Marks & Spencer Regulatory News (MKS)

MARKS AND SPENCER GROUP PLC

FULL YEAR RESULTS 2012/13

52 WEEKS ENDED 30 MARCH 2013

'Strong progress in our transformation'

Full year results:

• Group sales up 1.3%1 at £10.0bn

• Total UK sales +0.9%: Food +3.9%; General Merchandise -2.4%

• Like-for-like UK sales -1.0%: Food +1.7%; General Merchandise -4.1%

• International sales +4.5%1

• Multi-channel sales +16.6%

• Underlying profit before tax2 £665.2m (last year pro-forma3 £687.2m; reported £705.9m)

• Statutory profit before tax £564.3m (last year £658.0m)

• Underlying basic earnings per share2 32.7p (last year 34.9p)

• Basic earnings per share 29.2p (last year 32.5p)

• Full year dividend 17p per share (last year 17p)

• Net debt £2.6bn (last year pro-forma3 £2.5bn; reported £1.9bn)

Marc Bolland, Chief Executive, said:

"In a challenging market, M&S sales grew by 1.3%. Three of the four parts of the business made strong progress.

"We are working hard to get the General Merchandise performance back on track. We have already made progress in our operational execution, and our new Autumn/Winter ranges have received a positive reaction. We are very pleased with Food performance which benefitted from our continued focus on delivering innovation, and unrivalled quality and provenance. Our International operations performed well in key markets and our Multi-channel business delivered strong growth."

Robert Swannell, Chairman, said:

"2012/13 was another year of progress for M&S where a mixed trading performance was balanced by good progress in building longer term foundations in line with our key strategic goals.

"In line with our dividend policy, the Board is recommending a final dividend of 10.8p per share, resulting in a full year dividend of 17p per share, level on last year."

Guidance for financial year 2013/14:

• Gross margin is expected to grow by 30bps to 50bps with a similar range in both General Merchandise and Food.

• Operating costs are expected to increase by c. 3.5% as a result of inflation and volume growth, the addition of new space and increase in depreciation.

• Group capital expenditure is expected to be c. £775m, a reduction on the previous guidance of £850m. From 14/15 we expect it to fall to c. £550m per annum, a reduction on the previous guidance of £600m per annum.

• We are targeting underlying profit improvement, but expect to incur c. £30m non-recurring dual running costs, as a result of the transition to the new web platform and the opening of the new EDC/NDC in Castle Donington.

• The change in the IAS19 accounting for pensions will result in a restatement of 12/13 reported results, when adopted in 13/14. This will reduce the 12/13 reported profit by £17m, with a similar reduction expected in 13/14.

• The planned opening of new space will add c. 2% to UK and c. 15% to International space.

• Effective underlying tax rate is expected to be 21.5%.

Current trading

Trading over the first seven weeks of the new financial year has been in line with our expectations.

Despite the challenging market conditions, we are focused on delivering our plan to transform M&S into a leading international multi-channel retailer. As we enter the third year of our transformation, we are encouraged by the significant progress we have made. Despite non-recurring dual running costs this year, we expect to make solid underlying progress; with more material improvements to follow from next year as momentum building across the business is increasingly reflected in the results.

We will update on our first quarter sales on 9 July 2013.

Outlook - 2014/15 onwards

Over the three years of our transformation we have worked hard to address the legacy under-investment in infrastructure and transform the business for the future. 2012/13 marked the peak year of this investment. As indicated, from 2014/15 we will move to a lower, more sustainable long-term investment level of c. £550m, which while significantly reduced, will allow us to continue to invest in the business on a consistent basis, avoiding the peaks and troughs seen in the past.

This transformation and the operational improvements we are making, lead us to expect to improve our General Merchandise margin over the next three years through a combination of tactical changes, sourcing and new systems, as well as early benefits of structural improvements.

As a result, we expect a material improvement in free cash flow from 2014/15, and will at this point evaluate future uses of cash, with a view to delivering improved shareholder returns.

Notes:

1 On constant currency basis

2 Underlying results are consistent with how the business is measured internally. Adjustments to derive underlying profit include one off strategic programme and restructuring costs, fair value movements on financial instruments and embedded derivatives, impairment of assets and the impact to income earned from M&S Bank following M&S Bank's recognition of a provision for potential financial product mis-selling.

