MARKS AND SPENCER GROUP PLC HALF YEAR RESULTS FOR 26 WEEKS ENDED 29 SEPTEMBER 2018
“Accelerated pace of change in the first phase of transformation”
|26 weeks ended||29 Sep 18||30 Sep 17||Change %|
|Profit before tax & adjusting items1||£223.5m||£219.1m||2.0|
|Free cash flow before adjusting items2||£300.4m||£218.4m||37.5|
|Adjusting items1, 2||£(96.8)m||£(100.8)m||4.0|
|Profit before tax||£126.7m||£118.3m||7.1|
|Profit after tax||£89.8m||£84.6m||6.1|
|Basic adjusted earnings per share1||10.6p||10.7p||-0.9|
|Basic earnings per share||5.4p||5.2p||3.8|
|Ordinary dividend per share||6.8p||6.8p||-|
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.
- New management structure and significant change in organisation and direction under substantially new leadership team
- Reshaping buy and focusing on hero lines in Clothing & Home
- Initial steps to restore value and broaden family appeal in Food
- Closure programme of over 100 full-line stores generating encouraging transfer rates; significant further change required
- Initial steps to drive digital catch up and change in culture; 20.4% of UK C&H sales now online
- Process in place to reengineer end to end supply chain, removing costs, complexity and working capital
- At least £350m of cost savings targeted, to underpin delivery
Steve Rowe, Chief Executive:
“In May I set out in our “Facing the Facts” presentation, the challenges we face and the steps we are taking in this the first phase of our transformation programme. Against the background of profound structural change in our industry, we are leaving no stone unturned and reshaping our business, its organisation and culture.
“This phase is about rebuilding the foundations of the future M&S and we are judging progress as much by the pace of change as the trading outcomes. Already, we have reorganised into a family of strong businesses in the biggest change to our structure for decades. We now have a largely new, very determined and energetic management team in place. M&S is becoming a faster, more commercial and more digital business.
“We are on track to restructure our store portfolio with over 100 full-line closures and expect to see newly remodelled stores open next year. We are fixing the basics of our online channel and there are very early signs of improvement. Every aspect of our ranges, how we trade, our supply chain and marketing is undergoing scrutiny and change.“
- Profit before tax & adjusting items up 2.0% as a result of the phasing of costs with full year cost guidance unchanged
- Adjusting items of £96.8m, including £47.6m for UK store closure programme
- Clothing & Home revenue down 2.7% impacted by store closures, with like-for-like sales down 1.1%. Online Clothing sales growth ahead of market. Gross margin down 20bps as a result of sale timing
- Food revenue down 0.2% with like-for-like revenue down 2.9% reflecting tough trading and our actions to restore trusted value, including fewer promotions and price investment, and Easter timing. Gross margin down 25bps as a result
- Net debt reduced to £1.78bn as a result of tight capital expenditure control and slightly lower working capital year-on-year
RESTORING THE BASICS
In May we set out the nine key pillars of our first phase ‘restoring the basics’ transformation agenda and we will report on the performance against each of these as we progress. Our objective is to create a profitable, growing family of businesses within three to five years, bound together not only by shared sites but by a common consumer brand, employment values, technology and customer data.
This half year report is presented in three sections:
- An update on progress against nine key areas of our ‘restoring the basics’ agenda outlined in May
- A financial review of our half year performance
- Unaudited accounts for the 26 weeks to 29 September 2018
1. Reshaping the ranges and customer profile in Clothing & Home
In Clothing & Home our business has an ageing customer base, a very wide range, a weak supply chain and an ageing store portfolio. Despite this, we retain a very strong customer franchise and market position. Clothing & Home revenue decreased 2.7% as we closed 21 full-line stores and three outlets in the period. Like-for-like revenue decreased 1.1%. Discounted sales were broadly level, with the impact of sale timing offset by a planned reduction in promotions.
Our objective is to reshape our buy; reducing the number of options, buying more stylish and contemporary product in greater depth, and to deliver market leading value. By focusing on stylish and wearable “Must-Have” essentials and building on our strong customer franchises in denim, lingerie, back to school and workwear, we will shift back towards family aged customers seeking style, quality and value.
During the first half we made a start on reducing the number of lines and bought slightly deeper into key categories such as dresses, where sales were up by 3% with strong growth online. We also reduced the price of hundreds of everyday lines, including our £15 men’s chinos, which generated an increase in sales of 8%. Our sales were held back by weakness in areas such as tops and in Kids daywear where range improvement is needed.
Our marketing has pivoted from group level branding campaigns towards a more effective retail and digital programme. Our recent “Must-Haves” campaign together with “Holly’s Picks”, endorsed by our new brand ambassador Holly Willoughby, capture our central themes of stylish everyday essentials and a family age customer. The “Love it for Less” campaign underpins the beginnings of our value investment.
