Marks & Spencer Regulatory News (MKS)

Issued: 8 November 2017

Press Release

Marks and Spencer Group Plc

Half Year Results For 26 Weeks To 30 September 2017

1Adjusted results are consistent with how business performance is measured internally. 2Refer to adjusted items note 3.

Steve Rowe, Chief Executive said:

"We have made good progress in remedying the immediate and burning issues at M&S I outlined last year. In Clothing & Home early results are encouraging and in International we now have a profitable and robust business. We recognise now that we face stronger headwinds in Food which will be addressed in the year ahead.

"The business still has many structural issues to tackle as we embark on the next five years of our transformation, in the context of a very challenging retail and consumer environment. Today we are accelerating our plans to build a business with sustainable, profitable growth, making M&S special again."

Headlines

· Clothing & Home revenue level with full price sales up 5.3% due to better product at lower prices, fewer promotions and two fewer clearance sales. Gross margin up 140bps, as we leveraged our sourcing capabilities and fully offset currency headwinds

· Food revenue up 4.4% driven by new stores. Gross margin down 130bps due to increased input cost inflation and limiting price increases to customers

· UK costs up 4.2% due to new space, investment in improved service, and tackling legacy pay and pension issues

· International profits trebled to £60.3m as a result of our decisive action to reduce losses in owned markets, as well as favourable currency movements

Restoring the basics

Over the past 18 months we have made good progress addressing the most immediate issues in order to arrest the decline at M&S. In line with our plan, we reduced discounting and cut the price of over 2500 lines as well as delivering better availability. Clothing & Home sales were level in the first half and we have leveraged our sourcing capability to fully offset significant currency headwinds. We have tackled and removed unsustainable losses in owned International markets.

Our overall priority is making our shopping experience special so we have invested in store service, adding over 3000 colleagues. In addition, we have simplified our head office structure with a reduction of over 500 roles. We have also implemented a simpler approach to pay and closed our UK defined benefit pension scheme to future accrual.

Building on these stronger foundations, we are now able to accelerate our transformation plan to face into long term structural change in our market place and make M&S special again.

We start with great brand recognition, over 32m customers and quality, value and innovation rooted in our DNA. However, increased global and digital competition, pressure on consumers' disposable income and increased cost inflation means unless we continue to adapt our business model, our competitive position will continue to erode. In this next phase of our programme we need to address structural challenges and continue to restore the basics at M&S, in order to deliver growth in later years.

The next phase of our transformation

Our progress and learnings over the last 18 months have given us the confidence to accelerate our transformation plan and we continue to focus on driving sustainable, profitable growth. The next phase of our transformation will see us:

· Build on our progress in Clothing & Home to focus on becoming the UK's essential Clothing retailer

· Accelerate our UK Clothing & Home space rationalisation plan

· Reposition our Food business including slowing our Simply Food store opening plan

· Work with key International franchise partners to build a growing, profitable International business

· Become a digital first organisation, with a third of our Clothing & Home sales online

· Substantially reduce our cost base

Rejuvenating Clothing & Home

Our position in Clothing & Home has eroded over the last 15 years as online retailers, new international competitors and discounters have taken market share. However, the business retains very strong market positions in lingerie, schoolwear, denim, suits and other areas which illustrate our capability.

In the next phase of our transformation we will continue to modernise our supply chain which needs to be faster and lower cost than today. Our digital fulfilment capability, while currently operating well, will require further investment to enable more rapid growth online and help us match increasingly fast competitor fulfilment rates.

It is our ambition that M&S will become the UK's essential Clothing retailer. At all levels we are sharpening our ranges, to provide better choices with fewer options, and delivering contemporary wearable style to become more popular. With our heritage in value, we will reinvest cost savings into affordability to ensure that our quality is unrivalled at any given price point.

Reposition and grow Food

The headwinds facing our Food business have intensified as competitors have encroached on some of our space with the rapid growth of convenience. Online home delivery is growing share. Hard pressed consumers are more aware of value and are careful about premium choices. Therefore, although our investment returns remain high, we are slowing our Simply Food opening programme as we reposition our food offer for future growth. Only the highest returning sites will qualify for addition to our store portfolio.

