6th Nov 2007 07:01
Marks & Spencer Group PLC06 November 2007 Marks and Spencer Group plc Interim Results 2007/08 26 weeks ended 29 September 2007 H1 Results:• Sales up 6.5% at £4.2bn: UK up 5.9%; International up 13.8%• UK like-for-like sales up 1.6%: General Merchandise up 2.3%; Food up 0.5%• Adjusted operating profit up 9.1% at £488.0m1; unadjusted operating profit £586.3m• Adjusted profit before tax up 11.5% at £451.8m1; unadjusted profit before tax £550.1m• Adjusted earnings per share up 15.1% at 19.1p1; unadjusted earnings per share 23.2p Q2 Trading:• Q2 UK sales +5.4%: General Merchandise +3.3%; Food +7.5%• Q2 UK like-for-like sales +1.2%: General Merchandise +1.7%; Food +0.5% Financial Highlights:• Capital expenditure expected to be £1.0 - £1.1bn for both 2007/08 and 2008/09• Share buy-back of up to £1bn, equivalent to c.10% of issued share capital• Interim dividend up 31.7% at 8.3p per share Stuart Rose, Chief Executive, said:"We had a good first half despite a tough market impacted by unseasonabletrading conditions, and at a time when many of our stores were undergoing majorrefurbishment. "Whilst the short term economic outlook remains uncertain, the actions we havetaken to reposition and revitalise M&S over the last three years put us in agood position to continue to outperform and give us confidence in the long termgrowth prospects of the business. "We continue to improve our core business. By Christmas we will have modernised70% of our space. We will have around 90% completed by Christmas next year. Weare ahead of our space growth target and now have a pipeline which will deliver15% growth in three years and 20% in four. Our Direct business is on course togenerate £500m of sales by 2010 and we are building momentum on International. "We are stepping up our capital investment in the business and expect to spendmore than £1bn in 2007/08 and in 2008/09. Investing in the business remains ourpriority but the strength of our balance sheet is such that we also intend torepurchase up to £1bn of shares, representing around 10% of the Company's issuedshare capital. In addition, the Board is announcing a step change in the interimdividend to 8.3p up 31.7% on last year. These decisions reflect our confidencein the strength and future prospects of the business." 1 From continuing operations before property disposals and exceptional items Chief Executive's Review: We are making good progress against our plans to develop our business. Over thenext five years our priorities are:• Driving the core business - product, service, environment and brand stretch• Property - developing, extending and growing our trading space• Growing M&S Direct• Developing our International business• Delivering our Plan A objectives Core businessDriving our core business to deliver better product, service and storeenvironment remains the priority. In General Merchandise, better styling, more choice and further action onpricing enabled us to grow volumes by 9%. Price deflation for the half wasaround 5%. Clothing market share increased to 11.0% (TNS Worldpanel Fashion:52 weeks ended 16 September 2007) with a strong performance in all areas. We introduced further initiatives to develop our clothing brands and improve theclarity of our product offer and in-store navigation. Better ranging inAutograph, along with the introduction of Autograph Weekend in womenswear,Autograph occasionwear in kids and the extension of the Autograph brand intohome accessories, have further strengthened our offer of better and bestmerchandise across womens, mens, lingerie, and home. Limited Collection nowincludes a range of basic fashion staples complementing the fast-fashion ranges. Most of our brands are introducing more frequent newness and this has been asignificant factor in improving brand awareness for fashionability. Better waysof working in our supply chain have enabled us to improve the phasing of productlaunches with many of our brands refreshing their ranges every three to fourweeks. We have trialled a number of initiatives to target our offer according to storeformat and local customer demand. We believe that better cataloguing of ourproduct ranges will give us a real opportunity to drive sales by store typegoing forward. In Food, we delivered further strong sales growth, reflecting the contributionfrom new space, strong performances in key product areas, realignment of priceson key product lines, and a more targeted promotional stance. We opened 62Simply Foods in the half, including 47 BP stores. Market share in Foodsincreased to 4.3% (TNS Worldpanel, Food & drink: 52 weeks ended 7 October 2007). We are committed to being the first choice for fresh, innovative, high quality,convenient food. Healthy foods under our Eat Well logo account for some 30% ofour product ranges, while organic sales have grown by over 40%. We areconstantly upping the pace on innovation. We continue to stretch the M&S brand into new areas and believe this is animportant area for future development. We have expanded our technology offer andthis is now in 25 stores as well as online. We have also extended ourhospitality offering and now have 27 Hot Food to Go counters, 7 eat over Delis,4 restaurants and 1 M&S Kitchen. We have delivered more consistent service with more stores delivering top scoresin our mystery shopping programme. We have introduced more food self-servicetills across the business, as well as a first trial in general merchandise. Wetrialled an integrated "multi-channel" ordering system for customers to orderfrom home and collect in store and vice versa: we plan to extend this servicefurther next year. As part of