23rd May 2006 07:03
Marks & Spencer Group PLC23 May 2006 23 May 2006 Marks and Spencer Group plc Preliminary Results 2005/06 52 weeks ended 1 April 2006 Financial Highlights: unaudited 2005/06 2004/05 % inc £m £m • Group revenue 7,797.7 7,490.5 +4.1 UK 7,275.0 7,034.7 +3.4 International 522.7 455.8 +14.7 • Adjusted Group profit before tax* 751.4 556.1 +35.1 • Group profit before tax 745.7 505.1 +47.6 • Adjusted earnings per share* from 31.4p 19.2p +63.5 continuing operations • Basic earnings per share 31.4p 29.1p +7.9 • Final dividend per share 9.2p 7.5p +22.7 • Total dividend per share 14.0p 12.1p +15.7 • Net cash inflow/(outflow) 550.5 (104.5) • Net debt 1,729.3 2,277.2 ** * Adjusted Group profit before tax and adjusted earnings per share are internalmeasures of performance which exclude the effect of exceptional items and assetdisposals. They provide additional information on the underlying performance ofthe Group and are consistent with how we have reported previously under UK GAAP. ** Adjusted for the adoption of IAS 32 and 39 - "Financial Instruments" to becomparable with net debt at 1 April 2006. Paul Myners, Chairman, commented:"The Group has made good progress in a difficult environment. Adjusted earningsper share at 31.4p are at an all time high. The Board is proposing a finaldividend of 9.2p per share, an increase of 22.7%, giving a full year dividend of14.0p, an increase of 15.7%. The full year dividend is covered 2.2 times byearnings. Having re-established cover at over 2 times, the Board's policy is togrow dividends broadly in line with adjusted earnings per share growth for eachhalf of the Group's financial year." Stuart Rose, Chief Executive, said:"The Group has had a good year. M&S is beginning to regain its confidence butwe still have much to do to ensure that we sustain growth in the long term. Ourkey priority remains the revitalisation of our core business, building on thework already in hand based on our principles of Quality, Value, Service,Innovation and Trust and driving further progress in product, environment andservice. "We need to drive sales, grow market share, improve the performance from ourexisting stores and continue to buy better. We also need to manage stockstightly and mitigate significant cost pressures on fuel, energy, rent and ratesin a competitive retail environment. We are under no illusions about the worknecessary to place us firmly on a path to long term growth and are committed todelivering this. "I would like to take this opportunity of thanking all our staff for their hardwork throughout the year." Chief Executive's Statement:In 2005/06 we said our priority was to drive the business, concentrating onproduct, environment and service. This plan enabled us to deliver an improvingperformance across the business as the year progressed. Food performed well,thanks to our renewed focus on outstanding quality and innovation. Clothingexperienced a difficult first half as we continued to improve our productstyling and pricing, change our buying practices and rationalise our brands. Thesecond half was much stronger, with improving performances in Womenswear andMenswear. Our Home business also made progress reflecting more competitivepricing and a strong performance in furniture. M&S continues to be the UK's leading retailer of Clothing and Footwear by bothvalue and volume. Throughout the year we improved market share and ended theyear ahead on volume (9.9% compared with 9.7% last year), as customers boughtmore in response to better product and pricing, but behind on value at 10.2%compared with 10.5% last year, primarily reflecting price deflation. Our focus on full price sales has proved successful. At the end of the fourthquarter we had achieved an improvement in full price market share in allbusiness areas for the first time in three years (9.2% to 10.1%). The gains weremost marked in Womenswear, including per una, where the improvement in productand value attracted more customers with market share increasing from 8.6% to10.0%. Our BrandWe have worked hard to rebuild customer perceptions of the M&S brand. Ourexternal communication has focussed on Food and Womenswear; areas that define M&S and most influence how customers perceive the brand. In store we havedeveloped innovative and stylish new packaging and point of sale material tocommunicate our brand values in a more distinctive way. This Spring, welaunched our 'Look Behind the Label' campaign which was designed to highlightour stance on ethical and product issues which are so important to ourcustomers. Customer reaction has been very positive. Response to our brand building throughout the year has been encouraging - notjust from customers, but from key stakeholders. We have been able to demonstratea clear upturn in brand momentum measures as a result of our creative campaignsand customers have voted with their feet. Levels of footfall have recovered tothe highs in 2002 with customer visits increasing by nearly 350,000 a week tojust over 15 million a week (last year 14.7m). We are now starting to convertmore of these visits to transactions. This will be a key area for improvement inthe year ahead. ProductImproving our values was, and remains, a key objective. We re-priced rangesacross all price points, without compromising our quality standards, withparticular emphasis on opening price points. Around 30% of our sales now