Marks and Spencer Group plc 2015/16 results: Continued strong growth in Food

^{1 Underlying results are consistent with how business performance is measured internally. Non underlying items principally include: the mis-selling provision for M&S Bank; one-off impairments within International; UK store review costs and asset write-offs of IT.}

Review of 2015/16:

• Continued strong growth in Food as we outperformed a competitive market.  We opened 75 new Simply Food stores which are performing ahead of expectations.
• Clothing & Home gross margin up 245bps; sales performance unsatisfactory but actions under way.
• Continued difficult trading conditions in International – operating profit down 39.6% to £55.8m.
• Tight control over cost and capital – free cash flow pre-shareholder returns of £539.3m and operating costs +1.8%.
• £451.7m returned to shareholders including: £301.7m dividend and £150m buy back. In addition a special dividend of 4.6p per share (or £75m) announced for the first half of 2016/17.

Strategic update summary:

• Focus on putting customers at the heart of M&S and driving sales growth.
• Implementing actions to recover and grow Clothing & Home:

– Re-establish style authority: focus on product, quality and fit
– Restore price position: lowering prices and reduced promotional stance
– Enhanced customer experience: sharper ranges, better availability and investment in store staffing

• Continuing to grow the Food business:

-Build on strengths: focus on innovation, quality and choice
-Commitment to value credentials: competitive pricing while maintaining margin
-Improved convenience: extending Simply Food store opening programme

• Driving profitability for shareholders:

-Continued tight control of costs and cash
-Focus on shareholder returns

• Additional strategic questions, including International, UK store estate and organisation to be addressed in the autumn.

Steve Rowe, Chief Executive, said:

“M&S is a great business with a strong customer base and loyal employees and we have much to be proud of.  We also know that we have lots of opportunities to improve and be better for our customers, our employees and our shareholders. We are putting customers right at the heart of our business.

“Our results last year were mixed. We continued to outperform on Food but we underperformed on Clothing & Home sales. This is not satisfactory and today we are outlining our initial plans to address the issues and to position Marks & Spencer to deliver profitable sales growth.

“We are clear on the actions needed to recover and grow Clothing & Home, which is our top priority; to continue to grow our Food business; and to focus on driving profitability. We are investing to re-establish our price position by sharpening prices and to enhance service by putting more employees into our stores.

“These actions, combined with the difficult trading conditions, will have an adverse effect on profit in the short term. We are, however, confident that our commitment to delivering the right product, price and service will help return Clothing & Home sales to growth.  This, together with continued momentum in Food, will provide us with a solid base from which to build a long term sustainable business.

Robert Swannell, M&S Chairman, said:
“Steve Rowe is today setting out his priorities as our new Chief Executive. His number one priority is to restore our Clothing & Home business to profitable growth, while maintaining the pace of growth and success of our market leading Food business.

“Today we announce a proposed final dividend for 2015/16 of 11.9p resulting in a full year dividend of 18.7p, up 3.9% on last year and broadly in line with underlying profit growth. As part of our ongoing programme of enhanced returns, we are also announcing a special dividend of 4.6p per share (c.£75 million) for the first half of the 2016/17 year. This will be paid to shareholders in July at the same time as the final dividend. We will update on further capital returns at our Interim results in November.”

Business and financial review starts from page 10. 

STRATEGIC UPDATE

Over the last six weeks we have undertaken a forensic review of M&S in order to build an honest picture of our business today.

We have many strengths. 32 million customers choose to shop with us every year because we have a strong brand identity with values rooted in our heritage of quality and innovation, underpinned by our ethical commitments and great partnerships. And the investments we have made in transforming our systems and supply chain, building an inspirational, easy-to-navigate website and taking greater ownership of our product design and sourcing, have helped us to make significant progress. Our employees are loyal and passionate about our brand and are determined for us to succeed.

We have listened to our customers and analysed our results to understand exactly why we have underperformed and identified where we need to take action to improve M&S. We have asked ourselves crucial questions about our business and the answers give us the blueprint to return M&S to growth.

Today, we are setting out the first phase of our strategic plan to recover and grow Clothing & Home and continue to grow Food. We will also be reviewing our cost base with the objective of delivering the first benefits this year. There are a number of other strategic questions which need further consideration, including those relating to our International business, our UK store estate and our organisation, and we will update on these in the autumn.

CUSTOMER & BRAND
We are operating in difficult and challenging times – consumer confidence has dipped, the clothing market is flat, online sales have slowed and there’s deflation in the food market. Our customers are changing too as they become increasingly style and health conscious, shop around and expect more.

