Marks and Spencer 1998 Annual Report Download - page 37

Littlewoods
There have been no sales from the Littlewoods stores acquired on
1 February 1998, and the Company has suffered a loss of interest
income. The net effect of this, the other pre-trading ex penses and
the accompanying modernisation of the ex isting Marks & Spencer
stores in these locations on the profits of the Group is estimated
at £4 million in 1997/ 98 and £45 million in 1998/ 99.
New Point-of-Sale equipment
New Point-of-Sale equipment is being installed in all UK and
European stores as part of a planned replacement programme.
The new tills will, among other things, be Year 2000 compliant
and capable of handling foreign currencies, including the euro.
This programme of till replacement involves revenue costs of
£7 million in 1997/ 98, and an estimated £20 million in 1998/ 99.
Direct Mail
The first clothing catalogues were mailed after the end of the
financial year. Start up costs for the ex panded Direct Mail
activities amounted to £4 million in 1997/ 98, and are ex pected to
be £20 million in 1998/ 99.
EFFECT OF CURRENCY CHANGES
Overall, the translation of overseas profits at current rates has
reduced repor ted profits by £4.0 million. The more serious impact
has come from the reduced margin on shipments of UK
merchandise to our stores overseas, particularly in Continental
Europe. We estimate the total costs of this transaction effect in
1997/ 98 at £12.6 million.
Foreign ex change cover is maintained for periods of
approx imately 10-15 months, and the 1997/ 98 figures therefore do
not reflect the full consequences of the rise of sterling in recent
years. The impact in 1998/ 99 is estimated to be £35 million.
The economic effects of the regional devaluations in the Far East
have been severe, both for our Far East franchise par tners and our
Hong Kong stores, which have suffered from a decline in regional
tourism. These influences became ver y apparent in the second half
of the year, and have led to an estimated shortfall of £18.3 million
in Far East profits.
Translation of net assets in overseas currencies reduces their
value by £34.1 million and this is shown in the statement of total
recognised gains and losses on page 48.
VAT
The Company received a payment of £53.2 million in respect of VAT
previously paid to H. M. Customs & Ex cise, but refunded following
an appeal brought by Littlewoods Home Shopping. This amount is in
respect of VAT applied to credit sales in previous years through the
Marks & Spencer account cards and is shown as an ex ceptional
item in the GroupÕs profit and loss account.
FINANCIAL SERVICES
The continued growth of Financial Services activities has increased
the relative balance sheet significance of the GroupÕs retail banking
operations. The following table shows the net assets of the
Financial Ser vices companies:
1998 1997
£m £m
Loans and advances to customers 1,572.9 1,308.4
(net of provisions)
Cash and current asset investments 52.8 45.8
Other assets 53.1 32.1
Total assets 1,678.8 1,386.3
Funding(1) 1,267.0 1,041.5
Customer deposits 71.8 68.1
Other liabilities 83.7 73.2
Total liabilities 1,422.5 1,182.8
Net assets of Marks and Spencer
Retail Financial Ser vices Holdings Ltd 256.3 203.5
Net assets of Captive insurance company 46.5 31.5
Net assets of Financial Services 302.8 235.0
(1) Group funding is provided by the GroupÕs Treasury from a long-term financing
facility.
The table analyses the balance sheet of Marks and Spencer
Retail Financial Ser vices Holdings Ltd which includes the Chester
based retail Financial Ser vices companies.
The Guernsey-based Captive insurance company, MS Insurance
Ltd, underwrites certain insurance risks for the parent company
either as co-insurer or re-insurer, and also re-insures a significant
part of the credit insurance under taken by the retail Financial
Ser vices operations.
Treatment of interest income
In previous years, the intra group interest charges paid by Marks &
Spencer Financial Services on borrowings from the Group have been:
a) A llocated against the operating profit of Financial Services in
the segmental analysis.
b) Allocated against cost of sales in the consolidated profit and
loss account.
This accurately reflects the trading position but does not, this
year, give an accurate picture of Group net interest. For the first
time, an ex cess of intra group over third party interest paid has
arisen. This ex cess (£22.7 million) has been added back to
segmental operating profit in arriving at the total Group operating
profit.
The operating profit for Financial Services shown in the
segmental analysis on page 52 still reflects the full interest cost on
borrowings totalling £81.5 million (last year £59.6 million).
YEAR 2000
The Group is well advanced with a detailed programme designed to:
a) Identify where modifications are necessary within the
software programs developed and maintained by Marks & Spencer.
b) Identify where similar changes are needed within computer
programs supplied to the Group or maintained by suppliers to the
Group.
c) Carr y out the necessary coding changes.
d) Accelerate, where appropriate, the introduction of new
programs which may replace other software which is not yet Year
2000 compliant.
e) Identify where the Group may be vulnerable to problems which
could arise from computer chips embedded in non-IT equipment
already in use.
MA RKS A ND SPENCER p.l.c. 35
FINAN CIAL REVIEW