Final Results
Marks & Spencer Group PLC
23 May 2006
23 May 2006
Marks and Spencer Group plc
Preliminary Results 2005/06
52 weeks ended 1 April 2006
Financial Highlights: unaudited 2005/06 2004/05 % inc
£m £m
• Group revenue 7,797.7 7,490.5 +4.1
UK 7,275.0 7,034.7 +3.4
International 522.7 455.8 +14.7
• Adjusted Group profit before tax* 751.4 556.1 +35.1
• Group profit before tax 745.7 505.1 +47.6
• Adjusted earnings per share* from 31.4p 19.2p +63.5
continuing operations
• Basic earnings per share 31.4p 29.1p +7.9
• Final dividend per share 9.2p 7.5p +22.7
• Total dividend per share 14.0p 12.1p +15.7
• Net cash inflow/(outflow) 550.5 (104.5)
• Net debt 1,729.3 2,277.2 **
* Adjusted Group profit before tax and adjusted earnings per share are internal
measures of performance which exclude the effect of exceptional items and asset
disposals. They provide additional information on the underlying performance of
the Group and are consistent with how we have reported previously under UK GAAP.
** Adjusted for the adoption of IAS 32 and 39 - 'Financial Instruments' to be
comparable with net debt at 1 April 2006.
Paul Myners, Chairman, commented:
'The Group has made good progress in a difficult environment. Adjusted earnings
per share at 31.4p are at an all time high. The Board is proposing a final
dividend of 9.2p per share, an increase of 22.7%, giving a full year dividend of
14.0p, an increase of 15.7%. The full year dividend is covered 2.2 times by
earnings. Having re-established cover at over 2 times, the Board's policy is to
grow dividends broadly in line with adjusted earnings per share growth for each
half of the Group's financial year.'
Stuart Rose, Chief Executive, said:
'The Group has had a good year. M&S is beginning to regain its confidence but
we still have much to do to ensure that we sustain growth in the long term. Our
key priority remains the revitalisation of our core business, building on the
work already in hand based on our principles of Quality, Value, Service,
Innovation and Trust and driving further progress in product, environment and
service.
'We need to drive sales, grow market share, improve the performance from our
existing stores and continue to buy better. We also need to manage stocks
tightly and mitigate significant cost pressures on fuel, energy, rent and rates
in a competitive retail environment. We are under no illusions about the work
necessary to place us firmly on a path to long term growth and are committed to
delivering this.
'I would like to take this opportunity of thanking all our staff for their hard
work throughout the year.'
Chief Executive's Statement:
In 2005/06 we said our priority was to drive the business, concentrating on
product, environment and service. This plan enabled us to deliver an improving
performance across the business as the year progressed. Food performed well,
thanks to our renewed focus on outstanding quality and innovation. Clothing
experienced a difficult first half as we continued to improve our product
styling and pricing, change our buying practices and rationalise our brands. The
second half was much stronger, with improving performances in Womenswear and
Menswear. Our Home business also made progress reflecting more competitive
pricing and a strong performance in furniture.
M&S continues to be the UK's leading retailer of Clothing and Footwear by both
value and volume. Throughout the year we improved market share and ended the
year ahead on volume (9.9% compared with 9.7% last year), as customers bought
more in response to better product and pricing, but behind on value at 10.2%
compared with 10.5% last year, primarily reflecting price deflation.
Our focus on full price sales has proved successful. At the end of the fourth
quarter we had achieved an improvement in full price market share in all
business areas for the first time in three years (9.2% to 10.1%). The gains were
most marked in Womenswear, including per una, where the improvement in product
and value attracted more customers with market share increasing from 8.6% to
10.0%.
Our Brand
We have worked hard to rebuild customer perceptions of the M&S brand. Our
external communication has focussed on Food and Womenswear; areas that define M&
S and most influence how customers perceive the brand. In store we have
developed innovative and stylish new packaging and point of sale material to
communicate our brand values in a more distinctive way. This Spring, we
launched our 'Look Behind the Label' campaign which was designed to highlight
our stance on ethical and product issues which are so important to our
customers. Customer reaction has been very positive.
Response to our brand building throughout the year has been encouraging - not
just from customers, but from key stakeholders. We have been able to demonstrate
a clear upturn in brand momentum measures as a result of our creative campaigns
and customers have voted with their feet. Levels of footfall have recovered to
the highs in 2002 with customer visits increasing by nearly 350,000 a week to
just over 15 million a week (last year 14.7m). We are now starting to convert
more of these visits to transactions. This will be a key area for improvement in
the year ahead.
Product
Improving our values was, and remains, a key objective. We re-priced ranges
across all price points, without compromising our quality standards, with
particular emphasis on opening price points. Around 30% of our sales now come
from opening price point merchandise compared with 12% in 2003/04. Price
realignment, better buying and control of stocks and markdowns have
significantly improved our margins in General Merchandise this year. Customer
perceptions on the value we offer have improved steadily throughout the year.
Value will continue to be a key driver across all price points. We are committed
to maintaining our competitiveness.
