Marks and Spencer Group (LON:MKS) reported higher annual group sales and said it expects profit growth to resume as management outlined plans to step up investment in stores, supply chain, digital systems and value.
On an analyst call, CEO Stuart Machin said the year had been “a year of 2 halves,” with the first half dominated by operational disruption and the second half seeing a return to sales and profit growth. He said the company served 34 million customers during the year, which he described as its highest number ever, and said M&S remained the U.K.’s most trusted brand according to YouGov.
“I once said that this was a lost year, but on reflection, it wasn’t,” Machin said. “It was a year of learning and everyone coming together as one team serving our customers and continuing our transformation.”
Sales Rise With Ocado Consolidation
Machin said total group sales were GBP 17.4 billion, up 20% from the prior year, reflecting the consolidation of Ocado Retail. Excluding Ocado Retail, sales were GBP 14.2 billion, up 1.9%.
The company reported adjusted profit before tax of GBP 671.4 million, including GBP 100 million of lost profit cyber insurance proceeds that were claimed and received during the half. Free cash flow from operations was an inflow of GBP 131.3 million. Machin said the company ended the year with a net funds position excluding lease liabilities, citing “strong profit conversion and disciplined debt management.”
Machin said the company’s financial footing allowed it to continue investing despite disruption, including in stores, supply chain, digital and technology, and value.
Food Business Outperforms
Machin described food as the “standout performer” of the year, with sales up 7% and volumes up 3.5%. He said M&S grew food market share to 4.1% by year-end, or 4.6% when including M&S sales on Ocado. The company served 800,000 more food customers during the year, which Machin said was the biggest gain of any supermarket.
He attributed the performance to quality, innovation and value, saying M&S upgraded more than 1,000 food products and launched 1,500 new products during the year. He highlighted the “Only... Ingredients” range, which he said had resonated with customers seeking products made with minimal ingredients.
Machin said value remains a priority, particularly in protein and fresh produce. He said the company’s price index to main supermarkets is “the best and lowest it’s ever been.” In response to questions about inflation, he said food inflation was running at 3% and that M&S was trying to mitigate cost headwinds through a GBP 120 million cost-out program while passing through as little as possible to customers.
Asked about food margins, Machin said the company still expects a net margin above 4%, consistent with prior Capital Markets Day commentary. He said the priority is cash growth through volume rather than margin percentage, while continuing to invest in value.
Fashion, Home and Beauty Remain Challenged
Fashion, home and beauty sales fell 7.7% for the year, with store sales down 2.3% and online sales down 18.4%. Machin said both stores and online returned to growth in the fourth quarter as availability improved and the summer range began to resonate with customers.
He said the company is attracting a broader and slightly younger customer base, with a 16% increase in customers under age 30. More than half of the spring/summer fashion range is priced at GBP 30 or under, he said. In lingerie, Machin said M&S sold 1.8 million GBP 10 bras during the year and maintained a strong market share position.
In response to Morgan Stanley analyst Isabel de Brava, Machin said the fourth-quarter growth included promotion and clearance, but that the company entered the new financial year with healthier stock. Stock is about two weeks higher than last year, he said, but is largely “good stock,” including core lines and summer newness. Availability is running in the high 80s, though he acknowledged shortages in smaller sizes in some areas of womenswear and menswear.
Asked by UBS analyst Yash Gandhi about returning fashion, home and beauty margins to pre-incident levels, Machin said he was “reasonably confident,” reiterating prior guidance of 10% or greater. He cited opportunities in sourcing, supply chain and a return to roughly 80% full-price sales.
Investment Plans Focus on Stores, Supply Chain and Technology
M&S plans to invest between GBP 650 million and GBP 750 million of capital net of disposals this year. Machin said the company is entering a phase it calls “reinvesting for growth,” focused on stores and online, supply chain, and data, digital and technology.
In food, M&S opened 12 new stores and renewed 18 stores last year. Machin said the company plans to open 18 more “bigger, fresher” food stores this year. In fashion, home and beauty, it opened three full-line stores last year and plans two full-line openings this year, along with a new R&D format store at Pantheon on Oxford Street in July.
Machin said new food stores are delivering strong returns, with some recent openings exceeding expectations. Responding to Shore Capital’s Clive Black, he said Cannock was performing 20% above expectations, Putney had delivered double-digit outperformance, and Bath and Bristol were above their business cases. He said M&S is moving toward a 20,000-square-foot food store blueprint to support more full-shop missions.
On supply chain, Machin said M&S has agreed two new food distribution centers in Avonmouth and Daventry, adding 1.7 million square feet of capacity. He said Daventry will be the company’s largest-ever food supply chain investment. In fashion, M&S acquired a 437,000-square-foot automated distribution center in Lichfield, which Machin said will improve availability, delivery speed, cutoff times and parcel consolidation.
CFO Alison Dolan said the headline purchase price for Lichfield was GBP 67.5 million, with about GBP 20 million more required to commission automation. She said the acquisition pulled forward a project that otherwise likely would have involved a more expensive greenfield site.
Outlook Points to Progress Despite Cost Headwinds
Machin said retailers face a “triple whammy” of headwinds, including higher taxes, increased regulation and cost pressures linked to conflict in the Middle East. He said M&S faces an additional GBP 150 million headwind from known cost increases and also cited a GBP 40 million packaging tax.
Asked about political reports of price caps, Chairman Archie Norman called the idea one with “a political life of about 30 minutes,” while Machin said M&S had not received direct communication on the matter. Machin called the idea “preposterous” and said the government should work with business on growth rather than trying to run businesses.
For the year ahead, Machin said M&S expects to “keep making progress with profits growing again compared to two years ago.” When asked by JPMorgan analyst Georgina Johanan whether that implied a mid-single-digit level of growth, Machin said it was “probably the right interpretation,” while noting uncertainty.
Dolan said the company’s cash priorities remain investing in growth and efficiency, while aiming to grow the dividend over time. “The focus for now is on investing into those growth opportunities,” she said.
About Marks and Spencer Group (LON:MKS)
M&S has a heritage of quality, innovation and value for money and has been voted the UK's most trusted brand. From these foundations, M&S is reshaping for sustainable profitable growth and value creation. We operate as a family of businesses, selling high-quality, great-value, own-brand products and services, alongside a carefully selected range of third-party brands. We do this through a network of stores and websites globally, and together, across our stores, support centres, warehouses and supply chain, our 65,000 colleagues serve over 30 million customers each year.
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