Marks and Spencer Group Plc (LON:MKS) has announced its half Year Results for the 26 Weeks Ended 28 September 2024.
“RESHAPING FOR GROWTH”
Strong first half results, building on performance of last year
· Profit before tax and adjusting items up 17.2% at £407.8m (2023/24: £348.1m)
· Statutory profit before tax of £391.9m (2023/24: £325.6m)
· Food sales up 8.1%; adjusted operating profit £213.1m (2023/24: £158.4m) and margin of 5.1%
· Clothing & Home sales up 4.7%; adjusted operating profit £242.2m (2023/24: £240.9m) and margin of 12.0%
· Ocado Retail JV share of adjusted loss £16.0m (2023/24: £23.4m adjusted loss)
· International constant currency sales down 10.3%; adjusted operating profit £15.2m (2023/24: £32.4m)
· Adjusted return on capital employed increased to 15.0% (2023/24:13.2%)
Consistent execution
· Food volume and value share growth for four years running. H1 growth driven by produce, meat and dairy and a strong programme of innovation. Strongest value perception in over a decade.
· Consecutive monthly market share growth in Clothing for four years. H1 growth driven by Womenswear. Full price sales mix broadly level with last year. Style perception continuing to improve.
· New UK stores and renewals trading ahead of forecast. Increasing site acquisition to accelerate store rotation.
· Digital investment to improve product planning and the online experience in Clothing & Home and forecasting, ordering and allocation in Food.
· Structural cost reductions on track, with c.£60m saved in the period, largely offsetting cost inflation.
· Building on benefits of Gist integration, focus now turns to investing in the network and increasing capacity.
· International reset underway under new leadership team.
· Strong financial position, with investment grade credit metrics reinforced. £190.3m bonds repurchase complete.
| Group Results (26 weeks ended) | 28 September 24 | 30 September 23 | Change (%) |
| Statutory revenue | 6,481.0 | 6,134.0 | 5.7 |
| Sales2 | 6,524.3 | 6,164.4 | 5.8 |
| Operating profit before adjusting items | 462.7 | 410.4 | 12.7 |
| Profit before tax and adjusting items1 | 407.8 | 348.1 | 17.2 |
| Adjusting items1 | (15.9) | (22.5) | 29.3 |
| Profit before tax | 391.9 | 325.6 | 20.4 |
| Profit after tax | 278.6 | 206.9 | 34.7 |
| Basic earnings per share | 14.0p | 10.6p | 32.1 |
| Adjusted basic earnings per share1 | 14.7p | 12.2p | 20.5 |
| Dividend per share | 1.0p | 1.0p | – |
| Adjusted return on capital employed1 | 15.0 | 13.2 | 13.6 |
| Free cash flow from operations | 16.3 | 27.7 | n/a |
| Net (debt) | (2,164.1) | (2,564.0) | n/a |
| Net funds/(debt) excl. lease liabilities | 22.4 | (319.9) | n/a |
1. Adjusted measures for 30th September 2023 have been restated due to net pension finance income being reclassified as an adjusting item (H1 2023/24 £12.1m).
2. References to ‘sales’ throughout this announcement are statutory revenue plus the gross value of consignment sales ex. VAT.
Non-GAAP measures and alternative profit measures (APMs) are discussed within this release. A glossary and reconciliation to statutory measures is provided at the end of this document. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability. Refer to Notes 1 and 3 of the financial information for further details. Results of Republic of Ireland (ROI) have been reclassified from the International segment to be reported within Food and Clothing & Home.
Stuart Machin, Marks and Spencer Group Chief Executive said:
“Executing our strategy to ‘Reshape M&S for Growth’ has again delivered an increase in customers, sales value and volume, market share, profit and returns. Both Food and Clothing have now delivered market share growth for four consecutive years.
Central to our strategy is our vision to be the most trusted retailer, with quality products at the heart of everything we do. This is not something we take lightly, and our relentlessness in delivering customers the best quality, innovation, service and value only available at M&S underpins our trading momentum.
In Food, we have been resolute in our commitment to trusted value. Over 1,000 products are being upgraded and 1,400 new lines are being launched across the year, putting us even further ahead of the pack on quality credentials, and value perception is the highest it’s been in a decade. Progress on being a ‘shopping list retailer’ has driven growth in larger baskets.
In Clothing, deeper buying into campaign lines and on-trend collaborations have driven yet another move on in style perception, with Womenswear and Menswear attracting new customers. Our authoritative lead on quality and value has supported strong full price sales in a promotional market.
The easy thing to do today would simply be to say that these are good results, but that wouldn’t be the right thing to do. In the spirit of being positively dissatisfied, we have so much to do over this year and beyond. Despite our strong trading momentum, there is much more opportunity for future growth and that energises us.
