Marks & Spencer Regulatory News (MKS)

Marks and Spencer Group Plc

Half Year Results For 26 Weeks Ended 26 September 2020

"ROBUST PERFORMANCE IN UNPRECEDENTED TIMES AS TRANSFORMATION ACCELERATES"

Robust performance in the face of Covid

· Food adjusted operating profit up 19% as the Group mitigated hospitality/franchise closures: Total LFL up 2.7%, ex. hospitality up 6.6%

· Ocado Retail revenue up 47.9% and growth in profitability. M&S H1 share of net profit £38.8m

· Improving C&H performance post spring lockdown: Revenue decline of 61.5% Q1; 21.3% Q2

· C&H online sales up 34.3% and market share grown, now #2 in the market

· Strong sell through of surplus stock. £8m raised for NHS Charities through 'Rainbow Sale'

· Adjusted operating profit of £61.8m and free cashflow of £77.6m

· Net debt reduced, substantial liquidity with £1.4bn of cash and available facilities

· Group revenue down 15.8%, adjusted loss before tax of £17.4m and statutory loss before tax of £87.6m

Never the Same Again actions to accelerate transformation

· Central leadership streamlined and strengthened; support centre costs reduced

· M&S on Ocado delivered: Overwhelmingly favourable customer response and synergies on track

· Store estate for the future: Streamlining of store costs and improved productivity, supported by market leading technology

· Sparks loyalty programme relaunched and grown to over 8m members, with over 1.5m app downloads

· Building on investment in data and digital with launch of a new division 'MS2' within C&H to step change online growth

1Free cash flow is cash generated from operating activities less capital expenditure, cash lease payments and interest paid

2The comparative figures for the half year ended 28 September 2019 have been restated to reflect the correction of an error that resulted from the transition to IFRS 16 Leases, resulting in an increase in profit for the period of £5.3m

There are a number of non-GAAP measures and alternative profit measures "APM", discussed within 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 CEO: "In a year when it has become impossible to forecast with any degree of accuracy, our performance has been much more robust than at first seemed possible. This reflects the resilience of our business and the incredible efforts of my M&S colleagues who have been quite simply outstanding. But out of adversity comes opportunity and, through our Never the Same Again programme, we have brought forward three years change in one to become a leaner, faster and more digital business. From launching M&S Food online with Ocado to establishing an integrated online business division 'MS2' to step-change growth, we are taking the right actions to come through the crisis stronger and set up to win in the new world."

NEVER THE SAME AGAIN

In May we outlined our intention to bring forward elements of the transformation as a result of the crisis to accelerate change under the Never the Same Again ("NTSA") programme. NTSA has impacted the shape and ways of working across the whole family of businesses with a focus on delivering a faster more streamlined digital multichannel business now. Highlights in the period include:

· A strengthened central leadership team with the arrival of Eoin Tonge, CFO, Richard Price MD Clothing & Home and Katie Bickerstaffe, Chief Transformation and Strategy Director and multiple further appointments in each of the businesses

· The successful switchover to supply of M&S products to Ocado Retail from 1 September and the strong performance of M&S products on the platform since launch

· Substantial restructuring and store cost reduction introducing new more flexible working and shifting focus and time to front of house service, enabled by the roll-out of market leading store technology

· Sparks loyalty programme relaunched and grown to over 8 million members as a digital first loyalty scheme through the M&S App, building on recent investment in data science capabilities to drive greater loyalty and engagement

· A substantial acceleration in the reshaping of Clothing & Home reflecting both lower demand but also the need to move to more popular faster moving mainstream product

· The launch of 'MS2' our new integrated global digital, data and online business division to enable Clothing & Home to compete like a pure play and maximise the significant online opportunity

These changes, combined with the continued transformation of the underlying businesses leave M&S well positioned to exit from the crisis in a stronger, leaner and more focused position.

ROBUST PERFORMANCE IN THE FACE OF COVID

The business has performed better than expected during the first half with revenue down 15.8%, outperforming the Covid-19 planning scenario by 22.8%. As a result, the Group exited the period with reduced stock levels year on year and generated free cashflow. Group net debt reduced £118.5m and at the end of the period we had £1.4bn of cash and available facilities including the £1.1bn undrawn revolving credit facility.

Strong Food performance mitigating hospitality and franchise closures: LFL ex hospitality up 6.6%

The Food business has performed strongly despite substantial Covid headwinds during the six-month period achieving 2.7% LFL growth or 6.6% when excluding hospitality, which was largely closed during lockdown. It adapted rapidly to the change in shape of demand to deliver improving LFL growth across the period. This was despite headwinds which included the exposure to travel and office locations, high dependence on food-to-go and a presence in full line stores in impacted shopping centre locations.

The change in shape of trade is illustrated in the table below with the adversely affected areas collectively accounting for c.40% of prior year sales.

