HIGHLIGHTS
GROUP
- Underlying Group profit before tax* up 6.0% to £805m
(£763.2m for 52 weeks)
- Adjusted earnings per share* up 6.0% to 24.7 pence per share
- Final dividend of 7.1 pence per share, up 9.2%. Full year dividend 11.5p, up 9.5%
- Group operating cash flow of £1,066.5m, before pension contribution of £400m
UK RETAIL
- Sales up 3.8% to £7.3bn (up 1.9% to £7.2bn on a 52 week basis)
- Underlying operating profit* up 19.3% to £768.0m (up 13.1% on 52 week basis)
MONEY
- 2.1 million '&more' credit card accounts, with 2.7 million cardholders
*excluding the effect of exceptional items
|
|
| |
53 weeks2004£m |
52 weeks2004£m |
52 weeks 2003 Restated* £m |
53 weeks % inc/ (dec) |
52 weeks % inc/ (dec) |
| Turnover |
8,301.5 |
8,154.8 |
8,019.1 |
3.5 |
1.7 |
| Pre-exceptional results |
| Operating profit |
866.0 |
822.9 |
773.0 |
12.0 |
6.5 |
| Profit before tax |
805.0 |
763.2 |
759.5 |
6.0 |
0.5 |
| Earnings per share |
24.7p |
23.4p |
23.3p |
6.0 |
0.4 |
| Post-exceptional results |
| Operating profit |
823.9 |
780.8 |
729.1 |
13.0 |
7.1 |
| Profit before tax |
781.6 |
739.8 |
715.7 |
9.2 |
3.4 |
| Earnings per share |
24.2p |
22.9p |
21.8p |
11.0 |
5.0 |
** Restated to reflect the adoption of FRS 17 'Retirement Benefits' and FRS 5 Application Note G 'Revenue Recognition', further details of which are provided in Note 1 to the attached preliminary financial statements.
Chairman, Luc Vandevelde commented:
We have delivered financial performance which I would describe as 'solid' but clearly we are not satisfied with our sales progress. The market share gains that we had hoped to achieve were not delivered. However, we did increase our share in Menswear, Lingerie, per una and women's casualwear and held share in Food. In addition, we are continuing to focus on improving choice and value, the appeal of our stores and the efficiencies of our operations.
This year we have seen good progress towards widening the Marks & Spencer offering, to reach out to more customers and create new sources of growth for the Group with the opening of the first Marks & Spencer Lifestore, development of Financial Services and the continued roll-out of Simply Food.
In view of our financial performance over the last year, I am pleased to propose a final dividend per share of 7.1 pence, up 9.2% compared to last year, giving a full year dividend of 11.5 pence per share.
Roger Holmes, Chief Executive said:
Whilst we established new areas of growth in Money and Home this year, the initial surge in the recovery of our Clothing and Food business faltered. Our Clothing share declined by 0.2% reflecting under-performance in Womenswear, particularly knitwear, and Childrenswear. We held market share in Food last year benefiting from the roll-out of our Food only stores, although like-for-like progress declined in the second half. We are addressing these issues by taking action covering our products, supply chain, stores and ways of working.
In Clothing we have strengthened the team, particularly in Womenswear, to deliver our key priorities of improved ranges, choice and value. This includes the major expansion of Limited Collection, a new approach to our 'smartwear' offer, which will arrive in 66 stores from September 2004. We are delivering greater choice to customers in 90 stores, building on the success of initial trials. And we will make Womenswear sales floors easier to shop, to give the same clarity that we have achieved in Menswear.
Following the significant shift of our production overseas we are now focusing on the second phase of our supply chain development. This will include further rationalisation, an increase in direct sourcing and the elimination of duplication in our logistics network. We will continue to re-invest part of our sourcing gains in lower prices, particularly in the entry price points to each range.
In Food we will develop our appeal and reduce reasons for customers to visit elsewhere by delivering our existing plans for Simply Food and continue to renew at least 30% of our food range during the year, particularly for special events. We will also highlight the unique qualities of our offer through more effective communication and a clearer promotional programme.
In stores our immediate focus will be to redevelop our existing city centre and high street stores and we will be trialling new concepts for these in the coming year.
We have plenty of opportunity to make the business more efficient. We will be accelerating our Retail Change Programme in stores and reducing Head Office costs.
