22nd May 2007 07:03
Marks & Spencer Group PLC22 May 2007 Marks and Spencer Group plc Preliminary Results 2006/07 52 weeks ended 31 March 2007 Financial Highlights: • Sales up 10.1% at £8.6bn: UK up 9.7%; International up 16.8% • UK like-for-like sales up 6.1%: General Merchandise up 7.8%; Food up 4.2% • Adjusted operating profit up 22.0% at £1,044.0m1; unadjusted operating profit up 23.0% at £1,045.9m • Adjusted profit before tax up 28.5% at £965.2m1; unadjusted profit before tax £936.7m • Adjusted earnings per share up 28.7% at 40.4p1; unadjusted earnings per share 39.1p • Final dividend 12.0p per share, up 30.4%; total dividend 18.3p per share, up 30.7% • Net cash generated £231.1m Trading Highlights: • Q4 UK sales +7.8%: General Merchandise +6.3%; Food +9.2% • Q4 UK like-for-like sales +3.8%: General Merchandise +4.6%; Food +3.0% • Total clothing market share up 70 basis points to 11.1%2 with growth in all areas • Food market share up 20 basis points to 4.3%3 • UK gross margin up 60 basis points to 43.4%; operating costs up 7.7% Business Highlights: • Further potential for continued growth from existing business • Modernised stores continue to outperform; 70% modernised by Christmas 2007 • 15-20% space growth target on track • 63 Simply Food stores opened 2006/07; 100 new stores planned for 2007/08 • M&S Direct sales £160m: 60% growth online; website successfully re-launched • International sales up 16.8% in 240 stores • 10,000 new jobs to be created over next three years 1 From continuing operations before property disposals and exceptional items 2 Clothing market share: TNS Worldpanel Fashion: 52 weeks ended 1 April 2007 3 Food market share: TNS Worldpanel, Food & drink: 52 weeks ended 25 March 2007 Stuart Rose, Chief Executive, said: "We have had a good year, delivering a 10% increase in sales to a record levelof £8.6bn. We have grown profits by over £200m. Market share has improved in allclothing categories and food. We continue to improve our product ranges,offering customers better quality, value, innovation and newness. Servicestandards have improved. We continue to invest in modernising our stores and 70%of our store portfolio will be modernised by the end of the year. "Capital spend has been around £800m in the year, supporting our future growth.Net cash generated was £231m. We used valuable property assets to substantiallyreduce our pension deficit to £283m. We have a strong balance sheet whichprovides us with the flexibility and capacity to invest for future growth. "Our plan remains the same - to drive further growth from our core businessthrough the delivery of better product, service and environment. We are alsostarting to broaden the business, by stretching the brand into new productareas, expanding space, driving our Direct business and growing our brandinternationally. This expansion will create up to 10,000 new jobs in the UK overthe next three years. "We are paying a record bonus of £91.0m (last year £73.0m). This includes a £26mreward for our store customer assistants. We have announced a number of seniormanagement changes and have a strong team in place to lead the Group through itsnext phase of growth. "In January, we announced Plan A, our five-year, 100-point plan to tackle someof the biggest challenges facing our business. Under this plan, we will work tohelp combat climate change, reduce waste, safeguard natural resources, tradeethically and promote healthier lifestyles. These principles are already deeplyembedded into the fabric of Marks & Spencer and put us in a good position totake a lead in this area. "We are pleased to announce the appointment of Martha Lane Fox as anon-executive director with effect from 1 June 2007. Martha brings a wealth ofexperience, particularly in the online arena. She co-founded Lastminute.com in1998. She is currently a board member of Channel 4. Current Trading "We have had a satisfactory start to the new financial year, despite toughcomparatives and significant disruption to trading in our stores as a result ofthe modernisation programme. "We expect the retail environment to become more challenging: competitionremains intense, and pressure on consumer spending as a result of interest raterises will also increase. Nevertheless, we are confident we can make furtherprogress in 2007/08. We will next update on trading for the first quarter on 10July 2007." Driving the business - Product, Service, Environment Our brand is our key asset. It is one of the most trusted and recognised brandsin the UK. According to a recent Millward Brown survey (April 2007), it is oneof the fastest growing brands in the world. We have worked hard to rebuild brandloyalty. Brand awareness continues to strengthen as more customers buy acrossall product areas of clothing, food and home. Investment in advertising hassupported the brand, driving increasingly positive customer feedback with everycampaign. Better product, service and store environment led to more customers visiting ourstores. Footfall grew ahead of the market, with around 16 million customersvisiting our stores every week. This, combined with improved levels ofconversion, was a key driver of sales growth. Market share has increased in both clothing and food. In clothing, we continueto be the UK's largest clothing retailer by both value and volume. Market shareincreased 70 basis points to 11.1%, with growth in all areas. Foods increasedits market share to a new high of 4.3% (up 20 basis points), driven by theopening of more Simply Food stores and continued focus on delivering betterproduct and innovation. Better buying, sourcing and leveraging of volume enabled us to improve our UKgross margin by 60 basis points. Although this was less than we had indicated atthe half year end, it reflects our decision to keep inventory clean at the endof the fourth quarter. At the same time we managed our operating costs tightly. In general merchandise, gross margin was up 120 basis points. We have now grownour general merchandise gross margins