MARKS AND SPENCER : FULL YEAR RESULTS FOR 52 WEEKS ENDED 3 APRIL 2021

May 26, 2021 at 02:05 am EDT

'NEVER THE SAME AGAIN - FORGING A RESHAPED M&S'

^{2020/21 is a 53-week year. The comparative period is 52 weeks to 28 March 2020. To aid understanding, we are showing the unaudited 52 weeks to 27 March 2021 with commentary and percentage changes on a 52-week basis unless otherwise stated.}

Resilient ﬁnancial performance in a year of disruption

Proﬁt before tax & adjusting items of £41.6m (53 weeks £50.3m)
Statutory loss of £201.2m (53 weeks £209.4m)
Food LFL revenue up 1.3%, underlying LFL ex-hospitality and franchise up 6.9%
C&H revenue down 31.5%. Online growth of 53.9% partly offsetting stores down 56.2%
Group online revenue ex-Ocado now £1.5bn
Ocado Retail share of net proﬁt £78.4m
Net debt excluding lease liabilities reduced £278.6m to £1.11bn and strong liquidity

Forging a reshaped M&S through the Never the Same Again programme

M&S Food growth supported by improved value perception and over 1,900 new lines
M&S products now over 25% of Ocado average basket and c.50% capacity growth planned
Clothing & Home business reshaped with shift to active and casual and more focused ranges
MS2 created to accelerate the shift to omni-channel with an online first approach
Sparks relaunch hits 10m members with substantially improved data capabilities
Accelerated opportunity to rotate the store estate into higher quality space

Steve Rowe, CEO at Marks & Spencer: 'In a year like no other we have delivered a resilient trading performance, thanks in no small part to the extraordinary efforts of our colleagues. In addition, by going further and faster in our transformation through the Never the Same Again programme, we moved beyond fixing the basics to forge a reshaped M&S. With the right team in place to accelerate change in the trading businesses and build a trajectory for future growth, we now have a clear line of sight on the path to make M&S special again. The transformation has moved to the next phase.'

	53 weeks ended 3 April 21	52 weeks ended 27 March 21	52 weeks ended 28 March 20
Group revenue before adjusting items	£9,166.9m	£8,972.7m	£10,181.9m
Group operating proﬁt before adjusting items	£222.2m	£209.7m	£590.7m
Proﬁt before tax & adjusting items	£50.3m	£41.6m	£403.1m
Adjusting items	£(259.7)m	£(242.8)m	£(335.9)m
(Loss)/proﬁt before tax	£(209.4)m	£(201.2)m	£67.2m
(Loss)/proﬁt after tax	£(201.2)m	£(194.4m)	£27.4m
Basic (loss)/earnings per share	(10.1)p	(9.8)p	1.3p
Adjusted basic earnings per share	1.4p	1.1p	16.7p
Free cash ﬂow¹	£296.4m	n/a	£205.7m
Net debt¹	£3.52bn	n/a	£3.95bn
Net debt excluding lease liabilities¹	£1.11bn	n/a	£1.39bn
Dividend per share	-	-	3.9p

¹^{Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, the comparative amounts for net debt and free cashflow have been restated.}

^{There are a number of non-GAAP measures and alternative proﬁt measures 'APMs', discussed within this announcement and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to adjusting items table below for further details.}

FORGING A RESHAPED M&S

Our results for the year bear the impact of the pandemic spanning the beginning of the ﬁrst national lockdown through to near to the end of the third lockdown in the UK. However, they also reflect an acceleration of the transformation which enabled the business to deliver a resilient performance.

In the ﬁrst section of this statement, we explain how this performance was delivered. We then outline how we have used this period to accelerate transformation under the Never the Same Again programme to ensure a reshaped business emerges from the crisis. Finally, we lay out our medium-term ambition for the Group's businesses and expectations for the year ahead.

A resilient ﬁnancial performance in a year of disruption

The Group delivered proﬁt before tax and adjusting items of £41.6m and a statutory loss before tax of £201.2m in a year characterised by unprecedented lockdowns, resilient performance and disciplined management of costs.
We are grateful for total government support of £306.1m which has partly offset the effect of lost trade and enabled us to maintain employment.
Food delivered strong underlying LFL growth of 6.9% after adjusting for the closure of hospitality and the adverse impact on franchise sales. Operating proﬁt before adjusting items of £213.6m was a creditable achievement given the related effects on product mix.
Ocado Retail contributed a share of net income of £78.4m in an exceptional period for the business and following the successful switchover to M&S supply.
Clothing & Home results reﬂect the heavy impact of lockdowns on stores, a substantial change in product mix and the challenges of clearing stock, partially offset by very strong growth online of 53.9%. As a result, net revenue declined 31.5% and there was an operating loss before adjusting items of £129.4m. Performance improved in the second half as online growth made greater inroads into the store sales decline. Clothing & Home online generated an operating profit margin of c.14%.
International operating proﬁt before adjusting items of £45.1m was resilient due to online growth which helped to mitigate the pandemic impacts on store sales in different regions.
The balance sheet has emerged stronger than expected. Lower discretionary costs and capex, managed stock ﬂow and a focus on working capital resulted in net debt excluding lease liabilities down £278.6m to £1.11bn and a strong liquidity position.

This resilient performance is due to the extraordinary efforts of colleagues across the business, playing their part to feed the nation, increase our capacity for home delivery and work with our trusted suppliers to adapt to rapidly changing restrictions across the year.

A reshaped M&S emerging from the pandemic period

Over the past three years the objective of the transformation has been to restore M&S to sustainable growth through 'facing into the facts' the business had failed to address. The transformation has included shifting to trusted value and broadening the appeal of our ranges in Clothing & Home and Food, investing in online and digital capability including establishing the investment in Ocado Retail and tackling both the high cost and outdated supply chains and the legacy store estate.

From the start of the pandemic we recognised that it would accelerate market trends providing an opportunity to bring forward transformation to emerge as a reshaped business.

Broadening M&S Food appeal: The Food business is broadening its appeal through more relevant family focused innovation and improved value perception led by over 340 'Remarksable value' lines which now represent c.10% of volumes. Growth is supported by a significant cost reduction programme including synergies from growth on Ocado, systems upgrades to reduce waste and the Vangarde supply chain programme which is delivering better availability.
Transition to M&S product on Ocado Retail completed successfully: Penetration of M&S lines on Ocado is consistently over 25% of the Ocado basket, outperforming Waitrose. The next stage is to grow capacity by c.50% in the next 18 months and to realise further potential from the joint venture with our partners Ocado Group.
Omni-channel Clothing & Home business emerging: Substantial reshaping has created a 'product engine' providing a contemporary, focused M&S range. In addition, complementary external brands have been successfully launched. The creation of MS2 has brought together the data and online teams to prioritise online trading and growth while leveraging the advantages of our store estate more effectively. MS2 draws on the data engine and the relaunched Sparks loyalty scheme which has grown to over 10m members, enabling a more personalised relationship with customers.
Accelerated rotation of the full line store estate: The drag on performance of the legacy estate has been exacerbated by Covid bringing forward the decline of some locations but also creating opportunities for rotation. We are increasing the speed of change to create a group of well-invested full-line stores in c.180 prime and core markets. The costs of the rotation programme will be largely funded by the release of cash from the development of freehold and long leasehold sites.
An International business focused on major partnerships and online: Online sales doubled in 2020/21 and we are now investing in increasingly localised fulfilment, expanding our presence on marketplaces such as Zalando and the launch of additional websites such as the 46 markets announced in March. Digital trading improvements, partner store modernisation and supply chain development are positioning the business for rapid recovery as lockdowns end. Following Brexit, the business is reconfiguring trading with its EU businesses to reflect the challenges of exporting to the EU.

Business positioned well for the medium-term despite near-term headwinds

Overall trading for the first six weeks of the financial year and since reopening has been ahead of the comparable period two years ago in 2019/20 and our central case. Core Food is in strong growth although hospitality and franchise remain adversely affected, with Clothing & Home sales growing since reopening and online remaining robust. International sales continue to be impacted by on-going restrictions, particularly in India.

While encouraging, it is unclear how the recovery will develop and if consumer activity will sustain. International markets continue to face headwinds with ongoing disruption and the material costs of Brexit which we are working to mitigate. At this early stage our central case is that we will generate profit before tax and adjusting items between £300-350m and as capital expenditure recovers towards pre-pandemic levels, our ambition is for a further reduction in net debt.

We have a clear path to a transformed business in the medium term. The priority is to fund investment in building omni-channel capability, including investment in the supply chain, store rotation and maintenance of our changing estate. As we recover balance sheet metrics consistent with investment grade, we will assess the reintroduction of dividend payments, although as we focus on restoring profitability this is unlikely in the current year.

