Earnings Transcript for MAKSF - Q2 Fiscal Year 2017

Executives: Steve Rowe - CEO Helen Weir - CFO

Analysts: Simon Irwin - Credit Suisse Geoff Ruddell - Morgan Stanley Jamie Merriman - Bernstein Charlie Muir-Sands - Deutsche Bank Angus Tweedie - Bank of America Richard Chamberlain - RBC Caroline Gulliver - Jefferies Georgina Johanan - JPMorgan Andy Hughes - UBS Clive Black - Shore Capital Adam Cochrane - UBS Anne Critchlow - SG Tony Shiret - Haitong Michelle Wilson - Berenberg Simon Bowler - Exane BNP Paribas Andy Wade - Numis Tom Gadsby - Liberum

Operator:

Steve Rowe: Good morning, all. Welcome to our Half Year Results and to the Second Part of our Strategic Update. For today’s agenda, Helen will first take you through a review of our interim results. I will then update you on our progress so far on the priorities we laid out in May, and our further strategic plans for the UK store estate and our international business. As well as that, we’ll recap on changes we’ve made to the organization and to the cost base. Helen will then return to update you on the costs of our decisions, capital allocation, and the framework and guidance for the rest of the year. And we’ll be happy to take your questions, as normal, at the end of the presentation. Before I hand over to Helen, I want to say a few words about where we’re going. When I became CEO seven months ago, we set out a number of questions which we would answer within the principles of creating a simpler, more sustainable business, with the customer at its heart, and operating as one team. We’ve applied this approach to fairer pay and pensions for our people, streamlining our senior management team, and implementing a simpler head office structure. We said we would take action to recover clothing and home, and continue to grow our food business. And today, we’ll outline our proposals for a profitable international business, built with our franchise partners, and a UK store estate that represents how customers shop in a multichannel environment. We’re making good progress on many fronts, and although profits are down in the first half, we expected them to be, in the context of the markets we operate in and the actions that we’re taking. And I want to be straight with you. On some of the previous investments, some of them have not generated the returns we’d hoped for. Today, we’re announcing actions to correct some of this. These are costly, and will take some time to implement. In addition, I’m sure that you’ve not missed the fact that we’re not making an additional return of cash to shareholders in the second half. This is to absorb the costs of our strategic plans, and reflects uncertainty in the marketplace. We’ve made some tough decisions, but these are vital to build a simpler, more relevant M&S, for now and for the future, with a strong multichannel proposition, and delivering sustainable returns. I’m going to come back and cover that in more detail later. For the moment, though, I’ll pass you over to Helen for the results.

Helen Weir: Thanks, Steve and good morning, everyone. I’m going to run through the results for the half-year, looking first at the headlines. Group sales were up by just under 1%, supported by a strong performance from our food business. Clothing and home sales were down, in part as a result of the challenging market conditions, particularly in the second quarter, but also as we begin to implement our strategy to reduce promotions and focus on full-price sales. As anticipated, underlying profits were down, as Steve’s already mentioned. On a statutory basis, PBT was impacted by significant non-underlying charges, including the cost of closure of the pension scheme to future accrual. Despite the fall in profits, our cash generation remains strong, meaning that we’ve been able to maintain our interim dividend. We’re currently below the targeted cover of about 2 times; however, we expect to rebuild this as our profits recover. Our net debt was broadly flat on the year. As you’ll have seen in the announcement, we expect to incur significant one-off cash costs associated with the proposed closure of some of our owned international businesses. We’ve previously outlined that our priority is maintaining a robust balance sheet. Given these additional costs, and the uncertain market conditions, we felt it prudent not to make any further enhanced returns of capital to shareholders in the second half. Turning to sales in more detail; our food business continued to perform well across the period, growing share against the backdrop of a highly competitive market. Our product innovation continues to set us apart, and we had some great new barbeque lines in our spirit of summer range. We opened a net 21 new Simply Food stores in the half, and they continue to outperform expectations. Food margin was up 10 bps, compared with last year. Although buying margin was slightly down with some input inflation, we’ve continued to benefit from operational efficiencies as a result of our work with suppliers to reduce costs. One area of focus during the half has been optimizing the number of units per tray, using half trays where appropriate. This has resulted in savings in logistics costs, as we’re shipping less air. As expected, clothing and home sales growth improved in Q2 as our early summer sale moved into the quarter. Notwithstanding this, we saw an increase in full price market share. This was encouraging in the context of the increased sales stock, especially given the tough market conditions during the summer. In line with our strategy, we reduced the number of promotions by one-third. For example, the number of cyber days in the half was reduced to one, compared with nine in the same period last year. And we estimate that this reduced our dotcom sales growth by about 7% during the half. Overall, clothing and home margin was broadly flat; however, this hides a number of underlying movements. Unsurprisingly, currency has been a key area of focus in recent months. About 70% of our clothing and home cost of goods is purchased in dollars. Our hedging policy is to buy currency 12 to 18 months in advance, and by 12 months out from the beginning of a season we have at least 80% of our estimated exposure covered. Year-on-year, we saw headwinds from the reduction in value of sterling; however, this was offset by benefits from better buying, including our continued move to lower cost sourcing locations. For example, we retendered all our schoolwear contracts, spanning three countries and multiple suppliers. At the same time, we improved fabric utilization, creating manufacturing efficiencies. The net effect of actions such as these was a 90 bps increase in buying margin. Discounting includes 30 bps saving from lower promotional sales, but also higher markdown costs as we saw 16% more stock into the sale year-on-year as a result of the challenging market conditions in the half. Moving on to look at operating costs; once again, these were tightly controlled, just up 1.8%. New Simply Food space and inflation were, once again, key drivers of the cost growth; however, we were able to hold store staff costs broadly flat on the year as a result of the annualization of the savings made last year. The costs of the additional investment in store staff to improve customer service, are expected to come through in the second half of the year, and I’ll come back to guidance later. In other areas, volume was a key driver of cost growth in distribution, as well as startup costs from our new warehouses in Enfield and Bradford. And we saw savings from marketing due to the annualization of the Sparks launch last year. Central costs were up, largely due to a greater proportion of dotcom costs being expensed, and higher depreciation. Moving on to look at international; constant currency sales fell year on year as we continued to be exposed to the challenging macroeconomic environment in many of our markets. In particular, Western Europe and the Middle East were affected by low consumer confidence and depressed tourism. Profits were lower by £6 million, primarily due to reduced profits in our franchise business where Middle East shipments were down, and we continue to see significant losses in a number of our owned businesses. Overall underlying profits were down 19%; M&S Bank profits were lower, due to the reduction in interchange fees in the second half of last year. However, this was offset by a reduction in interest costs as a result of the larger IAS 19 pension surplus at the end of the year. As I noted earlier, our statutory profit was reduced due to a number of non-underlying items, the largest of which was the charge resulting from the changes we’ve made to pensions and pay as we move to a fairer, more sustainable structure. The £127 million charge on the closure of the DB scheme to future accrual made up the majority of this, with the balance relating to the cost of the transition to the new pay structure. We also expect to see additional non-underlying costs of about £25 million spread over the next three years as we support our employees transitioning out of the DB scheme. We incurred a charge relating to redundancy costs following the simplification of our senior management structure, and the proposed reduction in our head office numbers. We estimate these changes will reduce our head office costs by about £30 million on a full-year basis. Half of this was already in the cost guidance we gave you at the prelims, and will be seen in the second half of this year, with the full benefit coming through next year. Of the total non-underlying charges of just over £200 million, less than £40 million is cash in the half. Group CapEx was down £38 million year on year, reflecting a reduction in our CapEx run rate. Absolute spending on supply chain and IT has reduced as we’re through the peak infrastructure spend, but it continues to be the biggest proportion of our spend. During the half we opened a new logistics depot in Enfield to support our continued growth in food, and our new automated clothing and homewear house in Bradford also came into use and has continued to ramp up over the period. As I’ve already noted, we continue to invest in food space, and opened three full line stores. I’ll return to the themes of capital investment and returns later. Cash flow for the half was strong; working capital increased as a result of higher inventory in clothing and home, as we focused on improving availability. And following the recent actuarial valuation, higher current service contributions resulted in an increase in pension funding year on year. During the half we returned over £260 million of cash to our shareholders in the form of our final dividend, and a special dividend of £74 million. In summary, we’re making progress. We saw continued market outperformance in food, and some early signs of progress in the implementation of our strategy in clothing and home. Costs were tightly controlled; the non-underlying costs of strategic change in the half were significant. Notwithstanding this, our business remains strongly cash generative. I’d now like to hand back to Steve who’ll take you through the strategic overview.

