 

Reshaping the ranges and customer profile in Clothing & Home

 

UK Clothing & Home revenue declined 3.6%, partly due to our store closure programme, with like-for-like revenue down 1.6%. UK Clothing & Home online revenue grew 9.8%, with clothing growth ahead of the online market. Encouraging progress in Q3 was constrained by weak availability in Q4 as we sold out of fast selling lines and experienced supply issues.

 

Our range remained too wide in FY 18/19 with the volume of options in our range splintering our buying scale and making our shops challenging to navigate. Our size ratios have been historically misaligned with the profile of the contemporary family age customer we aim to appeal to. However, where we have made progress in pruning options and introducing slimmer fits and more mid sizes, the customer response has been very strong. For instance, our new denim launch produced an initial 20% sales uplift and our sales of £15 women's jeggings were up 30% over the campaign period.

 

Creating a new range architecture in a business with weak processes, a slow supply chain and where buyers are building their confidence has proven challenging, and our sales both in store and online have been frustrated by poor availability in Q4. Although we made good progress reducing overall stock levels, with stock cover down almost three weeks and stock into sale down 14% across the year, many popular lines have sold out prematurely because of the failure to increase the depth of buy and the slowness of the stock flow.

 

Despite these teething problems the customer response to the initial changes has been very encouraging. In the year ahead, we expect to deliver a more marked reduction in options and range duplication, with a substantial increase in the number of '£1m+' lines for Autumn, a significant improvement in size ratios, further focus on style and fashion and additional investment in value.  This will be reinforced by the update of the sub brand strategy, including the re-launch of the Per Una range where the initial customer reaction to early changes we have made has been positive.

 

With the new range architecture, we will aim to shift to a 'first price, right price' trading philosophy, and further reduce the percentage of Clothing & Home sold at discount which remains too high. 

 

Our new range architecture and presentation will be combined with a rationalised, more contemporary in store environment. Around one third of our full-line stores were opened before WWII and three quarters are older than 25 years. Progress on renewing the stores has been limited to date although we have moved a lot of internal walls and sight barriers. A renewal brand format and a modernisation will be piloted in the year ahead.

 

We have reduced the complexity of our logistics network, closing four distribution centres and warehouses and opening a national distribution centre in Welham Green, which is now ramping up its boxed storage capacity. Along with foods we are rolling out the first phase of our Fuse programme, deploying new tools which will help us remove excess stock trapped in stores where it does not sell, and holding it centrally, improving availability and making our stores easier to shop. We are still at the early stages of modernising our supply chain network, technology and process and this remains a priority.

 

Transforming our leadership and accountability

 

Over the past two years we have built a substantially new leadership team, bringing fresh perspective, energy and challenge to a business held back by deeply entrenched cultural norms. Our ambition is to intensify cultural and behavioural change throughout M&S, driving the business to act 'bigger, bolder, faster'. We are creating clear and accountable businesses supported by common values, shared infrastructure and customer data and have continued the streamlining of corporate functions. The Clothing & Home and Food businesses now have end-to-end functional accountability, enabling more efficient and effective decision making.

 

Critically we are taking steps to bring back the voice of the stores. Over the years a business that was famously product and store led has developed a 'Head Office knows best' mentality, remote from the customer. In our new organisation we are ensuring that the role of the store is central to all our activity, whether that be active engagement in range decisions for the first time or store managers leading the trading feedback calls which are attended by all commercial executives. Store managers will now have visibility of their own P&Ls, and Food managers are given the granular information to act on their own waste. M&S has an extraordinary workforce of loyal colleagues and our aim is to be the most involving workplace in large scale UK retail.

 

Becoming a digital first retailer across M&S

 

In our digital operations, we began to address the basics of our website which has helped to deliver UK Clothing & Home online growth of 9.8% in FY 18/19, improving our online clothing market share by 0.3 percentage points. During Q3, when we had strong seasonal demand, growth was well into double digits.

 

Improvements in site speed, a redesigned homepage, enhanced product imagery, a simpler check-out and an improved delivery proposition have collectively contributed to over nine percent improvement in the conversion of website traffic to customer purchases.  We are top quartile amongst our peers on page loadspeed. Navigation and personalisation on-site, as well as product marketing remain a significant opportunity.

 

Castle Donington had its best peak performance since it opened with significant improvements in most key metrics including a later delivery cut off, following targeted investment to remedy problems with its reliability, efficiency and capacity. We are investing c.£9m in further process improvements to meet our growth plans for this year.  However, we expect that the need for an additional fulfilment centre has been successfully deferred for another two to three years.

 

M&S in store technology and systems have been historically underinvested and require improvement. Already we have started to address this problem, giving all store managers tablet computers to release office bound time for the shop floor.  The successful Honeywell hand held terminal programme has been extended. In the year ahead, we will roll out new applications and accelerate our self-checkout programme to reduce constant queuing issues. Our in store WiFi will be upgraded with the objective of delivering a universal 'high speed anywhere' capability for our customers and store colleagues.

