Annual report and financial statements 2008

Financial review

 

Revenue

  UK Retail International Retail
2008 £8,309.1m £712.9m
2007 £7,977.5m £610.6m
     
Total +4.2% +16.8%
Like-for-like -0.5% +6.6%

 

Total revenues were up 5.1% driven by new space in the UK and strong performance in our International business.

UK revenues were up 4.2% in total with like-for-like decline of 0.5%. The performance in the first half of the year was strong, despite the unseasonable weather and significant disruption from our modernisation programme. However, in the second half of the year the deterioration in the economic environment and consumer spending had an adverse impact on our performance.

During the year, we added 4.8% of space (on a weighted average basis), 8.7% in food and 3.0% in general merchandise.

International revenues were up 16.8% with good performances in both owned and franchised stores, up 15.5% and 18.7% respectively. This was driven by both strong like-for-like performance and 38 new store openings.

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Operating profit

  UK Retail International Retail
2008 £972.9m £116.4m
2007 £956.5m £87.5m
     
Total +1.7% +33.0%

 

Operating profit before property disposals and exceptional items was £1,089.3m, up 4.3%.

In the UK, operating profit before property disposals and exceptional items was up 1.7% at £972.9m. The UK gross margin was 0.4 percentage points down on the year at 43.0%, mostly due to a greater proportion of food sales in the overall mix. General merchandise gross margin was level on the year at 52.6%, with further improvement in primary margin being offset by higher markdowns. Food gross margin was 0.1 percentage point lower than last year at 33.9% due to higher waste and the growth in franchised Simply Food stores which generate a lower gross margin. The net operating margin for franchised stores is above that achieved by owned Simply Food stores.

UK operating costs were up 4.3% to £2,630.0m. A breakdown of UK operating costs is shown below:

  52 weeks ended  
  29 March
2008
£m		 31 March
2007
£m		 % increase/
(decrease)
Retail staffing 834.8 819.5 + 1.9
Retail occupancy 841.4 750.4 + 12.1
Distribution 383.8 329.7 + 16.4
Marketing and related 144.6 137.5 + 5.2
Support 408.9 394.6 + 3.5
Total before bonus 2,613.2 2,431.7 + 7.5
Bonus 16.8 91.0 - 81.5
Total including bonus 2,630.0 2,522.7 + 4.3

 

Despite the step up in space growth, retail staffing costs were well controlled, in response to the more difficult trading environment experienced over the year. Our mystery shop scores, which measure the quality of service in stores, continue to be very strong. The increase in retail occupancy costs reflects both space growth and the increased depreciation related to the modernisation programme. Increase in distribution costs reflects growth in both general merchandise and food volumes, as well as furniture order deliveries. Growth in marketing expenditure reflects higher in-store marketing costs due to new store openings and modernisations. Support costs, which include non-store related overheads, were well controlled.

We will be paying a bonus of £16.8m for 2007/08 (last year £91.0m). The level of bonus payment reflects performance against our original operating plan.

The UK operating profit includes a contribution of £28.3m (last year £19.5m) from the Group’s continuing economic interest in M&S Money.

International operating profit before property disposals was £116.4m, up 33.0%, reflecting the strong sales performance of the business. Owned store operating profits decreased by 2.0% to £44.5m, largely due to the Republic of Ireland where operating results were affected by new store opening costs, and start up losses relating to Taiwan. Franchise operating profits grew by 70.8% to £71.9m reflecting strong sales and margin performance.

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Profit on property disposals

Profit on property disposals was £27.0m (last year £1.9m). This relates to proceeds from the sale of stores where we have relocated, or plan to relocate at a later date.

Exceptional items

The exceptional pension credit of £95.0m (last year £nil) has arisen due to the changes made in the terms of the UK defined benefit plan relating to how members’ future benefits build up from 1 October 2007. To the extent that members have chosen the option to limit their future pensionable salary increases in line with inflation, there is a past service credit to reflect the impact of adjusting their projected final pensionable salaries.

