Annual report and financial statements 2008

Group Directors’ report

Business review

The Companies Act 1985 requires the Company to set out in this report, a fair review of the business of the Group during the financial year ended 29 March 2008, including an analysis of the position of the Group at the end of the financial year, and a description of the principal risks and uncertainties facing the Group (known as a ‘Business review’).

The information that fulfils the Business review requirements can be found in the following sections of this report. All the information detailed in these sections is incorporated by reference into this report and deemed to form part of this report:

The Group Director’s report (together with the sections of the Annual report incorporated by reference) has been drawn up and presented in accordance with, and in reliance upon applicable English company law and the liabilities of the directors in connection with that report shall be subject to the limitations and restrictions provided by such law.

Principal activities

Marks and Spencer Group plc is the holding company of the Marks & Spencer Group of companies (the ‘Group’). We are one of the UK’s leading retailers, with over 21 million people visiting our stores each week. We offer stylish, high quality, great value clothing and home products, as well as outstanding quality food, responsibly sourced from around 2,000 suppliers globally. We employ over 75,000 people in the UK and abroad, and have 622 UK stores, including Simply Food franchised stores, as well as an expanding international business.

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Profit and dividends

The profit for the financial year, after taxation, non-equity dividends and minority interests amounts to £821.7m (last year £659.9m). The directors have declared dividends as follows:

  £m
Ordinary shares  
Paid interim dividend of 8.3p per share 140.1
(last year 6.3p per share)  
Proposed final dividend of 14.2p per share 217.9
(last year 12p per share)  
Total ordinary dividend, 22.5p per share  
(last year 18.3p per share) 358.0

 

The final ordinary dividend will be paid on 11 July 2008 to shareholders whose names are on the Register of Members at the close of business on 30 May 2008.

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Share capital and control

(i) Structure

The information in this section is given pursuant to section 992 of the Companies Act 2006 and is correct as at 29 March 2008.

The Company’s authorised share capital was £800,000,000 divided into 3,200,000,000 ordinary shares of 25p each and there were 1,586,478,423 ordinary shares in issue. The ordinary shares are listed on the London Stock Exchange and can be held in certificated or uncertificated form.

The rights and obligations attaching to the Company’s ordinary shares, in addition to those conferred on their holders by law, are set out in the Company’s Articles of Association, a copy of which can either be viewed in the investors section of our website marksandspencer.com/thecompany, or obtained by writing to the Company Secretary, or from Companies House in the UK. The holders of ordinary shares are entitled to receive the Company’s report and accounts, to attend and speak at general meetings of the Company, to appoint proxies and to exercise voting rights.

Changes to the Company’s Articles must be approved by special resolution of the Company. New Articles are being proposed at this year’s Annual General Meeting (AGM) which include a number of changes, some of which may impact on the rights, obligations, restrictions on transfer or voting rights attaching to those shares. Explanatory notes relating to these changes are included in the appendix to the Notice of Meeting booklet which accompanies this report.

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Interests in voting rights

Information provided to the Company pursuant to the Financial Services Authority’s (FSA) Disclosure and Transparency Rules (DTRs) is published on a Regulatory Information Service and on the Company’s website. As at 6 May 2008, the Company had been notified under DTR5 of the following significant holdings of voting rights in its shares:

  Ordinary shares % of share capital Nature of holding
Brandes Investment Partners, L.P (21.03.07) 111,595,173 6.57% Indirect Interest
Capital Research and Management Company (11.04.08) 86,833,000 5.47% Indirect Interest
Legal & General Group plc (26.03.08) 72,771,104 4.57% Direct Interest

 

The Board is responsible for the management of the business of the Company and may exercise all the powers of the Company subject to the provisions of relevant statutes and the Company’s Memorandum and Articles of Association. For example, the Articles contain specific provisions and restrictions regarding the Company’s power to borrow money; provisions relating to the appointment of directors, subject to subsequent shareholder approval; delegation of powers to a director or secretary or committees of one or more persons; and subject to certain exceptions, a director shall not vote on or be counted in a quorum in relation to any resolution of the Board in respect of any contract in which he/she has an interest which he/she knows is material. There are no known arrangements under which financial rights are held by a person other than the holder of the shares. Shares to be acquired through the Company’s share plans rank equally with the shares in issue and have no special rights. As far as the Company is aware, there are no persons with significant direct or indirect holdings of voting rights in the Company other than as set out in the paragraph entitled ‘Interests in voting rights’ (above).

