Marks & Spencer Regulatory News (MKS)

Marks and Spencer Group Plc

Full Year Results For 52 Weeks Ended 28 March 2020

"Securing the future... accelerating change"

1 Prior year comparatives restated for the adoption of IFRS 16 'Leases' and for the effects of the rights issue completed in June.

2 Free cash flow is cash generated from operating activities less capital expenditure, cash lease payments and interest paid.

There are a number of non-GAAP measures and alternative profit measures "APM", discussed with this announcement and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to adjusting items table below for further details.

Steve Rowe, Marks & Spencer CEO said: "Last year's results reflect a year of substantial progress and change including the transformative investment in Ocado Retail, outperformance in Food and some green shoots in Clothing in the second half. However, they now seem like ancient history as the trauma of the Covid crisis has galvanised our colleagues to secure the future of the business. The way our people have rallied to support our customers and communities has been awe-inspiring. From the outset we recognised that we were facing a crisis whose effects and aftershocks will endure for the coming year and beyond: Whilst some customer habits will return to normal others have changed forever, the trend towards digital has been accelerated, and changes to the shape of the high street brought forward. Most importantly working habits have been transformed and we have discovered we can work in a faster, leaner, more effective way. I am determined to act now to capture this and deliver a renewed, more agile business in a world that will never be the same again."

● Profit before tax & adjusting items £403.1m, including an adverse profit impact of c.£52m in March which we largely attribute to Covid-19

● Profit before tax of £67.2m including adjusting items of £335.9m, with £212.8m for costs and stock write downs for Covid-19

● Strong Food LFL revenue of 1.9% and operating profit up 11.2%. Volume outperforming the market

● Clothing LFL revenue decline of 6.2% and operating profit down 37.0%, adversely impacted by availability in H1. Reengineering of ranges accelerating during the year

● Acquired 50% of Ocado Retail, a valuable investment in online grocery which transforms the growth potential of M&S Food. Ocado Retail delivered 40.4% revenue growth for the 9 weeks to 3 May. Switchover and synergy plans on track

● Progress against transformation priorities, helping the business to withstand the crisis

● Over £1bn of actions, including c.£500m of planned cost reductions and further actions to manage cash under scenario planning for Covid-19

● Liquidity secured including removal or substantial relaxation of covenants on the £1.1bn revolving credit facility (RCF). Eligibility to the UK Government's Covid Corporate Financing Facility (CCFF) confirmed and £300m allocated

● Outperformance against Covid-19 scenario, with cashflow over £150m better than scenario after six weeks, largely driven by trading

● Launched the Never the Same Again programme to draw on learnings from the crisis and capitalise on the opportunities to drive the transformation plan in a changed consumer environment.

Good progress on transformation in 2019/20

Prior to the Covid-19 impact, both major businesses were making good progress in implementing the transformation programme with Food outperforming the market and despite teething issues in changes to men's clothing ranges, kids, womens, and lingerie starting to show sustained, improved performance.

In recent years we have made a number of structural changes to the basic infrastructure of the business including closing 54 of our legacy shared stores, migrating off mainframe infrastructure to cloud based systems and implementing new warehouse management systems. These changes have been instrumental in helping the business to react effectively in the early weeks of the crisis.

To illustrate more clearly our new more decentralised model, we are for the first-time introducing segmental profit reporting in our family of businesses: UK Food, UK Clothing & Home and International. This demonstrates the strength and balance of the combined businesses, which has been a major source of resilience in the crisis.

Outperformance in Food

The UK Food business outperformed the market and saw strengthening sales performance as changes to range, value, and customer communication took effect: revenue increased 2.1%, with LFL sales up 1.9%, strengthening throughout the year, including an estimated 0.3% benefit from the effects of Covid-19 in March. Operating profit before adjusting items increased 11.2%. Value perception has improved resulting in growth in volume ahead of value at 3.3%.

We set out the strategy for Food 18 months ago, rebuilt the leadership team and started the repositioning of the business to broaden its appeal and move to 'trusted value'. The programme was picking up momentum prior to the crisis:

● Price investment was further strengthened through the launch of 'Remarksable' value and 'Fresh Market Special' lines, many at 65 pence. The level of promotions also continued to reduce. As a result, the price index of comparable product baskets has improved compared with key competitors, resulting in better price perceptions

● A new programme of range innovation was brought forward including significant launches in healthy, Plant Kitchen, made without, and family product to broaden appeal. This was combined with innovative new marketing including Little Shop and Britain's Got Talent sponsorship

● 5 'test and learn' renewal Food stores were opened showcasing more of the full M&S range in a modern engaging environment and testing new product innovations with encouraging results. We expect to move towards extension of these formats in the coming year

● Through Project Vangarde, which has now been rolled out to 90 stores, the leadership team has demonstrated scope for reducing waste, improving availability and running stores more efficiently.

Ocado Retail positioned strongly for growth

During the year we completed the purchase of 50% of Ocado Retail providing M&S with a profitable, scalable presence in online grocery, the UK's fastest growing channel. We reported a first time net income contribution for Ocado Retail to group profit of £2.6m for the 7 months to 1 March 2020, with the early contribution reflecting the limited period since completion. This is the contribution to group results prior to switchover to M&S supply on 1 September, which we expect to drive volume growth for M&S Food.

