26 weeks ended 27 September 2003

FINANCIAL HIGHLIGHTS
BEFORE EXCEPTIONAL ITEMS

• UK Retail sales up 4.3% to £3.3bn
• Group operating profit up 8.6% to £335.4m
• Group profit before tax up 7.4% to £311.5m
• Earnings per share up 7.0% to 9.2 pence per share
• Interim dividend of 4.4 pence per share, up 10%
• Group operating cash flow of £509.4m

Chairman, Luc Vandevelde commented:

"We have delivered earnings growth of 7.0% in the first half, in what has been a challenging trading environment. We have held market share in Clothing, grown market share in Food, and achieved buying efficiency gains. We have also managed the business tightly, controlling underlying costs to support our investment in new initiatives.

In light of this, I am pleased to declare an interim dividend of 4.4 pence per share, an increase of 10% on last year.

Progress has been made with our new initiatives in Food, Money and Home, establishing paths to future growth. We see these as opportunities to meet the needs of our existing customers in new ways and also to attract new customers. Over this half year, we have continued the roll-out of the Simply Food stores and have launched the '& more' loyalty and credit card, which is being well received by our customers. We are also on plan to open our first Marks & Spencer Lifestore next Spring.

As we go into this important trading period, we remain focused on delighting our customers with great products at great value, giving them reasons to keep coming to us and buying more "  

Roger Holmes, Chief Executive said:

" For this half year we achieved a Group operating profit before exceptional items of £335.4m, up 8.6%, and Group profit before tax and exceptional items of £311.5m, up 7.4%. The Group operating cash flow is £509.4m.

We have grown UK Retail operating profits by 20%, enabling us to invest in the growth strategies for our business and, specifically, in the national launch of our new '&more' credit and loyalty card.

In Clothing we delivered modest overall sales growth of 2.5% in a period of limited space expansion, holding market share. We performed well in casualwear, both in women's and men's wear, notably in 'per una', which delivered strong like-for-like sales in its second year. However, knitwear was affected by the hot weather and we have more work to do in women's tailoring. In Lingerie, we achieved a 0.7% gain in market share. We have seen early signs of stabilisation within our Childrenswear business, supported by a pleasing performance in schoolwear.

In Food, overall sales growth was ahead of the market but performance was less strong in the second quarter when we had lower levels of promotional activity than last year, with sales also affected by the hot weather. For the Autumn season, we have increased promotional activity back to normal levels. We continue to make progress on our target of adding 500,000 square feet of new food space, some 150 stores, by March 2006. By the end of September, we had opened 37 Simply Food stores, of which we opened 19 in this half year, and had 29 Food stores, of which we opened one during the same period.

We continue to improve efficiency in the Clothing supply chain and the improvement in the Clothing bought-in margin was ahead of plan. We are also managing our stock better and put 10% less stock into our Summer sale. In Food, we are looking to re-invest the sourcing gains we have made to date.

We remain on track to meet our target of holding underlying operating costs level for the full year, as we continue to drive efficiencies throughout the business. In the second half we will see the cost benefits from increased scale and efficiency as a result of decreasing the number of warehouse operators. We also see an opportunity to advance our supply chain through the use of Radio Frequency Identification technology, which we are currently trialling.

In Money, our retail financial services business, we launched the new '&more' credit and loyalty card in October, following a successful pilot in South Wales. We are only four weeks into the launch and our customers have been pleased with the offer, demonstrating the strength of the relationship that we have with them. Two million customers have already received their cards and the opt-out rate to date is 3%, roughly half the level experienced during the pilot at a similar stage. We are also activating 60,000 cards a day and the penetration of retail sales has reached 18.4% which compares with an average for September of 14.8%.

We continue to make progress on the launch of the new stand alone Home concept store Marks & Spencer Lifestore, opening at the end of February 2004. We also announced during this period that we would be trialling the format in our existing Kingston satellite store in Summer 2004 and opening a new store at Thurrock in 2005.

