Highlights:
Robust performance in the face of Covid
Food adjusted operating profit up 19% as the Group mitigated hospitality/franchise closures: Total LFL up 2.7%, ex. hospitality up 6.6%
Improving C&H performance post spring lockdown: Revenue decline of 61.5% Q1; 21.3% Q2
C&H online sales up 34.3% and market share grown, now #2 in the market
Strong sell through of surplus stock.
Adjusted operating profit of
Net debt reduced, substantial liquidity with
Group revenue down 15.8%, adjusted loss before tax of
Never the Same Again actions to accelerate transformation
Central leadership streamlined and strengthened; support centre costs reduced
M&S on Ocado delivered: Overwhelmingly favourable customer response and synergies on track
Store estate for the future: Streamlining of store costs and improved productivity, supported by market leading technology
Sparks loyalty programme relaunched and grown to over 8m members, with over 1.5m app downloads
Building on investment in data and digital with launch of a new division 'MS2' within C&H to step change online growth
See full results at: https://corporate.marksandspencer.com/media/press-releases/5e0f046f7880b21924350282/half-year-results-for-26-weeks-ended-26-september-2020-robust-performance-in-unprecedented-times-as-transformation-accelerates-
1Free cash flow is cash generated from operating activities less capital expenditure, cash lease payments and interest paid
2The comparative figures for the half year ended
There are a number of non-GAAP measures and alternative profit measures 'APM', 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 adjusting items table below for further details.
NEVER THE SAME AGAIN
In May we outlined our intention to bring forward elements of the transformation as a result of the crisis to accelerate change under the Never the Same Again ('NTSA') programme. NTSA has impacted the shape and ways of working across the whole family of businesses with a focus on delivering a faster more streamlined digital multichannel business now. Highlights in the period include:
A strengthened central leadership team with the arrival of
The successful switchover to supply of M&S products to
Substantial restructuring and store cost reduction introducing new more flexible working and shifting focus and time to front of house service, enabled by the roll-out of market leading store technology
Sparks loyalty programme relaunched and grown to over 8 million members as a digital first loyalty scheme through the M&S App, building on recent investment in data science capabilities to drive greater loyalty and engagement
A substantial acceleration in the reshaping of Clothing & Home reflecting both lower demand but also the need to move to more popular faster moving mainstream product
The launch of 'MS2' our new integrated global digital, data and online business division to enable Clothing & Home to compete like a pure play and maximise the significant online opportunity
These changes, combined with the continued transformation of the underlying businesses leave M&S well positioned to exit from the crisis in a stronger, leaner and more focused position.
ROBUST PERFORMANCE IN THE FACE OF COVID
The business has performed better than expected during the first half with revenue down 15.8%, outperforming the Covid-19 planning scenario by 22.8%. As a result, the Group exited the period with reduced stock levels year on year and generated free cashflow. Group net debt reduced
Strong Food performance mitigating hospitality and franchise closures: LFL ex hospitality up 6.6%
The Food business has performed strongly despite substantial Covid headwinds during the six-month period achieving 2.7% LFL growth or 6.6% when excluding hospitality, which was largely closed during lockdown. It adapted rapidly to the change in shape of demand to deliver improving LFL growth across the period. This was despite headwinds which included the exposure to travel and office locations, high dependence on food-to-go and a presence in full line stores in impacted shopping centre locations.
The change in shape of trade is illustrated in the table below with the adversely affected areas collectively accounting for c.40% of prior year sales.
We expect some of the changes in mix to continue into the future as working life and the use of offices changes but post Covid, there will also be a recovery in demand for occasion and formalwear as events return.
C&H recorded an operating loss before adjusting items of
Transformation priorities
Central to the transformation programme is a far-reaching re-engineering of the Clothing & Home range and these changes have been accelerated and made even more urgent as a result of Covid. With the arrival of
Turbo-charging online growth through the launch of 'MS2', creating an integrated global digital, data and online business division within Clothing & Home with operating flexibility to compete with pure play competition and develop our growing portfolio of guest brands
Further reducing option count and the long tail of slow-moving SKUs to reshape the range to volume buys of faster moving lines and concentrating supply into fewer, high quality suppliers delivering better quality and cost price. For
Moving to 'trusted value' and maintaining quality while reducing the proportion of sales sold at discount including store wide blanket sale events and materially reducing the quantum of product ending up in clearance. Already 'Friends & Family' promotions have been removed.
Reducing costs and improving stock flow by re-engineering the end to end supply chain under an integrated supply and sourcing team led by
Using the new instore technology base, more concentrated ranges and supply chain improvements to restructure store operating costs whilst moving resource from administration and stock shifting to front of house service.
Launching a fully integrated online, digital and data division 'MS2' to maximise the online opportunity
Over the past three years the group has made significant investment in its online capabilities including transitioning its web platform to the cloud, building a comprehensive customer data engine for over 20m customers, and improving and relaunching the Sparks loyalty programme. This has been supported by expansion of capacity and improvements to operations at the Castle Donington distribution centre, which has enabled a c.50% increase in singles despatch in the first half of the year and recent growth in market share such that it is now the second largest Clothing online business in the
However, to date M&S.com has been structured as the online channel of a stores retail business moving in lockstep with the rhythm of physical store-based trading rather than competing head to head with pure play competitors. Building on the investments we have made in recent years and embedding the pure play mentality and ways of working we began to adopt during lockdown, we are launching a new division within the Clothing & Home business MS2 to maximise online growth. MS2 inverts the model to create a single integrated online, digital and data team within Clothing & Home supported by our stores and a refocused product supply engine.
