Marks and Spencer Group plc

Good morning all and welcome to the M&S full year of results presentation. Firstly and most importantly, I hope you and your families are well. Here today with me are Archie Norman, our chairman, and David Sado, our interim CFO. If you're listening on Wednesday, the 20th of May, there will be a Q&A conference call at 9.30am for analysts and investors and a media call at 11 o'clock. And the eagle-eyed amongst you will have seen the details of this on this morning's results release. The presentation has three parts to it. David and I will talk you through the results for last year. I will then talk about our response to the COVID-19 pandemic, managing effectively through the crisis with the help of our phenomenal colleagues and securing the future of the business through decisive action. And finally, I will talk about how we are using the lessons of the crisis to accelerate the transformation of M&S. To start, an overview of our performance last year. As you will already have seen, we reported adjusted profit this morning of $403 million, which included an estimated adverse impact on trading of around $52 million for the pandemic in March. Prior to this, 2019-20 was a year of substantial progress against the transformation plans. We completed the investment in Ocado Retail, which will accelerate growth in food and is now more relevant and strategically valuable than ever before. Food consistently outperformed the market. And in clothing, we began to see the green shoots of resetting the business in half two. The work we've done to engineer the basic infrastructure of the business has helped us respond to the crisis in a more agile way. And we've been reflecting the accountable business model. We've shifted to segmental reporting of food, clothing at home and international. The results illustrate the strength and flexibility of having combined operations under one M&S brand, which has never been more important. Looking in more detail at the food business, volume grew ahead of the market and performance accelerated throughout the year. It was a year of real progress and demonstrates the strength of our strategy. 18 months ago, we began the move to trusted value by halving promotions and investing in price and broadening the appeal of M&S food through a new program of innovation supported by family-focused marketing. In the past year, we have taken some major steps towards our ambition of doubling the size of the M&S food business. We've opened five test and learn stores, which showcase the full range in an engaging, innovative and modern retail format. We've been rolling out Project Vanguard to 90 stores in the second half, which ultimately aims to unlock more productive stores through changes to processes in our supply chain. And of course, we've been completing the transformational investment in Ocado Retail, for which we are reporting a first time contribution this morning. In clothing and home it was, and please do forgive the pun, a year of two distinct halves. Following availability issues in H1, we implemented a number of actions to drive improved availability performance in H2. And these included reducing the options in H2 by over 11%, focusing on hero categories such as denim, knitwear and lingerie, and these were supported by even more relevant marketing campaigns. We continued to drive full price sales throughout and had shorter, sharper approaches to clearance sales. And we introduced fixes to search and had a later cutoff for delivery at mns.com. And as you can see, we began to see the benefits of this on trading prior to the effects of COVID-19 in March. In international, we have shifted from an owned model to one that is largely a franchise and JV operation. In the past year, we're focused on localizing our offer and range through investment in lower pricing and product design specifically for the local marketplace. We've been modernizing the store environment across more than 70% of the estate. And as you can see on the chart, franchise shipments began to improve in half too, again, prior to the effects of COVID in March. We've also started to make strong progress in developing the online proposition for the international business. I'm now going to hand over to David, who will take you through the financials.

Thanks, Steve. Good morning, everyone. I'm now going to take you through the financial results for the year, which is a reminder, consistence with the half year are now reported under IFRS 16. Sales were slightly down at 10.2 billion and group adjusted profits reduced by 21%. there was an adverse impact to our adjusted profit of around £52 million in March compared to estimate that we largely attribute to COVID-19. Statutory profits were down 20%. We have recognised 213 million of COVID-specific adjusted items, which I will explain shortly, and we therefore estimate the total impact of COVID-19 to be £265 million. The effective tax rate was 20.7%, which was slightly lower than expected. We generated over £200 million of free cash flow and our net debt included leases reduced 1.2% on last year. As previously announced, we will not be paying a final dividend for the last financial year. During the year, we undertook a full review of the way operating costs are allocated between the businesses, and we are now reporting the full P&L down to operating profit for each of our three segments – food, clothing and home, and international. This allows the financial information to align with the way the business is managed and holds leadership appropriately to account. Firstly, food performance. Sales were up 2.1% with our strategy to lower prices, remove promotions and broaden appeal, improving volume growth through the year. Operating margin increased by 30 bps. Within this, gross margin decreased more than we expected as continued investment in price and inflation were not fully offset by cost savings and a reduction in promotions. Operating costs reduced both in absolute terms and as a percentage of sales. As we made good progress in our £350 million cost saving programme, efficiencies in store staffing and in other store costs more than offset the pay review and cost inflation. Central costs reduced due to lower depreciation as previous investments reached the end of their life and there was a one-off system write-off last year. Distribution costs increased largely due to cost inflation. We estimate that the increased demand pre-lockdown in March benefited food adjusting operating profit by approximately £4 million. In clothing and home, sales were heavily impacted by COVID-19 in March. After a disappointing first half, we saw improved sales both in store and online, supported by rationalisation of ranges, better availability and growth in key categories. Gross margin was down more than planned as a result of sourcing headwinds in labour and raw materials and the adverse impact of higher than expected promotional sales and shorter clearance periods. Despite all categories of operating costs reducing year-on-year, lower depreciation and cost efficiencies in store staffing and our move to a single-tier network, these were not sufficient to offset the fall in like-for-like sales and inflation and therefore caused a decline to operating margin. Re-estimate that the significant drop in demand and the shutdown of clothing and home store operations post-lockdown negatively impacted March adjusted operating profit by approximately £44 million. Turning to international, both sales and operating profit declined. We estimate adverse effect on March operating profit of 12 million, largely related to COVID-19. In our owned business, the full year sales decline was driven by Ireland, partially offset by 17 new store openings in India. These new stores, however, came with opening costs which impacted profit. The franchise operating profit was impacted by our strategic investment in lower prices and ongoing efficiency initiatives by key partners, leading to destocking as well as the effects of the political disruption in Hong Kong. Now looking at the profit bridge. As we have seen, the increase in food operating profit was more than offset by clothing and home and international declines. Within other, M&S bank income declined by 10 million, predominantly as a result of bad debt provisions taken at the year end, reflecting the higher risk of customer default. Offsetting bank within the other bar is 2.6 million pounds of our share of the Ocado retail profit. As a reminder, that is for the period from acquisition to the end of February. The interest cost benefit largely reflects a hedge unwinding and lower lease interest with other factors such as our new bond issue and cash proceeds from the rights issue offsetting each other. Within this year's adjusted items, we have recognised a charge of £213 million relating to the COVID pandemic. This includes a charge for stock provisioning to write down items which are unlikely to be saleable when stores reopen or will be cleared below cost and for stock that will be hibernated. In addition, there is an incremental charge to the impairments of stores and goodwill recognised using our COVID-19 scenario cash flows. Turning to the net debt bridge. As a reminder, under IFRS 16, there are a few more items on the bridge this year. We have started at EBITDA before cash rent to allow you to get a clearer view of the underlying cash flows. At the end of the bridge, we show the net effect of capital repayments and new leases on total debt. Free cash flow was lower than last year. This reflects a lower EBITDA of 1.2 billion, a working capital outflow and higher capital expenditure. In terms of working capital, you may remember that we had a planned reduction of inventory levels last year. We ended this year with higher than planned levels of stock as a result of food stockpiling demand and lower than expected clothing sales in March. As a result, you can see that after payment of our final dividend, net financial debt decreased by 53 million pounds. Total net debt, including the effects of capital repayment of leases and net new leases capitalized, however, decreased by 50 million relative to the opening position. That's it for me. Thank you very much indeed. I will now hand you back to Steve.