We are committed to continue to extend the accessibility of our Simply Food offer and will communicate our plans later this year. We will also extend the reach of our '&more' card and open a further Marks & Spencer Lifestore in Kingston, followed by one in Thurrock. In addition, since the year end, we have agreed heads of terms on a 192,000 square foot site on a 35 year lease at the Broadmead Shopping Centre, Bristol.
In summary, we still have a lot to do but I am confident that we can succeed. I am supported by a talented management team and committed colleagues from across the business. We share a passion to see Marks & Spencer thrive and believe that our plans can put the business on a more secure footing.
OPERATING REVIEW
Group Summary
Turnover (excl. VAT and sales taxes)
|
|
|
53 weeks 2004 £m |
52 weeks 2004 £m |
52 weeks 2003 Restated £m |
53 weeks % inc/ (dec) |
52 weeks % inc/ (dec) |
| Retailing |
| UK Retail |
7,293.7 |
7,159.8 |
7,027.1 |
3.8 |
1.9 |
| International Retail |
677.8 |
665.0 |
662.1 |
2.4 |
0.4 |
| |
7,971.5 |
7,824.8 |
7,689.2 |
3.7 |
1.8 |
| Financial Services
| 330.0 |
330.0 |
329.9 |
- |
- |
| |
8,301.5 |
8,154.8 |
8,019.1 |
3.5 |
1.7 |
Operating profit before exceptional items
|
|
|
53 weeks 2004 £m |
52 weeks 2004 £m |
52 weeks 2003 Restated £m |
53 weeks % inc/ (dec) |
52 weeks % inc/ (dec) |
| Retailing |
| UK Retail |
768.0 |
728.1 |
643.8 |
19.3 |
13.1 |
| International Retail |
47.4 |
44.2 |
42.8 |
10.7 |
3.3 |
| |
815.4 |
772.3 |
686.6 |
18.8 |
12.5 |
| Financial Services |
50.6 |
50.6 |
86.4 |
(41.4) |
(41.4) |
| |
866.0 |
822.9 |
773.0 |
12.0 |
6.5 |
| |
|
|
|
|
|
| Profit before tax and exceptional items |
805.0 |
763.2 |
759.5 |
6.0 |
0.5 |
| |
|
|
|
|
|
Earnings per share
|
24.2p |
22.9p |
21.8p |
11.0 |
5.0 |
| Adjusted earnings per share |
24.7p |
23.4p |
23.3p |
6.0 |
0.4 |
The results have been prepared using the same accounting policies as stated in last year's annual report with the exception of those policies that have been amended by the adoption of FRS 17 'Retirement Benefits' and FRS 5 Application Note G 'Revenue Recognition'. Where relevant, comparatives have been restated.
The reporting period for this financial year covers the 53 weeks to 3 April 2004, whereas the prior period covers the 52 weeks to 29 March 2003. For comparative purposes, the commentary that follows, in so far as it relates to the profit and loss account, is provided on a 52 week basis (to 27 March 2004 and 29 March 2003).
UK Retail
Turnover, including VAT, was up 1.8% on last year, down 0.4% on a like-for-like basis. The quarterly and half yearly sales performance for the 52 week period is set out below:
| Actual increase / (decrease) on last year |
Q1* % |
Q2* % |
H1* % |
Q3
% |
Q4
% |
H2
% |
FY
% |
| Clothing |
3.9 |
1.3 |
2.8 |
(3.3) |
(2.5) |
(3.1) |
(0.5) |
| Home |
1.6 |
(1.7) |
0.2 |
(5.1) |
(13.7) |
(7.6) |
(4.6) |
| General Merchandise |
3.7 |
1.0 |
2.6 |
(3.6) |
(3.9) |
(3.7) |
(1.0) |
| Food |
8.1 |
5.4 |
7.0 |
4.7 |
4.3 |
4.6 |
5.7 |
| Total |
5.6 |
2.9 |
4.4 |
(0.4) |
(0.1) |
(0.3) |
1.8 |
| |
| Like-for-like increase / (decrease) on last year |
Q1* % |
Q2* % |
H1* % |
Q3
% |
Q4
% |
H2
% |
FY
% |
| General Merchandise |
3.1 |
0.4 |
2.0 |
(4.5) |
(5.2) |
(4.7) |
(1.8) |
| Food |
5.1 |
1.6 |
3.5 |
0.7 |
(1.4) |
- |
1.6 |
| Total |
4.0 |
0.9 |
2.6 |
(2.5) |
(3.4) |
(2.8) |
(0.4) |
* Restated to reflect the adoption of FRS 5 Application Note G.