During this period as customers completed larger shops categories such as grocery & household and meat, fish and poultry performed well, offsetting the adverse impact on categories such as hospitality and food-on the-move which together accounted for around one quarter of prior year sales in total.

Operating profit before adjusting items increased 19.0% driven by the strong underlying performance with product mix effects due to the reduced sales in food-on-the-move and hospitality more than offset by lower costs.

Transformation priorities

The Food transformation plan has an objective of protecting the magic of M&S Food while modernising its systems, processes and store base, broadening its appeal and moving to 'trusted value'

· Value perception continues to improve, supported by the further expansion of Remarksable lines and fewer promotions

· We are creating over 750 new lines including in organic, Remarksable value, grocery and homecare to broaden appeal both on Ocado and in store, where c.450 of these products are now also available

· The five renewal stores reopened last year performed well as customers responded to broader ranges and better display. Key elements of this format have been successfully implemented in new stores such as Notting Hill, Nottingham Giltbrook and Maidstone

· The Vangarde supply chain processes have been implemented across 159 stores, with early indications from the first phase of positive sales growth averaging 1.8% compared with similar stores

· In September, a new ambient Food depot opened in Milton Keynes providing capacity for further growth.

The business successfully executed on the critical strategic milestone of making the M&S range available online for the first time at Ocado.com. The customer response to switchover was overwhelmingly positive with demand for the new range driving both an increase in the number of products in customer baskets and strong forward demand. Suppliers have benefited from the additional volume opportunity from online growth through Ocado Retail and synergies are on track with an expected £15m in the current financial year.

Growth of 47.9% and strong initial return on investment from Ocado Retail

Last year's investment in 50% of Ocado Retail means M&S is well positioned to take advantage of the long-term opportunity created by the step change in online grocery shopping in the UK. Ocado Retail delivered 47.9% year on year revenue growth for the 26 weeks to 30 August 2020. This has been an exceptional period for Ocado Retail helped by Covid related increase in demand for online shopping. Higher than normal average basket size, combined with optimisation initiatives, drove efficiencies in customer fulfilment centres (CFCs) and lower delivery costs as a percent of sales. Including exceptional anticipated insurance receipts, Ocado Retail generated a first full half year contribution to M&S Group adjusted profit before tax of £38.8m.

Revenue growth at Ocado Retail is currently constrained by the capacity limits of its established CFC network, but investment is in place to drive substantial growth with 40% additional capacity coming on stream by Autumn 2021 and further growth thereafter.

Improving C&H performance post lockdown with strong online sales growth and sell through of surplus seasonal stock

The Clothing & Home result was heavily impacted by the full Covid lockdown in the first quarter, ongoing social distancing and the priority to clear stock. As a result total revenue declined 40.8%, comprising a decline of 61.5% in quarter one and 21.3% in quarter two. Online revenue increased 34.3% driven by strong traffic, increased conversion and lower returns. Online growth was supported by previous investment in capacity at Castle Donington distribution centre which performed well during the period, although, this growth was insufficient to offset the decline in store sales. The business is emerging well ahead of the Covid-19 scenario both in sales and stock position and there are signs that new range structures can drive sales.

After stores reopened in the second quarter following the Spring lockdown, the business still had substantial headwinds to deal with in the form of a store estate generating two thirds of sales in high streets, shopping centres and town centres and a product mix in which formal, outerwear and event related categories accounted for around one quarter of sales last year.

The underperformance of destination stores in city centres and shopping centres is illustrated in the table below with retail parks, outlets and clothing lines sold within Simply Food stores outperforming the average.

The strong category shift is illustrated in the table below with casual clothing, kids, lingerie and home strongly outperforming formal, holiday, shoes and outerwear, with the variance particularly marked online.

We expect some of the changes in mix to continue into the future as working life and the use of offices changes but post Covid, there will also be a recovery in demand for occasion and formalwear as events return.

C&H recorded an operating loss before adjusting items of £107.5m reflecting the lower sales and the successful clearance of surplus seasonal ranges, partly offset by a reduction in operating costs.

Transformation priorities

Central to the transformation programme is a far-reaching re-engineering of the Clothing & Home range and these changes have been accelerated and made even more urgent as a result of Covid. With the arrival of Richard Price as MD of Clothing & Home we are bringing forward implementation of the strategy:

· Turbo-charging online growth through the launch of 'MS2', creating an integrated global digital, data and online business division within Clothing & Home with operating flexibility to compete with pure play competition and develop our growing portfolio of guest brands

· Further reducing option count and the long tail of slow-moving SKUs to reshape the range to volume buys of faster moving lines and concentrating supply into fewer, high quality suppliers delivering better quality and cost price. For Autumn Winter, option count has been reduced by a further 20% resulting in an estimated 30% reduction versus 2018

· Moving to 'trusted value' and maintaining quality while reducing the proportion of sales sold at discount including store wide blanket sale events and materially reducing the quantum of product ending up in clearance. Already 'Friends & Family' promotions have been removed.

