Financial review

Operating profit before property disposals and exceptional items was £768.9m, down 29.4%.

In the UK, operating profit before property disposals and exceptional items was down 32.9% at £652.8m. Gross margin was 1.7 percentage points down on the year at 41.3%. General Merchandise gross margin was down 0.7 percentage points at 51.9%, reflecting further improvement in primary margin offset by higher promotions and markdowns. Food gross margin was 2.35 percentage points lower than last year at 31.5% reflecting investment in price realignment and increased promotional activity, along with the planned growth in franchised Simply Food stores.

UK operating costs were up 4.3% to £2,743.4m. A breakdown of UK operating costs is shown below:

Retail staffing costs remained tightly controlled despite growth in space, reflecting improved productivity whilst at the same time improving customer service levels. The increase in retail occupancy costs reflects space growth and higher energy costs as well as the increased depreciation related to the modernisation and space expansion programmes. Distribution costs rose due to higher fuel costs, as well as volume growth in M&S Direct and furniture deliveries. Reduction in marketing expenditure reflects fewer campaigns including reduced TV coverage. Support costs, which include non-store related overheads, were down 2.4% due to ongoing cost saving initiatives.

We will be paying a bonus of £2.8m for 2008/09 (last year £16.8m). The level of bonus payment reflects performance against our original operating plan.

The UK operating profit includes a contribution of £24.8m (last year £28.3m) from the Group’s continuing economic interest in M&S Money.

International operating profit before property disposals was broadly level at £116.1m (last year £116.4m). Owned store operating profits were £45.8m, up 2.9%, reflecting the acquisition of our previously franchised businesses in Southern and Eastern Europe. As a result of this change franchise operating profits were down 2.2% to £70.3m.

Profit on property disposals was £6.4m (last year £27.0m). This includes the proceeds from the sale of our old stores in Edinburgh and Derby where we relocated to new premises.

Exceptional charges of £135.9m (last year nil) relate to changes announced in January 2009, including the head office restructuring programme, closure of 26 non-strategic stores and the rationalisation of the logistics network.

The exceptional pension credit of £231.3m (last year £95.0m) has arisen due to the changes made in the terms of the UK defined benefit plan relating to how members’ future benefits build up. Employees’ annual increases in pensionable pay have been capped to 1%, and early retirement benefits for members who joined the scheme before 1996 amended. The credit reflects the impact of adjusting the projected final pensionable salaries.

Net interest payable was up 33.0% at £151.4m reflecting an increase in the average net debt over the year. Net finance costs were up £82.3m after pension finance income of £35.4m (last year £58.9m), and the unwinding of the discount on the partnership liability to the pension scheme. The Group’s average cost of funding was up marginally to 6.1% (last year 5.9%).

Taxation

The taxation charge is based on the full year pre-exceptional effective tax rate of 27.0% (last year 27.0%).

Earnings per share

Adjusted earnings per share from continuing operations, which excludes the effect of property disposals and exceptional items, decreased by 35.8% to 28.0p per share. The weighted average number of shares in issue during the period was 1,573.2m (last year 1,671.3m).

The Board has taken the decision to rebase the Group’s dividend payment to 15.0p per share from the current level of 22.5p per share, a reduction of 33.3%. This will be achieved through a 33.1% reduction in the 2008/09 final dividend to 9.5p per share, followed by a reduction in the 2009/10 interim dividend to 5.5p per share. Having re-based the dividend to 15.0p per share, the Board’s policy regarding future dividends is to re-build cover towards two times and, thereafter, to grow dividends in line with adjusted earnings per share.

Share buyback

Since 29 March 2008, we have bought-back 10.9m shares for cancellation, for a consideration of £40.9m. This now takes the total of shares bought back as part of the buy back programme announced in November 2007 to 136.6m representing 8.0% of the shares in issue in July 2007.

Capital expenditure

Capital expenditure was £652m compared with £1,055m last year. Since March 2008 we have added 5.6% of trading space, representing over 623,000 square feet. This included the opening of two major flagship stores in Colliers Wood, South London and the new Westfield Centre at White City, West London, as well as improving the quality of space in a number of major out of towns and city centre stores through store extensions. We stepped up the investment in our supply chain and technology in line with our strategy to build an infrastructure fit to support the future growth of the business.

Cash flow and net debt

The Group reported a net cash inflow of £107.5m (last year outflow £917.5m). Cash inflow from operations increased by £135.9m, reflecting a working capital inflow of £194.0m compared with an outflow of £170.9m last year. Capital expenditure, net of disposals, was £604.1m (last year £927.4m) reflecting further investment in our modernisation programme as well as new space growth. We generated £58.3m during the year from disposal of properties and equipment.

As part of actions taken to better manage our debt and balance sheet, the Group agreed changes to the property partnership with the pension fund on 25 March 2009. These changes make the annual distributions to the pension scheme at the discretion of the Group in relation to financial years 2010/11 onwards. This discretion is exercisable if the Group does not pay a dividend or make any other form of return to its shareholders. As a result, the distributions to the pension fund in 2009 and 2010 remain as financial liabilities while the remaining balance of £571.7m is now an equity instrument. £539.6m of this was previously included in net debt. The Group’s interest charge will therefore no longer reflect the unwinding of the discount from 2010/11. The valuation of the pension asset relating to the interest in the property partnership remains unchanged reflecting amounts that would accrue to the pension fund on a deferral.

Pensions

At 28 March 2009 the IAS 19 net retirement benefit deficit was £152.2m (29 March 2008 surplus of £483.5m). The decrease in value is largely due to the impact the economic downturn on the market value of the pension asset portfolio, partly offset by a decrease in inflation and the exceptional pension credit.