'From transformation to delivery'
Full year results:
- Group sales up 2.7%1 at £10.3bn
- Total UK sales +2.3%: Food +4.2%; General Merchandise 0.0%
- Like-for-like UK sales +0.2%: Food +1.7%; General Merchandise -1.4%
- International sales +6.2%1
- Multi-channel sales +22.8%
- Underlying profit before tax2 -3.9%3 to £623m
- Statutory profit before tax +6.1%3 to £580m
- Underlying basic earnings per share2 +0.9%3 to 32.2p
- Basic earnings per share +14.8%3 to 32.5p
- Full year dividend 17.0p per share level on the year
- Net debt down £150.7m to £2.46bn
Marc Bolland, Chief Executive, said:
“M&S grew sales by 2.7% last year. We are focused on improving our performance in General Merchandise and were pleased to see early signs of improvement. Our Food business had a very strong year, consistently outperforming the market.
"Three years ago, we recognised the scale of investment required to transform our business, investing to strengthen our foundations and improve our customer offer. We are making solid progress on this journey and are now focused on delivery."
Robert Swannell, Chairman, said:
“The investment made in executing our strategy over the last three years puts M&S in a stronger position to compete in a retail world undergoing profound change. Our priorities now are to deliver on the investment we have made and to make M&S a more profitable, stronger and well-equipped business.
“In line with our dividend policy, the Board is recommending a final dividend of 10.8p per share, resulting in a full year dividend of 17.0p per share, level on last year.”
Guidance for financial year 2014/15
- Gross margin is expected to grow by c.100bps in General Merchandise as a result of sourcing benefits, particularly in the second half of the year. Food gross margin is expected to grow by 10bps to 30bps due to further operational efficiency.
- Operating costs are expected to increase by c.4% as a result of an increase in depreciation, inflation and the addition of new space.
- Group capital expenditure is expected to be lower at c.£500m to £550m.
- The planned opening of new space will add c.1% to UK space, with c.2.5% in Food and no net space growth in GM. International space is expected to grow by c.10%.
- Underlying effective tax rate is expected to be 19.0%.
Looking ahead - 2014/15 onwards
Our initial programme of investment associated with our strategic priorities is now largely completed. Capital expenditure is expected to drop to c.£500m to £550m per annum in each of the next three years.
The operational improvements we are making lead us to expect to deliver a significant improvement in our General Merchandise gross margin over the next three years, through a combination of a new approach to sourcing and trading capabilities. We expect a further step up to come beyond this with the completion of the single tier logistics network and GM4 systems implementation in 2016/17.
As a result of this, we are focused on improving free cash flow. The Board is committed to maintaining a progressive dividend policy with dividends broadly twice covered by earnings. We are targeting a net debt/EBITDA ratio within the range of 2.0x - 1.5x and remain committed to an investment grade rating. This gives potential for any excess cash to be returned to shareholders on a regular basis.
Current trading
As previously indicated, our new M&S.com site will take four to six months to settle in and, as a consequence, will have some impact on General Merchandise performance in the first quarter. The improving trend in Clothing sales we saw in the fourth quarter has continued in our stores. Our Food business continues to outperform the market.
We will update on our first quarter sales on 8 July 2014.
Notes:
1 On constant currency basis.
2 Underlying results are consistent with how the business is measured internally. Adjustments to derive underlying profit include profit on disposal of property, UK and Ireland one-off pension credits, interest income on tax repayment, restructuring costs, international store review, fair value movements on embedded derivatives and the impact to income earned from M&S Bank following M&S Bank’s recognition of a provision for potential financial product mis-selling.
3 Last year results have been restated for the changes to IAS 19 “Employee Benefits”. Refer to the Financial Review for further details.