2. Protecting the magic but modernising the rest in Food
Food revenue decreased 0.2%, with like-for-like revenue down 2.9%. We opened 22 new Food stores in the period, the benefit from which was partly offset by full-line closures. As expected, reported revenue was adversely impacted by the timing of Easter and by the actions we are taking to restore “trusted value”. These include reducing prices and removing complex and confusing promotions. Although we are starting to reshape the ranges and tackle the weakness in our supply chain, waste and availability remain worse than market comparator levels.
We are at the early stages of reengineering our food categories and development pipeline to broaden our appeal and frequency of shop. Over recent years the business has become excessively dependent on both short-term promotions and complex and confusing multi-buys including the profit dilutive “Dine In” programme. We have already reduced the prices of over 100 everyday lines with many more to go. Sales have been impacted by the pain of transition to “trusted value” and we expect this pattern to continue in the lead up to Christmas.
Illustrations of our actions include our Oakham whole chicken at a “New Lower Price” of £3.50, the “Best Ever” Burger and “Best Ever” Prawn Sandwich, and the £5 everyday value “Stag Tin” butter shortbread, all highly successful. As with Clothing & Home, marketing has been redirected towards sales driving programmes including “What’s new at M&S” on social channels, appealing to a different audience at lower cost than traditional media.
3. Transforming our leadership
Both main UK businesses are building very strong leadership teams, so that two-thirds of our most senior business leaders are new in the last 18 months. In Clothing & Home Wes Taylor as Menswear Director and Jill Stanton as Womenswear Director are leading very substantial programmes of change alongside recent appointments in supply chain and marketing. The Food team is now substantially new with the appointment of George Wright, due to join next year from Tesco PLC as Commercial Director, April Preston as Product Development Director, Sharry Cramond as Marketing Director and Nick Hewitt as Finance Director. Dean Simpson has arrived to lead the store renewal programme. Kirsty Ward, formerly VP of Financial Services at Walmart Inc. and Jeremy Pee, formerly Digital Director at Loblaw Companies Limited, will be joining before Christmas.
We continue to attract and promote new talent interested in joining potentially the biggest turnaround project in UK retail.
4. Building greater accountability
The embedded M&S culture is siloed, slow, and hierarchical. We have now completed the first phase of restructuring, evolving to a simpler accountable family of businesses supported by common values, shared infrastructure and customer data, and a streamlined central team. Jill McDonald and Stuart Machin, as Managing Directors, have full accountability for Clothing & Home and Food, and complete functional business boards now including marketing, supply chain, finance and technology. This reorganisation included the redeployment of c.350 colleagues previously sitting in Group marketing. Our International business is also structured in the same manner as the UK.
5. Becoming a digital first retailer across M&S
As part of our digital first approach, Jeremy Pee joins us as Chief Digital & Data Officer in December to lead the turnaround of our data and loyalty programmes and the digital conversion of the business.
In advance we have launched the “Decoded programme”, which involves sending 1,000 colleagues on a one-day digital immersion programme and 150 colleagues on an 18-month data analytics programme. To give M&S the opportunity to access the best of digital innovation and change our culture, we have also established incubation partnerships with Founders Factory and True Capital, partly to provide insight into the sector and partly to expose M&S colleagues to the speed and agility of entrepreneurial management.
Our website and online fulfilment capability remain well behind the best of our competitors. However, very early steps to improve our website have helped deliver UK Clothing & Home growth of 9.1% online, with clothing growth ahead of the market, and further improvement has been seen in recent weeks. Technology and supply chain resilience remains an issue but despite this 20.4% of UK Clothing & Home sales are now online compared with 18.2% in H1 2017/18. We have completed an investment in Castle Donington to improve the immediate capacity issues through peak trading. Further investment will be needed next year to meet our growth plans to 2021, after which additional despatch capacity will be required.
IT development and the transition from legacy systems remains challenging. A further IT development write-off was taken in the first half and we continue to experience teething problems with new systems, notably new warehouse management systems. Work is in hand to address basic weaknesses in merchandise and range planning processes. The migration to the new technology partner TCS has progressed, although inevitably this transition has created some bedding down issues.
6. Creating a high-quality store estate fit for the future
Our estate is older than those of our competitors with numerous legacy issues which urgently need to be addressed.
We are on track to close over 100 full-line stores and have now closed 29 under our accelerated UK store closure programme. The sales transfer rates from these early closures has been encouraging and most colleagues have been successfully redeployed. We are also at the early stages of planning the redevelopment of some of our older sites in city centres. Our UK stores are predominately leasehold and while around half of our lease liabilities fall due within 10 years our average remaining tenure on market rent leases is around 20 years. In addition, we retain a freehold interest or part interest in many of the problematic older stores. Future development will be undertaken under strict returns criteria, to ensure that we begin to reduce this historic burden on our business.
The combination of rising business rates and rent increases continues to put pressure on the cost base but we expect rent inflation to diminish substantially as the new reality dawns on landlords and centre owners. Combined rent and rates inflation on continuing stores in the first half was c.1%.
With this cost pressure we are moving towards a leaner operational structure. In the first half we implemented the streamlining of regional management structures removing around 500 roles.