Total selling space increased by 433k sq ft to 12,782k sq ft (General Merchandise 9.1m sq ft and Food 3.7m sq ft). The increase in selling space arose as follows:
| Footage increase / (decrease) |
Sq. ft '000 |
| Simply Food stores |
120 |
| Food stores |
85 |
| Lifestore |
77 |
| Outlet stores |
19 |
| Other new stores (Castlepoint and Speke) |
106 |
| Extensions in existing stores |
73 |
| Footage closures |
(47) |
| Total |
433 |
The weighted average footage for the period rose by 1.8 % (General Merchandise 0.8% and Food 4.2%).
The performance of Clothing for the year as a whole has been disappointing, with total Clothing sales down 0.5% on last year. Womenswear, in particular, has performed below expectations with a strong performance from per una and casualwear, held back by the performance in other areas. Elsewhere, Lingerie and Menswear performed ahead of last year until the last quarter when sales were marginally lower. Childrenswear has again been weak. Clothing market share for the year as a whole declined by 0.2 percentage points to 11.0%.
In Home, we are repositioning our offer and broadening our appeal to more customers. A pilot Marks & Spencer Lifestore was opened in Gateshead in February and new product introduced down the chain. Customers responded well to the Lifestore environment and were excited by the concept, but the product in some areas has been too contemporary and sales were down on last year. A second Marks & Spencer Lifestore is due to open in Kingston in the summer followed by one in Thurrock, taking forward the learnings in environment, product appeal and price.
In Food, we have maintained our market share over the year as a whole. We out-performed the market in the first half of the year, but our like-for-like performance was not as strong in the second half in a competitive sector. We continue to benefit from additional footage as we extend the reach of the Food offer. We opened 49 Food stores during the year, of which 40 are Simply Food stores, 10 in partnership with Compass. We remain on plan to open 500,000 square feet of new food space by March 2006. Like-for-like food inflation for the year was c.1%.
We are continuing to realise gains in our Clothing bought-in margin as a result of work on the supply chain and actions taken in previous years to increase overseas production and consolidate the supply base. For the year as a whole this delivered an improvement in the bought-in margin which was ahead of plan, helped by a weak dollar. Total markdown costs were marginally ahead of last year, offset by slightly lower shrinkage. Overall, the full year Clothing gross margin was 1.5 percentage points ahead of last year. We expect the bought-in margin in 2004/05 to be 0.75 percentage points ahead of this year, and remain on track to deliver a 3 percentage point improvement to the Clothing bought-in margin in the three years to 2005/06.
The Food gross margin for the full year was 0.5 percentage points ahead of the same period last year. The improvements seen in Food waste in the first half were negated in the second half as a result of the weaker sales performance and, for the year as a whole, waste as a per cent to sales was in line with last year.
Logistics costs of £310m, which are included in cost of sales, were broadly in line with the same period last year. The changes to the general merchandise logistics operation, which were announced at the end of last year, were completed during the first half of the year. 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 £11.5m have been realised in the second half of the year. Alongside the change of contractors, progress was made in acquiring the assets used in the distribution network. We have purchased six warehouses, in addition to one we already owned, and agreed leases on three more, incurring capital expenditure of £78.1m.
UK Retail operating costs of £1,835m, excluding exceptional charges, increased by 1.2% over last year:
- employee costs decreased by 1.3% to £912.8m; within this, performance bonuses for management and store staff were down £29m on last year;
- property, repair and renewal costs of £323.6m decreased by 3.4%;
- depreciation was £227.3m, an increase of 4.4%; and
- other operating costs of £371.3m increased by 10.7%. This was largely due to costs incurred in improving business efficiency in Retail Change and the supply chain and I.T costs to support the growth initiatives of Simply Food, Home and Loyalty.
Including logistics costs, operating expenses have increased by 1.0% on last year. Underlying UK Retail operating expenses, which exclude the incremental costs of the growth initiatives, were down 1.3%.
