Marks and Spencer Group plc

Good morning everybody and welcome to the M&S interim results. In a moment Steve and then Owen are going to go through the entrails of the half year. But what matters to me is that it is now four years since we embarked on this transformation program at M&S. And I met the other day one of our distinguished alumni, somebody actually who you probably all know, and he made a very good remark to me. He said, the trouble with M&S is it's a great British institution, but is it a business? And I think that sort of sums it up. Now our project is about turning a great institution into a great business and there have been plenty of doubters and cynics along the way and I understand that and probably I would have been one too but I hope you'll see from these results that we are very very serious about the reshaping of the business. You know, I've never seen short-term profits as the most important measure of our success. It is quite nice to have some, but probably the really important thing from today in terms of results is that we've substantially strengthened the balance sheet with very strong cash flow, and that's investment and growth for the future. But the real test, and in a sense the quiz for you guys, is look behind the label and answer these questions. What has happened to the perception of quality, style and value in the clothing business? What's happened to the perception of quality and value in the food business? What's happened to our market share in food? Not over one year in pandemic, but over two years. So comparing now to before the pandemic struck. What's happened to the percentage of full price sales in clothing and home? And what's happened to our market share? Not of discounted sales, but full price sales in clothing and home, particularly women's wear and kids wear. Is our online growth now matching the relative decline in the store sales so that overall we're on the cusp of getting back to a growth business? What percentage of our space is in danger of becoming modernized and conforming? And perhaps more qualitatively, is the management team and the business structure unrecognizably different with real pace and energy and determination to change? Now, these are the questions that the board is asking, and I think they're the questions that you should answer. And meanwhile... It's quite nice to be making some money again. Thank you.

Good morning and welcome to the M&S half-year results presentation. I hope you and your families are well. If you're watching the presentation on Wednesday the 10th of November, there will be a conference call for analysts and investors at 9.30 a.m. Details of this are on the results release. This morning's presentation is split into two parts. Firstly, Owen Tonge, our Chief Financial Officer, will take you through the results for the half year. I will then talk in more detail about how our transformation has, along with some COVID bounce back, driven a strong performance. Four years ago, I spoke to you frankly about where we were. I set out a three-phase strategy that began with fixing the basics, which had been ignored for too long. Now, there'll always be a list of things to sort out, as in any trading business, and I've always been clear that I will never over-claim on our performance. We have seen some tailwinds from the effects of COVID bounce back, as well as some headwinds from the well-documented turbulence in relation to supply chain issues. However, we have delivered a strong performance with, for the first time, underlying improvements in all main businesses. I'm out in some of our stores for today's presentation and it's here you can see our progress. For example, our Hackney store first begun trading 85 years ago as a full line store. And in August, we reopened it as a renewed food store with a bigger, better, fresher offer. This includes options to help our customers shop more sustainably with fill your own on cupboard essentials to help reduce plastic and packaging use. This is one of the many steps we're taking to become a net zero business scope three by 2040 through our refocused sustainability action plan, Plan A. Overall, we've reported a strong financial result compared to two years ago. We generated double-digit revenue growth in food. Ocado Retail drove strong order growth despite tough comparatives to last year and made another solid contribution to group results. Clothing at Home has delivered double-digit full-price sales growth and online sales are up over 60% compared to two years ago. In addition, a focus on working capital and disciplined investment has resulted in healthy reduction in net debt. Underlying improvements are evident across the main businesses with gains in market share and customer perception. M&S Food is growing market share with improving quality and value perception. Ocado Retail has increased capacity by over 50% since the M&S investment. In clothing and home, style and value perceptions have increased and market share is now growing across the online and store channels. We have record online customer numbers and strong levels of retention illustrating the future potential of MS2 to accelerate our online growth. The store pipeline now includes over 20 full-line stores and many new food stores, leaving us well positioned to close legacy sites and move rapidly towards our goal of a modern, fit-for-purpose estate that supports omnichannel retailing. The international business is rebounding, growing online sales despite dealing with the dual headwinds of lockdowns in some markets and EU border-related costs. I'll share more detail on the transformation shortly, but before I do, I will take you through the numbers.