We have already sharpened prices in core categories and will be taking further steps to bring out value in our ranges. We will increase the pace of relevant innovation, step change our availability and ranging, and continue to develop our Foodhall proposition.

International partnerships scaled in key markets

We have substantially reshaped our International business, which has improved profitability and positioned us for steady growth. Operating with strong partners who have scale, local infrastructure and access to good locations will allow us to grow this business. We now need to focus on our proposition, ensuring better availability, sharper prices and improved customer service and environments, so we can meet international and local competition in each market.

Channels for the future

We will invest in our online capabilities to ensure a more personalised and seamless customer journey, and much greater convenience. We expect our online share of sales to grow very significantly and we are aiming for one third of our Clothing & Home sales to be online in the medium term. This, and the better than expected levels of sales transfer from recent closures, means that we are accelerating our UK store rationalisation programme, including closures, space reduction and relocations. Our intention is to reshape the estate to focus on high volume locations with conforming store size and fit for purpose back-of-house facilities. We will prioritise a digital first approach in our stores and in our central functions.

Delivering lower cost retailing

We have taken good first steps in streamlining our central costs and bringing on board new talent.

We are undertaking a significant review of our cost base with the aim of generating a substantial reduction in legacy and structural costs. In addition, we are working on the opportunity to reduce working capital and release cash. In the next phase, further significant changes will be made to consolidate strong accountable business units in Food and Clothing & Home. We will develop our organisation and culture as we create a faster, more commercial M&S.

We will continue to operate strict capital disciplines within our existing capital framework including a robust balance sheet, progressive dividend policy, continuing to invest for growth and returning any surplus capital to shareholders.

Full year guidance 2017/18:

1As at year end

• Given stronger than anticipated buying margin in the first half we now expect to deliver growth in Clothing & Home gross margin of between 25 and 75 basis points

• As a result of increased input costs and higher promotions in the first half we now expect a decrease in Food gross margin of between 75 and 125 basis points

• We expect to open c.80 new Simply Food stores, half of which will be owned, resulting in space growth of c.5%

Group revenue: constant currency

We will report our third quarter trading update on 11 January 2018.

See glossary for definitions.

For further information, please contact:

Investor Relations:

Fraser Ramzan: +44 (0)20 3884 7080

Helen Cox:  +44 (0)20 3884 4757

Media enquiries:

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

Investor & Analyst webcast:

Investor and analyst presentation will be held at 09.30 on 8 November 2017. This presentation can be viewed live on the Marks and Spencer Group plc website.

Fixed Income Investor Conference Call:

This will be hosted by Helen Weir, Chief Finance Officer at 14:00 on 8 November 2017:

Dial in number: +44 (0) 20 3427 1915 Access code: 1249472

A recording of this call will be available until 18 November 2017:

Dial in number: +44 (0) 20 3427 0598 Access code: 1249472

HALF YEAR FINANCIAL REVIEW

UK: FOOD

Food revenue increased by 4.4% as we opened 24 new Simply Food stores, however like-for-like revenue was down 0.1%. In a challenging market environment we introduced additional choice by extending the range in selected categories and ran more promotions. We launched over 750 new products in the period and sales of our Spirit of Summer products grew by c.20%. Market share increased by 10 bps to 4.2% according to data from Kantar Worldpanel (12 w/e 8 October 2017).

The decline in gross margin of 130bps year-on-year to 31.3% was more than expected. We absorbed significant input cost inflation while limiting price increases for customers. These costs were not fully offset by gains from our on-going value optimisation program, and process improvements to reduce waste.

New stores continued to exceed sales expectations and we have significantly reduced the average lease commitment on new store approvals in line with the more rigorous capital framework announced last year.

UK: CLOTHING & HOME

Clothing & Home revenue was level, with like-for-like revenue down 0.7%. Revenue grew in quarter two, benefiting from an encouraging performance of our new Autumn range in September supported by cooler weather. As expected, revenues were adversely impacted by our decision to reduce the number of clearance sales in the period from 4 to 2. Full price sales increased by 5.3%. Availability improved further in the period while customer satisfaction scores increased on the previous year.