Steve Rowe: Thank you, Helen. I’m now going to first cover an operational update on the plans we laid out in May, and then update you on the second part of our strategic review. As a reminder, these are the exam questions I set the business to address. I said we would answer these, making fact-based decisions, and putting the customer at the heart of our business. The top three that are highlighted in green I covered in May, and I’ll give you a progress update on those in a minute. As promised, I will also talk today about our plans for international store estate, our UK store estate, the organization, and costs, completing the second part of our review. Now I don’t propose to run through all of our customer work again this morning, but rest assured we’ve done what we said and put the customer at the heart of our operations. We continue our conversations with customers, and building our relationships with them through our Sparks program. Since we’ve last met, we’ve added a further 1 million customers to that program, and have spoken to hundreds of thousands more customers, and we’ve determined a set of brand attributes what they want Marks & Spencer to stand for. So it will be no surprise to you to hear that quality underpins both clothing and home, and food. This means offering a cut above the rest in terms of everything we do for our customers at any given price point. In clothing, this quality is a combination of fabric, fit and finish, things I will come back to time and time again. And we’re complementing this with two other things; contemporary wearable style, and authority in the ranges that we offer. And in food, quality is complemented with newness, innovation and excitement and, of course, convenience. That’s convenient food in convenient locations. In clothing and home, I first want to update you on our progress on product. Product is key to recovering and growing our clothing and home business. We’re pleased with the improvements that we’ve been able to make to our autumn/winter ranges, and in May we outlined that we’ focus on contemporary wearable style, wardrobe essentials, and the fit of our product. We’ve done exactly that. We now have a color palette that is cleaner, simpler and, frankly, more sophisticated. And we have a much better fit profile, across every division. For autumn, we’ve eliminated duplication, and we’ve reduced our option count by 10% and in women’s wear, where we had more to do, this has reduced by 20%. It means that we’ve been able to buy key styles, in more depth, and focus on our wardrobe essentials. And we’ve increased authority here, with more options, more color ways, across the Group. For example, we extended the size offering in our core bra range, and we’ve achieved a record market share of over 33%. And despite this, we still see further growth opportunities. We’ve reviewed all of our blocks for fit in clothing, and continue to make improvements. We’ve also shown a light on fit in stores, holding events, such as a bra fit event, and a suit advisor event. And our customers are noticing. This is coming through in our fit scores online, which have increased over the last year from 2.7 stars to 3.5 stars. There’s still more to do, but I’m pleased with our progress to date. And the right product can only be backed up if the right availability is in our business. Autumn launch was up 8 percentage points on last year, with ongoing increases in core availability in store and online. We saw the benefit of this in our strong performance in back to school, with school uniform sales up 10% in quarter two, even though we are the market leader. Back in May, you’ll remember that I highlighted how average selling prices increases in the business have resulted in higher promotion and markdown cost. Since January, we’ve reduced the price of 1,700 lines, and ensured that new lines are positioned at the correct price in the marketplace. We’ve seen strong volume improvement, particularly at opening price points. And this has helped us to continue to reduce promotions, as Helen said. Our sales of good products in womenswear were up 14% as a result of this, as we increased the proportion of the catalog there, by 4 percentage points. We’ve also changed the layout of our stores to reflect how customers like to shop, with more of our clothes grouped together in product categories rather than in brand coordinated departments. But at the same time, we’ve added some visual merchandizing for inspiration. And we’ve backed this up with 3,300 new customer assistants, and training in-store colleagues, deploying them to areas which make a difference to our customer’s shopping experience, where it matters, places like fitting rooms and cafes. But this isn’t only about improving our service in stores. When we met in May, we still hadn’t launched our universal app, an app for a tablet. We actioned this over the summer, and around 30% of M&S.com transactions are now made through a tablet. Another way we’re just introducing and using more technology is the new low cost, handheld Honeywell devices which we’ve deployed in stores. We introduced this because it has multiple uses. It speeds up collecting, shop your way, it manages parcels, and it’s able to scan orders and locate merchandize in stores, saving valuable time for our customers and our customer assistants. Now it’s still early days. We’ve had the new collection for eight weeks, and it will take time for our customers to fully notice the changes we’re making to products and the in-store experience. However, we are beginning to see some signs of improvement in our performance, with a better sales trend in quarter two, and over 30 basis points increase in our full price market share. I’m also delighted by the customer satisfaction scores, which are now at their highest point for a number of years. But there’s more we can do to build on this full price market share improvement. We’ll continue to increase the focus on core M&S brands and sub brands which are most relevant for our customers; Per Una, Autograph, Blue Harbour. Limited and classics will continue as collections, but Indigo, Collezione and North Coast will be eliminated from the range, further simplifying our offer. And we’ll also optimize our existing store estate by continuing to rebalance trading space to areas where there is market share opportunity, and so improve space productivity. We will ensure our value positioning is clear, and continue to reduce promotions, as we evolve our business to a more healthier balance of just four clearance sales a year. I’m sure many of you are wondering about our approach to the currency pressure. Our hedging approach means that we have some protection, and we aim to balance the increased input costs with a focus on better buying and reduced markdown. We will avoid price increases, wherever possible, and we will remain competitive and offer our customers great value. So a combination of developing a simpler offer, of great value, for our customers. Now moving on to food. Our food priorities, as I set out in May, build on the successful progress we’ve made in our food business over a number of years. We fulfill a special role for our customers here, and our strategy is all about refining and reinforcing what we do so that we can continue to grow our food business. Innovation is the drumbeat of the food business, and around 25% of the catalog is improved every year. Highlights in the period include the barbecue range that Helen mentioned, or a re-launched cook range, which plays into consumer trends of wanting to cook something healthily, whilst also being quick and convenient. And healthy living, wellbeing and fitness are areas of opportunity for the whole business. In food, we also expanded our offer of gluten and lactose free products, as demand for specialist dietary categories continues to grow. And our growth in foods means our suppliers can continue to invest. For example, Greencore has opened a new state of the art sandwich manufacturing facility, and that’s given us market leading products again. And here we too will remain competitive on price, enabled by top line sales growth, and by the resulting volume benefits, removing needless inefficiencies from the supply chain. We’ve continued our work of tailoring our ranges and delivered further modest improvements to availability on top of the 1,100 basis points we delivered over recent years. And there continue to be many areas where M&S is underrepresented and where we believe we can trade profitably. A recent example of this is our new Simply Food store opening in Dulwich. It’s a 5,500 square foot store, which is enabling us to enter a new market, for the first time; convenience locations in high urban footfall territories. As a result, we continue to punch above our weight in destination categories such as convenience, ready meals, food to go and hospitality, which are all seeing strong performances. Market share in food has been on an increasing trend for some time, and was up a further 20 basis points in the last 12 week period. Our Simply Food opening program will take us to over 1,000 stores selling food in the next couple of years, driving our share to new levels. And stores we’ve opened in the past 12 months have continued to exceed their sales payback, and many of them are delivering that payback within two to three years. Moving forward, it’s simply going to be more of the same. The formula is successful, and is delivering results. We have a world class team. Our pipeline of innovation remains strong, and we’ve said that we’ll prioritize areas such as health, where we’re industry leading. And convenience will remain at the center of our approach, whether it’s through an accessible store estate, food to order, or a truly convenient product. Now as you can see, we’ve made good progress against the objectives we set ourselves in May. I now want to move on to the second part of our strategic update. Before I review our strategic decisions on international, I want to be clear with all our audiences; we remain fully committed to developing our international business. We must, however, have a sustainable business which gives us more opportunity for growth in the future. There are two parts to our international business. We have a highly profitable franchise operation with strong, dedicated partners that we’ve been in partnership with for a number of years, and we operate in some 267 stores. Last year, our franchise business generated profits of 87 million. On the other hand, our owned operations delivered a loss of 31.5 million and, clearly, this is not sustainable. Within this, though, stores in 10 countries lost 45 million on sales of just 171 million, and some of these markets have been loss making for over five years. As such, we need to make some major changes. We’ve undertaken extensive review of our international business, on a market-by-market, store-by-store basis, to determine how we can generate sustainable returns for the future. We’ve looked at the customer response to the brand in each market, and whether we have traction with them. We also examined the underlying levers of profitability, and the opportunity for the M&S brand to grow in the future, driven by the local market size and the dynamics of that marketplace. As a result, we are proposing to exit our own businesses in 10 markets, and this will see us close all our 53 owned stores in these markets, including 10 in China, and 7 in France. These proposals will incur significant costs, and Helen is going to run through the financial implications of that with you shortly. I am clear this is the right thing to do in order to create the right foundation from which to grow profitably in the future. We will continue to trade on an owned basis in the remaining countries where we are more profitable, our brand is more established, and we can see the potential for long-term profitable growth. This includes our own businesses in Ireland, Hong Kong and the Czech Republic, and our joint ventures in India and in Greece. We will continue to develop our successful franchise business. Our partners have invaluable local knowledge, great customer insight and a strong infrastructure which complements our capabilities in sourcing and in design. We also have a food franchise business in France where our quality and our newness resonate with customers, and we’re fully committed to retaining and extending this further. So in summary, we are fully committed to our international business. But we’re taking action to reestablish it as a more sustainable and profitable operation with our focus on the franchise partnerships. Now let’s take a look at the UK store estate. You will all recognize that we’re operating in a multichannel landscape and that online penetration continues to grow with pace. For our owned business, this is now around 17% of total and we would continue to expect it to grow, over time. We’ve done a good job online, and this continues, as I said earlier, with that universal app. However, we have to become more agile in our approach to stores. While our Simply Food opening program will bring increased convenience for customers, and continue to drive our store numbers selling food to over 1,000, we need to be more proactive with our clothing and home space. Remaining in declining markets in the UK is not an option. Our ambition for clothing and home is to have fewer, slightly larger, more inspirational stores with real range authority. These will be in the right locations and allow us continued full UK coverage. They will be complemented by our strong multichannel proposition, enabling us to continue to hold our market share and recover and grow our clothing and home business. So this is how we are going to transform the estate over the next five years. In clothing and home, we currently have 304 full line stores selling both clothing and home and food. This represents about two thirds of our UK space and our program will see us make changes in over 100 locations. It involves churning around one-quarter of our space, leading to a net reduction of around 10% in clothing and home, with 60 fewer stores selling the range in five years’ time. However, we see this as improving our range authority for customers, and sales productivity of space should offset through a net reduction in terms of revenue. We’ll achieve this through a combination of approximately 30 full line closures, downsizing or replacing another 45 stores with Simply Foods and, as we develop our pipeline and our roadmap, relocating some of our stores too. In some places where we’re underserved, we will open new stores. At the same time, we’ll improve the quality of remaining clothing and home stores by rebalancing our space, allowing us to offer greater range authority and grow share. A really great example of relocation is in Rugby, where we moved our store 1.5 miles from a small high street store to a 42,000 square foot, purpose built retail park store. It’s allowed us to deliver that greater authority, an inspirational environment for our customers, and clothing ranges complemented by a fantastic shop your way service. Sales transfer and growth has meant we’ll generate more sales, trade in a more relevant location and pay back the capital invested within three to four years. So to summarize, we’ve announced plans today to improve our UK estate, making it more modern, more productive and, importantly, more relevant to our customers. Doing this will shift our two third clothing and home space allocation closer to 50-50 between clothing and home and food. Our goal is to deliver a better shopping experience for our customers, which means more convenient locations complemented by growing online offer, maintaining market share in clothing and home and continuing to grow our food business. Our final exam question relates to organization and cost. During the half, we undertook a detailed review of the M&S organization and its processes. In short, the review highlighted that M&S had become too complex, inefficient and costly. During the half, we outlined proposals to simplify our UK head office structure, with a view to simplifying and improving our ways of working. We’ve reduced the size of the senior management team and, most significantly, the operating committee has agreed a new model for the business which will fundamentally change how we operate. This new structure drives full accountability and ownership, with business units as the lead. It creates an integrated customer experience with M&S.com run as a channel rather than its own business unit and importantly is set up to execute our strategy, standardizing processes and removing duplication. We’ve also been busy in regard to costs. You remember I said I wanted an [actual approach] to our employees and to create a more efficient, leaner, head office structure. This has required some tough decisions, but these are the right things for our business to move forward. To recap, we’ve completed the consultation, with respect to pension and pay, which will create a standard equitable approach for all of our colleagues. This involved 35,000 contract amendments, of which 99% have been accepted. The vast majority of our colleagues will be better off as a result of these changes. We’ve also set out proposals to reduce the number of head office roles by around 525, and reduce the number of roles based in London by 400. The consultation has been extensive, but is now complete, and we intend to implement our plans during the course of the next few months. As a result of this, over time, we would expect property costs to reduce as a result of fewer London-based employees. Continued cost control will remain a top priority for the business. We will have an efficient head office, we will continue to streamline our logistics and we’ll continue to further develop our crunch cost culture. Now, Helen will take you through the financial plan.