Better buying practices are key to driving the business as we become more
demand-led. We now have offices in Istanbul, Hong Kong, Bangalore, Bangladesh
and Sri Lanka. Delhi and Shanghai will open this year. This gives us a
substantial international presence enabling us to work more quickly and
effectively with our supply base, sourcing more efficiently with greater
flexibility, and ensuring our strict trading standards are met. Better
sourcing, coupled with tighter stock controls, is also enabling us to deliver
higher volumes, higher margins and better cash flow for suppliers. During the
year, we increased the amount of product we buy direct to around 25% (last year
20%).
'Open To Buy' was introduced across General Merchandise during the year enabling
us to deliver the latest trends, introduce more new product and chase fast
sellers. This will be extended further in the coming year.
We also introduced more stylish, wearable merchandise, stepping up innovation
across all product ranges. In Food, innovative product development and
relentless commitment to quality continues to set us apart. For example, we
introduced our unique, additive-free 'Cook!' range and committed to remove
hydrogenated fats from virtually all of our food products by the end of 2006.
Environment
By the end of 2006 nearly everyone in the UK should be within easy reach of a
modernised M&S store. In 2004/05, we trialled the new look in four stores. This
was extended to 23 stores by the end of 2005/06. As well as enhancing customer
perceptions of the brand, the trials generated good returns with sales growth
averaging 10% in the fourth quarter. We are now extending this programme and by
the end of 2006 we will have modernised some 35% of our floor space, as part of
a £500m-plus capital expenditure programme, introducing better design, lighting,
layout, equipment, changing rooms, service areas and cafes.
In order to drive our Food business, we opened a further 25 'Simply Food' stores
during the year and concluded a £38m deal to buy 28 former Iceland stores which
will open this summer as 'Simply Food' outlets. We are also trialling a 'Simply
Food' offer in nine BP Connect service stations. If this trial is successful,
there will be significant opportunity for expansion in the coming years.
Service
Outstanding customer service is the third key part of our plan. Starting in June
2005, all 56,000 of our store colleagues participated in the 'Our Service Style'
programme. We also restructured customer assistants' pay, introducing some of
the best rates on the high street, and offered a new, clearer career path.
We need to do more to further improve service. Our aim is to make service
training part of everyday life and we will be adding more specialist sales staff
in areas such as suiting, lingerie, footwear and foods. Our aim is to make sure
we always have well-motivated, properly trained people in the right place at the
right time to help our customers.
Fantastic product, better stores and outstanding service has delivered better
sales and profits. As a result, we have been able to reward all our staff with a
record bonus payout totalling £73m. We hope to be able to repeat this in the
coming year.
Looking ahead
Continuing to improve product, environment and service will remain our priority.
Our focus will be on driving sales and market share from our existing space. We
will continue to improve the efficiency of our supply chain through better
buying, greater flexibility, better catalogue and stock control, and continued
management of markdowns and waste. We are rolling out a substantial store
modernisation programme. We will continue to drive through further improvements
in service and improve availability.
We will also begin to broaden our business, focussing on reaching a wider
customer base and stretching our brand reach. We are extending our Food business
with the Simply Food programme, continuing to take our outstanding food to new
customers. Our work with Amazon will significantly improve our e-commerce
functionality as it comes on stream in 2007. We continue to look for
opportunities to expand our international business.
Financial Review:
Summary of Results: unaudited 2005/06 2004/05 % inc
£m £m
Total revenue 7,797.7 7,490.5 4.1
UK 7,275.0 7,034.7 3.4
International 522.7 455.8 14.7
Operating profit before exceptional charges and asset disposals 855.8 649.1 31.8
UK 790.1 588.4 34.3
International 65.7 60.7 8.2
Profit before tax, exceptional charges and asset disposals 751.4 556.1 35.1
Loss on property disposals (5.7) (0.4)
Exceptional operating charges - (50.6)
Profit before tax 745.7 505.1 47.6
Adjusted EPS from continuing operations 31.4p 19.2p 63.5
Dividend per share (declared) 14.0p 12.1p 15.7
The figures above exclude the results of Kings Super Markets which has been
treated as a discontinued operation.
UK
Revenue for the 52 weeks ended 1 April 2006 was £7,275.0m, up 3.4% and up 1.3%
on a like-for-like basis. Sales of General Merchandise remained broadly level,
with Clothing sales flat and Home seeing a 0.8% increase. Food recorded strong
growth of 7%. An analysis of sales trends by business area, is shown below:
H1% H2% FY%
Revenue
Clothing -4.9 +4.4 0.0
Home -11.2 +10.5 +0.8
General Merchandise -5.5 +5.0 +0.1
Food +5.6 +8.2 +7.0
Total -0.2 +6.6 +3.4
Like-for-Like H1% H2% FY%
General Merchandise -6.1 +3.5 -1.0
Food +1.6 +5.4 +3.6
Total -2.3 +4.5 +1.3
In Clothing, better values, better buying, and better styling resulted in better
performance as the year progressed with sales up 4.4% in the second half.
Womenswear benefited from well-received ranges, including more frequent
additions of new product into stores. Per una had another very strong year.
Menswear rationalised its brands and extended its Autograph offer. Lingerie
benefited from a clearer offer with five brands, including the new per una
range. We restructured our Childrenswear area, where performance was weak, with
the aim of regaining a leading position in this important market. Our decision
to concentrate our Home offer on stylish outstanding value products with
mainstream appeal and very competitive pricing led to increased sales, supported
by a particularly strong performance in furniture.