by 770 basis points over the last twoyears. We believe we can further drive margin through efficiencies from oursupply chain going forward. Product We have worked on improving the buying and merchandising disciplines using bothour clothing and the food buying academies. Our teams have been focused onensuring we have the right values, price architecture, levels of newness andproduct excitement and innovation. This is supported by our sourcingcapabilities and supply base. We are now focusing on ensuring that we make themost of our catalogue for the type of space and format from which we trade. General Merchandise: During the year we made further progress on improving values across all pricepoints as well as further stretching our price architecture, particularly atbetter and best. Price deflation for the year was around 3%, slowing as expectedin the second half. Volumes were up around 14% over the same period. All areasof the business performed well. Womenswear, including Lingerie, delivered another strong performance, benefitingfrom well-constructed ranges, and more newness, supported by strong marketingcampaigns. Core product areas, including knitwear, formalwear, lingeriecollections, bras and knickers also performed well. Per una had an excellentyear. It is a major brand with wide appeal and strong potential. We recentlyintroduced new better and best product ranges in casualwear, including Golfwithin Classics and Autograph Weekend. Autograph lingerie also has strongpotential. Womenswear market share improved from 10.5% to 11.3%. Lingeriedelivered strong growth in share from 24.3% to 26.1%. Menswear had a good year, building further on its already strong position,growing market share from 9.6% to 10.3%. We added to our better casualwear rangein Blue Harbour with the introduction of Golf. Mens formalwear performed well,especially in suits with the introduction of our opening price point machinewashable suit at £49 and our recently introduced premium range at £499. Childrenswear made its first market share improvement for six years, up from4.2% to 4.5%, with better sales in both boyswear and girlswear driven byimproved ranges, especially at better and best, and a strong Back to Schoolcampaign. Home is performing well. We offer great value across the ranges. At openingprice points we introduced new kitchen accessories and bedding ranges. At thepremium end, we extended the Autograph brand into furniture and homeaccessories. The successful trial of electrical products in 13 stores andonline, will be extended into a further 12 stores this year. We believe this isan important step to extending our product offer. We are also looking at somenew product areas and our first range of green products for the home islaunching online later this year. Food: Food had a strong year, growing ahead of the market despite much toughercomparatives. Market share increased from 4.1% to 4.3%. Performance was drivenby our continued focus on quality, value and innovation. Newness and innovation have been consistent drivers in foods where the focus ison quality, freshness, natural and healthy products. Celebration and indulgencefoods were also strong. This year we introduced the Foods Standards Agency Traffic Lights as well as %Guideline Daily Amounts (GDA) labelling on the front of pack of food productsincluding ready meals. We are extending this across all recommended FoodStandards Agency categories. We will have removed artificial colours and flavourings from nearly all ourfoods by the end of 2007, including all chilled foods, cakes, biscuits andbakery. By June 2007, all our foods will be 100% free from Aspartame. We havealso banned additives particularly associated with concerns about foodintolerance and children's diets, including artificial colours such asCarmosine, Ponceau 4R, Sunset and Quinoline Yellow which are used in cakes andbakery. We have begun to print clear symbols on our food packaging, to make it easy forcustomers to recycle or compost waste. The Government approved WRAP symbolsindicating the source of the packaging and how to dispose of it currently appearon 670 prepared food products (12% of our food lines). We will extend this tothe vast majority of our food lines by the end of the year. New initiatives in Food, such as Hot Food to Go, Eat Over Delis, our firstrestaurant in Newcastle, and a "M&S Kitchen" in Canterbury have been welcomed bycustomers. We opened 63 new Simply Food stores, which enabled us to extend the reach of ourfood. A further 100 openings are planned this year. Under our agreement with BP,we are currently opening two petrol forecourt stores a week. Service Our investment in staff training, pay rates and career paths last year hascontinued to deliver better service, measured by our Mystery Shopping programme.Over the year we have made real progress and this has enabled us to driveconversion rates as well as cope with increased footfall and volumes.Recognising the importance of service, we are now linking the scores of theMystery Shopping programme directly to our store bonus. Service is also about giving our staff more information so they can sell ourproducts better. In foods we recently introduced Healthy Eating Assistants -some 1,400 store staff have been trained to offer information on nutritionbasics and provide healthy menu planners. We are now making changes to our supply chain and technology, investing in areassuch as RFID and point of sale systems, to support the future growth of thebusiness and improve the customer experience in store. Environment The store modernisation programme is a priority for the business. We now havearound 40% of our portfolio in the new store format. We are currently on site ina further 60 stores, representing 2.8 million square feet. This representsnearly a quarter of our store space. We are on track to have some 70% of ourstore portfolio modernised for the peak Christmas trading period. We are also meeting Plan A objectives in stores and offices, particularly onsourcing