Helen Weir: I’d like to update you on the guidance, including the financial implications of the strategic initiatives that we’ve announced today. Most of our current full year guidance remains unchanged; however, clothing and home gross margin is likely to be impacted by a greater than expected depreciation in sterling. We estimate that the headwind has increased to 140 bps for the year, from the previously guided 70 bps. Therefore, we’re reducing our guidance for growth in gross margin to between 0 and 50 basis points as we continue to work to offset the impact of the weaker pound. Just a few more words on currency, as clearly, the recent further depreciation of sterling is likely to have a significant impact on our business in the next few years. The chart shows the relative sterling rate we’re expecting as a result of our hedging approach and recent currency movements. Clearly, the impact of weaker sterling increases as we move into next year, and the proportion of currency which we hedged pre-Brexit declines. Fortunately, we have significantly improved our sourcing capabilities over recent years, and have a number of actions in place to mitigate these pressures. The actions we’re planning include better buying, continuing to explore different sourcing locations, in particular, moving a greater proportion of our purchases to zero duty locations, such as Bangladesh. We’re continuing also to look at opportunities to consolidate volumes to achieve additional benefits of scale. This is consistent with our commercial strategy to buy fewer lines in more depth. We’re actively taking steps to reduce the cost of markdown. We expect to have fewer sale events and we’re reducing the level of promotional activity to focus on full-price sales. As a last resort, we would consider price increases. However, as Steve has said, we’re committed to being price competitive and, wherever possible, we will avoid passing increases on to our customers. The impact of the fall in sterling on food is much less significant, as almost all of what we buy is sterling denominated. However, we do anticipate some input cost price pressures as we estimate that just under 20% of our cost of goods has currency exposure, and also as a result of increases in the national minimal wage. We will continue to mitigate these pressures through our value optimization program. So back to guidance for the year, some of you may wonder why our operating cost guidance is unchanged particularly given that the costs in the first half increased by only 1.8%. This is because we’re expecting a step up in the second half as a result of our investment in store staff. We’re also going to start to lap the cost savings that we made in the second half of last year, including savings in employee incentive costs. Capital expenditure for the current year is expected to be about £400 million. This is a result of targeting our investment more precisely and, of course, the reduction in investment in our international business. Hopefully, that gives you a better idea of what to expect for the remainder of the year. The proposed actions to close a number of our owned international businesses are expected to be largely completed in the next 12 months. We estimate the cost to be somewhere between £150 million and £200 million. Most of that will be cash. The key elements are going to be redundancy costs and also lease exit costs. We expect to take a provision for these in the second half of the year, but the cash outflows are likely to be predominantly next year. Of course, we’ll be working hard to minimize these costs. The businesses proposed for closure contributed a total of £45 million of losses last year, as Steve has already mentioned. The phasing of exits means that we don’t expect to see a benefit in our numbers this year; however, would expect about half the saving next year, with ‘18-’19 being the first year where the full effect will be seen in our profits. The implementation of our program to modernize the UK store estate will take place over a longer timeframe, dictated by the time it takes to find alternative sites, or alternative uses for existing sites. It typically takes at least three years from inception to the opening of a new full line store. We estimate the accounting cost of the program will be about £50 million per annum for the next three years, rising to £100 million in years four and five. This includes items such as the cost of lease exits and write-down of fixed assets. About half of this is likely to be cash in the long term; however, over the next three years we only expect to see about one-third of the annual cost flowing through as cash. In addition, the net capital investment is estimated to be about GBP50 million a year over the next five years. This will be managed within our previously guided medium-term CapEx spend of about £450 million a year. As Steve has said, this is a far-reaching project, which will result in a 10% reduction in our clothing and home space, and similar improvements in space productivity, as we upgrade the quality of our space. Our customers will benefit from more inspirational stores, offering better range authority and greater convenience. As I mentioned earlier, one of the areas we’ve been focusing on for some time is our approach to investment and returns. In recent years, we’ve spent significant sums upgrading our infrastructure. Much of this was necessary; however, it cost more than it should have and we didn’t deliver the projected returns. In response, we’ve already tightened our capital disciplines. We’re operating in a marketplace undergoing significant structural changes with considerable uncertainty about the future. This makes it harder to predict long-term cash flows reliably. We’ve concluded that our current approach to investments doesn’t sufficiently take this into account. Going forward, we’re going to be assessing investments with a greater emphasis on cash payback. While the required return period will vary by project, we believe that a three to four year payback on growth investments, such as stores, is reasonable for our business, albeit, we’ll accept longer paybacks from projects with more certain cash flows. We believe that this will increase the reliability of delivering returns from the investment that we make. In addition, we’ll balance our investment more effectively between growth and efficiency, or business as usual investment. This doesn’t mean we’ll shrink from making the necessary longer term investment in infrastructure when it’s needed. It does mean that we’ll make sure that we have the right mix of investment. In addition, because of the ongoing changes in consumer shopping behavior, we’re placing an increased emphasis on future flexibility. For this reason, we’ll be targeting shorter lease lengths; by this, I mean 10 to 15 years, rather than 25 years. Clearly, this is going to be location-specific, but overall, we will be looking to reduce the average length of our leases. We believe that these actions will ensure that we better prioritize our investment and also deliver better shareholder returns. I’d now like to hand back to Steve, just to wrap up.