We have been working closely with Ocado Retail to create a 'one business' mentality which includes common operating procedures, business plan, and shared talent. Switchover and synergy plans are on track. The value of the investment we have made has been further reinforced by the strong growth reported by Ocado Retail since lockdown, with growth for the most recent 9 week period of 40.4% reported at its AGM on 6 May.

Reengineering Clothing & Home

The UK Clothing & Home business experienced a year of substantial reshaping under new leadership, resulting in some encouraging performance indicators in the second half. However, revenue declined 8.3% overall, with LFL revenue down 6.2%, including an estimated 2.2% adverse impact from Covid-19 in March. Online revenue was level. Operating profit before adjusting items declined 37.0%, largely driven by lower sales, gross margin headwinds related to sourcing and promotional mix and the impact of the crisis.

Trading in the first half was affected by availability issues in Womenswear and in the second half by teething issues with the move of Menswear towards a more contemporary style and fit. However, towards the end of the year, prior to the effects of Covid-19, performance in Womenswear and Kids was encouraging, Menswear saw improving sales trends and Lingerie held its market leading share.

● In Womenswear, reshaping the buy and more contemporary style resulted in improving performance up until the onset of the crisis. Recent range proliferation has been reversed by 11% in Autumn/Winter and the focus on core strengths and hero categories resulted in some strong uplifts. In denim the market leading position was extended with a sales uplift of over 10% over two years

● The successful launch of Goodmove resulted in increases in share of activewear and growth in sales in this category of 16% in the three months post launch

● Kidswear under a new leadership team started to reduce the breadth of range and focused on stronger casual basics at better value resulting in LFL sales growth in the second half

● Menswear experienced initial problems with size and fit as the range migrated towards a more contemporary style and look, in order to address issues in the shape of buy. However, these issues should be non-recurring and we saw encouraging uplifts for instance in knitwear, the standout category, with LFL sales growth of 5.6%

● Lingerie market share held at 27%, and strong performances from 'Collection' as option count was marginally reduced

● Online performance improved prior to the adverse impact of Covid-19 on trading in March, but not as fast as expected and is being reorganised under new leadership as part of the post Covid-19 programme.

Changing the model in International

The first phase of transforming the International business has been the move away from direct ownership to a franchise and joint venture model, working with strong partners in high potential territories. The focus now is on localising ranges, reducing prices and will be increasingly on developing sales online globally.

International revenue at constant currency decreased 2.5%. Operating profit before adjusting items declined 15.2% to £110.7m, largely as a result of trading conditions in March.

The International online operation brings together operations in 44 markets including direct shipments from the UK, sales on third party marketplaces and sales fulfilled by franchise partners on their own websites. Online retail sales increased 26% to £103m, supported by the launch of 5 new transactional websites and an expansion of ranges on marketplaces.

Over £1bn of actions to reduce costs and manage cash under scenario planning for Covid-19

The Covid-19 crisis started to have an impact on the business in the first week of March with reductions in UK Clothing & Home sales which declined by 6.2% and 26.9% the week after. With the onset of lockdown, the effect on sales, colleagues and customers in both businesses has been dramatic. Clothing sales at the low point dropped to 16% of their level a year ago. Without the resilience of the combined Food and Clothing business model and extraordinary loyalty of colleagues the impact on the business would have been even more profound.

Covid-19 scenario

Our belief has been from the outset that the direct impact of the crisis on sales and stock flow will last through the year and that subsequent demand may be depressed. In a challenging environment to forecast accurately the business is being managed against a 'Covid-19 scenario' created in the early weeks of lockdown, which reflects a very substantial reduction in sales, particularly in Clothing & Home and volatile Food trading in the early months of the crisis. This scenario has been stress tested and even in the event of a longer and deeper impact on trading, the group maintains sufficient liquidity. Although we will be drawing on our available credit facilities in the coming year, under the scenario the business will have significant liquidity headroom throughout the next 18 months. We are pleased to note that in the first 6 weeks of the new year, sales and cash have substantially outperformed the scenario.

The scenario has the following core assumptions relative to our original FY 2020/21 budget:

● UK Clothing & Home, 70% decline in revenue for the four months to July and only a gradual return to original budgeted levels by February 2021 impacting annual revenue by c.£1.5bn

● UK Food, 20% decline in revenue for the four months to July, with revenue level thereafter, impacting annual revenue by c.£0.4bn

● International - Clothing & Home revenue to follow a similar pattern to UK Clothing & Home with a significant decline in April due to closures, impacting annual revenue by c.£0.2bn.

The table below sets out the revenue assumptions in the scenario by quarter showing variance to original budget.

In the light of the prolonged partial or total lockdown envisaged in our Covid-19 scenario, we have taken actions totalling c.£1bn relative to original budget to reduce costs and manage cash, while protecting our transformation plans and trading potential.

Substantial cost reduction of c.£500m in FY 2020/21

● Non-essential spending has been reduced at all levels. For instance, we expect Clothing & Home marketing to be down c.£50m for the year, pay levels and recruitment have been frozen saving c.£40m and technology costs will be down c.£40m

● Costs which are largely related to sales volume are being managed down, for instance Clothing & Home logistics down c.£60m, colleague costs post lockdown saving c.£40m and International costs saving c.£30m

● Fixed property related charges are expected to decline with service charge reductions, rent costs and other occupancy cost savings down by c.£20m before any more far reaching changes to the store portfolio

● Government support measures including business rates relief of c.£172m and the job retention scheme of c.£50m will further support this year's outcome.