renewable energy and sustainable materials and dealing with waste.This year, the first of a new breed of "green" stores will open using a newlow-energy infrastructure. When completed, our store in Bournemouth, will use25% less energy and emit 50% less CO2 every year. Two other green stores areplanned at Glasgow Pollok and Galashiels. Broadening the business - Property, M&S Direct, International Property In November we outlined our property strategy for adding 15-20% new space overthe next five years. We are making good progress against this target. Some of our best stores are large out of town stores, but our presence islimited and many of them are too small. We are expanding space in our existingstores in London Colney, Braehead, Cheshunt and Lisburn. Our Lisburn store willinclude an adjacent Home store and a restaurant. Later this year, we will beadding a new flagship out of town store in Glasgow Pollok. A new 105,000 sq ftstore in Colliers Wood will open in 2008. Average space in our large out oftown stores will be around 100,000 square feet. In major city centres we are on site developing a number of our key city centrestores including London Pantheon, Edinburgh and Belfast which will be completedlater this year. In Derby, we are relocating to a larger store. Looking ahead,we will be opening new major city centre stores in White City in London(September 2008) and in Portsmouth (March 2010). During the year we opened in three retail parks, Bolton Middlebrook, AbbeyCentre Belfast and Teeside. We now have a healthy pipeline of new stores andexpect to open a further seven this year. We recently appointed a senior retailexecutive to manage our retail parks. We opened 63 new Simply Food stores during the year, including 28 acquired fromIceland, eight of the 12 acquired from Somerfield and 18 franchise stores inlocations such as railway and motorway service stations and petrol forecourts.These stores have performed well and have enabled us to further extend the reachof our food offer and bring good quality, fresh food to convenient locations.Following agreement with BP we now have 19 stores on petrol forecourts and arecurrently opening two new stores a week. Our space expansion will create up to 10,000 new jobs in the UK over the nextthree years. For the current financial year 2007/08, we plan to add c.4.5% toour total footage, representing c.3% in general merchandise and c.8% in foods. M&S Direct Our Direct business, including food and flowers, has made good progress andsales from our website grew by almost 60% over the year. Total Direct sales were£160m. We had over 55 million visits to the website, making our site one of themost visited retail websites in the UK. We worked with Amazon to redevelop our website to improve functionality andcustomer experience, re-launching the website in March this year. The improvedfunctionality includes better navigation, search capability and quicker orderingand, overall, is a much stronger representation of the M&S brand. This enhanced functionality will enable us to increase our basket size throughimproved cross selling of product across our entire offer. A new orderingplatform will enable us to improve availability and we are now working onupgrading our in-store ordering systems to use a single integrated orderplatform across all channels of stores, telephone and online. This will provideimproved levels of customer service and fulfilment. We extended our online catalogues, especially in per una, where we now carry thefull range, and jewellery. We are also now offering more fringe sizes, extendingto XXXL across all relevant categories, extending selected bra lines andinfilling sizings across men's formalwear. International International had a good year. Our owned stores in the Republic of Ireland andHong Kong continue to make good progress with sales up 14.0%, driven by stronglike-for-like sales growth and two new store openings in the Republic ofIreland, where we now have 13 stores. Our franchise business also performed well, with sales up 21.5% driven by growthin existing markets and the entry into four new markets: Slovakia, Latvia,Bulgaria and Switzerland. During the year we opened our largest ever franchisestore of 52,000 square feet in the Dubai Festival City development as well asadding stores to our existing franchises in Greece, Hungary, India, Indonesia,Philippines, Romania, Russia, Singapore and Turkey. We will continue to developour franchise business, opening larger stores and extending the reach of ourbrand. At the same time, we are reviewing other development opportunitiesoverseas. In January 2007 we signed a joint venture, in which we hold a 60% interest, withPresident Chain Stores Corporation in Taiwan. We opened our first store inKaohsiung last week and will open two further stores in Taipei by the end of theyear. Plan A We are making progress on 'Plan A', which we launched in January. Plan A is afive-year business-wide eco plan which means that by 2012 we will become carbonneutral; send no waste to landfill; extend our sustainable sourcing; set newstandards in ethical trading and help customers and employees live a healthierlifestyle. We have issued a separate, detailed update on Plan A today. As part of this, wehave announced that, working with our suppliers, we will develop our first 'eco-factories' to pioneer innovative methods of sustainable manufacturing. Thefactories will manufacture lingerie, in Sri Lanka, and upholstery for furniture,in North Wales. Both will be carbon neutral and will contain features such asgreen roofs made from vegetation and the ability to harvest rain water. We have also announced today: • Since Fairtrade Fortnight in February, we have sold £1.9m Fairtrade cotton products and are the biggest retailer of Fairtrade cotton products on the high street. Also, in 2006/07 we sold over £22m of Fairtrade food products, up from £4m in 2005/06. Sales of our organic food were £100m, up 47% on the previous year. • A trial in Northern Ireland