During the year, £19.6m of revenue costs were incurred in connection with the relocation of the Head Office and have been charged as exceptional operating costs. This represents a change from previously published guidance of £16m, as a landlord contribution has now been spread over the period to the first rent review in accordance with UITF 28 'Operating Lease Incentives'.
We have also provided £22.5m as an exceptional charge in connection with the Head Office restructuring programme which was announced prior to the year end. This represents the anticipated redundancy costs for 500 people relating to the first phase of the programme. The cost relating to the second phase of the programme will be provided for in 2004/05, again as an exceptional charge, once our plans are further developed. Further guidance will be given in due course.
International Retail
|
At actual exchange rates |
At constant exchange rates |
| |
52
weeks
2004
£m |
52
weeks
2003
Restated
£m |
% inc/
(dec)
|
52
weeks
2004
£m |
52
weeks
2003
Restated
£m |
% inc/
(dec) |
|
|
|
|
|
|
|
| Turnover |
|
|
|
|
|
|
| Marks & Spencer branded businesses |
426.2 |
390.5 |
9.1 |
416.1 |
390.5 |
6.6 |
| Kings Super Markets |
238.8 |
271.6 |
(12.1) |
260.9 |
271.6 |
(3.9) |
| |
665.0 |
662.1 |
0.4 |
677.0 |
662.1 |
2.3 |
| Operating profit |
|
|
|
|
|
|
| Marks & Spencer branded businesses |
41.8 |
34.9 |
19.8 |
40.7 |
34.9 |
16.6 |
| Kings Super Markets |
2.4 |
7.9 |
(69.6) |
2.7 |
7.9 |
(65.8) |
| |
44.2 |
42.8 |
3.3 |
43.4 |
42.8 |
1.4 |
Turnover for the year in the Marks & Spencer branded businesses (Republic of Ireland, franchises and Hong Kong) increased by 9.1% (6.6% at constant exchange rates).
Operating profit for the Marks & Spencer branded businesses increased by 19.8% to £41.8m. In the Republic of Ireland, sales were ahead of last year and the performance of the three Simply Food stores opened during the year 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, following the end of the war and the removal of Hong Kong from the World Health Organisation's list of affected areas, trading conditions improved. More recently, trading conditions in Hong Kong have benefited from an increase in visitors from mainland China following a relaxation of border controls.
Turnover for the year at Kings Super Markets was 3.9% (at constant exchange rates) lower than the comparative period last year. On a like-for-like basis, which excludes the two stores closed at the beginning of the year, turnover was down 1.4%. The performance during the year was affected by local competition, a weak economy and uncertainty surrounding the disposal of the company, negotiations for which were terminated in August. Since then we have brought in new management who have been working to develop the business and drive financial performance, and we have seen an improvement in the second half of the year with turnover down 0.5% on a like-for-like basis (first half down 2.3%).
Financial Services
| Operating profit |
2004
£m |
2003
£m |
% inc/
(dec) |
| Underlying Operating Profit |
89.5 |
97.5
|
(8.2) |
| Credit Card launch impact |
(58.6) |
(25.0) |
134.4 |
| Marks & Spencer Money |
30.9 |
72.5 |
(57.4) |
| Marks & Spencer Insurance |
19.7 |
13.9 |
41.7 |
| Total Financial Services |
50.6 |
86.4 |
(41.4) |
The most significant event for Financial Services this year was the October launch of the '&more' credit and loyalty card within Marks & Spencer Money. The total impact of the launch on Money profit for the year was £58.6m, in line with guidance. Underlying profit was £89.5m and was impacted by the transfer of £300m of balances to the new '&more' card and the costs of running the enlarged cards business. Profit within Marks & Spencer Insurance, our Guernsey captive, increased by £5.8m to £19.7m, due to a reversal in the performance of underlying investments year-on-year and a release of insurance reserves of £4.2m.
In Personal Loans, our focus was on maintaining net interest margin in an increasingly competitive market place. Also, during the critical period around the launch of the credit card, promotional activity was curtailed to avoid customer confusion. As a direct consequence new business reduced by 15%. However, our earlier decision to concentrate on Marks & Spencer customers, who are lower risk than the industry average, has meant that credit losses were substantially reduced, increasing net income from Personal Loans by 14% year-on-year.
By the end of the year the total amount of lending to customers had risen to £2.5bn, exceeding the previous peak of £2.3bn in 2001. Within this total, balances on card accounts had reached £1.2bn, almost twice the level at the end of last year.
