Reshaping M&S to ship long run progress
Stuart Machin, Chief Govt stated:
“One yr in, our technique to reshape M&S for progress has pushed sustained buying and selling momentum, with each companies persevering with to develop gross sales and market share.
Our Meals and Clothes & Residence companies invested in worth to guard prospects from the complete power of inflation which, while impacting margin, was the appropriate factor to do, as serving our prospects effectively is the one path to delivering for our shareholders.
Meals outperformed the market, with buyer notion for high quality and worth the very best in six years. The advantages of the Gist acquisition and operational efficiencies additionally supported an improved efficiency within the second half. Clothes & Residence retained market-leading worth notion, and its model credentials proceed to enhance. Gross sales had been up in retailer and on-line, supported by progress in Click on and Accumulate gross sales, energetic App customers and Sparks loyalty membership; demonstrating the rising energy of our omni-channel mannequin.
The shop rotation and renewal programme delivered robust gross sales uplifts and can speed up this yr, together with the opening of 5 model defining full-line shops in main cities. Our disciplined method to capital allocation means we are able to make investments for progress, whereas additional lowering internet debt and sustaining funding grade credit score metrics, and we plan to renew dividend funds at our interim outcomes.
M&S is such a particular enterprise with a lot potential, and I need to thank all of my colleagues for his or her contribution to those outcomes. Delivering efficiency and driving change is everybody’s accountability at M&S, and so they have performed a exceptional job. Regardless of dealing with important headwinds, I’m inspired by the robust foundations established final yr and enthusiastic about what we are able to obtain within the yr forward.”
Non-GAAP measures and different proﬁt measures (APMs) are mentionedinside this launch. A glossary and reconciliation to statutory measures is suppliedon thefinish. Adjusted outcomes are according to how enterpriseefficiency is measured internally and introducedto assist comparability. Consult with adjusting gadgetsdeskunder for additionalparticulars. 1 References to ‘gross sales’ all through this announcement are statutory income plus the gross worth of consignment gross sales ex. VAT.
STRONG TRADING RESULTS
M&S delivered robust leads to 2022/23 regardless of important inflationary price headwinds impacting margins, reflecting the advantages of its programme to reshape for progress. Revenue earlier than tax and adjusting gadgets for the interval was £482.0m (2021/22: £522.9m). Statutory revenue earlier than tax was £475.7m (2021/22 £391.7m). Prior yr outcomes included £59.8m of UK enterprise charges aid and a internet charges cost of £139.7m in contrast with a internet charges cost of £186.6m in 2022/23.
RESHAPING M&S TO DELIVER LONG TERM GROWTH
M&S has a heritage of high quality, model, innovation and worth for cash, not too long ago leading to it being voted the UK’s most trusted model (supply: YouGov). After numerous years of considerable change and funding, a strengthening omni-channel place in Clothes & Residence and the broader attain of Meals together with by means of the Ocado Retail three way partnership, present alternatives for worthwhile progress.
Through the yr, the brand new management crew, Stuart Machin, CEO, supported by Katie Bickerstaffe as his Co-CEO, set out their priorities to ship sustainable progress. To help implementation of the plan, Stuart appointed Jeremy Townsend to the crew as CFO in January 2023, and he’ll stay with the enterprise till Might 2025.
This assertion studies supply in opposition to this plan, setting out how these priorities will ship worthwhile gross sales progress, enhance working margins, present funding decisions and drive shareholder returns. The 9 priorities are set out in additional element under.
OUTLOOK AND GUIDANCE
M&S has had begin to the brand new monetary yr, with each Meals and Clothes & Residence rising gross sales. Whereas the financial outlook for shopper spending is unsure, price inflation stays excessive, and market circumstances are anticipated to turn out to be more difficult, the technique is starting to ship improved efficiency and there stays a lot throughout the Group’s management.
In FY24, modest progress is predicted in revenues, pushed by omni-channel in addition to from the advantages of the accelerating retailer rotation plan. Additional funding in high quality and trusted worth will likely be partly offset by actions to mitigate sourcing price pressures and to scale back waste and inventory loss.
Value inflation contains over £50m of vitality prices in addition to colleague pay will increase of greater than £100m, that are anticipated to be offset by the supply of over £150m of in-year financial savings from the structural price discount programme. This offers scope to spend money on customer support and digital improvement, whereas controlling prices.
Regardless of dealing with important headwinds, we’re inspired by the robust foundations established final yr.