to encourage customers to use fewer carrier bags. Throughout June we will offer free newly-designed 'Bags for Life', illustrated by David Downton, with each food transaction. For the month of July we will charge 5p for each for our standard food carrier bags. All money raised will be donated to charity Groundwork Northern Ireland. • A campaign with Save the Children to raise money to enable 20,000 children in Western Uganda to go to school. With our customers' support we aim to raise at least £500k by donating 5% of the price of our main Back to School products during the peak month of August. This money will pay for the construction of over 120 new classrooms and up to 20 new washrooms; provide a safe water supply for six of Uganda's poorest schools and train teachers in 30 schools. People In order to lead the Group through its next phase of growth, we recentlyannounced a number of senior management changes. Steven Esom joins Marks &Spencer on 1 June 2007 as Director of Food. He was most recently ManagingDirector of Waitrose. Carl Leaver joined the business on 14 May 2007 as Directorof International. He was previously CEO of De Vere Group plc. Steven and Carlwill both join Marks & Spencer's Executive Committee. Guy Farrant, previously Director of Food, was appointed Director of Retail. KateBostock, Director of Womenswear and Girlswear has taken on additionalresponsibility for Lingerie. Matt Hudson, Director of Lingerie has becomeDirector of Trading for Womenswear, Lingerie and Girlswear. Following these changes, the responsibilities of the three Executive Directorshave been re-aligned. Stuart Rose will continue to manage the trading functionsof the business and will add International to his direct reports. With the storere-modernisation programme well underway, Ian Dyson will now be responsible forStore Design and Development and Procurement, alongside his currentresponsibilities for Finance, Property and IT. Steven Sharp remains responsiblefor Marketing and the M&S Money relationship with HSBC and will also focus onthe next generation of store design. Summary M&S has had a good year and our teams have delivered further improvement acrossall areas. We continue to focus on driving more from our core business andexploring new product opportunities for our brand as well as completing thesubstantial next stage of our modernisation programme. We are now starting to broaden our business and take it forward in its nextstage of growth. The next five years should see a significant contribution fromnew space, the scaling up of our Direct business and the strengthening of ourinternational presence. Financial Review: Summary of Results:* 52 weeks ended 31 March 2007 1 April 2006 % inc £m £m Total revenue 8,588.1 7,797.7 +10.1UK 7,977.5 7,275.0 +9.7International 610.6 522.7 +16.8 Operating profit before property disposals 1,044.0 855.8 +22.0UK 956.5 790.1 +21.1International 87.5 65.7 +33.2 Profit before tax, property disposals and exceptional items 965.2 751.4 +28.5Profit/(loss) on property disposals 1.9 (5.7)Exceptional finance costs (30.4) -Profit before tax 936.7 745.7 +25.6 Adjusted EPS 40.4p 31.4p +28.7Dividend per share (declared) 18.3p 14.0p +30.7 * From continuing operations Revenues Total revenues were up 10.1% with strong performances in both the UK andInternational businesses. Revenue growth by area in the UK was: Q3% Q4% H2% FY%RevenueClothing +9.2 +5.7 +7.8 +9.2Home +7.9 +10.7 +8.8 +13.1General Merchandise +9.0 +6.3 +7.9 +9.6Food +9.5 +9.2 +9.4 +9.7Total +9.2 +7.8 +8.6 +9.7 Like-for-likeGeneral Merchandise +7.1 +4.6 +6.0 +7.8Food +3.6 +3.0 +3.2 +4.2Total +5.6 +3.8 +4.8 +6.1 UK revenues were up 9.7% with like-for-like growth at 6.1% despite much toughercomparatives in the second half of the financial year and disruption to ourstores as we continued the store modernisation programme. During the year, weadded 2.7% of space (on a weighted average basis), 4.5% in Foods and 1.8% inGeneral Merchandise. International revenues were up 16.8% with strong performances in both owned andfranchised stores, up 14.0% and 21.5% respectively. This was driven by stronglike-for-like performance and 23 new store openings. Operating profit Operating profit before property disposals was £1,044.0m, up 22.0%. In the UK, operating profit before property disposals was up 21.1% at £956.5m,reflecting strong revenue growth and further gross margin gains. UK gross marginwas 43.4%, an increase of 60 basis points on the previous year. Although thiswas less than we had indicated at the half year end, it reflects our decision tokeep inventory clean at the end of the fourth quarter. At the same time wemanaged our operating costs tightly. General merchandise gross margin was up 120 basis points to 52.6% driven bybetter buying. We anticipate further margin gains in 2007/08, largely frombetter buying, but not quite at the same level as this year. Food gross marginat 34.0% was level on the year. UK operating costs, before bonus, were up 7.7% to £2,431.7m. This reflected theon-going investment in the growth of the business through our staff, stores andmarketing. Increasing underlying cost pressures in areas such as energy, fuel,rent and rates have been well managed. A breakdown of UK operating costs for the year is shown below: 52 weeks ended 31 March 2007 1 April 2006 % inc £m £mRetail staffing 810.1 741.0 +9.3Retail occupancy 717.3 682.1 +5.2Distribution 321.6 306.2 +5.0Marketing and related 144.7 113.8 +27.2Support 438.0 414.3 +5.7Total before bonus 2,431.7 2,257.4 +7.7Bonus 91.0 73.0 +24.7Total including bonus 2,522.7 2,330.4 +8.3 The increase in retail staffing costs reflects the impact of the changes made topay structures last year, as well as space growth and investment in additionalstaffing in our stores to improve service for our customers. The increase inretail occupancy costs reflects space growth and higher energy costs.Distribution costs increased at a rate well below volume growth. Furtherinvestment in marketing has contributed towards our top