1. A RESILIENT FINANCIAL PERFORMANCE IN A YEAR OF DISRUPTION

The reporting period spans the year from the beginning of the ﬁrst UK-wide national lockdown in March 2020 to the end of the third lockdown in April 2021. In most of this time our operations have been severely constrained by the change in day-to-day living, the effects of social distancing and partial or full closure of large parts of our store estate. This has resulted in substantial changes to the mix of products customers have bought and a wide divergence of store formats and channels.

The group has delivered a proﬁt before tax and adjusting items this year of £41.6m, compared with £403.1m last year. Statutory loss before tax was £(201.2)m respectively on a 52 week basis (£(209.4)m on a 53 week basis), compared to a statutory profit before tax in 2019/20 of £67.2m. Strong free cashﬂow has driven a healthy reduction in net debt. The substantial effects of reduced sales and directly attributable covid related costs of £269.6m as a result of the pandemic were only partly offset by government support of £306.1m.

Group results before adjusting items (£m)¹	2020/21	2019/20	%
C&H operating (loss)/profit	(129.4)	223.9	-157.8
Food operating profit	213.6	236.7	-9.8
International operating profit	45.1	110.7	-59.3
Share of Ocado Retail net income	78.4	2.6	2,915.4
Profit before tax & adjusting items	41.6	403.1	-89.7
Adjusting items	(242.8)	(335.9)	27.7
Free cashflow²	296.4	205.7	44.1
Net debt excluding lease liabilities²	£1.11bn	£1.39bn	-20.1
Net debt2	£3.52bn	£3.95bn	-10.9

¹^{On an unaudited 52 week basis to 27 March 2021 except where stated}

^{2Items shown on a 53-week basis. Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, the comparative amounts for net debt and free cashflow have been restated}

Strong underlying Food performance - LFL ex hospitality and franchise up 6.9%

M&S Food delivered strong underlying LFL growth of 6.9% after adjusting for the closure of hospitality and the adverse impact on the franchise business. Total sales were down (0.6)% and operating proﬁt before adjusting items of £213.6m reﬂected the negative effects of product mix. The trading impact on the convenience and hospitality businesses together with the effect of Covid related costs was only partially offset by government support and cost saving programmes.

The strong underlying LFL growth was delivered in the face of further additional headwinds, including the exposure to ofﬁce and shopping centre locations as illustrated below. Unlike some competitors M&S Food sales as reported do not beneﬁt from a direct online grocery presence, with these sales reported through Ocado Retail instead. The change in shape of trade is illustrated in the table below with the adversely affected areas collectively accounting for c.37% of prior year sales.

% change to 19/20		% change to 19/20
Simply Food	18	High Street	-18
Retail Parks	7	Shopping centre	-19
Franchise fuel	5	City centre	-33
M&S.com (online flowers/hampers/wine)	184	Franchise travel (rail/air/roadside)	-82
Total	17	Total	-29

Lockdown also resulted in steep declines in convenience categories such as food-on-the-move and initially in prepared meals given reduced footfall as customers switched to home cooking. However, the repurposing of space towards core categories such as grocery, household, and meat, ﬁsh and poultry, together with the continued transformation of our ranges and value position helped to offset the loss of convenience trade. The adversely impacted categories together accounted for around a third of prior year sales.

% change to 19/20		% change to 19/20
Meat, fish, poultry, deli	13	Hospitality	-81
Produce & flowers	8	Food-on-the-move	-47
Beers, wines, spirits	25	Bakery	-7
Grocery & household	27	Prepared meals	-5
Frozen	36	Confectionery	-4
Total	15	Total	-26

The Group had a good Christmas and a very strong Easter in 2021, which fell into week 53 of the ﬁnancial year.

The Food business incurred extra costs to support customer and colleague safety of £49.4m and incentives for non-furloughed colleagues working through the pandemic of £22.0m. In addition, £9.9m of costs were incurred as a result of Brexit, which are set out in further detail below.

Exceptional Ocado Retail contribution to results

Ocado Retail delivered 43.7% revenue growth over the 52 weeks ended 28 February 2021 and contributed a share of net income of £78.4m.

This has been an exceptional period for grocery online and Ocado Retail performed strongly. Higher than normal basket size and a smoothed trading proﬁle across the week together with reduced marketing costs delivered a strong improvement in profitability. The overall result included the Group's share of insurance receipts related to business interruption at the Andover customer fulﬁlment centre (CFC).

The well-planned switchover to M&S supply from Waitrose in September 2020 went smoothly with a positive customer response and the M&S share of basket has exceeded the Waitrose level prior to switchover.

Accelerating online sales growth of 53.9% partially offsetting store decline of 56.2% in Clothing & Home

The overall Clothing & Home result for the year was heavily impacted by lockdowns, on-going social distancing, steep decline in formal and occasionwear, the location of many of our stores in town and shopping centres and the priority to clear stock. As a result, total revenue declined 31.5%.

As we implemented MS2 and took multiple steps to improve online operating performance we were able to capitalise on the change in customer shopping patterns and saw a progressive increase in online sales and market share growth through the year. This was a result of strong trafﬁc, active customer growth, improving frequency and lower returns. The business had a good service and fulfilment performance supported by previous investment in the Castle Donington distribution centre and substantial expansion of fulfilment from store capability.

As reported for Food, stores in high streets, shopping centres and city centres created an extra drag on sales performance, with these channels representing c.70% of prior year store sales.

% change to 19/20		% change to 19/20
Retail Parks	-44	High street	-56
C&H in Food stores	-44	Shopping centre	-63
		City centre	-67
		Outlets	-60
Total	-44	Total	-61

Within categories, casual clothing, kids and home outperformed but not sufﬁciently to offset the adverse sales mix in areas such as formal clothing and holiday, with the categories in the right-hand table below accounting for c.18% of prior year sales.

% change to 19/20	Online	Stores	% change to 19/20	Online	Stores
Lingerie & essentials	121	-54	Formal	-15	-72
Kids	78	-43	Holiday	-31	-72
Casual	61	-56	Shoes & accessories	3	-68
Home & beauty	30	-47	Outerwear	15	-52
Total	66	-51	Total	-7	-69

Clothing & Home recorded an operating loss before adjusting items of £129.4m as lower sales were only partly offset by reduced operating costs. Losses substantially reduced in the second half as the actions we took to accelerate online growth partly compensated for losses in store. Overall, Clothing & Home online generated strong profitability, with an operating margin of c.14%, for the year. Conversely, the operating loss in stores represented a margin on sales of c.(26)%. Stringent action to reduce or postpone orders from suppliers together with measures to hibernate a small amount of stock resulted in a relatively clean stock position by the end of the year.

Resilient International proﬁt as a result of franchise partnerships and strong online growth

International sales reﬂected the pandemic impact and lockdowns across markets partly offset by the strong shift to online sales. Clothing & Home sales declined 21.6% at constant currency, largely driven by lower store sales in the Republic of Ireland and India and working with franchise partners to manage the effects of the pandemic. This was partly offset by online sales which more than doubled. Food sales, down 9.4% were more resilient particularly in the Middle East and Asia as Covid refocused customer demand to favour eating in. This helped to offset a weaker performance in travel franchise sales in Europe and disruption from Brexit in quarter four.

Operating proﬁt before adjusting items of £45.1m reﬂects in large part the lower Clothing & Home sales. The International business also incurred Brexit related costs of £6.2m in the year.

Relaunched Sparks loyalty scheme and M&S Bank customer offer

We relaunched the Sparks loyalty scheme in July shifting from a points-based plan which was delivered through a physical card, to a more customer friendly digital experience. Since relaunch total membership has grown to over 10m customers. The new Sparks operates on the M&S app and enables M&S to create a more personalised relationship with members as opposed to the traditional model of targeted promotions. Alongside Sparks we are repositioning the M&S Bank, closing down the branches and moving away from traditional banking accounts, focusing instead on credit, currency services and payments.

Balance sheet strengthened

At year end, the Group's net debt excluding lease liabilities declined by £278.6m and total net debt was down £434.7m. Although profitability was significantly reduced by the impacts of the pandemic, cashflow was preserved through a combination of actions to improve working capital including new terms with suppliers, adjustment to arrangements with landlords, reduced discretionary costs, careful management of capital expenditure and government support. During the period, the business strengthened its overall liquidity position by reducing net debt, refinancing its 2021/22 debt maturities and managing its standby liquidity facility with its banks.

Adjusting items reﬂect cost restructuring and the accelerated store rotation programme

We have reported adjusting items of £259.7m for the 53-week period (52 weeks: £242.8m). Significant charges of £133.7m relate to the costs of organisational change including the restructuring of operations announced in the summer of 2020 and in the Republic of Ireland. We expect the restructuring of operations to generate annualised cost savings of at least £115m. We have also provided £95.3m for accelerated depreciation and impairment as we increase rotation of the estate to address the drag of legacy stores unsuitable for modern trading or in declining locations. A charge of £79.9m has been recognised for intangible asset impairments, offset by a £90.8m gain largely relating to the release of a portion of the Covid inventory provision made in the prior year.