Food had a very successful year with sales up 7.0%, up 3.6% on a like-for-like
basis. This was driven by our renewed focus on outstanding quality and
innovation, backed by powerful advertising. We successfully tapped demand for
responsibly sourced, healthy food, not least with our additive-free 'Cook!'
range. We continue to offer everyday food of exceptional quality, like our
Oakham chicken, and customers again made us their first choice at key times like
Christmas and Easter. Our 'Simply Food' stores performed strongly.
UK operating profit before exceptional items and asset disposals was £790.1m, up
34.3% (last year £588.4m). This growth reflects the benefits of the actions
taken last year to improve supplier terms and control stock and commitment,
contributing to an increase in the gross margin of 3.6 percentage points to
42.8% (last year 39.2%). UK operating costs of £2,330.4m were up 7.4% on the
year, reflecting the impact of new space and the provision for a staff bonus of
£73m. Excluding the bonus, costs were up 4.1%. The UK operating profit also
includes a contribution of £9.6m from the Group's continuing economic interest
in M&S Money which was sold to HSBC in November 2004.
International
Our International business, comprising franchise and wholly-owned stores in Hong
Kong and the Republic of Ireland, continued to make good progress with sales up
14.7% and operating profit up 8.2% (before exceptional charges and asset
disposals).
Our franchise operation continues to grow with 198 stores in 31 territories.
This year saw openings in the Czech Republic, India, Indonesia, Poland, Saudi
Arabia and South Korea. We also opened our first franchise in Moscow.
Our wholly-owned stores in the Republic of Ireland also continued to perform
well, reflecting both new openings, and improvement in the performance of
existing stores. Underlying sales and profit in Hong Kong were strong but
overall results were affected by loss of space following the unplanned closure
of one store.
We agreed the sale of Kings Super Markets in the US, our only non-M&S branded
business, for £35.4m ($61.5m) ahead of the year end. The sale completed on 28
April 2006.
Net interest payable
2005/06 2004/05
£m £m
Interest payable (134.9) (120.9)
Interest receivable 13.0 16.5
Net interest payable (121.9) (104.4)
Other finance income 17.5 11.4
Total (104.4) (93.0)
Net interest expense was £104.4m compared to £93.0m last year. This largely
reflects a significant increase in average net debt following the Tender Offer
last year. The average rate of interest on borrowings for the year was 5.8%
(last year 5.7%).
Taxation
The tax charge reflects an effective tax rate for the year of 30.2%, (compared
to 29.7% for the last full year).
Shareholder returns and dividends
Adjusted earnings per share from continuing operations, which excludes the
effect of exceptional items and asset disposals, increased by 63.5% to 31.4p per
share. The average number of shares in issue during the period was 1,667.0m
(last year 2,006.2m), reflecting the impact of the Tender Offer last year.
The Board is proposing a final dividend of 9.2p per share (last year 7.5p per
share), an increase of 22.7%, bringing the full year dividend to 14.0p (last
year 12.1p), an increase of 15.7%. Full year dividend is covered 2.2 times by
earnings.
Cash flow and net debt
The Group generated net cash flow of £550.5m. Cash inflow from continuing
operating activities increased by £309.2m to £1,183.6m reflecting higher
operating profits, a marginally lower investment in working capital, and a
reduction in cash outflows relating to exceptional items. Within working
capital, investments in stock have been more than offset by the £73m bonus which
has been provided for, but will not be paid until July, together with an
increased level of trade payables.
During the year, the Group acquired tangible fixed assets of £326.8m. After
taking into account the timing of payments, the cash outflow for capital
expenditure was £298.5m. This excludes the £38.0m the Group paid to acquire 28
properties from Iceland which is included as a movement in working capital,
reflecting the revised classification of certain leasehold interests.
Net debt at the end of the year is £1,729.3m (last year £2,277.2m).
Capital expenditure
Group capital additions for the year were £326.8m compared to £218.5m last year,
reflecting the extension of the store modernisation programme. In the year we
added 1.4% to our total footage, representing an increase of 1% in General
Merchandise and 2.3% in Foods. Group capital expenditure for 2006/07 is expected
to be between £520m to £570m.
Pensions
The Group paid £51m of additional contributions into the UK Defined Benefit
Pension Scheme in April 2005. This payment is reflected in the net
post-retirement liability of £794.9m at 1 April 2006 (last year £676.0m). The
£118.9m increase in the level of this liability since the year end reflects
movements in AA corporate bond rates, partially offset by an increase in the
market value of scheme assets.
Guidance for the financial year 2006/07
The following guidance was provided in our Q4 trading update on 11 April 2006:
• The planned opening of new footage will add around 3% to total space,
representing a c.2% increase in General Merchandise footage and c.5% increase
in Food footage, on a weighted average basis. Total square footage at 1 April
2006 was around 13.1m square feet.
• Group capital expenditure for 2006/07 is expected to be in the range
of £520-570m. This includes £28m for the refurbishment of the Iceland stores.
• Gross margin is expected to improve between 50 to 100bps. This will be
driven mainly by improvements in General Merchandise primary margin from
better buying and improved supplier terms.
• Operating costs, including costs associated with new space and the
modernisation programme (including accelerated depreciation), but excluding
provision for bonus payments, are expected to increase by 6% to 7%. Any bonus
payment for 2006/07 will depend on the financial performance of the Group.
