MARKS AND SPENCER GROUP PLC FULL YEAR RESULTS FOR 53 WEEKS ENDED 3 APRIL 2021

“NEVER THE SAME AGAIN - FORGING A RESHAPED M&S”

^{2020/21 is a 53-week year. The comparative period is 52 weeks to 28 March 2020. To aid understanding, we are showing the unaudited 52 weeks to 27 March 2021 with commentary and percentage changes on a 52-week basis unless otherwise stated.}

Resilient financial performance in a year of disruption

• Profit before tax & adjusting items of £41.6m (53 weeks £50.3m) 
• Statutory loss of £201.2m (53 weeks £209.4m)
• Food LFL revenue up 1.3%, underlying LFL ex-hospitality and franchise up 6.9%
• C&H revenue down 31.5%.  Online growth of 53.9% partly offsetting stores down 56.2%
• Group online revenue ex-Ocado now £1.5bn
• Ocado Retail share of net profit £78.4m
• Net debt excluding lease liabilities reduced £278.6m to £1.11bn and strong liquidity

Forging a reshaped M&S through the Never the Same Again programme

• M&S Food growth supported by improved value perception and over 1,900 new lines
• M&S products now over 25% of Ocado average basket and c.50% capacity growth planned
• Clothing & Home business reshaped with shift to active and casual and more focused ranges 
• MS2 created to accelerate the shift to omni-channel with an online first approach
• Sparks relaunch hits 10m members with substantially improved data capabilities
• Accelerated opportunity to rotate the store estate into higher quality space

Steve Rowe, CEO at Marks & Spencer: “In a year like no other we have delivered a resilient trading performance, thanks in no small part to the extraordinary efforts of our colleagues. In addition, by going further and faster in our transformation through the Never the Same Again programme, we moved beyond fixing the basics to forge a reshaped M&S. With the right team in place to accelerate change in the trading businesses and build a trajectory for future growth, we now have a clear line of sight on the path to make M&S special again. The transformation has moved to the next phase.”

^{1Due to a change in the Group’s accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, the comparative amounts for net debt and free cashflow have been restated.}

^{There are a number of non-GAAP measures and alternative profit measures “APMs”, discussed within this announcement and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to adjusting items table below for further details.} 

FORGING A RESHAPED M&S

Our results for the year bear the impact of the pandemic spanning the beginning of the first national lockdown through to near to the end of the third lockdown in the UK. However, they also reflect an acceleration of the transformation which enabled the business to deliver a resilient performance. 

In the first section of this statement, we explain how this performance was delivered. We then outline how we have used this period to accelerate transformation under the Never the Same Again programme to ensure a reshaped business emerges from the crisis. Finally, we lay out our medium-term ambition for the Group’s businesses and expectations for the year ahead.

A resilient financial performance in a year of disruption

• The Group delivered profit before tax and adjusting items of £41.6m and a statutory loss before tax of £201.2m in a year characterised by unprecedented lockdowns, resilient performance and disciplined management of costs. 
• We are grateful for total government support of £306.1m which has partly offset the effect of lost trade and enabled us to maintain employment.
• Food delivered strong underlying LFL growth of 6.9% after adjusting for the closure of hospitality and the adverse impact on franchise sales. Operating profit before adjusting items of £213.6m was a creditable achievement given the related effects on product mix. 
• Ocado Retail contributed a share of net income of £78.4m in an exceptional period for the business and following the successful switchover to M&S supply.
• Clothing & Home results reflect the heavy impact of lockdowns on stores, a substantial change in product mix and the challenges of clearing stock, partially offset by very strong growth online of 53.9%. As a result, net revenue declined 31.5% and there was an operating loss before adjusting items of £129.4m. Performance improved in the second half as online growth made greater inroads into the store sales decline. Clothing & Home online generated an operating profit margin of c.14%.
• International operating profit before adjusting items of £45.1m was resilient due to online growth which helped to mitigate the pandemic impacts on store sales in different regions. 
• The balance sheet has emerged stronger than expected. Lower discretionary costs and capex, managed stock flow and a focus on working capital resulted in net debt excluding lease liabilities down £278.6m to £1.11bn and a strong liquidity position. 