 

M&S has the potential to have one of the strongest and most valuable customer data 'lakes' in the UK with the combination of Sparks, Online, the M&S credit card and Ocado. However, our customer data bases are currently disconnected and ineffective. Our Sparks loyalty programme needs substantial improvement and in the next year it will be repositioned, revamped and relaunched.

 

We have made good progress restoring the basics of our technology organisation, transitioning to a partnership with TCS, migrating our online platform to the cloud and rolling out new warehouse management software to enable the decommissioning of obsolete systems and the old mainframe base, which will deliver annualised savings of over £30m.

 

Our long-term partnerships with Microsoft, Decoded, Founders Factory and True Capital will also help give M&S the opportunity to access the best of digital innovation and entrepreneurial ideas and to become a data-driven and digitally enabled workforce.

 

Creating a high-quality store portfolio fit for the future

 

Our store estate is older than that of our competitors with a number of legacy issues. We are making good progress and have closed 35 full-line stores as part of our programme as at 30 March 2019, with sales transfer rates to nearby stores remaining above 20%. We have updated our plan for the future shape of our total store estate. Reshaping the store portfolio means tackling the legacy issues, but also opening new full-line stores as well as Food stores where we can exploit current weak retail demand to secure excellent sites for relocations. As part of our Food strategy we are concentrating on higher volume stores with good access and car parking to enable our customers to shop more of our range.  Therefore, some of the low volume, higher cost Simply Food stores, mostly on short-leases will also be progressively relocated or rationalised. 

 

Although we anticipate further net reductions in overall retail space, and we currently expect to close a further c.85 full-line stores and c.25 Simply Food stores in addition to the 35 full-line stores closed at FY18/19, our strategy is as much about right sizing, relocating and new openings as it is about closures.  As such we anticipate our owned store base is likely to remain broadly level.

 

As indicated at the half year we believe there is significant opportunity for rental cost reductions as we are reviewing our existing leaseholds. 

 

We have also begun a programme of development feasibility to unlock value from the large old town centre stores with surplus space. We have appointed a new Property Development Director and expect to initiate a number of redevelopments in the year ahead.

 

Cost savings of at least £350m by 2020/21

 

Last year we set out firm targets for cost savings as part of the first phase of transformation.  We have made good progress in the year, delivering savings of c.£100m, in addition to the operating costs of stores which have closed and are on the way to creating a leaner, more efficient cost base for the business.

 

Savings in 2018/19 derived from areas including the retail management restructure, the IT transformation plan, property costs, depreciation and central costs which enabled the business to offset inflation, new space and channel shift with the result that FY UK operating costs declined by 1.2%.

 

As we change the culture of the business we are clear that challenging costs will become a core part of our philosophy. In 2019/20 we anticipate ongoing savings from the annualisation of current year initiatives and additional benefits in areas including a new contract for store maintenance and in central costs, which should result in a further decline in total UK operating costs. 

 

Rebuilding profitable growth in International

 

International revenue decreased by 13.4% at constant currency driven by the closure of stores in loss making exit markets, and the sale of our business in Hong Kong to a franchise partner in December 2017. Excluding Hong Kong and exit markets, revenue grew by 1.1%. 

 

The International business was already fully embarked on rationalisation and repositioning prior to the transformation programme and further good progress has been made. Our objective is to create a much more competitive localised incarnation of M&S in those selected markets where we can attain a sustainable market share. During the year, we have implemented the 'market right pricing' programme across markets in Clothing & Home. The programme's cumulative performance since implementation has been encouraging with sales up 8% and volumes up 20%, following a net 10% reduction in selling prices.  This performance is helping to build confidence with our partners to reinvest into the business.  In the year we opened 37 stores and modernised a further 56.

 

As we aim to build a scalable business internationally, we continue to localise our ranges for the market.  This included a substantial increase to around 15% of locally designed clothing ranges, including an increase in our growing Indian joint venture which now has 77 stores. In addition, we launched our first ever Halal meat range in the UAE and also launched six country specific websites. We also re-platformed the website for our business in the Republic of Ireland.

 

Joint Venture with Ocado

 

In February 2019, we announced the creation of a new 50/50 JV with Ocado Group Plc ("Ocado"), the UK's leading pure play digital grocer, that will transform online grocery shopping for UK consumers.  Under the JV, M&S is acquiring a 50% share of Ocado's UK retail business, which will be supported by Ocado Smart Platform technology, for an initial consideration of £562.5m and deferred consideration of up to £187.5m, plus interest. The Ocado JV is expected to be recognised by M&S as an associate applying the equity method of accounting, reflecting the significant influence that M&S will have over the entity.

 

The JV combines the strength of M&S's brand and its leading food quality and innovation with Ocado's unique and proprietary technology to create an unrivalled online offer for customers. In bringing the best together, the JV will benefit existing and new customers, colleagues and suppliers.

 

The JV will trade as Ocado.com but benefit from access to M&S's brand, products and customer database from September 2020 at the latest, following the termination of the current Waitrose sourcing agreement and migration of JV sourcing to M&S.