line sales growth.Support costs, which include non-store related overheads, were impacted byincreased pension contributions. We will be paying a record bonus of £91.0m(last year £73.0m), which includes a £26m reward for our store staff andreflects the very strong performance of the business in 2006/07. We expectlike-for-like cost growth in 2007/08 to be in line with inflation, but we willalso fund space growth and the impact of volume growth in like-for-like stores. The UK operating profit includes a contribution of £19.5m (last year £9.6m) fromthe Group's continuing economic interest in M&S Money. This strong growth camefrom additional account holders and lower costs. For 2007/08 we expect M&SMoney to generate a profit contribution of between £25m to £30m. International operating profit before property disposals was £87.5m, up 33.2%,reflecting the strong sales performance of the business. Franchised operatingprofits grew by 40.8% to £42.1m. Owned store operating profits (Ireland and HongKong), increased by 26.8% to £45.4m. Net finance costs 52 weeks ended 31 March 2007 1 April 2006 £m £mFinance costs (112.6) (134.9)Finance income 13.0 13.0Net finance costs before exceptional items and pension (99.6) (121.9)finance incomePension finance income 20.8 17.5Finance costs before exceptional items (78.8) (104.4)Exceptional finance costs (30.4) -Net finance costs (109.2) (104.4) Net finance costs for the year, before exceptional items and pension financeincome, were down 18.3% at £99.6m reflecting the reduction in average net debt.The average interest rate for the year was 5.9% (last year 5.8%). Fixed chargecover was 5.9x (last year 4.9x). Pension finance income, which reflects thedifference between the expected return on pension scheme assets and the intereston scheme liabilities, was £20.8m. For 2007/08 this income has been calculatedat c.£54m. This increase reflects the expected increase in returns on pensionscheme assets following the contribution of £500.1m to the scheme which hasreduced the pension deficit. The Group's net debt has increased accordingly. The exceptional finance cost of £30.4m represents a one-off make-whole premiumarising on the redemption of £317.2m of secured bonds, together with thewrite-off of unamortised transaction costs. This redemption enabled us torelease the secured properties for their transfer into a limited partnershipwith the UK Pension Scheme (see Pensions below). Taxation The tax charge reflects a pre-exceptional effective tax rate for the year of29.4% (last year 30.2%). This reflects the refund of prior year tax. The 2007/08tax rate is expected to be in line with the current year rate. Earnings per share Adjusted earnings per share from continuing operations, which excludes theeffect of property disposals and exceptional items, has increased by 28.7% to40.4p per share. The weighted average number of shares in issue during theperiod was 1,688.6m (last year 1,667.0m). Dividend per share The Board is recommending a final dividend of 12.0p per share. This will resultin a total dividend of 18.3p per share, an increase of 30.7% (last year 14.0pper share). This is in line with the dividend policy announced in May 2006, togrow each half year dividend in line with adjusted EPS growth. Capital expenditure 52 weeks ended 31 March 2007 1 April 2006 £m £mModernisation programme 479 175New stores 120 49International 27 19Supply chain and technology 114 39Maintenance 52 56Total capital expenditure 792 338 Investing in the business is a key part of our strategy. Capital expenditure forthe year was £792.4m compared with £337.7m last year. The increase in spend on the modernisation programme reflects the investment inour 2006 programme, with some 40% of our space now under new format, as well asan earlier start to the 2007 programme in order to complete the work by our peakChristmas trading period. In addition, we commenced development work on majorcity centre stores such as London Pantheon, Edinburgh and Belfast, as well asextensions to some of our major out of town stores such as London Colney,Braehead and Cheshunt. Capital expenditure on new stores was up £71m, reflectingthe Simply Food opening programme and three new retail parks. Supply chain capital expenditure reflects investment made in new distributioncentres in Food and General Merchandise. Technology capital expenditure reflectsinvestment in Information Technology with the implementation of new financialsystems as well as a major project to start replacing our tills and point ofsale system. Capital expenditure for 2007/08 is expected to be between £850m and £950m. Cash flow and net debt 52 weeks ended 31 March 2007 1 April 2006 £m £mEBITDA 1,329.2 1,133.4Working capital and similar movements 114.1 64.1Capex and disposals (710.5) (264.3)Interest and taxation (282.6) (231.4)Dividends and share issues (215.7) (142.3)Other movements (3.4) (9.0)Net cash generated 231.1 550.5Opening net debt (1,729.3) (2,277.2)Exchange and other non-cash movements 44.3 (2.6)Partnership liability to M&S UK Pension Scheme (non-cash) (495.6) -Closing net debt (1,949.5) (1,729.3) The Group generated a net cash inflow of £231.1m (last year £550.5m), reflectingthe strong cash generation of the business. Cash inflow from continuingoperating activities increased by £259.0m. Working capital increased to £114.1mreflecting the additional bonus provision and a reduction in cash outflow onleasehold prepayments. Cash outflow on capital expenditure, net of disposals,was £710.5m (last year £264.3m) reflecting a step up in the modernisationprogramme and major store developments in several of our major city centrestores. The Group made a one-off, property-backed contribution of £500.1m to secure thefuture of the Group's defined benefit pension scheme. This is accrued for as aliability of £496.9m at year end. As a result, net debt at the end of the yearincreased to £1,949.5m, compared with £1,729.3m last year. Pensions A triennial valuation of the UK defined benefit scheme was carried