3 The pro forma adjustment to net debt in the prior year reflects the calculated fair value of the property partnership liability using a consistent interest rate in the discounted cash flow model with that as at 21 May 2012 when the terms of the property partnership were changed. Similarly, an adjustment to underlying profit before tax of £18.7m relating to the unwinding of the discount on this liability has been made.

Board Changes:

After nine years at M&S, Steven Sharp, Executive Director, Marketing, will be retiring from the business at the end of February 2014 and intends to take on a portfolio of interests. Steve joined M&S in 2004 and has played a significant role in shaping the M&S brand from the introduction of the 'Your M&S' branding in 2004 to numerous iconic advertising campaigns reinforcing M&S's quality, style and ethical credentials. Steve will step down from the Board following the Annual General Meeting on 9 July 2013 and will continue to work in the business as Creative Director until 28 February 2014.

As a result of the above, Patrick Bousquet-Chavanne will take over responsibility for marketing and will be put forward for election to the Board as Executive Director, Marketing and Business Development at the AGM on 9 July 2013. Patrick joined M&S in September 2012 as Director of Strategy Implementation and Business Development and has played a key role in the development of the new marketing strategy in womenswear. Patrick was previously a Group President at The Estée Lauder Companies.

Robert Swannell, Chairman said; "Steve has been responsible for many of the Company's iconic campaigns. I fully respect his desire to take up a portfolio of interests and he leaves the Company with our full support, appreciation for all of his exceptional work and our best wishes. On behalf of all my colleagues I look forward to welcoming Patrick Bousquet-Chavanne to the Board; he brings a wealth of international experience."

Marc Bolland, Chief Executive said "We are extremely grateful to Steve for all of his considerable achievements at M&S and the pivotal role he has played in developing the M&S brand. It has been great working with Steve over the last three years. I would like to welcome Patrick, who has worked closely with Steve over the past 12 months. Patrick has built leading consumer brands around the world and will be an excellent addition to the team."

Steven Sharp said; "When I started with M&S I expected to stay with the business for around five years. It has now become nine fantastic years, an experience which I have thoroughly enjoyed. I am really looking forward to the freedom to pursue a portfolio of interests. I am also very happy to continue working with M&S as Creative Director for the remainder of the year. This will allow me to continue to contribute to the transformation of the brand, a subject I'm committed to and very passionate about."

2012/13 operating review:

Business highlights:

• Food outperformed the market on a like-for-like basis

• Operational improvement in General Merchandise

• UK gross margin +10bps due to tight control of markdown

• Managed our cost base tightly with cost growth of 1.8%, lower than guidance

• Multi-channel sales up 16.6% with the launch of free next day store collection

• International sales +4.5%1 with strong like-for-like growth in key markets

Progress with our business transformation:

• Food repositioned to more specialist. Deli performance +14% and Bakery +20% ahead of other stores

• Food availability improved by 4% to date

• GM Womenswear plan is in place

• Concept stores performance 3% ahead of the rest of the store estate

• New Beauty shop in 55 stores, delivering strong double digit sales uplifts

• New Home concept launched in 33 stores; sales performance encouraging

• New EDC/NDC in Castle Donington commenced operations

• 45 new international stores opened, including eight new territories

• Seven international websites launched in Europe and China

• IT systems and Logistics roadmap refined; additional £50m of benefits identified

• 3.8million items of clothing collected through our Shwopping initiative

The market continued to be challenging throughout the financial year, with consumer confidence impacted by a weak macro-economic situation and continued pressure on disposable incomes. Trading was volatile, partly as a result of unseasonable weather conditions through both Spring/Summer and Autumn/Winter seasons.

Against this backdrop we focused on tight management of margin and costs. We took action to address the short term issues in General Merchandise and are pleased that we have seen an improvement in operational execution. At the same time we continued to invest for the long term, in line with our strategy to transform the business into an international, multi-channel retailer.

Sales

Group sales were up 1.3% on a constant currency basis (+0.9% actual currency), driven by good performance in our Food, International and Multi-channel businesses.