· Reducing costs and improving stock flow by re-engineering the end to end supply chain under an integrated supply and sourcing team led by Paul Babbs our new Supply Chain director. Already we are planning a substantial shift away from the highly labour-intensive singles picking network which was designed to manage the old, wide, slow-moving range under the previous 'single tier' project

· Using the new instore technology base, more concentrated ranges and supply chain improvements to restructure store operating costs whilst moving resource from administration and stock shifting to front of house service.

Launching a fully integrated online, digital and data division 'MS2' to maximise the online opportunity

Over the past three years the group has made significant investment in its online capabilities including transitioning its web platform to the cloud, building a comprehensive customer data engine for over 20m customers, and improving and relaunching the Sparks loyalty programme. This has been supported by expansion of capacity and improvements to operations at the Castle Donington distribution centre, which has enabled a c.50% increase in singles despatch in the first half of the year and recent growth in market share such that it is now the second largest Clothing online business in the UK.

However, to date M&S.com has been structured as the online channel of a stores retail business moving in lockstep with the rhythm of physical store-based trading rather than competing head to head with pure play competitors. Building on the investments we have made in recent years and embedding the pure play mentality and ways of working we began to adopt during lockdown, we are launching a new division within the Clothing & Home business MS2 to maximise online growth. MS2 inverts the model to create a single integrated online, digital and data team within Clothing & Home supported by our stores and a refocused product supply engine.

MS2 will bring together online, data and digital trading capabilities under a single team trading at a faster pace with range and availability adapted to the online model. The group will be led jointly by Richard Price and Katie Bickerstaffe with a mandate to compete as a 'pure play'. It will include:

· A step change in online product, presentation, pricing and social marketing including recognition that the online business will need a focused range

· A mandate to ensure we move towards more rapid fulfilment, investing in and expanding Castle Donington capacity

· Maximum usage of one of the best customer databases in the UK to drive digital customer engagement and build loyalty following the Sparks relaunch which has built to over 8m members

· A reinvented M&S App at the centre of online growth initiatives, building on the 1.5m downloads since the relaunch of Sparks and completely repositioning M&S financial and other services

· Creating a seamless "order online-order in store" approach by bringing a new click and collect and digital sales experience into five test and learn stores

· A commitment to drive growth in our International business through online propositions more aggressively at pace. Our International eCommerce operations will be brought into MS2 so they are managed alongside the UK business instead of being operated as separate channels

· Growing a curated portfolio of brand partnerships following the launch of Nobody's Child.

· All of this will be supported by the work being done on our end-to-end supply chain so that we're set up to deliver as a true omnichannel business.

Over three years our ambition is to achieve an online sales mix of at least 40%.

International Franchise and online contribution offset Covid pressures

Total International revenue declined 25.5% in the period reflecting the impact of lockdowns in multiple geographies in quarter one, peaking with the closure of 84% of all international stores and progressive reopening in quarter two. These impacts were partly offset by an International online sales increase of 75.4%.

Operating profit before adjusting items of £19.7m reflected the impact of lockdown in key owned markets such as India, where the closures were prolonged, and in Ireland. This was offset by resilient profit from franchise operations and a rapidly growing income stream online.

Transformation priorities

Through the crisis the capital light franchise and partner driven International model continues to work well. Our priority is to focus on developing online and partner sales globally. In the period, this included the launch of 6 dedicated flagship websites and the launch of M&S product on third party sites such as Zalando. In addition we are supporting partner growth with an increasingly localised proposition and fulfilment.

Shifting gears on store estate for the future

During the crisis, the business has demonstrated that it can use technology to communicate effectively and work more flexibly and productively. This has enabled colleagues multi-tasking and transitioning between Food and Clothing & Home and focusing on front line customer service. In August, the group announced a programme to streamline its store operations, regional management structures and support centres, which is now complete generating annualised cost savings of at least £115m helping us emerge from the crisis with a more productive business.

Covid has also underlined the imperative to continue to drive the modernisation of the store estate as many of the modern retail park stores with good parking outperformed but the business has been held back by the legacy estate: We now have a long term programme to catch up on the task of rotating the estate and releasing cash from the group's freehold and leasehold asset base to manage liability and reduce cost. During the period (three) new full line stores were successfully launched, five Simply Food stores were opened and 10 stores were closed. (11) leases were re-geared with an average (34%) rent reduction.