Thank you, David, for that comprehensive review. Now, of course, right now, the results from last year seem almost like ancient history. And as I will walk you through shortly from the outset, we recognize that we are facing a crisis whose effects and aftershocks will last for the coming year and beyond. And despite the trauma of the crisis for everybody, I have never been prouder to lead M&S. The way our people have rallied to support our customers and communities has been nothing short of awe-inspiring. And here's a short film which will bring that to life with a few of their actions.

At M&S, we're always all in for our customers. It's one of our values. It's what gets us up in the morning. But when COVID struck, it wasn't enough. We had to be all in for our colleagues, communities and suppliers too. Our M&S family, helping every family we can. Because we're all in this together.

We've been looking out for our incredible colleagues by making sure anyone self-isolating and all frontline colleagues are furloughed on full pay. Giving 50,000 colleagues who've kept working to feed and clothe the nation a 15% bonus and setting up a hardship fund for any colleagues who are struggling.

We've looked at every aspect of our customers' experience in stores to help keep everyone safe and well with the M&S customer service that makes us special. At our automated distribution centre in Castle Donington, we've made big changes to the way we work so our customers can get the things they need delivered to their homes while keeping our team safe we've introduced contactless delivery as standard encourage contactless payments in stores and we're one of the first retailers to set aside exclusive shopping times for vulnerable customers health and social care workers we kept innovating too within two weeks of lockdown we had designed and launched a new online food box service and we've sold over a hundred thousand We doubled the numbers of stores where our mobile pay-go technology can be used from 50 to 100. And we were the first to offer an e-gift card to help volunteers shop on behalf of people self-isolated at home.

Through the Neighbourly Community Fund and donations to the National Emergencies Trust, We're helping over a thousand charities support the most vulnerable in our communities across the UK. We've delivered over a million meals to those most in need and we've donated clothing care packs and made free food deliveries to NHS trusts in England, Scotland, Wales and Northern Ireland. We've made it easier for customers to get involved too. Over 400,000 rainbow bags for life have been purchased in store with all profits supporting NHS charities together. Over 30,000 customers switched their chosen Sparks charity after we added NHS Charities Together, National Emergencies Trust and the Neighbourly Community Fund to the list. We've sold over 65,000 All In This Together tees. They're now our fastest selling t-shirts ever.

And we haven't forgotten about our long-standing suppliers at home and overseas. We're supporting our clothing suppliers to make sure no time, work or material goes to waste. We're standing by our price on sourcing promises to 10,000 British farmers. And we're offering immediate payment to our small suppliers to help ease their cash flow.

And despite these challenging times, so many good changes are being made. We've set up the rollout of new technologies to help our colleagues be better connected than ever. And we're working faster and smarter to make good things happen for our customers, so they'll always remember that they can rely on M&S when it matters most.