 

We anticipate synergies for M&S of at least £70m by the third full financial year following completion through increased buying scale, harmonised buying terms on branded products and improved efficiencies on new product development. We expect some churn in customers as the JV transitions from the previous sourcing arrangements, however following the 'frictional' transition we plan to accelerate growth in the JV. There is a significant opportunity to reduce customer acquisition costs in the JV by marketing directly to our customer data base and the c.12 million M&S food customers who account already for around one third of online grocery spend, albeit mostly with our competitors.

 

Balance sheet and transaction financing

 

The Board believes that, given the high operating risk the business faces, it is important to maintain a strong balance sheet and cashflow, to provide security and underpin the changes we need to make.  In the next four years, in addition to the investment in our proposed JV, we have substantial debt repayments due on our bond financing and a significant pension obligation to fund. Further, in uncertain times our strong preference is to limit dependence on bank debt financing.

 

Therefore, having considered carefully other options, we believe it is appropriate to finance the JV by means of a Rights Issue and to reduce the Group's annual dividend payment to a sustainable level, which we aim to grow in line with earnings over time.

 

Details of the Rights Issue

 

On 27 February 2019 we announced the creation of a new 50/50 JV with Ocado. It was announced that the transaction would be primarily equity financed by a rights issue.

 

Today we announce the terms of the fully underwritten rights issue which is intended to raise gross proceeds of approximately £601.3 million.

 

The Rights Issue will result in the issue of 325.0 million new ordinary shares representing approximately 20.0% of the existing issued share capital of the Company and 16.7% of the enlarged issued share capital following completion of the Rights Issue. The Rights Issue will be on the following basis:

 

1 for 5 Rights Issue at 185 pence per New Ordinary Share

 

The rights issue price of 185 pence per New Ordinary Share represents a discount of approximately 31.8 per cent. to the closing middle-market price of 271.2 pence per existing ordinary share, or a discount of approximately 30.0 per cent. to the closing middle-market price of 264.1 pence per existing ordinary share when adjusted to reflect the ordinary shares becoming ex-dividend during the Rights Issue offer period, in each case on 21 May 2019 (being the latest business day before the announcement of the terms of the Rights Issue). Additionally, it represents a discount of approximately 28.0 per cent. to the theoretical ex-rights price of 256.8 pence per New Ordinary Share, or a discount of approximately 26.3 per cent. to the theoretical ex-rights price of 250.9 pence per existing ordinary share when adjusted to reflect the ordinary shares becoming ex-dividend during the Rights Issue offer period, both on 21 May 2019 (being the latest business day before the announcement of the terms of the Rights Issue).

 

It is anticipated that the Rights Issue will formally launch on or around 24 May 2019, subject to and following the approval of the Prospectus by the FCA. At this time further details of the Rights Issue will be provided to shareholders.

 

Full year guidance 2019/20

 

We remain in the difficult early stages of our transformation programme and while we expect some improvement in trading in each of our major businesses in the year ahead, progress is likely to be second half weighted. Trading in the first seven weeks of the financial year is in line with Board expectations, although the pattern of trade remains volatile in the context of weather and events. All guidance is shown before the effects of IFRS 16. For further detail on IFRS 16 please see Note 1 to the financial statements.

 

·    In Food, we expect net store closures to reduce sales by c.1% as the accelerated store closure programme is not fully offset by new Simply Food and full-line stores.  We anticipate gross margin to be -25bps to +25bps, as we balance further investment in trusted value with our cost reduction programme

·    In Clothing & Home, we expect net store closures to reduce sales by c.3%.  We anticipate gross margin to be -25bps to +25bps, with further investment in trusted value

·    We expect UK operating costs to decrease by up to 1%, largely as a result of continued cost efficiencies, store closures and lower depreciation

·    Capital expenditure is expected to increase to between £350m and £400m, largely as a result of an increase in investment in store environment, new store trials and C&H logistics capacity

·    We expect an adjusted effective tax rate of c.23%

 

	Full year guidance
UK Food
-      Space contribution (%)	c.-1
-      Gross margin change (bps)	-25bps to +25bps
Clothing & Home
-      Space contribution (%)	c.-3
-      Gross margin change (bps)	-25bps to +25bps
UK operating costs (%)	c.0 to -1
Adjusted effective tax rate (%)	c.23
Capital expenditure (£m)	350 to 400

 

Group revenue: constant currency

Q4 group revenue declined by 1.6% at constant currency reflecting the increasing pace of closures in our UK store estate and the adverse impact of Easter timing on like-for-like revenue of an estimated c.1.9% in Food and c.0.4% in Clothing & Home. International revenue grew 1.8% with exit market store closures and the sale of our retail operations in Hong Kong now largely annualised. Revenue at M&S.com reflects the planned reduction in promotional activity in our Food business, with solid underlying growth in clothing orders. 

