Financial Performance of Marks & Spencer Group PLC (M&S)

Financial Information for Managers: Marks & Spencer Group PLC (M&S)
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Financial Information for Managers: Marks & Spencer Group PLC (M&S)
1.0 Introduction
Marks & Spencer Group PLC (M&S) is a retail company based in the United Kingdom and operates in four segments, including UK Food, Clothing & Home, Ocado, and International. M&S is a public company incorporated in the UK under the Companies Act and is registered in England and Wales. Its address office is at Waterside House, 35 North Wharf Road, London W2 1NW (Marks and Spencer, n.d). The UK Food segment includes the UK Food franchise and the UK retail food business offering customers produce, protein deli and dairy, meals, ambient and in-store bakery, hospitality, Food on the Move, and desert and frozen. The UK Clothing & Home retail women, men, and kids' wear, lingerie, and home products via the UK retail stores and online channels. The Ocado segment is the company's share of profit and losses from the Ocado Retail Limited investment. Lastly, the International segment is the company's owned businesses in Asia, Europe, and international franchise operations (Reuters, 2022). M&S is also a major player in its market with an established reputation for expertise and efficiency. The company has 1509 stores, more than 100 websites internationally, and over 70,000 employees serving more than 30 million clients annually (Marks and Spencer, 2022). Like many retailers, M&S has also experienced an adverse economic climate affected by factors such as business closures due to COVID-19 and Brexit. In 2020, the retailer had planned for a slow return of sales, took steps to shore up its finances for 18 months, and scrapped its 2021 dividend due to the COVID-19 pandemic (Partridge, 2020). This paper evaluates Marks and Spencer's financial performance as reported in the income statement for its accounting period ended between 1 July 2020 and 30th June 2021 and the performance measures by the company in its annual report for the accounting period ended between the same period. The paper also compares Marks and Spencer's financial and non-financial performance measures with French Connection Group Plc, a retailer based in the UK, to reveal how these strategies benefit the companies and the stakeholders.
* Financial performance of Marks and Spencer
* How the business works and why it performed as it has
While 2020-2021 was a lost year for M&S's profitability, the retailer was still struggling even before the pandemic. In 2020, the retailer reported that the pandemic crisis would impact its business and further moved to cut 7,000 jobs (Davey, 2021). All retailers in the UK were hit by the pandemic, including Primark, whose annual profit had dropped by 90 percent. While Next had shown greater resilience during the crisis, the company's full-year profit also fell by 53 percent (Davey, 2021). Historically, M&S became the first retailer in the UK to make an annual pre-tax profit of more than GBP 1 billion in 1998 and 2008. Archie Norman, the Chairman, and Steve Rowe, the Chief Executive of the Group, have been steering the latest turnaround plan and have looked to transform the culture of the company. The company has closed stores, improved products and value, and increased the use of technology to broaden its retail appeal. The group also scrapped 2021 shareholders' dividends to preserve cash, cut costs, and warned that the pandemic crisis would last the entirety of 2020 (Partridge, 2021). While the retailer's food stores remained open throughout the pandemic and lockdowns, it claimed that travel restrictions had impacted business and profitability. M&S engages in the retail of food, clothes, and home products and operates in the UK and globally. The retailer has retail and franchise businesses in the UK, with the International segment operating in Europe and Asia. With its headquarters in London, the company was founded on 28th September 1884 by Michael Marks and Thomas Spencer (Forbes, 2022). The more than 130-year-old retailer reported in 2021 that it recorded an 88 percent profit slump due to the pandemic crisis and forced store closures (Forbes, 2022). The Group hit GBP 201 million loss in 2021 due to a drop in Clothing & Home sales. However, food operations showed improvement when every large grocery brand saw an increase in sales driven by increased demand from consumers who were forced to stay at home (Hardcastle, 2021). In its transformation plan, the Group turned to the Ocado partnership to accelerate its store closure and move to online grocery sales following the announcement that it had poor performance in 2020 (Faithfull, 2021). The apparel and homeware segment also slumped by almost a third due to the store lockdowns, although the food segment shot by 1.3 percent until 3rd April 2021. However, the retailer missed out on the shift to online grocery sales before its launch of the Ocado partnership in September 2020 (Faithfull, 2021). These business events and decisions will continue to affect the retail business in the coming years.