Steve Rowe: So as you can see, we’ve had quite a busy summer. Our aim is to build a sustainable business, which will delight our customers, provide robust foundations for future growth, and deliver value for our shareholders in the long term. We’ve made good progress on our plans, and our customers are already noticing a difference, particularly in clothing and home. We’ve also made major steps towards a fairer pay and pension arrangement, streamlined our management team, and announced plans to implement a simpler head office structure. We are building a sustainable and profitable international business, and a more relevant and accessible UK store estate. These have all required some tough decisions but, as I said earlier, I believe they are vital to building a simpler, more relevant M&S, with a strong multichannel proposition and delivering sustainable returns. Helen and I are now going to take questions. I’m conscious we’ve got two slightly different audiences, with two slightly different agendas today. So what we’re going to do is we’re going to take questions from the investment and analyst group first, if we can, for about 20 minutes, and then move on, if we can, to the press questions. So without further ado, we’ll get down to the first questions.

Q - Simon Irwin: Simon Irwin. Could you firstly just talk a little bit about food? I might be able to do the numbers myself, but what increase are you going to be seeing in your overall food space over the next few years, including the 200 stores and obviously the re-dedicated space? And should we start thinking about the danger of cannibalization, given the increased space, within the overall numbers? Secondly, are we any closer to an online solution for food, thinking medium term, or is that something that you wouldn’t consider? And then thirdly, can you just talk a little bit about the work that you’ve done on downsizing these stores, in terms of the overall amount of space that’s falling under the current plan, and when you effectively think you’ll be coming on to make plans for the rest of the estate that fall outside of the existing plan you talked about today?

Steve Rowe: Okay, right. There’s quite a lot in that one. I’m going to try and take some of those in reverse order, and perhaps you could help me, Helen, with the food space rebalance as we get there with the property plan?

Helen Weir: Yes, okay.

Steve Rowe: I think the first thing to do, in terms of how we’re adjusting space, we have already conducted trials across the country in a number of areas where we have moved space within the clothing and home area, and focused it on areas where there is market share opportunity, and we’re pleased with those results. That work will continue in the New Year, and once we get through the trading period and we’ll complete some of that work by the time that we get to the summer. The second part of that is that we’ve got a much larger piece of work to do which, to a degree, affects that 25% of the UK store space I talked about. Bear in mind that’s a couple of million square feet we’re talking about, and that will be wrapped up in the program which, as I’ve said, will take around five years to complete. Within that, we’ll continue to rebalance between clothing and home, and food, but also then within clothing categories, and again, identifying areas of market share. And we’ll tackle that on a store-by-store basis, because we have to marry that with changes to our estate in terms of the number of stores we’ll churn and relocate, and we’ll do that on a market-by-market, and lease-by-lease operation. The net food space I’ve talked about will move from [60%] 65%, roughly, clothing and home to around 50/50, and the net number for it on the stores?

Helen Weir: Increase in terms of overall food space is probably, over the period of the plan, about 30%.

Steve Rowe: In terms of cannibalization, we’ve built some of that cannibalization into our evaluation and we should be clear that, where we’ve got stores where we’re located in a conurbation, of course we see a little bit, but that’s all held within our investment cases.

Simon Irwin: Right, and you think that there is market space to take all this extra space within the food market, going forwards?

Helen Weir: Well, what we’ve done in our planning is we’ve looked at markets where we’re not currently represented and there are a lot of markets where we’re not currently represented. We have about two-thirds, a bit less than two thirds of the country within about 10 minutes from one of our stores, so there’s an opportunity there. I gather, behind your question a voice of caution, are you going to over expand here? I think one of the things there is, and it’s a bit the case with the overall plan for the estate that, particularly on food stores, the lead time on the leases from signing a lease to opening a store is probably more like a year. So we can tailor our cloth as we go through. So if we felt that we were seeing excessive levels of cannibalization and not getting the returns that we expected to go, we can cut our cloth. But based on the analysis we’ve done right now, and based on the performance of the stores that we’ve opened in the last year which are actually going ahead of our expectations, I’m never happy as a finance director, I said well, why couldn’t we get the forecast right. But we’re about 17% ahead expectations on the stores that we’ve opened in the last year. So at the moment, we believe there’s quite a lot of runway still to go.

Steve Rowe: We should be clear, this is not a race for space.

Helen Weir: Absolutely, it’s quality.

Steve Rowe: We’re not in a race for space. We’ve got very targeted locations, we know exactly what formats work in those locations, and we are landing them appropriately.

Simon Irwin: And online?

Steve Rowe: Online we continue to review the online prospects. Look, we’ve got a great business on food to order, and frankly, already this year our food to order of Christmas merchandise is 18% up on the year, and we’re delighted with the progress we’re making there. We’ll continue to look at that offer, but to be honest, the first thing we want to do is get the estate right, and that’s the priority for the moment.

Geoff Ruddell: Geoff Ruddell, Morgan Stanley. If you get to a space balance of 50/50, and I think your sales densities in food are about three times what they are in clothing, does that mean five years from now that 75% of your sales will be coming from food; I think it’s about 60% today?

Helen Weir: I think it’s not quite as much as that, but it’s starting to head towards that.

Steve Rowe: Bear in mind that some of the Simply Food returns, because of the size of the store, are less than some of our larger stores within the existing estate.

Geoff Ruddell: Thank you.

Jamie Merriman: Jamie Merriman, Bernstein. I’ve got three questions. The first one is, I think at the full-year results you talked about the property valuation that was ongoing. Can you give us an update on that, and is there any opportunity with the stores that you’re closing to sell some of those locations? Second is just the timing of the space reduction in clothing and home; is that equally phased over the five years, or is it more backend weighted? And then finally, just in terms of the CapEx spend with half of that going to supply chain and IT, can you give us a sense of where you are in that supply chain and IT investment, and when, and if, that might start to reduce at some point? Thanks.

Steve Rowe: Full house for you.

Helen Weir: Okay, thank you. Okay, your first question is about the property valuation, and I actually expected Simon to ask this question. So yes, we’ve done a review of our property values over the last period of time as part of the overall work on the estate that we’ve done. What we’ve found is that, as a result of that, the value that we have on the balance sheet is supported, clearly, or we wouldn’t be putting it on our balance sheet. By the valuation on an existing use basis, which is the sale and leaseback, we estimate the value is about £3 billion -- just over £3 billion. The current value on the balance sheet’s about 2.6 billion at the moment, but obviously the valuation basis, from an accounting point of view, is slightly different. In terms of the phasing of the changes to the store estate, I think I indicated in my presentation, or in the release, we expect a £50 million cost of change in the first three years, and that grows to 100 million in the last two years. The reason for that is the lead time on relocations and other store changes. You’ll be aware that this is not something you can just wave a magic wand at and suddenly everything changes overnight. This plan will take a while to unfold and so, therefore, actually you would expect to see more change, particularly in terms of locations of stores, as we go towards the back end of the plan. It doesn’t mean that we won’t be busy at the front end, but it means that the big substantial relocations and so forth are more likely to go towards the back end of the plan. And in terms of the CapEx spend, your question was around IT and supply chain and where we are in that journey, we’ve obviously made some very significant investments over the last five years in IT, and particularly in our supply chain, and those are the right investments to have made and they’ve given us a much more robust infrastructure. But I think pretty much any retailer you will talk to these days is saying they’re spending on IT and supply chain. Supply chain, enabled by IT, is a core capability; moving product through our business is a core capability. So we do expect to continue to invest in these areas, going forward, and continue to; not the same big projects, but there still needs to be ongoing investment, we need to expand capacity here etcetera, etcetera. And that’s the sort of investment you’re seeing coming through now, so it’s not big projects, but it’s continued upgrade of what we’ve got, and the same with our IT systems as well.

Jamie Merriman: Thank you.

Charlie Muir-Sands: Charlie Muir-Sands, Deutsche Bank. A couple from me. The first one on your food business, obviously the like for likes are slightly negative; it looks like some of the industry data is pointing to you doing increased promotional activity, whereas obviously the grocers are trying to do less. Where do you think you are now and is that a sustainable approach in these tougher times? The second one is whether you could give any indication as to how much of your occupancy cost base you might be able to reduce by this closure program. And then the third one is on your PPI mis-selling charges which obviously some of the banks have tried to draw a final line under now. I wondered if what you booked now is what you think you needed up until the end of that claims period, or we should be expecting this to roll on. Thanks.

Steve Rowe: So I’ll take the first one and Helen can take the second two. In terms of food like for likes, we’re pleased with where we are. The market has been soft, but we’ve continued to gain market share both in terms of total sales and like-for-like sales. And we know that our offer is resonating with customers and we continue to expand our customer base. So we’re pleased with that and quite relaxed about that, at the moment. Do you want to talk about occupancy and?