Plan A

As the world emerges from the crisis, we believe customers will look to brands they can trust and have confidence in to offer quality and value through trading ethically. During the first half of the year, our Plan A programme focused on managing the impact of Covid on the most vulnerable and healthcare workers. Highlights of the programme in the period included:

· Raising over £8m for NHS staff, volunteers and patients through the Rainbow sale in Clothing & Home, which helped trade through the surplus seasonal stock

· Redesigning packaging to remove unnecessary plastic such as carton lids, light weighting to use less plastic and making packaging easier to recycle with new bakery bags and sandwich packs that are recyclable

· Enhancing our climate change commitments from carbon neutral operations today to net zero emissions by 2035

· Replacing soya feed in M&S RSPCA Assured milk avoiding 4,000 tonnes being used each year. We also highlighted the sustainability credentials of over 4,000 products on M&S.com

· Working with our longstanding partner, Neighbourly, we have helped to put more than 6 million meals on the table for those who need it most by working with 1,500 local community groups

Net debt reduced with substantial available liquidity of £1.4bn, providing resistance against further disruption

At the start of the year the group outlined a Covid-19 scenario for liquidity planning purposes which anticipated peak drawings on its credit facilities in excess of £650m at half year reducing to £300-350m at year end. A combination of stronger trading than the scenario, concerted action on cash management and reduced costs has resulted in substantial outperformance of the liquidity scenario with cash generation and a reduction in debt at the half. The group has substantial liquidity comprising £286m of cash at the half year and £1.1bn of committed facilities which are undrawn, positioning it well for the remainder of the year and for the medium term.

Preparedness for Brexit

Our plans for the transition period ending 31 December 2020 are well advanced. Preparations have covered both the changes required for the transition, and further activity and mitigation in the event no Free Trade Agreement deal is signed with the EU.

A key focus in Food has been managing the administrative changes to import from the EU and moving goods from Great Britain to Northern Ireland and our European markets. We have invested in technology that will support us in tracking goods and providing the information required for the new customs and certification requirements. For goods inbound to the UK from the EU we are working with suppliers on import compliance to ensure continuity of supply. We have also created a single export centre in Motherwell to manage goods movements from Great Britain to the island of Ireland.

The increased administration will result in additional costs for both our Food and International businesses. If no Free Trade Agreement is signed with the EU there will be further costs for all food retailers in the UK which will likely affect retail pricing. There would also be a potential further reduction in the profitability of our International businesses. In particular this could have a material impact on our businesses in the Republic of Ireland and the Czech Republic and on our franchise food stores business in France.

The impact on the Clothing & Home business is much less than on Food. We have taken steps to mitigate any tariffs on inbound supply by establishing a customs warehouse and on ensuring business continuity in Northern Ireland and the Republic of Ireland by ensuring product labelling meets UK and EU requirements.

Outlook

There remains significant uncertainty regarding the near-term outlook in relation to both Covid and Brexit. Trading in the first four weeks of the second half has continued at similar rates to the end of Q2, with Food revenue up 3.0%, C&H revenue down 21.5% and International revenue up 7.4% due to the timing of shipments.

Although trading strongly, the business is entering a period of new Covid-related restrictions including the proposed circuit breaker lockdown. This will impact C&H profit as store sales are significantly reduced, albeit offset by increased online sales and reduced costs supported by furlough income. Prior to this impact our planning assumption for the balance of H2 in Clothing & Home was for similar sales trends to the first few weeks of H2. We enter this period with C&H stock levels down by more than £100m on last year and with less stock hibernated to next Spring than previously envisaged.

The group has made substantial plans to ensure customers can shop with confidence this Christmas, including the expansion of the teams to serve online orders by 30% in Castle Donington and an increase in-store picking capacity and the introduction of the book and shop app to help eliminate the requirement to queue over peak. We have also invested behind product lines which will provide flexible options for smaller gatherings.

Throughout this uncertain period and as we start to emerge from the crisis, our financial priority is to fund the transformation while focusing on generating cash and strengthening the balance sheet. Our objective is to ensure the business emerges from these uncertainties in a stronger, leaner and more focused position and with balance sheet metrics consistent with investment grade in the medium term.

We expect to report a third quarter trading update on 8 January 2021.

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 8.00am on 4 November 2020.

Steve Rowe and Eoin Tonge will host a Q&A session at 9.30am on 4 November 2020:

Dial in number: +44 33 0606 1122 Room Number: 016384 Pin: 7140

Fixed Income Investor Conference Call:

This will be hosted by Eoin Tonge, Chief Finance Officer, at 2pm on 4 November 2020:

Dial in number: +44 33 0606 1122 Room Number: 753824 Pin: 7026

International Access Numbers

US: +1 646 813 7960

ITFS:  International Access Numbers 

A recording of this call will be available until 5pm on 11th November 2020:

Dial in number: +44 33 0606 1122 Access code: 186855

HALF YEAR FINANCIAL REVIEW

Financial Summary

Notes:

There are a number of non-GAAP measures and alternative profit measures "APM", discussed within 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.

Group results

Group revenue decreased 15.6%. UK revenue declined 14.6% driven by Clothing & Home and International revenue declined 25.5%. As a result the group generated an adjusted loss before tax of £17.4m and a statutory loss before tax of £87.6m.

