Marks and Spencer Group Plc Full Year Results for 52 Weeks Ended 1 April 2023 (2024)

“M&S DELIVERS STRONG RESULTS AS IT RESHAPES FOR GROWTH”

Strong trading results

• Profit before tax & adjusting items of £482.0m (2021/22: £522.9m, including £59.8m UK business rates relief)
• Statutory profit before tax of £475.7m (2021/22: £391.7m)
• Clothing & Home sales1 up 11.5% to £3.72bn; Store sales up 14.9%, online up 4.8%; Strong growth in Click & Collect
• Clothing & Home adjusted operating profit £323.8m (2021/22: £330.7m, including £35.2m rates relief)
• Food sales up 8.7% to £7.22bn. Strong growth across core categories, hospitality and franchise
• Food adjusted operating profit £248.0m (2021/22: £277.8m, including £24.6m rates relief)
• Ocado Retail share of loss £29.5m (2021/22: share of profit £13.9m); capacity for future growth
• International constant currency sales up 11.2%; adjusted operating profit £84.8m (2021/22: £73.6m)

Reshaping M&S to deliver long term growth

• Clothing & Home delivering improved style perceptions and a sustained leading value position
• Food volume outperforms market; reflecting product innovation and value investment
• Ocado Retail reset underway; restoring leading service credentials and deeper collaboration with M&S
• Structural cost reduction programme delivering; over £150m of savings planned for FY24
• Accelerating store rotation; 8 full-line and 10 Food stores opening in FY24
• Progress on supply chain modernisation; Gist acquisition completed, integration on track
• Robust balance sheet and cashflow; maintained investment grade metrics; further bond repurchase announced
• Plan to restore dividend in FY24

Stuart Machin, Chief Executive said:
"One year in, our strategy to reshape M&S for growth has driven sustained trading momentum, with both businesses continuing to grow sales and market share. Our Food and Clothing & Home businesses invested in value to protect customers from the full force of inflation which, whilst impacting margin, was the right thing to do, as serving our customers well is the only route to delivering for our shareholders.

Food outperformed the market, with customer perception for quality and value the highest in six years. The benefits of the Gist acquisition and operational efficiencies also supported an improved performance in the second half. Clothing & Home retained market-leading value perception, and its style credentials continue to improve. Sales were up in store and online, supported by growth in Click and Collect sales, active App users and Sparks loyalty membership; demonstrating the emerging power of our omni-channel model. The store rotation and renewal programme delivered strong sales uplifts and will accelerate this year, including the opening of five brand defining full-line stores in major cities. Our disciplined approach to capital allocation means we can invest for growth, while further reducing net debt and maintaining investment grade credit metrics, and we plan to resume dividend payments at our interim results.

M&S is such a special business with so much potential, and I want to thank all of my colleagues for their contribution to these results. Delivering performance and driving change is everyone’s responsibility at M&S, and they have done a remarkable job. Despite facing significant headwinds, I am encouraged by the strong foundations established last year and excited about what we can achieve in the year ahead."

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. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability. Refer to adjusting items table below for further details. ¹ References to ‘sales’ throughout this announcement are statutory revenue plus the gross value of consignment sales ex. VAT.

STRONG TRADING RESULTS

M&S delivered strong results in 2022/23 despite significant inflationary cost headwinds impacting margins, reflecting the benefits of its programme to reshape for growth. Profit before tax and adjusting items for the period was £482.0m (2021/22: £522.9m). Statutory profit before tax was £475.7m (2021/22 £391.7m). Prior year results included £59.8m of UK business rates relief and a net rates charge of £139.7m compared with a net rates charge of £186.6m in 2022/23.

• Clothing & Home grew sales 11.5% with LFL sales up 11.2% driven by a more confident approach to buying and a focus on the modern mainstream customer, which is starting to drive better style perceptions. While store sales outperformed, online sales were also up, with growth in Click and Collect sales, active App users and Sparks loyalty membership. Volume and value market shares increased.
• Food grew sales 8.7% with LFL sales up 5.4%, outperforming the market in volume and value terms with broadened appeal, through focused product development and investment in trusted value. While investment in value reduced margin, the positive customer response supported the delivery of improved trading performance in the second half. Margin in the second half also benefitted from the acquisition of Gist.
• International sales were up 11.2% at constant currency, driven by demand for clothing from global partners. As a result, profits recovered despite the combined impacts of the exit from Russia and on-going EU border related costs.
• Ocado Retail sales were down 1.2%. While active customers grew, revenues reflected reduced volumes as a result of lower shopping frequency post-pandemic. Profitability was impacted by the effects of higher fixed costs from under-utilised capacity, the impact of which we are working together to reduce, as we build customer numbers over time.

RESHAPING M&S TO DELIVER LONG TERM GROWTH

M&S has a heritage of quality, style, innovation and value for money, recently resulting in it being voted the UK’s most trusted brand (source: YouGov). After a number of years of substantial change and investment, a strengthening omni-channel position in Clothing & Home and the broader reach of Food including through the Ocado Retail joint venture, provide opportunities for profitable growth.

During the year, the new leadership team, Stuart Machin, CEO, supported by Katie Bickerstaffe as his Co-CEO, set out their priorities to deliver sustainable growth. To support implementation of the plan, Stuart appointed Jeremy Townsend to the team as CFO in January 2023, and he will remain with the business until May 2025.

This statement reports delivery against this plan, setting out how these priorities will deliver profitable sales growth, improve operating margins, provide investment choices and drive shareholder returns. The nine priorities are set out in more detail below.