In addition to these savings we are exploring the potential for other changes, including a more streamlined support centre, changes to leadership structure and negotiations with landlords on commercial terms on lease contracts.

Actions to stabilise cashflow exceeding £500m

In view of the steep increase in working capital resulting from unsold stocks we are experiencing a cash outflow during the lockdown period and expect to draw on our credit facilities in the months ahead. Under the Covid-19 scenario, drawings are estimated to peak in early Autumn at c.£600m, although our current performance would suggest a lower figure. To reduce risk, maximise liquidity, and enable a return to growth in the future steps have been taken to underpin cash flow and reduce working capital.

● Capital expenditure for the year has at this stage been reduced to c.£140m, saving c.£195m in cash outflow in the current year against budget. Only essential and short payback investment focused on growth has been retained such as the new ambient food depot, investment in online fulfilment and site development and the digital & data programme

● Cash management initiatives including in-year deferral of corporation tax, VAT and duty payments and likely savings from lower corporation tax paid for 2020/21

● As previously reported, there will be no final dividend for 2019/20 and the board does not expect to pay a dividend for the current financial year, using the funds instead for balance sheet support in the region of £340m.

Liquidity and additional headroom secured for 2020 and 2021

It was an immediate priority for the company to secure its debt facilities to provide for the cash requirements modelled under the Covid-19 scenario described above and given the risk in an uncertain market to ensure there is downside protection under even more adverse sensitivities. Therefore:

● Formal agreement has been reached with the syndicate of banks providing the £1.1bn revolving facility to remove or substantially relax covenant conditions for the tests arising in September 2020, March 2021, and September 2021

● We have confirmed that we are eligible to access funding under the Government's Covid Corporate Financing Facility and been allocated an issuer limit of £300m

● As a result of these actions we expect to have considerable headroom under our available facilities in FY20/21. While we will experience a cash outflow in the first half of the year as sales reduce and we pay for our previous stock commitments, we would expect this to partly reverse in the second half of the year

● Under the Covid-19 scenario, drawings against our available facilities would be in the range of £300m-£350m by the end of 2020/21

● The cancellation of the final dividend of c.£130m will generate further cash savings after year end.

Experience to date has been ahead of the Covid-19 scenario against which we set strong cost and cash management plans and has outperformed the scenario by over £150m year to date, with actions planned to further improve our cash flow. If sustained, under the Covid-19 scenario we consider the Group well positioned to exit the crisis with limited drawdown against its facilities in 2020/21, with a further saving of the final dividend in the early months of next year. We intend to adopt a dynamic approach to investment using sustained cashflow outperformance to capitalise on strong investment opportunities under our 'never the same again' agenda.

Management of excess Clothing & Home stock

Like all fashion businesses one of the biggest challenges arising from the crisis is the mounting backlog of unsold stock for Spring/Summer 2020 and the forward pipeline of stock already ordered for Autumn/Winter. We closed 2019/20 with Clothing & Home stock of c.£500m and at that time had committed forward orders of £560m scheduled to arrive in the following six months. As the lockdown eases a large proportion of current season stock will remain unsold and demand for many categories is likely to be weak. We have acted quickly to improve this position.

● We have cancelled late summer stock which will no longer be required reducing forward commitment at cost by £100m

● Of the balance of stock and forward orders c.£400m is year-round basic product where M&S trades strongly and which will be carried forward at low risk, albeit creating a short-term increase in stock carrying levels

● Of the unsold seasonal stock, we have made arrangements to hibernate around £200m until Spring 2021, secured storage facilities and planned for the cost of these actions

● We have therefore taken a charge of £145.3m in adjusting items to reflect the cumulative impact of the combined handling, clearance, hibernation and write-off of the stock bulge described above.

The combined impact of lockdown, social distancing and depressed demand is therefore likely to continue through the year.

Never the Same Again

During the crisis we have all had to work differently and customers have rapidly changed habits and may never shop the same way again. We intend to use the learning from the crisis and have drawn up our 'never the same again' agenda to accelerate transformation.

What we are learning in the crisis

The crisis illustrated how differently we can use technology, run stores, and make decisions fast. In a business with a history of slow cultural change we intend to use these lessons, to ensure that as lockdown eases, we are never the same again in culture, organisation and work habits. For instance:

● A smaller top team has made decisions faster and more efficiently delegating trading and operating management to business unit heads. Numerous working groups, committees and elaborate management processes have been disbanded

● Support colleagues have learnt to improvise their routines at lower cost with no detriment to trading standards

● Our strategic relationship with Microsoft has been highly effective, supported by Teams

● In stores given the need to furlough and redeploy colleagues, valuable lessons have been learnt about our ability to multi-task and increase the pace of work with no adverse impact on service

● Online has for a period been our only significant Clothing business and has illustrated the need to be leaner and more integrated to compete with online pure plays

● The reduction in forward order volumes in Clothing has forced the need to change ranges to buy more of less from fewer core suppliers.