Thanks, Steve, and good morning to everyone. This time last year, I was presenting my first set of results to CFO, and what a year it has been for us all. Pleasingly, as these half-year results show, we are starting to see both the benefit of a bounce back after the challenges of COVID, and importantly, real underlying progression as a result of our transformation. This period has not been without its challenges, with parts of the business still in recovery mode. It is worth remembering that clothing and home stores were closed in the first week of the half and are still down double digits on pre-pandemic levels. Our food hospitality business was closed until mid-May, and along with our food travel franchise business, continues to trade well below pre-pandemic levels. So in that context, we are delighted with how the half has progressed. Now, before we dive in, an important point to note on how we are presenting today's results. Given the unprecedented nature of last year, throughout this presentation and in our press release this morning, all comparatives are given against financial year 19-20, unless stated otherwise, which we believe is a more meaningful measure of underlying performance. So, the group headlines. Group revenue was up 5% on 19-20, and the group delivered an adjusted profit before tax of £269.4 million. It is worth noting that the result includes UK business rates relief of 47.5 million. Performance on cash continues to be strong as we focus on recovering our balance sheet with a further healthy reduction in net debt in the period. I'm going to take you through the results now in a little more detail. Starting with food, food sales were up over 10% on 19-20, which is a really strong result. It's worth digging into the detail a little bit more here. If we exclude the hospitality and franchise businesses, which continue to be adversely impacted, core business performance was very strong, with sales consistently up around 17% throughout the period. And in some core categories like frozen, grocery, and household, up 30 to 40%. It's also worth noting that unlike our competitors, these sales numbers do not benefit from a direct online grocery presence, with these sales reported through Ocado Retail instead. In addition, whilst footfall and transactions remain below pre-pandemic levels, encouragingly, total basket size was up over 30%. Operating profit increased over £50 million and operating margin performance was strong. But we should look at the drivers of this in more detail. Gross margin was down, reflecting the lower revenue from our higher margin hospitality business, as well as additional warehousing and freight charges. This was partly offset by the strong growth in core categories and the continuing cost-saving programs, including synergies from Ocado. Our store staffing costs improved, both due to the restructuring efficiencies we announced last year, as well as other ongoing programs. These were partly offset by pay inflation and ongoing COVID costs. The improvement in other store costs relates largely to government business rates relief and lower depreciation charges as legacy store modernizations reach the end of their economic lives. In distribution and warehousing, increased costs reflect a number of items. Firstly, investment in our Milton Keynes Ambient Depot to support growth. Secondly, increased pay and incentives related to warehouses and haulage, which started to build towards the end of the period. Also, higher costs to serve from increased M&S.com orders for hampers, wine and flowers. And finally, inefficiencies from EU border-related processes related to serving Northern Ireland. So despite these headwinds, overall, this reflects a good performance. Turning now to the contribution from Ocado Retail. In this case, I'll talk to the results against last year, as we did not own our investment for much of this period in 19-20. Last year clearly was an exceptional period for grocery online during the lockdowns, and therefore we are annualising against this. This is reflected in the revenue performance. Also, towards the end of the period, trading was impacted by the fire at the Ayr with CFC. However, these two impacts were offset by strong underlying growth in our capacity to just over 600,000 orders per week. And the plan to ramp up capacity to drive growth remains very exciting. Encouragingly, M&S products continue to account for over 25% of the average Ocado basket. EBITDA was down, reflecting the revenue and cost impacts of the Aerith fire, as well as expected normalisation towards pre-pandemic basket size and shape of week. Exceptional items in the period reflect insurance receipts, as well as exceptional calls from Aerith. Further receipts are anticipated in the second half. Overall, the M&S Group share of Ocado retail profit after tax was 28.1 million pounds in the period. Moving on to clothing and home, sales were down 1% with growth reported in the second quarter. Overall, a strong online performance mitigated the lost revenue from stores. Importantly, full price sales grew by a very encouraging 17.3% as customers responded to better product in a period where we ran fewer promotions and reduced stock into sale. Our store business, which was closed in week one, recovered throughout the period, but remained significantly down. City centres and high streets continued to create a drag on sales, with a better performance from retail parks, which were flat compared to 1920. Average footfall on transactions continued to be materially behind pre-pandemic levels, but basket size was up, partly compensating for this. The metrics in our online business were strong on both a one and two year basis. Traffic increased overall, with traffic through our app up over 200% on 19-20 following the relaunch of Sparks last year. All this helping to drive the 60% growth in active customers over two years. As we anticipated, returns rates have started to normalize towards pre-pandemic levels, but remain around three percentage points lower due to continuing trends in customer behavior and product mix. This resulted in a good overall performance for the online channel. In total, clothing at home generated an operating profit well ahead of 19-20 levels. And at a headline view, online operating profit margins stayed strong at around 10%, with stores also delivering a 10% operating margin. Going into more detail, you will see that gross profit was up as a result of the strong full price trading and lower stock into sale, which more than offset cost headwinds of adverse currency and additional freight costs seen over two years. It's a similar story to the food business in both store staffing and other store costs. In store staffing, the improvement was driven by both the restructuring efficiencies from last year, as well as ongoing efficiency programmes. These more than offset pay inflation. And in other store costs, the movement largely relates to government business rates relief and lower depreciation charges as legacy store modernisations reached the end of their economic lives. Within distribution and warehousing, we see the impact of costs to serve online demand, as well as increased pay and incentives relating to haulage. And finally, in central costs, investments in technology, data, and digital initiatives, as well as higher pay-per-click marketing activity to drive online growth, were partly offset by lower depreciation of technology assets. And finally, to international. Performance reflected disruption and complexity arising from the current EU border processes and food supply chains, predominantly in the Republic of Ireland, and the continued impact of COVID on Asian markets, in particular in India in the first quarter. Clothing and home revenue recovered to pre-pandemic levels, driven by strong online growth. And whilst performance in India was severely impacted in the first quarter, recovery has been stronger than anticipated in the second quarter. Similarly, in owned European markets, whilst trading restrictions remained in place at the start of the period, sales performance upon reopening has been strong. In our food business, EU border complexities have heavily restricted our ability to provide a chilled catalogue. This has resulted in significant costs and complexity to operate in Ireland, which has impacted these numbers. In addition, it has led to a review of our business model in the Czech Republic and a restructuring of operations in France. Overall, operating profit was down, driven principally by the cost of the current EU border processes and tariffs. Gross profit declined due to those tariffs, as well as due to additional waste from inefficiencies in EU border processes, partly offset by the online growth. In store staffing costs, the deterioration in leverage of the fixed and semi-fixed cost base due to revenue reduction was only partly mitigated by efficiency savings from the retail restructuring announced in the Republic of Ireland last year. The movement in other store costs reflects government support in owned markets and rent concessions in India. Distribution costs increased significantly as a result of EU border related processes, as well as from the growth of online sales. And central costs reflect the higher marketing costs associated with online sales. So bringing all that together for the group, As discussed, when compared to 1920, profit growth in food, Ocado retail and clothing at home offset the decline in international profit. M&S bank contribution declined, principally as a result of a significant decrease in income from credit card and travel money sales compared with two years ago. Net finance costs were level. Within this, a lower pension credit, reflecting the lower pension surplus compared to 1920, offset a reduction in the net interest payable on lease liabilities. Overall, the group delivered a £269.4 million adjusted profit before tax. Adjusting items in the period were £82 million, which I will cover next, and that generated a healthy statutory profit before tax of £187.3 million. Within adjusting items, the store estate charges reflect the impacts of the store rotation programme in the period. The Ocado Intangibles related charge increased in the period, reflecting deferred tax charges relating to the substantive enactment of the increase in the UK corporation tax rate. Adjusting items also reflect charges relating to the restructure of our European operations. Turning to cash flow since the start of the year. Overall, we had very good cash generation in the period, resulting in a further reduction of our net debt. This firstly was a result of EBITDA, the drivers of which I've already discussed. In working capital, strong trading and the timing of clothing home stock intake in advance of the peak Christmas period has resulted in trade payables increasing ahead of stock, leading to a benefit in the period. In CapEx, property maintenance spends normalized and we continue to invest in the transformation. Major investments in the period have included spend on nine new stores, seven food renewals and the expansion of the Bradford Distribution Center. The adjusting items cash outflows largely relate to the organisational restructuring costs in the Republic of Ireland from last year. There are, of course, other ups and downs, but overall, a further financial net debt reduction of over 280 million pounds in the period has resulted in a very strong cash position at period end. It is worth noting that our lease obligations also reduced. We continue to do a lot of work on our leases, and further colour on the breakdown of our lease obligations is included as an appendix slide on the website. Now, turning to the outlook. Pleasingly, trading for the first few weeks of the second half has remained consistent with trends reported in the second quarter. However, whilst we are encouraged by our strong performance in the first half and in recent trading, there are macro pressures now affecting all our core businesses, including labour shortages, COVID disruption in factories and continued EU border challenges. These will all lead to further cost pressures in the second half of the year. Consumer confidence also remains a little uncertain given planned increases in taxes and current pressures in household bills such as energy and petrol prices. However, given the underlying progression, we believe the business is well positioned to deal with most of these challenges as we head into our important peak period. Capital investment for the group won't be at pre-pandemic levels yet as some planned transformation investments will now fall into the next financial year. Our central case is therefore that we will generate an increased profit before tax and adjusting items compared to our previous guidance. We also expect a stronger reduction in net debt than previously anticipated. As I said before, our capital allocation model remains unchanged. The priority is to invest in the transformation of the business and the recovery of balance sheet metrics consistent with investment grade. As we outlined in May, we will continue to assess the reintroduction of dividend payments. But in the context of our capital allocation model, this remains unlikely in the current year, despite the stronger than expected cash performance. With that, I will now hand you back to Steve, who's going to talk more about our progression.

Thank you, Owen.

