Marks and Spencer Group plc

Welcome to the Marks and Spencer interim results for 2022. I'm wearing my Jaeger zip-neck top today because, of course, we've turned the temperature down in the building a bit, so it's a bit chilly. Sign of the times. Anyway, it's a tough old world out there. I don't think there's ever been a time in my career where the macro factors have been more formative on how the business is performing, and it's what we're all talking about. But we can only do what we can do, and I hope you'll get the impression today that we're really driving this business, irrespective of all the noise in the outside world. Here's my view on it. I think we are now in the consumer crunch period. I think we can already see that. I think it's been very well socialized. And actually, one thing people underestimate is customers have been hearing about this. They've seen it on their television screens for months now. What is less well ingested is the cost of doing business crunch. so right across retail manufacturing distribution we're seeing rising cost of operating it's not just wages it's the energy cost it's the transport costs it's the packaging costs and so on some of that still to come through and so that means that all of us have got to run faster up the down escalator look I think we know that winter is coming the customer knows that and we've already seen a few falling leaves so we have are seeing people change but our trading in the first half has been relatively strong. We've seen good growth, partly growth in market share, and even though in food you can see signs where volumes across the industry are going negative, you can see signs of trading down for discounters, our own remarkable range has been, well, we've had difficulty keeping up with the volume of demand. The Marks & Spencer customer isn't just any customer. I mean, it's partly the brand strength, but also most of our customers probably are either in employment. On average, most of them have slightly above average earnings. The majority of our customers, after all, are not that exposed to high levels of mortgage, partly because a significant portion are retired. and tend to be a slightly older demographic. So we do think that, whilst we're not insulated, we've got some protection in that regard. The second point to make is that our cost of doing business has been too high for years. We're making a lot of changes, and there's a lot of stuff that's happening, and I hope you'll see this in the presentation, which will allow us to reduce our costs faster than some of our perhaps more well-oiled competitors. So just two or three examples of that. I am very excited about what we're doing now with store rotation. I know it sounds rather old-fashioned, you know, the idea of opening great new stores and closing old ones, but for Marks & Spencer this is really powerful. Secondly, online, so a moving volume into online. On average, and depending on how you account for it, and there's not any exact science, Our online business is roughly as profitable as the store business. You could say it's more profitable. As we move more volume in, it becomes more profitable. And the third thing to say is that we've invested a lot of money into omnichannel data and digital data engine. We'll translate that investment into driving sales. And actually, we do believe that we could end up in a... market leading position or certainly a position well ahead of many of our competitors in that respect and we're beginning to get there. So those are really exciting things and I do want I don't want us to get too consumed with what's happening in the macro environment, because our job is to change M&S for the future. That's what the team are doing. The scope for improvement here is tremendous. We've got a new leadership team, which is very dynamic, very fast-paced. We've got a lot of good things happening, and that's why we're looking forward to the year ahead, and we believe we're going to come out of it stronger than ever.

Thank you, Archie. Well, good morning, everyone. Welcome to the M&S half-year results presentation. If you're watching this on November the 9th, there is a conference call for analysts and investors at 9.45am. There are four parts to today's presentation. Firstly, I will share an overview of today's results. Then Owen will walk you through the financial detail. Katie and I will then talk to you about the commercial plans driving our performance in the period, and importantly, how we're building resilience to the downturn as we reshape M&S for growth. I will then come back to talk to you about our guidance for the balance of the year and what we are doing to accelerate change and build further resilience to the macro headwinds ahead. So now to the results. Trading in the first half has been robust. Sales have grown ahead of the market in both food and clothing and home, with profit before tax and adjusting items of 205 million. We generated very strong sales growth and market share gains in clothing and home, and importantly maintained our full price mix from last year, which helped to deliver a margin of just under 10%. In food, sales were strong and volume outperformed the market as we kept our shape. But profit was down as we invested in trusted value, reflecting the market-wide inflationary headwinds, and we also absorbed higher costs in a number of areas, partly due to timing. International delivered a bounce back in sales and a recovery in profit, despite continuing to absorb Brexit-related costs and the exit from several markets. And as already reported, the Ocado retail result reflected normalising customer trends, increased costs from new capacity, as well as inflationary headwinds. We exited the period with a strong balance sheet and cash position and access to liquidity, having completed the important strategic acquisition of our food logistics provider, GIST. This gives us control of our supply chain and one of our biggest cost levers for the first time. Over now to Owen, who will walk you through the detail of these financial results.

