MARKS AND SPENCERS

A R E P O R T A S S E S S I N G A N D I N T E R P R E TI N G T H E F I N A N C I A L I N F O R M A T I O N P U B L I S HE D I N T HE A N N U A L R E P O R TS A N D O T H E R U S E F U L F I N A N C I A L D O C U M E N T S B Y M A R K S & S P E N C E R S , T HE U K B A S E D R E TA I L E R E N G A G E D I N T HE R E TA I L O F C L O T H I N G , F O O T W E A R , F O O D A N D HO M E P R O D U C T S .

Dhruv Abrol University of Westminster 10 April 2011

TABLE OF CONTEZNTS
Table of Conteznts................................................................................................... 2 Introduction and Backdrop ................................................................................. 3 An assessment of the financial position of M&S for the period running from 2006 to 2010. ................................................................................................. 4
An assessment of the performance of M&S from 2006 to 2010. ........................... 7 2006 .................................................................................................................................................................................. 7 2007 .................................................................................................................................................................................. 9 2008 ............................................................................................................................................................................... 11 2009 ............................................................................................................................................................................... 12 2010 ............................................................................................................................................................................... 13

An assessment of the liquidity of M&S from 2006 to 2010 ..................... 14 Economic factors and growth prospects ....................................................... 15
References

INTRODUCTION AND BACKDROP

Marks and Spencer plc is a British retailer, headquartered in the City of Westminster, London, with over 700 stores in the United Kingdom and over 300 stores spread across more than 40 countries. It specialises in the selling of clothing and food products. M&S was founded in 1884 by Michael Marks and Thomas Spencer in Leeds. In 1998, it became the first British retailer to make a pre-tax profit of over 1 billion (BBC, 1998), although a few years later it plunged into a crisis which lasted for several years. In November 2009, it was announced that Marc Bolland, formerly of Morrisons, (wood, 2009) would take over as chief executive from Executive Chairman Stuart Rose in early 2010; Rose remained in the role of non-executive Chairman until he was replaced by Robert Swannell in January 2011.

AN ASSESSMENT OF THE FINANCIAL POSITION OF M&S FOR THE PERIOD RUNNING FROM 2006 TO 2010.

In 2006, the groups turnover stood at 7797.7 million GBP, with an operating profit of 836.6 million GBP. During the nancial year their total assets increased from 4,285 m to 7271.5 m. The current liabilities increased from 1289.3 m to 1962 m. Working capital saw a sharp increase from negative 451.8 m to 1231.4 m GBP. Shareholders funds also saw a sharp rise from 521.4 m to 3271.3 m. International operating profit increased by 8.2% to 65.7m. International operating profit increased by 8.2% to 65.7m. The Group generated a cash inflow of 551m (last year an outflow of 105m). Within this, the cash inflow from operating activities decreased by 404m to 1,198m. The groups turnover stood at 8588.1, for the year 2007 with a 10.91 % profit margin. The operating profit for the year was recorded at 976 million GBP. The total assets saw a marginal increase from the previous year and were recorded at 7469.8 m. The current liabilities decreased to 1605.3 m and the working capital increased slightly and was recorded at 1301.8 m. Shareholders funds increased to 3736.5 m. The group also recorded a 27.8% increase in earnings per share. In 2008, the groups turnover reached 9022 million with a healthy 12.51% profit margin. The operating profits were recorded at 1039.6 m and the total assets increased from 7469.8m to 9805.4 m GBP. The current liabilities increased to 1987.9 m and the working capital increased to 1778.2 m. Shareholders funds also increased substantially and were recorded at 4602.1 m GBP.

The year 2009 saw the groups turnover rise marginally to 9062.1 m, however the profit margins fell down drastically to 7.79%. The operating profit fell by almost 50% to 591.5 m. The total assets however, did not see much change and were recorded at 9888.5 m. The current liabilities increased to 2306.9 m and the working capital was recorded at 1702.2m. Shareholders funds increased slightly to 4712.1 m GBP. By 2010 the turnover increased to 9536.6 million. Even though the operating profit increased to 852 million, the profit margin declined a bit further to 7.37%. The total assets were recorded at 9783.8 million. The current liabilities decreased to 1890.5 million and the working capital increased to 2233.2 million. Shreholders funds remained stable and were recorded at 4799.2 million.
TABLE 1 SUMMARY OF M&S COMPANY RATIOS 2006-2010

Ratio Current Ratio Liquidity Ratio/Quick Ratio Gearing(%)