As I said earlier, the management action taken to accelerate change means we feel we've passed an inflection point. We've moved into the next phase of the transformation, shaping the M&S of the future and our path to growth. As a result of this, we now have a repositioned M&S food business delivering profit and share growth. A profitable online grocery business through our investment in Ocado Retail, which is set for rapid capacity expansion. A reshaped clothing and home business with better product, driving improved style and value for money metrics. And MS2 delivering strong online growth. An acceleration of the store rotation program to build a modern store estate fit for the future. International focused on growth through strong trading partnerships and a multi-platform online business with global reach. Much of our work over the past three years in food has been about protecting the magic of our unique product development and quality credentials while broadening appeal. We've refocused development on mainstream ranges which appeal to families. For example, improving and simplifying choice in core product categories such as pasta, ready meals and bakery, and expanding importantly and previously underserved areas such as frozen. We've done this while maintaining investment in development of product for special occasions and events where we know we have a strong market position. A great example of this is our light-up gin globe, which has grown to a brand worth tens of millions of pounds. You can see the results on the slide, with growth in core everyday categories and encouraging core barstick metrics, despite the ending of restrictions. On multiple levels, the data points to customers completing more of their shop with M&S, which has been key to our strategy. We've also reduced promotions, sharpened our tiering, and improved our everyday price credentials, while protecting our quality differentiator. This has driven an improvement in price perception, which are ahead of the market. And you can see this in our Remarksable range, where we offer high quality everyday staples at really competitive prices, which retain the M&S difference, for example, bread being vitamin D enriched. but it's not just about everyday staples. By expanding our iconic dining program in three clear tiers, from date night at 10 pounds to families at 15, and special occasion events from 15 to 20, we've broadened appeal and improved its profitability. We've been evolving our renewal store formats to build bigger, better, and fresher food halls, including here in our Hackney store. Renewal enables us to offer greater choice in core categories such as grocery, produce and frozen in a format which we think is really distinctive, giving customers an easy as well as inspiring shop in a store which is operationally more efficient. The first half alone, the format has been invented across 14 new or renewed stores, have expanded into hospitality, opening two and all cafes in the period. Modernizing the end-to-end operation has always been core to the food strategy. It's never been more important to have an operationally efficient supply chain capable of delivering multi-year cost savings to underpin the top line growth. The Vanguard store process improvements have now been implemented across 75% of the estate. and the changes mean that many more of our stores are free of backstage stock and ready to trade on opening. New forecasting, ordering, allocation and space planning systems will start to be rolled out towards year-end, allowing us to be much more flexible in cataloguing and reducing waste. With our distribution partners, we're also working on plans to create a streamlined, modern, automated network, reducing the long-term cost to serve the business. And as has been widely reported, there are growing issues of driver, warehouse and supplier labour shortages, creating additional pressures for all retailers, including M&S. We aren't just accepting the higher costs, which come with increased pay rates and retention bonuses. We're also increasing truck cage and trade fill volume and resetting delivery schedules and depot picking processes to help manage the pressures. Because of our concentrated supply base and strong working relationships with our logistics partners, GIST, we believe the food business is comparatively well placed for these challenges. Our food business is all the more encouraging given our online offer is almost wholly delivered through Ocado Retail. There has been a step change in the online market, which appears to be stabilising around 12% of the grocery sales compared with 7% pre-pandemic. Within this context, with Aerith now reopened and three new CFCs already open this year, we'll shortly have increased peak day capacity by over 50% since the M&S investment. We therefore have a fantastic opportunity to drive rapid, sustainable growth through Ocado's strong service and extensive range, underpinned by the M&S brand. In half one alone, M&S product generated sales of close to 300 million on Ocado.com, and is consistently over 25% of the basket. We do expect the normalization of basket economics to continue, and ORL, like all retailers, will see cost pressure in the remainder of the financial year. but we're very pleased by the growth opportunity Ocado Retail has presented and the synergies we've been able to generate within M&S Food. While the pandemic created tremendous upheaval for the clothing and home business, it hastened trends we were already responding to and was a catalyst for us to go further and faster in our transformation. In the first half, double-digit growth in full price sales helped to deliver a sharp rebound in clothing and home results. Even more encouragingly, growth from online offset the headwinds from lower store sales and we've grown market share in both channels. At the heart of this improvement has been the re-engineering of the product engine. We kick-started this last year by putting 1,300 colleagues through a training academy in efficient buying and merchandising. We armed the team with new tools, enabling more accurate ranking and planning of range and made further improvements in product, fit and finish. Alongside this we've upgraded product display in store and online with initiatives such as the edit which creates a more inspiring sales driving environment and brings outfits together rather than by department. Focusing the buyer on fewer lines has enabled us to increase the line item rate of sale in core areas such as women's denim where sales per option are up by over 50% as we bought deeper on a third fewer options. We've made the most of our scale by moving into growth categories such as Athleisure through Gridmove, where we are now the number one full-price women's brand. We're growing Kids Daywear and Home, where Apoc3 is now a £20 million brand. Overall, we're confident that customers are seeing better products and our style perception is improving on the back of the improvements we've made. Many retailers have operated with less stock this year against the backdrop of recovering demand. At the period end, we had three weeks less stock cover than prior to the pandemic. We've learned to operate effectively with lower stock levels and have eliminated nine weeks from the women's very critical path, resulting in orders being placed closer to the date of sale. This has enabled us to drive efficiencies and be more agile and responsive to customer demand and trends. At the same time, we've shifted rapidly to a full price trading stance. All of our friends and family mass promotions have been removed with a focus on trusted everyday value, which retains the M&S quality point of difference. This has helped lead to a 50% less stock being put into the summer sale. Despite fewer promotions and less sales stock, our value perception has improved. At the end of the half, our clothing business led the market according to YouGov. We're really encouraged by this as it evidences the positive difference customers can see in our products and ranges. A year ago, we created MS2, bringing together the online, digital, and data teams to draw on our own customer data and Spark's loyalty program to personalize selling and improve our online offer. We can see that MS2 is beginning to prove the power of our omni-channel offer, matching the speed and flexibility of PurePay competitors with our store base for click and collect, returns, and rapid fulfillment. We have driven continued improvement in website performance and usability, with mobile now accounting for about 50% of orders. And since relaunching Sparks as a digital loyalty program last year, membership has grown to 13 million and has helped to drive rapid adoption of the M&S app, The app now has over three million active users, and just under half of all orders made on mobiles are generated through it. Combining Sparks and the app user base creates powerful advantage for our online marketing, and means we can offer personalized benefits linked to our omnichannel offer, such as bra fit appointments, scan and shopping food, and easy online collection of returns. Through MS2 initiatives, we've driven strong growth in active online customers. This has been the driving force behind the 60% sales growth. Online participation has grown to 34% of total clothing and home sales against our longer term target of 40%. With a large customer base of over 20 million, we have a real opportunity to drive sales through increased frequency and spend. We are also starting to exploit the advantage of being omnichannel to improve service, learning from our experience of fulfilling customer orders from store stock during the pandemic. Over the past few years, we've doubled our online fulfillment capacity. We've invested in Castle Donington, expanded our Bradford distribution center, and grown our in-store fulfillment program. In the first half, we built on this by updating our systems at pace to ensure that wherever possible, a click and collect order can be filled from stock which is already in the customer's store of collection. This accounted for around 9% of all click and collect orders in the period, and we plan to expand this to around 20%, paving the way for same-day collection and delivery. Last year, I spoke to you about our plans to broaden the reach of the business through the M&S brand platform. We're now trading with over 30 partners online, and this ranges from exclusive collaboration with Ghost for Dresses to school shoes with Clarks to complement our strong position in school uniforms. It's early days but the initial results were encouraging. Brands with 3.5% of our sales mix in the first half and typical online baskets which include brands having almost twice the average order value of those without. To complement our brand strategy, in January we acquired the Jaeger brand and stock. We've been able to relaunch Jaeger in just nine months as an inclusive modern British brand. Our approach is digital first. We've supplemented this with selected store presence, including here in Stratford. We believe we can rebuild this iconic brand by bringing all of the advantages of the M&S customer base, the infrastructure and platforms through the business, creating value for customers and shareholders alike. At the year end, we set out our goal of achieving a modernized full line estate of around 180 stores through accelerated store rotation. Rotation means closing in at least 110 locations and relocating to either a new full line or food only store and in many cases consolidating multiple stores into one. There has rarely been a better time to acquire new space and we now have around 20 full line stores including a further sixth former Debenhams stores in the pipeline. Such as the new one we recently reopened in Leamington and a site in Stevenage where work is already underway. New stores will incorporate the food-in-all format, a new approach to clothing and home decor and display, and a digital store initiative such as rapid click and collects and returns. Store rotation is critical as it allows us to break the paradox of short-term profit considerations and lease exit costs which previously slowed the pace of change. This is because we can generate strong paybacks on new stores with short lease lengths. We've been able to recapture around 30% of sales from closed stores in nearby stores or online and have generated encouraging early results from new retail park locations such as Nottingham Gilt Brook, Sears Solihull and Maidstone Eclipse. In Leamington Spa we've recently consolidated two units into one by closing a clothing site in the Royal Pryor Shopping Centre and Warwick Simley Food and then extending a new food site at Leamington Shopping Park into the former Debenhams next door to create a new prime store. The incremental cash contribution net of closure costs is expected to generate payback on the net capital invested of under four years. And we're able to largely fund the legacy and closure costs of this program through releasing cash from redevelopment projects such as Marble Arch, which we announced earlier this year with around 20 potential projects now under consideration. Wherever possible, we will accelerate our plans to create a modern store estate which is fit for an omnichannel future. Our objective in international is to create a growing business through a limited number of strong trading partnerships and global online growth. We saw a solid rebound in the first half despite lockdowns, particularly in the Asian markets such as India. And the EU border costs were incurring following Brexit. Online sales have more than doubled since 1920. And despite strong comparatives, growth was even up 29% on last year in the first half. This growth has been driven by very strong performances in markets with a store presence such as India and Ireland, coupled with rapid scaling on marketplaces. As in the UK, we are building omnichannel capabilities and driving growth through the M&S app in markets such as India. To improve service and support online fulfillment, we'll also open a hub in 2022. We've also continued to modernize the store estate with new stores in Singapore and Yasman in Dubai, offering a renewed format in food for international markets. To improve partner service, we've also opened a UK hub for international franchise shipments, enabling stock to bypass the UK network, increasing speed to market and newness of stock. Following Brexit, we have, as previously guided, seen substantial headwinds in the form of reduced availability of our food operations in the Republic of Ireland and substantial administration costs. We're working to mitigate these through restructuring the cost base and a planned step up in local sourcing. By going further and faster in our transformation over the past 18 months, we are coming out of the pandemic period in a very different shape. This reflects the strength of the leadership team who have driven transformative change at a pace and the hard work of all of my colleagues. We delivered strong revenue growth in food with growing market share and continued strong quality and value perceptions. Ocado Retail has increased capacity by over 50% since the M&S investment and is set for further rapid capacity growth. Combining M&S food with Ocado's strong service and the extensive range is really bringing the best together with M&S product consistently over 25% of the basket. The steps taken to improve products and re-engineer the product's engine in clothing and home has driven improving style and value perceptions, increasing full price sales and growing market share. MS2 is beginning to prove the power of our omnichannel strategy with record online customer numbers and strong levels of retention driving double digit online sales growth. We've made good progress on rotating the store estate and we'll accelerate the plan wherever possible to create a modern store estate which is fit for an omnichannel future. We're driving substantial international online growth alongside a group of strong trading partnerships despite the headwinds and strong comparatives. It's early days, but the trading in the first four weeks of the second half has been encouraging and consistent with growth reported in quarter two. We go into peak conscious of the substantial uncertainties, but confident that we are facing into them from a strengthened position. In food, Christmas food to order is ahead of plan, and we've made our ranges simpler in terms of tiering so they're easier to shop. We've backed our key product lines with big buys and are offering even better value. In clothing and home, the changes we've made in supply chain mean we've more than doubled peak capacity at our Castle Donington site. And we've repurposed Space Elsewhere to ensure dedicated fulfillment and capacity for our third-party guest brands. Across food and clothing and home, we've made improvements to our gifting range and merchandising, and our product ranges are the best I've seen. I've always said that we will never over claim our progress and you've seen that today. We've called out the tailwinds and been upfront that it isn't always simple to unpack the numbers. But it is clear that the underlying performance across all of the main businesses is improving. We're gaining market share. Customer perceptions for value, quality and style are improving and in some cases market leading. For the first time, when I look under the bonnet, our main businesses are in a large part firing on all cylinders. The hard yards of driving long-term change are beginning to be borne out in our performance.