% change	FY	Q1	Q2	Q3	Q4
Food	-0.6	-0.1	-0.2	-1.2	-0.8
-      Like-for-like	-2.3	-3.1	-2.7	-2.1	-1.5
Clothing & Home	-3.6	-1.6	-3.7	-4.8	-3.9
-      Like-for-like	-1.6	-0.6	-1.6	-2.4	-1.3
Total UK sales	-1.8	-0.7	-1.6	-2.7	-1.9
-      Like-for-like	-2.0	-2.2	-2.3	-2.2	-1.4
International	-13.4	-21.1	-15.8	-15.1	1.8
Total Group	-2.9	-2.9	-3.1	-3.9	-1.6
Total M&S.com (Memo only)	5.0	6.3	5.0	7.2	0.2
UK Clothing & Home online (Memo only)	9.8	9.9	8.5	14.1	4.9

See glossary for definitions.  Prior year revenue has been restated for the reclassification of cards & gift wrap from Clothing & Home to Food.

We will report our first half results on 6 November 2019.

 

 

For further information, please contact:

 

Investor Relations:                                                        

Fraser Ramzan:                                +44 (0)20 3884 7080

Rebecca Edelman:                           +44 (0)20 3884 6029

 

Media enquiries:

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

 

Investor & Analyst webcast:

Investor and analyst presentation will be held at 9am on 22 May 2019. This presentation can be viewed live on the Marks and Spencer Group plc website.

 

Fixed Income Investor Conference Call:

This will be hosted by Humphrey Singer, Chief Finance Officer, at 2pm on 22 May 2019:

 

Dial in number: +44 (0)330 336 9126                                         Access code: 4941368

 

A recording of this call will be available until 5pm on 29 May 2019:

Dial in number: +44 (0) 207 660 0134                                        Access code: 4941368

 

 

 

FULL YEAR REVIEW

		52 weeks ended
			30 Mar 19 £m	31 Mar 18 £m		Change  %
	Group revenue		10,377.3	10,698.2		-3.0
	Food1		5,903.4	5,940.0		-0.6
	Clothing & Home1		3,537.3	3,671.0		-3.6
	UK		9,440.7	9,611.0		-1.8
	International		936.6	1,087.2		-13.9
	Group operating profit before adjusting items		601.0	670.6		-10.4
	UK		474.0	535.4		-11.5
	International		127.0	135.2		-6.1
	Net finance costs		(77.8)	(89.7)		13.3
	Profit before tax & adjusting items		523.2	580.9		-9.9
	Adjusting items		(438.6)	(514.1)		14.7
	Profit before tax		84.6	66.8		26.6
1.  Prior year revenue has been restated for the reclassification of cards & gift wrap from Clothing & Home to Food.  For further detail please see Note 2 to the financial statements

UK: Food

Food revenue decreased 0.6%, with like-for-like revenue down 2.3%, or 1.5% when adjusted for the timing of Easter. Revenue reflected the effects of price investment and a change in product mix as we reduced promotions. However, during the second half, we saw an improving trend with volumes up 1.8% in the fourth quarter, adjusted for Easter. We opened 48 new stores during the year in line with our plan to focus new store expansion on only the highest returning locations, although the contribution from space diminished through the year as our full-line closure programme progressed.

Gross margin was down 15bps year-on-year at 31.1%. The benefit of promotional savings and our cost reduction programmes largely offset the effects of cost inflation and price investment.

 

UK: Clothing & Home

UK Clothing & Home revenue declined 3.6%, partly driven by our store closure programme, with LFL sales down 1.6%. Discounted sales decreased, as a result of the planned reduction in stock-into-sale. UK Clothing & Home online revenue grew 9.8%, which was ahead of the clothing market, with strong growth in womenswear, as we made improvements to our website and delivery proposition and focused on key categories such as dresses in our 'Must Haves' campaign.  

 

Gross margin increased 20bps to 57.1%.  Buying margin was down 20bps as adverse currency headwinds more than offset sourcing gains across the year. Discounting reduced by 40bps, largely as a result of the 14% reduction in stock into sale.

 

UK operating costs

 

52 weeks ended	30 Mar 19 £m	31 Mar 18 £m	Change %
Store staffing	1,044.7	1,070.6	(2.4)
Other store costs	950.4	992.1	(4.2)
Distribution & warehousing	564.6	538.0	4.9
Marketing	155.1	151.6	2.3
Central costs	694.8	698.0	(0.5)
Total	3,409.6	3,450.3	(1.2)

UK operating costs decreased 1.2%. Store closures more than offset the cost of new space and channel shift. Cost savings across the business outweighed inflation related increases.

 

Store staffing costs reduced, as savings from store management restructuring, closures and other efficiencies more than offset pay inflation. Other store costs reduced driven by lower depreciation, due to our closure programme and as a number of assets have reached the end of their useful life, which more than offset rent and rates inflation in the year.

 

The growth in distribution and warehousing costs was largely driven by inflation and the costs of channel shift, as well as costs associated with the closure of an equipment warehouse, with some offset achieved from improved efficiencies at Castle Donington.

 

The increase in marketing costs reflected investments in our Food brand and the planned increase in costs in the second half of the year due to the timing of campaigns.

 

Central costs reduced as lower incentive costs year-on-year, the benefits of technology transformation programmes and other cost efficiencies more than offset system investment write offs and expenditure on the Fuse programme.