continued service training, we recently retrainedall of our in-store wine advisors to support the newly extended and improvedwine ranges. As planned, 70% of our space will be in the modernised format by Christmas 2007,completing a pivotal phase of our refurbishment programme. Trading held up wellover the half, despite significant disruption to some four million square feetof space as a direct result of this programme. The last six weeks have seen usrelaunch our flagship stores in Belfast, Cheshunt, Edinburgh, Lisburn and LondonColney. London Pantheon re-launches in three weeks. The modernisation programmecontinues to deliver strong incremental sales uplifts and returns. We will commence the next phase of the modernisation programme in January 2008with completion due by Christmas 2008, when we expect to have around 90% of theportfolio in the modernised format. To support the continuing growth of the business, we are investing in our supplychain. In Foods we will add capacity to manage the growth and increasedcomplexity of the business. In General Merchandise we have entered into a 50/50joint venture with ProLogis, a major international owner, manager and developerof industrial distribution facilities, to co-own and develop, subject toplanning consent, a retail distribution centre in Bradford. The facility willbe leased to M&S and is expected to be operational by 2010. We are also investing in our systems. We implemented a new Amazon platform tosupport our Direct business. We installed new finance systems and also began amajor refresh of our store information technology. This will include new pointof sale systems which will help us further improve service in our stores. PropertyDuring the half we added 3.8% more trading space, representing over 500,000square feet. In line with our property strategy we: - extended space in a number of major out of towns and city centre stores;- added to our retail park portfolio with the opening of 3 stores in West Cornwall, Preston Deepdale and Kinnaird Park;- extended the footprint of our Simply Food portfolio with the opening of 62 stores, including 47 BP franchise stores, taking the total to 267. Since the end of the half year we have relocated our Derby store to a new 83,000sq ft store, and opened a new 71,000 sq ft store in Pollok, Glasgow and a further 14 Simply Foods. We have been successful in identifying opportunities to improve the quality ofour store portfolio and add space, and are developing a healthy pipeline of newstores. This will enable us to achieve our target of 15-20% more space in threeto four years, a year earlier than previously indicated. We are on track to add4.5% more space to our UK store base this year and next year we plan to add afurther 7%. Major new stores include: Colliers Wood (April 2008) and White Cityin London (September 2008). M&S DirectThe relaunch of our website in March 2007 has led to a step change in activitywith sales up 60% driven by significant improvement in traffic and conversionlevels. We are pleased with the progress of Direct and continue to target £500mof sales from this business by 2010. We have worked hard on improving and extending the product ranges available toour online customers, introducing more fringe sizes, including Big and Tall inmenswear, and a number of exclusive ranges, such as made-to-measure shirts. InFoods, our wine and gift offers have also been extended. We are improving our infrastructure and service levels with fulfilment from twoadditional distribution centres. We trialled our first multi-channel service inthe half and intend to roll this out to more stores in due course. InternationalInternational had a strong half with sales up 13.8% and profits up 31.3%. Duringthe half we opened two new stores in the Republic of Ireland, three stores inTaiwan and 12 franchise stores, including two new territories, Lithuania and theUkraine. We have 257 stores in 36 countries and a strong brand that translateswell internationally and are now in a position to accelerate our growth plans. In Ireland, we have built a strong pipeline of new stores and expect to add30-40% of new space over the next five years. In Central and Eastern Europe, wesee substantial opportunities to grow from our existing franchise store base andwill be working with our partners to move this forward. In some cases this willinclude investing with our franchise partners where we and they believe thiswill facilitate a faster pace of growth and greater operating efficiency. We arecurrently in discussions with a number of partners and expect to concludeagreements in the coming months. We also plan to invest in major developing markets including China and India. Webelieve both of these markets offer substantial opportunities for us to developour brand. We have decided to enter China on a wholly-owned basis, leveragingoff the operational presence we already have in Hong Kong and Taiwan. We willtake a long term view of this market and expect to grow on a site by site basisin order to manage our exposure and risk. We expect our first store to openduring the course of the next financial year. India is an equally exciting longterm opportunity and a market where we have been trading for 6 years. We arelooking to accelerate the pace of growth in this fast developing economy overthe next few years. We believe that there is a significant opportunity to grow our Internationalbusiness going forward and are targeting a 15-20% contribution to Group revenueswithin the next five years. Plan AWe continue to make good progress meeting our 100 point eco-plan, Plan A, but weknow there is still more to do. As part of our commitment to become carbonneutral, we are announcing today that we have signed-up our first two suppliersto provide us with renewable energy from anaerobic digester plants. Also, fromJanuary, we will extend our trial of charging 5p for food carrier bags to 33stores in the South West of England, with all profits going to environmentalprojects. This follows the success of our trial in Northern Ireland where we sawa reduction in carrier bag usage of 66%. In addition:- We opened our first three eco-stores last month at Bournemouth, Gallashiels and Pollok. Our first wind turbine, on a farm in Aberdeenshire, is now operational.