OK, good morning, everybody. It's Archie here. I'm here with Steve and Owen and the team. Hopefully you've all seen the film of the show, so you've already got the gist of what we're saying. And doubtless, you've been travelling through social media and some of you have already published and said what you think anyway. So we're not going to go back through all of that. I think it's a good presentation. Look, I think this is a strong set of results. I don't usually say that, but I mean it on this occasion. And the business is in more confident shape than it's been for a very, very long time. So look, let's fire away with some questions and have a talk about it. And Owen and Steve will do their best to answer your points. I think we should start, if we may, with age before beauty. So how about Clive Black?

Thank you very much, Archie. Neither age nor beauty on my side, sir. Can I ask a question, please, about the cost challenges facing the business? I mean, very pleasing to see the trading progress and very well done. But between the two core categories of clothing and home and food, what is the shape of the cost headwinds that the business faces over the next 12 months or so, please? Thank you.

I think for both parts of the business, obviously, overall labor cost inflation is going to have an impact. Obviously, with the national living wage, we'll have to keep up with that, and we're going to see circa 6% growth on that. That is a core cost. element. We are obviously also seeing cost pressures in our logistics networks and well-publicized incentives have been put in place for drivers and warehouse operatives. That's obviously going to impact more notably quarter three, but it will also have a full year effect into next year. So I think we will see that and that impacts, it does actually impact both sides of the business actually as well. I think in the cost of goods side of things, obviously we are starting to see inflation in actually, again, in both sides of the business. It's not really impacting us that dramatically in clothing and home now, but the environment is definitely getting more challenging and people will obviously see the freight in particular is in some ways off the charts in terms of actually spot prices, but we will be able to manage it against spot, but it'll still have an upward pressure. And then raw materials, because of the flow in from labor really, which is driving a lot of raw material inflation costs is starting to filter through. So I think we're probably, as we said in the statements, I think we're seeing cost prices ramp up and we think it's going to be ramping up into next year. It's probably, we're going to get into a place where it's going to have an impact this year, but it's going to be more material into next year. I did forget one cost area, which is energy, which will also impact into next year. Not huge for us, but it does. It's just another one to add into the list as well. So, yeah, look, there's no getting away from the fact that we are going into an inflationary environment.

Just to build on Eric's point, I think the other area we know that if you work your way through our P&L, we're over-costed is our logistics. And that's, you know, we've talked about this is the first stage of transformation. We know we've got more to do to optimize our logistics in both sides of the house. And so as we go through the next stage of our plans, some of those inflation costs will be offset by better efficiency through the Vanguard program, which Lawrence has been driving with the teams.

Okay, so thank you for that. Is it fair to say then that in the near term, you're more concerned about logistics and food inflation, but for clothing and home, particularly around COGS, that would be something more for

um at age 223 is that would that be right owen yeah i think that's probably fair um i think it is coming first through into i mean that's kind of i mean kind of reflects a little bit the um the supply chain there and the the lead times of supply chains so i think that's i think that's probably fair is that we're kind of seeing that first through into into food thank you very much that's that's helpful okay thank you clyde um uh

Shall we go to Adam Cochrane from Deutsche Bank?

Hi, good morning, guys. I have to say congratulations on the results. It's been a rare occurrence to say it, so I'll remarks-able almost. Very good. Thank you very much, Adam. That should be a no title. On the question, where are we with repaying furlough and business rates and things? I just want to make sure that we've got all of the right bits terms of the cost base and is there any decisions now to repay business rates given how much more profitable you are than than expected um and then secondly the the third party brands very impressed by the sales performance there how are you thinking about trialing them or how are the trials going in the stores thanks

Do you want to talk about rates and furlough and stuff like that?

Yeah, maybe you talk about branches. So on furlough, we haven't received any furlough income this year. On rates, I mean, I think rates, we've obviously been clear that we received 47.5 million in the first half of the year. For the balance of the year, it'll probably be about 60 million. Obviously, the rates relief, it's effectively tapered off now, or tapered off at the end of June, really. And we don't expect to be repaying it. I think when you look at the overall impact COVID has had on our overall business in the 18-month period, our view is we've taken rates and we've used it, rates relief, and we've taken rates relief and used it as it was intended. So that's how we think about it. And as I said, we're now not really getting any rates relief right now. And we expect to be paying close to full rates in the second half of the year.

I think Owen's comments are right. Look, to bear in mind, Marks & Spencer is one of the highest corporate taxpayers in the UK. Actually, even last year, we were very high because of our aggregate taxes we pay on employment and elsewhere. We pay a lot more tax than many of our large competitors. That's the first thing. And secondly, the rates relief. We paid rates. We paid less. We actually have an issue with the business rates program, which Steve's been very clear about. And insofar as we took rates relief, it was for stores which were effectively closed or very adversely impacted. So that was what the rates relief was intended for. Steve, do you want to talk about brands?

Yes. I won't start on the business race, as you know.

We will never get away.

We'll publicise on my views on those. The brands, we are pleased with the start. We started last year introducing a selection of third-party brands which really supplement that which we offer in Marks & Spencer with either adjacent products or adjacent customers or deliver even stronger offers in some of the market-leading categories we have. It's very early days. There are about three and a half percent of the revenues that we took in this half. And we continue to learn about which brands are most appropriate. I think the first thing to say, though, is the one that we own, which is only just relaunched, is Jaeger. We've spent the summer really moving through some of the old stock we bought with the brand. The team have reshaped it. I can tell you the launch has been phenomenal. I think on most prices of it. Not only has it been great in total and online, good in the trial stores we've got, but also good internationally. And the reason that's significant is if you go back in the history of Jaeger, circa 50% of the revenues in Jaeger were generated by the overseas businesses. And it's landed particularly well in the Middle East. I think as we move forward, where perhaps we had an idea that we would do one or two or a limited number of brands, I think what we now see is the potential to increase the scale and become much more of a marketplace in our consideration and really develop the ecosystem based off the fact that we've got an exceptional relationship with customers and the data that's now been provided to us by the data engineer by Sparx gives us the opportunity to make sure we've got absolutely the right selection of brands for our customers' offer in the future.