 

M&S Bank

 

M&S Bank income before adjusting items was down £12.7m to £27.6m. This was predominantly the result of an increase in bad debt provisioning due to the impact of revised forward estimates of economic indicators, including the impact of Brexit, and a modest increase in underlying bad debt due to the risk of customer default. Underlying credit income was slightly up, as a result of more competitive pricing. M&S Bank income after adjusting items increased £1.1m to £6.7m.

 

International

52 weeks ended       Revenue	30 Mar 19 £m			31 Mar 18 £m	Change %	Change CC %	Change CC % excl. Hong Kong
Franchise	409.1			360.6	13.4%	13.3%	2.2%
Owned Retained1	527.5			660.2	-20.1%	-19.3%	0.3%
Total Retained	936.6			1,020.8	-8.2%	-7.7%	1.1%
Owned Exit	-			66.4	-	-	-
Total	936.6			1,087.2	-13.9%	-13.4%	-6.1%
Operating profit before adjusting items
Franchise		72.2		86.1	-16.1%
Owned Retained1		52.7		53.1	-0.8%
Total Retained		124.9		139.2	-10.3%
Owned Exit		2.1		(4.0)	152.5%
Total		127.0		135.2	-6.1%

¹Hong Kong results reported in owned retained until the business was sold to our franchise partner in December 2017.

 

Total International revenue decreased 13.4% at constant currency. Excluding the impact from exit markets and Hong Kong, revenue at constant currency increased 1.1%. This was driven by our franchise operations where Food revenue increased by 8%, with notable growth in France, the Middle East and Singapore. In Clothing & Home we implemented market right pricing across most markets and saw an improving trend in retail sales in Q4. Owned retained revenue reflects solid growth in India and Greece, which largely offsets ongoing difficult trading conditions in the Republic of Ireland.

 

International operating profit before adjusting items decreased 6.1% with total retained operating profit down 10.3%. This was largely driven by the sale of our business in Hong Kong and the implementation of market right pricing. The decline in franchise operating profit reflects the allocation of £8m of costs from owned to franchise following the closure of owned markets and the sale of our business in Hong Kong, in addition to the implementation of market right pricing. Owned retained profit increased, excluding the effects of the disposal of Hong Kong. The £2.1m profit in owned exit markets largely reflects the recovery of an historical VAT receivable.

 

Net finance cost

 

52 weeks ended	30 Mar 19 £m	31 Mar 18 £m	Change £m
Interest payable	(82.0)	(95.4)	13.4
Interest income	7.6	6.0	1.6
Net interest payable	(74.4)	(89.4)	15.0
Pension net finance income	25.8	17.7	8.1
Unwind of discount on Scottish Limited Partnership liability	(8.8)	(10.9)	2.1
Unwind of discount on provisions	(17.3)	(5.2)	(12.1)
Ineffectiveness on financial instruments	(3.1)	(1.9)	(1.2)
Net finance cost	(77.8)	(89.7)	11.9

 

Net finance cost decreased by £11.9m to £77.8m, primarily due to a decrease in interest payable as a result of the repayment of the US$500m bond which matured in December 2017. Pension net finance income increased by £8.1m driven by a higher UK defined benefit pension scheme surplus at the start of the year compared to the start of the prior year. The unwind of discount on provisions reflects our UK store estate programme and our central London office reorganisation. 

 

Profit before tax & adjusting items

 

Profit before tax and adjusting items was £523.2m, down 9.9% on last year. The decrease was principally due to a 2.3% reduction in UK gross profit, partially offset by the decrease in operating costs in the year.

 

Adjustments to profit before tax

 

The Group makes certain adjustments to statutory profit measures, in order to derive alternative performance measures that provide stakeholders with additional helpful information on the performance of the business. Further material charges relating to our strategic programmes are anticipated as programmes progress. For further detail on these charges and the Group's policy for adjusting items please see Notes 1 and 3 to the financial statements. 

 

52 weeks ended	30 Mar 19 £m	31 Mar 18 £m	Change £m
Strategic programmes
- UK store estate	(222.1)	(321.1)	99.0
- Organisation	(51.8)	(30.7)	(21.1)
- Operational transformation	(16.4)	-	(16.4)
- IT restructure	(15.6)	(15.5)	(0.1)
- UK logistics	(14.3)	(13.1)	(1.2)
- Changes to pay and pensions	(6.2)	(12.9)	6.7
- International store closures and impairments	(5.3)	(5.0)	(0.3)
UK store impairments, asset write-offs and onerous lease charges	(62.1)	(63.4)	1.3
M&S Bank charges incurred in relation to the insurance mis-selling provision	(20.9)	(34.7)	13.8
GMP and other pension equalization	(20.5)	-	(20.5)
Establishing the Ocado JV	(3.4)	-	(3.4)
Other	-	(17.7)	17.7
Adjusting items	(438.6)	(514.1)	75.5

 

We have recognised a number of charges in the period relating to the implementation of our strategic programmes including: 

 