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Significant agreements – change of control

There are a number of agreements to which the Company is party that take effect, alter or terminate upon a change of control of the Company following a takeover bid. Details of the significant agreements of this kind are as follows:

  • the £400m Medium Term Notes (MTNs) issued by the Company to various institutions on 28 March 2007 under the Group’s £3bn Euro Medium Term Note (EMTN) programme contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of an MTN may require the Company to prepay the principal amount of that MTN;
  • the £250m puttable callable reset notes issued by the Company to various institutions on 11 December 2007 under the Group’s £3bn EMTN programme contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of an MTN may require the Company to prepay the principal amount of that MTN;
  • the $500m US Notes issued by the Company to various institutions on 6 December 2007 under section 144a of the US Securities Act contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of such a US Note may require the Company to prepay the principal amount of that US Note;
  • the $300m US Notes issued by the Company to various institutions on 6 December 2007 under section 144a of the US Securities Act contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of such a US Note may require the Company to prepay the principal amount of that US Note;
  • the £1.2bn Credit Agreement between the Company and various banks dated 13 August 2004 contains a provision such that, upon a change of control event, unless new terms are agreed within 60 days, the facilities under that agreement will be cancelled with all outstanding amounts becoming immediately payable with interest; and
  • the agreement between HSBC and the Company relating to M&S Money dated 9 November 2004 (as amended and restated on 1 March 2005) contains a clause such that, upon a change of control of the Company, any new owner would be obliged to give undertakings to HSBC in respect of the continuation of the agreement, negotiate revised terms or terminate the agreement.

The Company does not have agreements with any director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company’s share schemes and plans may cause options and awards granted to employees under such schemes and plans to vest on a takeover.

(ii) Issue of new ordinary shares

During the period, 12,447,224 ordinary shares in the Company were issued as follows:

  • 114,556 shares under the terms of the 1997 Executive Share Option Scheme at prices between 358p and 557p;
  • 66,030 shares under the terms of the 2000 Executive Share Option Scheme at prices between 215p and 350p;
  • 2,054,623 shares under the terms of the 2002 Executive Share Option Scheme at prices between 270p and 353p; and
  • 10,212,015 shares under the terms of the United Kingdom Employees’ Save As You Earn Share Option Scheme at prices between 156p and 559p.

(iii) Purchase of ordinary shares

The Company was authorised by shareholders, at the July 2007 AGM, to purchase in the market up to 170 million shares, representing 10% of the Company’s issued share capital, as permitted under the Company’s Articles. The Company engages in share buy backs to create value for the shareholders, when cash flow permits and there is not an immediate alternative investment use for the funds. The Company announced on 6 November 2007 that it would begin a share buy back programme to purchase up to 10% of the Company’s issued share capital. Since then and up to 19 May 2008, the date of this report, 127,017,902 of the Company’s ordinary shares, with a nominal value of 25p each, were bought back and cancelled, representing 7.5% of the Company’s issued share capital at 10 July 2007, the date of the 2007 AGM. An up-to-date summary of all transactions is available on our website. This standard authority is renewable annually and approval will be sought from shareholders at the 2008 AGM to renew for another year. It is the Company’s present intention to cancel any shares it buys back, rather than hold them in treasury.

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Board of directors

The membership of the Board and biographical details of the directors are incorporated into this report by reference.

Martha Lane Fox was appointed to the Board as a non-executive director on 1 June 2007. Jack Keenan retired from the Board on 10 July 2007.

On 10 March 2008 the Company announced a number of Board and senior management changes. Lord Burns will retire as Chairman with effect from 1 June 2008. Sir Stuart Rose will be appointed Executive Chairman from 1 June 2008.

