Marks and Spencer Group Plc (LON:MKS) today announced it’s half year results for 26 weeks to 30 September 2017.
Steve Rowe, Chief Executive said: “We have made good progress in remedying the immediate and burning issues at M&S I outlined last year. In Clothing & Home early results are encouraging and in International we now have a profitable and robust business. We recognise now that we face stronger headwinds in Food which will be addressed in the year ahead.
“The business still has many structural issues to tackle as we embark on the next five years of our transformation, in the context of a very challenging retail and consumer environment. Today we are accelerating our plans to build a business with sustainable, profitable growth, making M&S special again.”
Headlines
· Clothing & Home revenue level with full price sales up 5.3% due to better product at lower prices, fewer promotions and two fewer clearance sales. Gross margin up 140bps, as we leveraged our sourcing capabilities and fully offset currency headwinds
· Food revenue up 4.4% driven by new stores. Gross margin down 130bps due to increased input cost inflation and limiting price increases to customers
· UK costs up 4.2% due to new space, investment in improved service, and tackling legacy pay and pension issues
· International profits trebled to £60.3m as a result of our decisive action to reduce losses in owned markets, as well as favourable currency movements
Restoring the basics
Over the past 18 months we have made good progress addressing the most immediate issues in order to arrest the decline at M&S. In line with our plan, we reduced discounting and cut the price of over 2500 lines as well as delivering better availability. Clothing & Home sales were level in the first half and we have leveraged our sourcing capability to fully offset significant currency headwinds. We have tackled and removed unsustainable losses in owned International markets.
Our overall priority is making our shopping experience special so we have invested in store service, adding over 3000 colleagues. In addition, we have simplified our head office structure with a reduction of over 500 roles. We have also implemented a simpler approach to pay and closed our UK defined benefit pension scheme to future accrual.
Building on these stronger foundations, we are now able to accelerate our transformation plan to face into long term structural change in our market place and make M&S special again.
We start with great brand recognition, over 32m customers and quality, value and innovation rooted in our DNA. However, increased global and digital competition, pressure on consumers’ disposable income and increased cost inflation means unless we continue to adapt our business model, our competitive position will continue to erode. In this next phase of our programme we need to address structural challenges and continue to restore the basics at M&S, in order to deliver growth in later years.
The next phase of our transformation
Our progress and learnings over the last 18 months have given us the confidence to accelerate our transformation plan and we continue to focus on driving sustainable, profitable growth. The next phase of our transformation will see us:
· Build on our progress in Clothing & Home to focus on becoming the UK’s essential Clothing retailer
· Accelerate our UK Clothing & Home space rationalisation plan
· Reposition our Food business including slowing our Simply Food store opening plan
· Work with key International franchise partners to build a growing, profitable International business
· Become a digital first organisation, with a third of our Clothing & Home sales online
· Substantially reduce our cost base
Rejuvenating Clothing & Home
Our position in Clothing & Home has eroded over the last 15 years as online retailers, new international competitors and discounters have taken market share. However, the business retains very strong market positions in lingerie, schoolwear, denim, suits and other areas which illustrate our capability.
In the next phase of our transformation we will continue to modernise our supply chain which needs to be faster and lower cost than today. Our digital fulfilment capability, while currently operating well, will require further investment to enable more rapid growth online and help us match increasingly fast competitor fulfilment rates.
It is our ambition that M&S will become the UK’s essential Clothing retailer. At all levels we are sharpening our ranges, to provide better choices with fewer options, and delivering contemporary wearable style to become more popular. With our heritage in value, we will reinvest cost savings into affordability to ensure that our quality is unrivalled at any given price point.
Reposition and grow Food
The headwinds facing our Food business have intensified as competitors have encroached on some of our space with the rapid growth of convenience. Online home delivery is growing share. Hard pressed consumers are more aware of value and are careful about premium choices. Therefore, although our investment returns remain high, we are slowing our Simply Food opening programme as we reposition our food offer for future growth. Only the highest returning sites will qualify for addition to our store portfolio.
We have already sharpened prices in core categories and will be taking further steps to bring out value in our ranges. We will increase the pace of relevant innovation, step change our availability and ranging, and continue to develop our Foodhall proposition.
International partnerships scaled in key markets
We have substantially reshaped our International business, which has improved profitability and positioned us for steady growth. Operating with strong partners who have scale, local infrastructure and access to good locations will allow us to grow this business. We now need to focus on our proposition, ensuring better availability, sharper prices and improved customer service and environments, so we can meet international and local competition in each market.
Channels for the future
We will invest in our online capabilities to ensure a more personalised and seamless customer journey, and much greater convenience. We expect our online share of sales to grow very significantly and we are aiming for one third of our Clothing & Home sales to be online in the medium term. This, and the better than expected levels of sales transfer from recent closures, means that we are accelerating our UK store rationalisation programme, including closures, space reduction and relocations. Our intention is to reshape the estate to focus on high volume locations with conforming store size and fit for purpose back-of-house facilities. We will prioritise a digital first approach in our stores and in our central functions.
Delivering lower cost retailing
We have taken good first steps in streamlining our central costs and bringing on board new talent.
We are undertaking a significant review of our cost base with the aim of generating a substantial reduction in legacy and structural costs. In addition, we are working on the opportunity to reduce working capital and release cash. In the next phase, further significant changes will be made to consolidate strong accountable business units in Food and Clothing & Home. We will develop our organisation and culture as we create a faster, more commercial M&S.
Marks and Spencer Group Plc will continue to operate strict capital disciplines within our existing capital framework including a robust balance sheet, progressive dividend policy, continuing to invest for growth and returning any surplus capital to shareholders.