1. Developing exceptional product worthy of a trusted brand, through investment in great tasting, value for money, quality Food, and developing stylish, great value, quality Clothing and Home ranges.
2. Driving omni-channel growth. Increasing the participation of Clothing & Home online sales, through leveraging the national store and distribution network, to offer a convenient and consistent service however and wherever customers choose to shop. And growing utilisation of Ocado Retail’s capacity, by providing superior service, market-leading choice and M&S products.
3. Capitalising on the strength of the M&S brand to grow global sales through capital light partnerships and the development of a multi-platform online business.
4. Making £400m of structural cost savings over five years, reducing cost to serve, and growing our margins through technology improvements to increase retail and supply chain efficiency and simplified and streamlined digital, technology and support centre functions.
5. Creating a high-performance culture. A simpler, faster, delivery focused business which is passionate about M&S products, puts the customer first and has the digital skill set to make fast, informed decisions.
6. Accelerating store rotation and renewal to create a more productive estate of c.180 full-line stores and opening more than 100 new Food stores positioned in growth locations, which support omni-channel retailing.
7. Modernising the supply chain to improve availability and customer service, while reducing costs and working capital.
8. Creating a more engaging and connected customer experience to drive omni-channel growth. This brings together the Sparks loyalty programme and payment options, supported by an effective and more efficient technology infrastructure.
9. Disciplined capital allocation, to strengthen the balance sheet, reinstate an investment grade rating for our debt and restore dividends. Robust liquidity and balance sheet metrics allow for a further bond repurchase exercise of c.£225m in respect of our medium-term maturities, also announced today.

OUTLOOK AND GUIDANCE

M&S has had a good start to the new financial year, with both Food and Clothing & Home growing sales. While the economic outlook for consumer spending is uncertain, cost inflation remains high, and market conditions are expected to become more challenging, the strategy is beginning to deliver improved performance and there remains much within the Group’s control.

In FY24, modest growth is expected in revenues, driven by omni-channel as well as from the benefits of the accelerating store rotation plan. Further investment in quality and trusted value will be partly offset by actions to mitigate sourcing cost pressures and to reduce waste and stock loss.

Cost inflation includes over £50m of energy costs as well as colleague pay increases of more than £100m, which are expected to be offset by the delivery of over £150m of in-year savings from the structural cost reduction programme. This gives scope to invest in customer service and digital development, while controlling costs.

Despite facing significant headwinds, we are encouraged by the strong foundations established last year.

DIVIDEND

The Group suspended dividend payments at the start of the pandemic to protect the balance sheet. This enabled it to invest in its transformation priorities and trusted value. With the business generating an improved operating performance and having a strengthened balance sheet with credit metrics consistent with investment grade, the Board plans to restore a modest annual dividend to shareholders, starting with an interim dividend at the results in November.

DELIVERING PROFITABLE SALES GROWTH

M&S’ goal is to deliver profitable long-term sales growth through developing exceptional product and a trusted brand, offering a leading omni-channel retail experience including through Ocado Retail and expanding the global reach of the business.

FOOD OUTPERFORMS DUE TO INVESTMENT IN INNOVATION AND TRUSTED VALUE

The objective for Food is to achieve 1% growth in market share and an adjusted operating margin of c.4% over the next five years. This will be delivered through ‘protecting the M&S magic’ of trusted value and innovation in fresh, easy-to-cook food, while fixing the backbone processes of the supply chain and driving growth in the store estate.

Food grew sales 8.7% to £7.22bn with LFL sales up 5.4%, with particularly good growth in hospitality and franchise. Sales in core categories were up c.5.0% and well ahead of pre-Covid levels, reflecting the strategy to broaden appeal. Grocery market share increased 20bps to 3.6%, with M&S outperforming all major full-line supermarkets. (source: Kantar 52 w/e 19 March 2023).

Operating profit before adjusting items of £248.0m compared with £277.8m in the prior year (which included £24.6m of business rates relief), resulting in a net adjusted operating margin of 3.4%.

While investment in value reduced margin in the first half, as we did not pass through the full impact of cost inflation to customers, the resulting positive effect on customer volumes drove sales. Combined with an in-year contribution to operating profit from the Gist acquisition of £27m, this enabled an increase in second half adjusted operating margin to 4.5%, compared with 3.8% last year.

Growth underpinned by investment in trusted value: In recent years, Food has shifted to trusted value to broaden appeal, reducing the volume of promotions and become competitive at opening price points. At a time when customers’ focus is on the cost of living, further investment was made early in the year, which meant that the business did not pass through the full impact of cost inflation on its margins. This included:

• Sharpening the prices of over 100 ‘Remarksable value’ lines which offer M&S quality at everyday prices, implementing ‘locked prices’ across a range of c.150 everyday family favourites and moving the iconic ‘Dine-In’ offer to ‘Always On’ – offering an affordable, restaurant-quality alternative to eating out; and
• As a result, the mix of value lines increased. For instance, Remarksable sales were up 40%, and featured in over c.20% of customer baskets. Dine-In launches such as ‘steak and chips’ also drove substantial sales growth in the offer.

Performance fuelled by innovation and investment in basket building categories: The innovation pipeline helped to increase sales of fresh categories across the year and ambient products over Christmas, Valentine’s and Mother’s Day when event sales grew by an estimated 20%. Product launches included:

• A programme of quality upgrades with M&S winning c.200 ‘tried and tested’ awards from titles such as Good Housekeeping. For instance, the introduction of Oakham™ Gold chicken means that all the fresh chicken sold is now slower-reared, British and RSPCA Assured;
• Strong seasonal launches such as the ‘master grill’ range for summer barbeques and Limited Editions for key events; and
• Reset and relaunched ranges aimed at driving market share in larger baskets including soft drinks, household cleaning, frozen desserts, and cereals.

Quality and value perceptions highest in six years: M&S continues to generate market-leading quality and sustainability perceptions in Food, while the continued strategy of investment in trusted value has driven improved perceptions of value.