- We have maintained our position as the leading retailer of Fairtrade cotton with sales to date in 07/08 currently at £15m. Organic food sales increased 43% to £81m.- Customers also helped us to raise over £600k in September for Save the Children from sales of our back to school clothing ranges. The money raised will assist over 15,000 children in Western Uganda to go to school. Current trading:We have had a satisfactory start to the Autumn season. We expect the retailenvironment to continue to be challenging and the outlook for consumer spendingto remain uncertain. However, we believe we are well positioned for theimportant third quarter and into 2008. We will update on trading for the thirdquarter on 9 January 2008. Financial Review: Summary of Results:* 26 weeks ended 29 Sept 2007 30 Sept 2006 % inc £m £m Total revenue 4,184.3 3,929.4 +6.5UK 3,864.0 3,647.9 +5.9International 320.3 281.5 +13.8 Operating profit before property disposals and exceptional items 488.0 447.4 +9.1UK 435.5 407.4 +6.9International 52.5 40.0 +31.3 Profit before tax, property disposals and exceptional items 451.8 405.1 +11.5Profit on property disposals 3.3 1.4Exceptional pension credit 95.0 -Profit before tax 550.1 406.5 +35.3 Adjusted EPS 19.1p 16.6p +15.1Dividend per share (declared) 8.3p 6.3p +31.7 * From continuing operations RevenuesTotal revenues were up 6.5% with strong performances in both the UK andInternational businesses. Revenue growth by area, by quarter in the UK was: Q1% Q2% H1%RevenueClothing 3.5 2.8 3.1Home 13.4 7.8 10.4General Merchandise 4.3 3.3 3.8Food 8.5 7.5 8.0Total 6.4 5.4 5.9 Like-for-Like Q1% Q2% H1%General Merchandise 2.9 1.7 2.3Food 0.7 0.5 0.5Total 2.0 1.2 1.6 UK revenues were up 5.9% with like-for-like growth of 1.6% despite thechallenging retail environment and significant disruption from our modernisationprogramme. During the half, we added 3.8% of space (on a weighted averagebasis), 8.4% in Food and 1.8% in General Merchandise. International revenues were up 13.8% with good performances in both owned andfranchised stores, up 12.0% and 16.5% respectively. This was driven by stronglike-for-like performance and 17 new store openings. Operating profitOperating profit before property disposals and exceptional items was £488.0m, up9.1%. In the UK, operating profit before property disposals and exceptional items wasup 6.9% at £435.5m. The UK gross margin was level on the year at 43.6%. Generalmerchandise gross margin was up 80 basis points to 54.0% reflecting furtherimprovements in primary margin offset by higher markdowns arising out of thesummer sale. Food gross margin was 45 basis points down on last year at 33.8%due to higher waste and the lower gross margin achieved at franchise stores,which grew significantly in the period. The net operating margin for franchisestores is above that achieved by owned Simply Food stores. UK operating costs were up 5.6% to £1,261.2m. A breakdown of UK operating costsis shown below: 26 weeks ended 29 Sept 2007 30 Sept 2006 %inc/ £m £m (dec)Retail staffing 400.1 394.1 +1.5Retail occupancy 402.9 361.7 +11.4Distribution 174.8 154.3 +13.3Marketing and related 62.2 56.8 +9.5Support 203.4 194.4 +4.6Total before bonus 1,243.4 1,161.3 +7.1Bonus 17.8 33.1 -46.2Total including bonus 1,261.2 1,194.4 +5.6 Retail staffing costs were well controlled, demonstrating an agile response tothe more difficult trading environment experienced over the summer months.Despite this, our mystery shop scores, which measure the quality of service instores, continue to be very strong. The increase in retail occupancy costsreflects space growth and increased depreciation related to the modernisationprogramme. Distribution costs increased broadly in line with volume growth.Further investment in marketing reflects additional campaigns, includingKidswear. Support costs, which include non-store related overheads, were wellcontrolled. We have accrued a bonus of £17.8m which compares to £33.1m last year. Thisreflects a trading performance broadly in line with our plans this year,compared to a substantial outperformance last year. The level of full year bonuswill depend on the Group's trading performance in the second half of the year. The UK operating profit includes a contribution of £12.9m (last year - £11.4m)from the Group's continuing economic interest in M&S Money. International operating profit before property disposals was £52.5m, up 31.3%,reflecting the strong sales performance of the business. Owned store operatingprofits, increased by 8.1% to £22.6m. Franchise operating profits grew by 56.5%to £29.9m. Exceptional itemsThe exceptional pension credit of £95.0m (last year - nil) has arisen due to thechanges made in the terms of the UK defined benefit plan relating to howmembers' future benefits build up from 1 October 2007. To the extent thatmembers have chosen the option to limit their future pensionable salaryincreases in line with inflation, there is a past service credit to reflect theimpact of adjusting their projected final pensionable