General Merchandise sales were down 2.4% with like-for-like sales down 4.1%. We faced difficult trading conditions over the course of last year, with a highly promotional clothing market and unseasonal weather. Against this backdrop we focused on full price sales and more effective management of markdown, thereby protecting our gross margin. At the start of the financial year we identified merchandising issues in our Spring/Summer 2012 clothing collections. We took decisive action, appointing a new management team and delivering improvements in our operational execution through better availability and stock management. The improvement in product will take time to come through, but our customers will start to see the benefits of the changes from this summer.

Food sales were up 3.9%, with like-for-like sales up 1.7%, consolidating our position as the UK's leading high quality food retailer. Our strategy to focus on our heritage of quality, innovation and provenance is continuing to deliver results and set us apart from the competition. The investment we have made in our operational execution, from new systems to better customer service, has helped us deliver further improvement in product availability.

International business continued to perform well with sales were up 4.5% on a constant currency basis (+0.9% actual currency). Our franchise business in the Middle East delivered a good performance. In Asia, our key markets in India and China continued to trade strongly with double digit like-for-like growth. While the trading in legacy markets was once again impacted by macroeconomic pressures, we saw an improvement in performance towards the end of the year. Operating profit was down 10.9% on a constant currency basis, due to difficult macroeconomic conditions in legacy markets and start-up costs in priority markets.

UK gross margin

General Merchandise gross margin was up 45bps at 51.8% as a result of improved markdown management, and ongoing sourcing initiatives, which more than offset input cost pressures in areas such as wages.

Food gross margin was up 35bps at 31.7% due to improved buying and better management of promotional spendoffsetting commodity price inflation. In addition, we are continuing to see the benefits of our investment in new Food systems.

Total UK gross margin was up 10 basis points at 40.9%, as a result of the mix change due to a difference in the rate of sales growth in General Merchandise and Food. 

UK operating costs

UK operating costs were up 1.8% on last year. We continued to manage costs tightly despite upward pressures from new space, inflation and investment in business initiatives such as improved customer service in stores. These pressures were mitigated by efficiencies generated through the supply chain and IT programme, as well as a reduction in the depreciation charge.

Underlying operating profit

Underlying group operating profit was £781.6m (last year £810.0m). Within this, UK operating profit was £661.4m (last year £676.6m) and International operating profit was £120.2m (last year £133.4m).

Net debt and cash flow

Net debt at the end of the year was £2.6bn (last year £1.9bn, pro forma £2.5bn adjusting for the change in terms of the property partnership with the pension fund). Working capital was well managed with a £72.3m inflow in the year. Our ongoing investment in our UK and International stores, the new multi-channel platform and new systems and supply chain resulted in capital expenditure of £829.7m (last year £720.7m). Overall, there was a net cash outflow of £67.2m (last year £117.4m inflow).

2012/13 business review:

We are two years into our three year plan to transform M&S into a truly international, multi-channel retailer. We have made good progress against our objectives.

1) Focus on the UK

Stores

Last year we began the roll-out of our new store format, designed to make our stores easier to shop by improving navigation and making better use of space. At the end of the year we completed work on 337 stores, representing over 65% of our space. We remain on track for completion by mid 2013/14.

The sales performance in the new concept stores has been 3% ahead of the rest of the business, an improvement on the initial 2.6% uplift, delivering a 13% internal rate of return, ahead of our hurdle rate of 12%.

We also commenced the second phase of our store transformation, which includes the roll-out of our new M&S Beauty department and our stylish and inspirational new Home concept. This is helping customers reappraise the M&S offer and we are pleased with the sales performance in both new departments.

In August 2012, we opened our eco-friendly flagship store at Cheshire Oaks, which showcases the very best of M&S as a leading multi-channel retailer under one roof, including latest in store technology such as browse and order points. The store received very positive feedback from our customers which is reflected in its strong sales performance to date.

Clothing

Clothing market conditions were challenging throughout the year, with customers remaining cautious and planning their spending carefully. In a competitive market, with high levels of promotional activity we protected margins, with tactical offers on selected products that demonstrated great value.