What will never be the same again

Steps have already been taken to ensure that the change of gear of the last few weeks endures, including the following:

● Steve Rowe has already announced changes to the business leadership structure with the formation of a small executive board consisting of the operating MDs together with Katie Bickerstaffe who has now started as Chief Strategy & Transformation Officer, and Eoin Tonge Chief Finance Officer who is arriving in early June

● Central support costs and headcount will be examined at all levels, delegating decisions to business unit and category heads

● In stores, multi-tasking and more flexible management structures will be integrated into the way the business works and manages

● Digital is being consolidated under a single transformation team bringing together data, online development and technology

● The direct to the front-line tech enabled communication combined with increased flexibility in working patterns will become permanent.

Accelerating the transformation programme

● The move to 'trusted value' in Clothing & Home will be accelerated and option count reduction and supplier concentration brought forward

● The reduction in range and shift towards fast moving product at great value necessitated by the crisis will result in a permanent reduction of 20% in Autumn/Winter store option count

● The role of the sourcing offices will be increased so that sampling, ordering and quality issues are dealt with offshore

● A faster, 'near-sourcing' supply chain will be developed, to enable the test and re-order of seasonal fashion lines particularly for the online business

● The replacement of ageing stores already underway and shift in relationships with property providers will accelerate

● The longstanding issues with availability and waste in the Food supply chain will be tackled with the roll out of the Vangarde programme and addressing the contract and relationship with Gist.

Becoming an Online winner in C&H and Food

Customers may never shop the same way again. The sharp growth of online grocery during the crisis is evidence of this as is the strengthening performance of our online Clothing & Home.

The Ocado joint venture relationship is an integral part of our strategy to bring M&S Food into the online and home delivery market which we expect to be even more vibrant as a result of the crisis. Since the formation of the joint venture Ocado Retail has performed strongly and following lockdown, revenue in its most recently reported 9 weeks to 3 May was up 40.4%.

The Food business is now working closely with Ocado Retail to ensure that it has a compelling offer at the switchover from the Waitrose supply contract on September 1st.

● Adding over 6,000 M&S lines to Ocado from September compared with just c.4,000 Waitrose lines which will be removed from the site. We believe M&S has substitutes at the same price or lower, and of the same quality or better, for the majority of the current offer

● Finalising product data sets for online trading, supply chain processes for direct to Customer Fulfilment Centre deliveries and switchover procedures for September

● Negotiating supplier terms and other working arrangements to deliver synergies for M&S starting this year and building to not less than £70m in 36 months from inception of supply

● Agreeing through Ocado new supply agreements with major branded suppliers to improve M&S competitiveness in branded sourcing

● Bringing onto the Ocado Retail platform around 1,600 core Clothing & Home lines per year to be available on the site, providing a further route to market and a customer acquisition channel. The Autumn range will be launched in September with c.850 lines made available.

In addition, in Clothing & Home, the M&S.com and large stores platforms will be opened to complementary guest brands to broaden appeal and increase online growth.

Further strengthening the management team

We have created a significantly renewed management team, to implement the "never the same again" agenda. In the coming weeks the new team will finally take shape with a number of important new arrivals:

● Katie Bickerstaffe has joined as Chief Strategy and Transformation officer

● Eoin Tonge joins as CFO in June

● Richard Price joins as Managing Director, Clothing & Home in July

● Will Smith joins as Property Director in May

● Stephen Langford joins as Head of Clothing & Home online in May

● Helen Milford joins as Store Operations Director in June

● Paul Babbs joins as Head of Clothing & Home supply chain in May

● Craig Lovelace joins as Finance Director of Food in June

Recent trading performance

The first six weeks trading has been ahead of the Covid-19 scenario particularly in Food and online.

● Store sales in UK Clothing & Home were reduced to a trickle due to the closure of space running down (98.8%) year on year at the low point. In store sales of essentials increased from £252k per week in the first week of lockdown to £1.4m per week by week six

● Although online Clothing & Home has traded throughout, demand in the initial weeks for clothing was very low with a gradual uplift since. In the last 3 weeks online sales have been running c.20% up year on year

● Standalone Simply Food stores have traded strongly, up 17% with a positive trend in many Retail park stores which typically have direct access from car parks. In the earliest weeks of lockdown this was offset by lower sales in travel franchise units (c.5% of revenue) and the closure of in-store hospitality and cafes (c.4% of revenue). In the last three weeks overall Food sales have on average been level.

● We also experienced an initial adverse margin mix as demand shifted towards ambient grocery sales, although this is now diminishing.

1. unaudited revenue for the 6 week period from 29 March 2020 to 9 May 2020

*At constant currency

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For further information, please contact:

Investor Relations:

Fraser Ramzan: +44 (0)20 3884 7080

Hannah Chambers: +44 (0)20 3882 4714

Media enquiries:

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

Investor & Analyst presentation and Q&A:

A pre-recorded investor and analyst presentation will be available on the Marks and Spencer Group plc website from 8.30am on 20 May 2020.