So, the group headlines for the half. Group revenue was up 9% and the group delivered an adjusted profit before tax of £205.5 million, which demonstrates a robust performance. It's worth noting that last year's profit figure included £47.5 million of UK business rates relief. Net debt, whilst down year on year, has increased since year end. This was driven by a free cash outflow given our acquisition of Gist and the expected movement in working capital. I'll start with our food business. Firstly, as I've said before, M&S food reported sales do not include our direct online grocery business interest, with these sales reported through Ocado Retail instead. Total food sales were up 5.6%, with like-for-like sales contributing 3% of this growth, and new space and new business, including our partnership with Costa Coffee, delivering the remainder. Sales were driven by increasing price inflation and mixed through the period. Although volumes continued to outperform the market, they were down in core baskets due to the market reversion post-pandemic. They are still strongly ahead of pre-COVID levels. The continuing recovery of our franchise and hospitality businesses provided a tailwind in the half as expected. These parts of our business attract smaller baskets, so our overall average basket size is down compared to last year. Operating profit decreased compared to last year, but it is important to understand the detail. Firstly, given the highly inflationary environment, like most of the market, we have seen a decrease in gross margin. Although we had the improving margin mix from our recovery and hospitality business, this was therefore more than offset by cost inflation and our decision to invest in trusted value for customers. In store staffing, ongoing efficiencies enabled by technology improvements in store more than offset pay inflation. Within other store costs, last year the food business received £19.7 million of business rates relief, which was not repeated this year. This contributed 60 of the 70 basis points impact you can see here. In addition, we have seen inflation in our energy and other store running costs. And in our supply chain costs, in the first half, we saw the annualisation of the increase in labour costs, which started to build as a result of labour shortages in the market last autumn. And we also felt the impact of higher fuel costs. These impacts were partly offset by productivity efficiencies. Central food costs reflect our investments in technology, data and digital initiatives, which are weighted towards H1 this year, as well as marketing spend. Overall, stripping out the impact of business rates relief from the comparative, operating margin in the half reflects our decision to protect customers, investing in trusted value and not passing through the full effect of inflation in cost of goods. Also, increased supply chain costs from H2 last year, which we are acting at pace to address, starting with the acquisition of GIST. And finally, the first half weighted nature of investments. Turning now to the contribution from Okada Retail. The revenue performance has already been reported in some detail as part of Okada Retail's quarterly trading updates. But as a recap, revenue declined over this period as the increase in active customers and order numbers was offset by the decrease in average basket size to pre-pandemic levels. The M&S brand remains consistently over 25% of Ocado's sales and a growing share. We've moved into growth over the period as we annualised against the temporary closure of our Aerith CFC after a fire last July which gave a softer comparative. EBITDA reflects this reversion to more normal shopping habits amongst customers, but it also reflects the lower operational leverage of new CRFCs, which are currently underutilized. And of course, industry-wide pressures within fulfillment and delivery costs. These impacts were partially offset by lower administration costs. reflecting the release of management long-term incentive provisions given current trading. We had a number of exceptional items in the period, mostly relating to insurance income for our Andover and Aerith CFCs. Overall, M&S Group's share of Ocado retail loss after tax was £0.7 million in the period. Moving on to clothing and home. Overall, sales were up around 14% on both a total and like-for-like basis. This was driven by volume growth, price inflation and product mix. Store sales continued to recover back towards pre-pandemic levels. Alongside this, the online business had a robust performance. Going into a bit more detail, online performance was driven by higher traffic and average order value, due largely to product mix, which helped offset a slight reduction in conversion. Returns rates were higher year on year, as expected, driven by the increasing penetration of third-party brands, as well as product mix and customer behavior. Encouragingly, when compared to 19-20 levels of returns, the main driver of the increase is brands. Our stores showed a strong continuing recovery as footfall, transactions and basket size were all up year on year, and we saw positive performance across all store formats. In total, Clothing at Home generated an operating profit almost 10% higher than last year, or over 30% when excluding rates relief from last year's figure. Looking at the detail, gross profit was down, driven by headwinds in raw materials and the unhedged portion of currency, partially offset by sourcing improvements. Full price performance for the business continues to be strong. However, it's worth noting that as we grow our third-party brands business, which is mostly online, it has a dilutive effect on gross margin. Across all cost lines, the impact of inflation and our investments was offset to some extent or another by increased leverage from higher sales. In-store staffing and other store costs, it's the same story as our food business. Naturally, the cost pressures in other store costs from not having rates relief this year and energy inflation more heavily impacted our stores business compared to online. Within distribution and warehousing, better fixed cost leverage along with a favourable delivery mix offset