out as at 31March 2006 resulting in an actuarial deficit of £704m. The Group has agreed a plan with the Pension Scheme Trustees to address thedeficit by transferring properties with a current market value of £1.1bn into apartnership established by the Group. A limited interest in this partnership wascontributed to the Pension Scheme on 13 March 2007. The Group retains controlover these properties, including the flexibility to substitute alternativeproperties. The properties held in the partnership have been leased back toMarks and Spencer plc. The pension scheme is entitled to a distribution from theprofits of the partnership of £50m per annum for 15 years. The value of thispartnership interest on the date of contribution was £500m and this isrecognised as an asset by the Pension Scheme. The impact of this transaction on the Group's balance sheet is a reduction inthe pension deficit of £500m and the recognition of an amortising liability inrespect of the obligations of the partnership to the Pension Scheme. At 31 March2007 the IAS 19 retirement benefit deficit was £283m (last year £795m) and theamortising liability had a value of £497m (last year £nil). Statements made in this announcement that look forward in time or that expressmanagement's beliefs, expectations or estimates regarding future occurrences andprospects are "forward-looking statements" within the meaning of the UnitedStates federal securities laws. These forward-looking statements reflect Marks &Spencer's current expectations concerning future events and actual results maydiffer materially from current expectations or historical results. Any suchforward-looking statements are subject to various risks and uncertainties,including failure by Marks & Spencer to predict accurately customer preferences;decline in the demand for products offered by Marks & Spencer; competitiveinfluences; changes in levels of store traffic or consumer spending habits;effectiveness of Marks & Spencer's brand awareness and marketing programmes;general economic conditions or a downturn in the retail or financial servicesindustries; acts of war or terrorism worldwide; work stoppages, slowdowns orstrikes; and changes in financial and equity markets. For further information, please contact: Investor Relations: Media enquiries: Amanda Mellor +44 (0)20 8718 3604 Corporate PR: +44(0)20 8718 1919Majda Rainer +44 (0)20 8718 1563 Investor & Analyst webcast: There will be an investor and analyst presentation at 09.30 (BST) on Tuesday 22May 2007. This presentation can be viewed live on the Marks and Spencer Groupplc website on: www.marksandspencer.com/thecompany. Video interviews with Stuart Rose, Chief Executive and Ian Dyson, Group FinanceDirector will be available on the above website. The interviews are alsoavailable in audio and transcript. Fixed Income Investor Conference Call: This will be hosted by Ian Dyson at 15.30 (BST) on Wednesday 23 May 2007: Dial in number +44 (0) 20 8515 2301/0800 279 2280 A recording of this call will be available until Wednesday 30 May 2007: Dial in number: +44 (0) 20 7154 2833/0800 358 3474 Access Code: 3738388 Consolidated income statement Year ended Year ended 31 Mar 2007 1 Apr 2006 Notes £m £m Revenue - continuing operations 2 8,588.1 7,797.7 Operating profit - continuing operations 3 1,045.9 850.1 Finance income 33.8 30.5Finance costs (143.0) (134.9) Analysed between:Before exceptional finance costs (112.6) (134.9)Exceptional finance costs 4 (30.4) - Profit on ordinary activities before taxation - continuing operations 936.7 745.7 Analysed between:Before property disposals and exceptional items 965.2 751.4Profit/(loss) on property disposals 1.9 (5.7)Exceptional finance costs (30.4) - Income tax expense 5 (277.5) (225.1) Profit on ordinary activities after taxation - continuing operations 659.2 520.6 Profit from discontinued operation 6 0.7 2.5 Profit for the year attributable to shareholders 659.9 523.1 Earnings per share 7A 39.1p 31.4pDiluted earnings per share 7B 38.5p 31.1pEarnings per share from continuing operations 7A 39.1p 31.3pDiluted earnings per share from continuing operations 7B 38.5p 31.0p Non-GAAP measure:Adjusted profit before taxation (£m) 1 965.2 751.4 Adjusted earnings per share from continuing 7A 40.4p 31.4poperationsAdjusted diluted earnings per share from continuing operations 7B 39.8p 31.1p Consolidated statement of recognised income and expense Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £mProfit for the year attributable to shareholders 659.9 523.1 Foreign currency translation differences (14.0) 11.1Actuarial losses on retirement benefit deficit (8.6) (169.3)Cash flow and net investment hedges- losses deferred in equity (7.4) (3.1)- recycled and reported in net profit 10.7 (1.4)- amount recognised in inventories 2.1 (3.8)Tax on items taken directly to equity 24.5 80.7Net gains/(losses) not recognised in the income statement 7.3 (85.8) Total recognised income and expense for the year 667.2 437.3Prior year adjustment 1 48.4Total recognised income and expense since last annual report 715.6 Consolidated balance sheet As at As at 1 Apr 2006 31 Mar 2007 (restated) Notes £m £mASSETSNon-current assetsIntangible assets 194.1 163.5Property, plant and equipment 4,044.5 3,575.8Investment property 25.1 38.5Investment in joint venture 9.3 9.0Other financial assets 3.0 3.3Trade and other receivables 247.0 242.8Deferred tax assets 11.6 83.9 4,534.6 4,116.8 Current assetsInventories 416.3 374.3Other financial assets 50.9 48.8Trade and other receivables 196.7 210.5Derivative financial instruments 2.4 76.4Cash and cash equivalents 180.1 362.6Assets of discontinued operation - 69.5 846.4 1,142.1 Total assets 5,381.0 5,258.9 LIABILITIESCurrent liabilitiesTrade and other payables 1,043.9 867.8Derivative financial instruments 8.3 8.0Borrowings and other financial liabilities 461.0 1,052.8Current tax liabilities 87.3 58.7Provisions 5.7 9.2Liabilities of discontinued operation - 20.5 1,606.2 2,017.0 Non-current liabilitiesBorrowings and