comefrom opening price point merchandise compared with 12% in 2003/04. Pricerealignment, better buying and control of stocks and markdowns havesignificantly improved our margins in General Merchandise this year. Customerperceptions on the value we offer have improved steadily throughout the year.Value will continue to be a key driver across all price points. We are committedto maintaining our competitiveness. Better buying practices are key to driving the business as we become moredemand-led. We now have offices in Istanbul, Hong Kong, Bangalore, Bangladeshand Sri Lanka. Delhi and Shanghai will open this year. This gives us asubstantial international presence enabling us to work more quickly andeffectively with our supply base, sourcing more efficiently with greaterflexibility, and ensuring our strict trading standards are met. Bettersourcing, coupled with tighter stock controls, is also enabling us to deliverhigher volumes, higher margins and better cash flow for suppliers. During theyear, we increased the amount of product we buy direct to around 25% (last year20%). "Open To Buy" was introduced across General Merchandise during the year enablingus to deliver the latest trends, introduce more new product and chase fastsellers. This will be extended further in the coming year. We also introduced more stylish, wearable merchandise, stepping up innovationacross all product ranges. In Food, innovative product development andrelentless commitment to quality continues to set us apart. For example, weintroduced our unique, additive-free 'Cook!' range and committed to removehydrogenated fats from virtually all of our food products by the end of 2006. EnvironmentBy the end of 2006 nearly everyone in the UK should be within easy reach of amodernised M&S store. In 2004/05, we trialled the new look in four stores. Thiswas extended to 23 stores by the end of 2005/06. As well as enhancing customerperceptions of the brand, the trials generated good returns with sales growthaveraging 10% in the fourth quarter. We are now extending this programme and bythe end of 2006 we will have modernised some 35% of our floor space, as part ofa £500m-plus capital expenditure programme, introducing better design, lighting,layout, equipment, changing rooms, service areas and cafes. In order to drive our Food business, we opened a further 25 'Simply Food' storesduring the year and concluded a £38m deal to buy 28 former Iceland stores whichwill open this summer as 'Simply Food' outlets. We are also trialling a 'SimplyFood' offer in nine BP Connect service stations. If this trial is successful,there will be significant opportunity for expansion in the coming years. ServiceOutstanding customer service is the third key part of our plan. Starting in June2005, all 56,000 of our store colleagues participated in the 'Our Service Style'programme. We also restructured customer assistants' pay, introducing some ofthe best rates on the high street, and offered a new, clearer career path. We need to do more to further improve service. Our aim is to make servicetraining part of everyday life and we will be adding more specialist sales staffin areas such as suiting, lingerie, footwear and foods. Our aim is to make surewe always have well-motivated, properly trained people in the right place at theright time to help our customers. Fantastic product, better stores and outstanding service has delivered bettersales and profits. As a result, we have been able to reward all our staff with arecord bonus payout totalling £73m. We hope to be able to repeat this in thecoming year. Looking aheadContinuing to improve product, environment and service will remain our priority.Our focus will be on driving sales and market share from our existing space. Wewill continue to improve the efficiency of our supply chain through betterbuying, greater flexibility, better catalogue and stock control, and continuedmanagement of markdowns and waste. We are rolling out a substantial storemodernisation programme. We will continue to drive through further improvementsin service and improve availability. We will also begin to broaden our business, focussing on reaching a widercustomer base and stretching our brand reach. We are extending our Food businesswith the Simply Food programme, continuing to take our outstanding food to newcustomers. Our work with Amazon will significantly improve our e-commercefunctionality as it comes on stream in 2007. We continue to look foropportunities to expand our international business. Financial Review: Summary of Results: unaudited 2005/06 2004/05 % inc £m £m Total revenue 7,797.7 7,490.5 4.1 UK 7,275.0 7,034.7 3.4 International 522.7 455.8 14.7Operating profit before exceptional charges and asset disposals 855.8 649.1 31.8 UK 790.1 588.4 34.3 International 65.7 60.7 8.2Profit before tax, exceptional charges and asset disposals 751.4 556.1 35.1Loss on property disposals (5.7) (0.4)Exceptional operating charges - (50.6)Profit before tax 745.7 505.1 47.6Adjusted EPS from continuing operations 31.4p 19.2p 63.5Dividend per share (declared) 14.0p 12.1p 15.7 The figures above exclude the results of Kings Super Markets which has beentreated as a discontinued operation. UKRevenue for the 52 weeks ended 1 April 2006 was £7,275.0m, up 3.4% and up 1.3%on a like-for-like basis. Sales of General Merchandise remained broadly level,with Clothing sales flat and Home seeing