Marks and Spencer 2013 Annual Report Download - page 36

Financial review Marks and Spencer Group plc Annual report and financial statements 2013 34
“ We’re building an
infrastructure fit to
support our future as
an international, multi-
channel retailer.”
Alan Stewart
Chief Finance Officer
Financial review
Investing in our future
Our investment is strengthening our UK
business through the roll-out of our new
store format – encouraging customers
to reappraise M&S. Multi-channel sales
accelerated to £651.8m and International
sales reached £1.1bn.
We added 2.8% new selling space in the
UK; including nine new wholly owned
sites for our popular Simply Food format.
As with our operating costs, we applied
a disciplined approach to our
expenditure. In the second year of our
plan, activity has peaked with capital
expenditure at £821m. Through prudent
management we expect capex to be
£775m in 2013/14, a reduction on the
previous guidance of £850m. From
2014/15 we expect it to fall to c.£550m
per annum, a £50m reduction on our
earlier guidance.
A better business infrastructure
Our investment is helping us deliver
transformational change to our business
infrastructure – ensuring it is fit to
support our strategic ambitions and
allows us to meet and exceed our
customers’ growing expectations.
To achieve these aims we need to
simplify our IT and management systems
and create a supply chain that is agile,
fast and flexible from end to end. We are
already making improvements; changing
the way we allocate stock to store and
sourcing more from our direct suppliers
to make the most of our scale.
In May 2013 our major new distribution
centre at Castle Donington became
operational, which will help us deliver
a step change in the way we serve
M&S.com customers. The fully automated
site ensures we have all e-commerce
stock in one central location, at the heart
of the UK road and rail network. Better
visibility of our stock will drive improved
availability, faster delivery times and
reduced distribution costs.
We are further strengthening our
multi-channel capabilities through the
in-house development of our new
website platform. Due to launch in Spring
2014, the new platform will be better
integrated with our in-store and service
systems – providing us with the flexibility
required to deliver a best-in-class
customer experience.
In a challenging trading environment,
we delivered sales of £10bn this year,
up 1.3%. We managed the business
prudently and our underlying profit
was £665m, with underlying earnings
per share at 32.7p.
Whilst the execution of our business
plans continued to move with pace, we
navigated the short term market
challenges through strong financial
management. In a highly promotional
marketplace, we protected our margins
through tight control of mark down and
well targeted promotional activity.
Improved buying and food waste
management helped us mitigate
commodity price increases and further
protect profitability.
This approach was supported by tight
cost management across the business,
with UK operating costs up 1.8%. I have
always been clear that running an
efficient business is not simply about
cost cutting; it’s about having the right
procedures and processes in place.
Our commitment to Plan A encourages
us to find new and better ways of doing
things to address the eco and ethical
challenges we all face. In doing so we
have delivered a net benefit of £135m
available to be reinvested back into M&S.
As members of the International
Integrated Reporting Council pilot, we
are committed to reporting the long term
value created by sustainable business
practice.
Strengthening our financial position
Our investment in future growth is
funded through our existing cash flows
– supporting our commitment to
maintaining an investment grade credit
rating and a progressive dividend policy.
We have maintained a strong balance
sheet, with net debt at £2.6 billion,
including £606m of property partnership
liabilities associated with the pension
fund.
In November we announced the
outcome of the triennial actuarial
valuation of our Defined Benefit Pension
Scheme as at 31 March 2012. This
resulted in a funding deficit of £290m, a
substantial reduction from £1.3bn as at
31 March 2009. As a result, we agreed a
reduction in the annual cash
contributions as part of the ten year
funding plan, saving £245m of which
£153m will fall in the next four years.
We have made good progress with our
funding activity this year. In December,
we issued £400m of 12.5 year bonds at
a rate of 4.75%. The bonds were
significantly oversubscribed and priced
below the Group’s average cost of debt
of c.6%, providing sufficient liquidity to
manage upcoming debt maturities.
In light of long-term interest rates and the
successful bond issuance, we decided
to buy back and cancel £250m of
puttable callable bonds issued in 2007.
This incurred a one-off non-underlying
cost of £75m. This activity supports our
funding strategy, ensuring we have the
right mix of funding sources that provide
the cost effectiveness and flexibility to
match our business requirements.
The transformation of our
infrastructure will deliver tangible
benefits for both our business and
our customers; creating a strong and
efficient platform from which to
deliver sustainable long-term growth.
Looking ahead