The bad debt charge as a percentage of total customer balances was 2.4% for the year which is similar to the rate charged last year. Within the new credit card portfolio, levels of delinquency as well as bad debt and fraud losses to date were negligible. Using experience based on the Chargecard, a provision of just under 1% of balances has been established. As expected, the operating cost ratio climbed higher this year to reach a peak of 6.7% of average balances. This ratio will now reduce as the rate of investment in new capability declines.
Within Savings and Protection, overall trading profit was down £1.3m, driven by a fall of £3.5m in Life income. The launch in February of our new Mini Cash ISA product went well with new deposits of £325m by the end of the year. Other Savings and Protection products performed well, with an 18% increase to £104m in gross unit trust retail investment, and a three-fold increase in the number of travel insurance polices sold. Initial results from the motor insurance pilot were encouraging and the product was launched nationally in April 2004. A series of new product and regional distribution trials are also planned which if successful will be rolled out during the year ahead.
Card and Loyalty Roll-out
This year saw the successful delivery of the largest project ever undertaken by Marks & Spencer Money, with the launch of the '&more' credit and loyalty card, which was delivered on time and within budget. Approximately 2.6 million Chargecard customers were given the option of converting to the '&more' credit card and of these, 1.7 million chose to accept the offer and activate the card. Those choosing not to activate the credit card have been retained as Chargecard customers. In addition, 380,000 new accounts were opened which was ahead of our range of expectations. According to recent Mori data, Marks & Spencer was ranked equal first in terms of new accounts issued across the UK credit card industry for the first quarter of 2004. At the end of March 2004, there were 2.1 million customers with an '&more' credit card account. This makes us a top-ten credit card operator from a standing start.
Within six months of launch, the average balance per account had reached £448, with the percentage of balances bearing interest standing at 77% which is in line with the industry average. Initial data on the newly acquired customers, shows that they spend more in store than converted Chargecard customers. Early results from the loyalty programme, although still in its infancy, indicate that customers are not only spending their loyalty vouchers but also increasing their spend.
Net interest expense
Net interest expense was £45.8m (£44.5m on a 52 week basis) compared to £40.5m for last year. The average rate of interest on borrowings during the period was 5.3%.
Taxation
The tax charge reflects an effective tax rate for the full year of 30.1% before exceptional charges, compared to 28.7% last year. The rate last year is lower due to the favourable resolution of a number of open prior year issues with the Inland Revenue. In particular, the Revenue accepted that contributions to European subsidiary closure costs were tax deductible in the UK. This one off benefit resulted in a favourable adjustment which was reflected in the effective tax rate for last year.
Earnings per share
Adjusted earnings per share, which excludes the effect of exceptional items, has increased by 6% to 24.7 pence per share (23.4 pence per share on a 52 week basis, an increase of 0.4%).
Dividend
A final dividend of 7.1 pence (last year 6.5 pence) is proposed, making the total dividend for the year 11.5 pence (last year 10.5 pence), an increase of 9.5%.
Capital expenditure
Group capital additions for the year were £434m compared to £311m last year and our previously published guidance of £540m. The major components of the additions are analysed below.
| |
2004 |
2003 |
| Capital expenditure |
£m |
£m |
| |
|
|
| New stores and extensions |
118
|
81 |
| Head office relocation |
40 |
- |
| Store renewal, refurbishment and new selling initiatives |
44 |
96 |
| Refrigeration equipment |
39 |
45 |
| IT equipment |
40 |
25 |
| Logistics |
95 |
17 |
| Other |
32 |
39 |
| UK Retail capital expenditure |
408 |
303 |
| International Retail |
20 |
6 |
| Money |
6 |
2 |
| Total Group capital expenditure |
434 |
311 |
The increase in capital expenditure over last year reflects the acquisition of warehouses as part of the restructuring of the general merchandise logistics operation, together with expenditure relating to the pending relocation of Head Office. The decrease compared to previously published guidance is due to the timing of planned new developments and refurbishment of existing stores. Group capital expenditure for 2004/05 is expected to be in the region of £400m.