MS2 will bring together online, data and digital trading capabilities under a single team trading at a faster pace with range and availability adapted to the online model. The group will be led jointly by
A step change in online product, presentation, pricing and social marketing including recognition that the online business will need a focused range
A mandate to ensure we move towards more rapid fulfilment, investing in and expanding
Maximum usage of one of the best customer databases in the
A reinvented M&S App at the centre of online growth initiatives, building on the 1.5m downloads since the relaunch of Sparks and completely repositioning M&S financial and other services
Creating a seamless 'order online-order in store' approach by bringing a new click and collect and digital sales experience into five test and learn stores
A commitment to drive growth in our International business through online propositions more aggressively at pace. Our International eCommerce operations will be brought into MS2 so they are managed alongside the
Growing a curated portfolio of brand partnerships following the launch of Nobody's Child.
All of this will be supported by the work being done on our end-to-end supply chain so that we're set up to deliver as a true omnichannel business.
Over three years our ambition is to achieve an online sales mix of at least 40%.
International Franchise and online contribution offset Covid pressures
Operating profit before adjusting items of
Transformation priorities
Through the crisis the capital light franchise and partner driven International model continues to work well. Our priority is to focus on developing online and partner sales globally. In the period, this included the launch of 6 dedicated flagship websites and the launch of M&S product on third party sites such as Zalando. In addition we are supporting partner growth with an increasingly localised proposition and fulfilment.
Shifting gears on store estate for the future
During the crisis, the business has demonstrated that it can use technology to communicate effectively and work more flexibly and productively. This has enabled colleagues multi-tasking and transitioning between Food and Clothing & Home and focusing on front line customer service. In August, the group announced a programme to streamline its store operations, regional management structures and support centres, which is now complete generating annualised cost savings of at least
Covid has also underlined the imperative to continue to drive the modernisation of the store estate as many of the modern retail park stores with good parking outperformed but the business has been held back by the legacy estate: We now have a long term programme to catch up on the task of rotating the estate and releasing cash from the group's freehold and leasehold asset base to manage liability and reduce cost. During the period (three) new full line stores were successfully launched, five Simply Food stores were opened and 10 stores were closed. (11) leases were re-geared with an average (34%) rent reduction.
Plan A
As the world emerges from the crisis, we believe customers will look to brands they can trust and have confidence in to offer quality and value through trading ethically. During the first half of the year, our Plan A programme focused on managing the impact of Covid on the most vulnerable and healthcare workers. Highlights of the programme in the period included:
Raising over
Redesigning packaging to remove unnecessary plastic such as carton lids, light weighting to use less plastic and making packaging easier to recycle with new bakery bags and sandwich packs that are recyclable
Enhancing our climate change commitments from carbon neutral operations today to net zero emissions by 2035
Replacing soya feed in M&S RSPCA Assured milk avoiding 4,000 tonnes being used each year. We also highlighted the sustainability credentials of over 4,000 products on M&S.com
Working with our longstanding partner, Neighbourly, we have helped to put more than 6 million meals on the table for those who need it most by working with 1,500 local community groups
Net debt reduced with substantial available liquidity of
At the start of the year the group outlined a Covid-19 scenario for liquidity planning purposes which anticipated peak drawings on its credit facilities in excess of
Preparedness for Brexit
Our plans for the transition period ending
A key focus in Food has been managing the administrative changes to import from the EU and moving goods from
The increased administration will result in additional costs for both our Food and International businesses. If no Free Trade Agreement is signed with the EU there will be further costs for all food retailers in the
The impact on the Clothing & Home business is much less than on Food. We have taken steps to mitigate any tariffs on inbound supply by establishing a customs warehouse and on ensuring business continuity in
Outlook
There remains significant uncertainty regarding the near-term outlook in relation to both Covid and Brexit. Trading in the first four weeks of the second half has continued at similar rates to the end of Q2, with Food revenue up 3.0%, C&H revenue down 21.5% and International revenue up 7.4% due to the timing of shipments.
Although trading strongly, the business is entering a period of new Covid-related restrictions including the proposed circuit breaker lockdown. This will impact C&H profit as store sales are significantly reduced, albeit offset by increased online sales and reduced costs supported by furlough income. Prior to this impact our planning assumption for the balance of H2 in Clothing & Home was for similar sales trends to the first few weeks of H2. We enter this period with C&H stock levels down by more than
The group has made substantial plans to ensure customers can shop with confidence this Christmas, including the expansion of the teams to serve online orders by 30% in
Throughout this uncertain period and as we start to emerge from the crisis, our financial priority is to fund the transformation while focusing on generating cash and strengthening the balance sheet. Our objective is to ensure the business emerges from these uncertainties in a stronger, leaner and more focused position and with balance sheet metrics consistent with investment grade in the medium term.
We expect to report a third quarter trading update on
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