Gross margin was ahead of expectations, up 140bps at 58.1%. We offset significant currency headwinds as we improved our planning process, allowing us to unlock better buying rates. We tendered an increased proportion of orders and also moved business to lower duty locations, both of which realised benefits earlier than expected. Margin benefited from the planned reduction in discounting with a c.20% reduction of stock into sale, in part due to the two fewer clearance sales, and a lower depth of cut.

During the second quarter we have reallocated space in 56 stores from womenswear to areas of growth opportunity such as Childrenswear and Home. Following feedback from our customers, we have also extended our ranges, increased stock availability and provided more inspiration in our smaller stores.

We opened two new stores and relocated a further two which are delivering improved sales densities. We also closed four Clothing & Home stores as part of the reshaping of the UK store estate and are seeing encouraging early results with respect to the proportion of sales transferred to nearby M&S stores.

At M&S.com we made further improvements to our delivery proposition, introducing returns to Simply Food stores and improved site speed. Revenue increased by 5.7% at constant currency.

UK operating cost growth was 4.2%, in line with our expectation for a higher rate of cost growth in the first half of the year. The costs associated with new space and volume drove one third of this increase. The main driver of the remaining increase was store staffing, where we invested in service, tackled our legacy pension scheme and moved to a simpler pay structure.

We continue to find ways to simplify our business and thus reduce costs. This is evident in both marketing, where we have focused on fewer, larger campaigns and in other store costs where we have offset increases from new space with lower than projected rent review agreements and other efficiencies. We have also delivered savings from head office efficiencies, as announced last year, in line with plan.

As we transition more of our systems to cloud based software services, we see a switch between capital spend and operating costs. This, together with increased incentive accruals, drove the increase in central costs in the half.

INTERNATIONAL

Reported International revenue increased by 2.3%, benefitting from currency translation. At constant currency, revenue declined by 3.1%, as a result of the now completed exit from loss making owned stores.

Franchise revenue increased 9.9% at constant currency. Shipments benefited from earlier fulfilment of Winter orders and expansion of our food business in markets such as Paris.

Owned retained markets revenue increased 0.6% at constant currency. Strong performances in India and Hong Kong were offset by a decline in sales in the Republic of Ireland, where we have reduced discounting in Clothing & Home.

Operating profit before adjusted items increased significantly. This is a result of reduced losses in exit markets, and improved margins in owned retained markets which benefited from transactional currency gains.

NET FINANCE COST

Net finance costs increased by £9.6m largely due to decreased pension net finance income, as a result of the lower net retirement benefit surplus and the lower discount rate at the start of the year. Net interest payable was up £2.9m primarily due to a £300m bond issued in December 2016 pre-funding the $500m bond maturing in December 2017. This was partially offset by lower interest on bank facilities.

ADJUSTED ITEMS

The Group makes certain adjustments to statutory profit measures in order to derive alternative performance measures that provide stakeholders with additional helpful information on the performance of the business.

On 1 April we completed the implementation of a simplified approach to pay and pensions. As part of this, we have committed to making transition payments (for a period of three years) to employees impacted by the closure to future accrual of the UK defined benefit scheme. The cost in the period was £6.7m.

As part of streamlining our UK cost base, we are consolidating our central London Head Office functions into one building. The charge of £26.5m for UK organisation is largely related to this.

Since the announcement of the new UK store estate strategy, the Group has conducted a review of the £4.7bn net book value of the property, plant and equipment on its balance sheet. This has identified an historical under depreciation of leasehold building assets, resulting in a £45.8m one-off non-cash depreciation charge, relating almost entirely to assets capitalised prior to 2012/13.

TAXATION

The effective tax rate on profit before tax and adjusted items was 21.0% (last year 20.0%). The effective tax rate is higher than the UK corporate tax rate of 19.0% as a result of the Scottish Limited Partnership structure. The effective tax rate was 28.5% (last year 36.7%) due to the impact of disallowable adjusted items.

EARNINGS PER SHARE

Adjusted basic earnings per share decreased 7.0% to 10.7p due to the lower adjusted profit generated in the period.