2. A RESHAPED M&S EMERGING FROM THE PANDEMIC PERIOD

Over the past three years the objective of the transformation has been to restore the business to sustainable growth. We have substantially reduced promotions and shifted to trusted value to broaden the appeal of our ranges, invested in online, data and digital capability, established the Ocado Retail joint venture and also tackled the legacy store estate and created more efficient operations. However, from the outset of the pandemic we recognised it would accelerate market trends providing an opportunity to bring forward transformation through the 'Never the Same Again' programme to emerge as a reshaped business.

M&S Food positioned for growth

The objective for Food is to 'protect the magic' by investing in our unique focus on own brand innovation and fresh, easy to cook food and growing through larger more inspirational stores, while modernising the cost base and supply chain. With strong customer perceptions on quality and a reputation for innovation and trust, yet a small market share, the business has a substantial growth opportunity.

Protecting the magic: The M&S Food range is built from deep supplier relationships and strong product knowledge to drive a high level of innovation. Over the past year we created over 1,900 new lines broadening appeal in healthy and family product. This included expanding Dine-In to feed a family of four and building on our strengths over key events. To help create next generation ideas a 'Food Innovation Hub' has been established bringing together packaging, product innovation and nutrition in areas such as plant-based protein and sustainable packaging.

Delivering better value: The aim for M&S Food is to always be great value, with better quality and ingredient content more than compensating for any difference in price. We have extended our position on trusted value by expanding the range of 'Remarksable Value' staple lines at an everyday low price to over 340 products, which now account for c.10% of volumes. This has supported a further improvement in value perception which is now at its strongest level in almost three years.

Larger and more inspirational stores: Food renewal aims to create larger stores with the efficiency of a supermarket and the 'soul' of a fresh food market and has this now been implemented in 15 stores with current year openings and renewals raising the total to around 40. These stores offer increased produce, bakery, ambient grocery and frozen ranges in an inspiring environment. The initial trial stores outside Covid affected city centres grew sales 15% last year.

Moving to digital marketing and sales: Food marketing has shifted focus away from conventional activity towards high impact brand building and increased social media engagement, which helps create a new shop window to the brand and reach new audiences. As a result, while we have reduced marketing spend and promotional activity is down substantially, the spend on social media and digital marketing has increased by c.35% on the prior year.

Food-on-the-move and hospitality: Despite the impact in office locations during Covid, we expect our sales in food-on-the-move to recover over time with further opportunities for growth through new channels to market. In addition, the M&S café offer has now been refreshed and simplified and this year will implement modern quick to serve menus, which are lower touch to prepare.

Upgraded systems: High waste and low availability in some instances reflects a cumbersome and under-invested supply chain and high touch forecasting and range management systems. We are now commencing a programme to upgrade core systems to reduce manual intervention and improve accuracy and efﬁciency. This includes updating forecasting and ordering technology with an objective of reducing waste by more than 10% and we are replacing the space, range and display system, improving the tailoring of ranges to store.

Rolling out supply chain improvements: The Vangarde programme is now operating in c.350 stores served by five depots with sales uplifts from the ﬁrst depot at over 3% compared with control stores, partly as a result of improved availability. We will be rolling this out to the full estate over the rest of this year. To grow ambient ranges and larger baskets we have opened a new depot in Milton Keynes enabling growth of 13% over Q3, with the next phase of capacity planned for 2021/22.

Lower cost to operate: We have now delivered over £180m of cost of goods savings over the past two years to help mitigate inﬂation and enable the investment in trusted value. This includes optimising volume with strategic suppliers, reducing packaging costs and respecifying ingredients. Increased volumes as a result of the Ocado switchover generated over £20m of synergies which was more than planned. In addition, current year operating costs will also benefit from the savings from restructuring retail operations announced last year.

Ocado Retail bringing multi-channel to M&S Food

The investment in 50% of Ocado Retail combined with the switchover to M&S own brand positions the business for a multi-channel offer working closely with our Ocado Group partners. The transition from Waitrose to M&S product has gone well with M&S consistently over 25% of the Ocado basket and around half of Ocado fresh category sales. The next stage is to aggressively grow capacity and to create further opportunities for both joint venture partners.

Ocado Retail is investing in c.50% increase in peak day capacity over 18 months which will help meet unfulﬁlled demand.

A new fulﬁlment centre (CFC) was opened in Bristol in March and additional CFCs in Purﬂeet and Andover will open later this year. These CFCs alone will provide an eventual 40% increase in sales capacity at full utilisation.
Further investments to increase the reach of the business into parts of the UK that Ocado Retail does not currently serve fully are likely in the months ahead. In addition, it plans to open more than 12 Zoom sites expanding its immediacy proposition across London and major UK cities.

Over the past year Ocado Retail has beneﬁted from the powerful combination of strong demand as a result of Covid which enabled it to operate at maximum capacity with a smoothed shape of week, generating a very strong proﬁt contribution. In the current year we expect some reversion of demand patterns and a reduction in average order value leading to a more normalised set of economics.

A reshaped omni-channel Clothing & Home business

Our objective is to deliver an omni-channel Clothing & Home business in the UK, backed by exceptional data and highly personalised customer relationships. All channels will be driven by a 'product engine' providing a more contemporary focused M&S range bought in greater depth alongside a family of internal and external partner brands with distinctive appeal to our customers.

A strengthened Clothing & Home 'product engine':

Over the last three years huge strides have been made in reshaping ranges around new trading principles, most notably to buy fewer lines in greater depth from fewer strategic suppliers. The extent of the shift has been obscured by Covid and the related trading turmoil, but we believe there is a marked improvement in style, shape of buy and value. For instance, by Autumn 2021 total option count is expected to be around a quarter lower than 2018 with the team implementing new range management tools to maximise rate of sale of each option, and we are planning further option count reductions in several areas

Clothing & Home option count¹
Autumn 18	17,900
Autumn 19	15,300
Autumn 20	13,100

Excludes furniture.

Following an initial phase when customers replenish their wardrobes, we expect a permanent shift in demand to include a reduction in formalwear and tailoring. With that we have shifted focus to growth areas such as the new ofﬁce smart wear, kids casual ranges and the Goodmove athleisure range. Goodmove delivered an exceptional performance over the past year recently achieving a number one retailer market share in full price sales in the category and has now been expanded from women's into men's and kids.

The emergence of platforms and the increasing cost of online customer acquisition for smaller retailers creates an opportunity for M&S to leverage its customer base, infrastructure and Sparks to partner with guest brands on the M&S platform. We can offer time pressured customers a curated group of value for money, contemporary, stylish brands with sustainability credentials. During the year we introduced guest brands for the first time and now distribute for an initial group of 21 partners. Results have been very encouraging with further substantial growth planned. In January we also acquired the Jaeger brand for £6m. Its historical reputation for innovation in natural ﬁbres, British sourcing and distinctive style provides a complementary addition to the M&S range.

MS2 as the integrated online and data business driving omni-channel growth:

Growth in the past year means Clothing & Home now has a base of over 9.0m active online customers making it one of the largest platforms in the UK. With that we have an objective to achieve in excess of 40% of Clothing & Home revenue through online in three years' time.

To take full advantage of this opportunity MS2 was created to prioritise online and leverage the store estate in a more effective way. The MS2 plan is able to draw on the Group's customer data engine and relaunched and enlarged Sparks loyalty programme to create a powerful insight tool and more personalised relationships with customers.

The MS2 plan focuses on three core objectives:

Improving the online offer: Our priority is to increase availability in the online channel from historic levels of c.80% in recent years. In addition, we will be introducing online only ranges, recognising the different rate of sale across channels including trialling 'test and repeat' products. Given that around one third of the M&S range is year-round product, we will also expand best seller and 'never out of stock' initiatives. Combined with a curated range of third-party brands we expect a substantial improvement in the online offer in the coming year.

Creating a digital-led customer experience: Recognising that a mobile-led customer experience is central to online success we are increasing investment in optimising M&S.com for mobile and growing the M&S app, which generated over 3.5m downloads last year as we relaunched Sparks. In addition, within the app we have built digital services such as scan and shop, to pay in store by phone and video powered retail services such as bra fit, beauty and furniture sales. In the summer M&S Bank also plans to launch a digital credit option.