salaries. Net finance costs 26 weeks ended 29 Sept 2007 30 Sept 2006 £m £mInterest payable (53.6) (59.3)Unwinding of discount on partnership liability (13.4) -Finance costs (67.0) (59.3)Finance income 2.0 7.0Net finance costs before exceptional items and pension (65.0) (52.3)finance incomePension finance income 28.8 10.0Net finance costs (36.2) (42.3) Net finance costs for the half, before pension finance income, were up 24.3% at£65.0m. This increase reflects the funding cost associated with the pension fundpartnership structure established in March 2007. This is effectively offset bythe higher level of pension finance income resulting from the reduction in thedeficit at 31 March 2007. Underlying net interest was in line with last yeardespite slightly higher levels of average net debt. The effective interest ratewas 5.8% (last year - 5.9%). TaxationThe taxation charge reflects an expected effective tax rate of 28.5% for thefull year (last year - 29.6%). The decrease reflects a reduction arising fromthe expected decrease in the UK deferred tax liabilities resulting from thereduction in Corporation tax rates on 1 April 2008. Earnings per shareAdjusted earnings per share from continuing operations, which excludes theeffect of property disposals and exceptional items, increased by 15.1% to 19.1pper share. The weighted average number of shares in issue during the period was1,693.3m (last year - 1,684.2m). DividendsThe Board is announcing an interim dividend of 8.3p, an increase of 31.7%. Thisreflects an uplift of 15% in excess of the growth in adjusted earnings pershare. A similar 15% uplift above the growth in adjusted earnings per share willapply to the final dividend for 2007/08. In 2008/09 the Board will return to itsexisting policy of growing dividends broadly in line with adjusted earnings pershare for each half of the financial year. Share buybackThe Board has decided to commence a programme to repurchase up to 10% of theCompany's issued share capital, representing around £1bn, using the authoritygiven by shareholders at the AGM held in July 2007. The buy back programme willbe financed in the short term out of existing resources. In due course we expectto raise additional finance to complete the programme and maintain appropriateliquidity levels going forward. Capital expenditure 26 weeks ended 29 Sept 2007 30 Sept 2006 £m £m Modernisation programme 294.3 208.2New stores 85.0 75.0International 19.1 23.7Supply chain and technology 49.8 45.8Maintenance 42.4 38.0Total capital expenditure 490.6 390.7 Capital expenditure in the half was £490.6m compared with £390.7m last year.The increased spend on the modernisation programme reflects a higher level ofspace being modernised and the inclusion of a number of significant developmentprojects such as Belfast, Edinburgh, London Colney, Braehead and Cheshunt.Capital on new stores was up to £85.0m reflecting the growing pipeline of spacecoming on stream. Capital expenditure for 2007/08 is now expected to be c. £1.0to £1.1bn. The increase compared to previous guidance reflects the faster thananticipated growth in new space, including extensions to existing stores, andthe 50% joint venture commitment in respect of the proposed Bradforddistribution centre. Cash flow and net debt 26 weeks ended 29 Sept 2007 30 Sept 2006 £m £m Cash flow from continuing operations 351.0 494.7Cash flow from discontinued operations - 0.7Capex and disposals (559.2) (301.3)Interest and taxation (92.5) (99.1)Dividends and share issues (197.9) (142.1)Other movements (31.9) 13.6Net cash flow (530.5) (33.5)Opening net debt (1,949.5) (1,729.3)Exchange and other non-cash movements (1.9) 17.2Closing net debt (2,481.9) (1,745.6) The Group reported a net cash outflow of £530.5m (last year - outflow £33.5m).Cash inflow from continuing operations decreased by £143.7m, reflecting a higherworking capital outflow due to the timing of pension payments, the 2006/07bonus, increased investment in inventories and leasehold prepayments in respectof new stores. Cash outflow on capital expenditure, net of disposals, was£559.2m (last year - £301.3m) reflecting increased investment in ourmodernisation programme, including several major store developments, as well asmore aggressive new space acquisition. PensionsAt 29 September 2007 the IAS 19 net retirement benefit surplus was £127.4m (lastyear - deficit £1,051.4m). The partnership liability to the Marks and Spencer UKPension scheme was £510.3m (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 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 09.30 (BST) on Tuesday 6November 2007. This presentation can be viewed live on the Marks and SpencerGroup plc 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. Consolidated income statement 26 weeks ended 29 Sept 2007 30 Sept 2006 31 March 2007 Notes £m £m £m Revenue - continuing operations 2 4,184.3 3,929.4 8,588.1 Operating profit - continuing operations 3 586.3 448.8 1,045.9 Finance income 4 30.8 17.0 33.8Finance costs 4 (67.0) (59.3) (143.0)Analysed between:Before exceptional finance costs (67.0) (59.3) (112.6)Exceptional finance costs 4 - - (30.4) Profit on ordinary activities before taxation - continuing operations 550.1 406.5 936.7 Analysed between:Before property disposals and exceptional items 451.8 405.1 965.2Profit on property disposals 3.3 1.4 1.9Exceptional pension credit 3,9 95.0 - -Exceptional finance costs - - (30.4) Income tax expense 5 (156.8) (126.0) (277.5)Profit on ordinary activities after taxation - continuing operations 393.3 280.5 659.2 Profit from discontinued operation 6 - 0.8 0.7Profit for the period 393.3 281.3 659.9 Attributable to:Equity