Statutory loss before tax includes total charges for adjusting items of £70.2m including charges of £92.1m related to organisation restructure and a £49.4m stock related credit representing the partial release of the provision established at FY19/20 as directly attributable to Covid following better than expected trading results. For full details on adjusting items and the group's related policy see notes 1 and 3 to the financial information.

The following items related to the Covid pandemic contributed a total of £10m to the adjusted loss before tax.

Reporting of accountable businesses

In FY 2019/20, 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 for the half year ended 28 September 2019 a reallocation of £6.8m of central costs from the previous UK segment to International (£5.8m) and M&S Bank (£1.0m). In addition, certain M&S.com flagship websites, which last year generated £19.1m of revenue and £1.7m of operating profit before adjusting items have been reclassified from UK Clothing & Home to International.

UK: Food

UK Food revenue decreased 0.3% with the decline attributable to the initial effects of lockdown in April which was followed by an improving trend in performance from quarter one to quarter two. Revenue was adversely impacted by the closure of franchise stores in travel locations and hospitality and café areas within stores. Like for like revenue grew in both quarters.

Operating profit before adjusting items increased 19.0%, largely due to reduced costs which more than offset an adverse mix impact on gross margin.

The table below sets out the drivers of the movement in operating profit before adjusting items.

· Gross profit decreased £25.5m or c.80bps. This was driven by an adverse mix impact of an estimated 140bps as a result of the shift in sales from hospitality and food on the move and into categories such as milk, fish and poultry, grocery and produce, which was partly offset by cost saving programmes including initial synergies from Ocado supply

· The reduction in gross profit was more than offset by operating cost savings. Overall we incurred £67.9m of costs relating to Covid which were offset by £56.1m of government support measures

· The reduction in Store staffing costs was driven by in store operational efficiencies including increased flexibility and permanent changes to ways of working partly helped through the prior investment in front-line tech enabled communication. We incurred £68.1m of costs relating to furloughed colleagues, staff bonuses for working through lockdown and the costs of additional door hosts which was partly offset by furlough support and the benefit of lower holiday hours in the period

· The movement in other store costs largely relates to business rates relief of £34.5m

· Distribution costs increase driven by delivery costs of strong online orders of flowers and wine and additional costs related to cleaning and social distancing in depots

· The reduction in central costs was largely driven by lower marketing activity.

UK: Clothing & Home

Clothing & Home revenue decreased 40.8% as a result of the impact of lockdown on store sales in quarter one, with improved performance following reopening in quarter two. Following initial disruption in April, online sales remained strong throughout the period supported by lower returns rates. There was a substantial shift from office dressing and formalwear, into casual adult clothing, while kids, home and beauty also performed well online.

Full price sales decreased 43.4% with discounted sales outperforming total sales as the Group's 'Rainbow sale' helped clear surplus stock, particularly in store and generated an £8m charitable donation to NHS charities.

The business generated an operating loss before adjusting items of £107.5m. While online growth resulted in a substantial improvement in online contribution margin, this was more than offset by the decline in stores.

The table below sets out the drivers of the movement in Clothing & Home operating (loss)/profit before adjusting items.

· Gross profit decreased £389.1m or 310bps. While buying margin increased 20bps driven by reduced input costs, the margin decline was largely a result of the closure of stores in quarter one and the resulting increased weight of discounted sales as surplus stock sold through at better than expected rates post lockdown

· The decrease in gross profit was partially offset by actions to lower costs. Overall, we incurred £115.9m of costs relating to Covid which were offset by £121.8m of government support measures

· Store staffing costs reduced driven by in store operational efficiencies including permanent changes to ways of working partly helped through the prior investment in front-line tech enabled communication. We incurred £108.6m of costs relating to furloughed colleagues, staff bonuses for working through lockdown and the costs of additional door hosts which was partly offset by furlough support and the benefit of lower holiday hours in the period

· Other store costs reduced due to business rates relief of £49.2m as well as utility savings in Clothing & Home space closed off during lockdown

· Distribution and warehousing increased by £5.7m with higher costs to serve online demand both from the Castle Donington warehouse and in-store partially offset by volume savings from reduced deliveries to store. The overall increase in distribution and warehousing costs was offset by delivery income within revenue

· The decline in central costs was largely driven by lower marketing activity and a reduction in depreciation of technology assets as we move to cloud-based solutions.

International

International revenue decreased 24.7% at constant currency with stores in both owned and franchise markets adversely impacted by Covid restrictions in quarter one, followed by a subsequent improvement following reopening in quarter two. Online sales remained strong throughout, particularly in markets in which the group has a store presence and through partner websites.

Within the owned business, India was heavily impacted by strict lockdown measures and the weighting of the business towards Clothing & Home. In European markets the Republic of Ireland and Czech Republic benefited from their more resilient Food offering and strong online growth. Franchise profits reflect the decline in shipments as partners managed stock positions in the face of restricted trading.