other financial liabilities 1,234.5 1,133.8Partnership liability to the Marks & Spencer UK Pension Scheme 496.9 -Retirement benefit deficit 283.3 794.9Trade and other payables 87.6 74.8Derivative financial instruments 0.2 9.5Provisions 16.8 19.1Deferred tax liabilities 7.3 6.1 2,126.6 2,038.2 Total liabilities 3,732.8 4,055.2 Net assets 1,648.2 1,203.7 EQUITYCalled up share capital - equity 424.9 420.6Share premium account 202.9 162.3Capital redemption reserve 2,168.5 2,113.8Hedging reserve (4.4) (8.0)Other reserve (6,542.2) (6,542.2)Retained earnings 5,397.1 5,057.2Total shareholders' equity 9 1,646.8 1,203.7Minority interest in equity 1.4 -Total equity 1,648.2 1,203.7 Consolidated cash flow information CASH FLOW STATEMENT Year ended Year ended 31 Mar 2007 1 Apr 2006 Notes £m £mCash flows from operating activitiesCash generated from operations - continuing 10A 1,442.6 1,183.6Cash generated from operations - discontinued 10B 0.7 13.9Tax paid (150.8) (101.5)Net cash inflow from operating activities 1,292.5 1,096.0 Cash flows from investing activitiesDisposal of subsidiary, net of cash disposed 48.8 -Capital expenditure and financial investment 10C (712.8) (266.3)Interest received 13.2 12.9Net cash outflow from investing activities (650.8) (253.4) Cash flows from financing activitiesInterest paid (123.4) (142.8)Exceptional interest paid (21.6) -Other debt financing 10D (479.2) (420.0)Equity dividends paid (260.6) (204.1)Other equity financing 10E 9.2 55.8Net cash outflow from financing activities (875.6) (711.1) Net cash (outflow)/inflow from activities (233.9) 131.5Effects of exchange rate changes (1.5) 1.6Opening net cash 282.4 149.3Closing net cash 47.0 282.4 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £mOpening net debt (1,729.3) (2,277.2) Net cash (outflow)/inflow from activities (233.9) 131.5Cash outflow/(inflow) from increase/(decrease) in current financial assets 2.6 (1.0)Cash outflow from decrease in debt financing 479.2 420.0Debt financing net of liquid resources disposed with subsidiary (16.8) -Fair value movement on derivatives 67.0 (3.7)Partnership liability to the Marks & Spencer UK Pension Scheme (non-cash) (495.6) -Exchange and other non-cash movements (22.7) 1.1Movement in net debt (220.2) 547.9 Closing net debt (1,949.5) (1,729.3) 1 General information and basis of preparation The results for the year have been audited and are prepared on the basis of theaccounting policies set out in the Group's 2007 Annual Report and FinancialStatements. The financial information has been prepared in accordance with theListing Rules of the Financial Services Authority. The summary of results for the year ended 1 April 2006 does not constitute thefull financial statements within the meaning of s240 of the Companies Act 1985. The full financial statements for that year have been reported on by the Group'sauditors and delivered to the Registrar of Companies. The auditors' report wasunqualified and did not contain a statement under s237(2) or s237(3) of theCompanies Act 1985. Following a change in external interpretation of IAS 12 - 'Income Taxes', theGroup's accounting policy for deferred tax now more closely reflects the mannerin which management expects to recover or settle the carrying amounts of itsbuildings through sale or use. The opening balance sheet at 3 April 2005 hasbeen restated to recognise £48.4m of additional deferred tax assets andreserves. There is no material impact of this change on the income statement. The Directors believe that the 'adjusted' profit and earnings per share measuresprovide additional useful information for shareholders on the underlyingperformance of the business, and are consistent with how business performance ismeasured internally. It is not a recognised profit measure under IFRS and maynot be directly comparable with 'adjusted' profit measures used by othercompanies. 2 Revenue The Group's primary reporting segments are geographic, with the Group operatingin two geographic areas being the UK and International. The geographic segmentsdisclose revenue and operating profit by destination and reflect managementresponsibility. Within each geographic segment the Group sells both food andgeneral merchandise and secondary segment disclosure is given for revenue. Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £m UK Retail 7,977.5 7,275.0 International RetailOwned stores(1) 369.5 324.2Franchised stores 241.1 198.5 610.6 522.7 Total revenue 8,588.1 7,797.7 (1) Owned stores consists of the Marks & Spencer owned businesses in the Republic of Ireland and Hong Kong. Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £m UK RetailGeneral Merchandise 4,002.8 3,651.8Foods 3,974.7 3,623.2 7,977.5 7,275.0International RetailGeneral Merchandise 423.9 366.0Foods 186.7 156.7 610.6 522.7 Total revenue 8,588.1 7,797.7 3 Operating profit Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £m UK Retail(1)Before property disposals 956.5 790.1Profit/(loss) on property disposals 0.2 (5.6) 956.7 784.5International RetailOwned stores 45.4 35.8Franchised stores 42.1 29.9Before property disposals 87.5 65.7Profit/(loss) on property disposals 1.7 (0.1) 89.2 65.6 Total operating profit 1,045.9 850.1 (1)Included within UK Retail is an operating profit of £19.5m (last year £9.6m) in respect of fees receivedfrom HSBC in relation to M&S Money. 4 Exceptional finance costs The exceptional finance costs represent the unamortised transaction costs, aone-off make-whole premium and the cancellation of the swaps arising on theredemption of £317.2m of secured bonds. These bonds were redeemed in order torelease properties for use in the limited partnership with the Marks & SpencerUK Pension Scheme. 5 Income tax expense The post-exceptional effective tax rate was 29.6% (last year 30.2%) and the pre-exceptional effective tax rate was 29.4% (last year 30.2%). 