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62% fall in pre-tax profits

M&S accelerates transformation plan after slump in profits

M&S label

M&S says accelerated change is the only option


Shares in Marks & Spencer rose sharply after it said it was accelerating its transformation plan, stripping out under-performing stores and improving its sluggish online business.

It announced the quickening of its plans after reporting a 62% slump in annual pre-tax profits, adjusted to a 5.4% fall on its preferred measure.

The figures involve closure of 100 stores and a re-balancing of its operations towards online sales. It will take £350 million out of costs, including a 25% reduction in clothing and home space.

In a statement it said the continued migration of clothing and home online, the development of global competition, the growth of home delivery in food and the march of the discounters “all amount to threats to our business and market position.

“These, together with a challenging UK consumer market, mean that we have to modernise our business to ensure we are competitive and reignite our culture.  Accelerated change is the only option. 

“Developments in the retail industry since then have reinforced our conviction about the need for the transformation of M&S.

“Changes in the high street and migration online mean that we have to be decisive with our store estate, renewing and closing stores more quickly. Our supply chains in both Clothing & Home and in Food require significant upgrades, so that we can be faster to market, reduce high stock levels in Clothing, and improve availability and waste in Food. 

“Although our online sales are growing, our online capability is behind the best of our competitors and our website is too slow. Our fulfilment centre at Castle Donington has struggled to cope with peak demand and some of our systems are dated. In both businesses we need to revitalise our ranges and reassert our reputation for value for money.”

Steve Rowe, Marks & Spencer CEO said: “At our half year results in November I outlined the need for accelerated change at M&S.

“The first phase of our transformation plan, restoring the basics, is now well under way and the actions taken have increased the velocity of change running through our business. These changes come with short term costs which are reflected in today’s results. 

“There are a number of structural issues to address and we are taking steps towards fixing these. The new organisation will largely be in place by July and the team is now tackling transforming our culture to make M&S a faster, lower cost, more commercial, more digital business.

“This is vital as we start to leverage the strength of the M&S brand and values across a family of businesses to deliver sustainable, profitable growth in three to five years.”

The company said it is taking steps to recover its appeal to family-age customers in Clothing & Home, reducing the number of lines and phases, buying more stylish product in greater depth and emphasising value.  In 2017/18 it grew customers for the first time in five years.

In food it is embarking on a programme to refresh the offer with relevant innovation, improved value for money, and a refocusing on more popular family product.  It is slowing the store opening programme while it reviews the format.

Russ Mould, AJ Bell Investment Director, said: “A sharp jump in Marks & Spencer’s shares this morning means that the retailer got its news management right, by releasing the details of big store closures ahead of its results, but the numbers themselves are nothing to be proud of and show just how much work there is still to be done.

“At least the accelerated pace of change suggests that chairman Archie Norman is just starting to get going and help chief executive Steve Rowe with the tough decisions that need to be made. However even Mr Rowe admits that it is going to be a long haul, as the goal now is to deliver sustainable, profitable growth ‘within three to five years.

“Investors now have to decide whether that’s too long to be left waiting at the check-out. At least an unchanged dividend of 18.7p per share equates to a dividend yield of around 6% (the twelfth highest yield in the FTSE 100 based on ordinary dividends alone), so patient holders may resist the temptation to throw in their M&S Homeware towel, at least for now.” 

Financial Summary

– Profit before tax & adjusting items down 5.4% impacted by the decrease in Food gross margin.

– Significant adjusting items of £514.1m including £321.1m for our UK store estate closure programme. Cash costs of transformation remain in line with plan.

– Strong cash generation even after restructuring costs reduced net debt by £107.2m, enabling the maintenance of a full year dividend, unchanged at 18.7p.

– Clothing & Home gross margin up 50 basis points with full price sales level. Revenue down 1.4% due to planned removal of two clearance sales, and unseasonal second half trading conditions.

– Food revenue growth of 3.9% driven by new stores. Gross margin down 140bps, as the company continued to absorb input cost inflation.

– UK costs up 1.8% due to costs of new space, inflation and channel shift offset by efficiencies and lower incentive costs.

– International profit before adjusting items more than doubled to £135.2m, as a result of the successful exit of loss-making owned markets and favourable currency effects.

Full year guidance 2018/19

  • In Clothing & Home it expects a year end space reduction of c.5%, as it accelerates the programme to close less productive stores. 
  • In Food, it expects year end space to be broadly level, as it opens Simply Food stores, but close less productive Full Line space.
  • It expects UK costs to decrease by up to 1%, as a result of cost efficiencies and lower depreciation offsetting the costs of new space, channel shift and inflation.
  • The effective tax rate on profit before tax and adjusting items is expected to be around 22%.
  • Capital expenditure is expected to be c.£350-400m.


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