Operating profit before adjusting items decreased 64.7%, with resilient franchise profitability and online contribution helping to partly mitigate the impact of lower sales in owned markets. Covid related costs of £7.5m largely relating to colleagues on International staff support schemes were partially offset by government support of £3.4m. In addition, in owned markets the result benefited from £4.6m of both government and landlord rent relief.

Ocado Retail Limited

The Group holds a 50% interest in Ocado Retail Ltd ("Ocado"). The remaining 50% interest is held by Ocado Group plc ("Ocado Group"). Half year results are consistent with the quarterly results reported by Ocado Group on behalf of Ocado Retail for the quarterly periods ended 31 May 2020 and 30 August 2020.

Group share of consolidated results of Ocado Retail Limited

Ocado Retail Limited is reported as 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. Exceptional items are defined within the Ocado Group plc Annual Report and Accounts

Retail revenue grew 47.9% as the channel shift to online grocery in the UK continues. While order size began to normalise from Covid related peaks, it remained above pre pandemic levels, with orders per week increasing to 345,000 in the second quarter as a result of a combination of strong demand, a phased re-opening of the website to new customers, and a normalisation of shopping patterns.

Ocado Retail EBITDA before exceptional items was £89.1m, driven by strong revenue growth and cost performance reflecting a period of sustained high demand. Units per hour throughput (UPH) increased in customer fulfilment centres (CFCs), driven mainly by improvements at Erith CFC. Trunking and delivery costs as a percent of sales were lower despite frontline worker bonuses and reduced deliveries per van, as a result of higher items per basket. Finally, the business had reduced marketing activity as a result of increased demand caused by Covid.

In addition Ocado Retail has recognised £28.5m of exceptional income before tax related to anticipated insurance receipts for business interruption for the period up to 30 August 2020 arising from the Andover fire in 2019, the value of which increased as a result of Covid.

As a result of strong EBITDA growth and insurance receipts, Group share of Ocado Retail profit after tax for the period was £38.8m. After a charge of £7.1m in adjusting items relating to the amortisation of the intangibles on the investment, Ocado Retail contributed £31.7m to Group profit after tax.

This continuing strong performance was reflected in the increased full year guidance by Ocado Group plc in its trading update on 2 November 2020.

M&S Bank and services

M&S Bank and services income before adjusting items was down £11.8m to £1.1m. This was the result of the increase in bad debt forward economic guidance provisions recognised due to the Covid impact on unemployment forecasts as well as a significant decrease in income from credit card income and travel money sales. M&S Bank and services income after adjusting items relating to PPI decreased £2.5m to £(0.3)m.

Net finance cost

Net finance costs decreased £14.4m to £79.2m. This was primarily due to higher pension income due to the increased IAS19 pension surplus at last year end of £1,902.6m. In addition, there was a decrease in the interest payable on lease liabilities and lower interest payable on debt due to the refinancing of the 2019 bond.

Group loss before tax

Group loss before tax was £87.6m, down £246.4m on last year. This includes adjusting items of £70.2m (last half year £17.5m).

Group loss before tax & adjusting items

Group loss before tax and adjusting items was £17.4m, down £193.7m on last year. The profit decrease was due to the decline in Clothing & Home and International operating profits reflecting the impact of Covid related social distancing measures and reduced footfall.

Adjustments to loss 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/gains and the Group's policy for adjusting items please see notes 1 and 3 to the financial information.

A charge of £92.1m has been recognised in relation to the Group's plan to integrate more flexible management structures into store operations as well as streamline the business at store and management level as part of the 'Never the Same Again' programme which resulted in a reduction of c.7,950 roles across central support centres, regional management, and our UK stores.

A gain of £49.4m has been recognised as being directly attributable to the Covid pandemic relating to the release of a portion of the inventory provision offset by further costs relating to cancellations and storage. The sell through of Clothing & Home stock has been much stronger than anticipated assisted by the Rainbow sale for NHS Charities resulting in a write back of inventory provisions and to align with our latest estimates of net realisable value based on current sales performance.

Charges of £15.3m have been incurred in relation to the one-off transition costs associated with the closure of the old Sparks loyalty programme following the launch of the new programme in July 2020.

A charge of £7.1m has been recognised relating to the amortisation of intangible assets acquired on the purchase of our share in Ocado Retail.

A charge of £2.9m has been recognised 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 with total future charges of up to c.£120m estimated within the next seven financial years.

A charge of £1.7m relating to establishing the investment in Ocado Retail Limited has been incurred. These charges related to preparations for the launch of M&S products being sold on the Ocado platform from 1 September 2020.

Charges of £1.4m have been incurred relating to M&S Bank, primarily relating to the insurance mis-selling provision. The Group's share of the total insurance mis-selling provisions of £358.7m exceeds the total offset against profit share of £244.1m to date and this deficit will be deducted from the Group's share of future profits from M&S Bank.