a 0.8% increase. Food recorded stronggrowth of 7%. An analysis of sales trends by business area, is shown below: H1% H2% FY%RevenueClothing -4.9 +4.4 0.0Home -11.2 +10.5 +0.8General Merchandise -5.5 +5.0 +0.1Food +5.6 +8.2 +7.0Total -0.2 +6.6 +3.4 Like-for-Like H1% H2% FY%General Merchandise -6.1 +3.5 -1.0Food +1.6 +5.4 +3.6Total -2.3 +4.5 +1.3 In Clothing, better values, better buying, and better styling resulted in betterperformance as the year progressed with sales up 4.4% in the second half.Womenswear benefited from well-received ranges, including more frequentadditions of new product into stores. Per una had another very strong year.Menswear rationalised its brands and extended its Autograph offer. Lingeriebenefited from a clearer offer with five brands, including the new per unarange. We restructured our Childrenswear area, where performance was weak, withthe aim of regaining a leading position in this important market. Our decisionto concentrate our Home offer on stylish outstanding value products withmainstream appeal and very competitive pricing led to increased sales, supportedby a particularly strong performance in furniture. Food had a very successful year with sales up 7.0%, up 3.6% on a like-for-likebasis. This was driven by our renewed focus on outstanding quality andinnovation, backed by powerful advertising. We successfully tapped demand forresponsibly sourced, healthy food, not least with our additive-free 'Cook!'range. We continue to offer everyday food of exceptional quality, like ourOakham chicken, and customers again made us their first choice at key times likeChristmas and Easter. Our 'Simply Food' stores performed strongly. UK operating profit before exceptional items and asset disposals was £790.1m, up34.3% (last year £588.4m). This growth reflects the benefits of the actionstaken last year to improve supplier terms and control stock and commitment,contributing to an increase in the gross margin of 3.6 percentage points to42.8% (last year 39.2%). UK operating costs of £2,330.4m were up 7.4% on theyear, reflecting the impact of new space and the provision for a staff bonus of£73m. Excluding the bonus, costs were up 4.1%. The UK operating profit alsoincludes a contribution of £9.6m from the Group's continuing economic interestin M&S Money which was sold to HSBC in November 2004. InternationalOur International business, comprising franchise and wholly-owned stores in HongKong and the Republic of Ireland, continued to make good progress with sales up14.7% and operating profit up 8.2% (before exceptional charges and assetdisposals). Our franchise operation continues to grow with 198 stores in 31 territories.This year saw openings in the Czech Republic, India, Indonesia, Poland, SaudiArabia and South Korea. We also opened our first franchise in Moscow. Our wholly-owned stores in the Republic of Ireland also continued to performwell, reflecting both new openings, and improvement in the performance ofexisting stores. Underlying sales and profit in Hong Kong were strong butoverall results were affected by loss of space following the unplanned closureof one store. We agreed the sale of Kings Super Markets in the US, our only non-M&S brandedbusiness, for £35.4m ($61.5m) ahead of the year end. The sale completed on 28April 2006. Net interest payable 2005/06 2004/05 £m £m Interest payable (134.9) (120.9)Interest receivable 13.0 16.5Net interest payable (121.9) (104.4)Other finance income 17.5 11.4Total (104.4) (93.0) Net interest expense was £104.4m compared to £93.0m last year. This largelyreflects a significant increase in average net debt following the Tender Offerlast year. The average rate of interest on borrowings for the year was 5.8%(last year 5.7%). TaxationThe tax charge reflects an effective tax rate for the year of 30.2%, (comparedto 29.7% for the last full year). Shareholder returns and dividendsAdjusted earnings per share from continuing operations, which excludes theeffect of exceptional items and asset disposals, increased by 63.5% to 31.4p pershare. The average number of shares in issue during the period was 1,667.0m(last year 2,006.2m), reflecting the impact of the Tender Offer last year. The Board is proposing a final dividend of 9.2p per share (last year 7.5p pershare), an increase of 22.7%, bringing the full year dividend to 14.0p (lastyear 12.1p), an increase of 15.7%. Full year dividend is covered 2.2 times byearnings. Cash flow and net debtThe Group generated net cash flow of £550.5m. Cash inflow from continuingoperating activities increased by £309.2m to £1,183.6m reflecting higheroperating profits, a marginally lower investment in working capital, and areduction in cash outflows relating to exceptional items. Within workingcapital, investments in stock have been more than offset by the £73m bonus whichhas been provided for, but will not be paid until July, together with anincreased level of trade payables. During the year, the Group acquired tangible fixed assets of £326.8m. Aftertaking into account the timing of payments, the cash outflow for capitalexpenditure was £298.5m. This excludes the £38.0m the Group paid to acquire 28properties from Iceland which is included as a movement in working capital,reflecting the revised classification of certain leasehold interests. Net debt at the end of the year is £1,729.3m (last year £2,277.2m). Capital expenditureGroup capital