Marks and Spencer Group plc

Good day and welcome to the Marks & Spencer Annals Call. This meeting is being recorded. At this time, I'd like to hand it over to your host, Archie Norman. Please go ahead, sir.

Well, good morning, everybody. It's Archie here, and I'm joined by Stuart and Alison, obviously. Thank you for joining us today. I was going to say great to see you all, but I can't see any of you. So, look, I think This is a set of results where we slightly feel we've said all there is to say about it, but I'm sure you'll think of some interesting questions. So let's crack on. Stuart is going to make a brief introduction, and then we'll take whatever questions there are. Thank you, Stuart.

Well, good morning, everyone. Thank you for joining us. As Archie said, Alison joins me in the room today. We've also got Fraser and Helen, so they're on hand for any follow-up questions. you may have throughout the day. I'm going to start with a look back at the half from April to September before moving on to give you some detail on where we are today. I will then look ahead to Christmas before finishing with the outlook for the rest of the year. I want to cover three objectives that we set out a couple of months ago, which were firstly to regain momentum, secondly, get back on track with growth, And thirdly, accelerate the pace of our transformation. So let's start with the last six months. The first half, as I've said, was an extraordinary moment in time for M&S. I'm not going to go over all the old ground today because I briefed everyone on the incident during our call in May. But everything regarding the incident has been well documented and we are now getting back on track. Our customers have been fantastic as always and I want to thank them again for their continued support and loyalty during the period. I also want to thank our supply partners and of course our colleagues across the whole of M&S who showed real determination and grit. This support together with the underlying strength of our business, our healthy balance sheet and robust financial foundations gave us the resilience to face into the incident and deal with it. At the prelims in May, we anticipated the material impact of the incident on group operating profit to be around $300 million this financial year, and we are broadly in line with that. I can confirm that this is mitigated by $100 million of insurance that we claimed and received during the period. This is the first set of results where we have consolidated Ocado Retail into our numbers. This is just an accounting change as part of the original joint venture, and it has no impact on our share of the business. Now, let me just touch on the headline numbers because across M&S, group sales grew 22% versus last year, but that was driven mainly by the accounting inclusion of a consolidated Ocado retail. Excluding the consolidation of Ocado retail, M&S sales were broadly flat with last year. Group profit before tax and adjusting items was $184 million, and excluding lease liabilities, we are still in a net funds position. Now, we put customers first and prioritized availability, which did drive waste and therefore increased costs in our food business. With our systems off, we didn't have a clear stock view, and of course we were using manual processes. But we took the decision to allocate stock out, fill the shelves, and that was the right thing to do for our customers. Despite the disruption in food, the business was resilient with robust sales growth of 7.8% in the half. Fashion, home and beauty sales in the half were down 16.4%. We had a particularly tough time here due to three key challenges. Firstly, we paused the online operations for just over six weeks and then brought them back gradually. Secondly, this impacted Click and Collect, which affected footfall into stores. And thirdly, supply chain disruption caused availability issues. As I said, this incident was an extraordinary moment in time. But change on the other hand is not a moment and in M&S change is a constant. We have a clear plan to reshape M&S for continued growth and we have never lost sight of this despite the disruption. That is why we accelerated our transformation during the half with investment in our three priority areas, restore rotation and renewal, supply chain modernisation and technology transformation. On store rotation, we opened 15 new or renewed stores in the first half, and we'll open more than 20 in the second half. This includes opening two flagship four-line stores, Bristol Cabot Circus, which opens next week, and Bath, opening February. On supply chain, in August, we announced a new 1.3 million square foot automated food distribution center in Davitry. which opens in 2029 to boost capacity for future growth, lower our cost to serve and improve product availability. A new regional food depot also opens in Bristol in 2026, increasing the proportion of stores served from their nearest depot. These investments are helping us get ahead of the growth curve and build a bigger, better food business. And on technology, we use the incident as an opportunity to strengthen our technology foundations and fast-track some timelines, including the new fashion home and beauty planning platform. Our job is to ensure we continue to transform and grow M&S while maintaining a strong investment-grade balance