Highlights:
Financial:
• Sales up 11.0% at £3,929.4m: UK up 10.5% at £3,647.9m; International up 17.7% at £281.5m;
• Adjusted profit before tax up 32.2% at £405.1m; unadjusted profit before tax £406.5m
• Adjusted earnings per share up 30.7% at 16.6p; unadjusted earnings per share 16.7p
• Interim dividend 6.3p, up 31.3%
• Net debt £1,745.6m (1 April 2006: £1,729.3m)
Trading:
• Q2 UK sales +10.5%: General Merchandise +10.0%; Food +10.9%;
• Q2 UK like for like sales up 6.4%: General Merchandise +7.9%; Food +4.7%;
• Market share growth in all product categories (total clothing market share up 90 basis points to 10.1%*)
• Food market share up 20 basis points to 4.0%**
• UK gross margin up 100 basis points to 43.6%
• Modernised stores delivering strong returns
• Agreement reached with BP to roll out Simply Food
• Acquisition of 12 stores to add to Simply Food portfolio
Lord Burns, Chairman, commented:
“The Group continues to make good progress and is stepping up its investment programme to secure future growth. In line with our new policy, the Board is proposing an interim dividend increase of 31.3% to 6.3p per share.”
* Clothing market share: TNS Worldpanel Fashion: 24 weeks ending 17 Sept 2006
** Food market share: Superpanel, Food & drink: 24 weeks ending 8 Oct 2006
Stuart Rose, Chief Executive, said:
“We had a good first half. We have delivered better product, better service and better store environment. We have gained market share in all areas in which we trade.
We continue to invest in our stores to provide for future growth. Our property review has identified opportunities in existing and new markets. Modernised stores are generating strong returns.
We are increasing investment in some areas such as specialist staff which we believe will directly benefit our customers and top line growth. Although we continue to see costs rising ahead of inflation in many areas, we are controlling non customer facing costs well.
Our plan remains the same. While competition remains intense, we are focusing on driving profitable revenues and market share. We continue to improve and develop our customer offer in core areas through better product while also driving service levels and improving store environment. Opportunities to stretch our brand into new products and services and to broaden the business across new channels and overseas are now being pursued.
Trading for the first five weeks of the third quarter is in line with the first half run rate, despite tougher comparatives. We believe we are well positioned for the all important Christmas period.”
Driving the business – Product, Service, Environment
Footfall increased significantly with 19 million more visits over the half, driven by better values, with style and innovation.
Market share in clothing increased by 90 basis points to 10.1%, reinforcing our position as the largest clothing retailer in the UK by both value and volume. Market share improved in all product areas. Foods also increased market share.
Buying efficiencies and increased volume delivered a gross margin increase of 100 basis points.
We continue to listen to our customers and brand momentum continues to improve, supported by strong advertising. The effectiveness of the ‘Your M&S’ campaign was acknowledged when it won the Grand Prix at the recent 2006 IPA Effectiveness Awards.
Product
General Merchandise
Quality and value remain our key drivers. Opening price points now represent around a third of our sales. Price deflation for the half was 5%, slowing in the second quarter as we came up against price reductions made last year. Volumes were up 17% over the same period.
Gross margins increased by 170 basis points, driven by better sourcing. We opened our office in Shanghai to add to our offices in Bangalore, Colombo, Dhaka, Hong Kong, and Istanbul. We now employ some 200 people overseas. Delhi will open in the second half. Stock control and speed to market continues to be a prime focus.
Womenswear made excellent progress with market share up from 9.4% to 10.5%. Core product performed well and our fast fashion ranges give us more fashion authority. Colour palettes have been strong and on target. We continue to refine our branding and segmentation to ensure we offer clear and focussed ranges. Per una continues to make strong progress. We now have a complementary offer of womenswear, enabling us to target the widest range of customers of any general merchandise retailer.
Lingerie performed well with market share up from 24.1% to 25.6%. We are the destination shop for lingerie in the UK. Our aspirational Autograph brand has now been extended into lingerie.
Menswear had an excellent half, building on its already strong base. Market share is up from 8.3% to 9.0%. Our branding is clear - Autograph, Blue Harbour and Collezione are understood by their target customers.
Childrenswear made its first market share improvement for six years, up from 4.0% to 4.4%. Both Boyswear and Girlswear are improving rapidly. Fast fashion is being used to deliver newness and excitement. Our Back to School campaign was particularly strong.
Home continues to grow. Having improved values across the ranges last year, the introduction of premium product such as the newly launched Autograph bedroom and bathroom ranges is enabling us to further stretch our price architecture while offering our customers greater choice. Furniture has performed well. We now have more authority across our core Home offer and are confident of further growth.
Food
Food had another successful half with total sales growing at twice the rate of the market. We continue to increase market share, up from 3.8% to 4.0%. Performance was driven by a relentless focus on quality, value and innovation, supported by powerful advertising. Our responsible approach to product development is being recognised by both our customers and campaigning and health groups.
We have a leading market position through the innovative development of first to market ranges. We are able to respond to key customer trends for healthier eating and 30% of our catalogue is now marketed under the Eat Well logo. We extended our Eat Well range by introducing new Nutritionally Balanced ready meals which, like the rest of our Eat Well range, are free of additives and preservatives. We have completed the removal of trans fats from all our foods and are the first UK retailer to have achieved this. There is increasing demand for responsibly sourced, healthy food; our additive-free ‘Cook!’ and Speciality ranges are well positioned to address this demand. Our value added organic food range was highlighted in our recent advertising campaign.