CLOTHING & HOME DELIVERING IMPROVED STYLE PERCEPTIONS AND SUSTAINING LEADING VALUE POSITION

The objective for Clothing & Home is to deliver a 1% increase in market share and an adjusted operating margin of c.10% over the next five years, by driving omni-channel growth of a stylish, quality, value for money M&S range, alongside a family of partner brands.

Clothing & Home grew sales 11.5% to £3.72bn with LFL sales up 11.2%. Full price sell-through at 88% was level with last year and well above historical levels. Clothing & Footwear market share increased 30bps to 9.3%. (source: Kantar 52 w/e 2 April 2023)

Store sales increased 14.9% to £2.5bn with strength in city centre and shopping centre locations. Online grew 4.8% to £1.2bn, with strong growth in Click and Collect sales, which were up c.20%, with more than one third of orders now generated through the M&S App.

Operating profit before adjusting items of £323.8m compared with £330.7m in the prior year (which included £35.2m of business rates relief), an increase of 9.6% excluding the impact of business rates. Adjusted operating margin of 8.7% is now c.170bps above 2019/20. Overall results reflected the leverage from sales growth offsetting cost pressures, particularly from sourcing and currency as we did not pass through the full impact of cost inflation to customers and from planned digital investments.

Style credentials improving with more confident buying: A more confident approach to buying, and focus on the modern mainstream customer, is starting to deliver increased value for money and style perceptions.

• Clothing & Home has focused on buying more deeply into core lines, and offering clearer price points and better availability. For instance, women’s denim sales have grown over several years, cementing M&S’ leading market share in the category, which has increased to 13% from less than 10% two years ago.
• Greater investment has been made into categories which drive style perception. For example, casual dress sales grew 40% in 2022/23. As the strength of demand became apparent, increased purchases of popular lines were made using short lead-time supply routes, meeting demand while managing markdown risk.
• The improved range is supported by digital analytics to assess profitability per option more accurately. In addition, availability is being measured and stock is being allocated on a demand weighted basis.

Strong performance of event related categories: In a year when customers were making the most of the return of events, weddings and holidays, growth was generated in top end ‘Autograph’ sales while making further progress in casual wear.

• Men’s ‘Autograph’ sales increased c.60% while chino sales increased c.25%, reflecting the strategy to build a “smart separates” business for workwear. A focus in the current year is on the introduction of more regular newness.
• Kidswear and Home offer important potential for improvement in market share. However, growth in the year was modest, in a more difficult market, against pandemic related comparatives. Having established a stronger value position, the aim is to build increased awareness and appeal of the range. For instance, partnerships such as Fired Earth are being expanded across more categories.

Sustained, market leading value perception: As a result of improvements to the range, and investment in trusted value, we have held leading value perception ratings in recent years, alongside Clothing & Home’s lead for quality and sustainability. Encouragingly, style perception is also now improving.

LEVERAGING OUR OMNI-CHANNEL ADVANTAGE

Omni-channel development, supporting growth in Clothing & Home online

Clothing & Home’s objective is to increase online sales participation and achieve a better margin for online sales. We aim to drive online growth through increased frequency and spend and using the national store and distribution network to offer a convenient and consistent service.

Online sales grew 4.8%, driven by an improved omni-channel proposition, with strong growth in Click and Collect sales which were up 20%. Customer orders grew 12.6%, despite the effects of courier capacity constraints over peak trading. This was partly offset by the normalisation of returns rates post-pandemic. As expected, online adjusted operating profit margin reduced to 5.0% from 9.1%, this was due to sourcing cost pressures which reduced gross margin and planned investments in digital and omni-channel improvements to drive future growth.

Acquiring, converting, and retaining customers: Customers who move from shopping in one channel to multiple channels and products typically spend more. An effective and profitable way to serve these omni-channel customers is through the M&S App.

• Use of the M&S App and associated Sparks memberships continued to grow with average active App users increasing by c.40% to 4.3m supported by sign up campaigns such as the ’12 days of Sparks’ in December when users could gain access to exclusive offers and rewards.
• The aim is that the App should provide a personalised ‘shop front’ to the M&S brand and Sparks loyalty membership and connect the store and online worlds through services such as easy collection & returns and ‘scan and shop’.
• Upgrades to the online experience have included, ‘one click’ checkout with digital receipts, and improved functionality in the App. At the same time, development of automation has driven further growth in the volume of personalised interactions.

Creating a convenient and consistent service across channels: The national store and distribution network provides an important customer service advantage with over 60% of orders collected at store and more than three quarters of online returns processed through the store network.

• Digital Click and Collect is being rolled out to the estate enabling rapid collection and we have implemented self-service returns, reducing the cost of processing and turnaround time for resale.
• Using in-store fulfillment to expand capacity allowed 9% of items ordered online to be filled from store stock. We are also trialling the resale of Clothing & Home returns made to Simply Food stores through local hubs.
• A key goal over the next three years is to leverage the omni-channel store and warehouse network, further reducing costs and creating additional capacity.

Early stage growth of third-party brands: M&S now trades with over 140 partners, strengthening the customer offer where brands are important such as dresses, sports, home and beauty. Third party brands help attract new shoppers, who also buy M&S products.

Total sales of Clothing, Beauty and Home brands increased 67% to £158m. Online brands sales now represent c.8% of total online sales

• Launches during the year included Clinique and Benefit in beauty and an extended sports offer through The Sports Edit at M&S.com.
• Having grown rapidly from a standing start, investment is being made to simplify on-boarding for partners, to introduce ‘drop ship’ capability to enable fulfilment from partner stock and to reduce the volume of split shipments, thereby lowering costs.

Ocado Retail Reset Underway

The Ocado Retail joint venture combines the strength of M&S’ brand, food quality and innovation with unique and proprietary technology to create a compelling offer. It has already generated significant volume growth and buying benefits for M&S Food with over £600m of M&S product sales through Ocado.com last year. During the year, new leadership was appointed, with Hannah Gibson taking the role of CEO.

