Annual Financial Report

RNS Number : 1501I

Marks & Spencer Group PLC

09 June 2011

 



Issued: 9 June 2011

Publication Announcement: Annual Report 2011

In compliance with Listing Rule 9.6.1, Marks and Spencer Group plc has today submitted a copy of the Annual report and financial statements 2011 to the UK Listing Authority, which will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, via the National Storage Mechanism which is located at hemscott.com/nsm.do.

In accordance with DTR 6.3.5(3) the Annual report and financial statements 2011, Annual review and summary financial statements 2011 and the Notice of Meeting will be available to view on our company website: marksandspencer.com/annualreport2011.

A condensed set of Marks and Spencer Group plc financial statements and information on important events that have occurred during the year and their impact on the financial statements were included in the Marks and Spencer Group plc preliminary announcement on 24 May 2011. That information together with the information set out below which is extracted from the Annual report and financial statements constitute the requirements of DTR 6.3.5 which is to be communicated via an RIS in unedited full text. This announcement is not a substitute for reading the full Annual report and financial statements.  Page and note references in the text below refer to page numbers in the Annual report and financial statements 2011.  To view the preliminary announcement, visit our company website: marksandspencer.com/thecompany.   

Principal risks and uncertainties

As with any business, we face risk and uncertainties on a daily basis.  It is the effective management of these that places us in a better position to be able to achieve our strategic objectives and to embrace opportunities as they arise.  Information is provided below on our principal risks and the mitigating activities underway to address them.  It is recognised that the Group is exposed to a number of risks, wider than those listed.  However, a conscious effort has been made to disclose those risks of most concern to the business at this moment in time and those that have been the subject of debate at recent Board or Audit Committee meetings. 