It's a broader...

Part of the strategy of the brand thing, and we'll come on and talk about that later in the year, I'm sure. Somebody's drawn my attention. If anybody is trying to figure out how to ask a question, you press star one, and then you'll appear on the list, I think. So I'm not encouraging you too much, but if you're wondering how to do it, that's how you do it. OK, shall we go to James Lancet from Barclays?

yeah good morning um two questions firstly um you've obviously seen this dramatic reduction markdowns which has been a big big driver of profitability how much of that do you think is um a function of the market because of course you're not the only people to have reported a similar phenomenon and how much of that is specific to ms and i suppose linked to that you're still reiterating the um target of at least seven percent um closing home margin by 23 24 despite doing a lot better than that in six months after you set the target. I appreciate it's an at least target rather than an exact target, but why not aim higher after this very strong six months?

Do you want to answer the first question?

I'll talk to Mark now. The first thing to say is that we have for some time been improving the product engine within Marks & Spencers. Katie Rich and the team have been working on the shape of the ranges, the shape of the buyers, much publicized is the fact we continue to reduce the number of lines that we offer and improve the depth. And you can see that in women's denim, where sales per option now up over 50% on where they were in 1920. And we continue to drive through the top 100 lines and top 100 ranges. We've talked about that a lot, and I think that's self-help. The second thing is that overall, the consumer is telling us, and it's coming through in the revenues, that our product is better. Better value, better style, better quality. And that, of course, helps the small price sell through. The third thing is we've removed all the mass productions now. During the course of the pandemic, we took the last three massive friends and family out. And that was, of course, driving a very big discount number, but also really undermining the value of our product, which I think was contributing to reducing its high-low principle of operation. It was bad. We've dealt with that. So I think there's a lot of self-help in the number. And we have, over a period of time, reduced the number of terminal stock in the business from 1.4 billion to a number now which has got six in front of it. That is the direction of travel we have been talking about and we've delivered it. Have we had some help, though, by the fact that there has been less discounting in the market in total? I think removal of some of the other players who were discount generative has been helpful. Does it also help that we've been tight in our stocks? And we really have played a tight game. in the right way because of the pandemic. We've seen some bouncer, of course, I wouldn't deny it. I think we said that in the statement. There's been plenty of COVID bounce back tailwinds there. But the direction of travel with better buying and a better product is one that we have been planning and working on. Again, last year, I think I said to you that we were putting everyone through the academy. 1,400 people have been through the Clothing at Home Better Buying Academy. And we need to make sure that is sustained. But we're pleased with the results.

On your second question around operating margin, one thing I think you just have to make an adjustment for the first half of the year is rates, which probably accounts for about 2% of the operating profit margin. I guess a probably more like-for-like comparison is 8% over 7%. We've said that lots of things have gone in our favor in this first half of the year. which is obviously really aided, particularly the full price performance. So maybe we're being a bit cautious, James, in relation to that statement. But, you know, we need to kind of do this on a regular, repeatable basis before we start kind of upgrading that type of guidance. But, you know, we're definitely moving in the right direction.

That's very helpful. Thank you. Okay. Thank you, James. I think we should go to Anne Critchlow from Societe Generale.

Questions, please. The first one about the Vanguard processes, just to ask when the remaining 25% of the food estate will adopt those processes. And then a couple of customer data questions, which are sort of linked. Are you ready to share any plans for Sparks yet on improving the incentives for customers to use the card? And also just to ask about the HSBC credit card. Who owns the data there and do you have the opportunity to look at what customers are spending on those cards? Thank you.

Shall I do the Vanguard and the HSBC question? Yeah. So on Vanguard, the first thing is that I think I said to you earlier in the year, we had intended to complete that before Christmas, but because of the change in COVID, we just paused the depots that were around the southeast, largely because of the impact of London trading and the return to work. So 75% were completed. We continue to deliver against the results, and we're pleased with the progress, particularly in areas like waste reduction that we've seen come through. In terms of the next 25%, our plan currently, assuming there is no further massive interruption through the pandemic or anything else, will be completed by the end of Q1. We'll start to roll that through. And normally they take about six to eight weeks to normalize into the system and start to see the benefits come through. So by the end of Q4, start of Q1 next year, Vanguardian food practices will be rolled through the food estate. I think importantly, though, Lawrence and the team have turned their focus, quite rightly, into the clothing at home. And we've already got the first pilots in clothing at home. And the journey there, having got to the end of replacing the warehouse management system, having got to the point where Donington is stabilized, we can now start to do the work on the Vanguard processes through clothing and home. There's a lot to do there as well. An awful lot of unproductive stock, which we see can be taken out of stores and centralized back in warehouses to make sure we optimize markdown. So again, fantastic job with the team, but it is a Good progress in food, more to do in clothing.

I think, Ann, just on what Steve says, I mean, the clothing home is a massive task, and that's great. It's all opportunity and all upside. But the issue in clothing home, as you can imagine, is the whole supply chain right back to the manufacturer in Asia. You can't just manage the store end of it. it's going to take a little while for that to come through. Just on the food thing, the only thing I'd add to what Steve said is that clearly the idea of Vanguard is you optimize the flow of stock precisely according to the sales and your forecasting system. It won't surprise you in the current circumstances, the flow of stock is not as smooth as one might like. So a lot of the benefits of Vanguard in my judgment, is still to come. Yes.

Bumpy is the way we describe it. But that's not because we believe that the program is in any way flawed. It's quite the reverse. I think had we not had Vanguard in place, frankly, with some of the things we see in front of us in terms of We'd have had a few more difficulties. One of the things that is helping us cope with some of the bumpiness of the journey. Sparks, 13.9 million people on there has moved up from less than 10 as it was 18 months ago. We are very pleased with the number of people joining. The scheme has been vastly improved from where it was four years ago, and we are seeing improvements in the customer satisfaction levels. There is more to do and we'll continue to improve that. The key thing, though, is that we are more focused actually on moving people onto the app. And the app growth is considerable. The digital team has done a good job there of moving people across. And the spend of people that use the app is considerably higher than those that don't. And the customer's perception of our app is much stronger than Sparks on its own.

But I think, as Steve said, I think there's more to do there. I think converting to Sparks has gone really well. Over 13 million users, very good. We are adding the services, so you can obviously order things like Brafit through there, Scan and Shop. So we're trying to get the connectivity with the stores much more clearer. So that's all really good. We are introducing payment options next year, which is going to be a step on. And overall, we're going to be investing pretty significantly in the Sparx platform as the kind of core platform, really our ecosystem in the future. On the HSBC credit card, sorry, on the M&S credit card, which is supplied by M&S Bank, which is obviously our JV with HSBC, we do have all the data. So that is actually an important elements of our data analysis that we do because it also enables us to show spend outside of M&S as well as inside M&S, which is very, very helpful. So that is a core part of our data engine.

So the aggregate of our data, if you assemble all the customers we have data on, it probably comes to about 20 million. Just bear in mind that that's not all current because some are not that active. Some are more active than others. But I think the broad point that underpins this is that we see data as core to our future strategy, and it relates to the brands program we referred to earlier. This is a pillar of what we're trying to do. At this juncture, remember what Steve said, we've got 13 odd million smart customers. That's really from a standing start a year ago. We relaunched the scheme. We scrapped the old scheme, and customers are invited to sign up for the new one. It's not a bad outcome, and we're not complaining. That's stage one. Harvesting, getting the customer data is stage one. Using it is stage two. And that's why we're hiring all these expensive data scientists and people to figure out how we effectively weaponize what should be a major strategic advantage for the future. Yeah. Great. Thank you.

Okay.

Thanks, Anne. Anything else from you? Okay, thank you, Anne. Charlie Millsands from Exane.

Yeah, morning, guys. Thanks for taking my questions.

I've got three topics, but all quite brief, hopefully. The first one relates to the clothing and home supply chain outlook. Obviously, you've talked about some of the well-publicized pressures there. I think a couple of your competitors have also shared their views on retail prices into next year. I guess you've also got a big currency tailwind benefit, so do you think you need to raise prices to protect bought-in margins? That's the first question.