As I said before the film, our view from the outset has been to plan for a crisis which will last for the year and beyond. Operating in an environment where it's impossible to forecast has meant our first priority has been to ensure we have substantial liquidity for the next 18 months. We've done this under a prudent COVID-19 scenario, which was formulated in the early days of lockdown and has been stress tested to even greater downside should that be required. Relative to the original budget, the scenario assumes very substantial declines in clothing and home sales in the UK and international markets with volatile trading in food. I should be clear, this does not represent a forecast, but it is the means against which we have planned over £1 billion worth of steps to reduce costs and manage cash flow. As you will have seen today, it's early weeks, but we are substantially outperforming this scenario with cash flow over £150 million better than envisaged. If we look in more detail at the cost and cash actions we have taken, there have been three major sources of cost reductions totaling circa half a billion pounds. Firstly, we've deferred all non-essential spending, and this including freezing pay and recruitment, slowing marketing and indeed some technology spend. Second is savings in areas related to volume, such as logistics in clothing at home and colleague hours after the lockdown. And finally, under the scenario, we'll receive over £170 million of very welcome business rates relief and circa £50 million of furlough receipts to the end of June. The balance sheet will also be supported by substantial reductions in capex, where we are focused solely on high return, short payback activity, which supports the transformation. It also benefits from the cancellation of the final dividend for the last year and the dividends in the current year. In addition, we are undertaking a major exercise to manage the flow of clothing and home stock, which I will talk about in more detail. As you can see on this slide, we expect the group to experience an adverse movement in cash flow under this scenario with a peak drawdown of facilities in the early autumn. However, relative to 1.4 billion of combined facilities under our RCF and the CCFF, we will retain very substantial headroom even at the peak. While the scenario assumes we end the year with drawings of 300 to 350 million, As I said earlier, we have outperformed this by over $150 million year to date. In addition, the balance sheet will benefit from the saving of the final dividend of around $130 million, which is always paid after year end. This leaves the possibility of the group being close to structurally undrawn in its facilities by the end of the year and able to invest in additional high return opportunities as trading develops. As the UK's leading clothing retailer, one of the biggest challenges the business has faced into during the crisis is the mounting backlog of unsold stock for spring-summer 20 and the forward pipeline already ordered for the autumn and winter seasons. We closed the year 1920 with clothing and home stock of about 500 million pounds with committed orders of about 560 million scheduled to arrive in the next six months. So we've undertaken a detailed exercise to manage the flow of stock and action as follows. We've canceled around 100 million pounds of summer 20 orders where the products will be no longer required. We've drastically reduced future commitment and are holding much more open to buy. However, in support of our supplier partners, we have paid for all garments in production and fabric which was already committed to prior to the crisis. Around £400 million of the balance of stock and forwarders is year-round products, an area of strength for M&S and will be carried over at low risk to autumn. And we've also made arrangements to hibernate around £200 million worth of seasonal stock until spring 2021 and storage facilities have been secured. Under our sales scenario, we have therefore taken a charge of £145 million in adjusting items to reflect the estimated combined costs of handling, clearance and hibernation of stock. Now for a piece of more positive news. It's early days, but trading over the first six weeks of the year has been ahead of the scenario, particularly in food and online, on an improving trend. As you can see on the chart, clothing and home sales of essential products in-store slowed to a trickle after lockdown, although have gradually improved since. Online performance was weak at the beginning of the period, but has accelerated and averaged over 20% growth in recent weeks. In food, there was initially an adverse margin mix with declines in prepared meals, but growth in grocery coupled with pressures on availability due to early stockpiling. Performance has also been affected by the closure of cafes, around 4% of revenue, and several travel franchise units, which were around 5% of our revenue. However, here too, we have returned to growth in recent weeks. So in summary, we've planned for a prolonged crisis from the start. Our scenario planning has secured very substantial liquidity and gives us substantial headroom. Against this scenario we have planned over one billion of cost and cash actions and although it's early days we are trading ahead of that scenario. Moving on to our plans for the future. During the crisis we've all had to work differently and I think it's clear to all of us that customers may never shop the same way again. Internally, the crisis has shown us how we can work faster, more flexibly and more effectively. I am determined that we learn lessons from this and accelerate our transformation to thrive in a new consumer landscape. For instance, a smaller executive team has been able to make decisions faster, with strong business unit leadership teams taking accountability for trading and operating decisions. Working groups and committees have been disbanded. All colleagues have had to operate more flexibly and many have been deployed across clothing and home and food. And operating as an online-only business in clothing and home has meant thinking and organising with almost a pure play mentality to compete effectively. The unprecedented action required to manage clothing and home stock has forced us to accelerate the rationalisation of SKUs, give more responsibility to sourcing office and work in the future with fewer, larger suppliers. We have a unique moment where we can shift to trusted value in clothing at home, like we have in food, and remove complex and confusing promotions. And the seismic shift in the property markets gives us an opportunity to exit legacy and expensive office space and modernise our store estate far more rapidly. We will apply these lessons to five clear priorities. Firstly, and most importantly, our focus is being an online winner in food and clothing. For the food business, this means the switchover plan for M&S to supply Ocado. The crisis has drastically accelerated the growth prospects for grocery online. And we've worked closely with Ocado Retail to ensure that the switchover, planned for September, is on track. We will list over 6,000 lines compared with just 4,000 Waitrose lines today, having developed over 1,000 new products. In addition, around 1,600 clothing and home lines will be available on the site. We believe M&S has substitutes at the same price or lower and of the same quality or better for the majority of the current Waitrose offer. and arrangements are being finalized with suppliers and synergy benefits are on track. The value of the Ocado investment is illustrated by the exceptional growth since lockdown. Ocado Zoom is now operating at capacity and plans for a further three CFCs in the next 24 months are on track. Second, we will turbocharge growth at mns.com. Digital has been brought together under a single transformation team which combines data, online development and technology. Marketing spend has been refocused onto acquiring and retaining recent customer growth. We are taking steps to maintain this momentum. We will relaunch Sparks and deliver improved payment options later in the year. And we've created a search engine optimization war room. And we're also targeting rapid app growth to drive conversion. We know our customers spend a substantial amount on brands elsewhere. So we're broadening our appeal by introducing a number of guest brands to our platform in the coming weeks. Over two years, we think adding about £100 million of the sales is a worthy ambition. We've built a £100 million online international business at retail value, with growth through marketplaces as well as our own brand websites. Our Indian site was launched in Q4 and we have more marketplace plans this year. Our third priority is to capture value in the food supply chain. Availability is still often below 90% and gross waste over 5% of sales. Our supply contract costs are high and inflexible. This crisis has illustrated more than ever the benefits of resolving the long-standing issues with availability, waste and cost. And last year we tested the Vanguard program which optimizes processes in the supply chain to deliver more productive stores. This was rolled out to 90 stores from the Barnsley depot, and sales and waste have been better than the trial plan. Our next step is to open a new ambient DC in quarter three of this year, which will ensure sufficient network capacity and a smoother flow of stock, and of course support further rollout of Vanguard trial across the network. We will also work to resolve the problematic supply contract with our logistics partner, GIST. Underpinning the focus on dot-com in clothing and home, we must accelerate the simplification of ranges and move to everyday value in our clothing business. As I outlined earlier, we've made progress reducing options and improving availability and value. However, the effects of the crisis and the unprecedented actions we've been forced to take to manage stock give us the opportunity to reset the offer in clothing and home. In effect, moving three years in one, which we will grasp. Autumn-winter SKUs are being reduced by a further 20%, leading to a cumulative cut of 30% in two years. We will have fewer but more strategic supplier partnerships, with more work being done directly from sourcing offices at lower cost and closer to the supply base. We plan to reset our promotions, removing the friends and family deals and shifting to trusted value, enabling much sharper everyday pricing. With far fewer options and less commitment, we can develop our test and reorder capability for faster clothing supply immediately. By autumn-winter 2021, the new, simpler value proposition will be clear. Reshaping our store estate has been a core part of the transformation program from the start. However, it has become even more clear in recent weeks that the property market is undergoing seismic change, which gives us a real opportunity to step change the transformation of the estate. There has probably never been a better time to relocate off-pitch stores and improve the quality of space. We've also opened negotiations with landlords on stores with onerous leases and where the terms are unlikely to be viable in the new world. And while there has been some short-term disruption to redevelopment plans for our larger stores, we are aiming to bring forward proposals later in the year. The closure programme remains on track, but we may be able to accelerate the next phase. So to summarise, last year was a year of substantial progress and change for the business. We made the transformational investment in Ocado Retail, food outperformed and changes introduced in half two improved the performance in clothing and home. We have scenario planned for a deep crisis from the start and have taken fast and decisive action to manage our cost base, cash and ensure access to liquidity. Against this plan, we have delivered robust trade and cash outperformance year to date. While 2021 may be a lost year in profit terms, we have shown our determination to act on learning from the crisis, harnessing the positive change to how we work and accelerating our priorities. Through this, we will deliver a renewed and stronger business in a world which will never be the same again. Thank you.