2013/14 operating review:
Business highlights:
- New General Merchandise strategy launched – reasserting leadership in quality and style
- Clothing sales returned to growth in the last quarter of the year
- Continued improvement in Womenswear full price sales
- Food continued to outperform the market on a like-for-like basis
- Food availability up; customer satisfaction scores at record high
- Managed our cost base tightly with cost growth of 3.5%, lower than guidance
- M&S.com sales +23%, outperforming the market
- 55% of M&S.com sales now picked up in store
- New web platform launched on time and on budget
- International sales +6.2% on a constant currency basis, with like-for-like growth in key markets
- 55 international stores opened
- Castle Donington EDC/NDC ramp up of volume and capability
We made these improvements against a challenging economic backdrop. Consumer confidence improved over the financial year but overall increases in incomes lagged inflation, meaning that consumers did not feel the benefit in their discretionary spending.
Sales
Group sales were up 2.7% on a constant currency basis (+2.8% reported currency), driven by good performances in our Food, International and Multi-channel businesses.
General Merchandise sales were level on the year with like-for-like sales down 1.4%. Our priority was delivering our strategy to refocus on quality and style, and after a year of changes our customers are noticing the difference, with Clothing returning to growth in the fourth quarter for the first time in three years on a like-for-like basis.
Food sales were up 4.2%, with like-for-like sales up 1.7%. We continued our focus on differentiation through quality and innovation. Through improvements in availability and choice, we made M&S food more relevant to our customers, more often.
International sales were up 6.2% on a constant currency basis (up 7.3% on a reported basis). Our priority markets delivered a good performance with strong growth in India and our flagship stores in China. While trading in the Republic of Ireland continued to be difficult, performance in our European business improved and we took full control of our Czech and Eastern European business. Our franchise business across the Middle East and Asia continued to perform well.
UK gross margin
General Merchandise gross margin was down 110bps at 50.7% as a result of increased cost of promotions and markdowns. Food gross margin was up 80bps at 32.5% due to supply chain efficiencies and effective management of promotional activity.
Total UK gross margin was down 20bps at 40.6%, as a result of the decline in General Merchandise gross margin as well as the mix change due to a difference in the rate of sales growth in General Merchandise and Food.
UK operating costs
UK operating costs were up 3.5% on last year. We continued to manage costs tightly despite upward pressures from new space, inflation and investment in business initiatives such as the supply chain infrastructure and improved customer service in stores. These pressures were mitigated by efficiencies generated through the supply chain and IT programme, and in our stores.
Operating profit
Underlying group operating profit was £741.9m (last year £778.6m). Within this, UK operating profit was £619.2m (last year £658.4m) and International operating profit was £122.7m (last year £120.2m). Statutory profit before tax was higher at £580.4m (last year £547.2m) after a reduction in net non-underlying charges.
Net debt and cash flow
Net debt at the end of the year was £2.46bn (last year £2.61bn). Net cash inflow of £154.3m (last year £67.2 outflow) primarily reflects a decrease in capital expenditure cash outflow which was £616.6m (last year £829.7m). Working capital was well managed with a £47.9m inflow in the year. Free cash flow before dividends was £427.9m (last year £204.1m).
2013/14 business review:
2013/14 marks a significant year on our journey to transform M&S from a traditional UK retailer into an international, multi-channel retailer.
1) Focus on the UK
Stores
Our priority over the last year has been to ensure that we offer an improved shopping experience for the 20 million people who shop with us each week. We have continued to improve the look and feel of our stores through the roll-out of our new store layout concept. The first phase is now complete and we are currently implementing the second phase.
Our top 70 stores now have refreshed Womenswear departments. Designed to showcase the latest collections and improve navigation, the new look and feel features high-impact entrance zones highlighting the latest trends, as well as new look destination departments such as Coat Shops and Dress Shops. We are also introducing revamped Footwear, Menswear, Accessories and Beauty departments.
General Merchandise
General Merchandise sales were level, with like-for-like sales down 1.4%. We faced a challenging clothing market, with unseasonal conditions and high levels of promotional activity.