Steve Rowe and David Surdeau will host a Q&A session at 9.30am on 20 May 2020:

Dial in number: +44 (0)20 8089 4223 Room Number: 264382 Pin: 6028

Fixed Income Investor Conference Call:

This will be hosted by David Surdeau, Interim Chief Finance Officer, at 2pm on 20 May 2020:

Dial in number: +44 (0)20 8089 4223 Access code: 748331

A recording of this call will be available until pm on 5pm on 30th May 2020:

Dial in number: +44 (0)20 7660 0134 Access code: 3811201

FINANCIAL REVIEW

Group revenue in growth in Q4, prior to Covid-19 effect in March

Q4 group revenue declined 2.6% at constant currency largely reflecting the increasingly adverse impact of Covid-19 on revenue in March relative to forecast. For the 8 weeks ended 22 February group revenue increased 2.8% with UK Food LFL revenue up 3.7% with strengthening volume growth and UK C&H LFL revenue up 0.3%, driven by stronger trends at M&S.com. International growth in the 8-week period largely reflected the timing of shipments as franchise partners called summer product earlier than last year.

See glossary for definitions. Prior year revenue has been restated for the reclassification of localised websites from Clothing & Home to International.

Full Year Financial Summary

Notes

1. Prior year comparatives have been restated for the adoption of IFRS 16 'Leases'. Refer to note 17 of the financial statements for detailed restatement tables and associated commentary.

2. Earnings per share and Dividend per share have been restated to reflect the bonus factor adjustment resulting from the rights issue (refer to notes 1 and 6 of the financial statements for further information).

There are a number of non-GAAP measures and alternative profit measures "APM", discussed with this announcement and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to adjusting items table below for further details.

Covid-19 Impact

Group revenue decreased 1.9%, largely as a result of lower UK Clothing & Home sales, including an adverse revenue impact of c.£83.5m in March which we largely attribute to Covid-19.  Group statutory profit before tax declined 20.2% to £67.2m. This was largely driven by a decline in Clothing & Home operating profit as a result of lower sales. Statutory profit before tax includes an estimated total impact of £264.7m for Covid-19. This comprises a trading impact of £51.9m in March which we largely attribute to the pandemic, in addition to £212.8m of charges in adjusting items which includes the recognition of additional inventory provisions of £157.0m and the impairment of stores and goodwill of £49.2m.  

As part of its scenario planning to mitigate the effects of Covid-19 the Group is planning a significant reduction in costs and a number of cash management initiatives, which are detailed in the Covid-19 Scenario section of this report.

Reporting of accountable businesses

During the year, the Group completed a comprehensive review of the way operating costs are allocated, allowing management to review the operating profit of each business. As a result, the Group now recognises three operating segments, being UK Clothing & Home, UK Food and International (previously UK and International). This allows the financial information to align to the way the business is managed and holds leadership appropriately to account. The review has resulted in a reallocation of £13.3m of central costs from the previous UK segment to International (£12.6m) and M&S Bank (£0.7m). In addition, certain M&S.com flagship websites, which last year generated £37.5m of revenue and £2.9m of operating profit before adjusting items have been reclassified from UK Clothing & Home to International.

UK: Food

UK Food revenue increased 2.1% and operating profit before adjusting items increased 11.2%, due to lower costs. We estimate a positive effect on March revenue of £17.7m and operating profit of £3.7m, largely related to Covid-19.

Like-for-like revenue was up 1.9%. Performance was particularly strong in quarter four with growth of 3.7% in the two months to February before increased demand related to Covid-19 in March. As we executed our strategy to broaden appeal and make M&S more accessible to more customers by removing promotions and lowering prices, total full year volumes were up 3.3%. As expected, the contribution from new space was largely offset by full line store closures.

The table below sets out the drivers of the movement in operating profit margin before adjusting items, which increased 0.3%:

Gross margin decreased 50bps which was more than expected, as continued investment in price and inflationary headwinds were not fully offset by reduced promotions and the programme to lower costs.

The reduction in gross margin was more than offset by operating costs, which reduced overall and as a percent of sales. Store staffing and other store costs were slightly down as efficiencies more than offset the pay review and cost inflation. Distribution costs increased largely due to cost inflation, impacting margin. The reduction in central costs was largely driven by lower depreciation, partly due to a system write off in the prior year.

UK: Clothing & Home

UK Clothing & Home revenue declined 8.3% and operating profit before adjusting items was down 37.0%. We estimate an adverse effect on March revenue of £78.1m and operating profit of £43.8m, largely related to Covid-19.

Like for like revenue declined 6.2%, of which an estimated 2.2% related to the adverse movement in March, largely due to Covid-19. After a disappointing first half, revenue performance both in store and online began to improve in the second half, supported by better availability and growth in key categories in Womenswear and Kidswear. Menswear experienced some initial problems as the range moved towards a more contemporary style and fit.

The table below sets out the drivers of the movement in Clothing & Home operating profit margin before adjusting items which was down 3.1%:

Gross margin decreased 120bps which was more than planned, as a result of sourcing headwinds including raw materials and labour and the adverse impact of higher than expected promotional sales and shorter clearance periods.

Operating costs were down in all areas, although increased as a percent of sales. The decline in store staffing costs was largely driven by efficiency programmes, which more than offset the pay review. Other store costs were driven by lower depreciation and cost savings such as the move to a single maintenance vendor. In distribution, reduced costs from the move to a single tier network and in our online operations more than offset inflation and channel shift. Central cost declines were largely driven by lower depreciation with efficiencies reinvested in increased marketing and the build out of digital operations.

M&S Bank and services

M&S Bank and services income before adjusting items was down £10.2m to £16.8m. This was predominantly the result of an increase in bad debt provisioning due to a higher risk of customer default. M&S Bank income after adjusting items decreased £1.9m to £4.2m.