additions for the year were £326.8m compared to £218.5m last year,reflecting the extension of the store modernisation programme. In the year weadded 1.4% to our total footage, representing an increase of 1% in GeneralMerchandise and 2.3% in Foods. Group capital expenditure for 2006/07 is expectedto be between £520m to £570m. PensionsThe Group paid £51m of additional contributions into the UK Defined BenefitPension Scheme in April 2005. This payment is reflected in the netpost-retirement liability of £794.9m at 1 April 2006 (last year £676.0m). The£118.9m increase in the level of this liability since the year end reflectsmovements in AA corporate bond rates, partially offset by an increase in themarket value of scheme assets. Guidance for the financial year 2006/07The following guidance was provided in our Q4 trading update on 11 April 2006: • The planned opening of new footage will add around 3% to total space, representing a c.2% increase in General Merchandise footage and c.5% increase in Food footage, on a weighted average basis. Total square footage at 1 April 2006 was around 13.1m square feet. • Group capital expenditure for 2006/07 is expected to be in the range of £520-570m. This includes £28m for the refurbishment of the Iceland stores. • Gross margin is expected to improve between 50 to 100bps. This will be driven mainly by improvements in General Merchandise primary margin from better buying and improved supplier terms. • Operating costs, including costs associated with new space and the modernisation programme (including accelerated depreciation), but excluding provision for bonus payments, are expected to increase by 6% to 7%. Any bonus payment for 2006/07 will depend on the financial performance of the Group. 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 Press Office: +44 (0)20 8718 1919Majda Rainer +44 (0)20 8718 1563 Investor & Analyst webcast:There will be an investor and analyst presentation at 09.00 (BST) on Tuesday 23May 2006: This presentation can be viewed live on the Marks and Spencer Groupplc website on www.marksandspencer.com/thecompany Fixed Income Investor Conference Call:This will be hosted by Ian Dyson at 14.30 (BST) on Tuesday 23 May 2006:Dial in number: +44 (0) 20 7190 1596/0800 358 5263A recording of this call will be available until Tuesday 30 May 2006:Dial in number: +44 (0) 20 8515 2499 Access Code: 443491# Video interviews with Stuart Rose, Chief Executive and Ian Dyson, Group FinanceDirector are be available at www.marksandspencer.com/thecompany orwww.cantos.com. The interviews are also available in audio and transcript. Consolidated income statement : unaudited Year ended Year ended 1 Apr 2006 2 Apr 2005 Notes £m £m Revenue 2 7,797.7 7,490.5 Operating profitBefore exceptional operating charges 850.1 648.7Exceptional operating charges 4 - (50.6) 3 850.1 598.1 Interest payable and similar charges (134.9) (120.9)Interest receivable 30.5 27.9 Profit on ordinary activities before taxation 745.7 505.1 Analysed between:Before exceptional operating charges and property disposals 751.4 556.1Loss on property disposals (5.7) (0.4)Exceptional operating charges - (50.6) Income tax expense 5 (225.1) (150.1) Profit on ordinary activities after taxation 520.6 355.0 Profit from discontinued operations 6 2.5 231.2 Profit for the year attributable to shareholders 523.1 586.2 Earnings per share 7A 31.4p 29.1pDiluted earnings per share 7B 31.1p 28.9pEarnings per share from continuing operations 7A 31.3p 17.6pDiluted earnings per share from continuing operations 7B 31.0p 17.4p Non-GAAP measure:Adjusted profit before tax (£m) 1 751.4 556.1 Adjusted earnings per share 7A 31.4p 19.2pAdjusted diluted earnings per share 7B 31.1p 19.0p Consolidated statement of recognised income and expense : unaudited Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m Profit for the year attributable to shareholders 523.1 586.2Exchange differences on translation of foreign operations 11.1 -Actuarial losses on defined benefit pension schemes (169.3) (78.1)Tax on items taken directly to equity 80.7 24.9Hedging reserve - fair value movement (3.1) - - recycled and reported in net profit (1.4) - - amount recognised in inventories (3.8) -Net losses not recognised in the income statement (85.8) (53.2)Total recognised income and expense for the year 437.3 533.0Effect of changes in accounting policy:First time adoption of IAS 39 (net of tax) (1.9) Consolidated balance sheet : unaudited As at As at 1 Apr 2006 2 Apr 2005 £m £m ASSETSNon-current assetsIntangible assets 163.5 165.4Property, plant and equipment 3,575.8 3,586.2Investment property 38.5 38.6Investments in joint venture 9.0 8.7Other financial assets 3.3 0.3Trade and other receivables 242.8 211.2Deferred income tax assets 35.5 24.6 4,068.4 4,035.0Current assetsInventories 374.3 338.9Other financial assets 48.8 67.0Trade and other receivables 210.5 213.8Derivative financial instruments 76.4 -Cash and cash equivalents 362.6 212.6Assets of discontinued operation 69.5 - 1,142.1 832.3 TOTAL ASSETS 5,210.5 4,867.3 LIABILITIESCurrent liabilitiesTrade and other payables 867.8 717.9Derivative financial instruments 8.0 -Borrowings 1,052.8 478.8Current tax liabilities 58.7 15.5Provisions 9.2 25.2Liabilities of discontinued operation 20.5 - 2,017.0 1,237.4 Non-current liabilitiesBorrowings 1,133.8 1,948.5Retirement benefit obligations 794.9 676.0Other non-current liabilities 