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.
For further information, please contact:
Investor Relations: Media enquiries:
Amanda Mellor +44 (0)20 8718 3604 Corporate Press Office: +44 (0)20 8718 1919
Majda Rainer +44 (0)20 8718 1563
Investor & Analyst webcast:
There will be an investor and analyst presentation at 09.00 (BST) on Tuesday 23
May 2006: This presentation can be viewed live on the Marks and Spencer Group
plc website on www.marksandspencer.com/thecompany
Fixed Income Investor Conference Call:
This will be hosted by Ian Dyson at 14.30 (BST) on Tuesday 23 May 2006:
Dial in number: +44 (0) 20 7190 1596/0800 358 5263
A recording of this call will be available until Tuesday 30 May 2006:
Dial in number: +44 (0) 20 8515 2499 Access Code: 443491#
Video interviews with Stuart Rose, Chief Executive and Ian Dyson, Group Finance
Director are be available at www.marksandspencer.com/thecompany or
www.cantos.com. The interviews are also available in audio and transcript.
Consolidated income statement : unaudited
Year ended Year ended
1 Apr 2006 2 Apr 2005
Notes £m £m
Revenue 2 7,797.7 7,490.5
Operating profit
Before exceptional operating charges 850.1 648.7
Exceptional operating charges 4 - (50.6)
3 850.1 598.1
Interest payable and similar charges (134.9) (120.9)
Interest receivable 30.5 27.9
Profit on ordinary activities before
taxation 745.7 505.1
Analysed between:
Before exceptional operating charges
and property disposals 751.4 556.1
Loss on property disposals (5.7) (0.4)
Exceptional operating charges - (50.6)
Income tax expense 5 (225.1) (150.1)
Profit on ordinary activities after taxation 520.6 355.0
Profit from discontinued operations 6 2.5 231.2
Profit for the year attributable to
shareholders 523.1 586.2
Earnings per share 7A 31.4p 29.1p
Diluted earnings per share 7B 31.1p 28.9p
Earnings per share from continuing
operations 7A 31.3p 17.6p
Diluted earnings per share from continuing
operations 7B 31.0p 17.4p
Non-GAAP measure:
Adjusted profit before tax (£m) 1 751.4 556.1
Adjusted earnings per share 7A 31.4p 19.2p
Adjusted diluted earnings per share 7B 31.1p 19.0p
Consolidated statement of recognised income and expense : unaudited
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
Profit for the year attributable to shareholders 523.1 586.2
Exchange differences on translation of foreign
operations 11.1 -
Actuarial losses on defined benefit pension schemes (169.3) (78.1)
Tax on items taken directly to equity 80.7 24.9
Hedging reserve
- fair value movement (3.1) -
- recycled and reported in net profit (1.4) -
- amount recognised in inventories (3.8) -
Net losses not recognised in the income statement (85.8) (53.2)
Total recognised income and expense for the year 437.3 533.0
Effect of changes in accounting policy:
First time adoption of IAS 39 (net of tax) (1.9)
Consolidated balance sheet : unaudited
As at As at
1 Apr 2006 2 Apr 2005
£m £m
ASSETS
Non-current assets
Intangible assets 163.5 165.4
Property, plant and equipment 3,575.8 3,586.2
Investment property 38.5 38.6
Investments in joint venture 9.0 8.7
Other financial assets 3.3 0.3
Trade and other receivables 242.8 211.2
Deferred income tax assets 35.5 24.6
4,068.4 4,035.0
Current assets
Inventories 374.3 338.9
Other financial assets 48.8 67.0
Trade and other receivables 210.5 213.8
Derivative financial instruments 76.4 -
Cash and cash equivalents 362.6 212.6
Assets of discontinued operation 69.5 -
1,142.1 832.3
TOTAL ASSETS 5,210.5 4,867.3
LIABILITIES
Current liabilities
Trade and other payables 867.8 717.9
Derivative financial instruments 8.0 -
Borrowings 1,052.8 478.8
Current tax liabilities 58.7 15.5
Provisions 9.2 25.2
Liabilities of discontinued operation 20.5 -
2,017.0 1,237.4
Non-current liabilities
Borrowings 1,133.8 1,948.5
Retirement benefit obligations 794.9 676.0
Other non-current liabilities 74.8 71.8
Derivative financial instruments 9.5 -
Provisions 19.1 19.7
Deferred income tax liabilities 6.1 4.7
2,038.2 2,720.7
TOTAL LIABILITIES 4,055.2 3,958.1
NET ASSETS 1,155.3 909.2
EQUITY
Called up share capital - equity 420.6 414.5
Called up share capital - non-equity - 65.7
Share premium account 162.3 106.6
Capital redemption reserve 2,113.8 2,102.8
Hedging reserve (8.0) -
Other reserves (6,542.2) (6,542.2)
Retained earnings 5,008.8 4,761.8
TOTAL EQUITY 1,155.3 909.2
Consolidated cash flow information : unaudited
CASH FLOW STATEMENT
Year ended Year ended
1 Apr 2006 2 Apr 2005
Notes £m £m
Cash flows from operating activities
- continuing
Profit on ordinary activities after
taxation 520.6 355.0
Income tax expense 225.1 150.1
Interest payable and similar charges 134.9 120.9
Interest receivable (30.5) (27.9)
Exceptional operating charges - 50.6
Operating profit before exceptional
operating charges 850.1 648.7
Decrease in working capital 10A 43.7 22.7
Exceptional operating cash outflow (14.6) (74.6)
Depreciation and amortisation 274.0 255.0
Share-based payments 24.7 22.2
Loss on property disposals 5.7 0.4
Cash generated from operations
- continuing 1,183.6 874.4
Cash generated from operations
- discontinued 10B 13.9 727.4
Tax paid (101.5) (166.7)
Net cash inflow from operating activities 1,096.0 1,435.1
Cash flows from investing activities