Ocado Retail generated total revenue of £2.22bn, down 1.2%. While active customers grew, revenues reflected reduced volumes due to lower shopping frequency as a result of pandemic reversion and the impact of cost inflation on customers. The M&S share of Ocado Retail net loss was £29.5m compared with a net profit of £13.9m in 2021/22. The reduction was driven by the effects of higher fixed costs from new and underutilised capacity, increased marketing to drive new customer growth and energy related cost pressures.

Resetting the customer proposition: The team’s focus is on improving customer experience including re-engaging lapsed and occasional customers with improved service including ‘kitchen table’ deliveries and investing in value to broaden appeal, through the Ocado Price Promise.

Improving operating costs: Alongside this, steps to reduce costs are underway. These include network optimisation, with the proposal to cease operations at the Hatfield site, shifting volume to more efficient CFCs including Luton; the first site with on-grid robotic pick, as well as marketing efficiencies and overhead reductions.

Deepening collaboration between Ocado Retail and M&S: The M&S core range available on Ocado.com has been increased by more than 300 lines to c.5,700, and we are starting to leverage the potential of the M&S customer base more broadly. Efficiencies are also being scoped from joint sourcing and logistics.

Substantial growth and profit potential: Ocado Retail has grown revenue by 40% since 2019 and has a large, addressable market and substantial invested capacity to grow sales and to recover profitability in the medium term.

EXPANDING GLOBAL REACH THROUGH STRONG PARTNERSHIPS

M&S’ objective is to grow International retail sales through leveraging its brand through capital light partnerships and a multi-platform online business with global reach.

International sales increased 11.2% at constant currency to £1.06bn, with partner retail sales growth of 8% driven by Clothing & Home. Sales were adversely impacted by c.5% by the exit from markets including Russia during the year.

Online sales were up 5% and are more than double pre-Covid levels now accounting for 22% of International Clothing & Home sales. Operating profit before adjusting items of £84.8m compared with £73.6m in 2021/22, which included a contribution in the prior year of £5.5m from Russia. Excluding the Republic of Ireland, operating profit was £67.9m compared with £58.2m in the prior year.

Demand recovery across partner markets: In franchise and partner markets, demand was robust as partners re-stocked as footfall increased following emergence from Covid, with particular strength in India and the Middle East.

Investing in European operations: European online sales have grown rapidly in the past three years, and investment is being made to improve customer service and reduce cost to serve, including opening a new logistics hub in Croatia enabling the direct import of stock destined for EU markets.

Working to improve Food profitability in the Republic of Ireland: In the Republic of Ireland, while performance in Clothing & Home was robust, the Food business continues to be impacted by Brexit related costs. Steps include cost restructuring, increasing the proportion of locally sourced supply and assessing new routes to market, with a franchise store trial underway with roadside retailer Applegreen.

IMPROVING OPERATING MARGINS

IMPLEMENTING A PROGRAMME TO STRUCTURALLY REDUCE COSTS

In 2022/23, adjusted operating margins were 8.7% in Clothing & Home and 3.4% in Food, against a medium-term objective of improving these to c.10% and c.4% respectively. The purpose of the cost reduction programme is structurally to reduce costs by more than £400m over the next five years. Accelerated store rotation and driving profitable online growth will be an important driver to improving margins. At the same time, we aim to offset annual inflation with productivity improvements.

To deliver this, investment is being made in technology to increase retail efficiency and reduce energy costs, embarking on a multi-year programme in the supply chain and simplifying and streamlining digital, technology and support centre functions. Examples of programmes include:

• The roll out of a further c.800 self-checkout tills (including within Clothing & Home) and further developments to scan and pay. As a result, in these stores over 70% of Food transactions are now self-serve. Alongside the effects of sales leverage, this has enabled the business to reach its target of 10% retail staff costs as a percentage of sales, ahead of plan;
• Warehouse rationalisation and investment in automation at the Bradford warehouse in Clothing & Home, alongside changes to returns processing; and
• Simplified structures within the support centre, which in 2022/23 included bringing together the digital and technology teams in data science, digital product development and enterprise systems.

In the year ahead, inflation from colleague pay of more than £100m and c.£50m in additional energy costs are expected. Investments are planned in store service, accelerating store rotation and new technology such as the Clothing & Home order planning system and the roll out of a new Food forecasting and ordering system. These headwinds will be partly offset by cost savings of over £150m, resulting overall in a slight increase in costs.

CREATING A CULTURE OF DELIVERY

A key element of the plan to reshape M&S is the creation of a high-performance culture. The aim is to raise the ‘bench strength’ of M&S talent and create a simpler, faster, digitally enabled organisation. This requires a culture that is closer to colleagues, closer to customers, and a place where everyone can be themselves and be their best. Key elements of the programme include:

• Building a simpler, faster, digitally enabled organisation; For instance, digital leadership has been reset, including the introduction of a new online and omni-channel director role. The technology, digital product and data teams have been brought together as one function and M&S Connect created, putting M&S Bank & Services and Sparks under one leadership;
• Creating a culture that is closer to colleagues and closer to customers; During the year this included a substantial investment in colleague pay and reward and the requirement for support centre colleagues to spend seven days per year working in store, bringing them close to the front-line;
• Raising the bar on talent; with fast-track learning and future leaders' programmes introduced developing skills sets at all levels. At the same time, robust goals linked to delivery of the nine priorities have been implemented; and
• Building the skills for tomorrow; The data science and AI apprenticeship group has expanded to over 200 colleagues and the M&S BEAM Academy, which develops technical skills sets, continues to grow. Alongside this the Product Academy has equipped over 25,000 colleagues with selling and service skills for modern omni-channel retailing.

This is supported by a set of core expectations and behaviours of how the business operates from day to day.