As we move into one of our most exciting shopping periods, we are well set up to offer our customers a great range of new products for Christmas. Our Christmas gift catalogue includes 50 per cent more products than last year. We have extended our food ordering service, as well as launching a new, all year round party ordering service 'Leave it to us', that includes 235 new products. We will also be introducing our largest range to date of party clothing. "  


OPERATING REVIEW

Group Summary

Retailing

UK Retail

Turnover, including VAT, was up 4.2% on last year, 2.4% on a like-for-like basis. The quarterly sales performance for the period is set out below:

Food inflation during the period was 1.5%.

Total selling space increased by 0.2m sq ft to 12.5m sq ft (General Merchandise 8.9m sq ft and Food 3.6m sq ft). The weighted average footage for the period rose by 1.1%.

Total Clothing sales for the period were up 2.5% on last year. The continuation of the hot summer weather into September adversely affected Clothing sales during that month, but overall market share was held for the half year.

Home sales in the first half were impacted by lower sales of furniture which suffered in a weaker market from strong competition, driven increasingly by promotional activity. The remaining areas of Home have increased sales in the period.

In Food, we out-performed the market in the first half of the year, but our performance was not as strong in the second quarter when we had less promotional activity. Like-for-like comparisons also suffered from an exceptionally hot summer and strong comparatives from the second quarter of last year. The focus on extending the reach of our Food offer has continued during the first half of this year. We have opened a total of 20 Food stores during the first half, of which 19 are Simply Food stores, four in partnership with Compass. We plan to open a further 35 Food stores by the end of the year. We remain on plan to open 500,000 square feet of new food space, some 150 stores, by March 2006.

We are continuing to realise gains in our Clothing bought-in margin as a result of work on our supply chain and actions taken in previous years to increase overseas production and consolidate our supply base. For the first half of this year this delivered an improvement in the bought-in margin which was ahead of plan. As a result of better stock management, approximately 10% less stock went into the Summer sale. Consequently, total markdowns for the period were marginally below the same period last year. Overall, the Clothing gross margin was approximately 1.6 percentage points ahead of the same period last year. We expect the bought-in margin in the second half to be 1 percentage point ahead of the comparative period last year, and remain on track to deliver a 3 percentage point improvement to the Clothing bought-in margin by 2005/06.

Improvements have been made in the level of food waste, both in absolute terms and as a per cent to sales, against a period of relatively high waste last year. Combined with lower costs of promotional activity and a reduction in bought-in costs driven by volume growth, this has resulted in a 0.9 percentage point improvement in the Food gross margin. In the second half of the year, we plan to re-invest the bought-in margin gains back into product quality and prices and expect the gross margin in the second half to be in line with last year.

Distribution costs, which are included in cost of sales, increased by 4.6% during the first half of the year. The changes to the general merchandise logistics operation which were announced at the end of last year were completed during August. Ten distribution centres are now operated by two contractors, Exel and Christian Salvesen. These new arrangements will generate ongoing annual savings of approximately £20m, of which £11m are expected to be realised in the second half of this year. Alongside the change of contractors, progress has been made in acquiring the assets used in the distribution network. To date we have purchased six warehouses, in addition to one we already owned, and agreed leases on two more, incurring capital expenditure of approximately £76.5m, of which £67.7m arose in the first half. Negotiations on the remaining warehouse are expected to be completed in the second half of the year.

We have now modernised 268 stores, representing approximately 94% of UK Retail selling space. A further nine stores will be trading in the new format prior to Christmas.

UK Retail operating costs of £909m, excluding exceptional charges, increased by 3.7% over the same period last year:

• employee costs increased by 3.2% to £461m;
• property, repair and renewal costs of £170m decreased by 1.7%
• depreciation was £113m, an increase of 3.3% and
• other operating costs of £166m increased by 12.2%. This increase was largely due to IT and marketing costs associated with growth initiatives such as the loyalty element of the '&more' card, Home and Food, together with costs incurred to support efficiency initiatives including a review of the global supply chain.

Including distribution costs, operating expenses have increased by 3.9% on the same period last year.

During the period, £3.7m of revenue costs were incurred in connection with the relocation of the corporate head office and have been charged as exceptional operating costs.