inflation and the additional cost of servicing third-party brands. And finally, within central costs, again, fixed cost leverage and lower depreciation offset a number of additional costs. This included investments in technology, data and digital initiatives, additional costs to support third-party brands and higher marketing activity. These investments are all heavily weighted towards our online business. Overall, a very strong performance. with a decrease in gross margin offset through better fixed cost leverage, with online operating margin impacted more by the growth of third-party brands and our growth investment decisions. And finally, to international. In clothing at home, a strong performance was driven by post-COVID recovery in India and Ireland, as well as shipments to our Middle East franchise business, offset by the decline from our Russian exit. Food sales declined due to the exits of part of our French franchise business and the chilled business in the Czech Republic, and the continuing challenge of EU border-related issues on the Republic of Ireland. Excluding France, however, food sales were level on the year. Overall, operating profit was up. Gross profit increased. The recovery in clothing and home store sales in India and Ireland post-COVID has driven an improved margin mix. Store staffing improved as a percent to sales, driven by greater fixed cost leverage due to the sales recovery. For similar reasons to the UK, other store costs have increased. Last year, we received COVID-related government relief in the owned markets and rent concessions in India, which did not repeat this year. And we have also seen the headwinds from increasing energy costs. Distribution costs increased due to inflation, as well as higher operational and administrative costs. And in central costs, whilst these increased, the growth was in line with sales. So, bringing that all together for the group, excluding the impact of UK business rates relief and the change in Ocado profit, the core M&S business generated a modest improvement in profit. As discussed, A reduction in profit on food was partly offset by the improved profit delivery from our clothing and home and international businesses. M&S Bank contribution was broadly flat, as an increase in the bad debt provision due to economic conditions was mostly offset by the increase in demand for travel money and increased credit card sales. Net finance costs were down for two main reasons. Firstly, due to a higher pension credit, reflecting the higher pension surplus at the start of the year. and secondly as a result of the partial buyback of our 2023 and 2025 bond maturities in May. Overall, the Group delivered a £205.5 million adjusted profit before tax. I will cover off adjusting item charges in the period next. After accounting for these, we get to our statutory profit before tax. Within adjusting items, the store estate charges reflect the latest view of the store rotation programme timings, exit routes and assumptions. Within our organisational change, a non-cash charge has been recognised for updated assumptions relating to the sublet of previously closed offices. We've recognised the credit within adjusting items, reflecting the latest fair value assessment of the contingent consideration remaining for Ocado Retail. And as a result of the economic environment, like many of our peers, we have recognised additional store impairments due to a change in discount rates. The acquisition of GIST has resulted in an adjusting items charge, around 6 million of this relating to transaction costs. And details on the rest of our adjusting items can be found within our press release. As we turn to look at cash flow, let's take a moment first on CapEx. CapEx levels stepped up as we increased our investment to drive business performance. you can see that property made up over half the spend. Essential maintenance and asset replacement spend continued, as did our investment in new store formats or renewals and the store rotation programme. Supply chain investment in the period includes investments in our food and clothing home infrastructure, including vehicle upgrades. IT and M&S.com spend includes costs relating to technology replacement and upgrades in stores, website development and technology solutions for our supply chain infrastructure, as well as investments in digital capabilities across the group. Looking at the full cash flow now, overall we had a cash outflow in the half, driving an increase in net debt compared to year end. This was of course driven by our acquisition of GIST, and an expected working capital outflow. But I will step you through the detail now. Firstly, EBITDA was down, which I have already discussed. As I flagged in May, we saw a partial unwind of the working capital benefits we have seen over the past two years. This was a little higher at the half due to phasing. A detailed breakdown of the levers is given in the financial review. CapEx I've already spoken through. As expected, cash tax stepped up as we restarted corporation tax payments after utilising brought forwards losses last year. Investments and acquisitions largely relates to the acquisition of GIST, offset by the cash acquired upon purchase. The Adjusting Items cash outflows include costs relating to the exit of our Russian franchise business, the UK Store Estate Programme, GIST acquisition transaction fees and M&S Bank Insurance mis-selling provisions. There are of course other ups and downs, but despite the cash outflow, we maintain a strong cash position. Which leads me on to the balance sheet. In the year, as part of our focus on liability management, we bought back £150 million of bonds due for maturity in 2023 and 2025, reducing our near-term liquidity draws. We finished this period with £2.9 billion of net debt, with around £600 million of financial debt within that. We have £770 million of cash on our balance sheet and an £850 million revolving credit facility. This, along with some uncommitted facilities, gives us access to over £1.6 billion of liquidity. The future is of course uncertain, so we thankfully enter it with a robust balance sheet and a more disciplined approach to capital allocation.