Good morning, everybody. It's Archie here. I'm very sorry that I can't see you all, of course. I did suggest we should do this as a Teams presentation, but I was told it wasn't technically reliable. So you'll have to settle for the sound of our voices. I'm here with Steve Rowe, Chief Executive, and David Serdo, who's our Acting Finance Director prior to Owen Tong's arrival. I did just want to say a word. David very kindly agreed to join us a few months back. I think he was looking forward to a reasonably tranquil interim role prior to his next assignment, and it hasn't quite turned out that way. So we're extremely grateful, David, to seeing you through this turbulent period. look we're going to go to Q&A all I've got to say is that obviously this is financially a bit of a lost year for us but we're very confident about our underlying position and from a business and a management point of view it will be one of our most exciting years ever and I know it's difficult for everybody but This is an opportunity to deliver dramatic change in our business. And we're very, very positive about seizing that opportunity. Now, we're going to come on to questions. In the new way of doing things, we're going to be quite brisk. So please, can you be brisk? Ask one question at a time. You might be entitled to a comeback. If you're reasonably sharp, we'll probably go for about 30 minutes, but I'll form that judgment. So not everybody will get in a question, but Fraser and the whole team are available throughout the day. And I know some of you have been talking to him already. So just procedurally, if you want to ask a question, you have to press star two and then ask your question. Please could you, although I can see who you are, the rest of the world can't necessarily, so please could you, I know you'll want to anyway, tell us who you are and who you work for, and then we'll fire away. Okay, so shall we get started? Let's take the first question.

Okay, the first question is from the line of Clive Black at Shore Capital Markets. Please go ahead, Clive. Your line is now open.

Good morning, Archie and the guys. So on the basis of brevity, Archie, can you say why you're confident about the underlying position and where you're excited about the future? And then just as a quick supplementary, how many working groups and committees have been disbanded in recent times following on from Steve's presentation. Thank you.

Well, I'll get Steve and Dave, you can say why we're confident and talk a bit about the changes. On working groups and committees, part of the Never Same a Grain program is we are not allowed to use those expressions anymore. So obviously there are meetings of people you can call and committees you like, but committees, reviews, work streams, we've learned in the last eight weeks, that we can manage without those, that we can decentralize decision-making, that people can make decisions very fast and capably on their own, and very visibly so as well. So, perforce, M&S is working in a way that's dramatically different from in previous eras, and we want to capture this moment. So the changes we're making under Never Same Again are, as you allude to, Clive, There are partly changes in structure, there are changes in investment pace, but there are very substantial changes in culture as well. Steve, you may want to add to that. Yes. Then let's come to why we're confident.

The smaller executive group that's been running the business in the last seven weeks is now formalised as an EXCO, Clive, and we have, as a part of that process, removed four formal committees, which will actually sit... where decisions were taken in a smaller group, so things like a separate investment committee, now done by that group, and where it was held once a month is now happening every week, so we make quick and live decisions. But there are plenty of examples throughout the business. In terms of the second part of that question, why are we confident? I think the first thing is, and the most important thing, is that we worked very hard and very quickly to make sure that we had under those scenarios which we showed, and we want to remind you it's a scenario, not a forecast, good liquidity and substantial headroom for the business, which allowed us to continue to invest in programs which will help the transformation, such as the increased food capability through the Vanguard trial and an additional ambient warehouse. So that's the first thing. The second thing is that before we went in, we were seeing a good trajectory as the transformation bit during the course of last year. The food business has outperformed the market pretty consistently throughout last year. We are still looking forward to the transformative joint venture with Ocado which will see us join the fastest growth channel in UK food retailing as we take about 6,000 M&S products online. Our clothing and home business, we were starting to see green shoots indeed. Until the end of February, we're showing light for light growth in clothing and home at a second consecutive series of growth in women's wear, lingerie and kids wear. And then on top of that, where we've seen the movement to a third online, we tested Donington's capability at Christmas, but that's proved substantial. And we have continued to outperform last year through online channels. And Donington is holding up well.

Financial.

security. Morning Clive. Yes we're comfortable with the scenario. We formulated it in the early days of the crisis. We believe it to be prudent. We used it as the opportunity to go in early with a series of measures to conserve cash and to reduce costs. They total over a billion pounds. So that gives us important resilience for the year ahead. And as you know, we've also arranged a waiver and an adjustment of our covenants associated with our RCF, which is helpful. And we also are eligible as an issuer under the government CCFF scheme. So we have substantial liquidity. And on that scenario, which we're following, we also have a significant headroom. So that gives us some confidence about our financial resilience over the weeks and months ahead. And we've been running ahead of scenarios so far. It's also important to note, as Archie mentions, that so far, six weeks in, we're comfortably within that scenario. We're actually £150 million better so far.

Okay. Thank you, Clive. Okay, we're going to go to Geoff Lowry from Redburn and then Simon Irwin from Credit Suisse. Geoff.

Yeah, great morning, team. Thank you for the enhanced disclosure around profitability by channel. On the food EBIT margin of approximately four, what do you think that number should be in time given synergies, waste, but also market forces? And second, on clothing and home, is your online clothing and home margin higher or lower than the 7% or so you've disclosed for the entire channel?

Right. I think in terms of the margins on food, what we have said in the past is that we will continue to work on improving the higher cost base that we have within our logistics, and that's part of the Vanguard programme. Indeed, as we said, we will start to deal with the problematic contract we have with GIST. At the same time, we are seeing shifts in the product which we're selling. Some of the higher margin prepared lines that we have high market shares in have been substituted for more scratch cooking under this scenario. So there are some swings and there are some balances in that. We would say that there are opportunities around that margin in food. In clothing and home, I would say that the opportunity to have less promotions still stands and we would want to see more of a trusted value position and better values continue to be brought to our clothing and home business. And indeed, in the sort of three years in one step that Archie alluded to, by the time we get to autumn-winter, we will have reduced the number of options in clothing and home by 30% over two years. So substantial changes there which should be margin accretive. Again, there we have a fairly expensive logistics setup which we are starting to... We've got to the end of the single-tier network programme and we're now starting to look for efficiency in that area too.