UK Retail capital expenditure for the period was £249.5m.

UK Retail capital expenditure for the full year is now expected to be in the region of £520m (£540m for the Group as a whole). The increase on last year is attributable to the investment in the Simply Food roll-out and the Home business, together with the acquisition of the UK general merchandise warehouses owned by contractors and the head office move to Paddington Basin.

International Retail

Turnover for the period in the Marks & Spencer branded businesses (Republic of Ireland, franchises and Hong Kong) increased by 6.5% (2.5% at constant exchange rates).

Operating profit for the Marks & Spencer branded businesses increased by 22.4% to £18.0m. The stores in the Republic of Ireland have performed ahead of last year and the performance of the first Simply Food store in Ireland has been encouraging. The franchise business and our stores in Hong Kong suffered in the first quarter from the effects of SARS and the war in Iraq. However, since the end of the war and the removal of Hong Kong from the World Health Organisation's list of affected areas, trading conditions have improved. For the first half of the year overall, profits from the franchise business were marginally ahead of last year, whereas profits from Hong Kong were below last year's level.

The performance of Kings Super Markets in the first half of this year has been affected by local competition and uncertainty surrounding the sale, negotiations for which were terminated in August. Since then we have been working with local management to develop the business and drive financial performance, and we have seen some improvement in performance. In addition, operating profits for the first half have been adversely impacted by a further charge of £1.5m in connection with two stores closed at the beginning of this financial year.

Financial Services

The focus in the first half of this year has been on the launch of a combined credit and loyalty card and the re-branding of the retail financial services business as Marks & Spencer Money.

In September we mailed selected Chargecard customers with details of our new '&more' credit card and we will have completed this process by mid November. Early indications are that our new proposition has been well received. Of the 2.6 million customers mailed, to date only 3% have opted out of the '&more' card and retained their Chargecard. This is roughly half the level experienced at a similar stage during the South Wales pilot.

To date, approximately 2 million customers have received their new cards and the volume of activation calls is increasing each day, having recently exceeded 60,000 per day. This is on target with our original expectations and has not been impacted by the recent minor change in our launch strategy, agreed with the OFT.

Three weeks into the migration process the penetration of retail sales on a Marks & Spencer card had reached 18.4% compared to an average of 14.8% in September.

Daily transaction volumes are also increasing dramatically and have already reached more than twice the level they stood at before the migration started. Operational systems, which were totally redesigned for the new business model, have performed well with no significant customer service issues experienced to date.

The activities undertaken to support the '&more' card and loyalty programme have had an impact on the operating profit for Financial Services which has decreased by £20.0m to £30.5m. Within this, underlying operating profits (excluding the profit impact associated with the launch of the '&more' card) for Marks & Spencer Money decreased by 5.6% to £53.9m. This reduction reflects performance on our Credit products in line with last year but a reduction in operating income achieved from our Savings & Protection products. In contrast to the investment performance in the same period last year, the results of the captive insurance company benefited from favourable investment returns due to increases in the underlying markets.

The proportion of retail sales made using the Chargecard reduced during the period to September with a consequential effect on balances. However an increase in the proportion of balances bearing interest together with an improvement in margin resulted in a 5.1% increase in operating income.

In personal lending (incorporating our Personal Loans and Personal Reserve products) competitive forces remain strong and outstanding balances are down 8.2% year-on-year. However, incremental interest bearing personal loan advances for the first six months are 3.1% ahead of last year. The increase in sales has been particularly strong from our internet distribution channel.

Total bad debt charges for all credit products for the first six months are £5.9m lower than last year on a like-for-like basis.

In other areas, the amount of new retail unit trust investment has increased by 18.8% with particularly strong performance from our High Income Fund which has remained a top-ranking fund in its sector over the period. Business volumes within our Life & Pensions business remained fairly stable however profit was impacted by capital losses on rising bond yields. The number of new general insurance policies sold increased significantly compared to last year following the launch of four new products. Travel insurance in particular has exceeded expectations and we sold 50,000 policies in the first half of the year.