Taxation

The effective tax rate on profit before adjusting items was 27.0% (last half year 23.1%). Given the lower anticipated level of profits, the effect of the recapture of previous tax relief under the Marks and Spencer Scottish Limited Partnership ("SLP") structure has increased compared with previous years. The effective tax rate on statutory profit before tax was 18.3% (last half year 22.9%) due to the impact of disallowable adjusting items.

Loss/Earnings per share

Basic loss per share was (3.5)p (last half year earnings of 6.4p), 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 1,951.7m (last half year 1,840.2m).

Adjusted basic loss per share was (0.4)p (last half year earnings of 7.1p) due to lower adjusted profit year-on-year and the increase in weighted average shares outstanding.

Capital expenditure

Group capital expenditure before disposals decreased £67.5m to £54.3m as a result of a decision to halt all non-essential spending during the pandemic.

The higher UK store remodelling spend last year largely reflected the investment in three trial renewal stores. Spend on UK store space was down due to the timing of store openings year on year.

Supply chain expenditure reflects investment in Food equipment to support anticipated volume growth and spend on improvements to Castle Donington capabilities to ensure readiness for peak trading during Covid.

IT and M&S.com spend related to the licence for the Food ordering and allocation system and investment in digital capability. Property asset replacement decreased £23.1m due to the prior year asset replacement programme in stores.

Cash flow & net debt

The business generated free cash flow of £77.6m largely driven by lower working capital, reduced lease payments due to timing, lower tax payments and lower adjusting items offset by a lower adjusted operating profit.

The working capital inflow since year end 2019/20 was driven by the extension of payment terms for Clothing and Home suppliers and a reduction in Food franchise receivables as a result of travel store closures.

Lower capital expenditure reflects the decision to halt non-essential spend during the Covid pandemic. Cash capital expenditure includes £77.2m relating to prior year capital accruals.

The decrease in financial interest and tax payments of £48.0m is due to the fact that no UK corporation tax has been paid reflecting the half year taxable loss position.

Defined benefit scheme pension funding of £36.2m reflects the second limited partnership interest distribution to the pension scheme.

Adjusting items cash outflow was £18.8m. This included £5.6m in relation to the transition to the new Sparks loyalty programme, £4.7m in relation to the store closure programme, £2.9m relating to Head office restructure, £1.7m relating to costs associated with the launch of M&S product on the Ocado Retail platform, £1.4m for M&S Bank and £1.1m paid for deep storage during the Covid pandemic.

Net financial debt decreased £64.5m from the start of the year. The group currently has £1,386m of total cash and committed credit facilities which are undrawn.

There was a further reduction in the value of discounted lease obligations outstanding. New lease obligations capitalised in the period of £11.5m is largely as a result of the new ambient Food depot. This was more than offset by £77.5m of lease repayments.

Of the outstanding discounted lease commitment at period end approximately 41% related to Full line stores and 30% to Simply Food stores with the balance largely relating to warehousing and offices.

Dividend

We did not pay a final dividend for 2019/20 and the board has announced the decision not to pay a dividend for the 2020/21 financial year.

Pension

At 26 September 2020, the IAS 19 net retirement benefit surplus was £890.0m (£1,902.6m at 28 March 2020). The surplus at last year end had increased significantly due to unusually high credit spreads due to the impact of Covid. During the half year period, credit spreads have reverted to more normalised levels giving rise to the decrease in the surplus.

In September 2020, the Scheme purchased additional pensioner buy-in policies with two insurers for approximately £750m. Together with the policies purchased in April 2019 and March 2018, the Scheme has now, in total, insured around 80% of the pensioner cash flow 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 Group's exposure to changes in longevity, interest rates, inflation and other factors.

Statement of financial position

Net assets were £2,712.5m at the half year end, a decrease of 26.9% since the start of the year largely due to the decrease in the net retirement benefit surplus.

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 including, but not limited to, those related to the Covid-19 pandemic 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 (pages 33-42).

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.

- Ends -

Principal risks and uncertainties

The principal risks and uncertainties which could impact the Group's long-term performance and additional information on the impact of Covid-19 on the Group's risk profile were set out on pages 33-42 of the Group's 2020 Annual Report and Financial Statements, along with mitigating activities relevant to each risk. Information on financial risk management was also set out on pages 152-162. A copy of the 2020 Annual Report and Financial Statements is available on the Group's website www.marksandspencer.com. An update on this disclosure is set out below.

Covid-19

The Annual Report identified specific changes to our risk profile as a consequence of the Covid-19 pandemic. In summary, it explained how a failure to effectively respond to the trading, operational, legal and financial consequences of the Covid-19 pandemic in the short term or during the course of a prolonged outbreak would adversely impact business performance.

The Covid-19 specific risks relating to Protection of customers & colleagues, Store portfolio management and Post-crisis recovery have not changed since the publication of the Annual Report and Financial Statements.