sheet. That means being disciplined in our investments and their hurdle rates. Let me add a little colour to each of our businesses In food, sales and market share growth are back on track. With three years of consecutive monthly volume growth outperforming the market, more customers are filling up their baskets at M&S more often. In fact, the latest Cantile figures show that M&S is the fastest growing store-based retailer in volume over the last four-week period. In the last 12 weeks, we served 800,000 more customers year on year. In the half, customers made 14 million more shopping trips to M&S Food than the same period last year, demonstrating more people are shopping with M&S Food more often. You've heard me talk about our strategy protecting the magic and modernizing the rest. In food, the magic means going to great lengths ensure the absolute best quality the leading on innovation and delivering trusted value our obsession with delivering world leading quality continues to drive sales take our upgraded italian mills range with sales up a third for example and our focus on innovation brings new products and new customers to mns our viral strawberry sando sold a million units in just four weeks In fact, we launched 700 new or quality upgrade products in the first half of this year alone. At the same time, offering trusted value is at the very heart of what we do. Sales of our value ranges are up 29%. Alex and the food team have made good progress, but we have so much opportunity ahead of us as we work towards becoming a full shopping list retailer and doubling the size of this food business. Now turning to fashion, home and beauty, where the recovery curve in this part of the business has been slower than in food. As I said, due to the pause in online sales and stock flow disruption. But now with online backup and systems running, we're making progress every day. And over the coming weeks, we expect stock flow to settle into a more normal rhythm. Despite this, we use the period to make further progress in improving our product ranges because outstanding products sit at the very heart of our strategy for fashion, home and beauty, with the M&S magic being our combination of quality, value and style. We consistently lead the market in value and quality, and now I can say for the first time, based on YouGov report yesterday, we're number one for style too. And the latest Cantile figures just out. show M&S number one in fashion market share in the last 12 weeks. This includes leading the market for women's wear and lingerie. So look, we're making progress and this is encouraging, but there is so much opportunity in this part of the business and there's lots for us to go after. John, as the MD, has been here now six months and has started to accelerate the strategy. being laser focused on the big rocks that we haven't yet really tackled, mainly the foundations of the business from sourcing, through supply chain, through merchandise planning and accelerating our online performance. In international, sales were down 11.6% due to our international websites being offline and shipment disruption. However, during the second quarter, performance improved as we restored systems and websites. Mark and the team have now made encouraging progress, resetting commercial terms with some of our franchise partners, which has helped enable investment in trusted value. We expanded our partnerships with Zalando and Amazon and put in place new wholesale arrangements, for example, launching lingerie in Davy Jones Australia, already performing ahead of plan. is it continues to be a growth opportunity in the medium term, but performance over recent weeks has been encouraging. Touching on Okaido retail, sales were strong, with growth of 14.9% over the half, driven by sales of M&S products, which grew faster at 20%. Sales growth has been encouraging, but we know there's lots to do to the path of profitability. Key opportunities include improving delivery efficiency with more same-day plots available, extending picking hours and rolling out further automation. These initiatives will boost the capacity over the next few years and support the path to profit. To finish, I will turn to the outlook. As we enter the second half, the consumer environment remains as uncertain as ever. As always, our priority is to offer the best product value, quality, innovation and, of course, in fashion style. We will continue to drive our transformation and to structurally reduce our costs to offset external headwinds. For context, during the first half of the loan, the increase to national insurance contributions and the packaging tax cost an extra $50 million. But there is much in our control. and the increase in our cost reduction ambition will help to address this. We're confident we will be recovered and fully back on track by the end of the financial year. In the second half, we therefore anticipate profit at least in line with the prior year as residual effects of the incident continue to reduce in the coming months. Our plan to reshape M&S to sustainable long-term growth is unchanged. Our ambitions are undimmed and our determination to knuckle down and deliver is stronger than ever. To date, we have delivered meaningful progress, but that's what's exciting because there remains so much more to do. And for us, it's all to play for.