The Group suspended dividend funds at the beginning of the pandemic to guard the steadiness sheet. This enabled it to spend money on its transformation priorities and trusted worth. With the enterprise producing an improved working efficiency and having a strengthened steadiness sheet with credit score metrics according to funding grade, the Board plans to revive a modest annual dividend to shareholders, beginning with an interim dividend on the leads to November.
DELIVERING PROFITABLE SALES GROWTH
M&S’ objective is to ship worthwhile long-term gross sales progress by means of creating distinctive product and a trusted model, providing a number one omni-channel retail expertise together with by means of Ocado Retail and increasing the worldwide attain of the enterprise.
FOOD OUTPERFORMS DUE TO INVESTMENT IN INNOVATION AND TRUSTED VALUE
The target for Meals is to attain 1% progress in market share and an adjusted working margin of c.4% over the following 5 years. This will likely be delivered by means of ‘defending the M&S magic’ of trusted worth and innovation in contemporary, easy-to-cook meals, whereas fixing the spine processes of the availability chain and driving progress within the retailer property.
Meals grew gross sales 8.7% to £7.22bn with LFL gross sales up 5.4%, with notably good progress in hospitality and franchise. Gross sales in core classes had been up c.5.0% and effectively forward of pre-Covid ranges, reflecting the technique to broaden enchantment. Grocery market share elevated 20bps to three.6%, with M&S outperforming all main full-line supermarkets. (supply: Kantar 52 w/e 19 March 2023).
Working revenue earlier than adjusting gadgets of £248.0m in contrast with £277.8m within the prior yr (which included £24.6m of enterprise charges aid), leading to a internet adjusted working margin of three.4%.
Whereas funding in worth lowered margin within the first half, as we didn’t cross by means of the complete impression of price inflation to prospects, the ensuing optimistic impact on buyer volumes drove gross sales. Mixed with an in-year contribution to working revenue from the Gist acquisition of £27m, this enabled a rise in second half adjusted working margin to 4.5%, in contrast with 3.8% final yr.
Development underpinned by funding in trusted worth: Lately, Meals has shifted to trusted worth to broaden enchantment, lowering the quantity of promotions and turn out to be aggressive at opening worth factors. At a time when prospects’ focus is on the price of residing, additional funding was made early within the yr, which meant that the enterprise didn’t cross by means of the complete impression of price inflation on its margins. This included:
Efficiency fuelled by innovation and funding in basket constructingclasses: The innovation pipeline helped to extend gross sales of contemporary classes throughout the yr and ambient merchandise over Christmas, Valentine’s and Mom’s Day when occasion gross sales grew by an estimated 20%. Product launches included:
High quality and worth perceptions highest in six years: M&S continues to generate market-leading high quality and sustainability perceptions in Meals, whereas the continued technique of funding in trusted worth has pushed improved perceptions of worth.
CLOTHING & HOME DELIVERING IMPROVED STYLE PERCEPTIONS AND SUSTAINING LEADING VALUE POSITION
The target for Clothes & House is to ship a 1% improve in market share and an adjusted working margin of c.10% over the following 5 years, by driving omni-channel progress of a classy, high quality, worth for cash M&S vary, alongside a household of companion manufacturers.
Clothes & Residence grew gross sales 11.5% to £3.72bn with LFL gross sales up 11.2%. Full worth sell-through at 88% was degree with final yr and effectively above historic ranges. Clothes & Footwear market share elevated 30bps to 9.3%. (supply: Kantar 52 w/e 2 April 2023)
Retailer gross sales elevated 14.9% to £2.5bn with power in metropolis centre and buying centre areas. On-line grew 4.8% to £1.2bn, with robust progress in Click on and Accumulate gross sales, which had been up c.20%, with multiple third of orders now generated by means of the M&S App.
Working revenue earlier than adjusting gadgets of £323.8m in contrast with £330.7m within the prior yr (which included £35.2m of enterprise charges aid), a rise of 9.6% excluding the impression of enterprise charges. Adjusted working margin of 8.7% is now c.170bps above 2019/20. General outcomes mirrored the leverage from gross sales progress offsetting price pressures, notably from sourcing and foreign money as we didn’t cross by means of the complete impression of price inflation to prospects and from deliberate digital investments.
Model credentials enhancing with extraassuredshopping for: A extra assured method to purchasing, and concentrate on the trendy mainstream buyer, is beginning to ship elevated worth for cash and elegance perceptions.