Helen Weir: Yes, in terms of the occupancy cost base reduction, we’re talking about, over the five years, a 10% reduction in space. The actual occupancy cost reduction will be less than that because we will be moving into higher quality space. So we’re moving out of relatively lower quality space into higher quality space. So I wouldn’t build into your model as much as a 10% reduction in occupancy costs, but equally, what I would be looking for, and we are looking for and expect, is an increase in productivity of the space that we move into, so it’s better quality space. And in terms of the PPI mis-selling, obviously these are quite historic amounts now, we believe that we have made a good provision, a reasonable provision. Obviously, HSBC run M&S Bank on our behalf and working with them we believe that the provision we’ve made is an appropriate provision, going forward. Clearly, potentially we’re looking now at time-barring coming in, in 2019. There’s a level of uncertainty between now and then about exactly what the level of claims will be, but we do believe that we’ve made a full provision there. We shall see what actually happens with time.

Angus Tweedie: Angus Tweedie, Bank of America. The first question, I suppose, is on the space reduction. Why did you think 10% was the right number, and can you give us any idea about assumptions you’re using there in terms of online penetration and things in five years’ time? And then the second thing on avoiding price increases wherever possible; should we take that to mean that gross margins in clothing and home can be flat next year, or will you try and protect them, or how do we think about that?

Helen Weir: In terms of space reductions, we didn’t set out with 10% as the right answer. That was the result of the work that we did. And you’re very, very right that one of the key things we looked at was online penetration. There are two key variables in the analysis that we’ve done. One is what do you expect to see in terms of online penetration and the other is sales retention as you close stores or relocate stores. Those are the two assumptions that the analysis is most sensitive to. In terms of online penetration, we actually didn’t look over five years because, frankly, property decisions are not five-year decisions. So we looked over 10-plus-years and we looked at penetration levels from a low point, I think in 10 years, of nearly 30% to over 40%. So we did a number of different scenarios looking at different online penetrations. Clearly, if the market changes significantly and online penetration is a lot more or a lot less then that will affect the outcome. We wouldn’t sit here and say, well, we said five years ago we were going to do this, so we’re going to do this regardless. And I think that’s the important thing about the property or the estate strategy that we’ve set out today is that it is dependent on market conditions, to a certain extent. So what we set out is a clear direction of travel. It’s got a lot of work that goes behind it but clearly, the actions that we will take will be sensitive to market conditions over time. But that’s the sort of range that we were looking at. So we were looking at quite significant variability in the overall range when we came up with the analysis. And then the other thing is we looked at it on a micro market by micro market basis, and you’re going to see different patterns in different places.

Steve Rowe: I think it’s worth pointing out we’ve brought in some very sophisticated marketplace tools that do this and drive analysis by customer shopping region based on property and destinations. So we’ve had a whole series of lenses to have a look at this by. But as Helen said, the key thing here is that we’ll try and be more and more agile as we move forward with shorter leases so we can respond to market conditions as they change, and that’s going to be the future of retail, I think. In terms of your conversation [about] prices, as I said, we don’t see us passing those increases onto customers. We intend to offer outstanding value in the marketplace over the next year. In terms of margin guidance, at this stage we’ve got to see how that pans out with the market, but we would suggest there are limited opportunities for upside to our margin after this year.

Richard Chamberlain: Richard Chamberlain, RBC. Steve, I just wondered if you could make a comment on marketing costs. I think they were down about 10% in the first half; should we expect those to reverse now and start to grow again? Potentially, that could be a driver of clothing like-for like-improvement. That’s the first thing. And then maybe, Helen, you could just say, or try and say, what you think is M&S’s maintenance CapEx these days? Obviously, CapEx is now running well below depreciation, but how much of that would you actually say is maintenance now of that £400 million? Thanks.

Steve Rowe: So in terms of marketing costs, I think Helen outlined part of the reason they’re down is because of that change to where we were with Sparks. We’ve literally just anniversaried the launch of Sparks and we had considerable activity as we did it. Remember, we got off to a really fast start and, as I said, we’re up to now 5 million people on a Sparks card, so we’ve had a tremendously successful launch. Part of the reason we did Sparks, though, was because it gives us a different type of marketing. So rather than necessarily increase our cost of marketing, Sparks will allow us to bring it down. So we bring down the number of promotions that we do and we can also do more direct marketing, targeted to customers where we understand their shopping habits, we understand what they want. So in actual fact, what you won’t see is a substantial rise backing new marketing costs as we come out of the second one.

Helen Weir: In terms of maintenance CapEx, it depends a little bit on what you classify within maintenance because, at one extreme, we’ve got maintenance which is we need to replace an escalator in a store. Then you start moving through, well, because our volume is growing we need to build out some more racking in a distribution center, or we’re upgrading our system; we have to do it because the current one is going out of support, but we add additional features into that. So if you group all of that little lot together, I think of the £450 million, probably around £200 million I would probably categorize as maintenance within that broader bucket of stuff we probably have to do to keep the business growing, okay? And then the rest will be investment in stores, investment in growth kind of architecture, that kind of thing.

Richard Chamberlain: Brilliant.

Steve Rowe: We’ve got about 10 more minutes, five to 10 minutes for the analysts.

Caroline Gulliver: Caroline Gulliver, Jefferies. A few questions from me, please. The first one is on the range rationalization, cutting Indigo, etc. What percentage of sales are from those three brands at the moment, and what’s the timeline for cutting those brands? And do you expect all the sales to transition to your other brands, or are you expecting some negative impact? The second question is just on online sales. They were obviously flat and you mentioned a 7% hit from pure promotions during the period; just wondered were there any other structural issues going on there. At what point do you expect online sales to start growing again? And also, if you could just update us on your click and collect stats; is it still around two-thirds collected in store, so therefore, deliveries down, or potentially? And also for Simply Food, obviously as you’re expanding the Simply Food estate, what’s the pickup rate from Simply Food? Then sorry, one more, just on Ireland and Europe in the businesses that you are retaining, if you take out the sold businesses, it’s still quite low profitability and I think you said last time that was due to FX. Just wondered what the outlook was for the retained European businesses in terms of profitability into the second half. Thank you.

Steve Rowe: Right, now I’m going to go a bit quick on some of these. First of all, we don’t declare sales by group or by brands, so I’m afraid I’m not going to give you that information; it’s commercially sensitive. However, the timeline for that is that will take place during the course of the late spring and summer next year. We’ve already changed the location and footprint of those in stores now and we’ll continue to do that in the spring. And yes, we do expect all of those sales to transition into other areas of core M&S brand or, indeed, other brands. In terms of online, the 7% underlying run rate there is in line with the marketplace and we would consider that we’re making good progress online. Frankly, we have reduced the number of cyber days, as Helen said; we’ve come down from nine to one. We’ve got more of that to do, which will carry on to the start of next year, but we’re pleased with the underlying run rate there. And then finally -- you got the other two? Good.

Helen Weir: Okay, click and collect is still about two-thirds, as you say, of the dotcom sales in UK and about one-third of that, so about one-third of the two-thirds is collected in Simply Foods. But as you say, we are increasing the number of places. And then you asked about the FX impact on the retained EU business, I think two effects, we’ve talked about this before, transactional and translational. In the short term, because of the way in which they’re hedged, our European businesses are not necessarily seeing the benefit of the stronger euro. That will start to come through and, fundamentally, what they’re facing is a dollar euro translation. It happens to go through sterling, but ultimately, that’s the fundamental economics of the business. So there will be, in the longer term, not necessarily in the second half but in the longer term, a benefit from -- or at least no impact from the devaluation of sterling. But what we will see in our numbers is obviously a translational benefit, going forward on our euro-denominated businesses.

Georgina Johanan: Georgina Johanan from JP Morgan. Three very brief ones from me, please. Firstly, apologies if I missed it, but you said that in your analysis you’d taken into account sales retention. So if you could just give us your thinking around that, please? And secondly, the international owned businesses that have been closed and the 45 million of losses, are there any costs associated with those businesses that you have to retain to continue to run your owned businesses? And then finally, just on the Q2 like-for-like performance, obviously a strong improvement versus Q1 but clearly helped by the timing of the sale; can you give us an estimate of the boost to Q2 from that, please? Thank you.

Steve Rowe: If I take that last one first, we did move the sale and we said we were going to do that, but we also stripped out a load of promotions. And when you get down into the nuts and bolts of this, broadly they cancel each other out, so the benefit of the sale minus the promotions meant that they cancel each other out.

Helen Weir: Okay. The other two questions were around sales retention. Clearly, that depends very, very significantly by location. If you’ve got a store that’s got other stores nearby, then we would expect to retain the vast majority of sales. If you’ve got a standalone store frankly, you don’t retain a lot of the sales. You may retain a bit online, but you don’t retain nearly as much, so it’s very, very dependent on particular location And then in terms of the international 45 million losses, are there any retained costs? That’s taken into account in the numbers that we’ve provided. So that we’d expect that 45, which were the losses last year, to flow through.