With Clothing in growth and strong online performance, we are clear that now is the time to seize the opportunity in other categories including Home and Beauty. Across Clothing & Home online, we need to accelerate our transformation and reimagine our proposition. Under new leadership, we’ve now got a grip on our digital and technology infrastructure, as progress to date has been slower than we would have liked, so we must accelerate delivery. We are resetting priorities in International to drive future growth, as well as acting now to improve short-term performance. We have fresh impetus in our store rotation plan with the acquisition of ten major new sites in high quality, high growth locations, but we want to go faster so every store is a store we’re proud of.
The business remains in robust financial health. We have improved our return on capital employed to 15% and further strengthened our balance sheet, giving us the capacity and flexibility to invest for growth and deliver structural cost reduction, demonstrating our ability to deliver value for shareholders.
The recent Budget’s long-term impact on M&S, our suppliers, and our customers is for now uncertain. Meanwhile, we are confident and we remain on track and focused on what is in our control. We have the best Christmas food range I’ve seen in my time at M&S and the most stylish seasonal clothing offer yet, and we know customers are looking forward to celebrating Christmas with M&S.
I want to thank my colleagues for everything they have done and are about to do, and of course, all of our customers for shopping with us.”
RESHAPING FOR GROWTH
As M&S continues to invest in the early stages of ‘Reshaping for Growth’, the business has delivered improved sales and volume, profit and market share in both Food and Clothing & Home.
Our vision is to be the UK’s most trusted retailer, with quality products at the heart of everything we do. We are making progress, with a strong programme of product innovation and improvements to perceptions of quality, value and style. There remains a long way to go in our reshaping programme and clear opportunities exist for profitable growth to achieve the objective of a one percent increase in Food and Clothing & Home market share by FY28.
Our store rotation programme is picking up pace. New and renewed stores are trading well, with relocations of Full Line stores more productive and renewal stores able to offer a full M&S Food range. We are accelerating store acquisition, securing 10 new locations in recent weeks. However, there is more to do to develop the store pipeline to achieve the objective of a focused productive group of 180 Full Line stores and 420 Food stores by FY28. Separately we are also progressing with the disposal of two warehouse properties.
Our online business made progress in the period, with double digit growth in Clothing & Home, and the exit of the bulky furniture category. It remains a critical objective to grow online participation from the current 1/3 mix of Clothing & Home sales and we are addressing issues in fulfilment and website performance which provides opportunities for growth.
The programme of cost reduction is on track, and we remain confident of achieving £500m of savings by FY28, across stores, the support centre and supply chain. In the period, we delivered our target operating margins of over 4% in Food and over 10% in Clothing & Home, but cost pressures remain strong with labour cost inflation running at 10% in the current year. Early-stage modernisation of the supply chains includes the roll out of a new forecasting and ordering system in Food, warehouse capacity investments and the multi-year development of a new planning platform in Clothing & Home. While structural cost savings have largely offset the impact of operating cost inflation in the current year, further investment in efficiency initiatives and automation will be needed.
Our plans depend on three critical enablers: Building a high-performance culture, transforming the digital experience and technology infrastructure, plus disciplined capital investment and allocation.
Creating a high-performance culture is critical to delivering the service customers expect of M&S. At the heart of this is a culture of positive dissatisfaction and ‘always aiming higher’ with a support centre that is closer to customers and front-line colleagues. Support centre colleagues now spend at least seven days each year working in store as part of performance objectives. M&S’ People Director ran all aspects of a store for three months during the period, taking accountability to improve and resolve the issues found. We aim to promote at least 50% of leadership internally with the expectation that promoted colleagues spend at least one month working in customer-facing roles.
M&S plans to upgrade legacy systems and invest to support omni-channel sales. With the arrival our new Chief Technology Officer we have completed a comprehensive review of systems and are now embarking on a multi-year programme of investment. The business is currently operating complex, costly, legacy applications which need upgrading. Investment will also be made in the data engine and the Sparks loyalty programme to deliver a more personalised customer experience.
Our focus on operational cash flow generation combined with a disciplined approach to capital investment and allocation is key to the M&S transformation. This is delivering an improvement in return on capital employed and a strong balance sheet. We have declared an interim dividend of 1p per share being one third of last year’s total dividend. The final dividend will be determined at year end, based on performance for the year.
OUTLOOK
During the first half of the year, cost inflation has continued to be elevated, running well ahead of price inflation and the consumer environment has been uncertain. Despite this, the business has traded well growing volume and value market share.
As we enter the second half, we expect this backdrop to persist. Nevertheless, in the first five weeks of the second half overall trading remains on track and we are confident of making further progress in the remainder of the year.