Capital structure

In order to support the growth of Marks & Spencer Money, additional funding arrangements have been put in place. During August, a three year Syndicated Loan Facility was signed which will be used to provide surety and flexibility of funding and provide further back-up for the Commercial Paper programme in the second half of the year.

During the period, 5,100,000 ordinary shares (representing 0.2% of the issued share capital) were purchased in the market at a total cost of £15.5m and a weighted average price of 305p.

On 25 September 2003, 28,398,331 B shares were redeemed at par at a total cost of £19.9m. Following this redemption, 140,421,470 B shares remain in issue. The next opportunity for redemption will be in March 2004.

Net interest expense

Net interest expense was £23.9m compared to £18.8m for the same period last year. The average rate of interest on borrowings during the period was 5.2% and interest cover was 14.6.

Taxation

The tax charge reflects an estimated effective tax rate for the full year of 32.8% before exceptional charges, compared to 28.6% for the last full year. Last year's charge benefited from prior year contributions to European subsidiary closure costs being accepted as tax deductible in the UK.

Earnings per share

Adjusted earnings per share, which excludes the effect of exceptional items, has increased by 7.0% to 9.2 pence per share.

Cash flow

The Group generated an operating cash inflow for the period of £509.4m (last half year £422.5m). Within this, the cash inflow from retailing activities was £417.9m (last half year £283.9m) benefitting from an improvement in working capital this year compared to the same period last year. The cash inflow from financial services activities was £91.5m (last half year £138.6m). A smaller decrease this year in customer balances of £13.3m, (last half year a decrease of £57.3m), is primarily responsible for the reduction in cash inflow from financial services activities.

During the period, the Group acquired tangible fixed assets totalling £257.5m (last half year £165.6m). After taking into account the timing of payments, the cash outflow for capital expenditure was £198.8m (last year £129.9m). During the period, the Group received £116.1m from the sale of the Fenchurch Street property. Acquisitions and disposals includes an inflow of £78.0m, being deferred proceeds following the sale of stores in France to Galeries Lafayette.

At the end of the period, net debt was £1.6bn, a decrease of £213m, giving rise to retail gearing of 28.2%, with total gearing at 43.8%.

Pensions

At the end of last year, we reported that the FRS 17 valuation of the Group's UK defined benefit pension scheme showed a deficit of £1.2bn (£0.9bn after deferred tax). The actuary has updated this FRS 17 valuation of the scheme as at 27 September 2003. The results of this update show that the deficit has decreased to £1.1bn (£0.8bn after deferred tax).

We announced in May that we would bring forward the next formal actuarial valuation of the defined benefit pension scheme, which was planned for March 2004, to allow us to make an earlier informed decision as to the contribution level and asset mix going forward. This also recognised the importance of pension provision to our employees and the need to continue to review the long-term funding strategy for the scheme. This review is underway and we expect to reach a conclusion on the contribution level and asset mix during the second half of the year. At this stage, we recognise that this is likely to result in an increased level of funding but are not yet in a position to quantify this.

Updated guidance

• We are targeting a 1 percentage point improvement in the Clothing bought-in margin for the second half*, but our guidance of 3 percentage points over three years is unchanged.
• In the second half of the year, the Food gross margin will be broadly level with the same period last year. *
• UK operating costs, including distribution, are expected to increase by around 3% for the full year, due to the investment in growth initiatives, with underlying costs held broadly level. This is before taking account of the likely impact that the actuarial review of the Group's UK defined benefit pension will have on the amount charged for pensions.
• The Head Office move to Paddington Basin will incur some £25m to £30m of revenue costs which will be treated as an exceptional charge, of which approximately £20m will be incurred this year. *
• In Money, the profit impact of the national roll-out remains approximately £60m, a net increase of £35m on the year.
• This financial year incorporates a 53rd week, which is expected to add between £30m and £40m to full-year profit before tax.
• Group capital expenditure will be in the region of £540m. *
• The current estimate of the pre-exceptional effective tax rate is 32.8%. *

* New or updated guidance.

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 such forward-looking statements are subject to various risks and uncertainties, including 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.

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