Early in the financial year, our performance was impacted by merchandising issues. We improved our processes, tightened stock management and changed the way we allocate stock to stores. We also aligned our buying procedures more closely with our marketing activity - delivering record availability on advertised lines.

We took decisive action to address the performance of our Clothing business; bringing in a new team, listening carefully to our customers and improving our operational execution.

We have restated our commitment to quality, with a new Quality Charter, promising to deliver the M&S difference on every product. With a new team in place, we are reinvigorating our style credentials and will deliver a confident edited collection of the season's key styles, along with the quality wardrobe staples we're famous for. For example, our classic £6 white tee shirt benefited from improved styling, better fabric and superior finishing, resulting in a sales uplift of 15%.

In May we launched our new Beauty concept, featuring an edited collection of niche beauty and skincare brands from around the world alongside M&S' own reformulated beauty products. New Beauty concept departments were 25% ahead of the rest of the store estate.

Home 

Despite the static housing market furniture sales rose 2%, driven by improved quality and faster delivery times on a number of key lines. In August we launched our new in-store Home concept, which transformed the way we showcase our products. It also embraces technology to offer greater choice and make it easier to shop our ranges. The new concept is now in 33 stores, with performance in these stores 9% ahead of non-concept stores.

Food 

Our Food business delivered an excellent performance this year, with sales consistently ahead of the market, driven by our trusted quality and ongoing innovation.

Provenance, quality and trust continue to underpin everything we do - from our relationships to suppliers to the products we sell. Our high ethical and sourcing standards continue to set us apart from the competition. We were pleased to be unaffected by the recent issues affecting the Food industry.

We offered customers even more choice through constant innovation and first-to-market products, launching nearly 2,000 new lines and refreshing 25% of our entire range. From new international ranges such as 'España' and 'Modern Asian', to new healthy range 'Delicious and nutritious', our innovative products kept customers coming back. We also continue to drive the health category and are proud to be the market leaders in healthy own label chilled ready meals.

This reputation for innovation, coupled with exceptional quality, means M&S has become a destination of choice for customers looking to make celebrations more memorable. Once again they placed their trust in us at special times of the year, and last summer provided several opportunities to celebrate. We also had our biggest ever Easter week as well as a record Christmas, outperforming the market in the two key trading weeks.

With value still front of mind for customers, we ensured our offer remained competitive through a combination of independent weekly price matching and well targeted offers. We launched Simply M&S, a range of 700 products that highlights the great value we offer on everyday items, without compromising on M&S quality. In addition our everyday promotions such as our 3 for £10 on meat and fish and 'Weekends In' deals, helped customers get even better value from their weekly shop.

Our new store format has now been rolled out to 337 Food Halls, improving the shopping experience, providing elements of theatre and reinforcing our position as a specialist food retailer. Both our new bakeries and new delis are well ahead of non-concept stores. In addition we invested in even better customer service through our new staff zoning initiative. Ongoing supply chain improvements and the implementation of our new space, range and display system have helped us deliver further improvement in availability and we remain on track to deliver our 5% improvement target by the end of 2013/14.

2) Multi-channel

Multi-channel sales accelerated this year, growing by 16.6% despite tough comparatives. Over the last 12 months we have made the M&S shopping experience easier, more convenient, as well as more inspiring for our customers, however they choose to shop with us. We now have over 3.6m weekly visitors to our UK website, thanks to a combination of improved navigation, more style advice and greater choice, including 40% more online product exclusives. Our online business now accounts for 13% of our General Merchandise sales.

Our 'Shop Your Way' service - which allows customers to order and collect their shopping in the way that suits them best - grew in popularity, with over 44% of orders now collected in stores. Delivery is now available to 476 UK stores and this year we improved the service further with the launch of free next day delivery to stores.

Sales from new channels have grown strongly as we brought the very best of online to our stores. We made more of our product offer available through new Browse and Order points in stores and by equipping 1,200 store employees with iPads. Large digital screens play catwalk videos and our new Home and Beauty departments use technology to inspire customers and provide tailored advice and guidance.