Is your online margin in clothing and home higher or lower than the 7% for clothing and home in total?

It's currently lower, as you'd expect. But that's partly a function of the issues we've had at Donington, the evolving way in which we're fulfilling online and the increasing scale we're seeing. So you touched on a really important point. It's the faster-growing part of clothing at home that Stephen did. And so there's a huge amount of work going into how we engineer not just faster growth but also better profitability out of online. And that's part of the Never the Same Again program with Katie Bigstar coming in to bring all that together. Because in the last few weeks, of course, what we've found is in clothing at home, we are an online business. The rest is a trickle. So when you are an online business, you're a pure play. So you might as well behave like a pure play. And when you behave like a pure play, you find that the world is rather different. So, yeah, there's work to be done there. Just to add to what Steve said on food, look, we're not doing margin forecasts here or at any time, but you can add up the numbers. We are ambitious for the food business. I mean, we've come through a period where we were anxious for the food business. And obviously, we've been anxious the last few weeks. But going forward, we are ambitious for it. We were seeing outperformance, like for like. We're seeing great opportunities to reduce waste, to improve operating efficiency. And the supply chain thing isn't just to do with sheds and trucks. It's also to do with the way the product arrives in the stores. We've, so we've had good light for light growth. We've got the new format stores, which are, you know, experimental, but we can see real possibilities there. And Stuart Machen is very keen to see further physical expansion in the store base, as you would imagine. And then we've got Ocado coming in on top of that, and we've talked about the numbers there. the real possibilities. And you can run your own numbers on the exact margin. David, anything to add?

Sorry, David. Just to say that in terms of the food performance, we did call out some opportunities raised around supply chain efficiencies, which obviously will be beneficial towards margin. But as Archie says, the big story really are the opportunities in sales and the opportunities to grow quantum profit.

Okay. We're going to Simon Irwin from Credit Suisse and then Charlie Millsands at Exane. Simon, good morning.

Good morning, everyone. Thanks for taking my question. Can you just talk about your vision for what the store of the future actually looks like, the percentage of food versus clothing and home? and particularly how you're going to get there. You know, you've closed just 54 out of the 110 outlines. Clothing and home space fell just 2% last year. Maybe you can outline where we are with leases on larger stores and just how long it's going to take you to get stuck into the rump of the estate.

Okay, Steve.

Yeah, okay. The store of the future conversation is Not as straightforward as perhaps you would like it to be because we have different mixes of food and clothing at home depending on the format. So where we have large out-of-town stores such as Camberley or Hedgen, they tend to be clothing dominant both in footprint and revenue and profit. Of course, at the other end of the extreme, our Simply Foods are 100% food. So we have a mixed estate. What I think it's fair to say is that we are in a program of reducing clothing footprints, either through the store closure program or through remodeling of the existing stores. And as you will have seen in Hedge End, we actually gave more footage to food within Hedge End, and that's something that we'll carry on doing during the course of this year. In terms of the closure program, we are on schedule with where we wanted to be. We've got to balance this quite carefully on a site-by-site basis because some of the leases we're dealing with are complicated and onerous. But we are on track and we will continue to close down stores within the programme. We're also taking this moment to renegotiate leases and are having what I would describe as constructive conversations with landlords. And those are ongoing. We expect to have some acceleration of the reshape during the course of the summer and the autumn.

You know, we don't know this, but... We think there's never been a better time to reshape the portfolio because there are real property opportunities for us out there, partly with the demise of other retailers, but also because there are not many people looking for good new space. So we do want to move faster, as Deepa said, and that applies both ends of the rotation of the portfolio.

But look, the other point is... I'm sure there's never been a worse time for exiting large space if you've got long leases.

Yes and no. I know what you're saying, that landlords are not easily going to replace us if we leave the space. But that's a negotiation. And we know that we need to change the space. So Will Smith, who just arrived as our new property director, is going to get into this. And a lot of these older stores we have, we are in active discussion with landlords about the future of that site. So I think we don't have the luxury that other companies have, having a collection of short leases. So it is slower with M&S, and it is more expensive, as you've seen. I would be very surprised that we're not moving a lot faster in the next six months.

And I'll just be honest. I would say that the conversations we're having now, the landlords are being very pragmatic about this. And in many cases, it's better to have a renegotiated lease conversation than an empty store. And we should remember that. Secondly, the other thing I'd point out is our very largest stores actually are our most profitable. So the larger clothing home stores. And the closure programme has been largely focused on the high street stores that we have. over the last couple of years, and that will continue. In addition, it's not just a closure program, it's a reshaping program, both in terms of footprint, but also in terms of the estate. And we actually have opened 25 new stores, including two new full-loan stores, one in the West Country and one in Rochdale.

Yeah. Okay. Thank you, Simon.

Charlie. Yeah, thank you very much. It's Charlie Muir-Sands from EXAM. I want to focus on food, please. Firstly, you've alluded to sort of a negative margin mix around demand, but you've highlighted that you are going to tackle the GIST contract, which I think you've talked about a number of times in the past. Do you think there's actually a good chance that you could resolve that this year?

Look, might I just comment on that? JIST isn't, the JIST contract, we could have had this conversation, Steve, I think any time in the last 25 years. Yes. This is a long, long running thing. It's not anybody's fault. It's just that many moons ago, M&S entered into the structure where in effect the distribution and transport arm of the business was outsourced on a long-term contract and just built up a network to serve M&S. I mean, in some ways, typical of the type of supplier relationships M&S does. And as a result, we've developed an interdependence. In this day and age, it doesn't work that well because it's a sort of disincentive on both parties to invest and modernize. And we've had very good discussions with them about it they're under new ownership. I'm sure this will be an ongoing rumbling thing. And I honestly couldn't tell you when it's going to result, but we're having a constructive relationship. Steve, is that a fair?

I don't think it's actually. I mean, just to remind you, I mean, in the way the relationship is structured, that essentially just have the IT, the physical locations and the people and we pay for the capital that goes into that on an open-book basis. And that's not quite right in terms of structure. And there is more to do, and we're working on that as part of the Vanguard rollout. And in terms of the margin, I should also point out that, as Archie said earlier, whilst there might be some margin mix in terms of the type of product we're selling, there are upsides in terms of both the changes to the availability and the waste, and indeed the high-cost base here.