Risk description	Mitigating activities
Finance - Our priorities continue to focus on maintaining a strong financial position that supports continuous improvements to our customer offering across our UK and International operations.
Economic outlook Uncertain economic conditions impact consumer confidence and our ability to achieve our sales forecast. As consumers' disposable incomes come under pressure from increased VAT rates, cuts in public spending and increased fuel prices, trading conditions continue to remain a challenge for our UK business.	Throughout the year we have continued to review and monitor the effectiveness of our pricing, promotional and marketing strategies across our General Merchandise (GM) and Food businesses, tailoring our consumer offering where appropriate. Despite pressures on our cost base, we have continued to innovate in order to retain our point of difference and the loyalty of our customer base.
Product costs Increasing product costs may impact the profitability of our business. Our GM and Food businesses are having to develop plans to address rising commodity prices, particularly in the cost of oil, food and cotton, as well as general inflationary pressures on our supply base such as labour cost increases in Bangladesh and China.	Where possible, we are leveraging the scale of our GM business to absorb cost price inflation without passing on significant price increases to customers. Both the GM and Food businesses are working with suppliers on an ongoing basis to increase efficiencies and to identify opportunities for taking costs out of their supply base to protect margins and profitability, without compromising on quality or diluting the emphasis we place on innovation.
Financial position Deterioration in our financial position limits our flexibility and ability to grow the business. In the event that the Group's financial performance does not meet market expectations, our ability to borrow from lenders on our existing terms may be impacted, resulting in increases to the cost of borrowing and insufficient funding to meet our capital requirements and growth plans.	Group Treasury regularly carries out forecasting of our debt capacity, financial covenants and other rating metrics within current rating bands. The funding level of our pension scheme is monitored in collaboration with the Trustees on a regular basis, with clear parameters in place that would trigger an intra-valuation debate between the Trustees and the Company. Regular communication with rating agencies and brokers has continued throughout the year.
Selling channels - We have ambitious plans for our UK, International and M&S Direct businesses as part of our commitment to becoming an international multi-channel retailer by 2015.
Store environment Failure to deliver improvements across our store estate to time, to budget or to the desired quality could negatively impact consumer perception of the M&S brand. Customer research has highlighted that some of our stores are difficult to shop and the positioning of our clothing sub-brands is unclear. We have taken this feedback on board and are investing in delivering improvements to strengthen and clarify our brand.	To ensure that our new store plans meet our customers' needs with minimal disruption to their shopping experience, we plan to introduce a phased roll-out of improvements across our store estate. Close monitoring of progress against key milestones is underway, with direct reporting lines into the Executive Board.
Food competition Aggressive expansion of our competitors into M&S markets could impact our market share. The major supermarkets have outlined significant expansion plans over the next three to five years. This is leading to greater competition for the acquisition of sites and has heightened the need for us to improve accessibility of our stores and differentiate our product offering.	We have a clear space growth plan in place for 2011/12 and beyond to reduce the drive time to our stores for our customers. We continue to implement targeted marketing and promotional strategies in response to competitor openings. To maintain our position as a leading specialist food retailer, our 2011/12 Food strategy will focus on innovation and inspiration, underpinned by our three core values, 'Freshness, Speciality and Convenience'.
M&S Direct A new online platform with flexibility to support future growth is not delivered by the time our contract with Amazon expires. In November 2010, we announced our desire to become a leading UK multi-channel retailer and to make our brand more accessible around the world. To achieve this, we are investing in a new online platform that will not only provide a more enhanced shopping experience but also help to accelerate our growth.	Laura Wade-Gery, our new Executive Director of Multi-channel E-commerce brings with her a wealth of experience in multi-channel retailing. Our multi-channel growth strategy is underpinned by a clear plan for implementation of the new platform both in the UK and overseas. We are working closely with our partner Amazon to ensure the quality of our existing online offering is not compromised while we build the new platform.
International Failure to leverage our systems and processes limits growth of our international business. Our aim is to increase our international presence and to build a leadership position in priority markets. To deliver this, it is crucial that we adopt an organisation structure that is supported with robust systems and supply chain capability.	The appointment of Jan Heere as Director of International will drive the achievement of our international growth plans. The focus on enhancing international systems and processes has continued throughout the year in alignment with the development of our international strategy.
People and change - Our people are fundamental to the long-term success and growth of this business.
Our people Reduced motivation and retention of key employees impacts our ability to deliver business plans. As we go through a period of economic uncertainty as well as a number of internal change initiatives, it is ever more important to ensure that M&S remains a great place to work.	A monthly briefing is cascaded to our top managers and a quarterly results broadcast is held for all employees to communicate the growth ambitions and underlying plans of the business. Development of talent for the future remains a key priority. We are rolling out our development programme 'Lead to Succeed' to more of our managers, helping them to realise their full potential. Alongside the recruitment of a number of new directors across the business, the development of strong succession plans is a key area of focus for the Board.
Programme and workstream management Benefits from our major business programmes and workstreams are not realised. Implementation of our major programmes and strategic workstreams is now underway which underpin the achievement of our three-year plan and ambition to become a leading multi-channel international retailer by 2015. Critical to their success will be the achievement of our forecasted benefits.	Our Strategic Programme Office centrally governs the strategic initiatives across the Group and provides regular reviews and updates on their status, tracking of costs and realisation of benefits to the Executive Board. All major programmes possess their own governance structures, supported by robust project management discipline.