Analysing the shopping habits and behaviours of the 32 million customers who shop with us has shown that they carry a deep rooted affection for M&S but, for some, M&S is no longer their first choice.  We have been listening to them to understand why and we have heard some common themes. This insight forms the basis of our plans for the business. We believe that M&S is a special brand and we are committed to making every moment special for our customers.

CLOTHING & HOME 
Our Clothing & Home sales performance has been unsatisfactory for a number of years and today we set out the actions we are taking to recover and grow this important part of our business.

Style Authority
We will re-establish our style authority by focusing on wearable, contemporary style and unbeatable wardrobe essentials.

Product is key to this. Our customers look to M&S not for fashion trends but for accessible products they can wear with confidence. This will be complemented by a refocus on stylish everyday essentials, which we will continually refresh to ensure they are current and competitive, and underpinned by standout M&S innovation.

Quality will remain central to our thinking. Whether buying t-shirts or dresses; socks or suits; vests or school uniform, our customers will recognise that M&S has returned to being famous for unrivalled quality delivered through fabric, fit and finish.

Price position 
We will restore our price position by investing in everyday price and reducing the number of promotions and sales. Lowering prices and moving our price architecture towards ‘Good’ will make us more competitive, particularly on opening price points

We have been too reliant on promotions and sales which has eroded our value credentials. We will significantly reduce promotions and have fewer but better clearance sales in order to rebuild trust in our pricing stance. We will be more targeted in our promotions, leveraging data from our Sparks card customers, and offer fewer channel-specific promotions.

Experience
We will enhance our customer experience across all channels by delivering clearer ranges and real choice in order to make their purchasing decisions simpler and quicker.

Our customers tell us that product duplication makes shopping with M&S confusing and that navigating through our sub-brands to find what they are looking for requires effort. We also fail to deliver on availability meaning that customers can’t always find the products they want.

We will address this by reducing the number of products we sell in our Autumn/Winter ranges, stripping out duplication and buying with greater depth and authority so that we have a strong offer in all our stores regardless of their size.

We will make our stores easier to shop by reducing the level of co-ordination and help customers by inspiring them with selective and impactful outfit merchandising which will give us more flexibility to trade the seasons and trends.

Underpinning all of this will be an investment in service. Our employees are the lifeblood of M&S and they can be the difference in converting footfall into customers. We will improve standards and offer better service by investing in more employees in our stores and improving our instore facilities. Some basic changes to the environment, coupled with great service, can turn a shopping trip into an experience.

We will also continue to develop and improve our digital channels so that we stay up-to-date and relevant and can respond intuitively online and on mobile.

In summary, recovering our Clothing & Home business won’t happen overnight. It will take time for customers to notice the improvements we are making and change their shopping behaviour, but we are confident that our commitment to delivering the right product, price and service will help return Clothing & Home sales to growth.

FOOD 
We have a strong Food business that is delivering results. We have consistently outperformed the market despite fierce competition and high deflation. We believe that our core strategy on Food is clear and that our focus on quality, innovation and choice is right and will continue to deliver sustainable, profitable growth.

We are delighting our customers in Food where the M&S brand stands for authority on quality and newness.  They come to us for innovation, great taste and convenience and trust us to act with integrity. But there is more that we can do to build on our product strengths, maintain a competitive price position and improve convenience.

Quality, Innovation and Choice
M&S takes product development very seriously, employing the best Food specialists from all corners of the culinary world. As a major own-brand retailer we also have world-leading supplier partnerships which gives us a unique and unrivalled product position. As a result, our customers tell us that M&S Food products are second-to-none in terms of quality, freshness and taste.

We believe that we can build on this in a number of areas for example, healthy eating, which is consistently cited as one of our customers’ key concerns. It means much more than diet ranges and meals; our customers want to eat healthily which plays right to our strengths on fresh produce, meat, fish and convenient recipe dishes.

M&S plays an important role in inspiring customers every day and they want us to help inspire them with recipes and ideas, and wow them with events. So from Wednesday night suppers to Christmas celebrations we will put their needs at the centre of our product innovation.

Our customers also want real choice and we will provide this by carefully tailoring our ranges to the location of the store and the mission of the shopper. This will enable us to stock more of our new innovative products in smaller stores, as well as help manage cost of waste.

Value Credentials 
We will continue to invest in price to stay competitive. The food market continues to be deflationary and we will make sure that we offer great value.

We believe we can do this while maintaining our gross margin through ongoing supply chain efficiency programmes that are already delivering improvements with much more to play for. We will continue to reduce the level of promotions, and focus instead on more personalised offers for customers using our Sparks card.