shareholders of the Company 393.2 281.3 659.9Minority interest 0.1 - - 393.3 281.3 659.9 Basic earnings per share 7A 23.2p 16.7p 39.1pDiluted earnings per share 7B 23.0p 16.5p 38.5pBasic earnings per share from continuing operations 7A 23.2p 16.7p 39.1pDiluted earnings per share from continuing operations 7B 23.0p 16.5p 38.5p Non-GAAP measure:Adjusted profit before taxation (£m) 1 451.8 405.1 965.2 Adjusted basic earnings per share from continuing operations 7A 19.1p 16.6p 40.4pAdjusted diluted earnings per share from continuing 7B 18.9p 16.4p 39.8poperations Consolidated statement of recognised income and expense 26 weeks ended 29 Sept 2007 30 Sept 2006 31 March 2007 £m £m £mProfit for the period attributable to shareholders 393.2 281.3 659.9 Foreign currency translation differences 6.8 (13.0) (14.0)Actuarial gain/(loss) on retirement benefit scheme 288.5 (244.4) (8.6)Cash flow and net investment hedges- (losses)/profit deferred in equity (15.7) 7.6 (7.4)- recycled and reported in net profit 6.0 - 10.7- amount recognised in inventories 3.2 (4.8) 2.1Tax on items taken directly to equity (93.6) 86.9 24.5Net profit/(loss) not recognised in the income statement 195.2 (167.7) 7.3 Total recognised income and expense for the period 588.4 113.6 667.2Prior period adjustment 1 - 48.4 - 588.4 162.0 667.2 Consolidated balance sheet As at As at As at 29 Sept 2007 30 Sept 2006 31 March 2007 (restated) Notes £m £m £mASSETSNon-current assetsIntangible assets 198.5 172.8 194.1Property, plant and equipment 4,372.9 3,823.0 4,044.5Investment property 25.1 38.4 25.1Investment in joint venture 9.4 9.2 9.3Other financial assets 3.0 3.0 3.0Retirement benefit asset 9 149.0 - -Trade and other receivables 277.8 236.5 247.0Deferred tax assets - 150.9 11.6 5,035.7 4,433.8 4,534.6 Current assetsInventories 517.1 466.2 416.3Other financial assets 47.7 48.3 50.9Trade and other receivables 309.1 225.3 196.7Derivative financial instruments 5.2 66.7 2.4Cash and cash equivalents 207.3 218.9 180.1 1,086.4 1,025.4 846.4 Total assets 6,122.1 5,459.2 5,381.0 LIABILITIESCurrent liabilitiesTrade and other payables 887.5 953.3 1,043.9Derivative financial instruments 13.2 6.3 8.3Borrowings and other financial liabilities 1,018.0 915.1 461.0Current tax liabilities 96.1 89.9 87.3Provisions 5.8 7.0 5.7 2,020.6 1,971.6 1,606.2 Non-current liabilitiesBorrowings and other financial liabilities 1,271.0 1,159.5 1,234.5Partnership liability to the Marks & Spencer UK Pension 510.3 - 496.9SchemeRetirement benefit deficit 9 21.6 1,051.4 283.3Trade and other payables 96.3 76.7 87.6Derivative financial instruments 1.3 6.6 0.2Provisions 14.5 17.7 16.8Deferred tax liabilities 163.0 6.1 7.3 2,078.0 2,318.0 2,126.6 Total liabilities 4,098.6 4,289.6 3,732.8Net assets 2,023.5 1,169.6 1,648.2 EQUITYCalled up share capital - equity 425.4 421.7 424.9Share premium account 208.0 173.7 202.9Capital redemption reserve 2,168.5 2,168.5 2,168.5Hedging reserve (10.7) (5.0) (4.4)Other reserves (6,542.2) (6,542.2) (6,542.2)Retained earnings 5,773.1 4,952.9 5,397.1Total shareholders' equity 10 2,022.1 1,169.6 1,646.8Minority interest in equity 1.4 - 1.4Total equity 2,023.5 1,169.6 1,648.2 Consolidated cash flow information CASH FLOW STATEMENT 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 Notes £m £m £mCash flows from operating activitiesCash generated from operations - continuing 12A 351.0 494.7 1,442.6Cash generated from operations - discontinued 12B - 0.7 0.7Tax paid (77.0) (74.7) (150.8)Net cash inflow from operating activities 274.0 420.7 1,292.5 Cash flows from investing activitiesDisposal of subsidiary, net of cash disposed - 48.5 48.8Capital expenditure and financial investment 12C (556.0) (300.6) (712.8)Interest received 1.2 7.2 13.2Net cash outflow from investing activities (554.8) (244.9) (650.8) Cash flows from financing activitiesInterest paid (16.7) (31.6) (123.4)Exceptional interest paid - - (21.6)Other debt financing 12D 534.1 (145.5) (479.2)Equity dividends paid (203.5) (154.6) (260.6)Other equity financing 12E (26.3) (5.9) 9.2Net cash inflow/(outflow) from financing activities 287.6 (337.6) (875.6) Net cash inflow/(outflow) from activities 6.8 (161.8) (233.9)Effects of exchange rate changes 0.2 (1.4) (1.5)Opening net cash 47.0 282.4 282.4Closing net cash 54.0 119.2 47.0 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £mOpening net debt (1,949.5) (1,729.3) (1,729.3) Net cash inflow/(outflow) from activities 6.8 (161.8) (233.9)Cash (inflow)/outflow from (decrease)/increase in current financial (3.2) (0.4) 2.6assetsCash (inflow)/outflow from (increase)/decrease in debt (534.1) 145.5 479.2financingDebt financing net of liquid resources disposed with - (16.8) (16.8)subsidiaryFair value movement on derivatives - 19.4 67.0Partnership liability to the Marks & Spencer UK Pension Scheme (non-cash) - - (495.6)Exchange and other non-cash movements (1.9) (2.2) (22.7)Movement in net debt (532.4) (16.3) (220.2) Closing net debt (2,481.9) (1,745.6) (1,949.5) 1 General information and basis of preparationThe results for the first half of the financial year have not been audited and are prepared on the basis of theaccounting policies set out in the Group's 2007 Annual Report and Financial Statements. The financial informationhas been prepared in accordance with the Disclosure and Transparency rules of the Financial Services Authority andwith International Accounting Standard (IAS) 34 - 'Interim Financial Reporting' as endorsed by the European Union.These consolidated financial statements for the period do not constitute statutory financial statements within themeaning of s240 of the Companies Act 1985. The summary of results