Ocado Retail

On 5 August 2019, the acquisition of 50% of Ocado Retail was completed. Ocado Retail Limited is an associate of M&S as certain rights are conferred on Ocado Group plc for an initial period of at least five years from acquisition.

The investment in associate is recognised at a cost of £769.0m. This incorporates initial consideration of £560.9m paid in cash on acquisition, contingent consideration of £202.4m and transaction costs of £5.7m. The contingent consideration is conditional on reaching agreed earnings and capacity targets.

The M&S share of Ocado Retail Limited profit for the period from acquisition to 1 March 2020 is £2.6m. Summarised financial information in respect of Ocado Retail Limited is below:

On 6 May 2020, Ocado Retail Limited reported 40.4% revenue growth for the 9 weeks to 3 May 2020. For further detail on Ocado Retail Limited please see note 18 to the financial information.

International

International revenue decreased 2.5% at constant currency with operating profit before adjusting items down 15.2%. We estimate an adverse effect on March revenue of £23.1m and operating profit of £11.8m, largely related to Covid-19.

In owned markets, a weak trading performance in the Republic of Ireland was partly offset by continued growth in India driven by 17 new store openings, although opening costs impacted profit. Franchise shipments declined as a result of investment in lower prices, partner driven stock efficiencies and political unrest in Hong Kong, although trends improved in the second half.

Net finance cost

Net finance costs decreased £26.3m to £187.6m. This was primarily due a reduction in net lease financing costs and the reversal of ineffectiveness on a currency swap. In July we issued a £250m bond partially refinancing a £400m redemption in December. In March 2020, in response to Covid-19 the group's long-term credit rating was lowered by Moody's and Standard & Poor's to Ba1/BB+ respectively. This should result in an additional c.£15m of annual interest costs, payable following the next coupon payment, on bonds issued under the Group's EMTN programme.

Group profit before tax

Group profit before tax declined 20.2% to £67.2m. This includes adjusting items of £335.9m.

Group profit before tax & adjusting items

Group profit before tax and adjusting items was £403.1m, down 21.2% on last year. The decline includes an estimated impact from Covid-19 of £51.9m in March. The profit decrease was largely due to the decline in Clothing & Home operating profit.

Adjustments to profit before tax

Consistent with previous years, the Group makes certain adjustments to statutory profit measures, in order to derive alternative performance measures that provide stakeholders with additional helpful information and to aid comparability of the performance of the business. For further detail on these charges and the Group's policy for adjusting items please see Notes 1 and 3 to the financial information.

*Included within the total

A number of charges have been recognised in the period relating to the implementation of previously announced strategic programmes including:

● A charge of £29.3m (of which £11.6m represents the directly attributable incremental impairment due to Covid-19) in relation to store closures identified as part of transformation plans reflecting an updated view of latest store closure costs. Further material charges relating to the closure and re-configuration of the UK store estate are anticipated as the programme progresses. Following restatement for IFRS 16 and the updated view of store closure costs, future charges of up to c.£110m are estimated within the next two financial years

● A charge of £13.8m in relation to the redundancy costs associated with the review of the support centre organisational structure and an updated view of ongoing costs associated with centralising the Group's London support centres

● A charge of £11.6m in relation to the transformation and simplification of supply chain and operations across Clothing & Home and Food

● A net charge of £10.2m as we continue to transition to a single tier Clothing & Home UK distribution network, including the cost of closure of two distribution centres. In February 2020 next steps were announced with a further two sites expected to close in the next two years, resulting in an expected additional charge of c.£13m.

Store impairment and other property charges of £78.5m (including £24.2m representing the directly attributable incremental impairment due to Covid-19) were recognised. In response to the ongoing pressures impacting the retail industry, as well as reflecting the Group's strategic focus towards growing online market share, the Group has revised future projections for UK stores (excluding those stores which have been captured as part of the UK store estate programme).

Charges of £12.6m have been incurred relating to M&S Bank, primarily relating to the insurance mis-selling provision, as well as further charges recognised in relation to forward economic guidance provisions recognised as a result of Covid-19. The Group's share of the total insurance mis-selling provisions of £327.6m exceeds the total offset against profit share of £242.7m to date. Further costs of c.£100m, predominantly relating to the estimated mis-selling liability are expected and will be deducted from the Group's future profit share from M&S Bank.

A charge of £16.8m has been recognised predominantly related to the amortisation of intangible assets acquired on the purchase of our share in Ocado Retail.

A credit of £23.5m has been recognised in the period relating to the release of a provision for employee related matters recognised in FY 17/18 following settlement in the period for £0.6m.

Covid-19 adjusting items

Following the declaration by the World Health Organisation of the Covid-19 global pandemic and the subsequent UK and International government restrictions, Clothing and Home has been unable to trade from full line stores, M&S outlet stores and a number of Food franchises have temporarily closed and trade in Food has had to continue with social distancing measures in place. As a result, charges of £212.8m have been recognised relating to the Covid-19 pandemic. The charges relate to stock provisioning, impairments of intangible assets, property, plant and equipment and onerous contract provisions, cancellation charges and one-off costs. Should the estimated charges prove to be in excess of the amounts required, the release of any amounts previously provided would be treated as adjusting items.

The impact that Covid-19 has had on underlying trading is not recognised within adjusting items.