Charlie, you probably know this, but there's seven years to run on that contract. So every year that evolves is another year ticking by for both sides. So there's some pressure to engage. OK, we'll move on. Charlie, do you want to come back on that?

No, that was very clear. I just did wonder, though, you haven't revised your second half food budget. I mean, I realise that hopefully we're going to be able out of a hard lockdown by then. But, you know, as many people are beginning to acknowledge, we're going to be facing a very negative recessionary scenario. You guys have historically been pretty pro-sick. I just wondered what gave you the confidence to not be a bit more cautious on your second half food sales?

Sure, just to be clear, we haven't published a budget. We've published a scenario. David, I think the question is, why haven't we revised the second half scenario?

Well, a scenario was established in the early days of the crisis. It's surfaced very well so far. We are expecting a decline against our original expectations throughout the year. But during that time, we expect some beginning to return or more normal shopping patterns. But right throughout this financial year, we are assuming a decline against our expectations. Original expectation.

Original expectation. We should be clear, this is a scenario we could have written. Nobody has a crystal ball here. It's quite a difficult time for people to put accurate forecasts in. We need to make sure we had something to base our plans on. And I think in the sort of plan for war and pray for peace scenarios, we've done that to ensure we've got the right liquidity in the business and we're taking the right action.

But, Charlie, remember, too, I mean, this isn't a point about why we haven't revised the scenario, but... Our food business has been disadvantaged in the crisis because of the swivel away from food for now and sandwiches sales are well down and all that sort of thing. And the people going to have to queue to go shopping, they're going to go shop once and they're going to go to the big store. So just structurally, we're disadvantaged versus some others. But that will ease from now. So we see, if anything, improvement from here. Our good simply food stores, the standalone ones with car parking, etc., have been performing well up. They're in really good shape. The difficulty is where travel locations are closed, office locations, wherever you would normally be sitting, are closed, so you're not buying your sandwiches.

and what I would say is the exit rate, if you like, of the period of the sales that we've put in front of you is substantially different to the start. There was almost a shock to the system, whether it be in food or clothing at home or online in the first weeks after we locked down. Every single one of those divisions has accelerated its performance as things have normalised. And if I... took out things like hospitality which essentially affect the food business or the franchises which are in those travel locations then i can tell you our light for light performance in food incorporated high single digits um which we are pleased with and accelerating as i said yeah hospitality is good point because we close all the cafes sorry how much four and a half percent of the sales have just gone from that alone and some of that's going to

Anyway, Charlie, I'm not answering your original question when we're wittering on, so I think we may move on. We're going to go to Anne Critchlow and then the great Geoff Ruddle from Morgan Stanley.

Thanks very much. Thanks for taking my question. OK. The £500 million PopEx savings are based on your COVID-19 scenario, but you're trading better than that scenario at the moment. So should we be assuming that quite a bit of those cost savings wouldn't be achieved? How dependent are they on your trading scenario?

Where we have got increases in volume through the food business, they've already baked into our scenarios. What we did is immediately stop a large chunk of discretionary spending in areas like clothing and home marketing, etc. And we don't see that coming back into the scenario even if things move on. And look, never the same again moment that Archie talked about his teeth. We are re-examining every aspect of the business in terms of its operating costs and expenditure and those we are embedding through the programme.

Yes, we've been through our discretionary costs. We've cancelled or deferred them as far as possible and we're continuing to work on our cost reduction programme. It's very important to re-engineer our P&L going forward. But to your point about where we're performing better against the scenario, which is sales-related, clearly there will be some volume-related costs, but they'll be more than compensated by variable margin.

Yeah, I mean, look, we're in the world of the unknown, aren't we? If things improve dramatically, then clearly we'll bring some costs back rather than eschew the sales. And just on the capital as well, we took the capital originally down, we started off down at $80 million, and then we've built back up to $140 million. If We're here to create a profitable growing business in the future. And if things are strong enough, we will selectively make the right investments. But the scenario test is showing the first priority was to demonstrate total resilience. And I mean total resilience, not just for the next few months, for the next 12 months and beyond. And that was the board's priority.

Thank you.

Thanks, Anne.

Geoff? Yeah, good morning. Just a very general question for me, which is that you refer in the statement to the plan to introduce guest third-party brands into the clothing business. Could you just talk to us a little bit more about the logic behind that and how you envisage that unfolding?

Yeah, certainly, Geoff. I mean, what we have seen is a number of things. First of all, there are opportunities to expand the repertoire of M&S in two ways. In areas where we don't have expertise but are highly relevant to the customer and also in areas where we already have market dominance and by adding some complementary brands to our repertoire could really push that home in our markets where other competitors may be weakened. We're in live discussions with a number of brands as we speak and you will expect to see some of those appear on our website in the next few weeks and months. and they range from online pure plays to well-established brands. What I will say to you is we're not trying to become some kind of online department store. That's not the extension. This is about complementary branded offers.

Thank you. And if I could just have a supplemental question as well. You currently have a pension surplus that's bigger than your market cap. I realise it's a IAS 19 one-time only thing, but is there any scope over the next few years, you think, to sort of effectively claw some of that back somehow? I'm thinking particularly of the Scottish partnership in terms of the property.

Who wants to have a go at that? David, it's a good thing you're here.

Very good observation about the relativities of the two numbers. It is a surplus, and we're happy about that. Clearly, as you pointed out, these measurements can change from time to time, but we're in a good position in terms of our performance pensioners and our future pensioners. So we're just happy that's a strong part of our balance sheet and our business.

Just before we get too happy about it, Geoff, as you know, it's a surplus that we're funding. So through the artifice of the Scottish Limited Partnership, really, we've made a deficit look like a surplus, which is and it's all fine, but we are currently funding it to the tune of £130 million a year in that That is a cash contribution to the pension fund each year that drops to around 68 million in 2023. So in three years' time, we come down a peg, and then it sits on that peg for quite a while. So there's no near-term possibility of saying, can we have our money back? It actually works the other way. We're still contributing to it.

But there's no ability to lower that number? the contributions?

I think it's extremely unlikely. I mean, obviously the pension trustees have been extremely supportive in the current scenario and working with us, but I think it's pretty unlikely. And we need to have, with the pension fund, good cooperation on the Scottish Limited partnership and the security they have over stores as well.