74.8 71.8Derivative financial instruments 9.5 -Provisions 19.1 19.7Deferred income tax liabilities 6.1 4.7 2,038.2 2,720.7 TOTAL LIABILITIES 4,055.2 3,958.1 NET ASSETS 1,155.3 909.2 EQUITYCalled up share capital - equity 420.6 414.5Called up share capital - non-equity - 65.7Share premium account 162.3 106.6Capital redemption reserve 2,113.8 2,102.8Hedging reserve (8.0) -Other reserves (6,542.2) (6,542.2)Retained earnings 5,008.8 4,761.8TOTAL EQUITY 1,155.3 909.2 Consolidated cash flow information : unaudited CASH FLOW STATEMENT Year ended Year ended 1 Apr 2006 2 Apr 2005 Notes £m £m Cash flows from operating activities - continuingProfit on ordinary activities after taxation 520.6 355.0Income tax expense 225.1 150.1Interest payable and similar charges 134.9 120.9Interest receivable (30.5) (27.9)Exceptional operating charges - 50.6Operating profit before exceptional operating charges 850.1 648.7Decrease in working capital 10A 43.7 22.7Exceptional operating cash outflow (14.6) (74.6)Depreciation and amortisation 274.0 255.0Share-based payments 24.7 22.2Loss on property disposals 5.7 0.4Cash generated from operations - continuing 1,183.6 874.4Cash generated from operations - discontinued 10B 13.9 727.4Tax paid (101.5) (166.7)Net cash inflow from operating activities 1,096.0 1,435.1 Cash flows from investing activitiesAcquisition of subsidiary, net of cash acquired - (125.9)Disposal of subsidiary, net of cash disposed - 477.0Capital expenditure and financial investment 10C (266.3) (113.5)Interest received 12.9 15.4Net cash (outflow)/inflow from investing activities (253.4) 253.0 Cash flows from financing activitiesDebt financing 10D (562.8) 637.8Equity financing 10E (148.3) (2,502.0)Net cash outflow from financing activities (711.1) (1,864.2) Net cash inflow/(outflow) from activities 131.5 (176.1)Effects of exchange rate changes 1.6 1.1Opening net cash 149.3 324.3Closing net cash 282.4 149.3 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m Opening net debt (2,147.7) (2,043.9)Reclassification on the adoption of IAS 32 and 39 (129.5) -Opening net debt - under IFRS (2,277.2) (2,043.9) Net cash inflow/(outflow) from activities 131.5 (176.1)Cash inflow from decrease in current asset investments (1.0) (11.0)Cash outflow/(inflow) from decrease/(increase) in debt financing 10D 420.0 (757.1)Debt financing net of liquid resources disposed with subsidiary - 839.7Exchange and other movements (2.6) 0.7Movement in net debt 547.9 (103.8) Closing net debt (1,729.3) (2,147.7) 1 General information and basis of preparation The results comprise those of Marks and Spencer Group plc and its subsidiariesfor the 52 week year ended 1 April 2006 and have been prepared in accordancewith International Financial Reporting Standards (IFRS) as adopted for use inthe EU, and those parts of the Companies Act 1985 applicable to those companiesunder IFRS. The summary of results does not constitute the full financialstatements within the meaning of s240 of the Companies Act 1985. The fullfinancial statements for 2005, which were prepared under UK GAAP, have beenreported on by the Group's auditors and delivered to the Registrar of Companies.The audit report on those financial statements was unqualified and did notcontain a statement under s237(2) or s237(3) of the Companies Act 1985. Thefull financial statements for 2006, prepared under IFRS, will be finalised indue course and delivered to the Registrar of Companies after the AGM. The Directors believe that the 'adjusted' profit and earnings per share measuresprovide additional useful information for shareholders on underlying performanceof the business, and are consistent with how business performance is measuredinternally. It is not a recognised profit measure under IFRS and may not bedirectly comparable with 'adjusted' profit measures used by other companies. 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. Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m UK Retail 7,275.0 7,034.7 International Retail(1) 522.7 455.8 Total revenue 7,797.7 7,490.5 (1) International Retail consists of the Marks & Spencer owned businesses in the Republic of Ireland and Hong Kong, together with franchise operations. Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m UK RetailGeneral Merchandise 3,644.4 3,641.6Food 3,630.6 3,393.1 International RetailGeneral Merchandise 366.0 331.1Food 156.7 124.7 Total revenue 7,797.7 7,490.5 3 Operating profit Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £mUK Retail(1)Before exceptional operating charges and property disposals 790.1 588.4Property disposals (5.6) (0.1)Exceptional operating charges - (60.3) 784.5 528.0International RetailBefore exceptional operating charges and property disposals 65.7 60.7Property disposals (0.1) (0.3)Exceptional operating charges - 9.7 65.6 70.1Total operating profit 850.1 598.1 (1) UK Retail operating profit includes a contribution of £9.6m from the arrangement with HSBC. 4 Exceptional items Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m Head office relocation - (8.8)Head office change programme - (6.3)Board restructure - (8.4)Closure of Lifestore - (29.3)Defence costs - (38.6)Sale of head office premises - 31.1Release of provision held against European closure - 9.7Exceptional items - (50.6) 5 Taxation The taxation charge for the 52 weeks ended 1 April 2006 was £225.1m (last year£150.1m), giving an effective tax rate of 30.2% (last year 29.7%). Included inthe tax charge for the year is a credit of £nil (last year £19.1m), which isattributable to exceptional operating charges. 