Kate Bostock was appointed to the Board as an Executive Director of Clothing and Steven Esom was appointed to the Board as Executive Director of Food on 10 March 2008. Details of these changes are set out in the Corporate governance statement and are incorporated into this report by reference.

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Directors’ indemnities

The Company maintains directors’ and officers’ liability insurance which gives appropriate cover for any legal action brought against its directors. The Company has also granted indemnities to each of its directors and the secretary to the extent permitted by law. Qualifying third party indemnity provisions (as defined by section 234 of the Companies Act 2006) were in force during the year ended 29 March 2008 and remain in force, in relation to certain losses and liabilities which the directors (or secretary) may incur to third parties in the course of acting as directors (or secretary) or employees of the Company or of any associated company.

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Directors’ interests

The beneficial and non-beneficial interests of the directors and connected persons in the shares of the Company are shown in the Remuneration report. Options granted under the Save As You Earn (SAYE) scheme and Executive Share Option Schemes are shown in Directors’ interests in long-term incentive schemes. Further information regarding employee share schemes is given in note 12 to the financial statements.

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Related party transactions

Internal controls are in place to ensure that related party transactions involving directors, or their connected parties, are conducted on an arm’s length basis.

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Directors’ responsibilities

The directors are obliged under company law to prepare financial statements for each financial year and to present them annually to the Company’s members in the Annual General Meeting.

The financial statements, of which the form and content is prescribed by the Companies Act 1985 and applicable accounting standards, must give a true and fair view of the state of affairs of the Company and the Group at the end of the financial year, and of the profit for that period.

The directors are also responsible for the adoption of suitable accounting policies and their consistent use in the financial statements, supported where necessary by reasonable and prudent judgements.

The directors confirm that the above requirements have been complied with in the financial statements.

In addition, the directors are responsible for maintaining adequate accounting records and sufficient internal controls to safeguard the assets of the Group and to prevent and detect fraud or any other irregularities, as described more fully in the Corporate governance statement.

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Directors’ responsibility statement pursuant to DTR4

The directors confirm that, to the best of their knowledge:

(a) the Group and Company financial statements in this report, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, IFRIC interpretations and those parts of the Companies Act 1985 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Group taken as a whole; and

(b) the management report contained in this report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

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Audit information

Each director confirms that, so far as he/she is aware, there is no relevant audit information of which the Company’s auditors are unaware and that each director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

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Employee involvement

We have maintained our commitment to employee involvement throughout the business.

Employees are kept well informed of the performance and objectives of the Group through personal briefings, regular meetings, email and Chief Executive broadcasts at key points in the year to all head office employees and store management. These are supplemented by our employee publications including Your M&S magazine and DVD presentations. More than 3,500 employees elected onto Business Involvement Groups across every store and head office location represent their colleagues in two-way communication and consultation with the Company.

They have continued to play a key role in a wide variety of business changes.

The thirteenth meeting of the European Council took place last July. This Council provides an additional forum for informing, consulting and involving employee representatives from the countries in the European Community.

Directors and senior management regularly visit stores and discuss with employees matters of current interest and concern to the business.

Share schemes are a long-established part of our total reward package, encouraging and supporting employee share ownership. In particular, over 25,000 employees currently participate in Sharesave, the Company’s all employee Save As You Earn scheme. Full details of all schemes are given in the Remuneration report.

We maintain contact with retired staff through communications from the Company and the Pension Trust. Member-nominated trustees have been elected to the Pension Trust Board, including employees and pensioners. We continue to produce a regular Pensions Update newsletter for members of our final salary pension scheme and our M&S Retirement Plan.

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Equal opportunities

The Group is committed to an active Equal Opportunities Policy from recruitment and selection, through training and development, appraisal and promotion, to retirement.

It is our policy to promote an environment free from discrimination, harassment and victimisation, where everyone will receive equal treatment regardless of gender, colour, ethnic or national origin, disability, age, marital status, sexual orientation or religion. All decisions relating to employment practices will be objective, free from bias and based solely upon work criteria and individual merit.