Maximising M&S's omni-channel advantage: Unlike pure play retailers, M&S has an advantage in its store network which provides an opportunity for rapid collection and returns and drives incremental in-store sales. Investment in Castle Donington, expansion of our site at Bradford and the repurposing of the Thorncliffe warehouse means that M&S has sufficient capacity for online deliveries for the next 2-3 years. Following the restructuring to reduce store costs last year and the success of buy online ship from store, we are investing in technology improvements to enable a low-cost rapid click and collect offer from store stock. In addition, as part of the omni-channel strategy we have launched ﬁve '10x' stores. In these stores we are targeting a substantial increase in the use of digital services such as contactless click and collect and returns and digital payment, as well as specific benefits for Sparks members.

Accelerating rotation of the store estate

A continued headwind to M&S brand perception and performance is the legacy estate of full line stores (selling both Clothing & Home and Food) often in declining locations or centres, with inefficient space which is difficult to shop and costly to replenish. We have already closed or relocated 59 full line stores, 16 food stores and 8 outlets, but the effect of the pandemic means we can move faster. There has rarely been a better time to acquire new replacement stores on good terms and we are planning 17 new or expanded full line stores over the next two years, including a number of former Debenhams sites, with the pipeline continuing to grow. While long leases have historically constrained our ability to rotate, we plan to largely fund future closure costs through the disposal for redevelopment of freehold and long leasehold properties.

Framework for rotation: M&S had 254 full line stores at year end. While practically all Clothing & Home departments in these stores contribute positive cash, a number are in long term decline, struggle to cover their allocated central costs as a percentage of sales and cannot justify future investment.

Our objective for the full line estate is to achieve a fully modernised core of c.180 stores. Our current best view of the future estate based on stress tests, regional modelling and current retail and efficiency requirements is as follows.

Around 100 stores in prime retail markets growing from the current base of c.80. In these markets we will invest in renewal, redevelopment, or replacement of existing stores.
Around 80 stores in core markets, growing from the current base of c.65 stores through investments such as the relocation of high street units to retail parks.
In c.110 remaining locations we will rotate the estate. This will mean either relocating to a Food only store or another full line store as above or consolidating multiple stores into one. In around 30 locations which can no longer support a store we will close, recapturing trade in nearby stores or online.

The overall benefit of well-located space is illustrated by the profitability metrics of each group shown below. The average Clothing & Home cash contribution margin in 2019/20 of prime leasehold stores was 25% of sales or £3.0m per store. This is a higher margin and more than 3x the cash contribution per store of those out of which we plan to rotate.

Store grouping	C&H cash contribution margin¹	Average cash contribution £m¹
Prime stores	25.4%	3.0
Core stores	23.4%	1.3
Rotation stores	18.5%	0.9
Total	22.5%	1.4

^{1Metrics for 2019/20 adjusted for covid impacts in March 2020. Leasehold stores exclude long leaseholds.}

The financial benefits of rotation are compelling, for instance the table below illustrates the returns from consolidating Northampton and Kettering stores into one at Rushden Lakes Retail Park prior to the pandemic. The previous stores were ageing, with sales in decline and no investment case to bring them up to standard. The new retail park, built between the two towns incorporates shopping, dining and leisure facilities on a site with good access and car parking. The disposal of the freehold of one store helped to fund the closure and the lease costs of the remaining term of the other. The new store has generated a substantial cash profit and LFL sales were in growth pre-Covid. The net investment cost of the new store was £2.1m resulting in a strong payback on the net capital invested.

Kettering closure	£m	Northampton closure	£m	Rushden Lakes opening	£m
Sales	14.3	Sales	24.2	Sales	39.0
Cash contribution	1.1	Cash contribution	2.5	Cash contribution	4.8
LFL 17/18 %	-12.3	LFL 17/18 %	-7.0	LFL 19/20 %	+6.5

The pace of rotation: To reduce investment risk and maximise returns to shareholders we have set a target payback for relocations including recapture of less than 4 years, with standard lease terms of 10 years. Returns outside of these parameters are considered where they enable an exit of long-term liability or in exceptional locations.

We will work with landlords to negotiate appropriate terms at exit and repurpose or develop space. However, in some cases it will be more economic and brand enhancing to have a vacant store than lose the opportunity to move to a better location. Reflecting this at year end further charges of c.£268m are estimated over the life of the programme including for accelerated depreciation and impairment. When combined with the operational costs of closure we currently expect to incur total cash costs of c.£260m over the remaining period.

Funding the rotation: We have a number of freehold and long leasehold properties, which offer an opportunity to fund rotation through the release of cash from development. This includes the Marble Arch proposal and additional stores including a number for residential development. These properties tend to be in locations where land values for alternative use are higher than for existing use. We have an objective to release at least £200m from these projects.

International business focused on major partnerships and online

The International business has an objective of delivering market relevant product, great digital service for partners and driving growth online through MS2. Based on strong performance last year we have an ambition to more than double international online retail sales. This will be delivered by investing in digital marketing, expanding categories further with major marketplaces and entering into new markets such as the 46 countries announced in March. As the business scales we expect to build fulfilment capacity to drive more rapid customer service and lower costs.

We are also modernising operations and digitising our trading interface for partners. This includes:

Launching a fully digital showroom. This transforms partners' ability to create curated ranges relevant to their markets and plan ﬂoors, windows and campaign without the cumbersome and costly buying fairs previously held.
Driving faster rotation of the store estate with new digitally enabled stores. This includes a ﬁrst '10x' trial, offering partners omni-channel innovations such as digital ﬁtting room assistance and self-checkout.
Creating a UK hub for export at Hemel Hempstead. This avoids the need for International stock to enter the UK network where it is broken down for storage and keeps product consolidated for onward shipment. In addition, partners will have the facility to collect stock regularly rather than receiving infrequent shipments.

EU markets post Brexit

The most challenging effect of the Brexit deal is to make the supply of fresh and chilled product, especially prepared food, into the EU very lengthy and bureaucratic creating an enduring impact on availability and trading costs. This situation is unlikely to improve in the near term and we therefore need to reconfigure trading with our EU businesses. The most significant impact is on our Food operations in the island of Ireland and we are implementing multiple medium-term solutions to stabilise the business in both the North and the Republic. We have already modified food export into the Czech Republic and are working with our partners in France to review the model. While these operations are relatively small in the context of the Group, changes to our EU businesses as a result of Brexit related costs may result in future restructuring charges.

See table in the following section for details of current expectations of cost impacts in 2021/22.

3. BUSINESS POSITIONED WELL FOR THE MEDIUM-TERM DESPITE NEAR-TERM UNCERTAINTY

2021/22 a year of recovery

While encouraging, it is unclear how the recovery will develop and if consumer activity will sustain in Clothing & Home as well as what the eventual pace and shape of recovery in hospitality and convenience in Food will be. We have a strong programme of capacity growth at Ocado Retail although we expect some normalisation of shape of week with respect to its economics. The business also continues to face headwinds with ongoing disruption in various International markets, both the Clothing & Home and Food supply chains and the costs of Brexit.

Our central case for the current year therefore assumes a gradual return towards more normal customer behaviour in stores in Clothing & Home and hospitality and franchise in Food. With that, we are assuming the receipt of business rates relief in line with government guidance. Our scenario does not assume further lockdowns.

In this central case UK costs normalise to levels broadly consistent with 2019/20 underpinned by the benefit of the restructuring announced last year, which will largely offset an increase in base pay rates, costs related to transformation and higher variable costs such as online fulfilment.

The business is now exposed to additional costs following Brexit, largely due to the administrative burden on exports of food, particularly to the island of Ireland. This includes additional supply chain costs at Motherwell and Faversham depots, as well as costs of a digital track and trace platform, additional variable cost per tray, veterinary certification, and costs of change. Potential tariffs relate to duty on exports of Clothing & Home and elements of the Food catalogue into the EU.

The total estimated cost impacts for the business are shown below, c.£27-33m of which relate to operations on the island of Ireland. We have provided a range of potential tariffs depending on the solutions implemented. We are also working on longer term initiatives including a review of European business models, local sourcing and re-routing product through European hubs.

Costs 2021/22	UK Food	International	Total
Administrative costs	(12)	(17)	(29)
Tariffs	-	(13-18)	(13-18)
Net Costs	(12)	(30-35)	(42-47)

Capital investment for the Group will increase to similar levels to 2019/20 as we invest in the transformation, restart a programme of store maintenance and accelerate rotation.

Our central case is therefore that we will generate profit before tax and adjusting items between £300-350m and our ambition is for a further reduction in net debt.

A path to a transformed business in the medium term

As the business emerges from Covid, we have an ambitious plan for future growth with a clear path to a transformed business.

Food is delivering growth in core categories with larger baskets and is now positioned to expand further in convenience, build sales through larger renewed stores and progressively improve profitability. In addition, Ocado Retail has already announced plans which will increase peak day capacity by c.50% and has a structurally profitable long-term model for growth.