6 Discontinued operations Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m Profit before tax 3.2 35.5Taxation on results (0.7) (2.4)Profit after tax 2.5 33.1Gain on disposal of subsidiary net assets - 199.0Taxation - (0.9)Net gain on disposal - 198.1 Profit from discontinued operations 2.5 231.2 The profit after tax from discontinued operations in the current year isentirely attributable to Kings Super Markets (last year £3.9m). The balance oflast year's profit after tax, together with the net gain on disposal is entirelyattributable to the sale of Marks and Spencer Retail Financial Services Holdingsto HSBC Holdings plc completed on 9 November 2004. 7 Earnings per share The calculation of earnings per ordinary share is based on earnings after tax(last year earnings after tax and non-equity dividends), and the weightedaverage number of ordinary shares in issue during the year. The adjusted earnings per share figures have been calculated in addition to theearnings per share required by IAS 33 - 'Earnings per Share' and are based onearnings excluding the effect of exceptional items and property disposals. These have been calculated to allow the shareholders to gain an understanding ofthe underlying trading performance of the Group. For diluted earnings per share, the weighted average number of ordinary sharesin issues 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 1 Apr 2006 2 Apr 2005 £m £m Earnings after tax and non-equity dividends 523.1 583.4Profit from discontinued operations (2.5) (231.2)Earnings after tax and non-equity dividends - continuing 520.6 352.2Exceptional operating charges and property disposals (net of taxation) 2.0 31.5Adjusted earnings after tax and non-equity dividends - continuing 522.6 383.7 Weighted average number of ordinary shares in issue (millions) 1,667.0 2,006.2Potentially dilutive share options under Group's share option schemes (millions) 14.5 12.1 1,681.5 2,018.3 A Basic earnings per shareWeighted average number of ordinary shares in issue (millions) 1,667.0 2,006.2Basic earnings per share (pence) 31.4 29.1Profit from discontinued operations per share (pence) (0.1) (11.5)Basic earnings per share - continuing (pence) 31.3 17.6Exceptional operating charges and property disposals per share (pence) 0.1 1.6Adjusted basic earnings per share - continuing (pence) 31.4 19.2 B Diluted earnings per shareWeighted average number of ordinary shares in issue (millions) 1,681.5 2,018.3Diluted earnings per share (pence) 31.1 28.9Profit from discontinued operations per share (pence) (0.1) (11.5)Diluted earnings per share - continuing (pence) 31.0 17.4Exceptional operating charges and property disposals per share (pence) 0.1 1.6Diluted adjusted basic earnings per share - continuing (pence) 31.1 19.0 8 Dividends Year ended Year ended Year ended Year ended 1 Apr 2006 2 Apr 2005 1 Apr 2006 2 Apr 2005 per share per share £m £m Dividends on equity ordinaryshares:Paid final dividend 7.5p 7.1p 124.3 161.3Paid interim dividend 4.8p 4.6p 79.8 75.6 12.3p 11.7p 204.1 236.9 Dividends on non-equity B shares(1)Interim dividend - 3.36% - 1.4Final dividend - 3.78% - 1.4 - 2.8 204.1 239.7 (1) Under IAS 32 - 'Financial Instruments' dividends on non-equity shares are now treated as part of interest. The Directors have proposed a final dividend of 9.2p per share (last year 7.5pper share) which, in line with the requirements of IAS 10 - 'Events after theBalance Sheet Date', has not been recognised within these results. This makes atotal ordinary dividend of 14.0p per share (last year 12.1p per share). Thisresults in an ordinary dividend of £154.8m (last year £124.3m) which will bepaid on 14 July 2006 to shareholders whose names are on the Register of Membersat the close of business on 2 June 2006. The ordinary shares will be quoted exdividend on 31 May 2006. Shareholders may choose to take this dividend inshares or in cash. 9 Statement of changes in shareholders' equity Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m Opening shareholders' equity 909.2 2,859.1First time adoption of IAS 32 and 39 (see note 12) (67.6) - 841.6 2,859.1Profit for the year attributable to shareholders 523.1 586.2Dividends (204.1) (239.7)(Purchase) / sale of shares held by employee trusts (6.0) 0.3Shares issued on exercise of share options 61.8 68.4Redemption of B shares - (19.2)Actuarial loss on post-retirement liability (169.3) (78.1)Foreign currency translation 11.1 -Charge for share-based payments 24.7 22.2Tax on items taken directly to equity 80.7 24.9Loss on cashflow hedges deferred in equity (8.3) -Purchase of own shares - (2,300.0)Tender Offer expenses - (14.9)Closing shareholders' equity 1,155.3 909.2 10 Cash flow analysis Year ended Year ended 1 Apr 2006 2 Apr 2005 £m £m A Decrease in working capital - continuing(Increase)/decrease in inventories (42.2) 55.0Increase in receivables (4.1) (1.0)Payments to acquire leasehold properties (38.0) (0.1)Increase/(decrease) in payables 128.0 (31.2) 43.7 22.7 B Cash flows from discontinued operationsProfit on ordinary activities after taxation 2.5 231.2Profit on sale - (199.0)Taxation 0.7 3.3Interest payable and similar charges 0.4 0.2Interest receivable (0.6) -Operating profit 3.0 35.7Decrease in working capital 3.5 