Brand and reputation - Our founding principles of Quality, Value, Service, Innovation and Trust continue to influence how we do business and our reputation for being one of the UK's most trusted brands.
Corporate reputation External expectations relating to our Plan A, ethical or corporate governance commitments are not adequately managed. Our brand continues to be trusted in the marketplace with Plan A being an integral component of the M&S brand. With such a strong brand comes high expectations and the need to consistently deliver quality and value to our wide stakeholder base.	Our commitment to Plan A and becoming the world's most sustainable major retailer by 2015 continues to be a priority for the Group with one of our key objectives being for all M&S products to have at least one Plan A attribute by 2020. We have recently launched 'Only at Your M&S' emphasising to customers that they will find exclusive and innovative products that are unique to M&S. We are ensuring that adequate policies and procedures are in place to meet the requirements of the Bribery Act 2010 which comes into force in July this year.
Our customers Loss of engagement with our core clothing customer. As we seek to enhance the M&S brand and make our sub-brands more distinctive, it is important that we continue to address our core customers' specific needs.	To maintain our market-leading position for clothing, we continue to respond to our customers through focus groups, online reviews and our in-house Customer Insight Unit. Our marketing campaigns continue to be an important way of communicating with our customers, in order to keep the M&S brand fresh and at the forefront of their minds.
Food safety A food safety related incident occurs or is not effectively managed. As the leading retailer of fine quality fresh food in the UK, it is paramount that the food products we sell to our customers are safe.	We have a dedicated team in place responsible for ensuring that all M&S food products are safe for consumption through rigorous controls and processes, with a continuous focus on quality. We maintain robust governance of the food supply base through our long established supplier audit programme and reporting process.
Day-to-day operation - We are a customer-centric business and strive to deliver an efficient and effective operation.
The Group faces a number of operational risks on an ongoing basis, including: Stock management; Supply chain management; Key supplier failure; and IT security, each of which were disclosed in last year's Annual Report. We recognise that these are important and still subject to regular review, however this year we have sought to focus our disclosure on those that have been assessed as more significant to the Group.
The risks listed do not comprise all those associated with M&S and are not set out in any order of priority. Additional risks and uncertainties not presently known to management, or currently deemed to be less material, may also have an adverse effect on the business.
Financial risks and uncertainties
The principal financial risks faced by the Group are liquidity/funding, interest rate, foreign currency and counterparty risks. The policies and strategies for managing these risks are summarised as follows:
Liquidity/funding risk The risk that the Group could be unable to settle or meet its obligations as they fall due at a reasonable price.		The Group's funding strategy ensures a mix of funding sources offering flexibility and cost effectiveness to match the requirements of the Group. Operating subsidiaries are financed by a combination of retained profits, bank borrowings, medium-term notes and committed syndicated bank facilities.
Counterparty risk Counterparty risk exists where the Group can suffer financial loss through default or non-performance by financial institutions.		Exposures are managed through Group Treasury policy which limits the value that can be placed with each approved counterparty to minimise the risk of loss. The counterparties are limited to the approved institutions with secure long-term credit ratings A+/A1 or better assigned by Moody's and Standard & Poor's respectively, unless approved on an exception basis by a Board director. Limits are reviewed regularly by senior management. The credit risk of these financial instruments is estimated as the fair value of the assets resulting from the contracts. The Group has very low retail credit risk due to transactions being principally of a high volume, low value and short maturity.
Foreign currency risk Transactional foreign currency exposures arise from both the export of goods from the UK to overseas subsidiaries, and from the import of materials and goods directly sourced from overseas suppliers.		Group Treasury hedges these exposures principally using forward foreign exchange contracts progressively covering up to 100% out to 18 months. Where appropriate hedge cover can be taken out longer than 18 months, with Board approval. The Group is primarily exposed to foreign exchange risk in relation to sterling against movements in US dollar and euro. Forward foreign exchange contracts in relation to the Group's forecast currency requirements are designated as cash flow hedges with fair value movements recognised directly in comprehensive income. To the extent that these hedges cover actual currency payables or receivables, then associated fair value movements previously recognised in comprehensive income are recorded in the income statement in conjunction with the corresponding asset or liability. The Group uses a combination of foreign currency debt and derivatives to hedge balance sheet translation exposures. The Group also hedges foreign currency intercompany loans where these exist. Forward foreign exchange contracts in relation to the hedging of the Group's foreign currency intercompany loans are designated as held for trading with fair value movements being recognised in the income statement. The corresponding fair value movement of the intercompany loan balance results in an overall £nil impact on the income statement.
Interest rate risk The Group is exposed to interest rate risk in relation to the sterling, US dollar, euro and Hong Kong dollar variable rate financial assets and liabilities.		The Group's policy is to use derivative contracts where necessary to maintain a mix of fixed and floating rate borrowings to manage this risk. The structure and maturity of these derivatives correspond to the underlying borrowings and are accounted for as fair value or cash flow hedges as appropriate.

Directors' Responsibility Statement

The 2011 Annual Report contains the following statements regarding responsibility for the financial statements in compliance with DTR 4.1.12.  Responsibility is for the full Annual report and financial statements 2011 and not the condensed statements required to be set out in the Annual Financial Report announcement.

The directors are responsible for the maintenance and integrity of the Company's website.  Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.  Each of the directors confirm that, to the best of their knowledge:

- the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

- the Business review contained in the Annual report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

The Directors of Marks and Spencer Group plc are listed in the Group's 2011 Annual report, and on the Group's website: marksandspencer.com.

For further information, please contact:

Corporate Press Office: [phone]

 

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