Balance sheet
Fixed assets have increased by £62.5m to £3,497.6m. Included within this are properties owned by the Group with a net book value of £2.2bn, of which £1.8bn was unencumbered. As a result of the pending relocation of Head Office, we have reviewed the carrying value of Michael House. This review indicated that there was a shortfall in estimated recoverable value compared to book value as a result of current market conditions. Accordingly, we have written down the carrying value and taken a £20m charge through the statement of total recognised gains and losses, as the property had previously been revalued.
Stock at the end of the year was £398.0m, an increase of £36.2m on the balance at the end of last year. Approximately £10m of the increase is due to the move towards direct sourcing of merchandise which results in the Group taking ownership of the stock earlier in the supply chain. Food stock has also increased by £10m due to the increase in footage and the proximity of Easter to the year end. The balance of the increase relates to Clothing and is a consequence of the weak sales performance in the fourth quarter. Action has been taken to clear this stock in the early part of the new financial year, with an appropriate provision made in these results.
Customer advances (net of provisions for bad debts) have increased by £436.5m since last year due to the launch of the '&more' credit and loyalty card in October.
Other debtors have decreased by £98.2m to £298.5m. This reduction is driven by the receipt, shortly after last year end, of deferred proceeds from the sale of our business in France and by a decrease in the level of prepaid pension contributions for the UK defined benefit pension scheme.
Cash and investments at the end of the year were £720.6m, an increase of £248.7m on the balance at the end of last year. This increase is largely driven by the receipt of cash ISA deposits shortly before the year end.
Creditors due within and after more than one year have increased in aggregate by £883.4m. This increase is largely due to an increase in gross borrowings of £413.9m, including £400m raised to fund an injection into the UK defined benefit pension scheme, and a £360.7m increase in customer deposits mainly driven by the successful launch of the Mini Cash ISA.
Provisions for liabilities and charges have decreased by £136.8m as we incurred further costs in connection with the closure of the European operations and the costs associated with rationalising the General Merchandise logistics operation which were provided for last year. In addition, there has been a significant decrease in the deferred tax liability as the £400m contribution to the UK pension scheme has resulted in a related deferred tax asset of £90m, representing the deductions from current tax that we expect to receive in future periods.
Capital structure
Additional funding arrangements have been put in place during the year in order to support the growth of Marks & Spencer Money. In August 2003, a three year Syndicated Loan Facility was signed which is used to provide surety and flexibility of funding and provide further back-up for the existing Commercial Paper programme.
In March 2004, we raised £400m through a 10 year Public Bond Issue under the existing Medium Term Note programme, at a fixed rate of 5.625%, in order to fund the contribution into the UK defined benefit pension scheme.
During the financial year 18,490,000 ordinary shares (representing 0.8% of the weighted average issued share capital of Marks and Spencer Group plc) were purchased in the market for a total cost of £52.9m, at a weighted average price of 286p.
On 25 September 2003 and 25 March 2004, 28,398,331 and 19,176,707 B shares respectively, were redeemed at par, at a total cost of £33.4m. Following this redemption, 121,244,763 B shares remain in issue. The next opportunity for redemption will be 27 September 2004.
Cash flow
The Group generated an operating cash inflow for the year of £666.5m (last year £1,168.7m). Within this, the cash inflow from retailing activities was £602.3m (last year £848.8m). A major factor in the reduction in operating cash flow was the year-on-year net increase in contributions paid to the UK defined benefit pension scheme of £357m, being the one-off injection of £400m in March 2004 offset by a year-on-year reduction in regular contributions to the scheme. This was partly compensated for by an improvement in working capital.
The cash inflow from Financial Services activities was £64.2m (last year £319.9m). Within this, the growth in customer ISA cash deposits, together with other favourable working capital movements, has more than compensated for the cash outflow required to fund the growth in customer advances following the launch of the '&more' card.
During the period, the Group acquired tangible fixed assets totalling £433.5m (last year £311.0m). After taking into account the timing of payments, the cash outflow for capital expenditure was £428.8m (last year £324.5m). During the year, the Group received £126.2m (last year £25.0m) from the sale of properties.
Acquisitions and disposals include a net inflow of £51.3m, being deferred proceeds following the sale of stores in France to Galeries Lafayette less agreed adjustments under the terms of sale agreement.
At the end of the period, net debt was £1,994.7m, an increase of £163.3m, giving rise to retail gearing of 44.7% (last year 53.0%) including the net post-retirement liability.
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) and announced that we would bring forward the next formal actuarial valuation of the scheme.