Basic earnings per share increased from 1.0p to 5.2p primarily due to higher adjusted items in the prior year. The weighted average number of shares in issue during the period was 1,624.3m (last year 1,622.4m).

CAPITAL EXPENDITURE

Group capital expenditure remains well controlled with the tighter disciplines we have put in place resulting in a 16% reduction year on year.

UK store environment spend reflects the reallocating of space from Womenswear to Childrenswear and Home in a number of stores as well as investment in refreshing our cafés.

Spend on UK store space was down as we opened 14 owned stores compared with 18 last year and due to the receipt of higher landlord contributions.

Capital expenditure on Supply Chain has reduced, as many infrastructure projects such as the new Enfield food depot and Bradford distribution centre are now complete and spend is focused on getting the most out of existing capacity. In addition, a greater proportion of IT and M&S.com costs were expensed.

International spend was down, as a result of our decision to exit a number of markets.

The business delivered free cash flow before adjusted items of £218.4m, up £6.7m on last year.

Defined benefit pension funding reflects the £36.4m second limited partnership interest distribution to the pension scheme in the current year as well as the final contribution for the defined benefit scheme paid after the year end. The charge in the first half of last year reflected service contributions to the scheme which is now closed to future accrual.

Free cash flow was £104.5m, down £69.4m on last year due to the increase in adjusted item cash outflows in the period. These cash outflows primarily relate to the closure of stores in International markets and the transitional payments associated with the changes to pay and pensions.

Despite the costs of our strategic programmes, net debt was down £217.2m on last year.

DIVIDEND

We have announced an interim dividend of 6.8p, level year-on-year. This will be paid on 12 January 2018 to shareholders on the register of members as at close of business on 17 November 2017.

PENSION

At 30 September 2017, the IAS 19 net retirement benefit surplus was £638.4m (last full year £692.8m). We are well hedged for interest rate exposure and therefore the increase in the discount rate (from 2.55% to 2.70%) has not resulted in an increased 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 such forward-looking statements are subject to various risks and uncertainties, including failure by Marks & Spencer to predict accurately customer preferences; decline in the demand for products offered by Marks & Spencer; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of Marks & Spencer's brand awareness and marketing programmes; general economic conditions or a downturn in the retail or financial services industries; acts of war or terrorism worldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets.

- Ends -

Principal risks and uncertainties

The principal risks and uncertainties which could impact the Group's long-term performance remain those detailed on pages 30-33 of the Group's 2017 Annual Report and Financial Statements, along with mitigating activities relevant to each risk. Information on financial risk management is set out on pages 118-121 of the Annual Report, a copy of which is available on the Group's website www.marksandspencer.com/thecompany. These principal risks cover:

- Clothing & Home recovery;

- Food safety and integrity;

- Corporate responsibility;

- Information security (including cyber);

- Technology;

- Customer proposition & experience;

- Talent & succession;

- Margin;

- Brand;

- UK store estate;

- Profitable growth; and

- Third party management

The impact of the United Kingdom's decision to leave the European Union remains uncertain for the UK and the Group. The implications for the Group could include, but are not limited to:

- volatility in currency and corporate bond rates which could have an impact on the Group's trading performance and pension valuation and charges;

- changes in consumer confidence which may impact on the Group's ongoing trading performance;

- tightening of the labour market arising from changes to the EU principle of freedom of movement; and

- uncertainty on international trade tariffs.

The Board continues to monitor the ongoing negotiations between the UK and the EU to assess the potential impact and any transitional arrangements that may be agreed.

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 and profit or loss of the issuer, or the 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.

The directors of Marks and Spencer Group plc are consistent with those listed in the Group's 2017 Annual Report and financial statements with the exception of Archie Norman who joined the Board as Chairman on 1 September 2017, replacing Robert Swannell who retired on the same date. A list of current directors is maintained on the Group's website: www.marksandspencer.com/thecompany.

By order of the Board

Steve Rowe

Chief Executive

1The '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.

2In the prior year interim financial statements, the foreign exchange reserve was presented within Retained earnings.

3 Amounts 'reclassified and reported in profit or loss' includes the revaluation of the cross currency swaps, offsetting the revaluation of the US dollar hedged bonds with finance costs.