MAKING DISCIPLINED INVESTMENT CHOICES

M&S’ capital investment programme is focused on increasing volume in growth channels and on structural reductions of the cost base. Appraisal of investments applies hurdle rates commensurate with risk, with a primary focus on cash payback on store investments.

Total investment during the year was over £500m, up from £300m in 2021/22. This included the £103m net initial payment for the acquisition of Gist and just over £400m of capital expenditure. The increase in capex largely related to store renewals, the resumption of property asset replacement following the pandemic and improvements to the technology infrastructure. In the coming year, we expect to maintain a similar level of capital expenditure.

Capital expenditure is focused on three programmes.

1. Accelerating store rotation and renewal to create a high productivity brand defining estate of c.180 full-line and c.400 Food stores positioned in growth locations. Over five years this is expected to reduce Clothing & Home selling space by c.20% and increase Food space by c.10-15%.
   • In 2022/23, the full-line estate reduced by three stores, while the owned Simply Food estate increased by five. In some cases, we are on track to double sales and pay back the capital invested in c.3-4 years, including closure costs for relocations. A good example of this is the Chesterfield High Street store, which was closed and the business relocated to the nearby retail park.
   • This year the plan is to open 8 full-line and 10 Food stores while closing c.20, of which 10 will be closed for relocation. The relocations include opening five new ‘flagship’ properties in Liverpool, Leeds, Manchester, Birmingham and Thurrock.
   • Over 80 stores are now in a renewal format including a new full-line store at Stevenage. In full Food renewals these add capacity in areas catering to the larger family shop. Paybacks currently average c. four years and in the next phase the plan is to refine space allocation, range and service to further increase returns.
2. Modernising the Clothing & Home and Food supply chains to create a lower cost network which prioritises the timely flow of products over storage and stock holding.

   Clothing & Home is planning a five-year programme of investment which includes:

   • Consolidation, to focus on fewer, more strategic clothing and fabric suppliers;
   • Systems upgrades to create greater visibility, improve replenishment and reduce excess stock commitment and storage; and
   • Creating a logistics network to support the omni-channel offering, largely using existing assets, and investing in automation and new capacity to improve availability and speed up delivery and returns.

   In Food last year the acquisition of Gist was completed, taking control of the logistics network:

   • The H2 contribution from the acquisition was c.£27m, from the elimination of management fees, operational savings and improved service over peak;
   • There is the potential to drive productivity improvements from shared transport across Clothing & Home and Food and a plan for network modernisation is being developed; and
   • A new forecasting, ordering and allocation system is being implemented, with the planned benefit of helping to reduce waste.
3. Creating a more engaging digital customer experience which brings together loyalty and payment, supported by an effective technology infrastructure.

   In 2022/23, the teams working on omni-channel & Sparks were combined with those responsible for commercial and enterprise planning systems to optimise use of technology resources across the Group.

   • Investment in year included technology improvements in stores and the initial implementation of the food forecasting and ordering system, personalisation developments and the trial of Sparks Pay;
   • Steps are being taken to upgrade core systems, including enterprise resource and new payroll applications and the supply chain improvements outlined above; and
   • The opportunity to create a more effective payment and loyalty proposition through a unified single sign on across all M&S products is also being evaluated.

The Group’s ability to invest is driven by its capital allocation framework, which focuses on the generation of free cashflow from operations. In 2022/23, this was £170m and after the initial consideration for the acquisition of Gist, net debt excluding lease liabilities reduced by a further c.£64m to £356m, with the group continuing to have substantial cash balances of £1,068m. After recent improvements to the balance sheet, ratios of debt to EBITDA and cashflow to net debt are now at levels consistent with an investment grade credit rating which balances the needs of shareholders and creditors while providing a robust ‘sponsor covenant’ to pension trustees. In 2023/24, we will continue to focus on free cashflow, prioritised investment and look to achieve an investment grade credit rating during the year.

DRIVING SHAREHOLDER RETURNS, RESTORING THE DIVIDEND

With the business generating an improved operating performance and having a strengthened balance sheet with credit metrics consistent with investment grade, the Board plans to restore a modest annual dividend to shareholders starting with an interim dividend with the results in November.

For further information, please contact:
Investor Relations:
Fraser Ramzan
+44 7554 227758
Sandeep Dasgupta
+44 7868 735 381

Media enquiries:
Corporate Press Office
+44 (0)20 8718 1919

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 24 May 2023.

Stuart Machin, Katie Bickerstaffe and Jeremy Townsend will host a Q&A session at 9.30am on 24 May 2023:

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Fixed Income Investor Conference Call:
This will be hosted by Jeremy Townsend, Chief Financial Officer, at 2pm on 24 May 2023:
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Important Notice:

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the UK version of the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK law by virtue of the European Union (Withdrawal) Act 2018. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

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 forward-looking statements are subject to various risks and uncertainties, including, but not limited to, 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 including, but not limited to, those related to the Covid-19 pandemic 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 regarding risks to Marks & Spencer’s business, please consult the risk management section of the 2023 Annual Report (pages 56-65).
The forward-looking statements contained in this document speak only as of the date of this announcement, and Marks & Spencer does not undertake to update any forward-looking statement to reflect events or circ*mstances after the date hereof or to reflect the occurrence of unanticipated events.

FULL YEAR FINANCIAL REVIEW

Financial Summary

Notes:

There are a number of non-GAAP measures and alternative profit measures ("APMs”) discussed within this announcement, and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to the adjusting items table below for further details.

Group results

Group sales were £11,988.0m. This was an increase of 9.9% versus 2021/22, driven by Clothing & Home sales up 11.5%, Food sales up 8.7% and International sales up 12.6%. UK Food sales growth also reflects the impact of third party sales by Gist Limited of £84.2m following its acquisition, which had a positive effect of c.1.3% in the year. Like for like sales were unaffected by the acquisition of Gist.