I'll give you all three questions first, and then we'll do a spill from out. Oh, okay. And then, yeah, sure, absolutely.

I mean, the second question relates to free cash flow and use of cash. I note the comment on the pre-recorded call saying you're unlikely to pay a dividend this year. I just wondered if you could help us out. Where do you think normalised capex will get to, and how long do you think before a dividend comes in? And then the third question, and this I appreciate, is...

Sorry, our news is going to set in. Let's answer those two questions.

Well, let's try and answer them. Okay, what about inflation and margin? Sorry, I think we said earlier, we do expect to see inflation come through in cost of goods and in transport. Will it be at the rate, I mean, the spot rates that people are paying at the moment for containers, I don't see that being sustained at all. We are protected to a degree because we have longer-term contracts. We keep people like Maersk. And we're also hedging our currency going forward. And we're bought ahead into spring-summer. There is inflation in certain raw materials. I think that will be sustained. And we will work hard to make sure we mitigate that through other efficiencies. But inevitably, there's going to be some inflation. Our key thing is we continue to make sure that we offer our customers great value compared to competition. And we've done a good job of getting rid of the high-low inflation promotional aspect of the business, which means we are offering better values and better prices. And there is a virtual circle there of continuing to be able to drive volume with our manufacturers. And that point I made about denim has helped maintain the margins that we've got. So we do see it coming through. At what rate? Not sure yet, but it's definitely out there in the market. And I think, you know, The currency tower, yes, we've got that again. We're hedged a little bit, but... Yeah, we do.

I think you've answered the question perfectly. I think we do expect some movement, but it's very hard to give you exact guidance on that right now. But I think you should assume, given it's an inflationary environment, there will be inflation pass-through, but we've got to do it in a sensible way. On free cash flow, like the... uh the the normalized capex what we said actually is we expected capex to revert back to kind of pre-pandemic levels or a little bit above pre-pandemic levels actually as you can see we're not expecting that to happen this financial year there's been a bit of um a bit we're a bit behind in our in our capital spend program and some of that's in in property to do with um and materials getting materials in and and slowness there which is kind of knocking on impact on on some of our programs there i do expect that to catch up and some of it's actually in technology and around having having the right people that's probably probably one that's probably a little bit more concerning because we we there are programs that we have to deliver against so um It's not a good thing for me that the capital is behind. It obviously helps free cash flow, but not a good thing. I expect to try and catch that up into next year. We're definitely looking at capital above 400 million type of numbers into next year. That's what I will be targeting.

Great, thanks. And my third topic, and I appreciate this, is perhaps waving the red rag, is an online sales tax. We know it's buried in the autumn budget. Is the government still considering the possible indications there? And I just wondered as a company what your view is on whether you think that is a sensible thing to do and how you as a company would adjust to such a situation?

Well, thank you, Charlie. That's probably not really a results-focused question, but it's a good question. And if we're not careful, Steve will take up the next 30 minutes answering it.

But Steve, give us the top-line position on that. Fundamentally, we have a problem in the retail sector and in other sectors, by the way, because the business rate structure is outdated and unfed. I mean, what you've got is a tax that the government can collect very easily from invisible assets, but it means there is a bias towards bricks and mortar retailers in the tax collection, and we are already, as I said, a top 25 taxpayer in the UK. What it means is that others are not paying their fair share in the UK, and it means there are uncompetitive positions in my mind. Is the answer an online sales tax? I don't think it is, frankly, because what it's doing is is penalising the consumer for the fact that the tax is not collected elsewhere in the P&L. And I think there should be other charges within the tax system that the government should overhaul.

We recognise that, from a Treasury point of view, this is a revenue problem. They get a lot of revenue from a tax which is now out of date and unreasonable and actually quite socially damaging because it impacts high streets and town centers in leveling up vacations. So it's quite conflicted with government policy. That's the core problem. I don't think we should equivocate that then, as Steve said, with an online sales tax. And it's a slightly perverse thing for the UK government at this juncture saying, we've got probably one of the most advanced consumer online economies in the world. Is it the right thing to do? to turn around and tax it in a way that other countries aren't. I think those are quite big and difficult policy questions.

Great. Thank you very much.

Okay. Thanks, Charlie. Okay. Shall we go to Simon Irwin from Credit Suisse, and then we'll go to Georgina from J.P. Morgan.

Hi, everyone. Three questions for you, as per usual. First, congratulations. Can you just talk a little bit about what you're seeing in terms of recent trends in clothing and home, particularly around home itself and also in some neglected categories such as formal wear and party wear, et cetera, as we kind of move into peak season? Secondly, can you just talk a little bit about international? You talk a bit about kind of moving to local sourcing in Ireland. I mean, should we look at that as being a kind of permanent diminution in overall profitability if you have to go down that route?

Thank you. We'll take those two questions and come to the third barrel.

Trends-wise, the first thing is that we must almost separate out longer-term trends from some of the short-term things that are still happening in the market and There is an acceleration, you talked about tailoring, there is over a period of time there's been acceleration away from tailoring. There's no doubt about that. However, as we saw at the US today, people are still wearing suits, tailoring is not finished. We saw a very strong bounce back in tailoring as we got back to work, back to school, as did the market, frankly. September was up 3% on two years. Yeah, September 30% on two years, which is fantastic. However, it's just come back off a little bit as we got into October, November. And I think that what we've seen, though, is the strength of our casual wear range. And again, good growth, good market share gain in denim again. So denim goes from strength to strength. A good reaction to our jersey wear and our knitwear ranges. Again, areas where we already lead in the market. And then I think, and broadly, that relaxed dressing style. Kids wear has been really strong throughout the period and continues to be strong for us as we've repositioned away from what was a fairly formal style. go and see Nan for Sunday lunch type range to something that represents really what kids wear. And we've continued to make market share gains there. And we went back to being number one in school wear in September. Specifically in home wear, we've had good running at home. We were repositioning the core home wear before we went into the pandemic. It was accelerated by the fact that, frankly, everyone has a home. And that trend to a degree has continued. I think with people spending more time working from home now, That's likely to continue, albeit not necessarily at the rate that it was. As we see the consumer behavior, it's probably, you know, there's a Christmas, we've been through the sort of return to work and the investment piece buying that you get around this time of year. We're now really into gifting and food. And we think our customers are, or we know our customers, what they've said and what they're doing, are looking forward to a strong celebratory Christmas, plenty of events. And that will lead to party wear continuing to be strong. Albeit, it's probably more about separates than big pieces, for example. And then as we get to the new year, we think there'll be another push into health and fitness, which has been continuing. And we are positioned as the number one brand in the full price brand in the UK in terms of good movement, a house-owned brand for sport and leisure wear. And then again, I think there'll be a back to work moment again in the spring. So we've got different chain movements in consumer behavior. The long-term structures, I think, are still true. I think we're well positioned in the work we've done in the product engine with Katie and with Richard to make sure that we are, you know, continue to be strong where we've always had strength in formal wear, but pushing into more sharing those layers.

And why don't I take the international question? I think you probably need to divide the international kind of story into two, which is, international excluding uh ireland and then into internet and then ireland so in the international excluding ireland i think what we've seen really is predominantly predominantly the impacts of lockdowns um and and largely in asia and in in uh in india that that was uh more severe in q1 it sort of it got a little bit better in q2 and we had an improving performance but in other parts of asia And that's carried on a little bit longer. So we're obviously quite hopeful of recovery there. And as you've seen, our online part of our business is performing really strongly. In Ireland itself, actually, it is actually a tale of two halves as well, a tale of two stories there as well. Our clothing and home business is actually performing really well. And that's very encouraging. I think in some ways, we're as well positioned in that market as we are in the UK. in relation to clothing at home. It's obviously the food business, which has been hit the hardest by Brexit. And that's where most of the costs that we see, where the impact on profitability hits us. And in truth, I think it is a long-term game or a medium-term game to try and ameliorate those costs. I think it's going to take a bit of time. It's hopefully going to take a little bit of changes from a political perspective, but it's going to take time and it's going to take time for us to bet in insourcing. definitely believe we have a lot of work to do in our Irish food business, and that's both north and south. It's not where we want it to be from a profitability perspective or from a consumer proposition perspective, so we've got a lot of work to do, and it's going to take a bit of time.