The Covid-19 specific risks which have evolved since publication of the Annual Report relate to Liquidity, Clothing & Home Inventory Management and Strategic realignment.

Liquidity: At the start of the year the group outlined a scenario for liquidity planning purposes which anticipated peak drawings on its credit facilities in excess of £650m at half year with a £300-350m increase at year end. However, a combination of stronger trading, concerted action on cash management and reduced costs has resulted in substantial outperformance of the scenario. This has resulted in net cash generation and a reduction in debt at the half year, with committed facilities undrawn. While these activities have had a positive impact, the risk of significantly reduced trading over an extended and currently undetermined timeframe remains and could impact the business's ability to operate within committed credit facilities.

Clothing & Home Inventory Management: The Annual Report noted 'A failure to effectively manage the implications of the lockdown period on all aspects of the Clothing & Home supply chain and inventory management would adversely impact customer experience, trading performance, liquidity, operational efficiency and third-party relationships for an extended period'. Actions taken by our sourcing teams to manage orders, better than anticipated performance to clear stock lines and implementation of deep storage plans have improved the risk position since the year end. However, the continued uncertainty around the future impact of Covid-19 on customer behaviours and trading conditions means that while reduced, unpredictability of the impact on inventory valuation remains.

Strategic realignment: The Annual Report noted 'An inability to define and successfully implement a revised strategy to rapidly respond to a post-Covid world and the associated changes in customer behaviours and operational requirements would significantly undermine the transformational imperatives of the business'. Significant progress has been made in the period since to align the strategic priorities through the Never The Same Again programme particularly around the focus of online activities. While significant strategic and planning progress has been made since year end, this remains a risk factor as we transition to implementation.

The Covid-19 pandemic may continue to have a significant impact on the business and amplify the existing principal risks and uncertainties as set out below. This now includes the potential consequences of a second period of lockdown in the UK or in our international markets.

Principal risks and uncertainties

The directors do not consider the following principal risks and uncertainties to have changed since the publication of the Annual Report for the year ended 28 March 2020:

· Trading performance recovery

· Business transformation

· Liquidity & funding

· Food safety and integrity

· Corporate compliance and responsibility

· Information security

· Business continuity and resilience

· Third-party management

· Talent, culture and capability

· Technology capability

· Brand, loyalty and customer experience

The following principal risks and uncertainties have changed since the publication of the Annual Report:

Brexit

The Annual Report included a principal risk linked to the UK's exit from the European Union, specifically 'An inability to quickly identify and effectively respond to the challenges of a post-Brexit environment could have a significant impact on performance across our business.' While this remains applicable, the continued delay in agreeing the terms of the UK's departure from the European Union has elevated the risk of a 'no deal' exit and, consequently, increased the likelihood of more severe operational and economic challenges for both our UK and international business activities following the end of the transitional period than would have occurred under an orderly exit. The potential implications for the business include:

· Deterioration in customer sentiment

· Operational complexity and cost due to restrictions on the movement of goods and stricter border controls (including the movement of goods between Great Britain and Northern Ireland)

· Costs passed through from our suppliers

· Continuity of supply and supplier viability

· The imposition of import and export duties

· Additional regulatory responsibilities and costs

· Increased complexity and cost in our international operations, particularly in the Republic of Ireland, the Czech Republic and our franchise activities in France.

The mitigating activities remain consistent with those disclosed in the Annual Report.

Ocado Retail Investment

The Annual Report and accounts included a risk related to the launch of M&S food products on-line through the investment in Ocado Retail Limited. Specifically, the risk had identified that 'A failure to effectively execute the launch of M&S products for Ocado Retail would significantly impact the achievement of our strategy to take our food online in a profitable, scalable and sustainable way'. Having successfully launched our food range online in September 2020, this risk is no longer applicable.

The directors have concluded however that it should be replaced with a new risk linked to our investment in Ocado Retail Limited and that 'A failure to effectively manage the strategic and operational relationship with Ocado Retail, or a significant deterioration in the trading performance of the business, would significantly impact the achievement of our multi-channel food strategy and the ability to deliver shareholder value' has been added to the principal risks and uncertainties. Mitigating activities include representation on the Ocado Retail Limited Board and Audit Committee, a dedicated M&S project team, and agreed operating processes and ways of working.

Statement of directors' responsibilities

The directors confirm that, to the best of their knowledge, this condensed consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.4R, DTR 4.2.7R and DTR 4.2.8R, namely:

- the condensed set of financial statements gives a true and fair view of the assets, liabilities, financial position, cash flows and profit or loss of the issuer, or undertakings included in the consolidation;

- an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

- material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.

There have been no changes to the directors of Marks and Spencer Group plc to those listed in the Group's 2020 Annual Report and Financial Statements. A list of current directors is maintained on the Group's website: www.marksandspencer.com.

By order of the Board

Steve Rowe

Chief Executive