Our store formats need renewing to create a more modern, customer and service friendly and digital environment for both main businesses. However, any evolution in format will fall into the second stage of transformation. At this stage, store expenditure remains tightly controlled with limited low-cost investment to improve sight lines and basic customer services.
7. Cost savings of at least £350m by 2020/21
M&S has in recent years become high cost to operate at all levels and we set out hard targets to reduce costs as part of the first phase of transformation. We are making good progress on our ambition to generate cost savings of at least £350m by 2020/21 to create a leaner, more efficient base for the business.
In the current year cost savings derive from the management restructure, IT transformation programme, property costs, and central costs including procurement, in addition to the operating costs of stores which have closed. We expect these will offset inflation, new space and channel shift, with the result that we are maintaining our guidance of up to 1% reduction in full year UK operating costs.
We expect our programme to build from its current base. The closure of marginal low contributing stores and the rationalisation of unprofitable categories and ranges will in time unlock significant cost, margin, working capital and maintenance capital savings. These include an improved shape and depth of buy reducing the cost of singles handling and stock clog in Clothing & Home. Improved rates of sale in Food will reduce unnecessary waste and through our closure programme we will eliminate the facilities maintenance costs of outdated equipment in legacy stores.
We will also further rationalise the number of holding centres for stock as we complete our single tier network. In addition, we will leverage technology to improve store operations from labour scheduling to stock management and replenishment to self-scan and checkout. We will maintain an intense focus on central costs, procurement and support functions which do not drive sales.
8. Modernising our Clothing & Home and Food supply chains
In both major businesses the supply chain infrastructure is well short of state of the art, management has been fragmented, and consequentially stock levels, availability, markdown and waste all remain at uncompetitive levels. However comprehensive programmes including “Fuse” are now underway to implement end to end changes supported by expert outside advice.
In Clothing & Home stock carrying levels remain at c.20 weeks and availability remains unsatisfactory. Supply chain and store operating costs are impacted by the complexity of stock handling and the volume of slow-moving lines. The initial assessment of Clothing & Home “Fuse” is promising, with significant reduction in stock and cost to operate. In physical distribution we are on track to open a further national distribution centre at Welham Green next spring and this will allow us to increase our single tier network coverage to c.85%.
In our Food supply chain we operate high and demanding standards of freshness and code life. However, both waste and availability remain at uncompetitive levels compared to our major rivals. The Food programme aims to address this problem and to date has focussed largely on changing processes at store level. Initial results from the “academy” stores are encouraging, but there was no significant benefit in the first half results. Longer term progress will require more far reaching restructuring of the supply chain.
9. Rebuilding profitable growth in International
Our International business is now emerging from the fundamental restructuring to reshape it around a number of very strong franchise partners and to exit some of the loss-making owned businesses. This now provides a viable platform for implementing essential improvements, in pricing to become market competitive, in supply chain, and online.
In the first half International revenue decreased by 18.4% at constant currency primarily as a result of the sale of our business in Hong Kong to a franchise partner in December 2017. Excluding Hong Kong and exit markets, revenue grew by 1.6% at constant currency.
Our International competitiveness is increasingly impacted by the growth of other international fashion brands. Our objective is to adapt our International ranges and prices to compete in local markets not just as a premium priced British brand. Price reductions have delivered encouraging volume uplifts where implemented. As we roll out the programme to larger markets, price deflation will impact margins, but we are repositioning the businesses for future growth.
Full year guidance 2018/19
Trading conditions remain challenging and the headwinds from the growth of online competition and the march of the discounters remain strong in all our markets. Therefore, as we embark on the difficult early stages of transformation we are expecting little improvement in sales trajectory.
- In Clothing & Home we now expect a space reduction of c.4% (previously 5%) as at year end. Our programme remains on track
- Capital expenditure remains under tight control and we expect it to be between £300-350m before disposals (previously £350-£400m)
- All other full year guidance remains unchanged and is shown in detail on page 16
First half group revenue: constant currency
Group revenue decreased by 3.0% at constant currency. First half revenue was adversely impacted by Easter timing by an estimated 0.8% in Food and 0.2% in Clothing & Home and the Group’s accelerated UK store closures. International revenue reflects the sale of our retail operations in Hong Kong to a franchise partner at the end of December 2017. Excluding Hong Kong and exit markets, International revenue grew by 1.6%.
|Clothing & Home||-2.7||-1.6||-3.7|
|Total UK sales||-1.1||-0.7||-1.6|
|M&S.com (Memo only)||5.6||6.3||5.0|
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 third quarter trading update on 10 January 2019.
For further information, please contact:
Fraser Ramzan: +44 (0)20 3884 7080
Mark Davies +44 (0)20 3884 6508
Rebecca Edelman +44 (0)20 3884 6029
Corporate Press Office: +44 (0)20 8718 1919
Investor & Analyst webcast:
Investor and analyst presentation will be held at 9.00am on
7 November 2018. 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 2.00pm on 7 November 2018:
Dial in number: +44 (0)330 336 9125
Access code: 8343136
A recording of this call will be available until 5.00pm on 14 November 2018:
Dial in number: +44 (0) 207 660 0134
Access code: 8343136