In Clothing & Home the new buying approach and expanded online capability is gaining traction with customers. We have more active online customers and stores are positioned for recovery. We are targeting in excess of 40% of Clothing & Home revenue online in three years, with an overall operating margin ahead of 2019/20 levels. International has ambitious plans to grow online sales, working with partners in key markets and in time to offset the costs of Brexit.

Capital Allocation to prioritise the transformation

The priority is to fund investment in the transformation and to rebuild balance sheet metrics towards levels consistent with investment grade. Our approach will prioritise building omni-channel capability, including investment in the supply chain and maintenance of the changing estate, with an expectation of capital investment recovering to pre-Covid levels. As above we are seeking to fund the costs of rotation of the store estate with the realisation of funds from our asset management programme.

As we recover balance sheet metrics consistent with investment grade, we will assess the reintroduction of dividend payments, although as we focus on restoring profitability this is unlikely in the current year.

For further information, please contact:

Investor Relations:

Fraser Ramzan: +44 (0)20 3884 7080

Jack Cook: +44 (0)20 3882 5535

Media enquiries:

Corporate Press Office: +44 (0)20 8718 1919

Investor & Analyst presentation and Q&A:

A pre-recorded investor and analyst presentation will be available on the Marks and Spencer Group plc website from 7:30am on 26 May 2021.

Steve Rowe and Eoin Tonge will host a Q&A session at 9.30am on 26 May 2021:

Registration link here

Dial in number: +44 33 0606 1118
Room Number: 095533
Pin: 2990

Fixed Income Investor Conference Call:

This will be hosted by Eoin Tonge, Chief Finance Officer, at 2pm on 26 May 2021:

Registration link here

Dial in number: +44 33 0606 1118
Room Number: 753824
Pin: 7026

International Access Numbers

US: +1 646 813 7960

ITFS: International Access Numbers

A recording of this call will be available until 5pm on 2nd June 2021:

Dial in number: +44 33 0606 1118
Access code: 905044

FULL YEAR FINANCIAL REVIEW

Financial Summary

53 weeks ending	52 weeks ending
	3 April 21 £m	27 March 21 £m	28 March 20 £m	*Change* *% (52 week)*
Group revenue before adjusting items	9,166.9	8,972.7	10,181.9	-11.9
UK Food	6,138.5	5,994.8	6,028.2	-0.6
UK Clothing & Home	2,239.0	2,198.6	3,209.1	-31.5
International	789.4	779.3	944.6	-17.5

Group operating profit before adjusting items	222.2	209.7	590.7	-64.5
UK Food	228.6	213.6	236.7	-9.8
UK Clothing & Home	(130.8)	(129.4)	223.9	-157.8
International	44.1	45.1	110.7	-59.3
M&S Bank and Services	1.9	2.0	16.8	-88.1
Share of result in associates and joint ventures	78.4	78.4	2.6	2,915.4

Interest payable on lease liabilities	(124.9)	(122.5)	(133.4)	8.2
Net financial interest	(47.0)	(45.6)	(54.2)	15.9
Profit before tax & adjusting items	50.3	41.6	403.1	-89.7
Adjusting items	(259.7)	(242.8)	(335.9)	27.7
(Loss)/profit before tax	(209.4)	(201.2)	67.2	-399.4
(Loss)/profit after tax	(201.2)	(194.4)	27.4	-

Basic (loss)/earnings per share	(10.1)p	(9.8p)	1.3p	-
Adjusted basic earnings per share	1.4p	1.1p	16.7p	-
Dividend per share	-	-	3.9p	-100
Net debt	£3.52bn	n/a	£3.95bn	*-10.9*

Notes:

2020/21 is a 53-week year. The comparative period is 52 weeks to 28 March 2020. To aid understanding, we are showing the unaudited 52 weeks to 27 March 2021 with commentary and percentage changes on a 52-week basis unless otherwise stated.

Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, the comparative amounts for net debt and free cashflow have been restated.

There are a number of non-GAAP measures and alternative profit measures ('APMs'), discussed within this announcement and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to the adjusting items table below for further details.

Group results

Group revenue before adjusting items was £9,166.9m on a 53-week basis. On a 52-week basis, it decreased 11.9%, with UK revenue down 11.3% driven by Clothing & Home revenue declining 31.5%, and International revenue down 17.5%. The Group generated an adjusted profit before tax of £50.3m and a statutory loss before tax of £(209.4)m on a 53-week basis (or £41.6m and £(201.2)m respectively on a 52-week basis).

Statutory loss before tax includes total charges for adjusting items of £259.7m on a 53-week basis, including charges of £133.7m related to organisational change, £95.3m in relation to store closures identified as part of transformation plans, £79.9m for intangible asset impairments, offset by a £90.8m gain largely relating to the release of a portion of the Covid inventory provision made in the prior year.

For full details on adjusting items and the Group's related policy see notes 1 and 3 to the financial information.

UK: Food

UK Food revenue decreased 0.6%. Like for like (LFL) revenue grew in the first three quarters but declined in the fourth quarter as the UK-wide lockdown forced the hospitality business and parts of our franchise business to close again. M&S Food reported sales do not benefit from a direct online grocery presence, with these sales instead reported through Ocado Retail.

Excluding franchise and hospitality, core M&S Food categories performed strongly, particularly over key events, with LFL revenue growth of 6.9% for the year.

% change to 2019/20	Q1	Q2	Q3	Q4	FY
Food	-2.1	1.6	2.2	-4.4	-0.6
Food LFL	2.0	3.4	2.6	-2.7	1.3
Food LFL ex franchise and hospitality	7.7	8.6	8.4	2.8	6.9

Operating profit before adjusting items decreased 9.8%, largely due to an adverse mix impact on gross margin, which was only partially offset by reduced costs which benefitted from government support.

52 weeks ended	27 Mar 21 £m	28 Mar 20 £m	Change %
Revenue	5,994.8	6,028.2	-0.6
Operating profit before adjusting items	213.6	236.7	-9.8
Operating margin	3.6%	3.9%	-35bps

The table below sets out the drivers of the movement in operating profit before adjusting items. To improve understanding we provide additional information on Covid-related impacts with adjusted profit. Some direct Covid costs and government support are visible within the right-hand table as they were incremental to 2019/20, whereas other costs, for example the ongoing costs of furloughed colleagues (£41.9m), were also costs in 2019/20 and so are not visible. The full costs and government support for furlough income and business rates are detailed in a separate section.

Operating profit before adjusting items	£m	*Operating profit before* *adjusting items*	£m
2019/20	236.7	*2019/20*	*236.7*
Gross profit	(60.7)	Hospitality/franchise gross profit	(154.0)
Store staffing	30.8	Core categories gross profit	93.3
Other store costs	56.3	Direct Covid costs	(69.0)
Distribution and warehousing	(46.8)	Government support	101.0
Central costs	(2.7)	Other cost savings	5.6
2020/21	213.6	*2020/21*	*213.6*

Gross profit decreased £60.7m or c.84bps primarily as a result of hospitality closures and lower convenience sales, partly offset by strong growth in core categories and cost saving programmes, including initial synergies of £21.4m from Ocado supply.
Store staffing costs declined £30.8m, primarily driven by £45.5m of efficiencies enabled by technology improvements in store. We incurred Direct Covid costs within store staffing relating to incentives for retail colleagues of £20.8m and door host costs of £33.7m. Store staffing costs include government furlough support of £28.8m.
The movement in other store costs largely relates to government business rates relief of £70.8m, partly offset by additional Covid-related cleaning and hygiene costs.
Distribution and warehousing reflects the increased costs as a result of online orders, as well as Brexit-related costs of £9.0m and Covid-related hygiene and social distancing measures. The Food business incurred total costs relating to Brexit of £9.9m in the year; a detailed breakdown is given in the Brexit section below.

Ocado Retail Limited

The Group holds a 50% interest in Ocado Retail Ltd ('Ocado Retail'). The remaining 50% interest is held by Ocado Group plc ('Ocado Group'). Full year results are consistent with the quarterly results reported by Ocado Group on behalf of Ocado Retail for the quarterly periods ended 31 May 2020, 30 August 2020, 29 November 2020 and 28 February 2021.

Group share of consolidated results of Ocado Retail Ltd

£m	52 weeks ended 28 Feb 21
Revenue	2,353.2
EBITDA before exceptional items	189.9
Exceptional items	50.5
Operating profit	204.2
Profit after tax	156.8
M&S 50% share of profit after tax	78.4

^{Ocado Retail Ltd is reported as an associate of M&S as certain rights are conferred on Ocado Group plc for an initial period of at least five years from acquisition. Exceptional items are defined within the Ocado Group plc Annual Report and Accounts 2020. A prior year comparative is not provided here as the investment in Ocado Retail Ltd was made part-way through 2019/20.}

Revenue grew 43.7% on an annual basis due to strong demand for online grocery, higher than normal basket size and a smoothed trading profile across the week. Following switchover on 1 September, M&S products have accounted for over 25% of the average Ocado basket.