Okay. Do you want to come back on that, Simon?

Yeah, well, no, I just had the third. It was just whether you've got anything to kind of say, given you're measuring... your UK business versus 2019, to what extent are you benefiting from the demise of Debenhams? I mean, is there a very different pattern in terms of stores that used to have a Debs nearby versus ones that didn't?

So let's take the macro. There is no doubt that we are having some benefit from the closures of other competitors in the high street, mainly Arcadia and Debs. Is it Very visible at the moment. No, it's not. And if you look at the total growth in the home market, it's down. And I think there is probably a better quality of sales we're getting because, of course, there's an awful lot of discounting in those two players. And that's gone out of the market. I think that's helped everyone with their full price sale. And in terms of shape, I think probably because our locations are largely in places that have been quite heavily hit by the pandemic anyway, in terms of the changing shape, it's quite difficult to say that, you know, in places like Bluewater or Bromler, etc., it's quite difficult to say what exactly has come through. Has it been as much as, has it re-appeared in the market? No. Too early to say, though. Too early to say.

It's part of the trouble is that very high portion of the Devlin stores were closed, were in old town centres which have been majorly impacted by the pandemic, and our stores have too. So there's so much noise around. I know you're thinking, look, surely you can compare the Devlin locations and non-Devlin locations. The answer is it's too cloudy to be able to say that, but there's clearly been some benefits, particularly in specific categories. Our interface for Debenhams across categories wasn't actually that high, but there's clearly been some benefit. And part of the benefit, incidentally, is going to be that we, as we said, we're taking a number of Debenhams sites. We'll have to completely reconvert them. I mean, the Debenhams tool shape configuration design is not... It's not the future, it's not ours. So, no, Owen is wincing at the clock.

But the locations are very good. We'll get some cracking sites, yeah. Any other judges? Don't forget just how big the beauty business was. The brandy beauty business was part of the Debenhams mix.

Yeah, that's not coming our way. It's not coming our way at all.

All right, thanks very much indeed.

Thanks, Simon. Now, let's go to Georgina Johannonen from JP Morgan, and then we'll go to, then we'll have Simon Bullock. Simon, well, I was going to say the second Simon, but that'd probably be a mistake. The other Simon.

Good morning, guys. Can you hear me?

Morning.

Hi. Hi, Georgina. Good morning. Good morning. Just, well, two questions from me with the second having two parts, if that's all right, please. The first one, just looking to next year, I mean, obviously there's a huge number of moving parts and I appreciate there's no crystal ball, but in terms of your thinking at the moment with all of those moving parts, if we were to take your guidance for this year and obviously strip out that rates benefit, that would obviously be our starting point for looking at next year. Would you actually expect with all the internal positive work, but the external headwinds, to be able to push ahead on a year-on-year basis next year? That's my first question, Pete.

My second is... Okay, Georgina, let's take that and we'll come back, all right? Yeah.

Why don't I have a go at that? I mean, I think the... Look, it is, as you rightly say, hard for us to be kind of giving guidance or forecasts for next year at this point in time. And particularly as we sit today, there is just a lot of uncertainty out there in the marketplace. I mean, it really is. I think Fraser used the term, the world is a little bit bent out of shape, and it really is a little bit bent out of shape. So I think we are cautious on the trading environment into next year. And I think it will be... It would certainly be our ambition to progress, but we're going to have to see how we get through this year first before we make those statements. That being said, the business is in good nick as it goes into next year. There's still a lot more to do, but it is very reassuring that we've got the core growth that we've seen in food and the better full price performance in clothing. But we have to sustain that. And some of that we're getting good tailwinds, as Steve has said before today. So we've got to work hard to sustain that. So I think it will be a very good performance to progress for next year, as I stand today, given the trading environment.

Georgina?

Great. Thank you. That's very clear. And my second question was just around all the work that you're doing with third-party brands. I guess, first of all, what are you hearing from them in terms of the model that they'd like to work with you on? Would they prefer a wholesale model, more of a commission-based marketplace model? Just be interested to hear, please. And then second of all, I appreciate it's still early days, but what are you seeing in terms of new customer acquisition coming through those, those brands, you know, are you, are you generating sort of the type of customer that wouldn't have traditionally shopped at Marks?

Georgina, Steve's going to give you the line of length on that. Just a caveat. A year ago, we didn't talk about third party brands. And in truth, it wasn't, didn't feature as a large part of our strategy. We, we, We decided to start experimenting as part of our innovation program, and it really started with, I guess, nobody's child's name, a ghost collaboration. And so there's been a tremendous amount of learning in the last year. It's quite small at the moment, both in economic terms. But we're quite excited about the idea of it. And the reason is this. We're not going to become a sort of general purpose platform. That's not our idea. For our customers, there are certain things that they like to buy. And so our third-party brands are all about our customers and what they like. So in tomorrow's world, when people don't want to shop around endlessly online, when search engine optimization is extremely expensive marketing costs, when small brands have difficulty acquiring customers, and we've got this massive platform with the data and the magnet brand of M&S, It's a reason why we are competitively advantaged in trading with third-party brands, and they will enhance our platform. That's the logic of it. And we don't know where this, in truth, we don't know where this could go, but we're quite excited about what we've seen from our little toe in the water.

Is that fair, Steve? I think that's very fair, Archie. To just emphasize Archie's point, the general platforms, Ultimately, they're sort of dangerously heading towards the same place as some of the department stores, i.e. what's the differential when they've all got the same brand in the same place? Some level of adjacency and addition to our ecosystem that is appropriate for our customer base is one of the strengths that we have. Can I just add one, just to add specifically the question?

About half and half is consignment versus wholesale today. I think at this point in time, we are favoring moving more to consignment and more to a kind of a dropship model because I think we are prioritizing getting the value of our data and our ecosystem rather than providing a full solution to a brand, et cetera, and so on. Because that's what our priority and focus should be. We shouldn't rule that out in the future, but that's what our priority is.

It's where we are. We're not brilliant on clothing, home supply chain. The time may come when our fulfillment capacity changes and we can take a different view.

I think what Charlie's point... This is all based around a data engine, so making sure the adjacencies and the ecosystem develops. I think that the proposition for customers, and therefore the way we will fulfill to customers, will develop as we change our capacity in terms of our capability online. And indeed, those brands change their focus. I mean, it's interesting that Seesaw, for example, has changed its focus away from some others into Marks & Spencer because of the way we fulfill. And different brands do have different requirements at the moment, by the way. It's not one size fits all. But what we can see is that with those adjacencies, again, early days, we saw that with Nobody's Child and with Jaeger, we have picked up some new customers to the Marks & Spencer ecosystem. It's a relatively small number. 3% of the people who bought into those brands were new customers. What's interesting, though, is about 8% were people who were Marks & Spencer clothing customers who had shopped clothing at other departments, such as lingerie, and not bought women's wear. So I think, again, in terms of building the relationship with our customers on a broader range of products, as Artie said right at the start, that are adjacent to their current relationship. They're a really important part of this. But you say small toe, very small toe, tiny toe, toenail maybe, in the water.

All right. Time's ticking on. So can we try and stop? It's not your fault. It's our fault for being too wordy. But Giorgino, do you want to come back?

No, that's great. Thank you very much.

Thank you very much. So we'll go to Simon Bowler from Numis. And then we've got three people who are patiently waiting. If we're quite clipped, we'll get through everybody. So we've got Simon, Richard Chamberlain, Maria Laura Adorno and Lorenzo Maggiota. So, yeah, let's crack on then. Simon.

Great. Thank you. And I'll keep it with just two quick ones and I'll back your memory to be able to remember them. The first one is just you've spoken to kind of Marble Arch and 20 asset management projects. Is that consistent with the 200 million release of capital you've spoken to before? Or if all of those came off, would we be looking at a bigger number? And the second one is around hospitality and food on the move, where you've spoken to the improving run rate an exit rate in September versus the first half. Can you just share a little bit of colour on what trends you're seeing and how hopeful you are of those businesses fully recovering at some point in time?