for the year ended 31 March 2007 is an extract from the published Annual Report and FinancialStatements which have been reported on by the Group's auditors and delivered to the Registrar of Companies. Theaudit report was unqualified and did not contain a statement under s237(2) or s237(3) of the Companies Act 1985. Following a change in external interpretation of IAS 12 - 'Income Taxes' the Group's accounting policy for deferredtax now more closely reflects the manner in which management expects to recover or settle the carrying amounts ofits buildings through sale or use. The opening balance sheet at 2 April 2006 has been restated to recognise £48.4mof additional deferred tax assets and reserves. There is no material impact of this change on the income statement. The Directors believe that the 'adjusted' profit and earnings per share measures provide additional usefulinformation for shareholders on underlying performance of the business, and are consistent with how businessperformance is measured internally. It is not a recognised profit measure under IFRS and may not be directlycomparable with 'adjusted' profit measures used by other companies. 2 Revenue The Group's primary reporting segments are geographic, with the Group operating in two geographic areas being the UKand International. The geographic segments disclose revenue and operating profit by destination and reflectmanagement responsibility. Within each geographic segment the Group sells both Food and General Merchandise andsecondary segment disclosure is given for revenue. 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m UK Retail 3,864.0 3,647.9 7,977.5 International RetailOwned stores1 190.2 169.8 369.5Franchised stores 130.1 111.7 241.1 320.3 281.5 610.6 Total revenue 4,184.3 3,929.4 8,588.1 1Owned stores consists of the Marks & Spencer owned businesses in the Republic of Ireland, Hong Kong and Taiwan. 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m UK RetailGeneral Merchandise 1,867.9 1,800.0 4,002.8Food 1,996.1 1,847.9 3,974.7 3,864.0 3,647.9 7,977.5International RetailGeneral Merchandise 228.4 196.2 423.9Food 91.9 85.3 186.7 320.3 281.5 610.6 Total revenue 4,184.3 3,929.4 8,588.1 Sales of General Merchandise and Food are subject to seasonality due to higher demand during the Christmas periodwhich falls in the second half of the financial year. 3 Operating profit 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m UK Retail1Before property disposals and exceptional items 435.5 407.4 956.5Property disposals 3.3 1.4 0.2Exceptional pension credit2 95.0 - - 533.8 408.8 956.7International RetailOwned stores 22.6 20.9 45.4Franchised stores 29.9 19.1 42.1Before property disposals 52.5 40.0 87.5Property disposals - - 1.7 52.5 40.0 89.2 Total operating profit 586.3 448.8 1,045.9 1 UK Retail operating profit includes a contribution of £12.9m (last half year £11.4m) from M&S Money under theterms of our arrangement with HSBC.2 The exceptional pension credit has arisen due to changes in the UK defined benefit plan relating to how members'benefits build up from 1 October 2007. To the extent that members have chosen the option to limit their futurepensionable salary increases to inflation there is a past service credit to reflect the impact of adjusting theirprojected final pensionable salaries. 4 Finance income/(costs) 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m Finance incomeBank and other interest receivable 2.0 7.0 13.0Pension finance income (net) 28.8 10.0 20.8 30.8 17.0 33.8 Finance costsInterest payable on bank borrowings, facilities and medium term notes (51.8) (57.4) (107.4)Amortisation of issue costs of bank loans (0.5) (0.7) (1.5)Interest payable on finance leases (1.3) (1.0) (2.2)Dividend on non-equity B shares - (0.2) (0.2)Unwinding of discount on partnership liability to the Marks & Spencer UK (13.4) - (1.3)Pension SchemeBefore exceptional finance costs (67.0) (59.3) (112.6)Exceptional finance costs1 - - (30.4) (67.0) (59.3) (143.0) Net finance costs (36.2) (42.3) (109.2) 1 The exceptional finance costs represent the unamortised transaction costs, a one-off make-whole premium and thecancellation of the swaps arising on the redemption of £317.2m of secured bonds. These bonds were redeemed in orderto release properties for use in the limited partnership with the Marks & Spencer UK Pension Scheme. 5 Taxation The taxation charge for the 26 weeks ended 29 September 2007 is based on an estimated full year effective tax rateof 28.5% (last full year 29.6%). This rate reflects a 1% reduction due to the expected decrease in UK deferred tax liabilities, resulting from thereduction in corporation tax rates on 1 April 2008. 6 Discontinued operationOn 31 March 2006, the Group announced the sale of Kings Super Markets Inc to a US investor group for $61.5mexcluding cash in the business at the date of disposal. 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 tax and the weighted average number ofordinary shares in issue during the period. The adjusted earnings per share figures have been calculated in addition to the earnings per share required by IAS33 - 'Earnings per Share' and are based on earnings excluding the effect of property disposals and exceptionalitems. These have been calculated to allow the shareholders to gain an understanding of the underlying tradingperformance of the Group. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assumeconversion of all dilutive potential ordinary shares. The Group has only one class of dilutive potential ordinaryshares being those share options granted to employees where the exercise price is less than the average market priceof the Company's ordinary shares during the period. Details of the adjusted earnings per share are set out below: 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m Earnings after tax 393.2 281.3 659.9Profit from discontinued operations - (0.8) (0.7)Earnings after tax attributable to equity shareholders - continuing 393.2 280.5 659.2Property disposals (net of tax) (3.3) (1.4) (1.4)Exceptional pension credit (net of tax) (66.5) - -Exceptional finance costs (net of tax) - - 23.9Adjusted earnings after tax - continuing 323.4 279.1 681.7 Weighted average number of ordinary shares in issue 1,693.3 1,684.2 1,688.6(millions)Potentially dilutive share options under Group's share option schemes 19.4 22.6 26.3(millions)Weighted average number of diluted ordinary shares (millions) 1,712.7 1,706.8 1,714.9 A Basic earnings per shareWeighted average number of ordinary shares in issue 1,693.3 1,684.2 1,688.6(millions) Basic earnings per share (pence) 23.2 16.7 39.1Profit from discontinued operations per share - - -(pence)Basic earnings per share - continuing (pence) 23.2 16.7 39.1Property disposals per share (pence) (0.2) (0.1) (0.1)Exceptional pension credit (net of tax) (3.9) - -Exceptional finance costs per share (pence) - - 1.4Adjusted basic earnings per share - continuing (pence) 19.1 16.6 40.4 B Diluted earnings per shareWeighted average number of ordinary shares 1,712.7 1,706.8 1,714.9(millions) Diluted earnings per share (pence) 23.0 16.5 38.5Profit from discontinued operations per share - - -(pence)Diluted earnings per share - continuing (pence) 23.0 16.5 38.5Property disposals per share (pence) (0.2) (0.1) (0.1)Exceptional pension credit (net of tax) (3.9) - -Exceptional finance costs per share (pence) - - 1.4Adjusted diluted earnings per share - continuing (pence) 18.9 16.4 39.8 8 Dividends 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m Final dividend of 9.2p per share (last year 7.5p per share) 203.5 154.6 154.6Prior period interim dividend of 6.3p per share - - 106.0 203.5 154.6 260.6 The Directors have approved an interim dividend of 8.3p per share (last half year 6.3p per share) which, in linewith the requirements of IAS 10 - 'Events after the Balance Sheet Date', has not been recognised within theseresults. This results in an interim dividend of £141.2m (last half year £106.0m) which will be paid on 8 January2008 to shareholders whose names are on the Register of Members at the close of business on 16 November 2007. Theordinary shares will be quoted ex dividend on 14 November 2007. Shareholders may choose to take this dividend inshares or in cash. 9 Retirement benefits 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m Opening net retirement benefit deficit (283.3) (794.9) (794.9)Current service cost (55.1) (54.7) (113.9)Exceptional pension credit (note 3) 95.0 - -Curtailment gain - 1.0 2.0Interest cost (140.7) (129.0) (261.2)Expected return on assets 169.5 139.0 282.0Employer contributions 53.5 31.6 611.3Actuarial gain/(loss) 288.5 (244.4) (8.6)Closing net retirement benefit asset/(deficit) 127.4 (1,051.4) (283.3) Analysed on the balance sheet as:Retirement benefit asset 149.0 - -Retirement benefit deficit (21.6) (1,051.4) (283.3)Closing net retirement benefit asset/(deficit) 127.4 (1,051.4) (283.3) The main financial assumptions used to assess the liabilities of the scheme have been updated by independentqualified actuaries to assess the liabilities of the scheme. The most significant of these are the discount rate andthe inflation rate which are 5.8% (last full year 5.3%) and 3.2% (last full year 3.0%) respectively. The amount of the asset/deficit varies if the main financial assumptions change, particularly the discount rate. Ifthe discount rate increased/decreased by 0.1% the IAS 19 net asset would increase/decrease by c.£100m. 10 Statement of changes in shareholders' equity 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £m Opening shareholders' equity as previously reported 1,646.8 1,155.3 1,203.7Prior period adjustment - Deferred tax (note 1) - 48.4 -Opening shareholders' equity restated 1,646.8 1,203.7 1,203.7Profit for the period attributable to shareholders 393.2 281.3 659.9Dividends (203.5) (154.6) (260.6)Foreign currency translation differences 6.8 (13.0) (14.0)Shares issued on exercise of share options 5.6 12.5 44.9Purchase of shares held by employee trusts (31.9) (18.4) (18.4)Purchase of call option for Company's shares - - (17.3)Actuarial gain/(loss) on retirement benefit scheme 288.5 (244.4) (8.6)Deferred tax on retirement benefit scheme (86.5) 73.3 4.0Charge for share-based payments 16.7 12.8 27.3Deferred tax on share schemes (7.3) 13.8 22.3Cash flow and net investment hedges (6.5) 2.8 5.4Deferred tax on cash flow and net investment hedges 0.2 (0.2) (1.8)Closing shareholders' equity 2,022.1 1,169.6 1,646.8 11 Capital commitments 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £mCommitments in respect of assets in the course of construction 497.6 272.2 265.8 In the event of a material change in the trading arrangements with certain warehouse operators, the Group has acommitment to purchase property, plant and equipment, at values ranging from historical net book value to marketvalue, which are currently owned and operated by them on the Group's behalf. 