Convenience 
Convenience is essential for our customers when they are increasingly time-poor and need convenient solutions and easy access. Forty percent of all food consumed in the UK is eaten out of the home and convenience is the only segment of food retail predicted to grow over the next few years. This presents us with a great opportunity to respond with conveniently prepared products in convenient stores.

This is why we are accelerating our Simply Food opening programme. The stores that we have opened this year are already delivering ahead of expectations and we believe there is an opportunity to add even more space. In addition to the 250 new Simply Food stores already due to open by March 2017,  we are announcing today that we are extending our opening programme by c.100 stores per year in 2017/18 and 2018/19, making our food offer accessible to even more customers.

In summary, we are going to continue to grow our Food business through delivering quality, innovative products to our customers from great stores in convenient locations.

PAY AND PENSIONS UPDATE
We have used the introduction of the UK National Living Wage as an opportunity to review how we reward our people to ensure we attract and retain the best talent and continue to provide great service for our customers.  We have announced today proposals for a fairer, simpler and more consistent approach to pay and pensions.

We are proposing a significant base rate increase for Qualified Customer Assistants to £8.50 per hour outside London and £9.65 in Greater London, as well as pay rises for Section Coordinators and Section Managers, with effect from April 2017. We are also proposing to simplify our approach to premium payments

In addition, we are proposing to close our UK defined benefit (DB) pension scheme for future service accrual (it has been closed to new members since 2002) and enrol current defined benefit members in our defined contribution savings plan from April 2017.

We have started a period of consultation with our people on both of these proposals.

We do not expect these changes to have a significant impact on underlying costs in this or next year. However, there will be a non-underlying charge in the current financial year in the range of c.£100m to £150m. This non-underlying charge is largely driven by the DB pension changes because when current active members become deferred members, the annual increase in their pensionable salary is linked to CPI as opposed to being capped at 1%.

OUTLOOK AND GUIDANCE FOR FINANCIAL YEAR 2016/17
Market conditions continue to be challenging and we are managing our business accordingly

We are confident that the actions we are taking to address the Clothing & Home sales performance will deliver results, however it will take time for our customers to notice the improvements and change their shopping behaviour. Given current market conditions, and our decision to invest in price and reduce promotional activity, in order to give our customers everyday better value, we expect to see a similar sales trend to 2015/16.

We will continue to realise buying margin gains in Clothing & Home from ongoing sourcing initiatives. However, as previously guided, currency is a headwind of c.70bps this year.  We expect this, combined with our decision to step up the level of investment in price, to deliver an increase of c.50-100bps in the Clothing & Home gross margin.

In Food, we expect the roll out of our standalone Food stores to continue to drive sales growth, with space forecast to grow by c.5% in the year ahead.

Given ongoing competitive pressure in the Food market, we expect gross margin to remain level on last year, as we continue to re-invest operational efficiencies into price, quality and innovation.

Tight control of costs remains a priority and we will continue to focus on driving efficiencies. Operating costs are expected to increase by c.3.5%. We will invest in store staffing to give our customers great service. In addition, we are facing higher costs as a result of new space and increased depreciation as well as volume growth and inflation.

In our International business, we expect the factors which impacted last year’s profits to persist through this year. We see further pressure from the Euro exchange rate, as well as weak trading conditions in Western Europe. The macro-economic backdrop in most of our franchise markets is not improving, and we will continue to work with our franchise partners to support them through these challenging times.

We are continuing with our focus on cash generation. Capital expenditure is expected to be lower at c.£450m.
The tax rate for the current financial year is expected to be 20%.

Overall, we expect the combination of difficult trading conditions, both in the UK and in our International markets, as well as our decision to invest in price and reduce our promotional activity, to have an adverse impact on profit in the short term. However, we’re confident our actions will provide us with a more solid base from which to build long term sustainable growth

There are many areas of our business that we are still reviewing. In the autumn we will report back on plans for our UK store portfolio, the shape of our International business and our organisation.

We will update on our first quarter sales on 7 July 2016.

download full year results press release PDF

For further information, please contact:
Investor Relations:
Majda Rainer:+44 (0)20 8718 1563
Helen Cox: +44 (0)20 8718 8491

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

Investor & Analyst webcast: Investor and analyst presentation will be held at 10am on 25 May 2016. This presentation can be viewed live on the Marks and Spencer Group plc website on
www.marksandspencer.com/investors

Fixed Income Investor Conference Call:
This will be hosted by Helen Weir, Chief Finance Officer at 2pm on 25 May 2016:
Dial in number: +44 (0)20 3427 1904 Access code: 8600945
A recording of this call will be available until 3 June 2016:
Dial in number: +44 (0)20 3427 0598 Access code: 8600945