In May 2012 we re-launched our mobile optimised site to deliver an even richer browsing and shopping experience. We launched our first ever transactional iPhone app in July and created a new M&S Home iPad app, which brings our home catalogue to life in an easy to shop format. As a result, mobile and tablet sales increased by almost 200% and now account for 18% of multichannel sales.

To fulfil our multi-channel ambitions we need to be an agile business, with the right infrastructure in place and the ability to innovate with pace. This year we made real progress with the opening of our new 900,000 sq ft e-commerce distribution centre (EDC/NDC) at Castle Donington in May 2013. The site is helping us to better serve customers and further improve our delivery times and product availability. During the year we also completed the first phase of testing of our new multi-channel platform, which will launch in spring 2014, and showcase the best of M&S via a fashion-forward online environment and offering a crisp, easy-to-shop experience.

3) International

Sales in our International business were up 4.5% on a constant currency basis, reflecting strong growth in our priority markets. We now trade from 418 stores in 51 territories

In Asia, we focused on driving growth in our priority territories of India and China. With our partners, Reliance Retail we opened six new stores in India and we continued to grow our presence in Shanghai, with the opening of seven new stores. Our Hong Kong operations also performed strongly and we opened one new store.

Our franchise operations across key territories in the Middle East performed well, with sales up 9%. We opened 19 new stores across 11 territories, including new markets such as Georgia, Kazakhstan and Armenia.

Our European business was impacted by the ongoing weakness of the Irish and Greek economies. We strengthened our Czech Republic business and are pleased to have seen early signs of improvement. Our Champs Élysées store in Paris continued to perform well and our first full-line French store opened in October at So Ouest.

Following the successful launch of our local French and Irish websites, we launched six new local in-country websites. In addition, we launched an online shop on China's leading retail website TMall and have announced plans to launch an e-commerce offer for the Russian market, operated by our existing franchise partner FIBA.

We also began work to improve our international buying processes - combining our central planning with local market knowledge to deliver a more tailored product offer that better reflects local seasonality, culture and customer profile.

Supply Chain and IT

To fulfil our international, multi-channel ambitions, it is essential we have the infrastructure and organisational capabilities to drive this growth. Since we launched our plan to transform M&S, we have made considerable progress.

We have reviewed the legacy logistics road map, and adapted it to the changing customer shopping habits. We now plan to operate three rather than four UK distribution sites. The first one of these, our dedicated e-commerce and NDC facility has commenced operations at Castle Donington in May 2013. Once fully operational it will help us achieve a step change in service to our multi-channel customers including improved availability and later delivery cut-off times as well as improved efficiency within our operations. The remainder of the new network will be delivered by 2015/16, cutting our lead times by 70%.

As mentioned during our recent Castle Donington presentation we expect a non-recurring dual running cost of c. £30m this year associated with the transition to the new web platform and our new EDC.

We have also made good progress with our systems upgrades and our new multi-channel platform build is on schedule for launch next spring.

Plan A

After our five year milestone in 2012, this year was one of planning and progress for Plan A. Having achieved our big operational targets of becoming carbon neutral and sending no waste to landfill, we continued our journey of improvement; stretching ourselves further and extending the influence of Plan A.

We had great success in 2012/13 in engaging our customers and employees in Plan A. Through our Shwopping initiative, our customers and employees helped divert 3.8 million items of clothing from landfill, recycling them with Oxfam. We also extended the scope of Shwopping, working with Business in the Community to offer businesses a free clothes recycling service for offices and workplaces. More than 10,000 garments were collected in the first month, with over 150 companies signed up to 'Shwop at Work', including B&Q, IBM and Thames Water.

Our Big Beach Clean-Up in May 2012 saw 6,000 M&S customers and employees help the Marine Conservation Society clean over 100 beaches, collecting over 11,500kg of rubbish. 27,000 people took part in the Big Butterfly Count, a nationwide survey aimed at helping us access the health of our environment and 3,000 schools registered to take part in our School of Fish programme.

We're proud of what we have achieved in this area, but there is more to do in terms of how we influence our employees, customers, suppliers and even our competitors. In 2013/14 we will work with our external Sustainable Retail Advisory Board to shape our future vision for Plan A - ensuring it reflects changing social priorities, whilst continuing to tackle the environmental and ethical challenges that inspired its launch.