The charges relate to:

Following a detailed assessment of all retail inventory, a charge of £157.0m has been recognised (C&H: £145.3m; Food: £6.0m and International: £5.7m). The provision relates to items from previous seasons which are unlikely to be saleable when stores reopen; items in the summer sale that are likely to be cleared below cost and the cost associated with hibernating stock to Spring/Summer 2021. The provision in Food includes charges related to unsaleable seasonal goods as a result of the lockdown of activity in late March.

As a direct result of the Covid-19 pandemic, following a reperformance of all impairment assessments using the cash flows in the Covid-19 scenario, incremental impairment charges have been recognised of £49.2m (Store impairments: £24.2m, per una: £13.4m and UK store estate programme: £11.6m).

£6.6m of charges have been recognised relating to onerous contracts and other provisions, cancellation charges and impairment and write-off of intangible assets in the course of construction following project cancellations.

Taxation

The effective tax rate on profit before tax and adjusting items was 20.7% (last year 20.7%). This was lower than the expected effective tax rate due to an increase in the estimated deferred tax assets of the Group which resulted from a change to the previously enacted UK corporate tax rate of 17% back to 19%. The effect of this increase is not expected to impact future years. The effective tax rate is higher than the UK statutory rate due to the recapture of previous tax relief under the Marks and Spencer Scottish Limited Partnership ("SLP") structure. The effective tax rate on statutory profit before tax was 59.3% (last year 46.2%) due to the impact of disallowable adjusting items.

Earnings per share

Basic earnings per share were 1.3p (last year 2.5p), due to the decrease in profit year-on-year and the increase in weighted average shares outstanding. The weighted average number of shares in issue during the period was 1,894.9m (last year restated for the bonus factor related to the rights issue (1,698.1m), reflecting the issuance of 325m shares following the completion of the rights issue.

Adjusted basic earnings per share decreased 29.5% to 16.7p largely due to lower adjusted profit year-on-year and the increase in weighted average shares outstanding.

Capital expenditure

Group capital expenditure before disposals increased £49.0m to £332.0m.

UK store remodelling spend increased £34.3m largely reflecting the investment in five 'test and learn' trial stores. Spend on UK store space was down as 13 fewer owned Food stores opened compared with the prior year.

Supply chain expenditure reflects investment in the expansion of the Bradford distribution centre. Spend has reduced due to the significant prior year investment in the Welham Green national distribution centre.

IT and M&S.com spend decreased largely due to the completion of the technology transformation programme. Property asset replacement increased £33.4m due to the initiation of an asset replacement programme in stores.

Statement of financial position

Net assets were £3,708.5m at the year end, an increase of 50.2% on last year largely due to the investment in Ocado and the increase in the net retirement benefit surplus.

Cash flow & net debt

The business generated free cash flow before shareholder returns of £225.0m, down on last year, driven by lower adjusted operating profit, lower depreciation, working capital increase and higher capital expenditure. The working capital outflow relative to last year was largely a result of the timing of payments and increased inventory. This follows a planned reduction in inventories in the prior year, and higher than normal year-end inventory levels as a result of additional Food to meet stockpiling demand and lower than expected Clothing & Home sales in March.

Higher capital expenditure reflects the spend on 'test and learn' stores and the asset replacement programme in stores.

Defined benefit scheme pension funding of £37.9m largely reflects the second limited partnership interest distribution to the pension scheme.

Adjusting items in cash flow during the year were £88.0m. These included £22.7m in relation to the store closure programme, £20.9m for organisational change, £15.4m for operational transformation, £12.6m for M&S Bank, £4.3m for the technology transformation programme and £3.7m relating to distribution and warehousing.

During the year, a Rights Issue was completed, raising proceeds net of costs of £574.4m, for the purpose of funding the acquisition of 50% of Ocado Retail which completed on 5 August 2019. The cash paid for the investment in Ocado Retail and associated transaction costs of £577.8m does not include the adjustment to the consideration on the finalisation of the completion statement currently held as a receivable of £11.5m.

After the payment of the final dividend from 2018/19, the interim dividend for 2019/20 and the reduction in outstanding discounted lease commitments due to capital repayments, net debt was down £50.2m from the start of the financial year.

Dividend

We paid an interim dividend 3.9p on 10 January 2020. The board has announced the decision not to pay a final dividend for 2019/20 and that it does not anticipate paying a dividend for the 2020/21 financial year.

Pension

At 28 March 2020, the IAS 19 net retirement benefit surplus was £1,902.6m (£914.3m at 30 March 2019). The increase in the surplus is mainly due to a significant increase in longer dated credit spreads driven by market changes linked to Covid-19 resulting in a reduction in scheme liabilities. Additionally, the return on scheme assets increased due to a fall in gilt yields. It is currently anticipated that the increase in surplus will give rise to an increased pension credit next year.

In April 2019, the Scheme purchased additional pensioner buy-in policies with two insurers for approximately £1.4bn. Together with the two policies purchased in March 2018, the Scheme has now, in total, hedged its longevity exposure for around two thirds of the liabilities for pensions in payment. The buy-in policies cover specific pensioner liabilities and pass all risks to an insurer in exchange for a fixed premium payment, thus reducing the Company's exposure to changes in longevity, interest rates, inflation and other factors.