Georgina Johanan: Thank you very much.

Andy Hughes: Andy Hughes, UBS. Just three quick ones on the numbers. 90 basis points up for your intake margin; what would it have been before the price investment? Secondly, you’re 20% off womenswear options, I think it’s the third time you’ve done that. Is that right; we’re not counting the same 20% cut each time? So if you could just clarify that. And then the in-house design percentage; you laid great store on getting it up to the 65% level, are we there yet?

Steve Rowe: Right, all three for me. So womenswear options; when you say we’ve done this three times, I’ve only done it once and it’s 20%.

Andy Hughes: On your CEO watch, yes, okay, fine.

Steve Rowe: And it is 20%, it’s a real 20% and we’ve got 20% on a like-for-like basis and we’re also, remember, cutting back on phases. I remember last year in May I talked about the fact there were some 14 phases in womenswear. That’s coming down to nine as we progress through next year. So you’re going to see real material changes in the drop in number of ways in that area.

Andy Hughes: Are you saying that the other ones weren’t real then?

Steve Rowe: I’m saying that we’ve cut the number of ways, or range of options by 20%. We’ve done that this season as we move into the autumn. The second thing was in-house design. We’re at about 70% and we’ve hit that target and we’re probably there might be a little bit more but we’re probably about the right level because we’ve still got a balance in here between some of the full service vendors and some direct sources which have got design capability which we use. So that’s about the right level. And we strengthened the design team substantially and, at the same time, we’ve made further investments in our overseas buying offices. I’ve literally been to see all of them in the last two months and our capability overseas is very strong, at the moment. And then finally, intake margin, I can’t remember that number. I’ve concentrated on what I’ve got. And we’ve given you guidance this year that we think, after the investment in price, we’ll be about 0 to 50 bps.

Clive Black: Clive Black, Shore Capital. I think I’ll just ask one question. What do the Board think of dividend hereon? You’ve kept it flat at the half-year and Helen outlined the capital strategy for the second half. What should investors take as to the Board’s view of dividends?

Helen Weir: I think what our investors should take is that we first, our priority is a robust balance sheet, as we’ve set out very clearly. But secondly, we do recognize the importance of regular dividends to our shareholders; hence, the fact that we’ve maintained our interim dividend. The reality, I think I mentioned, is that our business, although our profits are down we still are a strongly cash generative business and dividends ultimately do get paid out of cash. And so what I think investors should take is that we do recognize the importance of income and a regular dividend to them. But equally, I think what they would want, and certainly what I hear from investors is, they would want a business that’s got a robust balance sheet and takes prudent decisions.

Steve Rowe: I’m now going to move on to the group from the press who’ve been very patient. At the end of that, if you’ve still got any questions we’ll come back to you, but I’m going to move on to some of the questions from the press now.

Unidentified Analyst: A question about international; can you give a bit more insight about what went wrong in these 10 markets? Were you trying a one size fits all model, given France in particular was quite a recent addition to your portfolio? And separately, on clothing, the decision to scale back, is it a mission of defeat in terms of getting the business to grow again?

Steve Rowe: The first thing to say, when I said we’re scaling back, we’re removing and changing the footprint in the UK. What I also said was that we believe that we’ll have more productive footprint and that, combined with the growing multichannel offer, means that we believe we can hold and grow our market share. So this is not about cutting back, this is about making sure we’ve got the right estate for future shopping habits and the way that our customers want to shop with us. Honestly, it’s not scaling back at all, it’s about platforms for future growth. In terms of the international, look, lots of things have changed and I do want to point out we’ve got a very successful franchise model. We’ve got business in Ireland, a good business in Hong Kong, a good business in Czechoslovakia and great JVs in Greece and India, and so many of the moves we’ve made in international were right. The cost of operation in those markets I’ve proposed, times the opportunity for growth as I outlined based on the customer, is not as big as we thought it was and the markets have changed and moved on. And what we’re doing is making sure we’ve got a robust foundation for future growth elsewhere in international, which is why we’ve proposed those closures.

Unidentified Analyst: Just on the international store closures, have you also cancelled plans, were there plans for further international growth that you’ve now put the brakes on, were there many stores in the works and are you able to say how many? And then also on the job losses, we’ve got the 2,100 for the international, is that just international or does that include the UK stores that would be affected as well? Thanks.

Steve Rowe: There was only one store in the international pipeline that we’ve cancelled, and that was Rokin in Amsterdam where we took that action earlier on in the year. So there are no further stores, owned stores in the pipeline, but our franchise partners, as I’ve said, do have plans to expand their store network and we’ll be building the business that way. In terms of the job losses, I’ve been clear, these are proposals today and we have proposed, and are consulting with, 2,100 colleagues internationally. That does not include anyone in the UK store estate. As I’ve said, this is a five-year program. We’re committed to continuity of employment as a primary objective and we will look at this on a store-by-store basis. And as continue to grow our Simply Food network, M&S over the long-run will have more employees not less. This is not about job cuts, this is, again, about foundation for growth.

Unidentified Analyst: Sorry, just one follow-up about the sales profit split between the food and clothing, was it 50/50 space but 75% on sales, how will that be profit split between the two divisions?

Steve Rowe: We don’t declare that.

Helen Weir: We don’t disclose that. Just trying to do the mental math.

Steve Rowe: We don’t break down the profits between the two groups.

Unidentified Analyst: Is clothing still bigger?

Steve Rowe: We don’t break down the profit between the two groups.

Unidentified Analyst: Okay. Thanks.

Unidentified Analyst: I was just looking at the results; obviously, the second quarter performed better than the first. I was wondering why that was, whether it was just because of the movement of the sale. And also, if you can give a bit of indication on current trading and whether that positive trend has continued?

Steve Rowe: Look, we don’t update on current trading; this is a half-year presentation, it’s around quarter 2. I think what I did say is that eight weeks of autumn, I’m pleased with the result so far and the customer feedback we’ve been getting has been good. We’ve seen a small uptick in full-price market share, which again I’m pleased with, and a small uptick in volume and market share growth. So again, I’m pleased. In terms of the movement of sale, yes, we benefited from the movement of sale in the second quarter but, at the same time, there was a drag, which was the promotional sense, i.e., reducing the number of promotions across the business and they were neutral. So there is a real improvement in the run rate.

Unidentified Analyst: Sure, and any indication of where the UK closures might fall as well in terms of locations?

Steve Rowe: No.

Unidentified Analyst: All right. Thanks.

Unidentified Analyst: Do you have any idea when you will be able to tell us where the 30 store closures are and what will happen to the staff working in those; will they move to Simply Food stores or --?

Steve Rowe: We’ve already said that we’re committed to continuity of employment for our employees, where possible. We’re going to tackle this on a market-by-market basis and a store-by-store basis over a five-year period, and what we’ll do is we’ll discuss it with the store teams as and when it’s appropriate.

Unidentified Analyst: You’ve talked about not passing on currency exchange impact on clothing and also minimizing on food; are you able to share what the impact will be on food prices, if any?

Steve Rowe: There is some impact on input prices, which Helen outlined, but what we’ve said is we believe we can mitigate that within our business by better optimization of our supplier base and the supply chain. So at this stage, we believe the net impact on our customers will be that we’ll continue to remain competitive, offer great value and, if anything, we’re reducing prices across the board in food.

Unidentified Analyst: So, are you rolling it out, an increase?

Steve Rowe: No, not at this stage.

Adam Cochrane:

-- :

Helen Weir: The answer is no. Probably about one-third of the portfolio that we’re looking at this freehold. Some of those will be within the SLP, the Scottish Limited Partnership, but within the agreement that we have we can just substitute stores in and out. Clearly, we have to demonstrate its equivalent value, etc., but there’s quite a degree of flexibility around that; it was set up that way.

Adam Cochrane: Okay. In terms of looking at the freehold estate, did you look at alternative use valuations as well to see if you could sell the freehold for alternative use and then open up a store somewhere else in the same vicinity?

Helen Weir: You mean sell it for development and stuff like that?

Adam Cochrane: Yes.

Helen Weir: That’s something that our property team does on a regular basis and certainly is one of the things that we’ll be looking at as part of the plan that we’ve outlined today.

Adam Cochrane: Okay. Thanks. That’s brilliant

Unidentified Analyst: I just wanted to ask about the exit from China and also France. Obviously, last time M&S exited France there was some difficulty with the government, and in China the role the government plays there. Are you expecting any sort of difficulties or particularly high costs in exiting those countries?