FOOD SUSTAINING VOLUME GROWTH AND COMPETITIVENESS
Food sales increased 8.1%, with like-for-like growth of 7.5% driven by UK volume growth of 6.5%. Volume growth has now outperformed the market for four years running. Market share was up 30bps to 3.7% for the 12 weeks to 29 September 2024. Adjusted operating profit margin increased to 5.1% from 4.1% last year, with structural cost reduction initiatives largely offsetting cost inflation. This enabled the benefits of volume growth to flow to improved profitability.
Investing in trusted value, innovation and improved choice
· Prices were ‘dropped and locked’ on key shopping list items such as fish, dairy and poultry, and seasonal fresh market specials were relaunched, driving sales of core lines.
· Quality upgrades included sandwiches, collection pizzas and desserts as part of a programme of over 1,000 lines this year, with partners investing in improved capabilities. Category transformations in confectionery, ‘gastropub x Tom Kerridge’ and Indian food delivered accelerated growth.
· The personal care range was upgraded and relaunched as part of the strategy to enable customers to do more of their shopping with M&S.
· Value perception reached its strongest position in over 10 years.
New Food stores and renewals trading well
· Two Foodhalls in new Full Line stores and three new standalone stores opened in the period.
· New Food stores averaged c.14,000 square feet, compared with the current average of c.8,000, enabling customers to shop the full M&S range. Food sales have outperformed target by c.8%.
· Four renewals included Chancery Lane and Blackheath with a further eight planned for the second half. Renewal stores opened last year grew sales by a further 9%.
· New format trials included the introduction of the full M&S range to a smaller 7,000 square foot store in Sidcup, with encouraging results.
· We anticipate the eight Food stores opened in FY24 will generate strong annualised returns:
| AnnualisedSales (£m) | AnnualisedCash Contribution (£m) | NetCapex (£m) | Payback (years) |
| 117 | 13 | 28 | 3.4 |
Fixing the infrastructure of M&S Food to improve availability and reduce cost to serve
Food supply chain programmes are driving a series of changes to create a more modern, cost-effective flow of product from field or factory through to checkout. These include:
· Implementation of the ‘One Best Way’ retail operations programme which is improving productivity and contributing to structural cost reductions. Following good results in the Leeds region, this is now being implemented more widely.
· Roll out of a new forecasting and ordering system which is nearing completion, helping us to better match supply to market conditions and to improve availability which is critical as we continue to target volume growth.
· Long term agreements with strategic partners enabling investment in product innovation, factory capacity and supply chain resilience.
· The first steps on developing a modern, lower cost to serve logistics network, with additional capacity for growth.
CLOTHING & HOME DELIVERING CONSISTENT GROWTH, AND FURTHER IMPROVEMENT IN STYLE PERCEPTION
Clothing & Home sales increased 4.7%, with LFL sales up 5.3%. Sales growth improved in Q2 (8.1%) compared with Q1 (1.3%), with more seasonable weather. Market share was up 90bps to 10.3% for the 12 weeks to 15 September 2024, with M&S outperforming the market for c.4 years. Despite a more promotional market, full price sales mix was broadly level at 80.5%. Adjusted operating profit margin was above target at 12.0% (£242.2m) compared with 12.4% (£240.9m) last year. The slight reduction in margin reflected investments in technology and digital development, partly offset by cost savings.
Strong performance of core categories
· Women’s, Men’s and Lingerie saw good growth in categories such as knitwear, casual tops and men’s Autograph lines.
· Deeper buying into campaign lines drove a further increase in style perceptions. Collaborations with Sienna Miller and Bella Freud sold rapidly.
· In a softer Kidswear market we slightly grew share, with growth in boys’ daywear, also supported by the launch of The Parent Hood, a baby club offering member savings and community events.
· Perceptions of quality and value remain market leading with style improving in the period.
Accelerating online growth
· Online participation increased to 33% (31% LY). Online sales were up 11.3%, with growth increasing to 16.5% in Q2, as we introduced an upgraded fashion-led online experience, as marketing was weighted towards brand and social channels.
· Partner brand sales continued to perform well, up c.40% with growth in dresses and footwear.
· The exit of bulky furniture completed in August, freeing resources and space to focus on growth in core Home.
· There remains further opportunity to improve customer experience and tackle fulfilment challenges as we invest in our online growth strategy.
New Full Line stores trading strongly ahead of plan, generating healthy paybacks
· Overall store sales increased 1.7%. Two new Full Line stores at Dundee and Washington Galleries opened in the period with their Clothing & Home sales outperforming appraised levels by 13%.
· Flagship stores in Bristol and Bath are expected to be opened in the next financial year.
· A clothing only store format trial will open in Battersea in December 2024.