Acquisition of subsidiary, net of cash
acquired - (125.9)
Disposal of subsidiary, net of cash disposed - 477.0
Capital expenditure and financial investment 10C (266.3) (113.5)
Interest received 12.9 15.4
Net cash (outflow)/inflow from investing
activities (253.4) 253.0
Cash flows from financing activities
Debt financing 10D (562.8) 637.8
Equity financing 10E (148.3) (2,502.0)
Net cash outflow from financing activities (711.1) (1,864.2)
Net cash inflow/(outflow) from activities 131.5 (176.1)
Effects of exchange rate changes 1.6 1.1
Opening net cash 149.3 324.3
Closing net cash 282.4 149.3
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
Opening net debt (2,147.7) (2,043.9)
Reclassification on the adoption of IAS 32
and 39 (129.5) -
Opening net debt - under IFRS (2,277.2) (2,043.9)
Net cash inflow/(outflow) from activities 131.5 (176.1)
Cash inflow from decrease in current asset
investments (1.0) (11.0)
Cash outflow/(inflow) from decrease/(increase)
in debt financing 10D 420.0 (757.1)
Debt financing net of liquid resources
disposed with subsidiary - 839.7
Exchange and other movements (2.6) 0.7
Movement in net debt 547.9 (103.8)
Closing net debt (1,729.3) (2,147.7)
1 General information and basis of preparation
The results comprise those of Marks and Spencer Group plc and its subsidiaries
for the 52 week year ended 1 April 2006 and have been prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted for use in
the EU, and those parts of the Companies Act 1985 applicable to those companies
under IFRS. The summary of results does not constitute the full financial
statements within the meaning of s240 of the Companies Act 1985. The full
financial statements for 2005, which were prepared under UK GAAP, have been
reported on by the Group's auditors and delivered to the Registrar of Companies.
The audit report on those financial statements was unqualified and did not
contain a statement under s237(2) or s237(3) of the Companies Act 1985. The
full financial statements for 2006, prepared under IFRS, will be finalised in
due course and delivered to the Registrar of Companies after the AGM.
The Directors believe that the 'adjusted' profit and earnings per share measures
provide additional useful information for shareholders on underlying performance
of the business, and are consistent with how business performance is measured
internally. It is not a recognised profit measure under IFRS and may not be
directly comparable with 'adjusted' profit measures used by other companies.
2 Revenue
The Group's primary reporting segments are geographic, with the Group operating
in two geographic areas being the UK and International. The geographic segments
disclose revenue and operating profit by destination and reflect management
responsibility. Within each geographic segment the Group sells both Food and
General Merchandise.
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
UK Retail 7,275.0 7,034.7
International Retail(1) 522.7 455.8
Total revenue 7,797.7 7,490.5
(1) International Retail consists of the Marks & Spencer owned businesses in the
Republic of Ireland and Hong Kong, together with franchise operations.
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
UK Retail
General Merchandise 3,644.4 3,641.6
Food 3,630.6 3,393.1
International Retail
General Merchandise 366.0 331.1
Food 156.7 124.7
Total revenue 7,797.7 7,490.5
3 Operating profit
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
UK Retail(1)
Before exceptional operating charges and property
disposals 790.1 588.4
Property disposals (5.6) (0.1)
Exceptional operating charges - (60.3)
784.5 528.0
International Retail
Before exceptional operating charges and property
disposals 65.7 60.7
Property disposals (0.1) (0.3)
Exceptional operating charges - 9.7
65.6 70.1
Total operating profit 850.1 598.1
(1) UK Retail operating profit includes a contribution of £9.6m from the
arrangement with HSBC.
4 Exceptional items
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
Head office relocation - (8.8)
Head office change programme - (6.3)
Board restructure - (8.4)
Closure of Lifestore - (29.3)
Defence costs - (38.6)
Sale of head office premises - 31.1
Release of provision held against European closure - 9.7
Exceptional items - (50.6)
5 Taxation
The taxation charge for the 52 weeks ended 1 April 2006 was £225.1m (last year
£150.1m), giving an effective tax rate of 30.2% (last year 29.7%). Included in
the tax charge for the year is a credit of £nil (last year £19.1m), which is
attributable to exceptional operating charges.
6 Discontinued operations
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
Profit before tax 3.2 35.5
Taxation on results (0.7) (2.4)
Profit after tax 2.5 33.1
Gain on disposal of subsidiary net assets - 199.0
Taxation - (0.9)
Net gain on disposal - 198.1
Profit from discontinued operations 2.5 231.2
The profit after tax from discontinued operations in the current year is
entirely attributable to Kings Super Markets (last year £3.9m). The balance of
last year's profit after tax, together with the net gain on disposal is entirely
attributable to the sale of Marks and Spencer Retail Financial Services Holdings
to HSBC Holdings plc completed on 9 November 2004.
7 Earnings per share
The calculation of earnings per ordinary share is based on earnings after tax
(last year earnings after tax and non-equity dividends), and the weighted
average number of ordinary shares in issue during the year.
The adjusted earnings per share figures have been calculated in addition to the
earnings per share required by IAS 33 - 'Earnings per Share' and are based on
earnings excluding the effect of exceptional items and property disposals.
These have been calculated to allow the shareholders to gain an understanding of
the underlying trading performance of the Group.
For diluted earnings per share, the weighted average number of ordinary shares
in issues is adjusted to assume conversion of all dilutive potential ordinary
shares. The Group has only one class of dilutive potential ordinary shares
being those share options granted to employees where the exercise price is less
than the average market price of the Company's ordinary shares during the year.
Details of the adjusted earnings per share are set out below:
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
Earnings after tax and non-equity dividends 523.1 583.4
Profit from discontinued operations (2.5) (231.2)
Earnings after tax and non-equity dividends
- continuing 520.6 352.2
Exceptional operating charges and property
disposals (net of taxation) 2.0 31.5
Adjusted earnings after tax and non-equity
dividends - continuing 522.6 383.7
Weighted average number of ordinary shares in
issue (millions) 1,667.0 2,006.2
Potentially dilutive share options under Group's
share option schemes (millions) 14.5 12.1
1,681.5 2,018.3
A Basic earnings per share
Weighted average number of ordinary shares in
issue (millions) 1,667.0 2,006.2
Basic earnings per share (pence) 31.4 29.1
Profit from discontinued operations per share
(pence) (0.1) (11.5)
Basic earnings per share - continuing (pence) 31.3 17.6
Exceptional operating charges and property disposals
per share (pence) 0.1 1.6
Adjusted basic earnings per share - continuing (pence) 31.4 19.2
B Diluted earnings per share
Weighted average number of ordinary shares in issue
(millions) 1,681.5 2,018.3
Diluted earnings per share (pence) 31.1 28.9
Profit from discontinued operations per share (pence) (0.1) (11.5)
Diluted earnings per share - continuing (pence) 31.0 17.4
Exceptional operating charges and property disposals
per share (pence) 0.1 1.6
Diluted adjusted basic earnings per share -
continuing (pence) 31.1 19.0
8 Dividends
Year ended Year ended Year ended Year ended
1 Apr 2006 2 Apr 2005 1 Apr 2006 2 Apr 2005
per share per share £m £m
Dividends on equity ordinary
shares:
Paid final dividend 7.5p 7.1p 124.3 161.3
Paid interim dividend 4.8p 4.6p 79.8 75.6
12.3p 11.7p 204.1 236.9
Dividends on non-equity B
shares(1)
Interim dividend - 3.36% - 1.4
Final dividend - 3.78% - 1.4
- 2.8
204.1 239.7
(1) Under IAS 32 - 'Financial Instruments' dividends on non-equity shares are
now treated as part of interest.
The Directors have proposed a final dividend of 9.2p per share (last year 7.5p
per share) which, in line with the requirements of IAS 10 - 'Events after the
Balance Sheet Date', has not been recognised within these results. This makes a
total ordinary dividend of 14.0p per share (last year 12.1p per share). This
results in an ordinary dividend of £154.8m (last year £124.3m) which will be
paid on 14 July 2006 to shareholders whose names are on the Register of Members
at the close of business on 2 June 2006. The ordinary shares will be quoted ex
dividend on 31 May 2006. Shareholders may choose to take this dividend in
shares or in cash.
9 Statement of changes in shareholders' equity
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
Opening shareholders' equity 909.2 2,859.1
First time adoption of IAS 32 and 39 (see note 12) (67.6) -
841.6 2,859.1
Profit for the year attributable to shareholders 523.1 586.2
Dividends (204.1) (239.7)
(Purchase) / sale of shares held by employee trusts (6.0) 0.3
Shares issued on exercise of share options 61.8 68.4
Redemption of B shares - (19.2)
Actuarial loss on post-retirement liability (169.3) (78.1)
Foreign currency translation 11.1 -
Charge for share-based payments 24.7 22.2
Tax on items taken directly to equity 80.7 24.9
Loss on cashflow hedges deferred in equity (8.3) -
Purchase of own shares - (2,300.0)
Tender Offer expenses - (14.9)
Closing shareholders' equity 1,155.3 909.2
10 Cash flow analysis
Year ended Year ended
1 Apr 2006 2 Apr 2005
£m £m
A Decrease in working capital - continuing
(Increase)/decrease in inventories (42.2) 55.0
Increase in receivables (4.1) (1.0)
Payments to acquire leasehold properties (38.0) (0.1)
Increase/(decrease) in payables 128.0 (31.2)
43.7 22.7
B Cash flows from discontinued operations
Profit on ordinary activities after taxation 2.5 231.2
Profit on sale - (199.0)
Taxation 0.7 3.3
Interest payable and similar charges 0.4 0.2
Interest receivable (0.6) -
Operating profit 3.0 35.7
Decrease in working capital 3.5 682.0
Depreciation and amortisation 6.3 9.7
Loss on property disposals 1.1 -
13.9 727.4
C Capital expenditure and financial investment
Purchase of property, plant and equipment (298.5) (232.2)
Proceeds from sale of property, plant and equipment 45.1 117.8
Purchase of intangible fixed assets (10.9) (10.9)
(Purchase)/sale of non-current financial assets (3.0) 0.8
Sale of current available for sale investments 1.0 11.0
(266.3) (113.5)
D Debt financing
Cash (outflow)/inflow from borrowings (144.6) 649.0
(Repayment)/drawdown of syndicated bank facility (200.0) 200.0
Redemption of securitised loan notes (3.1) (2.8)
Redemption of medium term notes (58.3) (95.2)
Decrease in obligations under finance leases (3.0) (1.6)
Redemption of B shares (11.0) -
Movement in other creditors treated as financing - 7.7
Cash (outflow)/inflow from debt financing (420.0) 757.1
Interest paid (142.8) (116.5)
Non-equity dividends paid - (2.8)
(562.8) 637.8
E Equity financing
Equity dividends paid (204.1) (236.9)
Shares issued under employee share schemes 61.8 68.4
Redemption of B shares - (19.2)
Net (purchase)/sale of own shares held in employee
trusts (6.0) 0.6
Purchase of own shares - (2,300.0)
Tender Offer expenses - (14.9)
(148.3) (2,502.0)
11 Adoption of International Financial Reporting Standards
As at As at
2 Apr 3 Apr
2005 2004
£m £m
Net assets under UK GAAP 521.4 2,454.0
Adjustments (after taxation)
IFRS 1- 'Property Revaluation' a 376.2 378.5
IFRS 2 - 'Share Schemes' b 9.8 6.2
IAS 10 - 'Dividend Recognition' c 124.3 160.7
IAS 17 - 'Leases'
Treatment of leasehold land d (72.4) (102.4)
Finance leases e (1.8) (1.7)
Lease incentives f (21.0) (17.2)
Fixed rental uplifts g (13.5) (10.3)
IAS 19 - 'Employee Benefits' h (27.2) (30.7)
IAS 38 - 'Intangible Assets'
Software assets i 13.0 22.7
Goodwill and brands j 1.3 -
Other (0.9) (0.7)
Net assets under IFRS 909.2 2,859.1
Year
ended
2 Apr
2005
£m
Net income under UK GAAP 587.0
Adjustments (before taxation)
IFRS 1- 'Property Revaluation' a 1.1
IFRS 2 - 'Share Schemes' b (23.0)
IAS 17 - 'Leases'
Treatment of leasehold land d 29.9
Finance leases e (0.2)
Lease incentives f (5.1)
Fixed rental uplifts g (4.5)
IAS 19 - 'Employee Benefits' h 5.3
IAS 38 - 'Intangible Assets'
Software assets i 1.4
Goodwill and brands j 0.5
Other (0.1)
5.3
Taxation 4.6
Discontinued operations - software assets (10.7)
Net income under IFRS 586.2
a) IFRS 1 - 'Property Revaluation'
Under UK GAAP property was stated at historical cost, subject to certain
properties having been revalued as at 31 March 1988. A property revaluation was
prepared on an existing use basis by external valuers DTZ Debenham Tie Leung
as at 2 April 2004. The Group has elected under IFRS 1 to reflect this
valuation, in so far as it relates to freehold land and buildings, as deemed
cost on transition at 4 April 2004.
b) IFRS 2 - 'Share Schemes'
The Group operates a range of share-based incentive schemes. Under UK GAAP where
shares (or rights to shares) were awarded to employees, UITF 17 required that
the charge to the profit and loss account should be based on the difference
between the market value of shares at the date of grant and the exercise price
(i.e. an intrinsic value basis) spread over the performance period.
Save As You Earn (SAYE) Share Option Schemes were exempt from this
requirement and no charge was made. IFRS 2 requires that all shares or options
(including SAYE) awarded to employees as remuneration should be measured at
fair value at grant date, using an option pricing model, and charged
against profits over the period between grant date and vesting date, being the
vesting period. This treatment has been applied to all awards granted but
not fully vested at the date of transition.
c) IAS 10 - 'Events after the Balance Sheet Date'
Under UK GAAP, dividends are recognised in the period to which they relate. IAS
10 requires that dividends declared after the balance sheet date should not
be recognised as a liability at that balance sheet date as the liability does
not represent a present obligation as defined by IAS 37 - 'Provisions,
Contingent Liabilities, and Contingent Assets'. Accordingly the final
dividends for 2003/04 (£160.7m) and 2004/05 (£124.3m) are derecognised
in the balance sheets for April 2004 and April 2005 respectively.
d) IAS 17 - 'Leases - Treatment of Leasehold Land'
The Group previously recognised finance leases under the recognition criteria
set out in SSAP 21. IAS 17 requires the land and building elements of
property leases to be considered separately, with leasehold land normally
being treated as an operating lease. As a consequence, payments made to acquire
leasehold land, previously treated as fixed assets, have been re-
categorised as prepaid leases and amortised over the life of the lease. In
addition the revaluation previously attributed to the land element has been
derecognised.
e) IAS 17 - 'Leases - Finance Leases'
Also under the provisions of IAS 17, the building elements of certain property
leases, classified as operating leases under UK GAAP, have been reclassified as
finance leases. The adjustments are to include the fair value of these leased
buildings within fixed assets and to set up the related obligation, net of
finance charges, in respect of future periods, within creditors.
f) IAS 17 ' Leases - Lease Incentives'
Under UK GAAP, leasehold incentives received on entering into property leases
were recognised as deferred income on the balance sheet and amortised to
the profit and loss account over the period to the first rent review. Under
IAS 17, these incentives have to be amortised over the term of the lease.