·    A charge of £222.1m in relation to our accelerated and expanded store closure programme, which has been expanded to include a number of Food stores. This charge includes accelerated depreciation, impairment of assets, estimated onerous leases and other closure costs. Further material charges relating to the closure and re-configuration of the UK store estate are anticipated as the programme progresses, the quantum of which is subject to change through-out the programme period as decisions are taken in relation to the size of the store estate and the specific stores affected.  Based on current plans, further charges before the adoption of IFRS 16 are expected to be incurred predominantly in the next two years and are anticipated to be c.£100m, bringing total programme costs to c.£680m;

·   A charge of £51.8m largely in relation to costs associated with centralising and rationalising our London office functions as well as redundancy costs related to the review of the retail organisational structure;

·   A charge of £16.4m in relation to the transformation and simplification of our supply chain and operations across Clothing & Home and Food. This includes initiatives to reengineer the end to end supply chain, remove costs and complexity and working capital;

·    A charge of £15.6m in relation to our technology transformation programme which we began in the prior year; and

·   A net charge of £14.3m as we continue to transition to a single tier Clothing & Home UK distribution network, including the closure of two of our distribution centres.

 

In FY 16/17 we announced our intention to close owned stores in ten international markets. A net charge of £5.3m has been recognised in the period reflecting the actualisation of previously estimated closure costs.

 

In response to the ongoing pressures impacting the retail industry, as well as reflecting our strategic focus towards growing online market share, we have revised future projections for certain UK stores. As a result, UK store impairment testing has identified stores where the current and anticipated future performance does not support the carrying value of the stores. A charge of £52.8m has been incurred primarily in respect of the impairment of assets associated with these stores. The charge has been classified as an adjusting item on the basis of the significant value of the charge in the year to the results of the Group.  Additional detail is in Note 10 to the financial statements.

 

We continue to incur charges in relation to M&S Bank insurance mis-selling provision resulting in a charge of £20.9m during the year.  The deadline for any claims to be brought by customers expires on 29 August 2019.  The estimated liability continues to be reviewed in FY 19/20 to ensure it reflects the best estimate of likely settlement, which could lead to further charges or releases.

 

We have recognised a non-cash charge of £20.5m in respect of the Group's defined benefit pension liability arising from equalisation of guaranteed minimum pensions ("GMP") and other pension equalisation costs following a High Court ruling in October 2018. Additional detail on the Group's GMP assessment is detailed in Note 8 to the financial statements.

 

In February 2019 we announced the creation of a new 50/50 Joint Venture with Ocado, the UK's leading pure play digital grocer. Transaction costs of £3.4m were incurred in the year.

 

Taxation

 

The effective tax rate on profit before tax and adjusting items was 20.3% (last year 21.6%). This is higher than the UK statutory rate predominantly due to the recapture of previous tax relief under the Marks and Spencer Scottish Limited Partnership ("SLP") structure, partially offset by the recognition of deferred tax assets in our Indian entity, following its return to profitability. The effective tax rate on statutory profit before tax was 55.9% (last year 56.4%) due to the impact of disallowable adjusting items.

 

Earnings per share

 

Basic earnings per share increased 31.3% to 2.1p, primarily due to the impact from lower adjusting items year-on-year. The weighted average number of shares in issue during the period was 1,624.1m (last year 1,624.0m).

 

Adjusted basic earnings per share decreased by 8.6% to 25.4p due to lower adjusted profit year-on-year. 

 

Capital expenditure

 

52 weeks ended	30 Mar 19 £m	31 Mar 18 £m	Change £m
UK store environment	26.0	26.6	(0.6)
New UK stores	40.1	72.1	(32.0)
International	11.0	11.6	(0.6)
Supply chain	48.7	23.8	24.9
IT & M&S.com	88.2	91.9	(3.7)
Property maintenance	69.0	72.9	(3.9)
Capital expenditure before disposals	283.0	298.9	(15.9)
Proceeds from property disposals	(48.1)	(3.2)	(44.9)
Capital expenditure	234.9	295.7	(60.8)

 

Group capital expenditure remains tightly controlled resulting in a 5.3% reduction year-on-year, before disposal proceeds. 

 

UK store environment spend was slightly down reflecting investment in store layout in the prior year, partially offset by investment in improved visual merchandising and click and collect facilities in a number of stores. Spend on UK store space was lower as we opened 15 fewer owned Food and full-line stores than the prior year. International expenditure remains focused on the store opening and modernisation programme.

 

Supply chain expenditure increased due to our investment in the Welham Green distribution centre as we move towards a single tier network for Clothing & Home, and in improvements to our capabilities at Castle Donington. Spend in IT and M&S.com was driven by the migration from our mainframe system, investment in the Welham Green distribution centre and website enhancements to optimise user experience. Spend was slightly lower than last year due to the on-going move towards more cloud-based solutions and following the technology transformation programme. Property maintenance spend largely relates to investment in our stores as well as investment in energy efficiency projects and reconfiguring our central London office building to rationalise the use of office space.

 

Proceeds from property disposals relate to the sale of six closed stores and the sale and leaseback of eight Food stores.