682.0Depreciation and amortisation 6.3 9.7Loss on property disposals 1.1 - 13.9 727.4 C Capital expenditure and financial investmentPurchase of property, plant and equipment (298.5) (232.2)Proceeds from sale of property, plant and equipment 45.1 117.8Purchase of intangible fixed assets (10.9) (10.9)(Purchase)/sale of non-current financial assets (3.0) 0.8Sale of current available for sale investments 1.0 11.0 (266.3) (113.5) D Debt financingCash (outflow)/inflow from borrowings (144.6) 649.0(Repayment)/drawdown of syndicated bank facility (200.0) 200.0Redemption of securitised loan notes (3.1) (2.8)Redemption of medium term notes (58.3) (95.2)Decrease in obligations under finance leases (3.0) (1.6)Redemption of B shares (11.0) -Movement in other creditors treated as financing - 7.7Cash (outflow)/inflow from debt financing (420.0) 757.1Interest paid (142.8) (116.5)Non-equity dividends paid - (2.8) (562.8) 637.8 E Equity financingEquity dividends paid (204.1) (236.9)Shares issued under employee share schemes 61.8 68.4Redemption of B shares - (19.2)Net (purchase)/sale of own shares held in employee trusts (6.0) 0.6Purchase of own shares - (2,300.0)Tender Offer expenses - (14.9) (148.3) (2,502.0) 11 Adoption of International Financial Reporting Standards As at As at 2 Apr 3 Apr 2005 2004 £m £m Net assets under UK GAAP 521.4 2,454.0 Adjustments (after taxation) IFRS 1- 'Property Revaluation' a 376.2 378.5IFRS 2 - 'Share Schemes' b 9.8 6.2IAS 10 - 'Dividend Recognition' c 124.3 160.7IAS 17 - 'Leases' Treatment of leasehold land d (72.4) (102.4)Finance leases e (1.8) (1.7)Lease incentives f (21.0) (17.2)Fixed rental uplifts g (13.5) (10.3)IAS 19 - 'Employee Benefits' h (27.2) (30.7)IAS 38 - 'Intangible Assets' Software assets i 13.0 22.7Goodwill and brands j 1.3 -Other (0.9) (0.7) Net assets under IFRS 909.2 2,859.1 Year ended 2 Apr 2005 £m Net income under UK GAAP 587.0 Adjustments (before taxation) IFRS 1- 'Property Revaluation' a 1.1 IFRS 2 - 'Share Schemes' b (23.0) IAS 17 - 'Leases' Treatment of leasehold land d 29.9 Finance leases e (0.2) Lease incentives f (5.1) Fixed rental uplifts g (4.5) IAS 19 - 'Employee Benefits' h 5.3 IAS 38 - 'Intangible Assets' Software assets i 1.4 Goodwill and brands j 0.5 Other (0.1) 5.3 Taxation 4.6 Discontinued operations - software assets (10.7) Net income under IFRS 586.2 a) IFRS 1 - 'Property Revaluation' Under UK GAAP property was stated at historical cost, subject to certainproperties having been revalued as at 31 March 1988. A property revaluation wasprepared on an existing use basis by external valuers DTZ Debenham Tie Leungas at 2 April 2004. The Group has elected under IFRS 1 to reflect thisvaluation, in so far as it relates to freehold land and buildings, as deemedcost on transition at 4 April 2004. b) IFRS 2 - 'Share Schemes' The Group operates a range of share-based incentive schemes. Under UK GAAP whereshares (or rights to shares) were awarded to employees, UITF 17 required thatthe charge to the profit and loss account should be based on the differencebetween the market value of shares at the date of grant and the exercise price(i.e. an intrinsic value basis) spread over the performance period.Save As You Earn (SAYE) Share Option Schemes were exempt from thisrequirement and no charge was made. IFRS 2 requires that all shares or options(including SAYE) awarded to employees as remuneration should be measured atfair value at grant date, using an option pricing model, and chargedagainst profits over the period between grant date and vesting date, being the vesting period. This treatment has been applied to all awards granted butnot fully vested at the date of transition. c) IAS 10 - 'Events after the Balance Sheet Date' Under UK GAAP, dividends are recognised in the period to which they relate. IAS10 requires that dividends declared after the balance sheet date should notbe recognised as a liability at that balance sheet date as the liability doesnot represent a present obligation as defined by IAS 37 - 'Provisions,Contingent Liabilities, and Contingent Assets'. Accordingly the finaldividends for 2003/04 (£160.7m) and 2004/05 (£124.3m) are derecognisedin the balance sheets for April 2004 and April 2005 respectively. d) IAS 17 - 'Leases - Treatment of Leasehold Land' The Group previously recognised finance leases under the recognition criteriaset out in SSAP 21. IAS 17 requires the land and building elements ofproperty leases to be considered separately, with leasehold land normallybeing treated as an operating lease. As a consequence, payments made to acquireleasehold land, previously treated as fixed assets, have been re-categorised as prepaid leases and amortised over the life of the lease. Inaddition the revaluation previously attributed to the land element has beenderecognised. e) IAS 17 - 'Leases - Finance Leases' Also under the provisions of IAS 17, the building elements of certain propertyleases, classified as operating leases under UK GAAP, have been reclassified asfinance leases. The adjustments are to include the fair value of these leasedbuildings within fixed assets and to set up the related obligation, net offinance charges, in respect of future periods, within creditors. f) IAS 17 ' Leases - Lease Incentives' Under UK GAAP, leasehold incentives received on entering into property leaseswere recognised as deferred income on the balance sheet and amortised tothe