12 Cash flow analysis 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £mA Cash flows from operating activities - continuingProfit on ordinary activities after taxation 393.3 280.5 659.2Income tax expense 156.8 126.0 277.5Interest payable and similar charges 67.0 59.3 (33.8)Interest receivable (30.8) (17.0) 143.0Operating profit 586.3 448.8 1,045.9Increase in inventories (100.8) (92.4) (42.8)(Increase)/decrease in receivables (110.6) 3.4 12.5Payments to acquire leasehold properties (37.9) - (13.5)(Decrease)/increase in payables (62.4) (5.0) 136.6Exceptional operating cash outflow - (0.5) (4.2)Depreciation and amortisation 158.0 129.0 282.7Share-based payments 16.7 12.8 27.3Profit on property disposals (3.3) (1.4) (1.9)Exceptional pension credit (95.0) - - 351.0 494.7 1,442.6 B Cash flows from operating activities - discontinuedProfit on ordinary activities after taxation - 0.7 0.7Profit on sale of business - (0.4) (0.4)Operating profit - 0.3 0.3Decrease in working capital - 0.1 0.1Depreciation and amortisation - 0.3 0.3 - 0.7 0.7 C Capital expenditure and financial investmentPurchase of property, plant and equipment (552.9) (286.6) (666.9)Proceeds from sale of property, plant and equipment 7.0 1.5 2.9Purchase of intangible fixed assets (13.3) (16.2) (46.5)Sale of non-current financial assets - 0.3 0.3Sale/(purchase) of current financial assets 3.2 0.4 (2.6) (556.0) (300.6) (712.8) D Debt financingCash inflow from borrowings 46.4 - 21.6Drawdown of syndicated bank facility 488.8 - 296.4Redemption of securitised loan notes - (1.4) (319.6)Redemption of medium term notes - (92.2) (818.2)Issue of medium term notes - - 397.5(Decrease)/increase in obligations under finance leases (1.1) 2.8 (2.2)Redemption of B shares - (54.7) (54.7) 534.1 (145.5) (479.2) E Other equity financingShares issued under employee share schemes 5.6 12.5 44.9Purchase of own shares held in employee trusts (31.9) (18.4) (18.4)Purchase of call option for Company's shares - - (17.3) (26.3) (5.9) 9.2 13 Reconciliation of net debt to balance sheet 26 weeks ended Year ended 30 Sept 29 Sept 2007 2006 31 March 2007 £m £m £mBalance sheet and related notesCash and cash equivalents 207.3 218.9 180.1Current financial assets 47.7 48.3 50.9Bank loans, overdrafts and commercial paper (226.4) (104.6) (159.7)Syndicated bank facility (787.9) - (296.9)Medium term notes (1,212.9) (1,606.7) (1,177.3)Securitised loan notes - (310.4) -Finance lease liabilities (61.8) (52.9) (61.6)Partnership liability to the Marks & Spencer UK Pension Scheme (510.3) - (496.9) (2,544.3) (1,807.4) (1,961.4)Interest payable included within related borrowing 62.4 61.8 11.9Total net debt (2,481.9) (1,745.6) (1,949.5) Principal risks and uncertainties The principal risks and uncertainties which could impact the Group's long-termperformance remain those detailed on pages 40 and 41 of the Group's 2007 AnnualReport and Financial Statements, a copy of which is available on the Group'swebsite www.marksandspencer.com. The Chief Executive's Review in this InterimManagement Report includes a commentary of the primary uncertainties affectingthe Group for the remaining six months of the year. Statement of directors' responsibilities The directors' confirm that this condensed set of financial statements has beenprepared in accordance with IAS 34 as adopted by the European Union, and thatthe interim management report herein includes a fair review of the informationrequired by DTR 4.2.7 and DTR 4.2.8. The directors of Marks and Spencer Group plc are listed in the Group's 2007Annual Report and Financial Statements, with the exception of the followingchanges in the period: Jack Keenan retired on 10 July 2007, and Martha Lane Foxwas appointed on 1 June 2007. A list of current directors is maintained on theGroup's website: www.marksandspencer.com. By order of the Board Ian DysonGroup Finance Director5 November 2007 Independent review report to Marks and Spencer Group plc Introduction We have been engaged by the company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 29September 2007, which comprises the consolidated income statement, theconsolidated balance sheet, the consolidated statement of recognised income andexpense, the consolidated cash flow statement and related notes. We have readthe other information contained in the half-yearly financial report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the information in the condensed set of financialstatements. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half-yearlyfinancial report in accordance with the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority. As disclosed in note 1, the annual financial statements of the Group areprepared in accordance with IFRSs as adopted by the European Union. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with International Accounting Standard34, "Interim Financial Reporting", as adopted by the European Union. Our responsibility Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview. This report, including the conclusion, has been prepared for and onlyfor the company for the purpose of the Disclosure and Transparency Rules of theFinancial Services Authority and for no other purpose. We do not, in producingthis report, accept or assume responsibility for any other purpose or to anyother person to whom this report is shown or into whose hands it may come savewhere expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410, 'Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity' issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly, wedo not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the half-yearly financialreport for the six months ended 29 September 2007 is not prepared, in allmaterial respects, in accordance with International Accounting Standard 34 asadopted by the European Union and the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority. PricewaterhouseCoopers LLPChartered Accountants London5 November 2007 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Marks & Spencer