Statutory revenue in the period was £11,931.3m, an increase of 9.6% versus 2021/22.

The Group generated profit before tax and adjusting items of £482.0m, compared with £522.9m in the prior year.

The Group benefited from Covid-related UK business rates relief of £59.8m in 2021/22, which was not repeated in 2022/23.

Adjusting items were a net charge of £6.3m, compared with a charge of £131.2m in the prior year. The reduction was largely a result of a credit of £108.0m representing the revaluation of the contingent consideration payable for the investment in Ocado Retail Limited.

As a result the Group generated a statutory profit before tax of £475.7m, compared with £391.7m in the prior year.

Adjusted basic EPS was 18.1 pence, down 16.6% on 2021/22 reflecting business rates relief in the prior year. Basic EPS was 18.5 pence, up 17.8% on 2021/22, reflecting the reduced net charge for adjusting items.

For full details on adjusting items and the Group’s related policy, read more on notes 1 and 3 to the financial information.

UK: Food

UK Food sales increased 8.7%, with like-for-like sales up 5.4%, underpinned by strong performance of hospitality and franchise sales, following Covid restrictions in the prior year.

¹ UK Food sales growth in Q3 and Q4 reflect the impact of third party sales by Gist Limited, which had a positive effect in the FY of c.1.3%. UK Food sales are equal to statutory revenue.

M&S Food has an online grocery presence with Ocado Retail and these sales are reported through Ocado Retail and are not contained within these numbers.

¹ Includes M&S.com

Transactions increased, driven by the growth in hospitality and franchise sales which are typically smaller value and which were reflected in a reduction in overall basket value. However, larger basket transactions continued to grow.

Operating profit before adjusting items was £248.0m compared with £277.8m in 2021/22, with last year’s result benefiting from £24.6m of UK business rates relief.

The overall Food adjusted operating margin decreased by 80bps (40bps excluding rates relief). Within this, gross margin declined 110bps, largely as a result of investment in trusted value, while operating costs improved 70bps as sales grew faster than costs.

Total adjusted operating costs grew c.7%, with growth of c.4% excluding business rates relief and the acquisition of the Gist third-party business. This included pay and inflation related cost increases such as energy of c.7%, new space and volume of c.1.5%, and investments such as in-store technology improvements. However, this was partly offset by efficiencies of c.6%, predominantly in store staffing and benefits from the Gist management fee saving, following acquisition.

The table below sets out the resulting movement in Food adjusted operating margin by key cost driver:

• Store staffing costs decreased 50bps. Colleague pay increases were largely offset by retail efficiencies and sales growth.
• Other store costs increased 10bps, with a 40bps adverse impact from the receipt of business rates relief in the prior year, and additional energy cost headwinds.
• Distribution and warehousing costs increased 10 bps. The increase largely reflects pay and inflation increasing faster than sales, although these were partly offset by Gist management fee savings in H2.
• Central costs decreased 10bps due to sales leverage, despite additional technology investments in store and trials of the new forecasting, ordering and allocation system.

UK: Clothing & Home

Clothing & Home sales increased 11.5% with continued recovery of store sales, which are now above pre-Covid levels, and a robust performance by the online business.

To enable greater insight into these movements, further detail is provided on the performance of each channel.

Online

¹ Traffic: the number of site visits to M&S.com and the app.
² Conversion: the number of orders as a % of the number of site visits.
³ Prior year number restated due to basis of calculation. Returns rate represents returns on despatch sales.

Following strong performance last year, online sales remained solid with growth throughout the year despite a tough market backdrop. Average order value grew almost 6% reflecting higher average selling prices, partly driven by mix.

The online returns rate increased year-on-year due to the growth of third-party brands which have a higher returns rate and a reversion in product mix and customer behaviour. Store returns rates reduced, with fitting rooms now reopened post pandemic.

Stores

UK Clothing & Home store sales increased 14.9%, with all clothing store formats seeing an improvement in sales year-on-year, also supported by higher average selling prices and mix. Average weekly footfall was up 12.5% following Covid restrictions lifting during Q1 last year, contributing to an increase in transactions.

Total Clothing & Home

Operating profit before adjusting items was £323.8m compared with £330.7m in 2021/22, with last year’s result benefitting from £35.2m of UK business rates relief.

The overall Clothing & Home adjusted operating margin decreased by c.120bps (20bps excluding rates relief). Within this, gross margin decreased 290bps, although this was partly offset by lower operating costs as a percent of sales, as sales grew faster than costs.

Within gross margin, bought-in margin declined c.200bps. Sourcing, freight and in-year currency related cost pressures, particularly in H2, were not fully offset by pricing activity. In addition, as expected, promotional mix normalised and, third-party brands grew, diluting margin by c.30bps.

Total adjusted operating costs increased 7.6%, with growth of 5.2% adjusted for business rates relief. Pay and inflation related costs such as energy contributed 4% to cost growth, while space, volume and channel mix contributed 3% and investments were made in digital development, the growth of third-party brands and marketing. These were partly offset by efficiencies of c.3%, including store staffing.

The table below sets out the drivers of the movement in Clothing & Home operating profit before adjusting items for the total segment and by channel.

• Store staffing costs decreased 60bps. Colleague pay increases were more than offset by retail efficiencies and sales growth.
• Other store costs were level. There was a 100bps adverse impact from the receipt of business rates relief in the prior year, which was offset by the effects of sales growth.
• Distribution and warehousing costs improved 110bps due to sales growth and channel mix, which more than offset pay inflation.
• Central costs were level as a percentage of sales despite significant additional digital investments including website front end development and increased personalisation.

As outlined above, store margin increased, largely due to strong sales growth. Online margin was adversely impacted due to slower sales growth, product mix and digital investments.

International

Total International sales increased 11.2% at constant currency. Store sales grew 14% as the business recovered from lockdown in several markets in Q1 of the prior year. Online sales were up 5% led by India and growth through European marketplaces in H2.