Steve Rowe: Well, I think Helen’s already given guidance to some of the costs we think across the whole of the international business, so I think we’ve done that. In terms of how we conduct it, we have this morning spoken to colleagues from the European Works Council and other areas, we have representatives in every one of the territories we propose to close. We are fully committed to engaging with both our colleagues and the appropriate authorities in the right way. Whilst there are some complexities around different label legislation, I think the team have got a plan in place that will make sure our consultation is conducted in the right and proper way.

Anne Critchlow: Anne Critchlow, SG. Thinking about the lower price points, and also the fewer probates that you expect to have in the second half as well, what gave you the confidence to keep the minus 3% like-for-like clothing and home guidance? So that’s my first question. And then the second one is about good, better and best; do you still look at the business in this way and, if so, how did the percentage of good increase year on year in the first half?

Steve Rowe: Okay, so good, better and best, yes, we do but when we look again, one of the many lenses we used to look at pricing within the marketplace, we also use a basket of data we have in both food and clothing and home. We monitor basket prices and individual items as well as the overall range structure. As I said, we increase the sales of goods in womenswear, for example, by 14% and we’re seeing increases in good across every business unit at the moment. In terms of the confidence to continue with the guidance, our view on the market hasn’t changed and our view on our performance hasn’t changed since earlier in the year. We are making good progress with our plans and we’re, broadly speaking, where we expected to be.

Tony Shiret: Tony Shiret, Haitong. Two questions. First of all, can you give us some update on the profitability of your online general merchandise business and the differential between that and the in-store general merchandise whatever level you see appropriate? And the second question, you’re talking about sales densities in-store of general merchandise, going forward; can you tell us what those have done in the last five years? I know they’ve gone down; just quantum I’m looking at.

Helen Weir: Well, on the second one, we haven’t opened that much new space, so therefore, given our performance on sales has been negative, our sales densities would have gone down, but I think the key thing there is it varies a lot by store. There’s a huge amount of variability and part of the program that we talked about today is around replacing space that is not so well performed; not only reducing space but also the new space that we will open will have a higher productivity. So as I mentioned in my presentation, we’d look to improve our overall productivity by about 10% as a result of this.

Tony Shiret: I’m talking about in-store, excluding online sales in terms of the sales productivity.

Helen Weir: Yes, that’s what I was talking about.

Tony Shiret: Okay. So they’ve gone down [multiple speakers].

Steve Rowe: They’ve gone down. If you look back over a five-year period, there’s no doubt that our, if you strip out that online, we’ve had, if you take last year, a like-for-like business in stores which went down substantially and our RPS will have been representative of that. So this is about correcting that which is why I’m talking about a transfer and shift of about 2.5 million square feet.

Tony Shiret: Okay. But we’re talking about 20%/25% down, aren’t we, on a five-year view?

Helen Weir: I don’t know.

Steve Rowe: I’d have to confirm that, Tony. I just haven’t got that math in front of me at the moment.

Helen Weir: And the answer is it’ll be some and some. It’ll vary. In terms of the profitability of online, all of our channels are now profitable. Obviously, our stores are still a bit more profitable than online. We don’t disclose anything more than that separately. I sometimes find this a slightly strange question, though, because fundamentally we are a business that provides an opportunity for our customers to shop when and where they want. And, as Steve said in his presentation, we believe there is a role for stores and online, so one has to really look at the whole mix in terms of the performance.

Tony Shiret: But the mix is going to increase in terms of the percentage of online.

Helen Weir: Yes, and we would expect that the online profitability percentage would also improve. Actually, if you look at the marginal cost of an online sale versus the marginal cost of a store sale fully costed, then it’s exactly more profitable.

Michelle Wilson: Michelle Wilson, Berenberg. With your online sales, could you remind us what proportion of those sales are from international? And then on the food business, how do you think about the food business where we’re starting to see a slowdown in disposable income growth? How would that affect your food business and is there any way you would react to that slowdown?

Helen Weir: You do the second one and I’ll see if I can figure out the first one off the top of my head.

Steve Rowe: In terms of the market slowdown, we’ve been trading through a market slowdown for some time now and our food business has been fairly robust on that basis and, as I said, continue to gain market share. If you look forward, the consumer barometer that we have, there is actually a fair degree of optimism in the country at the moment and there was a big bounce back after the Brexit vote. It tailed off and then came back. Traditionally, when there’s been a downturn, if there’s been a downturn, M&S has benefited a little bit by the fact that people who used to dine out and want something special to eat usually dine in and buy M&S food. So we’ll see.

Helen Weir: I’ve tried to do a bit of mental math. I’m not sure I’ve quite got the numbers because we have two kinds of international sales. We have those that come through our dotcom site, so people internationally who are ordering off our UK site, and that’s about 5%. But then we also have our international site. So if I was to add up the total on dotcom that’s international, somewhere between 5% and 10%.

Michelle Wilson: And that’s all going through UK revenues?

Helen Weir: No, that’s not going all through UK revenues. The stuff that’s ordered off the dotcom site will go through UK, but the stuff that’s ordered on our international websites will go through our international numbers.

Michelle Wilson: Brilliant. Thanks.

Steve Rowe: It’s just important to say, because I don’t know where quite you’re going with that question, but we will maintain our online offer in all of the territories we currently do, whether that be through one of our platforms or whether it be through one of the marketplace platforms we use. So when we talk about coming out of those markets, it’s specifically about the closure of the store base.

Helen Weir: In fact, on that, what we have been doing is expanding our international reach in own currency sites. So for example, I think it’s Australia or New Zealand, you used to have to order off our dotcom site, previously ordered off our dotcom site. Now we have a local currency site that customers can order on, so we’re actually moving more to offering local tailored international sites.

Simon Bowler: Simon Bowler, Exane BNP Paribas. Three quick ones from myself, if that’s okay? First one, net working capital outflow in the first half, you mentioned that was due to inventory and availability improvements in clothing and home. Is that a yardstick for outflow we could expect for the full year and how should we think about working capital in outer years? Secondly, can you confirm some really basic math that a 7% currency headwind this year drove 140 basis points headwind in clothing and home gross margin, so 11% next year is 220 basis points as a headwind? I know there is things you do to offset that. And then, finally, you mentioned you’re comfortable with the food like-for-like performance. Obviously, you’ve got some volume growth coming out of the business and you don’t give us a profit split, but are you seeing any operating margin leverage when we consider volume growth less negative like-for-likes in stores?

Helen Weir: Okay, on the working capital, I called out a specific -- the things that affected our working capital particularly this period are the investment in stock for availability in stores. Typically, the way you manage these things in retail business is, first of all, you get your availability up and then you start bringing your stock disciplines back in. So over time, we will be looking to reduce the level of stock cover that we have. So I don’t think you should take what you’ve seen in the half and then just extrapolate that forward. In terms of the currency analysis that you’ve done, it’s not going to be 1 million miles off. The one thing that I would say is that the other thing that plays into this is the benefit you get from local currency. So within the year, there’s been an impact of dollar, but also when you go out and have negotiations, you say well, okay fine, cotton’s related to dollar, but the input cost of labor, etc., is actually locally denominated. So that’s actually rolled back a little bit in terms of our dollar impact, but the math you did is not going to be 1 million miles away. And then the food, I didn’t quite get -- did you catch the last one? It was about food leverage. Operating margin leverage if we get the [Multiple Speakers] back in.

Steve Rowe: Well, again, I think we’ve talked about that in terms of, as we’ve put more volume through the business, there are efficiencies in our supply chain. Number one, with the factories that we trade in, who are getting more volumes through the factories, and they can pass that back into us through efficiency. And then secondly, in our logistics system, and Helen talked about the fact we’ve done a lot of work on optimizing trades and things like that which reduced the cost of logistics. So yes, simply more volume through the business is good.

Simon Bowler: Okay. So minus 1% like for like, you’re happy that food profitability doesn’t go backwards with a shade, given the growth profile elsewhere?

Steve Rowe: Yes.

Simon Bowler: Okay, great. Thank you.

Steve Rowe: Have I got any more journalists, press questions?

Unidentified Analyst: I was just wondering, in the past 15 years, Marks & Spencer has expanded internationally and invested a lot to do it, retrenched and spent a lot to get out, expanded again, and invested a lot to do it and now you’re spending a lot again, to get out. Clearly, the mistakes and missteps have been bigger than any one person, who was involved in those decisions and bigger, perhaps, even than the team of which you were a part throughout. But can you be sure, now that you have fixed this dysfunction?

Steve Rowe: Yes.

Unidentified Analyst: How?