COVID-19 Response

The Covid-19 crisis started to impact the business in the first week of March with reductions in Clothing & Home sales across all our markets. While Food sales were resilient, we did not experience the stockpiling performance of the supermarkets. With the onset of lockdown, the effect on sales, costs, colleagues and customers in both businesses has been dramatic. Clothing sales at the low point dropped to 16% of their level a year ago.

Without the resilience of the combined food and clothing business model and extraordinary loyalty of colleagues for which we are grateful, the impact on the business could have threatened its existence.

Supporting colleagues

M&S has a longstanding deeply embedded colleague culture and loyal workforce and we have been deeply grateful to our hard-working colleagues who have supported the business throughout. Meanwhile we have taken measures to ensure safe working and support vulnerable colleagues some of which has resulted in higher operating costs:

● Colleagues needing to self-isolate, including c.3,000 required to shield themselves for 12 weeks, have been able to do so on full pay. Prior to the furlough scheme absenteeism increased to nearly 20% as schools closed and colleagues opted to stay home mostly to look after family members

● Circa 27,000 colleagues have been furloughed with pay topped up by the company through a largely voluntary approach to enable colleagues with caring commitments to step away from the business. This includes c.1,000 support centre colleagues who have been furloughed

● Store colleagues remaining at work supporting the business have been rewarded with 15% bonus pay for the duration of the lockdown period

● Colleague safety has been enhanced with time allocated in shifts for handwashing, sneeze guards installed at all tills, hand sanitiser in colleague areas, social distancing measures introduced at all sites and voluntary provision of visors, although take up on these has been low

● Based on anecdotal evidence we do not believe there has been a higher incidence of infection amongst our colleagues than the national average. However over twenty colleagues have been hospitalised and at least two have died from Covid-19 related disease.

Supporting customers

From the onset of lockdown our Clothing areas in stores have been closed although we have been able to sell a trickle of clothing essentials as part of the Food store trading. We have been able to maintain online trading throughout and kept the vast majority of our food halls open to support families and maintain trade.

● 560 out of 566 of our food halls have remained open throughout the lockdown period with the closed stores being office work locations. In addition, many transport franchise stores have been closed and office work locations together with a few shopping centre stores have been closed because of minimal customer flow

● Online Clothing & Home has traded throughout, following implementation of extra safe working procedures at our automated fulfilment facility at Castle Donington supplying families at home with essential clothing, bed linen and household equipment

● Social distancing in stores has been successfully implemented, supported through extra signage and queue greeters, and in the main customer compliance has been excellent. Extra safety precautions include additional deep cleaning of stores, regular cleaning of baskets and trolleys, expansion of Mobile Pay Go and encouragement to pay via contactless

● M&S was one of the first retailers to launch special shopping hours for health and social care workers plus separate shopping hours for elderly and vulnerable customers and first to market with an e-card to allow volunteers to shop for people required to shield at home

● The temporary "food boxes" have been launched online, prioritised for elderly and emergency care customers with rapid customer take up. In addition, we launched dedicated access to M&S Banking lines for time pressed NHS workers.

Supporting communities

Along with other national retailers M&S launched a wide-ranging suite of donations and services to the community focused on emergency workers and the most vulnerable. These included myriad local initiatives supporting hospitals and customers who could not access food together with national programmes including:

· The M&S Neighbourly Covid-19 Community fund with grants given to over 500 charities and community groups across the UK

· Supporting the National Emergencies Trust & NHS Charities with corporate and local donations

· Over a million meals donated through our Neighbourly food redistribution app in the first month of lockdown

· Patient packs delivered to NHS hospitals in cities across the UK and specific support packs for numerous hospitals such as scrubs to NHS Derbyshire, with thousands of partnerships between stores and their communities and NHS trusts

· Twice-weekly free food delivery service for the NHS workers at M&S's longstanding hospital partners at St Mary's and Great Ormond Street Hospital

· Over 65,000 t-shirts and over 400,000 bags for life sold in support of NHS Charities supported with online marketing and social media

· Numerous acts of personal kindness by store colleagues to help vulnerable customers unable to visit our stores.

Supporting suppliers

The M&S business model depends on very close and longstanding relationships with suppliers who in return support our quality requirements and fuel product development and innovation. It has therefore been important to invest where possible to ensure continuity of the critical supply base in some cases at the cost of working capital. We have therefore agreed to honour all outstanding commitments to product that has been manufactured or part manufactured and committed to pay for fabric commitments even though some will not be immediately required. In food we have moved to immediate payment to very small suppliers where needed and launched a campaign to back British farm suppliers.

Important Notice:

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 forward-looking statements are subject to various risks and uncertainties, including, but not limited to, 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. For further information regarding risks to Marks & Spencer's business, please consult the risk management section of the 2020 Annual Report.

The forward-looking statements contained in this document speak only as of the date of this announcement, and Marks & Spencer does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

1. The "Other reserve" was originally created as part of the capital restructuring that took place in 2002. It represents the difference between the nominal value of the shares issued prior to the capital reduction by the Company (being the carrying value of the investment in Marks and Spencer plc) and the share capital, share premium and capital redemption reserve of Marks and Spencer plc at the date of the transaction.

2. Included within Retained earnings is the fair value through other comprehensive income reserve.

3. The share premium amount of £493.4m is net of £26.6m in relation to transaction costs associated with the rights issue.

Comparative information has been restated for the impact of IFRS 16 (see note 17).