Ocado Retail EBITDA before exceptional items was £189.9m, driven by the strong revenue growth and cost performance reflecting a period of sustained high demand. Units per hour throughput increased in customer fulfilment centres, with operational improvements across the network. Trunking and delivery costs reduced as a percentage of sales due to fewer deliveries per van, as a result of a higher number of items per basket.

In addition, Ocado Retail has recognised £50.5m of exceptional income before tax, largely related to insurance receipts for business interruption for the period up to 28 February 2021 arising from the Andover fire in 2019.

As a result of strong EBITDA growth and insurance receipts, Group share of Ocado Retail profit after tax was £78.4m. After a charge of £14.2m in adjusting items relating to the amortisation of the intangible asset created by the investment, Ocado Retail contributed £64.2m to Group profit after tax.

UK: Clothing & Home

Clothing & Home revenue decreased 31.5% as a result of the impact on store sales of lockdowns and restrictions throughout the year. Performance improved following store reopening in quarter two and either side of the national lockdown in quarter three, and the online business built momentum through the year.

% change to 2019/20	Q1	Q2	Q3	Q4	FY
Clothing & Home	-61.5	-21.3	-25.1	-18.7	-31.5
Clothing & Home stores	-83.8	-39.5	-46.5	-60.6	-56.2
Clothing & Home online	21.5	46.4	47.5	105.8	53.9
Clothing & Home LFL	-59.3	-21.2	-24.1	-15.5	-29.8

To enable greater insight into these movements, we are providing further detail on the performance of each channel.

Online

52 weeks ended	27 Mar 21	28 Mar 20	% change
Traffic (m)	417.5	308.8	35.2
Active customers (m)	9.0	5.9	52.5
Conversion (%)	7.2	6.3	0.9 pts
Average order value (£)	49.7	51.5	-3.5
Returns rate (%)	18.8	28.0	-9.2 pts
Revenue £m	1,109.7	721.3	53.9

UK Clothing & Home online revenue increased 53.9%. Following initial disruption in April, online sales remained strong and built momentum, with quarter four revenue up 105.8%. Online customer traffic increased 35.2% driven by both direct and paid search helping to drive 52.5% growth in active customers to 9.0m. Growth was led by mobile, with over 3.5m downloads of the M&S app driven by the relaunch of Sparks. This led to increased app usage, with 2.3m monthly active users (2019/20: 1.2m), which also helped to drive better conversion. In addition, there was a benefit from a c.9 percentage point reduction in returns rates compared with last year due to changes in customer behaviour and product mix during lockdown. This offset headwinds from lower in-store orders, which are attributed to the online channel, as well as a small decline in average order value as customers' purchases focused on core product.

Stores

52 weeks ended	27 Mar 21	28 Mar 20	% change
Footfall, m (average/week)	1.9	5.9	-67.8
Transactions, m (average/week)	1.0	2.1	-52.4
Basket value (£)	30.6	32.3	-5.3
Revenue £m	1,088.9	2,487.8	*-56.2*

UK Clothing & Home store revenue decreased 56.2%: the impact of national lockdowns, local restrictions and the shape of the store estate adversely impacted the business with footfall down 67.8% and overall transactions down 52.4%. Basket value fell 5.3% in stores in line with online as customers' purchases focused on core product.

Total Clothing & Home

The Clothing & Home business in total generated an underlying operating loss before adjusting items for the year of £129.4m compared with a profit of £223.9m in the prior year. While online growth resulted in a substantial improvement in online operating profit, this was more than offset by the decline in stores, with lower costs insufficient to offset reduced overall sales.

52 weeks ended	27 Mar 21 £m	28 Mar 20 £m	Change %
Revenue	2,198.6	3,209.1	-31.5
Operating (loss)/profit before adjusting items	(129.4)	223.9	*-157.8*
Operating margin	-5.9%	7.0%	-12.9pts

The table below sets out the drivers of the movement in Clothing & Home operating (loss)/profit before adjusting items. To improve understanding, we provide additional information on Covid-related impacts within adjusted profit. Some direct Covid costs and government support are visible within the right-hand table as they were incremental to 2019/20, whereas other costs, for example the ongoing costs of furloughed colleagues (£129.1m), were also costs in 2019/20 and so are not visible. The full costs and details of government support for furlough income and business rates are detailed in a separate section.

Operating profit/(loss) before adjusting items	Total C&H £m	*Operating profit/(loss) before adjusting items*	*Total C&H £m*
2019/20	223.9	*2019/20*	*223.9*
Gross profit	(611.7)	Stores gross profit	(841.2)
Store staffing	147.6	Online gross profit	229.5
Other store costs	109.3	Direct Covid costs	(18.7)
Distribution and warehousing	(43.2)	Government support	196.4
Central costs	44.7	Other cost savings	80.7
2020/21	(129.4)	*2020/21*	*(129.4)*

Gross profit decreased £611.7m or (218)bps. Adverse currency movements and under-recovery of fixed logistics costs within margin impacted by (78)bps. Discounting increased (140)bps driven by an increased mix of clearance sales made at a higher depth of cut than last year.
Store staffing costs declined £147.6m, partly driven by £42.6m of efficiencies enabled by technology improvements in store. Store staffing costs include government furlough support of £88.6m.
The movement in other store costs largely relates to business rates relief of £101.4m.
Distribution and warehousing reflects the higher costs to serve online demand, both from the Castle Donington warehouse and shipments from store partially offset by volume savings from reduced deliveries to store. The overall increase in distribution and warehousing costs was offset by delivery income within revenue.
The decline in central costs was largely driven by lower marketing activity, lower headcount and a reduction in depreciation of technology assets as we move to cloud-based solutions and assets reach the end of their useful lives.

Clothing & Home online generated an operating profit margin of c.14%, with higher volumes leading to increased leverage of the online fixed cost base. Profitability also benefited from a reduced returns rate, although this was partially offset by the adverse impact of lower in-store orders. Conversely, the operating loss in stores represented a margin on sales of c.(26)%.

International

International revenue decreased 17.3% at constant currency ('CC') as stores were adversely impacted by rolling Covid lockdowns and restrictions. Online sales remained strong throughout, particularly in markets in which the Group has a store presence and through partner websites, with sales growth of 114.3% to £165.7m.

% change to 2019/20

Reported

Total revenue

-40.7

-9.2

-10.4

-10.2

-17.3

-17.5

52 weeks ended Revenue	27 Mar 21 £m	28 Mar 20 £m	*Change* %	*Change* *CC %*
Clothing & Home	483.2	620.7	-22.1	-21.6
Food	296.1	323.9	-8.6	-9.4
Total	779.3	944.6	*-17.5*	*-17.3*
Memo: Online revenue	165.7	77.2	114.6	114.3

The decline in Clothing & Home sales was driven by lower store sales in the Republic of Ireland and India, and lower franchise shipments particularly to Asia, partly offset by online growth. Food sales were more resilient particularly in the Middle East and Asia, as Covid disruption shifted habits to favour eating in. This helped offset the steep decline in travel franchise sales in Europe and Brexit related disruption in quarter four.

Operating profit before adjusting items was down 59.3% driven by the lower Clothing & Home sales and incremental costs relating to Brexit. A detailed breakdown of this is given in the Brexit section later in this report.

Operating profit before adjusting items	£m	*Operating profit before adjusting items*	£m
2019/20	110.7	*2019/20*	*110.7*
Gross Profit	(87.9)	Stores gross profit	(131.3)
Store staffing	14.0	Online gross profit	43.4
Other store costs	16.4	Online growth costs	(23.6)
Distribution and warehousing	(11.7)	Government support	13.1
Central costs	3.6	Other cost savings	32.8
2020/21	45.1	*2020/21*	*45.1*

Gross profit decreased £87.9m as lower store sales were only partially mitigated by strong online growth. Store staffing and other store costs declined. The costs of £10.8m relating to salary costs of colleagues on furlough were partially offset by government furlough support of £6.3m and reduced overtime hours, while the Group benefited from a further £6.8m of government support for rent and rates across owned markets, and £7.1m of rent relief. The increase in distribution costs largely relates to the growth of online sales and costs incurred as a result of Brexit of £6.2m which was only partly offset by lower distribution costs on shipments to stores. Central cost reductions were enabled by the shift to digital events from buying fairs and reduced travel.

M&S Bank & Services

M&S Bank & Services income before adjusting items was down £14.8m to £2.0m. This was the result of a significant decrease in income from credit card and travel money sales. M&S Bank and services income after adjusting items relating to PPI decreased £4.6m to £(0.4)m.