In May 2013 we outlined the strategy to refocus our GM business on the values that make us famous – quality and style. Over the course of last year, we upgraded 70% of our fabrics, added more luxurious finishes and improved our ‘better and best’ offer with more leather, silk and cashmere. We delivered more clarity and distinction to our sub-brands to make them more compelling and easier to shop. We launched M&S Collection, and by streamlining the brands reduced product overlap by 10%.
The re-launch was also accompanied by a new, more inspirational store concept and our successful Leading Ladies marketing campaign. After a year of changes our customers are noticing the difference. We returned the GM division to growth in the fourth quarter for the first time in three years.
We have continued to make improvements in our buying and merchandising. We strengthened our top team with key appointments to our product, buying and design teams, as well as the appointment of two new Sourcing Directors, based in the Far East, to oversee our GM sourcing in the region as we look to speed up our supply chain and improve margins. We worked hard to improve newness and availability, moving to ‘push allocation’ stock replenishment which has helped to deliver a 2.3% improvement in availability.
Food
Our Food business had a very strong year, with sales up 4.2%, up 1.7% on a like-for-like basis. We consistently outperformed the market, delivering 18 consecutive quarters of like-for-like growth.
Our strategy is to be more specialist and focus on quality and innovation. Our products are made exclusively for M&S and this unique position means they are not comparable with the rest of the market. Rather than joining the race to the bottom on price, we are focused on developing top-quality ranges that are competitively priced, whilst ensuring our farmers get a fair deal too.
With a core catalogue of over 6,400 products, we offer everything from everyday essentials to special occasion food. This year, more people turned to us to help deliver Christmas and we saw record sales. With a 38% market share, we are the established market leader in party food and sold 5.5 million packs during the festive season. At the same time, we continue to highlight the great value we offer on everyday essentials with sales of our Simply M&S range continuing to grow – accounting for 11% of total sales.
Our innovation is unrivalled, with 20% of our products new this year. This year we expanded our healthy food offer with Delicious & Nutritious, a range of salads and flatbreads inspired by Middle Eastern and Asian flavours. In a nod to the American trend, our Grill range included Posh Dogs barbecue hotdogs, which were a summer hit, selling 926,000 units.
We continued to enhance the shopping experience for our customers, introducing new ways of displaying products and improving choice by bringing the full range to c.110 stores. We improved on-shelf availability by seven percentage points over the last three years. As a result, we are seeing more customers shop with us more often.
We have worked hard to deliver efficiencies from our supply chain, which have allowed us to continue to invest in product quality and innovation to stay ahead of the market, keep our prices competitive as well as improve our margins without compromising product quality.
2) Multi-channel
M&S.com has delivered a strong performance in 2013/14 and outperformed the market with sales up 22.8%. Visits to the site increased by 9% this year and our online business accounted for 16% of General Merchandise sales compared to 13% last year.
As customer shopping habits continue to evolve we have seen mobile sales increase by over 90%. Sales from tablet devices have doubled and now account for c.25% of online sales compared with 15% last year.
This was also a landmark year for M&S.com, as two major infrastructure projects went live. In May 2013 we opened our dedicated 900,000 sq ft Distribution Centre at Castle Donington and in mid-February we completed the migration of our website from Amazon to a new M&S owned platform.
Our new flagship M&S.com website offers improved search functionality, enhanced imagery and a better view of stock availability that is refreshed every 15 minutes and live at the checkout so customers can buy with confidence. The site is also built on a flexible platform to enable continuous improvement in line with evolving technology and retail trends. We are managing this large transition carefully since we expected it would take time for our customers to migrate and get used to the site as well as for it to settle down technically. We have migrated 2.5m customers, processed over three million orders and made hundreds of optimisations to website journeys. We expect it to take four to six months for the new site to settle and for migration to be substantially complete.
Since the launch last May, we have been building capacity at Castle Donington and are now handling around 2 million singles every week. Activity at the site will continue to ramp up ahead of the peak trading season enabling us to make further improvements to our delivery proposition.