This resilient performance is due to the extraordinary efforts of colleagues across the business, playing their part to feed the nation, increase our capacity for home delivery and work with our trusted suppliers to adapt to rapidly changing restrictions across the year. 

A reshaped M&S emerging from the pandemic period

Over the past three years the objective of the transformation has been to restore M&S to sustainable growth through ‘facing into the facts’ the business had failed to address. The transformation has included shifting to trusted value and broadening the appeal of our ranges in Clothing & Home and Food, investing in online and digital capability including establishing the investment in Ocado Retail and tackling both the high cost and outdated supply chains and the legacy store estate.  

From the start of the pandemic we recognised that it would accelerate market trends providing an opportunity to bring forward transformation to emerge as a reshaped business.

• Broadening M&S Food appeal: The Food business is broadening its appeal through more relevant family focused innovation and improved value perception led by over 340 ‘Remarksable value’ lines which now represent c.10% of volumes. Growth is supported by a significant cost reduction programme including synergies from growth on Ocado, systems upgrades to reduce waste and the Vangarde supply chain programme which is delivering better availability.
• Transition to M&S product on Ocado Retail completed successfully: Penetration of M&S lines on Ocado is consistently over 25% of the Ocado basket, outperforming Waitrose. The next stage is to grow capacity by c.50% in the next 18 months and to realise further potential from the joint venture with our partners Ocado Group.
• Omni-channel Clothing & Home business emerging: Substantial reshaping has created a ‘product engine’ providing a contemporary, focused M&S range. In addition, complementary external brands have been successfully launched. The creation of MS2 has brought together the data and online teams to prioritise online trading and growth while leveraging the advantages of our store estate more effectively. MS2 draws on the data engine and the relaunched Sparks loyalty scheme which has grown to over 10m members, enabling a more personalised relationship with customers.
• Accelerated rotation of the full line store estate: The drag on performance of the legacy estate has been exacerbated by Covid bringing forward the decline of some locations but also creating opportunities for rotation. We are increasing the speed of change to create a group of well-invested full-line stores in c.180 prime and core markets.   The costs of the rotation programme will be largely funded by the release of cash from the development of freehold and long leasehold sites.
• An International business focused on major partnerships and online: Online sales doubled in 2020/21 and we are now investing in increasingly localised fulfilment, expanding our presence on marketplaces such as Zalando and the launch of additional websites such as the 46 markets announced in March. Digital trading improvements, partner store modernisation and supply chain development are positioning the business for rapid recovery as lockdowns end. Following Brexit, the business is reconfiguring trading with its EU businesses to reflect the challenges of exporting to the EU.

Business positioned well for the medium-term despite near-term headwinds 

Overall trading for the first six weeks of the financial year and since reopening has been ahead of the comparable period two years ago in 2019/20 and our central case. Core Food is in strong growth although hospitality and franchise remain adversely affected, with Clothing & Home sales growing since reopening and online remaining robust. International sales continue to be impacted by on-going restrictions, particularly in India.

While encouraging, it is unclear how the recovery will develop and if consumer activity will sustain. International markets continue to face headwinds with ongoing disruption and the material costs of Brexit which we are working to mitigate. At this early stage our central case is that we will generate profit before tax and adjusting items between £300-350m and as capital expenditure recovers towards pre-pandemic levels, our ambition is for a further reduction in net debt.

We have a clear path to a transformed business in the medium term. The priority is to fund investment in building omni-channel capability, including investment in the supply chain, store rotation and maintenance of our changing estate. As we recover balance sheet metrics consistent with investment grade, we will assess the reintroduction of dividend payments, although as we focus on restoring profitability this is unlikely in the current year.