Financial Review

Revenues

Group revenues were up 0.9% (+1.3% on a constant currency basis), driven by sales growth in both International and the UK, with particularly strong growth in Food.

*At constant currency

UK revenues were up 0.9% in total with a like-for-like decrease of 1.0%. We added 2.8% of space, 2.6% in General Merchandise and 3.1% in Food, on a weighted average basis.

International revenues were up 0.9%, (4.5% on a constant currency basis). Our owned businesses in India and China delivered a strong performance, driven by good like-for-like growth and the opening of new space. Similarly, our franchise business continued to perform well, especially the Middle East region which delivered strong growth. Despite continuing tough trading conditions impacting the full year performance in the Czech Republic and the Republic of Ireland, there was an improvement in trend in the second half of the year.

Operating profit

Underlying operating profit was £781.6m, down 3.5%.

In the UK, underlying operating profit was down 2.2% at £661.4m. Gross margin was up 10bps at 40.9%. General Merchandise gross margin was up 45bps at 51.8% as a result of improved markdown management and ongoing sourcing initiatives, which more than offset input cost pressures from areas such as wages. Food gross margin was up 35bps at 31.7% due to improved buying, combined with better management of promotional spend offsetting commodity price inflation.

Underlying UK operating costs were up 1.8% to £3,049.8m. A breakdown of the costs is shown below:

Retail staffing costs increased due to investment made in delivering customer service and increased space together with the impact of the annual pay review.

Occupancy costs were level on the year with increases from rent, rates and utilities offset by a decrease in depreciation.

Distribution costs continue to be managed tightly despite inflationary pressure and volume increases in Food and Multi-channel, as we continued to see the benefits of initiatives to improve supply chain efficiency.

The reduction in Marketing and related costs reflects more effective use of marketing spend within both Foods and GM.

Increase in support costs reflect the impact of annual pay increases and higher pension costs associated with auto-enrolment, which will continue into the coming year.

The underlying UK operating profit includes a contribution from the Group's continuing economic interest in M&S Bank of £51.1m, last year £50.7m.

International underlying operating profit was down 9.9% (down 10.9% on a constant currency basis). Franchise operating profits were down 3.9% to £106.3m, with our European franchise partners' trading environments impacting on their business. Owned store operating profits were down 39.0% to £13.9m, due to continued macroeconomic pressures in Europe combined with initial start-up costs in priority markets.

Non-underlying profit items

52 weeks ended

Strategic programmes incurred £6.6m of costs in the year which are not part of the normal operating costs of the business. These include brand segmentation and business integration costs, asset write-offs and accelerated depreciation. The cumulative strategic programme costs incurred since the strategy was announced is now £41m, of the c. £50m we announced in 2010.

Restructuring costs relate to the Group strategy to transition to a one tier distribution network and the associated closure costs of legacy logistics sites.

The fair value movement on the embedded derivative is driven by an increase in the expected RPI rate.

The fair value movement on the buy back of puttable callable bonds relates to a one-off finance charge resulting from the cancellation of bonds issued in 2007. These bonds included a coupon rate reset after five years based on a fixed underlying 25 year interest rate. In light of continued low long-term market interest rates and the successful £400m bond issuance in December 2012, the Group decided to buy back and cancel these bonds.

The reduction in the fee income received from M&S Bank is due to M&S Bank's potential redress to customers in respect of possible mis-selling of financial products. This reduction in fee income is expected to continue in the current year and amount to a further c. £45m. We are discussing with HSBC whether these charges are properly for our account under the terms of our agreement.

Net finance costs

The net interest payable was down 6.6% at £120.0m as a result of the lower cost of funding of 5.9% (last year 6.5%.) Underlying net finance costs were up £12.3m to £116.4m due to the unwinding of discount on partnership liability and a reduction in pension income.

Taxation

The full year effective tax rate on underlying profit before tax was 22.7% (last year 24.5%).

Underlying earnings per share

Underlying earnings per share decreased by 6.3% to 32.7p per share. The weighted average number of shares in issue during the period was 1,599.7m (last year 1,579.3m).