Net finance costs

Net interest payable was up 15.8% at £113.8m (last year £98.3m) reflecting an increase in the average net debt for the year. Consequently, net finance costs before exceptional items were up 4.3% after pension finance income of £58.9m (last year £20.8m) and the unwinding of the discount on the partnership liability to the pension scheme. Despite widening credit spreads within the debt capital markets and rising short-term LIBOR rates the Group’s average cost of funding remained level on the year at 5.9%.

Taxation

The taxation charge reflects a pre-exceptional effective tax rate of 27.0% for the full year (last year 29.4%). The decrease reflects a restatement of UK deferred tax liabilities resulting from the reduction in Corporation tax rates on 1 April 2008, and a prior year credit. The 2008/09 tax rate is expected to be 28.0%.

Earnings per share

Adjusted earnings per share from continuing operations, which excludes the effect of property disposals and exceptional items, increased by 7.9% to 43.6p per share. The weighted average number of shares in issue during the period was 1,671.3m (last year 1,688.6m).

Dividends

The Board is recommending a final dividend of 14.2p per share. This will result in a total dividend of 22.5p, an increase of 23.0%. This reflects a base uplift of 15% on the prior year dividend plus the growth in adjusted earnings per share. In 2008/09 the Board will return to its existing policy of growing dividends broadly in line with adjusted earnings per share.

Share buy back

In November 2007 we announced our intention to purchase up to 10% of the Company’s issued share capital, using the authority given by shareholders at the AGM in July 2007. As at 29 March 2008, we had bought back a total of c126m shares for cancellation, for a total consideration of £555.9m. This represents 7.4% of the shares in issue in July 2007. We intend to complete the 10% buy back programme during the summer of 2008.

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Capital expenditure

Investing in the business continues to be a key part of our strategy. Capital expenditure for the year was £1,054.5m compared with £792.4m last year.

The increased spend on the modernisation programme reflects a record 35% of our space being developed or modernised, including of a number of significant projects such as Belfast, Edinburgh, London Colney, Braehead and Cheshunt. Capital expenditure on new stores was up to £203.1m reflecting the increase in new space coming on stream. We stepped up the investment in our supply chain and technology with the roll-out of the POS system in stores and investment in further distribution capacity.

Cash flow and net debt

The Group reported a net cash outflow of £917.5m (last year inflow £231.1m). Cash inflow from continuing operations decreased by £206.6m, reflecting a higher working capital outflow due to the timing of pension payments, the 2006/07 bonus, increased investment in inventories and leasehold prepayments in respect of new stores. Cash outflow on capital expenditure, net of disposals, was £927.4m (last year £710.5m) reflecting increased investment in our modernisation programme, as well as more aggressive new space growth. We generated £91.6m during the year from the disposal of properties.

On 28 February 2008, the Group acquired Board control and 50% of the issued share capital of the Marinopoulos Group, located in Greece, Bulgaria, Croatia, Romania, Serbia and Switzerland for cash consideration of £38.1m, transaction costs of £0.8m and net cash acquired of £2.0m. On 20 March 2008, the Group acquired 51% of the issued share capital of COMS a.s., located in the Czech Republic, Latvia, Lithuania and Slovakia for cash consideration of £10.6m, transaction costs of £0.8m and net cash acquired of £1.9m.

Pensions

At 29 March 2008 the IAS 19 net retirement benefit surplus was £483.5m (last year deficit £283.3m). The change is due to a £95m decrease in the liabilities arising from the change in the UK defined benefit plan, as well as the increase in the discount rate used to calculate the liability at the year end in accordance with the accounting standard. The year end discount rate, which was 6.8% (last year 5.3%), reflects corporate bond rates at the year end and has led to a significant reduction in the IAS 19 calculation of the pension liability for accounting purposes at 29 March 2008.

The partnership liability to the Marks & Spencer UK Pension scheme of £723.2m (last year £496.9m) relates to the amortising liability in respect of the obligations to the Marks & Spencer UK Pension Scheme. The increase in the liability is due to the decision by the Group to pre-fund £200m of its annual contributions to the pension scheme, by placing £400m of additional properties into the partnership established with the Pension Scheme in 2007. The impact of the transaction will be to increase the annual distribution out of the partnership to the pension scheme by £21.9m for the 14-year period from July 2009.

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