Customers continued to enjoy the convenience of our Shop Your Way service, with 55% of multi-channel orders now collected in store or ordered in-store for home delivery.
3) International
Sales in our International business were up 6.2% on a constant currency basis (7.3% reported currency), to £1.15bn. We opened 55 new stores and now trade from 455 stores across 54 territories.
In Asia, sales were up 15.7% on a constant currency basis. We opened 22 new stores, focusing on driving growth in our key priority territories of India and China. In India our sales were strongly up with good like-for-like growth and we opened 10 new stores including our new flagship store in Bandra, Mumbai. In November we announced our plans to double our Indian store presence by 2016 through our partnership with Reliance Retail.
In China, we saw strong results from our Hong Kong stores, while our flagship Shanghai stores also performed well. In April we announced plans to focus on our centrally-located Shanghai stores and to open flagships in other cities, including Beijing and Guangzhou, and to find a local partner to support this roll out.
Our franchise operations continue to grow. One of our priority markets, the Middle East, saw sales increase by 2.6% on a constant currency basis. In February we unveiled our largest international store, a 72,000 sq ft flagship in Kuwait with our franchise partner Al-Futtaim Group. We opened 20 new stores across 10 markets, including the opening of our first standalone Lingerie & Beauty stores in Saudi Arabia with our franchise partner Al Hokair.
Sales in Europe were up 3.9% on a constant currency basis. We continued to grow our presence in Western Europe, opening our largest continental European store in The Hague. In France, we now have five stores including our flagship store at Beaugrenelle which features our largest Food Hall outside of the UK and Ireland. Through our new franchise partnerships with Relay France we will be opening our first standalone M&S Food store this Summer.
Following the actions we took to address the performance in the Czech Republic, Eastern Europe and Greece, we are pleased that sales improved during the year. Following a strategic review of our business in the Republic of Ireland we took the difficult decision to close four stores. We remain committed to the business in Ireland and will invest in our remaining stores.
Supply Chain and IT
In May 2013 we set out the details of our supply chain vision, with an aim of creating a single tier network by 2016/17. We have made good progress over the past year.
Our dedicated e-commerce and national distribution centre at Castle Donington opened in May 2013. Ramp up of volume continues as planned, with around 90% of e-commerce orders now processed through this new facility. We have also commenced the fit-out of the Bradford NDC. The roll-out of Allocation and Replenishment, the first part in our GM4 programme, has also started in General Merchandise.
Following a thorough review of our plans, we have taken a decision not to proceed with the site at London Gateway and have developed an alternative plan. This will secure the delivery of the single tier network by 2016/17 as planned, by operating from the two new NDCs, at Castle Donington and Bradford, supported by four of the existing regional distribution centres which will be converted into NDC use. This will use our capital investment more efficiently, with a planned £130m reduction in investment whilst largely retaining associated benefits.
Plan A
Plan A remains at the heart of the business, driving greater efficiency and environmental and ethical excellence into our operations.
This year we’ve helped 1,000 young people into work through the Make Your Mark programme, our customers recycled four million used or unwanted garments (worth an estimated £3.2 million to Oxfam) through the Shwopping scheme and we reached our target of training ½ million clothing supply chain workers on subjects such as employee rights, financial literacy and health care.
We’ve maintained our zero waste to landfill commitment and our status as the UK’s only carbon neutral major retailer. More than half of our products now have an environmental or social feature built-in that is above and beyond the market norm, for example Fairtrade and Organic food and drink, clothing made in an eco factory or homeware made using recycled materials.
4,000 employees volunteered to clean beaches with the Marine Conservation Society and we maintained our support for charities addressing a range of social and environmental issues including Breakthrough Breast Cancer, Royal British Legion, Oxfam, UNICEF and WWF.
Plan A continues to be recognised externally for its achievements. Since launch it has helped M&S win 140 awards, including last month being named the most ethical clothing retailer on the high street by Ethical Consumer Magazine.
Our detailed, annual environmental and social Plan A Report is published next month.