Sales excluding the Republic of Ireland were up 15.1% at constant currency, driven by Clothing & Home sales in India and continued robust demand from partners in the Middle East. Trading in Europe was adversely impacted by the closure of operations in Russia and France. Sales growth in the Republic of Ireland was robust despite continuing EU border related headwinds in Food.

Total International operating profit before adjusting items was up 15.2% to £84.8m, with adjusted operating margin up 10bps to 8.0%. This was largely driven by growth in markets excluding the Republic of Ireland.

Gross margin decreased by 20bps, driven by a reduced Clothing & Home gross margin in the Republic of Ireland. Operating costs increased 11.6% but reduced as a percent of sales. The increase in operating costs was largely driven by the business returning to a fully operational state following Covid related lockdowns in Q1 last year. In addition, pay and energy related cost inflation was absorbed in owned markets.

Ocado Retail Ltd

The Group holds a 50% interest in Ocado Retail Ltd ("Ocado Retail"). The remaining 50% interest is held by Ocado Group plc ("Ocado Group"). Full Year Results are consistent with the quarterly results reported by Ocado Group on behalf of Ocado Retail for the quarterly periods ended 29 May 2022, 28 August 2022, 27 November 2022 and 26 February 2023.

Notes: Retail revenue comprises revenues from Ocado.com and Ocado Zoom. Average orders per week refers to results of Ocado.com

Revenue declined 1.2% over the 52 weeks to 26 February 2023. While active customers grew 14.6% and order numbers increased 3.9%, basket sizes have continued to decline due to the near-term pressures of the pandemic unwind and cost-of-living crisis. Revenue performance in the last three quarters was ahead of last year.

¹ Exceptional items are defined within the Ocado Group plc Annual Report and Accounts 2022.

Ocado Retail EBITDA before exceptional items was down, reflecting smaller baskets, lower gross margins, under-utilised CFC capacity and higher fulfilment and delivery costs.

Ocado Retail recognised £21.2m of exceptional income before tax, predominantly relating to the insurance income for Andover and Erith CFCs, offset by costs relating to the development and introduction of new IT systems as Ocado Retail transition away from Ocado Group IT services, tools and support.

As a result of lower EBITDA, partly offset by exceptional profits, M&S Group share of Ocado Retail loss after tax was £29.5m.

M&S Bank and Services

M&S Bank and Services generated a loss before adjusting items of £0.5m, as compared with profit of £13.0m in 2021/22. Deterioration of the forward macro-economic environment guidance drove the need for higher bad debt provision resulting in insufficient profits to generate a profit share payment.

Net finance cost

Net finance costs before adjusting items decreased £41.5m to £144.6m. This was driven by higher average interest rates on cash balances and higher pension finance income from a larger opening pension surplus balance. In addition, interest expense reduced as a result of the partial buy-back of 2023 and 2025 bonds.

Adjusting items within net finance costs reflect a credit relating to the remeasurement of Ocado Retail contingent consideration of £108m and a charge of £2.8m reflecting the discount unwind on deferred consideration and revaluation of contingent consideration on the acquisition of Gist Limited.

Group profit before tax and adjusting items

Group profit before tax and adjusting items was £482.0m, down 7.8% on 2021/22. The profit decrease was largely due to declines in Food, Clothing and Home and Ocado Retail, offset by an increase in International operating profit and reduced interest. UK profits in the prior year benefitted from £59.8m business rates relief.

Group profit before tax

Group profit before tax was £475.7m, up 21.4% on 2021/22.

Adjusting items

The Group makes certain adjustments to statutory profit measures in order to derive alternative performance measures (APMs) that provide stakeholders with additional helpful information and to aid comparability of the performance of the business. For further detail on these (charges)/gains and the Group’s policy for adjusting items, please see notes 1 and 3 to the financial information. These (charges)/gains are reported as adjusting items on the basis that they are significant in quantum in current or future years and to aid comparability from one period to the next.

Adjusting items recognised were a net charge of £6.3m. These include:

A charge of £51.3m in relation to UK store estate rotation plans. This reflects a revised view of latest store exit routes, assumptions, estimated closure costs, charges relating to the impairment of buildings, fixtures and fittings, and accelerated depreciation.

A non-cash charge of £10.7m within organisation relating to updated assumptions regarding the sub-let of previously closed Merchant Square offices.

A charge of £16.4m for structural simplification of the organisation, which has resulted in a reduction of c.700 roles across support centres, management and stores, with the charge reflecting the associated redundancy and exit costs.

A net charge of £10.5m for UK logistics, reflecting estimated costs of closure relating to the announced closure of a further distribution centre in 2023/24, as part of the previously announced programme to transition to a single-tier UK distribution network.

A non-cash net credit of £15.1m in relation to UK and International store impairments, driven by revised future cash flow projections in relation to the carrying value of stores.

A charge of £22.1m relating to the acquisition of Gist to transform the supply chain. Within this, £18.2m of charges relate to the settlement of our pre-existing relationship with Gist Limited.

A non-cash charge of £14.0m with respect to the amortisation of intangible assets acquired on the purchase of our share in Ocado Retail partly offset by the related deferred tax credit.

Charges of £2.0m have been incurred relating to M&S Bank, primarily due to the insurance mis-selling provision.

In 2021/22, the Group announced the restructure of its franchise operations in France. Following finalisation of costs, £0.4m of the provision has been released, with no future costs currently expected.

A credit of £108m representing the revaluation of the contingent consideration payable for the investment in Ocado Retail Limited to £64.7m.

Taxation

The effective tax rate on profit before tax and adjusting items was 25.9% (2021/22: 18.2%).This was higher than the UK statutory tax rate primarily due to the impact of the recapture of tax relief on distributions to the Scottish Limited Partnership (SLP), which have resumed in the year, and non-taxable Ocado Retail losses.