In March 2004 we announced the results of this valuation which recorded a shortfall of £585m. We have subsequently made a cash contribution of £400m to the scheme, demonstrating our commitment to ensuring that the scheme is adequately funded and providing reassurance to scheme members.
At the same time, we announced the adoption of accounting standard FRS 17 for this financial year. The impact of adopting FRS 17 on the profit and loss account charge for the UK scheme, together with what the charge would have been under the previous policy based on SSAP 24, is as follows:
| |
Year ended 3 April 2004 |
Year ended 29 March
2003 |
| |
FRS 17 |
SSAP 24 |
FRS 17 |
SSAP 24 |
| |
£m |
£m |
£m |
£m |
| Operating cost |
117 * |
175 * |
122 |
136 |
| Other finance (income) / charges |
14 |
- |
(27) |
- |
| Net charge before tax |
131 |
175 |
95 |
136 |
*The operating cost charge for the year ended 3 April 2004 is marginally less than indicated previously as actual pensionable salaries for the year were lower than anticipated.
The FRS 17 charge for the year for the Group as a whole was £139.0m compared to a restated £104.8m last year. As a consequence of adopting FRS 17, a deficit of £470m net of deferred tax (£670m before tax) at 3 April 2004 is reflected on the Group's balance sheet.
International Financial Reporting Standards
It will become mandatory for all EU listed companies to report their consolidated financial statements under International Financial Reporting Standards ('IFRS') from 2005 onwards. This will apply to the Group for its 31 March 2006 year end. We have set up a programme to ensure compliance with IFRS is met. We have identified that the greatest impact on the Group is likely to be changes in the accounting treatment for property, share-based payments, financial instruments and software capitalisation.
Guidance for 2004/05
- The planned opening of new footage, plus the annualisation of footage opened in 2003/04, will add c.2% sales contribution to Clothing and c.5% to Food, on a weighted average basis.
- We anticipate further improvements in the Clothing bought-in margin of approximately 0.75 percentage points. We remain on track to deliver a total of 3 percentage points improvement to the Clothing bought-in margin in the 3 years to 2005/06.
- UK retailing operating costs, including logistics, but excluding any accrual for performance related bonuses, will increase by 5%. The investment in new footage, including the annualisation of costs associated with footage opened in 2003/04, will account for over 4% of this increase.
- If performance proves to be in line with business plans agreed by the Board, a bonus provision will be made. Guidance, reporting the impact on operating costs, will be given at the appropriate time.
- The revenue costs of the Head Office move to Paddington Basin will be c.£10m, compared to £19.6m incurred this year. These costs will be treated as exceptional.
- The Head Office restructuring programme, recently announced, will incur termination costs that will be treated as exceptional. We have made a provision of £22.5m for the cost relating to the first phase of approximately 500 roles in this financial year. The cost relating to the second phase of the programme will be provided for in 2004/05.
- The effect of the continued development of the '&more' credit and loyalty card business will be to reduce the impact of the credit card launch on Financial Services profits by c.£20m, from £58.6m this year to c.£40m in 2004/05.
- The effective tax rate is estimated to be c.31%, compared to a rate for 2003/04 of c.30%.
- FRS 17 has been adopted for the first time in this year's financial statements. We anticipate the charge to operating profit for the UK defined benefit scheme to be broadly similar to 2003/04 (at c.£117m). We estimate a net charge to interest relating to FRS 17 in 2004/05 of c.£10m, taking into account the funding cost of the £400m public issue.
- Group capital expenditure for 2004/05 will be c.£400m.
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, 'risk factors', inherent in the business, including: changes in political and economic conditions, financial and equity markets, or legislation and regulation; increased competitive influences (e.g. price), changes to sector formations (e.g. consolidation or fragmentation) or a downturn in the retail or financial services sectors; inaccurate predictions of our customer lifestyle preferences and failure to interpret them in the products and services we offer; changes in the level of customer footfall or spending habits; occurrence of product related failure or contamination; effectiveness of our brand awareness and marketing programmes to promote relevance to our current and potential customers; adverse impact on our supply chain, stores or business operations as a result of acts of war, terrorism or natural catastrophe; dependency on a major supplier of merchandise or support services; and disruption to information systems or IT infrastructure. This list should not be considered an exhaustive statement of all potential risks and uncertainties.
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