1. A RESILIENT FINANCIAL PERFORMANCE IN A YEAR OF DISRUPTION

The reporting period spans the year from the beginning of the first UK-wide national lockdown in March 2020 to the end of the third lockdown in April 2021. In most of this time our operations have been severely constrained by the change in day-to-day living, the effects of social distancing and partial or full closure of large parts of our store estate.  This has resulted in substantial changes to the mix of products customers have bought and a wide divergence of store formats and channels. 

The group has delivered a profit before tax and adjusting items this year of £41.6m, compared with £403.1m last year. Statutory loss before tax was £(201.2)m respectively on a 52 week basis (£(209.4)m on a 53 week basis), compared to a statutory profit before tax in 2019/20 of £67.2m. Strong free cashflow has driven a healthy reduction in net debt. The substantial effects of reduced sales and directly attributable covid related costs of £269.6m as a result of the pandemic were only partly offset by government support of £306.1m.

^{1On an unaudited 52 week basis to 27 March 2021 except where stated}

 ^{2Items shown on a 53-week basis. Due to a change in the Group’s accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, the comparative amounts for net debt and free cashflow have been restated}

Strong underlying Food performance – LFL ex hospitality and franchise up 6.9%

M&S Food delivered strong underlying LFL growth of 6.9% after adjusting for the closure of hospitality and the adverse impact on the franchise business. Total sales were down (0.6)% and operating profit before adjusting items of £213.6m reflected the negative effects of product mix.  The trading impact on the convenience and hospitality businesses together with the effect of Covid related costs was only partially offset by government support and cost saving programmes.

The strong underlying LFL growth was delivered in the face of further additional headwinds, including the exposure to office and shopping centre locations as illustrated below. Unlike some competitors M&S Food sales as reported do not benefit from a direct online grocery presence, with these sales reported through Ocado Retail instead. The change in shape of trade is illustrated in the table below with the adversely affected areas collectively accounting for c.37% of prior year sales.

Lockdown also resulted in steep declines in convenience categories such as food-on-the-move and initially in prepared meals given reduced footfall as customers switched to home cooking. However, the repurposing of space towards core categories such as grocery, household, and meat, fish and poultry, together with the continued transformation of our ranges and value position helped to offset the loss of convenience trade. The adversely impacted categories together accounted for around a third of prior year sales.

The Group had a good Christmas and a very strong Easter in 2021, which fell into week 53 of the financial year.

The Food business incurred extra costs to support customer and colleague safety of £49.4m and incentives for non-furloughed colleagues working through the pandemic of £22.0m.  In addition, £9.9m of costs were incurred as a result of Brexit, which are set out in further detail below.

Exceptional Ocado Retail contribution to results

Ocado Retail delivered 43.7% revenue growth over the 52 weeks ended 28 February 2021 and contributed a share of net income of £78.4m. 

This has been an exceptional period for grocery online and Ocado Retail performed strongly. Higher than normal basket size and a smoothed trading profile across the week together with reduced marketing costs delivered a strong improvement in profitability. The overall result included the Group’s share of insurance receipts related to business interruption at the Andover customer fulfilment centre (CFC).

The well-planned switchover to M&S supply from Waitrose in September 2020 went smoothly with a positive customer response and the M&S share of basket has exceeded the Waitrose level prior to switchover.

Accelerating online sales growth of 53.9% partially offsetting store decline of 56.2% in Clothing & Home

The overall Clothing & Home result for the year was heavily impacted by lockdowns, on-going social distancing, steep decline in formal and occasionwear, the location of many of our stores in town and shopping centres and the priority to clear stock. As a result, total revenue declined 31.5%.

As we implemented MS2 and took multiple steps to improve online operating performance we were able to capitalise on the change in customer shopping patterns and saw a progressive increase in online sales and market share growth through the year. This was a result of strong traffic, active customer growth, improving frequency and lower returns. The business had a good service and fulfilment performance supported by previous investment in the Castle Donington distribution centre and substantial expansion of fulfilment from store capability.

As reported for Food, stores in high streets, shopping centres and city centres created an extra drag on sales performance, with these channels representing c.70% of prior year store sales.