The effective tax rate on statutory profit before tax was 23.4% (2021/22: 21.1%). This is lower than the effective tax rate on profit before adjusting items due to the impact of non-taxable adjusting items.

In 2023/24 we expect the effective tax rate on profit before tax and adjusting items to increase to c.31-32%, largely as a result of the increase in the UK corporation tax rate.

Earnings per share

Basic earnings per share was 18.5p (2021/22: 15.7p), due to the increase in profit year-on-year. The weighted average number of shares in issue during the period was 1,963.5m (2021/22: 1,958.1m).

Adjusted basic earnings per share was 18.1p (2021/22: 21.7p) due to lower adjusted profit year-on-year.

Cash flow

The business generated free cashflow from operations of £170.4m, reducing year on year. This was driven by lower operating profit as a result of business rates relief in 2021/22, prior year working capital inflows, increased capital expenditure (detailed below), and tax payments.

Prior year working capital inflows were partly a result of changes to payment terms for Clothing & Home suppliers during the pandemic, which are partially reversing as Clothing & Home shifts back towards pre-Covid terms. The outflow was lower than anticipated due to the phasing of payables over year end.

Defined benefit scheme pension funding of £36.8m reflects the agreed SLP interest distribution to the pension scheme.

Increased taxation was principally due to the resumption of UK corporation tax payments in the period.

Adjusting items in cashflow includes £26.4m relating to the exit of the Russian franchise business, £22.8m relating to the UK store estate strategy, £8.9m related to structural simplification, £6.7m for costs related to the Gist acquisition and £2.0m relating to the M&S Bank insurance mis-selling provisions.

Loans to associates reflects drawdown of the shareholder loan facility by Ocado Retail, with an outflow of up to £70m anticipated in 2023/24.

Acquisitions, investments and divestments were driven principally by the payment of £102.8m relating to the acquisition of Gist, net of cash received.

The business generated free cashflow of £63.6m, resulting in a further reduction of net debt.

Capital expenditure

Group capital expenditure before property acquisitions and disposals increased £102.6m to £402.8m due to increased investment in technology, store remodelling and property asset replacement.

UK store remodelling costs reflects 31 Food renewals and upgrades to Clothing & Home space in several full line stores.

Spend on new UK stores primarily related to the opening of 3 full line and 6 Food stores and one Food extension.

Supply chain expenditure reflects investment in the underlying base food infrastructure together with spend on upgrading vehicles.

IT and M&S.com spend includes technology replacement and upgrades in stores, continued investment in website development and investment in food planning systems.

Property asset replacement has increased in the current year, primarily driven by the resumption of investment following the pandemic. This includes roof works and replacement of fridges, freezers, boilers, lifts and escalators.

Prior year disposals include receipts from the sale of two warehouses.

The movement in capital accruals and other items is driven by landlord contributions partially offset by an increase in capital accruals as capex spend normalises post pandemic.

Net debt

Group net debt decreased £61.6m driven by free cashflow from operations of £170.4m, and a net cash outflow of £102.8m relating to the acquisition of Gist.

New lease commitments, remeasurements (including from acquisitions) in the period were £270.7m, largely relating to 14 new UK leases, the consolidation of Gist Limited lease liabilities, lease additions in India, and UK property and logistics liability remeasurements. This was largely offset by £231.8m of capital lease repayments.

The composition of Group net debt is as follows:

The Medium Term Notes include five bonds, with maturities out to 2037, and the associated accrued interest. During the period part of the 2023 and 2025 bonds were repurchased, reducing near-term liquidity draws. The USD 300m 2037 bond is valued by reference to the embedded exchange rate in the associated cross currency swaps.During the year these swaps were reset and the embedded mark to market value realised resulting in an increased value of the debt. The full breakdown of maturities is as follows

Full-line store lease liabilities include £192.2m relating to stores identified as part of the UK store estate strategic programme. Of the remaining full-line stores lease liability, the liability-weighted average lease length to break is c.21 years. However, these average lease lengths are skewed by five particularly long leases on stores which are trading well in locations where the Group intends to remain. Excluding these five leases, the average term to break of leases outside the programme is c.16 years.

Simply Food store lease liabilities include £26.3m relating to stores identified as part of the UK store estate strategic programme. Of the remaining lease liability, the average lease length to break is c.10 years.

Within offices, warehouses and other lease liabilities, £143.0m relates to the sublet lease on the Merchant Square offices in central London, which is part of the strategic programme, organisation. Average lease length of all other offices and warehouses to break is c.8 years.

International leases relate primarily to India (c.£99m) and Ireland (c.£62m). Average lease length to break in India is close to nil, as the majority of these leases are past the break point, and so we have the flexibility to exit these at any time on several months’ notice. Average length to lease break or expiry in Ireland is c.8 years.

Pension

At 1 April 2023, the IAS 19 net retirement benefit surplus was £477.4m (2021/22: £1,038.2m). There has been a decrease of £560.8m from the start of the year largely driven by an increase in gilt yields.

The pension scheme is fully hedged for movements in gilt yields. However, on an IAS 19 basis there is an inherent basis risk to the scheme valuation, with the pension assets moving with underlying movements in rates and scheme liabilities exposed to the movement in corporate bonds yields. In a normal period, this always results in some dislocation between movements in the scheme assets and liabilities. However, the increase in gilt yields in the year led to a larger dislocation. Nevertheless, there has been no material worsening of the scheme's overall funding position and the scheme remains fully funded on a technical provisions basis.

The most recent actuarial valuation of the Marks & Spencer UK Pension Scheme was carried out as at 31 March 2021 and showed a funding surplus of £687m. This is an improvement on the previous position at 31 March 2018 (funding surplus of £652m), primarily due to lower assumed life expectancy.

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24 May 2023 2023 Corporate