Marks and Spencer 2016 Annual Report Download - page 24

22
MARKS AND SPENCER GROUP PLC
STRATEGIC REPORT
53 WEEK YEAR
This year we are reporting on the 53 weeks to 2nd April 2016.
Profi t metrics are provided on a 53 week basis in the Financial
Statements. To provide a meaningful comparison with last year’s
52 week period, all operating performance commentary in this
section is stated on a 52 week basis, unless otherwise noted.
On a 53 week basis, Group underlying profi t before tax was
£689.6m, up 4.3%. Statutory profi t before tax fell by 18.5% to
£488.8m as a result of a number of one o items, details of
which are set out below.
STRATEGIC PRIORITIES
We remained focused on delivering value for our shareholders
through the four key priorities we set out at the start of the year:
> Food sales growth;
> Improve Clothing & Home performance;
> Clothing & Home gross margin improvement;
> Strong cash generation.
We performed well against three of the four priorities, however,
our Clothing & Home sales performance is still not satisfactory.
In a tough grocery market, we continued to grow our Food
business, with revenue up 3.6% at £5.4bn. Our store opening
programme is driving sales growth – we opened 75 standalone
Food stores in the year, as well as seven full line stores, and grew
our market share to 4.3%.
UK Clothing & Home revenue was down 2.2%, at £3.9bn. Whilst
the market is increasingly challenging with low growth and high
levels of promotional activity, we’ve acknowledged that this sales
performance was unsatisfactory. We know that we need to improve
our products and execution and, as set out on pages 6-8, we have
a clear plan in place to address these issues.
Clothing & Home gross margin increased by 245 bps to 55.1%
driven mainly by gains in buying margin as a result of our continued
progress on sourcing more products directly and the benefi ts of
our dollar hedging approach.
We delivered strong free cash fl ow, pre-shareholder returns,
of £539.3m, up 2.9% on last year due to tight control over costs
and capital.
For the second year, we have increased the full year dividend to
18.7p, up 3.9% on last year, in line with profi t growth. We also
announced a special dividend of 4.6p per share (c.£75m) which
will be paid to shareholders at the same time as the fi nal dividend.
OPERATING PERFORMANCE
We continued to manage our costs tightly with UK operating costs
up 1.8%. This increase was driven by growth in Food selling space,
higher depreciation costs and additional employee incentive
costs. These were partially o set by productivity improvements
in a number of areas including store sta ng and supply chain.
M&S Bank profi ts were slightly down 0.4% at £59.9m. Overall
operating performance was strong, but this was o set by the
reduction in interchange fees.
International operating profi t was down 39.6% due to challenging
trading conditions and ongoing Euro currency pressure in our
owned markets and discounts for franchise partners operating
in markets a ected by di cult macro-economic conditions.
Some internal availability challenges also impacted performance.
Overall, Group underlying profi t before tax was £684.1m, up 3.5%.
Group profi t was £483.3m, down 19.5%, as a result of £200.8m
of non-underlying items. £102.4m of these charges related to
our International business. £50.3m related to further M&S Bank
provisions for insurance mis-selling and the balance largely related
to impairment of certain assets and UK stores as part of our UK
store portfolio review. There are further details on page 24 and
in Note 5 on page 97-98.
In February, we announced the outcome of the triennial actuarial
valuation of our UK defi ned benefi t (DB) pension scheme as at
31 March 2015. This resulted in a statutory surplus of £204m,
an improvement on the previous defi cit of £290m (as at
31st March 2012). This improved funding position refl ects the
additional contributions made since the 2012 valuation and
strong investment returns from the Scheme’s assets.
We have proposed changes to our UK DB pension scheme, which
has been closed to new members since 2002, to close it for future
accrual. Under these proposals, we would enrol current defi ned
benefi t members in our defi ned contribution savings plan from
April 2017.
Further details in note 30 on p121
STRONG CAPITAL MANAGEMENT AND DELIVERING
SHAREHOLDER RETURNS
Driving value for shareholders underpins our business strategy
and we remain committed to delivering strong shareholder
returns. We are making good progress against the clear capital
allocation policy set out by the Board last year:
Commitment to a strong balance sheet, including maintaining
an investment grade rating:
> Net debt/EBITDA ratio of 1.6x, comfortably within our ratio
range of 2.0x-1.5x;
> BBB minus rating;
We are committed to delivering profi t
for our shareholders by putting our
customers at the heart of everything we do.
HELEN WEIR CHIEF FINANCE OFFICER
OUR PERFORMANCE
FINANCIAL REVIEW