Steve Rowe: Look, the first thing we’ve done is, I think we have made mistakes in the past, there’s no doubt about that and the actions we’re taking today corrects some of those. But we also want to be clear, we’ve done this with a new focus on the marketplace in which we trade. Things changed, lots of things have changed since we first went back into those marketplaces, whether it be the change to online, whether it be levels of competition, whether it be the availability of space. We’ve taken a good look at each marketplace, what the opportunities for growth are, how the cost base is now maturing over a period of time, and what resonance we have with the consumer base there. And where we do have growth in international markets, it’s been done with a position where we’ve got greater insight than we’ve ever had. And we’re doing it, as I said, with franchise partners who’ve got great local expertise and can, frankly, tell us whether or not our brand is going to work and resonate with those customers. And just one minor criticism; this is not a withdrawal from an international business, this is not what happened in 2000. This is a correction to our owned business, and we’re going to maintain an owned business where it resonates; in the Republic of Ireland, in the Czech Republic, in Greece, in India, and in Hong Kong. And then you get growth opportunities through our franchise partners. So this is a correction, and providing a foundation for future growth.

Unidentified Analyst: Hi, Steve. You’re concerned about any sort of push back about the UK store closures, or reputational problems; obviously, M&S has been targeted a bit by that MP, Siobhain McDonagh. Big retailers in general are not flavor of the month and people really measure their high streets by whether M&S is there or not. So what do you think is going to be the reaction to the 30 closures?

Steve Rowe: Well, I think again, I’ve got back to, George, the principle that this is not a reduction in the number of Marks & Spencer stores available in the UK. We’ll reach more market towns and more towns than we have previously, with over 1,000 stores selling food. And what we’re changing is the balance of the clothing and home footprint in the UK. So I think the reaction will be largely positive when people sit down and look at the detail as we do this over the next few years. And I know that the letters I get from customers when we land a new Simply Food, they’re absolutely delighted with that. I think what we’ve got to do is get over the headline things that will happen, I’m sure, in the media tomorrow, and we’ll get down to the facts, which will be about an expanded Marks & Spencer in the food business over the next period of time. And on a local basis, we’ll deal with it on a one-to-one basis.

Unidentified Analyst: Just a follow-up thing [indiscernible] On the clothing side, are you keeping hold of the GM role? Are you keeping in charge of that, you took it back?

Steve Rowe: At the moment, we’ve made no changes in structure, and I’ll continue to keep an overview of the clothing and home business, yes.

Unidentified Analyst: Okay, and just wondered how the retail panel was going, of Mrs. M&Ss.

Steve Rowe: Well, there’s more than Mrs. M&S, although we’ve got lots of customers. We’ve talked to about 300,000 customers since the spring, and we continue to have ongoing dialogs, both in workshops and online, with a variety of panels and every division in the business is engaged in that. I myself am; I know the leadership team in clothing and home are regularly on these panels. And that dialog will continue; we’re absolutely committed to that, and making sure that customer is absolutely at the heart of what we do in the business.

Andy Wade: Andy Wade, Numis. First one, just in terms of average prices; you talked, if I’m getting the numbers round the right way, last time we saw you, about reductions of 15% on price across 30% of the ranges. One, have you put those in place, and two, should we, therefore, infer that average prices are down about 5ish%?

Steve Rowe: In the ranges where we have reduced like-for-like prices, so there’s two parts to this, right? There are lines as they come in and we refresh them and they’re new and, of course, in a fashion business we’re doing that all the time. The lines where we’ve had to reprice them, core products, as I said, 1,700 of those have gone down now and the average price decrease there was 17%.

Andy Wade: The 17% makes up what sort of percentage of the SKU range, I don’t know off the top of my head?

Steve Rowe: I’ll have to work that out. I’ll come back to you with that, [the 1,700]. But the key thing here is that what we’ve got is, as we bring new lines in, we’ve repositioned those to the marketplace against the competitive set and that work is largely done but we’ll keep an eye on it. And the principal one here is that we will maintain a competitive position in the marketplace. What we won’t do is let it get out of kilter again. And in terms of average selling price decrease, the full-price number, I’d have to calculate it, is a bit less than that. But within the mix, bear in mind we’re selling less goods on promotion, so the average price achieved in the business is slightly different. Does that make sense?

Andy Wade: Yes, that’s helpful, thanks. Second one, I know we’ve touched on this twice before now, but just to bottom it out, the Q1, Q2 timing of sale element. I appreciate you said that the timing of the sale was offset against the reduced promotional activity. But one of those is a phasing element between Q1 and Q2, whereas the other one is an ongoing strategic element and it’s important in looking at the change in run rate between Q1 and Q2. So I believe I remember you guys saying at Q1 that it was about 3%. So if we look at that, if we run that through, Q1 and Q2 are broadly similar size in clothing-ish, given the like-for-like differential and you’re like for like for the half was split down the middle. So on that basis, if you add 3% back to one of them, and take 3% off the other, you’re at minus [5.9] both Q1 and Q2. It doesn’t feel like so much of an improving trend then. Is my math wrong there?

Steve Rowe: No, if you add 3% take 3% that’s good.

Andy Wade: I don’t know, I’ve got stuff like that wrong before.

Steve Rowe: Look, Andy, there’s a lot of moving parts in there because what you’re looking at is differential promotions that aren’t necessarily reflective of the forward-promotional calendar and the scale of some of those is quite different. So we’ve taken out a mix of category promotions and online promotions and there’s some movement between the channels. So it’s not necessarily a straight negative as you move forward. And then the second thing is, the big thing we’ve taken out, is these category promotions and they were absolutely killing us. And so what we can do, and what we’re seeing is the trading to full price. So your math is fine, but it’s not quite that straightforward.

Helen Weir: I also think we’re not claiming a massive uplift and uptick in performance in the second quarter. We’re saying we see some early shoots of improvement. If you look at our performance relative to market, in the second quarter, not absolute, well, it certainly works on absolute, but also in terms of full price and volume share. Those are both improved, so there are some green shoots. I think in terms of the math, it’s a little bit in the rounding. So that’s why, it’s not a big song and dance, but there are some signs of improvement coming through.

Andy Wade: Great, okay. That’s very helpful, thanks. And then just very, very quick last one; you talked about looking to improve the sales density in the space you’re putting in, by 10% from the space that you will be getting rid of, to keep your clothing and home broadly flat on 10% less space. Across the portfolio at the moment, do you have a 10% higher sales density in larger space than in smaller space, because I wouldn’t necessarily have expected that?

Steve Rowe: In real terms, yes. Many of our larger stores have higher RPS than our smaller stores. And if you look back at the historical shape of the business, our biggest stores, the Bluewaters, the Camberleys, have higher densities of attraction of customers as well. So that is true, yes.

Helen Weir: And the impact we expect to see is by taking out the stores that have lower sales densities…

Andy Wade: You’ve taken out underperforming stores anyway.

Helen Weir: Therefore, you raise the average, effectively. So it’s not just the new stores are 10% better, but actually the overall average raises, because we’ve taken out outperformers.

Andy Wade: Thank you very much.

Tom Gadsby: Tom Gadsby, Liberum. Just a very quick one; similar question on food sales densities. Do you expect to hold the sales densities where they are as you grow into bigger space?

Steve Rowe: Largely, we’re not growing into bigger space. The vast majority of our change in food footprint will come through Simply Foods on a format which we’re very clear about and will maintain our sales density. In terms of the stores where we will correct the balance between clothing and food, sorry clothing and home and food in some we’ll maintain the RPS and in some it will come down slightly. But what we will do is generate additional returns in those stores, because the returns, in terms of return per square foot, in sales, as we’ve said earlier, is substantially bigger in the food division, than it is in the clothing and home division.

UnidentifiedAnalyst: Steve, can I just ask my question now, second question? Two things actually, very quickly. Firstly, your comment about no margin improvement or hard to see margin improvement after this year, is that a bought-in or an achieved comment?

Steve Rowe: At this stage, it’s an achieved comment. We’ll balance out the input prices that we’ve talked about with savings that we can make elsewhere, with things like markdowns and some efficiency within the supply chain.

Unidentified Analyst: And then just quickly, you talked about full-price market share gain; my Kantar subscription doesn’t cover full-price market share. Is that the first time in five or six years, I’m guessing, that you’ve actually been gaining full-price market share?

Steve Rowe: Yes, I’ll have to look back at the exact date, but somewhere around five years.

Unidentified Analyst: Thank you.

Unidentified Analyst: I just wanted to ask about your comments talking about conversations with your customers and also the optimism you mentioned that’s returned. Why do you think the optimism has come back and are you worried that your rivals like Next are about to shift to things like leisure spending?

Steve Rowe: We’ve got a good consumer barometer. We talk to lots of customers, it’s one of the biggest in the UK, and it’s a fairly simple set of questions that determine how they feel about the environment and the economy. And they’re saying they feel optimistic and they’re looking forward to a good Christmas. I think what we can also see is there is a shift in spending habits, which is based around leisure and experiential activity. But to be honest, our job is to make sure we’ve got the right product that attracts, it’s a big enough market for us to play in and that’s what we’re focused on.

Unidentified Analyst: And slightly left field, but are you concerned in any way about the U.S. election, what might happen tomorrow?

Steve Rowe: I’ve got plenty to worry about here, thanks very much. I think we’re probably done now. If there’s no further questions, thank you all very much for your time today, and we’ll see you soon.