Dividend

The Board is recommending a final dividend of 10.8p per share. This will result in a total dividend of 17p, in line with last year. The Board's dividend policy remains unchanged; a progressive policy with dividends broadly twice covered by earnings.

Capital expenditure

We continued to invest in our UK stores in order to create a more inspiring environment. The new concept had been rolled out to 337 stores at the year end. Our programme set out in November 2010 will complete during the current financial year.

Our commitment to improving multi-channel capabilities remains a priority with the development of our new multi-channel platform and the launch of five new in-country websites, and a dotcom presence in China. We now trade online locally in 10 countries.

We added 2.8% of selling space in the UK (on a weighted average basis), trading from 16.2m square feet at the end of March 2013. We opened a net 35 new stores during the year, including our flagship store in Cheshire Oaks. In our International business, space increased by c.16%, predominantly in our key strategic territories of India, China, the Middle East and Russia.

We continued to invest in our supply chain and technology in line with our strategy to build an infrastructure fit to support the future growth of the business.

Cash flow and net debt

*\* The property partnership liability pro-forma adjustment to net debt in the prior year reflects the calculated fair value of the property partnership liability using a consistent interest rate in the discounted cash flow model with that as at 21 May 2012 when the terms of the property partnership were changed.

The Group reported a net cash outflow of £67.2m (last year inflow £117.4m). This outflow reflects a 3% decline in underlying EBITDA, a lower working capital inflow and higher capital expenditure.

Net debt was £2,614.3m, an increase of £757.2m on last year as a result of the change in terms of the property partnership with the pension fund. Adjusting for this, net debt was £154.1m higher than last year.

The May 2012 bond matured in the period, and was refinanced from existing facilities and operating cash. Our funding strategy continues to ensure a mix of funding sources and tenor of maturity to provide cost effectiveness and flexibility to match the requirements of the business.

Pensions

At 30 March 2013 the IAS 19 net retirement benefit surplus was £193.0m (last year £78.0m). The market value of scheme assets increased by £743.6m, due to improved asset performance and company contributions. The present value of the scheme liabilities has increased by £628.8m due to a reduction in the discount rate. Our hedging strategy adopted since 2010 continued to reduce significant fluctuations between scheme liabilities and assets.

A full actuarial valuation of the UK Defined Benefit Pension Scheme was carried out at 31 March 2012 and showed a deficit of £290m. A funding plan of £112m was agreed with the Trustees. The difference between the valuation and the funding plan is expected to be met by investment returns on the existing assets of the pension scheme.

- Ends -

For further information, please contact:

Investor Relations:

Majda Rainer: +44 (0)20 8718 1563

Richard Harris: +44 (0)20 8718 9688

Media enquiries:

Corporate Press Office: +44 (0)20 8718 1919

Investor & Analyst webcast:

Investor and analyst presentation will be held at 9am on 21 May 2013. This presentation can be viewed live on the Marks and Spencer Group plc website on:

www.marksandspencer.com/thecompany.

Video interviews with Marc Bolland, Chief Executive and Alan Stewart, Chief Finance Officer will be available on the above website. The interviews are also available in audio and transcript.

Fixed Income Investor Conference Call:

This will be hosted by Alan Stewart, Chief Finance Officer at 2 pm on 21 May 2013:

Dial in number: +44 (0)20 8515 2319

A recording of this call will be available until 31 May 2013:

Dial in number: +44 (0)20 7959 6720 Access code: 4621150 #

Statements made in this announcement that look forward in time or that express management's beliefs, expectations or estimates regarding future occurrences and prospects are "forward-looking statements" within the meaning of the United States federal securities laws. These forward-looking statements reflect Marks & Spencer's current expectations concerning future events and actual results may differ materially from current expectations or historical results. Any such forward-looking statements are subject to various risks and uncertainties, including failure by Marks & Spencer to predict accurately customer preferences; decline in the demand for products offered by Marks & Spencer; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of Marks & Spencer's brand awareness and marketing programmes; general economic conditions or a downturn in the retail or financial services industries; acts of war or terrorism worldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets.