Final Results - Part 1
Marks & Spencer PLC
23 May 2000
PART 1
MARKS AND SPENCER PLC
PRELIMINARY RESULTS ANNOUNCEMENT
FINANCIAL YEAR ENDED 31 MARCH 2000
Group sales £8.2 billion (last year: £8.2 billion)
£557.2 million profit before tax and exceptional items
(last year: £628.4 million).
The 52-week equivalent profit is estimated at £517.2 million.
Full year dividend of 9.0p proposed (last year: 14.4p)
Commenting on these results, Peter Salsbury, Chief Executive, said:
'Last year I said we needed to reshape our business.
Twelve months on there are few people within this
organisation whose jobs have not changed.
We have radically refocused the Company towards our
customers, who are noticing a difference in our stores and
products. We have slowed the sales decline and current
trading continues to improve.
I am confident that the changes we have made to
reposition Marks & Spencer as a modern, customer-facing
business will achieve a sustainable recovery.'
Luc Vandevelde, Chairman, said:
'I took on the role of Chairman at the end of February this year. After
three months in the job, I am convinced that M&S will have a future as
successful as its past.
The Company is going through a period of significant change. We are being
transformed from a traditional retailer with unique supply side strengths
into a multi-channel retailer with unique customer understanding.
We are building the capabilities to satisfy customers needs across a wider
range of goods and services, first in the UK as we recover, then
internationally.
We have embarked upon a profound transformation that will take time and
require difficult but necessary decisions.
I would ask shareholders to accept our current financial performance and
recognise that this affects our dividend payout. I am not ignoring the
past but we need to be realistic about today.
We cannot compromise our future investment capacity. Consequently, we are
proposing a final dividend of 5.3p, a total dividend of 9.0p per share for
the year (versus 14.4p for last year). The extent of our confidence in
the future is indicated by the fact that the dividend represents a payout
of 100% of net profit.
The establishment of strong Operating Divisions and consequent changes to
the structure and processes in marketing, buying and selling, allow the
Marks and Spencer Board to concentrate on matters of strategic direction
and corporate governance. This has further reduced the need for
functional representation on the Board, as reflected in changes announced
today.'
FINANCIAL RESULTS
Group
Group sales at £8,195 million are similar to last year
(£8,224 million).
The full year Group profit before tax and exceptional
items is £557.2 million, with the value of the 53rd week
estimated at £40 million.
Exceptional charges of £139.7 million include an
additional £47.3 million of restructuring costs in stores
and Head Office incurred since the half year.
The results are analysed by Operating Division in more
detail below:
UK Retail
Turnover for the 52 weeks is £6,351 million (last year
£6,601 million) and operating profit before exceptional
items £386.8 million (last year £478.9 million). The
effect of the 53rd week is to add £132 million to sales
(giving £6,483 million) and an estimated £33.3 million to
operating profit (to £420.1 million).
A sales analysis, broken down by trading periods, is
given below. Like-for-like sales are now estimated by
comparing total sales with new and developed stores
excluded without any adjustment for deflection.
Sales Performance
Q1 Q2 15 wks 11 wks Total 8 wks
to to 52 wks to
8/1 25/3 20/5
% v LY % v LY % v LY % v LY % v LY % v LY
General -9.2 -10.4 -6.0 -2.4 -7.2 +3.8
Foods -1.2 +0.4 +3.2 +1.8 +1.2 +4.7
Total -6.1 -6.2 -2.8 -0.5 -4.0 +4.2
Like- -10.3 -9.9 -5.6 -3.3 -7.2 +2.1
for-
like
At the year-end, total UK selling space is 12.3m sq ft,
compared to opening footage of 12.0m sq ft. The weighted-
average selling space has increased by 6.1%.
We opened two major stores during the year, in Braehead,
Glasgow (91,000 sq ft) and Manchester (198,400 sq ft,
replacing temporary footage of 98,800 sq ft).
UK General - Sales and Margin
Sales Performance
Q1 Q2 15 wks 11 wks Total 8 wks
to to 52 wks to
8/1 25/3 20/5
% v LY % v LY % v LY % v LY % v LY % v LY
Clothing, -9.8 -10.3 -6.7 -3.6 -7.8 +1.5
Footwear
and Gifts
Home -1.6 -11.6 +6.0 +11.7 +1.0 +35.6
Furn-
ishings
Total -9.2 -10.4 -6.0 -2.4 -7.2 +3.8
General
Like- -14.6 -15.1 -9.2 -6.0 -11.1 +1.3
for-
like
We reduced the like-for-like sales decline in Clothing as
the year progressed.
We improved the gross margin, with the first effects from
new buying methods and better stock management over the
Christmas period. Year-end stock levels in all main
product areas are below last year's and forward cover
positions have improved.
The rate of increase in Home Furnishing sales has
accelerated, with a particularly strong performance in
Furniture.
UK Foods - Sales and Margin
Sales Performance
Q1 Q2 15 wks 11 wks Total 8 wks
to to 52 wks to
8/1 25/3 20/5
% v LY % v LY % v LY % v LY % v LY % v LY
Total -1.2 +0.4 +3.2 +1.8 +1.2 +4.7
Foods
Like- -4.2 -2.5 +0.8 -0.1 -1.3 +3.2
for-
like
Our constant innovation and the marketing of new products
(for example, Organics, Count on Us) have helped food
sales. We were the first retailer to guarantee all the
food products sold in our stores were made without
genetically modified ingredients and derivatives.
There was no price inflation. We have delivered an
improvement in gross margin through better buying
practices, and the benefits from the planned supply chain
efficiencies have still to come.
UK - Operating Costs
Operating costs have increased by 3.0% on a 52-week
basis.
We have invested an additional £39 million in marketing,
customer analysis and visual merchandising in stores, as
an essential part of our programme to become a customer-
led business. Within this total, we spent £13 million
more on television, radio and print advertising.
We have held personnel costs broadly level on the year.
The expenses of an additional 1400 sales staff have been
offset by a reduction in Head Office personnel and store
management.
International Retail
All sales and profit comparatives are given on a 52-week
basis at constant exchange rates.
In our International Retail Division we increased sales
by 5.9% and made an operating profit of £0.3 million,
before exceptional items (last year, loss of £9.9 million
on a comparable basis). The effect of the 53rd week is
to increase full year profits to £7.0 million.
In Europe, the second half performance was considerably
better than the comparable period last year, helped by the
closure of seven under-performing stores (three in France
and four in Germany) and the improved performance of our
franchises, particularly in Greece and Turkey. There has
been a small improvement in the European bought in margin,
partly due to better buying practices. We opened new
stores in Barcelona and Frankfurt, but overall footage has
reduced by 129,000 sq.ft.
Sales in the Far East have improved by 7%, helped by an
improving economy and significantly increased local
production. Costs have been well controlled and we have
reduced operating losses from £14 million to £4 million.
Although sales for Brooks Brothers show an 8% increase,
higher mark-downs and additional costs arising from US
expansion have impacted trading profits. Following a
first half where operating losses were £5 million
compared to a £1 million profit in the previous year,
second half operating profits of £11 million are in line
with last year.
Kings Super Markets has performed well, increasing sales
by 7% and operating profit by 5%. Three new stores were
opened in the second half-year.
Financial Services
We have increased pre-tax profits by 5% to £115.9 million.
Within our Financial Services retailing activities (that
is, excluding our captive insurance company) pre-tax
profits increased by 15% to £106.6 million.
We increased new personal loan advances by 13% to £905
million, broadening the range of customers. Growth has
been achieved by better analysis of the customer base and
the use of better-targeted selling methods. This has
allowed us to grow scale at acceptable risk and cost while
also making our rates more competitive.
We have re-priced our pension product to a new stakeholder
friendly charging structure. A further reduction in term
assurance rates and the launch of an over 50s Guaranteed
Protection Plan reinforce our position as one of the most
competitively priced providers of life and pensions
products. We increased new life and pensions policies by
28,000 to 58,000.
Unit trust funds under management have increased by 6% to
£1,166 million, despite lower sales of tax-sheltered
products.
Account Card profits increased by 9%.
Ventures
We had invested or committed some £16 million in ventures
by the end of the financial year, the potentially
significant investments being Talkcast Corporation,
Temposoft and Splendour.com.
Exceptional Items
The closure of our Canadian business was completed at a
cost of £21 million compared to an estimated £25 million.
Goodwill previously written off to reserves of £24.4
million increases the total exceptional charge to £45.4
million.
Total European restructuring costs of £17.0 million are
made up of £8.7 million of redundancy and related costs
and £8.3 million of losses on store disposals.
The exceptional charge for UK restructuring is £63.3
million. Of this, £16.0 million of redundancy costs were
reported at the half year following the rationalisation of
UK store management structures and the closure of a
distribution centre (Tyneside). The additional £47.3
million now provided for includes:
* Head Office costs of £18.5 million resulting mainly
from restructuring of UK Retail into Customer Business Units.
* £28.8 million that relates mainly to the cost of
restructuring store roles to refocus staff activities towards the
customer.
The net loss on property disposals (excluding European
stores noted above) is £14.0 million, of which a £17.2
million accounting loss relates to the disposal of The
Gyle. The actual profit realised from the sale was £53.4
million, but cumulative revaluations since acquisition
have been recognised through reserves and are not written
back to the profit and loss account, in line with the
Accounting Standard for investment properties.
Balance Sheet and Property
Of the intended £400 million to be raised through the sale
or re-financing of non-operational properties, to date
approximately £240 million has been realised from
disposals, the largest of which were The Gyle Shopping
Centre and an investment property in Newcastle.
Group capital expenditure was £451 million in the year
just ended. We expect the figure to fall in the current
year, with a further reduction in new store openings and
footage developments.
Dividend
We are proposing a final dividend of 5.3p per share,
making a total of 9.0p for the year (last year 14.4p),
equivalent to 100% of net earnings.
This will re-base the dividend to a level from which
appropriate earnings cover can be re-established more
quickly, improving our ability to invest in the Company's
future growth.
Current UK Trading
In the last 8 weeks, total sales rose by 4.2% or 2.1% on a
like-for-like basis. The aggregates were helped by strong
sales in Home (+36%). Cold and wet weather in April was
balanced by a warm May. Both 8 week periods include an Easter week.
Credit card sales now represent 11% of the total.
PROGRESS
In May 1999 we set out four priorities designed to
transform the business and move closer to the customer.
They were:
(1) Create clear profit centres.
(2) Change our business to be more customer-facing.
(3) Restore profitability overseas.
(4) Build the Financial Services business.
We identified these objectives as essential priorities to
enable us to deliver sustained recovery and build a
platform for long-term growth.
Organisation
The first step was to create clear profit centres to
structure our business to meet customer needs. To achieve
this, we:
* Established 5 Operating Divisions - UK Retail;
International Retail, Financial Services, Property and
Ventures. Each Operating Division is accountable for
delivering profit and value created targets.
* Created within UK Retail 7 Customer Business Units:
Womenswear, Menswear, Lingerie, Childrenswear, Home, Beauty
and Food. Each unit has integrated buying and selling teams
dedicated to their customer groups.
Creating a customer-facing business
We have focused on, first, the brand, and next, buying in
response to customer needs.
Brand
We undertook a fundamental review of the Marks & Spencer
brand and what it means to our customers. Consequently,
we have:
* Designed and launched an updated look for our brand.
* Established a Customer Insight Unit to understand the
shopping habits and demographics of our customers.
* Developed local store cataloguing to tailor our products
and store layouts to meet customer needs.
* Introduced clearly differentiated ranges that broaden and
build upon traditional markets such as our Autograph designer
collections, Salon Rose lingerie, and Count on Us calorie and
fat reduced foods.
* Created new product areas such as nursery and maternity
wear, mobile telephones.
* Largely achieved the restructuring to put 4000 customer-
facing advisors on the sales floor to deliver better customer
service. This will be completed by the autumn.
* Completed a transitional modernisation of 178 stores.
* Opened the first of three prototype stores in Sutton, to
be followed by Fosse Park (June) and Kensington (July). Here,
we will evaluate new customer facing initiatives and test new
concepts. These stores illustrate our progress to date in
better understanding and applying our knowledge of customers'
needs.
Buying and Logistics
The changes to our supply chain, and their resulting
impact, are of great significance to us. We have
fundamentally changed the way we source, buy and
distribute our products. This has been a difficult
process not only for our own people but also for our
suppliers. However, these changes are necessary to
improve our competitive position and could not have been
achieved without their co-operation.
We have reshaped our supply base to deliver economies of
scale and to reduce our overheads. We are increasing the
effectiveness of our buying and logistics by:
* Focusing our production volumes on a smaller number of
suppliers in each product area.
* Increasing the proportion of goods sourced overseas from
50% to 70% by the autumn season.
* Leveraging economies of scale to gain logistics cost
advantages.
At our Interim results, we identified £450 million in
annualised cost savings, of which £400 million would come
from general merchandise and £50 million from foods, by
2002/03. We have taken the first steps and will achieve
over £80 million of cost savings during the second half of
2000/01.
To drive further supply chain efficiencies, we have joined
the Worldwide Retail Exchange, a collaborative partnership
with 16 other retailers, as a founding member.
Other Channels
E-commerce - Our retail offer on the Marks & Spencer
website was piloted in the pre-Christmas season, building
on our established retail infrastructure. Over the next
few days, we will enhance the website to incorporate
increased functionality, simpler navigation and a broader
product offer. Approximately 1200 products will be
available by the end of this month, rising to 3000 by
Christmas.
Future developments will include a new ordering point
which allows customers to order from our web site in-
store, as well as access through new mobile and static
devices such WAP and DiTV.
Direct - We have expanded and improved our catalogues
following customer feedback and both sales and average
transaction values are up.
Restore profitability overseas
Marks & Spencer Stores
We have closed our Canadian operation and seven under-
performing stores in Europe. By the end of 2001, 35% of
European sales will be managed by our European Buying
Office, of which half will be unique products targeted at
local customers. In the Far East, over 50% of our clothing
is already sourced regionally and there is scope to take
this further.
Brooks Brothers
Brooks Brothers is a high quality brand with international
potential. We already have operations in Japan, Hong Kong
and Taiwan, and have announced a franchising move into
Italy, Austria and Switzerland with the Della Valle Group.
We will continue to seek opportunities where we can build
the brand internationally.
Our Brooks Brothers merchandise is already sold through
direct mail and on the internet, and we have put a
franchising arrangement in place to sell merchandise at
US airports.
Kings Super Markets
Kings Super Markets is a profitable, well-managed
operation but we were unable to achieve a price that reflected
the value of the business. We will continue to grow our business
in New Jersey and surrounding areas. This year we will be
opening the first stores on Long Island, New York.
Build our Financial Services business
Changes to the Account Card - we have recently announced a
substantial reduction in APR to 18.9%, making the M&S card
rate competitive with the more widely used credit cards
and 7.5% lower than the average store card.
The acceptance of other credit cards will inevitably have
an effect on full year profits in this Division, with some
reduction in the number of active M&S card users. We have
and will continue to develop incentives targeted at
specific customer groups which will generate loyalty to
the M&S card.
New product development - we have recently announced a
move into general insurance to increase the range of high
value products we offer. A home and contents policy will
be offered initially and other services will be launched
thereafter. Additionally, commission-free foreign exchange
delivered direct to customers' homes is now available to
all account card holders.
New distribution channels - we are piloting a new
Financial Services centre within three stores for face-to-
face selling and servicing of products, with two more
stores added over the coming months. We have also seen a
significant increase in sales volumes through our website
and we will continue to develop this channel of
distribution.
FUTURE
We are very aware that our shareholders, customers, employees
and business partners have all shared the burden of our
ambitious change programme, and we are grateful for their
support.
We have reorganised the Company to be more responsive to our
customers. We are now organised to understand them better and
to apply this knowledge to the entire range of our products
and services, with a greatly increased ability to tailor our
offer to their individual needs. By simplifying and improving
our processes, we are making the cost savings necessary for
this to happen. Moreover, our supply chain improvements are
making us more competitive, and there is a great deal more to come.
We are now using these skills to work across categories and
business areas, to stretch our brand in order to meet
customers' lifestyle needs with a variety of formats, selling
channels and new product areas.
Restoring the performance of our UK retail business must be
our first priority. Once that recovery is secure, we will
have a more effective foundation on which to build our
international strategy.
We have identified the priority actions which will lead to
sustainable recovery and an improvement in shareholder value,
and we are confident of our ability to achieve this goal.
MORE TO FOLLOW
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