I'll answer the first question. Do you want to answer the second, Steve? I think it broadly consists, I would say, Simon. If all of those 20 come off in a favourable way, there's probably a little bit of upside on that. but it's also kind of over a multi-year program as well. So, yeah, we've definitely stepped up our game there, and we're making really good progress. So, yeah, there is potential upside in terms of the token cash potential there.

Yeah. Specifically in terms of hospitality and food on the move, we have seen improving trends, particularly since people returned to work. The shape of it is really interesting. I mean, for example, we're back up on the year on sandwiches, albeit, we've still got considerable challenges in the city centres. And so the shape has really moved around. Again, people working from home, different priorities for school. But we've got challenges in all the places you expect. A three-day week in a city, for example, gives us a problem with those stores. And they were circa 25% food on the move businesses. But overall, we've seen that improving. That's a damage back up on the year at this stage. Hospitality is a bit more challenging. And I think the whole hospitality sector is saying this now. We're just not seeing the volume return of people. And we're running about 30% down on the football. That's been consistent now for the last two months. I don't expect that to change between now and January. It might have another change. But it is good in that we're already starting to reshape away from some of the small cafe propositions we had in the sim foods as we put the footprint back into our core food proposition. And part of the reason we've done that is because we've been growing market share in core categories such as fresh meat and vegetables. We've added over 1% market share to those categories. And that's part of the core strategy, sort of the more relevant to a broader range of shoppers and bigger footprints in our food business. So to a degree, the refocus into core is in line with our plan anyway.

All right. Simon?

That's all good. Thank you.

Thanks very much. OK, let's crack on. So we come to Richard Chamberlain and then from RBC, and then we'll go to Maria Laura O'Donoghue from Morgan Stanley. Richard.

Yeah, thank you Archie. Morning to you. So for me, first one is morning. Seasonal stock, it sounds like you're a little bit light on seasonal inventory at the moment. And I just wondered whether that means you have some sort of higher risk of discounting into the Christmas peak. I guess you might have a shorter window to sell that product this year. The second one, I just wondered if Owen or our team could run through the sort of current thinking on not planning to pay a final dividend this year. Because I guess with the higher profit expectations, slightly lower net debt, working capital in good shape, you could make an argument that maybe you should, you know, look to pay something, at least for sort of signalling purposes on confidence in the outlook, etc. So, yeah.

Sorry, the answer to the second question is probably shorter than the answer to the first.

No, I mean, I think I've been pretty consistent with saying that we have to have good clarity in terms of our investment grade metrics. There's no doubt about it, which you're absolutely right. The performance today that's helped. There's some benefits in working capital, which will unwind into next year. We have to take that into account and we are under spent on capital as well. I have to look at all of that in totality. Where I stand today, I don't think we should reintroduce it in this financial year. And as I said, most of the shareholders I've spoken to have asked me to prioritize the balance sheet.

We've got shareholders who would actually say, we'd rather you don't pay a dip down. Because if you believe where this is down to the path to growth, then restoring the balance sheet, we've got some quite significant growth things we want to do going forward. That is our priority and that's the board's view. Yeah.

Okay. So in terms of merchandise, The flow of merchandise has been bumpy, but we have got broadly the shape that we wanted within the range we've got today. We've been very careful not to allow terminal seasonal merchandise to move later than where we can reasonably sell it. And so where we are carrying any merchandise or reshaping the intake flow, it is of goods we know are appropriate for the forward season. So when I look at the sales and the trading between now and Christmas, there's no Absolutely, definitely not going to be mass discounting in this business. We're not doing that at all. If we've got individual lines that need correcting, will we take action? Of course, that's just normal trading. The January sale looks at this stage to be in good shape and in line with our plans. And what we'll do is we'll make sure that we flow merchandise as appropriate next year. But, you know, in the grand scheme of things, um you know this business if anything's still got too much stock in it and i'd like to bring the stock levels down we've done that quite successfully over the last year and whilst the shape of it you know it's a bit raggedy in places if i'm honest um overall this is again the direction of travel and it's one of the things we've accelerated during the course of kobe yeah okay great thanks i guess you also have an option to hibernate some some stock if necessary would you buy To be clear, Richard, we've got nothing in hibernation at this stage. We were really, really disciplined about anything we put away at the start of the pandemic, such as tailoring, is now back out. And we're not in a business that wants to hibernate stock. We will deal with what we've got in front of us. It's about buying better. And therefore, where we've got merchandise, which would have come late, that we think is terminal, we have made sure that we have taken the appropriate action. Okay.

Thank you, Richard. Thanks very much. Appreciate it. Now, look, time's marching on. I'm just going to take two more quick questions and then we'll close. So we'll come to Maria Laura Adorno from Morgan Stanley and then Lorenzo will come to you. And then I'm sorry, we've got other stuff to do today. So we'll take any questions or discussions later in the day. Maria Laura.

Thank you very much for taking my question. Just a very short one. Can you perhaps, in the context of everything that you've said around food inflation and how the market is playing out so far, talk a little bit about what you're seeing on the food front from a competitive standpoint, given the recent changes in the market? Thank you.

I mean, I don't think it's saying much that's related to the recent moves in the market. I mean, if we're talking about Alison Morrison there, I don't think we're seeing that much. I mean, I think they've got somewhat different strategies to us. I mean, I think we've tried to keep relatively focused on our strategy of going after medium-sized baskets, in a lot of cases, secondary shops, which we've been quite successful at, with a pretty strict range architecture. you know, underpinned by our marketables and our other value campaigns. And that seems to be working. It's hard to kind of, I'm almost struggling to see how that's kind of, you know, how that's working versus competitors. On inflation though, I mean, I think we're seeing, I mean, you saw with the counter data, you're starting to see inflation come through the system. So everyone is flowing inflation through the system. We're actually a little bit behind the market actually in flowing inflation through the system. So I think I think you're seeing that that's happening across the board.

To be honest, as Owen has implied, I don't want to give the impression we don't think about the competition, but we think about our business first. We have 3.5% market share. What's happening at Sainsbury's or Tesco is not the biggest issue for us. It's about the changing shape and evolution of our business, which has been You've really seen evidence in the last few months. We have, on a two-year basis, without the benefit of online, because all that's in Ocado, we've been pretty much the top performing food retail business. And that's not driven by what anybody else has done. That's driven by what we've done on product innovation, on value, on quality, which is a relentless focus for us. And on the stores and the beginning, we're just seeing the glimmers of life from the rollout of the renewal format.

Yeah. Okay. Maria Laura? Thank you.

Thank you very much. Thanks. Okay, so last question, last but not least, of course, from Lorenzo Maggiotto from Bank of America.

Hey, guys. Yeah, I'll be quick and conscious of your time. On the sort of discounting environment, do you think this sort of lower, better environment for yourselves and sort of most of the market will carry on through, I guess, Black Friday and the other important sort of discounting holidays in Q4? Or do you think those are sort of slightly different beasts where you should still see, you know, very significant discounting across the board? Cheers. Cheers.

I mean, we haven't actually talked about Black Friday because we haven't done Black Friday in this business now for four years. I mean, it's another one of those mass discount promotions where when you look at it in the cold light of day, you've made no money whatsoever, disrupted your supply chain, and we think it just adds to the sort of tricksy promotional thing that disrupts your value statements. So we are not taking part in Black Friday. We haven't done for a number of years. And what we're seeing is a much more normalized trading pattern that you would expect from a standard retailer. My view is overall in the market, it's coming off more and more rather than growing. And I do think that, again, most people will take advantage of the market and the way that it's structured at the moment to continue to try and push a full price stance. So I don't have a crystal ball on other people's trading at the moment.

But the two major players of discount are out of the market at the moment. Bill, that's very clear. Congrats again. Good quarter.

Okay. Good. Well, look, I think I'm going to draw a line under there because our hour is just about up. So I really appreciate good questions, good discussion. And we're team available. Fraser's here. Owen, Steve, we're available. Not completely available, but we're around during the day if you've got any other questions. So do come back to us and much appreciate your time. Thank you very much. Thank you. Thank you.