profit and loss account over the period to the first rent review. UnderIAS 17, these incentives have to be amortised over the term of the lease.Consequently, as the term of the lease is longer than the period to the firstrent review, amounts previously amortised to the profit and loss accountare reinstated on the balance sheet as deferred income and released over theterm of the lease. g) IAS 17 - 'Leases - Fixed Rental Uplifts' The Group has a number of leases that contain predetermined, fixed rentaluplifts. Under IAS 17, it is necessary to account for these leases suchthat the predetermined, fixed rental payments are recognised on a straightline basis over the life of the lease. Under UK GAAP, the Group accounted forthese property lease rentals such that the increases were charged in theyear that they arose. h) IAS 19 - 'Employee Benefits' Previously no provision was made for holiday pay. Under IAS 19 - 'EmployeeBenefits' the expected cost of compensated short-term absences (e.g.holidays) should be recognised when employees render the service that increases their entitlement. As a result, an accrual has been made for holidaysearned but not taken. i) IAS 38 - 'Software Assets' The cost of developing software used to be written off as incurred. Under IAS 38- 'Intangible Assets' there is a requirement to capitalise internally generatedintangible assets provided certain recognition criteria are met. Results havebeen adjusted to reflect the capitalisation and subsequent amortisation of coststhat meet the criteria. As a result expenses previously charged to the profitand loss account have been brought onto the balance sheet as intangible softwareassets and amortised over their estimated useful lives. j) IAS 38 - 'Goodwill' Goodwill used to be capitalised and amortised over its useful economic life.Under IAS 38 - 'Intangible Assets' there is a requirement to separately identifybrands and other intangibles acquired rather than include these as part ofgoodwill. Intangible assets, other than goodwill, are amortised over theiruseful lives. Goodwill, which is considered to have an indefinite life, issubject to an annual impairment review. As a result, the goodwill recognisedunder UK GAAP on the acquisition of per una of £125.5m has been split betweenbrand (£80m) and goodwill (£45.5m). The goodwill amortisation under UK GAAP hasbeen reversed but the brand has been amortised as required under IFRS. 12 First time adoption of IAS 32 and 39 The adoption of IAS 32 - 'Financial Instruments: Disclosure and Presentation'and IAS 39 - 'Financial Instruments: Recognition and Measurement' witheffect from 3 April 2005 results in a change in the Group's accountingpolicy for financial instruments. The impact of these standards on the Group'sopening balance sheet is shown below. The principal impacts of IAS 32 and IAS 39 on the Group's financial statementsrelate to the recognition of derivative financial instruments at fair valueand the reclassification of non-equity B shares as debt. Any derivativesthat do not qualify for hedge accounting are held on the balance sheet at fairvalue with the changes in value reflected through the income statement.The accounting treatment of derivatives that qualify for hedge accountingdepends on how they are designated, as follows: Fair value hedges The Group uses interest rate swaps to hedge the exposure to interest rates ofits issued debt. Under UK GAAP, derivative financial instruments were notrecognised at fair value in the balance sheet. Under IAS 39, derivative financial instruments that meet the'fair value' hedging requirements are recognised in the balance sheet at fairvalue with corresponding fair value movements recognised in the incomestatement. For an effective fair value hedge, the hedged item is adjusted forchanges in fair value attributable to the risk being hedged with thecorresponding entry in the income statement. To the extent that the designatedhedge relationship is fully effective, the amounts in the income statementoffset each other. As a result, only the ineffective element of any designatedhedging relationship impacts the financing line in the income statement. Cash flow hedges Under IAS 39, derivative financial instruments that qualify for cash flowhedging are recognised on the balance sheet at fair value with correspondingfair value changes deferred in equity. In addition, the Group hedges the foreigncurrency exposure on inventory purchases. Under UK GAAP, foreign currencyderivatives were held off balance sheet and these are now treated as cashflow hedges. The adjustments to the opening balance sheet as at 3 April 2005 are as follows: Restated Opening Effect opening balance of position sheet IAS 32 at under and 3 Apr IFRS IAS 39 2005 £m £m £m Non-current assets Derivative financial instruments - 71.1 71.1 Deferred tax asset 24.6 1.3 25.9 Current assets Derivative financial instruments - 2.8 2.8 Inventories 338.9 0.4 339.3 Current liabilities Derivative financial instruments - (1.9) (1.9) Borrowings (478.8) (66.2) (545.0) Trade and other payables (717.9) 24.7 (693.2) Non-current liabilities Derivative financial instruments - (12.0) (12.0) Borrowings (1,948.5) (87.8) (2,036.3) Impact on net assets (67.6) Non-equity B shares (65.7) Hedging reserve (1.6) Retained earnings (0.3) Impact on shareholders' funds (67.6) This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Marks & Spencer