* Factors affecting the company's business
There are various factors affecting business operations at M&S, and these can be analyzed through political, economic, sociological, technological, legal, and environmental perspectives or PESTLE analysis. These factors impact the company's products and servers, the nature of the retailer's market strategies and positioning, and its relationship with suppliers and clients. Free trade and Brexit are the main political factors that will affect the company between 2020 and 2021. Several countries have implemented free trade, and since M&S operates in the UK and many other locations around the world, this concept has allowed the company to import foreign products at lower prices while maintaining better profits. The UK's decision to disengage from the European Union is also a political factor that affects tariffs and trade regulations. For instance, the move by the country to leave the Union affected several trade policies with suppliers in the Union, leading to higher cost of products for end consumers. Pricing plays an important economic factor affecting M&S and the entire retail industry. The budget supermarket and clothing stores have become new competitors that have stolen the company's market share as customers can enjoy the same products at lower prices. Although M&S is a household name among customers of all ages, the long-standing reputation of the group has been lost as customers associate Marks and Spencer with the past. Sociologically, the group has become a less trendy brand for customers, particularly among young consumers. Self-checkout and online shopping are steering the company's business, but sustainability and fair-trade requirements have always been the legal constraints affecting business at M&S (Bush, 2019). In combination, these political, economic, sociological, technological, legal, and environmental factors affect the company's operations and profitability. The revenue of the company in 2020 was GBP 10,181.9 but saw a decline to GBP 9,155.7 in 2021 (see appendix 1) (Yahoo! Finance, 2022). As of 3rd April 2021, the company had cash liquidity of GBP 1,799 million, GBP 674.4 million in cash equivalent, and GBP1.1 billion in undrawn committed syndicated bank revolving credit facility (RCF), which is set to mature in April 2023 (Marks and Spencer, n.d). The company's financial statements also show that the company has undrawn uncommitted facilities of GBP 25.0 million (Marks and Spencer, n.d). According to M&S, this is an increase of GBP 395.2 million compared to the GBP 1,404.2 million liquidity position on 28th March 2020. These results were due to the strengthening of liquidity in response to the pandemic risks (Marks and Spencer, n.d). Besides the preservation of operational cash, the company also took important measures in response to the pandemic crisis. For instance, the company refinanced the December 2021 bond maturity with a GBP 300 million 2026 bond issuance. The group also extended the relaxation of covenant tests with the lending syndicate of the bank that provided the GBP 1.1 billion revolving credit facility up to and including the March 2022 period (Marks and Spencer, n.d). These strategies have helped the company remain in the business in the post-Covid-19 era.
* Strategies it has pursued from the economic and industrial context
The 2020/2021 financial report of M&S reflected the impact of the pandemic that spanned between the first UK-wide lockdown and the end of the third lockdown. Nevertheless, the report also reflected its transformation efforts, enabling its business to deliver robust performance. Profits before tax and adjusting items for 2021 GBP41.6 million and a statutory loss of GBP201.2 million. The company benefited from disciplined cost management, reduced discretionary costs, focused on working capital, and managed stock-flow strategies to deliver a strong balance sheet. These efforts also saw the company realize strong liquidity and reduce its net debt, excluding lease liabilities, to GBP1.11 billion. The UK government also supported M&S with GBP306.1 million to cushion against the pandemic effects. The Food segment of M&S delivered underlying Life-for-Like (LFL) growth of 6.9%, which adjusted following the closure of the hospitality industry in the UK and the negative impacts on the franchise sales. The lockdowns in the country had led to steep declines in the Food segment as customers switched to cooking in their homes. However, the segment realized greater sales during Christmas and the Easter of 2021, but the trend dropped towards week 52 of the financial period. The company's food business had to incur additional costs of GBP49.4 million to support the safety of customers and colleagues (Mark and Spencer, 2021). Ocado partnership is one of the most critical strategies that M&S pursued to recover from the pandemic shock. The pandemic distorted business at M&S, with the majority of the company's floor, spaced closed. Ocado Retail saw the company's revenues rise by 43.7 percent over 52 weeks in the year ended 28th January 2021, with a net income share of GBP 78.4 million (Marks and Spencer, 2022). This period was exceptional for the grocery online. The retailer with Ocado Retail is strongly performing more than the company anticipated.
In 2021, M&S's Clothing segment began selling rival brands, a move that marked the end of an era of avoiding clothing from competitors such as White Stuff, Joules, and Hobbs. This strategy was aimed at increasing online sales and growing profits that had drooled over the pandemic period (Valentine, 2021). M&S has always resisted any move to water down its brand with products from rival companies. The Clothing segment took the route adopted by M&S Food in 2009 of accepting a range of products from other brands to turbocharge its online sales. Besides White Stuff, Joules, and Hobbs, M&S now accepts products from Jack & Jones, Seasalt Cornwall, and Phase Eight, among others. The decision to welcome products from rival companies was made following a trial that saw curated offerings from Nobody's Child and Early Learning Center stocked. This process was part of a program dubbed "Never the Same Again" that the company launched in 2020 to transform the business and recover from the pandemic's impact that had altered consumer behavior (Valentine, 2021). These strategies are expected to boost M&S's business and recover from the losses due to the COVID-19 pandemic.
* Use of Performan...