The Group is responsive to the needs of its employees, customers and the community at large and we are an organisation that endeavours to use everyone’s talents and abilities to the full.

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Employees with disabilities

It is our policy that people with disabilities should have full and fair consideration for all vacancies. During the year, we continued to demonstrate our commitment to interviewing those people with disabilities who fulfil the minimum criteria, and endeavouring to retain employees in the workforce if they become disabled during employment. We will actively retrain and adjust their environment where possible to allow them to maximise their potential.

We continue to work with external organisations to provide workplace opportunities through our innovative Marks & Start scheme and by working closely with jobCentrePlus.

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Creditor payment policy

For all trade creditors, it is the Group’s policy to:

  • agree the terms of payment at the start of business with that supplier;
  • ensure that suppliers are aware of the terms of payment; and
  • pay in accordance with its contractual and other legal obligations.

The main trading company, Marks and Spencer plc, has a policy concerning the payment of trade creditors as follows:

  • general merchandise payments are received between 16 and 23 days after the stock was delivered;
  • food payments are received between 18 and 25 days after the stock was delivered; and
  • distribution suppliers are paid monthly, for costs incurred in that month, based on estimates, and payments are adjusted quarterly to reflect any variations to estimate.

Trade creditor days for Marks and Spencer plc for the year ended 29 March 2008 were 15.3 days, or 10.2 working days (last year 14.7 days, or 9.8 working days), based on the ratio of Company trade creditors at the end of the year to the amounts invoiced during the year by trade creditors.

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Market value of properties

The last formal valuation of the Group’s properties was carried out in September 2006. Taking into account movements in the Group’s property portfolio since that date, the directors are of the opinion that the market value of the Group’s properties, at 29 March 2008 exceeded their net book value (including prepayments in respect of leasehold land) of the fixed asset and leasehold properties by approximately £1.0bn.

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Charitable donations

During the year, the Group made charitable donations to support the community of £15m (last year £13.9m). These principally consisted of cash donations of £5.4m (last year £3.8m) which includes our ‘Marks & Start’ community programme, Breakthrough Breast Cancer, Save The Children, World Wildlife Fund, and local community donations, £1.9m (last year £3m) of employee time, principally on Marks & Start and school work experience programmes, and stock donations of £7.5m (last year £6.6m) to a variety of charities including Shelter, FareShare and The Birth Defects Foundation.

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Political donations

It is our policy not to make donations for political purposes in the UK, to EU political parties or to incur EU political expenditure. Accordingly, the Company and its subsidiaries did not give any money for political purposes in the UK nor did they make any donations to EU political organisations or incur any EU political expenditure during the year.

Under the provisions of the Political Parties, Elections and Referendums Act 2000, shareholder authority is required for political donations to be made or political expenditure to be incurred by the Company or any of its subsidiaries in the EU and disclose any such payments in the Annual report. The legislation gives a wide definition of what constitutes political donations and political expenditure, including sponsorship, subscriptions, payment of expenses, paid leave for employees fulfilling public duties and support for bodies representing the business community in policy review or reform.

At the 2006 AGM shareholders gave a limited authority (£100,000) to the Company and each of the six principal employing companies to make political donations or to incur political expenditure in the EU (which would not ordinarily be regarded as political donations) as a precautionary measure, to allow the Company to continue supporting the community and such organisations without inadvertently breaching the legislation. This authority will expire in 2010.

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Going concern

After making enquiries, the directors have a reasonable expectation that the Company and Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they have adopted the going concern basis in preparing the financial statements.

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Auditors

Resolutions to reappoint PricewaterhouseCoopers LLP as auditors of the Company and to authorise the Audit Committee to determine their remuneration will be proposed at the 2008 AGM.

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Annual general meeting

The AGM of Marks and Spencer Group plc will be held at the Royal Festival Hall, London on 9 July 2008. The Notice is given, together with explanatory notes, in the booklet which accompanies this report.

By order of the Board
Graham Oakley, Group Secretary
London
19 May 2008

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