· We anticipate the six Full Line stores opened in FY24 will generate strong annualised returns:
| AnnualisedSales (£m) | AnnualisedCash Contribution (£m) | NetCapex (£m) | Payback (years) |
| 251 | 47 | 87 | 2.1 |
Embedding change across the supply chain
Despite the improved performance of Clothing & Home, availability and sales remain constrained by a high cost, slow moving supply chain. Changes underway aim to embed growth through effective commercial processes, an efficient logistics network, strategic sourcing partnerships and a new planning platform.
· Investment in boxed storage and hanging capacity automation in the logistics network will increase capacity to serve online orders and reduce costs. Stoke and Ollerton warehouses commenced online shipments in the period, giving us capacity to service omni channel orders from four distribution centres.
· Suppliers in key categories such as denim have been reduced and we are creating long term partnerships, lowering costs and improving capabilities.
· The future adoption of a new planning platform will enable ranging by channel, and ordering and intake in real time. By 2027 this will be linked to capacity, production plans and material requirements with a rationalised group of more strategic suppliers. The first module of the platform will be introduced in the second half of this year.
OCADO RETAIL STRONG SALES GROWTH DRIVEN BY M&S PRODUCT – MORE TO DO TO IMPROVE PROFITABILITY
Results for Ocado Retail are reported by Ocado Group and are not consolidated in this release. M&S accounts for the joint venture as an associate interest.
Our vision for Ocado Retail remains to combine the magic of M&S Food with Ocado’s unique and proprietary technology to offer unbeatable choice, unrivalled service and reassuringly good value, underpinned by efficient and effective operations.
· Revenue increased 13.8% to £1.3bn and adjusted EBITDA was £18.1m (2023/24: £5.3m). The M&S group’s share of adjusted loss reduced to £16.0m (2023/24 £23.4m adjusted loss) driven by the improved sales performance.
· The M&S volume of product sold on Ocado increased 19.1% and represented 29.8% of Ocado Retail volumes (2023/24: 28.4%), with 95% of the addressable range now available to customers. M&S’ participation reached c.48% across fresh categories such as produce and poultry reflecting our growing strength in the ‘spine of the basket’.
· As a result of higher service delivery costs and continuing lease and Ocado Smart Platform (OSP) fees for the old Hatfield site, overall profitability has yet to benefit from increasing levels of capacity utilisation.
While the customer proposition is becoming more competitive, there remains more to do to improve overall levels of profitability before investing in new site capacity.
INTERNATIONAL RESET UNDERWAY
The ambition for International is to build a global omni-channel business, which brings the magic of M&S to customers around the world. The recent improvement in performance of the UK business, and the strength of the M&S brand and its partners provides a significant opportunity for growth, although results in the period were disappointing.
Sales declined 10.3% at constant currency, continuing the weak performance reported in H2 last year. Owned sales were down 13.2% driven by India. Franchise sales were down 7.8% with a softer C&H order book, partly offset by growth in Food franchise.
Operating profit before adjusting items declined to £15.2m (margin 4.7%) from £32.4m (2023/24: 8.9%).
Actions have been taken to lower stock levels, improve the range, reduce operating costs and strengthen leadership and we expect the business to stabilise in the next year.
The disappointing partnership sales reflect weak underlying demand and the need to improve value and style perceptions in local markets and we are testing new partnership models to enable this.
In addition, several wholesale and marketplace sales opportunities have been identified which should contribute to the second half result.
With reset actions underway we are confident International remains a growth opportunity in the medium term.
DISCIPLINED CAPITAL ALLOCATION AND INVESTMENT
A focus on operational cash flow generation combined with a disciplined approach to capital allocation and investment is delivering improved return on capital employed and further reduction in debt.
· H1 free cash flow from operations was £16.3m, as operating profit before adjusting items was partly offset by working capital outflows and the planned increase in capex. Group net debt reduced, driven by lease repayments.
· As a result of a stronger balance sheet and a further repurchase of £190.3m of medium-term bonds, credit metrics improved further.
· Investments in growth and efficiency projects continue to generate strong returns and we expect group net capex of c.£500m this year, with scope for increase in FY25 as projects that meet our hurdle rates are identified. Return on capital employed increased to 15.0% from 13.2%.
· The Board has declared an interim dividend of 1p per share being one third of last year’s total dividend. The final dividend will be determined at year end, based on performance for the year. As noted above, our capital allocation is focused on investing in the transformation, delivering returns above our hurdle rates. Cashflow which cannot be invested at our targeted returns will be returned to shareholders over time.
Investor & Analyst presentation and Q&A:
A pre-recorded investor and analyst presentation will be available on the Marks and Spencer Group Plc website here from 7:30am on 6 November 2024.
Stuart Machin and Jeremy Townsend will host a Q&A session at 9.30am on 6 November 2024:
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