6 Discontinued operation Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £m Revenue 13.0 228.2Cost of sales (8.2) (144.7)Gross profit 4.8 83.5Net operating expenses (4.5) (80.5)Net interest receivable - 0.2Profit before taxation 0.3 3.2Income tax expense - (0.7)Profit after taxation 0.3 2.5 Gain on disposal of subsidiary net assets 0.4 -Taxation - -Net gain on disposal 0.4 - Profit from discontinued operation 0.7 2.5 On 31 March 2006, the Group announced the sale of Kings Super Markets Inc to aUS investor group for $61.5m excluding cash in the business at the date ofdisposal. The disposal of the business was completed on 28 April 2006. 7 Earnings per share The calculation of earnings per ordinary share is based on earnings after taxand the weighted average number of ordinary shares in issue during the year. The adjusted earnings per share figures have also been calculated based onearnings excluding the effect of property disposals and exceptional items. Thesehave been calculated to allow the shareholders to gain an understanding of theunderlying trading performance of the Group. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. The Group has only one class of dilutive potential ordinary sharesbeing those share options granted to employees where the exercise price is lessthan the average market price of the Company's ordinary shares during the year. Details of the adjusted earnings per share are set out below: Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £m Earnings after tax 659.9 523.1Profit from discontinued operation (0.7) (2.5)Earnings after tax - continuing 659.2 520.6Property disposals (net of tax) (1.4) 2.0Exceptional finance costs (net of tax) 23.9 -Adjusted earnings after tax - continuing 681.7 522.6 Weighted average number of ordinary shares in issue 1,688.6 1,667.0(millions)Potentially dilutive share options under Group's share option schemes 26.3 14.5(millions) 1,714.9 1,681.5 A Basic earnings per shareWeighted average number of ordinary shares in issue 1,688.6 1,667.0(millions) Basic earnings per share (pence) 39.1 31.4Profit from discontinued operation per share (pence) - (0.1)Basic earnings per share - continuing (pence) 39.1 31.3Property disposals per share (pence) (0.1) 0.1Exceptional finance costs per share (pence) 1.4 -Adjusted basic earnings per share - continuing (pence) 40.4 31.4 B Diluted earnings per shareWeighted average number of ordinary shares in issue 1,714.9 1,681.5(millions) Diluted earnings per share (pence) 38.5 31.1Profit from discontinued operation per share (pence) - (0.1)Diluted earnings per share - continuing (pence) 38.5 31.0Property disposals per share (pence) (0.1) 0.1Exceptional finance costs per share (pence) 1.4 -Adjusted diluted earnings per share - continuing (pence) 39.8 31.1 8 Dividends Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £m Final dividend of 9.2p per share (last year 7.5p per share) 154.6 124.3 Interim dividend of 6.3p per share (last year 4.8p per share) 106.0 79.8 260.6 204.1 In addition the directors have proposed a final dividend in respect of the yearended 31 March 2007 of 12.0p per share amounting to a dividend of £204.0m. Itwill be paid on 13 July 2007 to shareholders who are on the Register of Memberson 1 June 2007. In line with the requirements of IAS 10 - 'Events after theBalance Sheet Date', this dividend has not been recognised within these results. 9 Statement of changes in shareholders' equity Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £m Opening shareholders' equity as previously reported 1,203.7 841.6Prior year adjustment - deferred tax - 48.4Opening shareholders' equity restated 1,203.7 890.0Profit for the year attributable to shareholders 659.9 523.1Dividends (260.6) (204.1)Purchase of own shares held by employee trust (18.4) (6.0)Shares issued on exercise of employee share schemes 44.9 61.8Purchase of call option for Company's shares (17.3) -Actuarial loss on post-retirement liability (8.6) (169.3)Foreign currency translation (14.0) 11.1Charge for share-based payments 27.3 24.7Tax on items taken directly to equity 24.5 80.7Gains/(losses) on cash flow and net investment hedges 5.4 (8.3)Closing shareholders' equity 1,646.8 1,203.7 10 Cash flow analysis Year ended Year ended 31 Mar 2007 1 Apr 2006 £m £mA Cash flows from operating activities - continuingProfit on ordinary activities after taxation 659.2 520.6Income tax expense 277.5 225.1Interest payable and similar charges 143.0 134.9Interest receivable (33.8) (30.5)Operating profit 1,045.9 850.1Increase in inventories (42.8) (42.2)Decrease/(increase) in receivables 12.5 (4.1)Payments to acquire leasehold properties (13.5) (38.0)Increase in payables 136.6 128.0Exceptional operating cash outflow (4.2) (14.6)Depreciation and amortisation 282.7 274.0Share-based payments 27.3 24.7(Profit)/loss on property disposals (1.9) 5.7 1,442.6 1,183.6 B Cash flows from operating activities - discontinuedProfit on ordinary activities after taxation 0.7 2.5Profit on sale of business (0.4) -Income tax expense - 0.7Net interest receivable - (0.2)Operating profit 0.3 3.0Decrease in working capital 0.1 3.5Depreciation and amortisation 0.3 6.3Loss on property disposals - 1.1 0.7 13.9 C Capital expenditure and financial investmentPurchase of property, plant and equipment (666.9) (298.5)Proceeds from sale of property, plant and equipment 2.9 45.1Purchase of intangible fixed assets (46.5) (10.9)Sale/(purchase) of non-current financial assets 0.3 (3.0)(Purchase)/sale of current financial assets (2.6) 1.0 (712.8) (266.3) D Debt financingCash inflow/(outflow) from borrowings 21.6 (144.6)Drawdown/(repayment) of syndicated bank 296.4 (200.0)facilityRedemption of securitised loan notes (319.6) (3.1)Redemption of medium term notes (818.2) (58.3)Issue of medium term notes 397.5 -Decrease in obligations under finance leases (2.2) (3.0)Redemption of B shares (54.7) (11.0) (479.2) (420.0) E Other equity financingShares issued on exercise of employee share schemes 44.9 61.8Purchase of own shares held by employee trust (18.4) (6.0)Purchase of call option for Company's shares (17.3) - 9.2 55.8 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Marks & Spencer