During the half we also launched new products where socially responsible and ethical considerations have helped to drive innovation. These included wider ranges of Fairtrade and Organic products as well as Omega-3 enriched Lochmuir Salmon which is bred to improved standards of animal welfare.
Service
There has been significant investment in staff training and career paths. Additionally we have increased pay rates to ensure competitiveness. We believe these investments will pay dividends through better service levels in our business. Mystery shopping scores continue to improve. This is more marked in our modernised stores. These improvements in service enabled us to cope with a 17% increase in General Merchandise volumes and significantly higher footfall.
Service initiatives in key areas such as Lingerie, Food and Menswear will continue to be rolled out. A serviced men’s footwear concept in 16 stores giving better choice and service has been successful.
Environment
Property
We have undertaken a complete review of our property portfolio. The key objective is to ensure that we are in the right place with the right space meeting the needs of tomorrow’s customers. We have one of the strongest and most recognised brands in the UK which needs a powerful showcase.
We have identified the following opportunities and over the next five years will:
• enhance our presence in major city centres through extensions, redevelopments and relocations;
• develop major out of town stores by extending existing space and seeking opportunities for new space;
• grow our presence in retail parks;
• develop our high street presence, expanding, relocating, consolidating or closing stores where appropriate;
• continue to develop our Simply Food business opening more owned and franchised stores
During this period, we expect to increase total owned space by 15-20% from 13.3 million square feet at the half year end. Overall, while we expect to have more stores, the emphasis is on quality of space.
Store Modernisations
Our store modernisation programme remains a priority. The four trial stores opened in 2004/05 continue to materially outperform. The 17 stores opened in 2005/06 have gained further momentum in the first half. Returns continue to be strong. We have opened a further 45 stores since the year end which are delivering strong incremental sales. We will have modernised 35% of our space by Christmas.
We plan to have some 70% of our space modernised by Christmas 2007. In order to open these stores well ahead of the peak third quarter, we will start some of these store modernisations in January this financial year. In addition, and following on from our property review, we will begin a number of significant developments in some of our key city centre and out of town stores.
New Space
During the half we opened stores in two retail parks in Teeside and Abbey Centre, Belfast. Bolton Middlebrook opened in October. In the half year we added 2% to our total footage on a weighted average basis, representing an increase of 1.4% in General Merchandise and 3.4% in Foods. Our full year space guidance remains unchanged.
We continue to open more space in Foods. During the half we opened 29 new Simply Food stores, 28 of which were acquired from Iceland last year. We are pleased with the performance of these stores. We expect to open around 20 stores in the second half, four of which have already opened. We have acquired 12 stores from Somerfield, eight of which will open this financial year.
The trial of a Simply Food offer in BP forecourt locations has been successful and we have now agreed with BP to roll this concept out to more forecourts starting next year. We believe there is an opportunity in some 200 locations going forward.
Stretching the brand
With the growing strength of the brand, we believe there are many opportunities for us to stretch our brand into new product areas.
In Foods, new initiatives, such as Hot Food to Go, Eat Over Delis and more recently a restaurant in Newcastle have been welcomed by customers.
Our trial of electrical products last year has now been extended in 13 stores with a wider offer including LCD TVs, DVDs, hi-fi, and laptops linked with a number of guest brands. While it is early days we are pleased with customer reaction.
E-commerce
Our on-line business continues to grow strongly from a relatively small base. We recognise the significant opportunity to develop this channel and together with Amazon have been working to redevelop our website to improve functionality and customer experience. We have restructured e-commerce which has now become a business unit in its own right. We will re-launch our web-site in Spring 2007.
International
International made good progress over the half. Our owned stores in the Republic of Ireland and Hong Kong performed well. The Republic of Ireland delivered strong sales growth, reflecting good underlying like for like performance, the opening of new stores in Drogheda and Newbridge, and the full year benefit of stores opened the previous year. During the half we modernised a third of our existing space. Hong Kong performance was also robust, despite the closure of one store and relocation of two stores in the second half of last year.
Our franchise operations also delivered a strong performance. During the half our franchisees opened a net of seven stores, including our first stores in Geneva, Riga, and Sofia, as well as adding to stores to our existing franchises in Greece, Hungary, India, Indonesia, Philippines, Romania, Singapore and Turkey. We expect to open around 15 stores in the second half, including new stores in Russia, India and a 52,000 square foot store in Festival City, Dubai.
Corporate Social Responsibility
Social responsibility and ethical trading is deeply rooted in our business. We continue to develop our 'Look behind the label' campaign to tell our customers about the effort that goes into ensuring that Marks & Spencer products are produced in a safe and ethical way. We receive wide recognition for our progress in this area.
• In July, M&S won Business in the Community's Company of the Year Award for the second time – the only company to do so.
• We received awards for our Breakthrough Breast Cancer cause-related marketing campaign and Marks & Start employability programme. We are now in our sixth year of supporting the Breakthrough Breast Cancer campaign and in October's Breast Cancer Awareness Month our customers helped us to raise £600,000.
• In the recent 2006 RSPCA Good Business Awards we won the Fashion and Food categories and came runners-up in cosmetics based on our animal welfare standards.
• We have been working closely with the Fairtrade Foundation on our range of Fairtrade food, clothing and home products which will be extended in the Spring.
• For the second year running, Greenpeace rated Marks & Spencer as the best food retailer for sourcing fish from well managed sources.
We recognise that there is much to do and are currently reviewing our total CSR policy to ensure that it meets the demands of customers today.
Summary
In summary the business is in good shape. Our investment in our core business is paying off. These results show that a combination of great value stylish product, exciting stores and good service are what customers want. We are now looking ahead for opportunities to drive the business and to broaden the business to new channels and overseas
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