 

Statement of financial position

 

Net assets were £2,680.9m at the year end, a decrease of 9.3% on last year.

 

Cash flow & net debt

52 weeks ended	30 Mar 19 £m	31 Mar 18 £m	Change £m
Adjusted operating profit	601.0	670.6	(69.6)
Depreciation and amortisation before adjusting items	544.9	580.6	(35.7)
Working capital	59.1	(96.8)	155.9
Defined benefit scheme pension funding	(37.9)	(41.4)	3.5
Capex and disposals	(264.8)	(346.0)	81.2
Interest and taxation	(184.7)	(200.5)	15.8
Investment in Joint Venture	(2.5)	-	(2.5)
Non-cash share based payment charges	19.2	18.9	0.3
Share transactions	(4.9)	(3.0)	(1.9)
Free cash flow before adjusting items	729.4	582.4	147.0
Adjusting items cash outflow	(145.3)	(164.9)	19.6
Free cash flow	584.1	417.5	166.6
Ordinary dividends paid	(303.5)	(303.4)	(0.1)
Free cash flow after shareholder returns	280.6	114.1	166.5
Opening net debt	(1,827.5)	(1,934.7)	107.2
Exchange and other non-cash movements	1.8	(6.9)	8.7
Closing net debt	(1,545.1)	(1,827.5)	282.4

 

The business generated free cash flow before adjusting items of £729.4m, up £147.0m on last year primarily as a result of working capital inflow, lower capital expenditure and lower interest and taxation payments. The working capital inflow was driven by the planned reductions in Clothing & Home inventory levels and the timing of creditors at year end. Lower interest and taxation payments reflect both the repayment of a bond in December 2017 and lower taxable profit in the prior year.

 

Defined benefit scheme pension funding in the year of £37.9m largely reflects the second limited partnership interest distribution to the pension scheme in the year.

 

Adjusting items in cash flow during the year were £145.3m. These included £27.3m in relation to our store closure programme, £24.9m in relation to organisational change, £20.9m for M&S Bank, £12.7m relating to the closure of stores in International markets and £11.1m in relation to our technology transformation programme. Total adjusting items in cash flow are anticipated to be a similar amount in 2019/20, prior to the implementation of IFRS 16.

 

After the payment of our final dividend from FY 17/18 and interim dividend from H1 18/19, net debt was down £282.4m on last year.

 

Dividend

 

On February 27 we announced the Board's decision to reduce our dividend per share by 40% to a sustainable level, which we aim to grow in line with earnings over time. We are declaring a final dividend of 7.1p (full year dividend 13.9p). This will be paid on 12 July 2019 to shareholders on the register of members as at close of business on 31 May 2019, subject to approval of shareholders at the Annual General Meeting, to be held on 9 July 2019. The 2018/19 final dividend per share and prior dividends per share will be restated in future accounts to reflect the bonus factor adjustment resulting from the rights issue in due course. The bonus factor adjustment arises due to the Rights Issue involving an element of bonus shares because the rights issue price is below the Closing Price of 271.2 pence per share.

 

Pension

 

As indicated at our Interim Results, M&S plc (the Company) reached an agreement with the Trustee of its UK Defined Benefit Pension Scheme with regards to the triennial actuarial valuation as at 31 March 2018. This resulted in a statutory surplus of £652m and is an improvement on the previous position at 31 March 2015 (statutory surplus of £204m), primarily due to lower assumed life expectancy. The Company and Trustee have confirmed, in line with the current funding arrangement, that no further contributions will be required to fund past service as a result of this valuation (other than those already contractually committed under the existing Marks and Spencer Scottish Limited Partnership arrangements and which are included in the calculation of the statutory surplus- see Note 9)

 

At 30 March 2019, the IAS 19 net retirement benefit surplus was £914.3m (last full year £948.2m).  The IAS 19 surplus includes the first partnership interest in the scheme assets, valued at £278.5m (Note 9). The decrease in the surplus is largely due to a decrease in the discount rate partially offset by a change in mortality assumptions and by the return on scheme assets.

 

In April 2019, following the year-end, the UK Defined Benefit pension scheme purchased additional pensioner buy-in policies with two insurers for approximately £1.4bn. Together with the two policies purchased in March 2018, the Defined Benefit pension scheme has now, in total, hedged its longevity exposure for around two thirds 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 Company's exposure to changes in longevity, interest rates, inflation and other factors.

 

IFRS 16

 

IFRS 16 'Leases' is effective for periods beginning on or after 1 January 2019. The Group will adopt the new financial reporting standard from 31 March 2019. The financial statements for the 52 weeks ending 28 March 2020 will be the first prepared under IFRS 16. The Group has decided to adopt using the fully retrospective transition approach meaning the comparative period will also be restated at this time.

 

There will be a significant impact on the balance sheet as at 31 March 2019. It is expected on a pre-tax basis that a right of use asset of approximately £1.7bn and lease liability of approximately £2.6bn will be recognised, along with the derecognition of onerous lease provisions of approximately £0.2bn and other working capital balances (including lease incentives) of approximately £0.4bn, which results in an overall adjustment to retained earnings of approximately £0.3bn.