Robustefficiency of occasionassociatedclasses: In a yr when prospects had been profiting from the return of occasions, weddings and holidays, progress was generated in high finish ‘Autograph’ gross sales whereas making additional progress in informal put on.
Sustained, market mainworthnotion: Because of enhancements to the vary, and funding in trusted worth, we’ve got held main worth notion scores in recent times, alongside Clothes & Residence’s lead for high quality and sustainability. Encouragingly, model notion can also be now enhancing.
LEVERAGING OUR OMNI-CHANNEL ADVANTAGE
Omni-channel improvement, supporting progress in Clothes & Residenceon-line
Clothes & Residence’s goal is to extend on-line gross sales participation and obtain a greater margin for on-line gross sales. We intention to drive on-line progress by means of elevated frequency and spend and utilizing the nationwide retailer and distribution community to supply a handy and constant service.
On-line gross sales grew 4.8%, pushed by an improved omni-channel proposition, with robust progress in Click on and Accumulate gross sales which had been up 20%. Buyer orders grew 12.6%, regardless of the results of courier capability constraints over peak buying and selling. This was partly offset by the normalisation of returns charges post-pandemic. As anticipated, on-line adjusted working revenue margin lowered to five.0% from 9.1%, this was as a consequence of sourcing price pressures which lowered gross margin and deliberate investments in digital and omni-channel enhancements to drive future progress.
Buying, changing, and retaining prospects: Clients who transfer from buying in a single channel to a number of channels and merchandise usually spend extra. An efficient and worthwhile method to serve these omni-channel prospects is thru the M&S App.
Making ahandy and constant service throughout channels: The nationwide retailer and distribution community offers an necessary customer support benefit with over 60% of orders collected at retailer and greater than three quarters of on-line returns processed by means of the shop community.
Early stage progress of third-party manufacturers: M&S now trades with over 140 companions, strengthening the shopper provide the place manufacturers are necessary corresponding to attire, sports activities, house and sweetness. Third social gathering manufacturers assist appeal to new buyers, who additionally purchase M&S merchandise.
Complete gross sales of Clothes, Magnificence and Residence manufacturers elevated 67% to £158m. On-line manufacturers gross sales now characterize c.8% of complete on-line gross sales
Ocado Retail Reset Underway
The Ocado Retail three way partnership combines the power of M&S’ model, meals high quality and innovation with distinctive and proprietary know-how to create a compelling provide. It has already generated important quantity progress and shopping for advantages for M&S Meals with over £600m of M&S product gross sales by means of Ocado.com final yr. Through the yr, new management was appointed, with Hannah Gibson taking the position of CEO.
Ocado Retail generated complete income of £2.22bn, down 1.2%. Whereas energetic prospects grew, revenues mirrored lowered volumes as a consequence of decrease buying frequency because of pandemic reversion and the impression of price inflation on prospects. The M&S share of Ocado Retail internet loss was £29.5m in contrast with a internet revenue of £13.9m in 2021/22. The discount was pushed by the results of upper mounted prices from new and underutilised capability, elevated advertising to drive new buyer progress and vitality associated price pressures.
Resetting the shopper proposition: The crew’s focus is on enhancing buyer expertise together with re-engaging lapsed and occasional prospects with improved service together with ‘kitchen desk’ deliveries and investing in worth to broaden enchantment, by means of the Ocado Worth Promise.
Enhancingworkingprices: Alongside this, steps to scale back prices are underway. These embrace community optimisation, with the proposal to stop operations on the Hatfield web site, shifting quantity to extra environment friendly CFCs together with Luton; the primary web site with on-grid robotic choose, in addition to advertising efficiencies and overhead reductions.
Deepening collaboration between Ocado Retail and M&S: The M&S core vary out there on Ocado.com has been elevated by greater than 300 traces to c.5,700, and we’re beginning to leverage the potential of the M&S buyer base extra broadly. Efficiencies are additionally being scoped from joint sourcing and logistics.
Substantial progress and revenue potential: Ocado Retail has grown income by 40% since 2019 and has a big, addressable market and substantial invested capability to develop gross sales and to recuperate profitability within the medium time period.
EXPANDING GLOBAL REACH THROUGH STRONG PARTNERSHIPS
M&S’ goal is to develop Worldwide retail gross sales by means of leveraging its model by means of capital mild partnerships and a multi-platform on-line enterprise with world attain.