And in the COVID-19 scenarios we're working on, we haven't assumed any changes to our pension contributions.

I mean, in an extreme world, maybe that's something one could look at, but we're not in that world. Okay, thanks, Jeff. We'll go to Richard Chamberlain and then Georgina Yohannan from J.P. Morgan. Richard.

Yeah, thank you, Archie. Morning, everyone. Morning. I've just got one question, please, on food. It does look like the performance... so far in Q1 is on an improving trend and is causing your cash flow to outperform your internal scenario. So I just wonder if you can touch on what's going on in terms of the food dynamics at the moment, frequency or basket size or whatever, how maybe the food trading patterns are evolving, what you're seeing there recently. Thanks.

Okay. You're absolutely right. Just to reiterate, that is an improving trend. in Q1, particularly when I look at the business, as Archie said earlier, without hospitality and without the travel locations in franchise. What I would say to you is that, like many others, we are seeing a substantial decrease in the quantity of footfall to all our food stores, as customers do a much bigger shop with us. We are seeing new customers, but it's more of our existing customers with bigger baskets, We're also seeing that shift into scratch categories and more ambient. And in fact, things like our frozen business, which we've been focusing on as part of the future development to make our food business more relevant, has been growing by around 70%. So new categories, less customers, bigger baskets. It's particularly pronounced for us because we have a huge number of food on the move customers in the business. So in the figures, we quote, we will have a substantial lunchtime trade, which is pretty much dried up in the way that it used to. And again, the only stores we've closed so far are actually five that are in, four in the city and one in Glasgow, which are city centre stores.

Okay, that's very helpful, Carla. Thanks, Steve. Thank you, Richard. Okay, we're making good progress here. So we're going to go to Vicky Gedge and then to Simon Bowler from Numis. So Vicky from PIMCO. I'm sorry, I missed out on Georgina.

Vicky's line may be muted. Vicky, could you please unmute your line? Well... Okay, in that case, we'll go to Georgina.

Sorry, I missed out on one. We'll go back to Georgina. Sorry, Georgina.

Morning, guys. Can you hear me okay?

Good morning.

Good morning. Hi, thank you for taking my question. I have one question and then just a very brief clarification, if that's okay, please. My question is, I mean, I appreciate very much that the focus is on cash this year, but just in the scenario analysis, can you give a ballpark of what PBT that would have actually implied in that analysis? I mean, on my sort of back of the envelope, it would be a broadly break-even PBT. So if you could just let me know if I'm in the right ballpark, please. And then the clarification was just on the branded that you're introducing to clothing and home. Is that on a wholesale basis or is it more of a marketplace model, please?

Okay. So I think Archie said at the start of the call, this is broadly, you know, a sort of lost year in terms of how we think about it, but we just don't know how we're going to see the scenarios unfold later on in the year. Um, so I think that's all the guidance I can give you. Um, in terms of, um, The brands, there are different models being deployed with different brands at this stage. But in commercial negotiations, I can't give you any more detail at this stage. David, do you want to comment on that?

Yes. I mean, the scenario is what it is. It's to help us manage our cash and liquidity in a very difficult environment. It's served us well so far. It was also extremely useful in the preparation of the year-end accounts. and we've managed our headroom and we've managed our cost reduction and caste conservation measures in the context of that scenario. But it isn't a forecast and it most certainly isn't guidance.

Thank you very much.

Okay. Thanks, Georgina. Now we're going to take two more and then we'll wind up and obviously available all day for any further questions. So we're going to go to Simon Bowler and then Adam Cochrane from Citi. Simon, good morning. Good morning.

A couple of quick questions, kind of coming back to the property side of things, where I guess we've talked quite a bit about property in particular lease, but does this change anything about your way of thinking of your own property estate? And then secondly, if we're thinking about an accelerated channel shift in the food part of the market, obviously you've got exposure to that now through Ricardo, but how does that make you think about the composition of your food space as well?

Interesting point.

I think what it shows is that the decision to partner and have the JV with Ocado, we said it was transformative and clearly within the market it is. That trend to online shopping, which has been the fastest growing part of the food sector for some time, is only going to continue. And we are well placed, the two teams have done a great job in making sure that we're ready to launch in September. 6,000 M&S products, which will be ready to go live against circa 4,000 Waitrose, where the quality is either the same or better than the Waitrose products, and the prices are either the same or lower than Waitrose. So we think we've made that shift at the right time. In terms of our existing offer, we will make some changes to it as we see trends developing in the marketplace in terms of the shape. But Stuart and the team will already – making great progress in making the range more relevant to a broader range of customers, and particularly a family shopper. And things like the frozen that I alluded to earlier was part of that. So we already were pushing further into more ingredient lines, more grocery lines, and a broader range for the family.

We don't see, Steve, do we? the Ocado thing as substitutional. Of course there's some interaction and of course anybody can see that I'm sure there'll be some business would have gone through the real estate will go through Ocado and vice versa but overall we think that both sides will benefit and the possibilities I mean both in the new formats and what we can do in food are exciting but also The handover in September to Ocado with the 6,000 products is the beginning and we've been focused on that because that's enormous and I'm sure there'll be some bumps in the road but basically we're geared up to do it. But that's just the beginning of the possibilities with Ocado. There are lots of other things on the food delivery and maybe one day click and collect etc. which we can

If you remember from last year, Simon, when we actually talked about this, our customers are already shopping for food online prior to the COVID-19 outbreak and circa £3 billion worth of business was being done with others by our own customers. So again, it's complementary to what we do rather than substitutional.

Okay, and then just coming back to the owned property, any comments on whether that's something that's being reviewed at this point in time? You mentioned broader property reviews.

We didn't quite catch the first part of that question, Simon.

Just with regards to the owned property, you've spoken quite a lot around conversations with landlords around the lease profile of your estate, but just if we should be thinking about anything with regards to that property that you own.

Yeah. I think two things, as part of the closure programme obviously we deal with that in the normal way and under our own steam and we make sure we're getting the value that's appropriate for those properties. In terms of the larger store, the larger property development piece, okay we've paused that at this stage because of the environment but we do have in our building plans for those property assets that we do have.