Consequently, as the term of the lease is longer than the period to the first
rent review, amounts previously amortised to the profit and loss account
are reinstated on the balance sheet as deferred income and released over the
term of the lease.
g) IAS 17 - 'Leases - Fixed Rental Uplifts'
The Group has a number of leases that contain predetermined, fixed rental
uplifts. Under IAS 17, it is necessary to account for these leases such
that the predetermined, fixed rental payments are recognised on a straight
line basis over the life of the lease. Under UK GAAP, the Group accounted for
these property lease rentals such that the increases were charged in the
year that they arose.
h) IAS 19 - 'Employee Benefits'
Previously no provision was made for holiday pay. Under IAS 19 - 'Employee
Benefits' the expected cost of compensated short-term absences (e.g.
holidays) should be recognised when employees render the service that
increases their entitlement. As a result, an accrual has been made for holidays
earned but not taken.
i) IAS 38 - 'Software Assets'
The cost of developing software used to be written off as incurred. Under IAS 38
- 'Intangible Assets' there is a requirement to capitalise internally generated
intangible assets provided certain recognition criteria are met. Results have
been adjusted to reflect the capitalisation and subsequent amortisation of costs
that meet the criteria. As a result expenses previously charged to the profit
and loss account have been brought onto the balance sheet as intangible software
assets and amortised over their estimated useful lives.
j) IAS 38 - 'Goodwill'
Goodwill used to be capitalised and amortised over its useful economic life.
Under IAS 38 - 'Intangible Assets' there is a requirement to separately identify
brands and other intangibles acquired rather than include these as part of
goodwill. Intangible assets, other than goodwill, are amortised over their
useful lives. Goodwill, which is considered to have an indefinite life, is
subject to an annual impairment review. As a result, the goodwill recognised
under UK GAAP on the acquisition of per una of £125.5m has been split between
brand (£80m) and goodwill (£45.5m). The goodwill amortisation under UK GAAP has
been reversed but the brand has been amortised as required under IFRS.
12 First time adoption of IAS 32 and 39
The adoption of IAS 32 - 'Financial Instruments: Disclosure and Presentation'
and IAS 39 - 'Financial Instruments: Recognition and Measurement' with
effect from 3 April 2005 results in a change in the Group's accounting
policy for financial instruments. The impact of these standards on the Group's
opening balance sheet is shown below.
The principal impacts of IAS 32 and IAS 39 on the Group's financial statements
relate to the recognition of derivative financial instruments at fair value
and the reclassification of non-equity B shares as debt. Any derivatives
that do not qualify for hedge accounting are held on the balance sheet at fair
value with the changes in value reflected through the income statement.
The accounting treatment of derivatives that qualify for hedge accounting
depends on how they are designated, as follows:
Fair value hedges
The Group uses interest rate swaps to hedge the exposure to interest rates of
its issued debt. Under UK GAAP, derivative financial instruments were not
recognised at fair value in the balance sheet.
Under IAS 39, derivative financial instruments that meet the
'fair value' hedging requirements are recognised in the balance sheet at fair
value with corresponding fair value movements recognised in the income
statement. For an effective fair value hedge, the hedged item is adjusted for
changes in fair value attributable to the risk being hedged with the
corresponding entry in the income statement. To the extent that the designated
hedge relationship is fully effective, the amounts in the income statement
offset each other. As a result, only the ineffective element of any designated
hedging relationship impacts the financing line in the income statement.
Cash flow hedges
Under IAS 39, derivative financial instruments that qualify for cash flow
hedging are recognised on the balance sheet at fair value with corresponding
fair value changes deferred in equity. In addition, the Group hedges the foreign
currency exposure on inventory purchases. Under UK GAAP, foreign currency
derivatives were held off balance sheet and these are now treated as cash
flow hedges.
The adjustments to the opening balance sheet as at 3 April 2005 are as follows:
Restated
Opening Effect opening
balance of position
sheet IAS 32 at
under and 3 Apr
IFRS IAS 39 2005
£m £m £m
Non-current assets
Derivative financial instruments - 71.1 71.1
Deferred tax asset 24.6 1.3 25.9
Current assets
Derivative financial instruments - 2.8 2.8
Inventories 338.9 0.4 339.3
Current liabilities
Derivative financial instruments - (1.9) (1.9)
Borrowings (478.8) (66.2) (545.0)
Trade and other payables (717.9) 24.7 (693.2)
Non-current liabilities
Derivative financial instruments - (12.0) (12.0)
Borrowings (1,948.5) (87.8) (2,036.3)
Impact on net assets (67.6)
Non-equity B shares (65.7)
Hedging reserve (1.6)
Retained earnings (0.3)
Impact on shareholders' funds (67.6)
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