Worldwide gross sales elevated 11.2% at fixed foreign money to £1.06bn, with companion retail gross sales progress of 8% pushed by Clothes & Residence. Gross sales had been adversely impacted by c.5% by the exit from markets together with Russia through the yr.
On-line gross sales had been up 5% and are greater than double pre-Covid ranges now accounting for 22% of Worldwide Clothes & Residence gross sales. Working revenue earlier than adjusting gadgets of £84.8m in contrast with £73.6m in 2021/22, which included a contribution within the prior yr of £5.5m from Russia. Excluding the Republic of Eire, working revenue was £67.9m in contrast with £58.2m within the prior yr.
Demand restorationthroughoutcompanion markets: In franchise and companion markets, demand was sturdy as companions re-stocked as footfall elevated following emergence from Covid, with specific power in India and the Center East.
Investing in European operations: European on-line gross sales have grown quickly previously three years, and funding is being made to enhance customer support and cut back price to serve, together with opening a brand new logistics hub in Croatia enabling the direct import of inventory destined for EU markets.
Working to enhanceMeals profitability within the Republic of Eire: Within the Republic of Eire, whereas efficiency in Clothes & Residence was sturdy, the Meals enterprise continues to be impacted by Brexit associated prices. Steps embrace price restructuring, rising the proportion of domestically sourced provide and assessing new routes to market, with a franchise retailer trial underway with roadside retailer Applegreen.
IMPROVING OPERATING MARGINS
IMPLEMENTING A PROGRAMME TO STRUCTURALLY REDUCE COSTS
In 2022/23, adjusted working margins had been 8.7% in Clothes & Residence and three.4% in Meals, in opposition to a medium-term goal of enhancing these to c.10% and c.4% respectively. The aim of the fee discount programme is structurally to scale back prices by greater than £400m over the following 5 years. Accelerated retailer rotation and driving worthwhile on-line progress will likely be an necessary driver to enhancing margins. On the identical time, we intention to offset annual inflation with productiveness enhancements.
To ship this, funding is being made in know-how to extend retail effectivity and cut back vitality prices, embarking on a multi-year programme within the provide chain and simplifying and streamlining digital, know-how and help centre capabilities. Examples of programmes embrace:
Within the yr forward, inflation from colleague pay of greater than £100m and c.£50m in extra vitality prices are anticipated. Investments are deliberate in retailer service, accelerating retailer rotation and new know-how such because the Clothes & Residence order planning system and the roll out of a brand new Meals forecasting and ordering system. These headwinds will likely be partly offset by price financial savings of over £150m, ensuing general in a slight improve in prices.
CREATING A CULTURE OF DELIVERY
A key component of the plan to reshape M&S is the creation of a high-performance tradition. The intention is to lift the ‘bench power’ of M&S expertise and create an easier, quicker, digitally enabled organisation. This requires a tradition that’s nearer to colleagues, nearer to prospects, and a spot the place everybody may be themselves and be their finest. Key parts of the programme embrace:
That is supported by a set of core expectations and behaviours of how the enterprise operates from day after day.
MAKING DISCIPLINED INVESTMENT CHOICES
M&S’ capital funding programme is targeted on rising quantity in progress channels and on structural reductions of the fee base. Appraisal of investments applies hurdle charges commensurate with threat, with a main concentrate on money payback on retailer investments.
Complete funding through the yr was over £500m, up from £300m in 2021/22. This included the £103m internet preliminary fee for the acquisition of Gist and simply over £400m of capital expenditure.
The rise in capex largely associated to retailer renewals, the resumption of property asset substitute following the pandemic and enhancements to the know-how infrastructure. Within the coming yr, we count on to keep up an identical degree of capital expenditure.
Capital expenditure is targeted on three programmes.
In Meals final yr the acquisition of Gist was accomplished, taking management of the logistics community:
The Group’s means to speculate is pushed by its capital allocation framework, which focuses on the era of free cashflow from operations. In 2022/23, this was £170m and after the preliminary consideration for the acquisition of Gist, internet debt excluding lease liabilities lowered by an extra c.£64m to £356m, with the group persevering with to have substantial money balances of £1,068m. After current enhancements to the steadiness sheet, ratios of debt to EBITDA and cashflow to internet debt at the moment are at ranges according to an funding grade credit standing which balances the wants of shareholders and collectors whereas offering a strong ‘sponsor covenant’ to pension trustees. In 2023/24, we are going to proceed to concentrate on free cashflow, prioritised funding and look to attain an funding grade credit standing through the yr.
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