Covid costs

In the following table we set out identifiable costs within adjusted profit related to Covid. We incurred a number of Direct Covid costs such as door hosts and hygiene of £63.2m, incentives for working through the pandemic for non-furloughed colleagues of £28.5m and there was a slight reduction in colleague holiday hours of £3.9m.

In addition, business rates relief of £174.6m partly compensated for the substantial loss of trade from closed space in Clothing & Home and hospitality areas and franchise stores in Food.

Finally, identifiable costs include government grants for furlough income of £131.5m, which were more than offset by the salary costs incurred for furloughed colleagues of £181.8m.

Costs relating to Covid within adjusted profit before tax in 2020/21	Group £m	C&H £m	Food £m	Inter'l £m
Operational costs related to Covid	(63.2)	(13.8)	(49.4)	-
Incentive for non-furloughed colleagues	(28.5)	(6.4)	(22.0)	(0.1)
Estimated lower colleague holiday hours	3.9	1.5	2.4	-
*Direct Covid costs*	*(87.8)*	*(18.7)*	*(69.0)*	*(0.1)*

Government business rates relief for lost trade	174.6	101.4	70.8	2.4
Government grants - furlough income	131.5	95.0	30.2	6.3
*Government support*	*306.1*	*196.4*	*101.0*	*8.7*

*Year-on-year Covid impacts within segmental profit bridges*	*218.3*	*177.7*	*32.0*	*8.6*
Salary costs for furloughed colleagues	(181.8)	(129.1)	(41.9)	(10.8)
Total cost impact in adjusted profit	36.5	48.6	(9.9)	(2.2)

Brexit

The following estimated cost impacts were incurred by the Group in 2020/21 as a result of Brexit.

2020/21	UK Food	International	Total
Administrative costs	(9.9)	(4.1)	(14.0)
Tariffs	-	(2.1)	(2.1)
Net costs	(9.9)	(6.2)	(16.1)

Administrative costs include additional supply chain costs at the Motherwell and Faversham depots as well as costs of a digital track and trace platform, additional variable cost per tray, veterinary certification costs and the one-off costs of change. Tariffs relate to duty on exports of Clothing & Home and elements of the Food catalogue into the EU.

In addition, the Group saw adverse trade impacts including the restriction of trade on certain products, port delays and increased operational complexity reducing availability.

Net finance cost

	52 weeks ended
	27 Mar 21 £m	28 Mar 20 £m	Change £m
Interest payable	(89.9)	(80.5)	(9.4)
Interest income	4.7	14.5	(9.8)
Net interest payable	(85.2)	(66.0)	(19.2)
Pension net finance income	47.2	23.6	23.6
Unwind of discount on Scottish Limited Partnership liability	(4.9)	(6.9)	2.0
Unwind of discount on provisions	(2.7)	(4.9)	2.2
Net financial interest	(45.6)	(54.2)	8.6
Net interest payable on lease liabilities	(122.5)	(133.4)	10.9

Net finance costs	(168.1)	(187.6)	19.5

Net finance costs decreased £19.5m to £168.1m. This was primarily due to higher pension income due to the increased IAS19 pension surplus at last year end. In addition, there was a decrease in the interest payable on lease liabilities offset by lower interest received on deposits and higher interest payable on debt due to a credit rating downgrade and the premium paid as part of the buyback of bonds.

Group profit before tax & adjusting items

Group profit before tax and adjusting items was £50.3m on a 53-week basis, down £352.8m on last year. The profit decrease was driven by the decline in Clothing & Home and International operating profits.

Group loss before tax

Group loss before tax was £(209.4)m on a 53-week basis, down £276.6m on last year. This includes adjusting items of £259.7m on a 53 week basis (last year £335.9m).

Adjusting items

The Group makes certain adjustments to statutory profit measures in order to derive alternative performance measures (APMs) that provide stakeholders with additional helpful information and to aid comparability of the performance of the business. For further detail on these charges/gains and the Group's policy for adjusting items, please see notes 1 and 3 to the financial information.

	53 weeks ended 3 Apr 21 £m	52 weeks ended 28 Mar 20 £m	Change £m
Strategic programmes - Organisation	(133.7)	(13.8)	(119.9)
Strategic programmes - UK store estate	(95.3)	(29.3)	(66.0)
Strategic programmes - Other	(5.8)	(27.3)	21.5
Directly attributable to Covid	90.8	(163.6)	254.4
Intangible asset impairments	(79.9)	(13.4)	(66.5)
Sparks loyalty programme transition	(16.6)	-	(16.6)
Amortisation and fair value adjustments arising from the investment in Ocado Retail Limited	(14.2)	(16.8)	2.6
Remeasurement of contingent consideration including discount unwind on Ocado Retail investment	(6.8)	(2.9)	(3.9)
Establishing the investment in Ocado Retail Limited	(1.7)	(1.2)	(0.5)
Store impairments and other property charges	6.9	(78.5)	85.4
M&S Bank charges incurred in relation to insurance mis-selling and Covid forward economic guidance provision	(2.4)	(12.6)	10.2
Other	(1.0)	23.5	(24.5)
Adjusting items	(259.7)	(335.9)	76.2

On a 53-week basis, adjusting items charges were £259.7m, with £16.9m incurred in week 53, largely related to restructuring costs.

A charge of £133.7m has been incurred in relation to organisational change. This includes the integration of more flexible management structures into store operations, as well as the streamlining of store and management levels as part of the Never the Same Again programme. This has resulted in a reduction of c.8,200 roles across support centres, regional management, and UK stores, with associated redundancy costs of £99.7m. We expect this restructuring to generate annualised cost savings of at least £115m.

A charge of £95.3m has been recognised in relation to store closures identified as part of transformation plans reflecting an updated view of latest closure costs as a result of an increase in the number of stores in the programme. Further material charges relating to the closure and reconfiguration of the UK store estate are anticipated as the programme progresses with total future charges of up to c.£268m estimated over the next 10 years, bringing anticipated total programme costs since 2016 to be up to c.£926m.

A gain of £90.8m has been recognised as being directly attributable to the Covid pandemic relating to the release of a portion of the inventory provision made in the prior year compared to initial estimates offset by further costs relating to cancellations and storage. The sell-through of Clothing & Home stock has been much stronger than anticipated.

A charge of £79.9m has been recognised in relation to impairment of intangible assets, comprising £39.6m for the impairment of Per Una goodwill, and the balance for replaced, retired or decommissioned computer software assets.

Charges of £16.6m have been incurred in relation to the one-off transition costs associated with the closure of the old Sparks loyalty scheme following the launch of the new programme in July 2020.

A charge of £14.2m has been recognised relating to the amortisation of intangible assets acquired on the purchase of our share in Ocado Retail.

A gain of £6.9m was recognised relating to the reversal of previously recognised store impairments offset by newly impaired stores. The Group has revised future projections for UK stores (excluding those stores which have been captured as part of the UK store estate programme) for the current view of pressures impacting the retail industry, which is less negative overall than previously projected.

Charges of £2.4m have been incurred relating to M&S Bank, primarily due to the insurance mis-selling provision. The Group's share of the total insurance mis-selling and forward economic guidance (FEG) provisions of £338.3m exceeds the total offset against profit share of £225.1m to date and this deficit will be deducted from the Group's share of future profits from M&S Bank.

Taxation

The effective tax rate on profit before adjusting items was 56.5% (50.3% on a 53-week basis; 2019/20: 20.7%). The effective tax rate on statutory loss before tax was a credit of 3.4% (credit of 3.9% on a 53-week basis; 2019/20: charge of 59.3%) due to the Group statutory loss offset by the impact of disallowable adjusting items. Given the lower level of profits, the effect of the recapture of previous tax relief under the Marks and Spencer Scottish Limited Partnership ('SLP') structure has increased compared with previous years. Next year, we anticipate an effective tax rate on profit before adjusting items of c.26% partly due to the continuation of the recapture of previous tax relief.

Loss/Earnings per share

Basic loss per share was 9.8p (last year earnings of 1.3p), due to the decrease in profit year on year and the increase in weighted average shares outstanding. The weighted average number of shares in issue during the period was 1,953.5m (2019/20: 1,894.9m). Basic loss per share on a 53-week basis was 10.1p.

Adjusted basic earnings per share was 1.1p (last year earnings of 16.7p) due to lower adjusted profit year on year. Adjusted basic earnings per share on a 53-week basis was 1.4p.

Capital expenditure

		53 weeks ended 3 Apr 21 £m	52 weeks ended 28 Mar 20 £m	Change £m
UK store remodelling	27.0	60.3	(33.3)
New UK stores	14.9	33.3	(18.4)
International	6.7	15.7	(9.0)
Supply chain	25.2	39.2	(14.0)
IT & M&S.com	47.6	81.1	(33.5)
Property asset replacement	19.2	102.4	(83.2)
Acquisition of Jaeger brand	6.3	-	6.3
Capital expenditure before property acquisitions and disposals	146.9	332.0	(185.1)
Property acquisitions and disposals	(0.3)	(2.7)	2.4
Capital expenditure	146.6	329.3	(182.7)

Group capital expenditure before disposals decreased £182.7m to £146.6m as a result of careful management of discretionary spending as a result of the pandemic.