I mean one of the things, Will Smith who's just arrived, interesting time to arrive, One of the things he's going to be looking at is this aspect because our property ownership is really historic. We own long leases that are of some value or freeholds in stores that somebody bought 25 years ago or even 100 years ago. And we've got vice versa, liabilities that relate back to that period. So there's a hell of a lot of work to be done sorting out that and asking yourself the question, of what we own that freehold because somebody bought it, but is it where we want the shareholders money to be? Or should it be dealt elsewhere? So we certainly see, we're not spectacular, but we see opportunities there. Okay, thanks. Okay, we're just going to take then one last question from Adam Cochrane. And then I think we'll draw a line. Adam,

Thank you. I better make it a good one, the last one. In terms of, maybe I might squeeze in two. Are there many challenges to accelerating the strategic measures that you're going to do anyway, given you're trying to manage the cash flow and the capex at the same time? It sounds really impressive that you're able to accelerate many of the changes at the same time as you're having to manage the the cash flow given the scenario. And the second question was going to be, when you think about the sort of gross margin outlook for clothing for next year, you've taken some provisioning this year, are you still expecting a very discount-driven competitive environment as you look forward for the next six, maybe even 12 months?

Thanks. Okay. The acceleration of some of the transformational plans we had in the business is driven by the fact that we had good plans in place for many of these as part of the overall programme. And what we are doing is focusing the teams very clearly on those which give us the quickest returns and form the foundational pieces of the future. We've also made sure that we are focused very much on developing the food business, as we said earlier, how much we see the opportunity there, but also within the digital growth plans. And We talked about a third online. That has never been truer. And we now have an aspiration to get more of the business online. So it's really about the focus within those transformation plans. The second part, in terms of margin in clothing, we think that you're likely to see a very, very discounted market through this summer. And that will, as people try to liquidate their positions on stocks, We are fortunate in that we have more merchandise, which we are able to flow into next year. And we work closely with our supply base to make sure that some of it is still offshore. But I think it will be more of a fire sale and then some normality later on in the year. What we also are doing, though, is taking this opportunity to reset our values. We talked about improving our values in clothing at home, cutting the number of ways, removing discounts, going to trusted value. Again, we will accelerate that part of the program and where we'd already reduced the number of ways in the autumn just gone by 11%, we intend to reduce it by a further 20% in autumn, winter this year. So a 30% reduction in two years as opposed to over the three years we had planned.

David, do you want to add anything? Yes, I'd just add really, we talked about our CapEx and the significant reductions versus our pre-COVID budget. But we have been careful to protect what's left to make sure that we do prioritize strategic initiatives and important trade initiatives. So like a second ambient DC, like important data and digital investment to help our online business. So I think we've done a good job there to make sure that we've protected the sources of future growth. And as we've pointed out, we do have headroom and liquidity. to see us through the next weeks and months and through the year. And we are trading well against that scenario, so we should be able to emerge as a strengthened business.

Look, Adam, thank you for asking that question because it sort of brings me to my concluding remarks, really. I'm sure you're no different. I mean, we've all found in the last eight weeks that perforce we've had to start operating completely differently. And we've been rather amazed to find that we can. That, you know, whether it's sitting at home or whether we've got 50,000 people working in stores, we can make them work extremely well. We've had to redeploy people from clothing into food who'd never worked in food before. We've had to multitask in a way that people never multitasked before. And there's real learning in that and in the centre. You know, I mean, as chairman, I... My job is to hover around from time to time. But I've been watching and talking with Steve and David about what's happening. We're at the moment in Waterside House. There's probably today in this building 30 people. Normally it would be over 2,000. But the business is running very well. We've got people who do things that currently they can't do. And the fact they're not doing them doesn't seem to have, well, the sky hasn't fallen in. There's lessons in that. You know, I've been coming in here and Steve's here, maybe Sasha, shouting at the screen all day and making stuff happen. Oh, sorry, talking calmly in a measured way at the screen. I mean, communications, we've seen dramatic changes in communications. All of a sudden, The leadership are talking directly to store managers as opposed to going through some cascade. And we've learned to be extremely effective. And our new technology, incidentally, our stores technology, largely teams-based, but there's a lot that goes with that that you won't see, which is retail-specific, has arrived just in time. It's been dramatically important to us. You know, there are no work streams, there's no reviews going on, there's no consultants here, but the business is moving faster than ever. You take our sourcing offices, and obviously they're in troubled locations around the world too, but the working with the sourcing offices has been dramatically effective because they've been dealing with suppliers, rescheduling stock and all those things. And it's become quite obvious that we should be asking them to do some things that we currently do here. Steve gave me an example the other day that, you know, typically for the clothing business, for every garment we commission or design, we have five samples. Those samples have to be flown back and forward and come in the post and litter at the office. That's a very slow process. That's a pre-digital process and pre-sourcing process. That process can happen substantially offshore now. I was talking to Jill Stanton the other day, who's obviously working from home with her team, done a great job. Because now we've had to cut back significantly on forward buy, the choices we make about the number of options we have I mean, you can't buy the same number of options on 40% or 60% of the volume. That would make no sense. So we've had to dramatically restructure the range and focus on the winners. And she said, look, it's amazing. I've been able to make three years' progress in one, and we can make decisions faster, and we're doing it individually in the categories, and we must just make sure it never goes back to how it was. No, that's why we're, as you say, balancing obviously the crisis and the day-to-day, which is formidable. I mean, every day there's new issues, often around safety. But that's why we're excited that we can pursue both together. I should just say that we have had an amazing period, too, in terms of colleague support across the business. You've seen we've done... huge amount of community contribution, work for the NHS, etc. And some of that's been centrally driven, but a lot's just been spontaneous. It just cropped up. We're one of the employers that has a very large number of colleagues working throughout. As far as we can tell, we don't have statistical evidence for this, we think that our level of COVID infection has been no higher than than the national average and it may be lower and that demonstrates that we've been able to work safely in shops and that's in the main without protective equipment with good social distancing and our shops have been a safe safe place um we certainly hope that's been the case notwithstanding that have been the odd tragedy and and we're very thankfully aware of that so there it is it's been like a big dipper You know, first stage was fastened seatbelts and some white knuckles as we went down wondering how we were going to secure the business. Then we sort of climbed out of the abyss, did the scenarios, secured the bank facilities, etc. And we're now quite excited about the run ahead. And I'm talking not just for us, but I think the whole business is feeling a rush of adrenaline about what we can achieve. Thank you all. Thanks for joining us. And as I said, praise on the team all day to answer any further questions.