 

Operating profit and EBIT before adjusting items increase due to the depreciation expense being lower than the lease expense it replaces. The overall impact on profit before tax and adjusting items depends on the relative maturity of the lease portfolio. Rounded to the nearest £10m, it is estimated that for the 52 weeks ended 30 March 2019:

·   Profit before tax when applying IFRS 16 is c£10m higher than that reported in these financial statements under current accounting standards, including IAS 17 Leases;

·    Profit before tax excluding adjusting items is c£10m lower; and

·    Operating profit before tax and adjusting items is c£130m higher.

 

The application of IFRS 16 requires a reclassification of cash flow from operations to net cash used in financing activities, however, the impact to the Group is cash flow neutral.

 

For further detail on IFRS 16 please see Note 1 to the financial statements.

 

Brexit
 

The continued delay in agreeing the nature and timing of the UK's exit from the European Union creates uncertainty that could impact the performance of our business. Whilst an orderly exit would allow business planning to more effectively address the consequences of change against a defined timeframe, a no deal outcome would have a more immediate and negative impact. Either outcome is expected to place increased pressure on how our business performs.

 

The potential impacts include:

•     A continued deterioration in customer sentiment

•     Operational complexity and costs due to restrictions on the movement of goods and stricter border controls

•     Costs passed through from our suppliers

•     Continuity of supply and supplier viability

•     The impact of import and export duties

•     Volatility in currency and corporate bond rates

•     Tightening of the labour market

•     Additional regulatory responsibilities and costs

•     Increased complexity and cost in our international operations, including our franchise partners.

 

The Board continues to monitor the ongoing negotiations between the UK and the EU to assess the potential impact and any transitional arrangements that may be agreed.

 

Important Notice:

 

The contents of this announcement have been prepared by and are the sole responsibility of Marks and Spencer Group plc ("Marks & Spencer"). The information contained in this announcement does not purport to be full or complete. No reliance may be placed by any person for any purpose on the information contained in this announcement.

 

This announcement is an advertisement for information purposes only and does not constitute a prospectus or prospectus equivalent document. Nothing in this announcement shall constitute an invitation or offer to sell or exchange, or the solicitation of an invitation or offer to buy or exchange, any security or to participate in the Rights Issue. Any decision to participate in the Rights Issue, purchase, subscribe for, otherwise acquire, sell or otherwise dispose of any security must be made only on the basis of the information contained in and incorporated by reference into the prospectus to be published by Marks & Spencer in relation to the Rights Issue. This announcement does not contain a recommendation concerning any investment option with respect to the Rights Issue.

 

This announcement is not and does not contain an offer of securities for sale or a solicitation of an offer to purchase or subscribe for securities in in any jurisdiction, including the United States, the Abu Dhabi Global Market, the Dubai International Financial Centre, Israel, Hong Kong, Japan, the People's Republic of China, New Zealand, Singapore, South Africa, Switzerland or the United Arab Emirates, or any other state or jurisdiction in which such release, publication or distribution would be unlawful. The securities mentioned in this announcement (the "Securities") have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered, sold, taken up, renounced or delivered, directly or indirectly, into or within the United States, except pursuant to an exemption from, or a transaction not subject to, registration under the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. There will be no public offer of the Securities in the United States. Subject to certain exceptions, the Securities may not be offered or sold in the Abu Dhabi Global Market, the Dubai International Financial Centre, Israel, Hong Kong, Japan, the People's Republic of China, New Zealand, Singapore, South Africa, Switzerland or the United Arab Emirates or to, of for the account or benefit of any national, resident or citizen of such countries.

 

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 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 2018 Annual Report (pages 22-24). 

 

In addition to the Principal Risks & Uncertainties disclosed in the 2017/18 Annual Report and Accounts, the forthcoming disclosure in the 2018/19 report will highlight additional risks in relation to Brexit, the proposed joint venture with Ocado plc, the potential impact of failure or resilience issues at critical business locations and the ongoing management of short and long-term funding to meet business needs. 

 

Directors Responsibility Report

 

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 30 March 2019. Certain parts thereof are not included within this announcement.

 

The directors confirm to the best of their knowledge:

 

·    The Group financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole.

·   The Management Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

·   The Annual Report, taken as a whole, is fair, balanced and understandable, and provides the necessary information for shareholders to assess the Group's position, performance, business model and strategy.

 

The Directors' Report was approved by a duly authorised committee of the Board of Directors on 21 May 2019 and signed on its behalf by Nick Folland, Group General Counsel & Company Secretary.

 

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. A copy of this announcement will be made available at https://corporate.marksandspencer.com/. The information contained within this announcement is inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. The person responsible for this announcement on behalf of M&S is Nick Folland, Group General Counsel and Company Secretary.

 

The information in this announcement may not be forwarded or distributed to any other person and may not be reproduced in any manner whatsoever. Any forwarding, distribution, reproduction or disclosure of this information in whole or in part is unauthorised. Failure to comply with any such restriction may constitute a violation of the securities laws of any such jurisdiction.

 

- Ends -