UK store remodelling costs related to Food renewal stores and the repurposing of space from Clothing & Home and cafes to Food. Spend on New UK stores related to seven Simply Foods and three full-line store openings in the year.

Supply chain expenditure reflects investment in food equipment and fleet to support anticipated volume growth, investment in a second ambient food national distribution centre in Milton Keynes and spend on improvements to Castle Donington capabilities and our Bradford warehouse to support online expansion.

IT & M&S.com spend includes costs related to the licence for the Food ordering and allocation system and investment in digital capability for example, to support integration of more flexible management structures into store operations.

Property asset replacement decreased £83.2m due to the prior year asset replacement programme in stores, although this will normalise towards pre-pandemic levels going forwards.

Cash flow

	53 weeks ended 3 Apr 21 £m	52 weeks ended 28 Mar 20 restated £m	Change £m
Adjusted operating profit	222.2	590.7	(368.5)
Depreciation and amortisation before adjusting items	603.1	632.5	(29.4)
Cash lease payments	(316.6)	(335.7)	19.1
Working capital	268.1	(67.8)	335.9
Defined benefit scheme pension funding	(37.1)	(37.9)	0.8
Capex and disposals	(203.8)	(325.9)	122.1
Financial interest and taxation	(81.8)	(171.1)	89.3
Investment in associate Ocado Retail Limited	11.2	(577.8)	589.0
Investment in joint venture	(2.5)	(2.5)	-
Employee-related share transactions	18.5	9.7	8.8
Proceeds from rights issue net of costs	-	574.4	(574.4)
Share of profit from associate	(78.4)	(2.6)	(75.8)
Cash received from settlement of derivatives	14.0	7.7	6.3
Adjusting items outflow	(120.5)	(88.0)	(32.5)
Free cash flow	296.4	205.7	90.7
Dividends paid	-	(191.1)	191.1
Free cash flow after shareholder returns	296.4	14.6	281.8

Opening net debt excluding lease liabilities	(1,388.6)	(1,404.7)	16.1
Free cash flow after shareholder returns	296.4	14.6	281.8
Exchange and other non-cash movements excluding leases	(17.8)	1.5	(19.3)
Closing net debt excluding lease liabilities	(1,110.0)	(1,388.6)	278.6

Opening net debt	(3,950.6)	(3,981.5)	30.9
Free cash flow after shareholder returns	296.4	14.6	281.8
Decrease in lease obligations	184.3	201.4	(17.1)
New lease commitments and remeasurements	(48.3)	(204.1)	155.8
Exchange and other non-cash movements	2.3	19.0	(16.7)
Closing net debt	(3,515.9)	(3,950.6)	434.7

2019/20 net debt and free cash flow figures have been restated. Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, to more appropriately reflect the nature of these transactions, the comparative amounts have been restated.

The business generated free cash flow of £296.4m, largely driven by working capital inflow, reduced capital expenditure and lower tax payments, which more than offset the lower adjusted operating profit.

The working capital inflow since year end 2019/20 was driven by higher payables in Clothing & Home and Food (c.£125m) largely due to the extension of payment terms for C&H suppliers and the timing of payments including to landlords. Lower stock was a result of strong Easter trading and the higher stock at prior year end resulting from lockdown. Franchise receivables reduced due to travel store closures.

Lower capital expenditure largely reflects the reduction of discretionary spending as a result of the pandemic. Cash capital expenditure includes £77.2m relating to prior year capital accruals.

The decrease in financial interest and tax payments to £81.8m is due to the reduction in UK corporation tax paid reflecting the full year taxable loss position.

Defined benefit scheme pension funding of £37.1m reflects the second limited partnership interest distribution to the pension scheme.

Adjusting items cash outflow was £120.5m. This included £92.1m relating to the costs of organisational change, £10.9m in relation to the store rotation programme, £6.2m paid for deep storage and fabric during the Covid pandemic, £5.6m in relation to the transition to the new Sparks loyalty programme, £2.4m for M&S Bank, and £1.7m relating to costs associated with the launch of M&S product on the Ocado Retail platform.

Net debt

Net debt excluding lease liabilities decreased £278.6m from the start of the year.

There was a further reduction in the value of discounted lease obligations outstanding. New lease commitments and remeasurements in the period largely relating to 11 properties were £48.3m of which 10 opened in the year. This was more than offset by £184.3m of lease repayments.

The composition of Group net debt is as follows:

	53 weeks ended 3 Apr 21 £m	52 weeks ended 28 Mar 20 restated £m	vs £m
Cash and cash equivalents	674.4	254.2	420.2
Medium Term Notes	(1,682.1)	(1,536.2)	(145.9)
Current financial assets and other	83.2	96.1	(12.9)
Partnership liability	(185.5)	(202.7)	17.2
Net debt excluding lease liabilities	(1,110.0)	(1,388.6)	278.6

Lease liabilities	(2,405.9)	(2,562.0)	156.1
- Full-line stores	(982.6)	(1,054.8)	72.2
- Simply Food stores	(727.0)	(747.7)	20.7
- Offices, warehouses and other	(494.5)	(523.7)	29.2
- International	(201.8)	(235.8)	34.0
Group net debt	(3,515.9)	(3,950.6)	434.7

^{2019/20 net debt and free cash flow figures have been restated. Due to a change in the Group's accounting policy to recognise BACS payments at the settlement date, rather than when they are initiated, to more appropriately reflect the nature of these transactions, the comparative amounts have been restated.}

Of the outstanding discounted lease commitment at period end, approximately 40% related to full-line stores and 30% to Simply Food stores, with 8% relating to International leases and the balance largely relating to warehousing and offices.

Liquidity

At year end, the Group held cash balances of £674.4m (2019/20: £254.2m), with undrawn facilities of £1.1bn expiring April 2023. This strong liquidity position is as a result of free cashflow performance and a £300m bond issuance in November, which was used to refinance the bond maturity due in December 2021.

The refinancing of the Group's December 2021 maturity, along with the successful negotiations in March 2021 to extend the relaxation of covenant measures on the revolving credit facility up to and including March 2022, mean that the Group has liquidity headroom of over £1.5bn.

Dividend

We did not pay a final dividend for 2019/20 and the Board has previously announced the decision not to pay a dividend for the 2020/21 financial year.

Pension

At 3 April 2021, the IAS 19 net retirement benefit surplus was £631.4m (2019/20: £1,902.6m). The surplus at last year end had increased significantly due to unusually high credit spreads as a result of Covid. During the year, credit spreads have reverted to more normalised levels giving rise to the decrease in the surplus.

The Trustee of the UK Defined Benefit Scheme has commenced a triennial actuarial valuation of the Scheme at 31 March 2021 as required by statute. The assumptions used are to be agreed between the Trustee and the Company. The Scheme surplus on a statutory basis was £652m at the last actuarial valuation in 2018.

In September 2020, the Scheme purchased additional pensioner buy-in policies with insurers for approximately £750m. Together with the policies purchased in April 2019 and March 2018, the Scheme has now, in total, insured around 80% of the pensioner cash flow liabilities for pensions in payment. The buy-in policies cover specific pensioner liabilities and pass all risks to an insurer in exchange for a fixed premium payment, thus reducing the Group's exposure to changes in longevity, interest rates, inflation and other factors.

Statement of financial position

Net assets were £2,285.8m at the year end, a decrease of 38% since the start of the year largely due to the decrease in the net retirement benefit surplus and the Group loss for the year.

Important Notice:

Statements made in this announcement that look forward in time or that express management's beliefs, expectations or estimates regarding future occurrences and prospects are 'forward-looking statements' within the meaning of the United States federal securities laws. These forward-looking statements reflect Marks & Spencer's current expectations concerning future events and actual results may differ materially from current expectations or historical results. Any forward-looking statements are subject to various risks and uncertainties, including, but not limited to, failure by Marks & Spencer to predict accurately customer preferences; decline in the demand for products offered by Marks & Spencer; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of Marks & Spencer's brand awareness and marketing programmes; general economic conditions including, but not limited to, those related to the Covid-19 pandemic or a downturn in the retail or financial services industries; acts of war or terrorism worldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets. For further information regarding risks to Marks & Spencer's business, please consult the risk management section of the 2021 Annual Report.

The forward-looking statements contained in this document speak only as of the date of this announcement, and Marks & Spencer does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

- Ends -

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Marks & Spencer Group plc published this content on 26 May 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 May 2021 06:04:03 UTC.

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