2010 2.18 1.86 74.53

2009 1.74 1.51 80.9

2008 1.89 1.65 88.96

2007 1.81 1.55 69.29

2006 1.63 1.44 65.27

Activity Inventory Turnover Total Assets Turnover Debtor Collection (days) Creditors Payment (days) 15.55 1.21 3.39 30.32 16.91 1.2 3.36 14.38 18.45 1.15 3.42 9.18 20.63 1.46 2.89 11.04 20.83 1.47 1.97 11.36

Debt Debt Ratio 50.90% 52.30% 53.10% 49.90% 55.01%

Profitability

Gross Profit Margin(%) Net Profit Margin(%) Return on total Assets(%) Return on shareholders funds(%)

37.94 7.37 7.18

37.21 7.79 7.14

38.65 12.51 11.51

38.9 10.91 12.54

38.29 9.6 10.29

14.64

14.99

24.53

25.07

22.87

Market PE Ratio 11.3 9.5 9.1 16.7

AN ASSESSMENT OF THE PERFORMANCE OF M&S FROM 2006 TO 2010.

M&S is one of the UKs leading retailers, with over 15 million people visiting their stores each week in 2006. They offer stylish, high quality, great value clothing and home products, as well as outstanding quality foods. They employ 65,000 people and had over 450 UK stores, as well as a flourishing international business.

2006

Clothing and Home UK SALES (EX. VAT) 3,644.4M (+0.0%) M&S is the UKs largest clothing retailer. Clothing represents 45.2% of our UK business. In 2005/06, they re-launched Menswear Autograph, expanded their Womenswear Autograph offer and introduced a per una range in Lingerie and Girls Boutique in Childrenswear. Home represents around 4.9% of their UK turnover and offers great value, stylish furniture and home products.

In value terms, Womenswear ended the year with 10.5% market share (last year 10.7%); Menswear, 9.5% (last year 9.8%); Lingerie 24.1% (last year 25.5%) and Childrenswear 4.1% (last year 4.3%)

Food UK SALES (EX. VAT) 3,630.6M (+7.0%) Food accounts for 49.9% of their UK business and they have a market share of 3.2% (source: TNS). In 2005/06, they re-launched the preservative-free Marks & Spencer Cook! range, extended Eat Well to over 1,000 products and started to sell only Fairtrade coffee. They had 144 Simply Food stores across the UK.

Total Food sales grew by 7% to 3.6bn and also enjoyed a 3.6% increase in like-for-like sales. Throughout the year, key areas such as fresh produce, particularly fresh fruit salads and juices, as well as meat, delicatessen and Food to Go products experienced strong growth. Christmas was particularly successful with like-for-like sales growing 5%. Sales in the last quarter continued to improve, helped especially by a healthy eating campaign which included 200 newly developed products.

International SALES 522.7M (+14.7%) Their International business comprises wholly-owned stores, in the Republic of Ireland and Hong Kong, and 198 M&S branded franchise stores worldwide, including 22 stores opened in 2005/06. In March, they agreed to the sale of Kings Super Markets, the US supermarket chain, for 35.4m ($61.5m) in the last part of the programme to refocus the business.

2007

Clothing & Home UK sales (exc. VAT) 4,002.8m (+9.6%) In 2007, they had a market share of 11.1% (source: TNS World panel) and sales accounting for 44.8% of our UK business. In womenswear they expanded the Autograph range and the fast fashion choice in Limited Collection; in menswear, Blue Harbour remains the UKs biggest mens casual wear brand; and grew their lingerie market share to 26.1%, offering clearly defined brands; and in childrens wear they reversed the poor performance with stronger ranges. Home, representing 5.4% of their UK business, has had two years of strong growth. Food UK sales (exc. VAT) 3,974.7m (+9.7%) In Food, they have a market share of 4.3% (source: TNS Worldpanel). In 2006/07, we launched a range of 120 Nutritionally Balanced ready meals which are free from artificial colours, flavours and hydrogenated fats and follow government salt, fat and sugar guidelines. Eat Well accounts for around 30% of food sales and some 1,300 products. Simply Food grew from 144 stores to 205 across the UK, including franchise stores in BP Connect forecourts, motorway service stations, railway stations and airports. International UK sales (exc. VAT) 610.6m (+16.8%) The international business accounts for 7.1% of Group turnover and has grown to 219 franchise stores in 34 territories worldwide as well as eight wholly-owned stores in

Hong Kong and 13 in the Republic of Ireland. During the year, they entered four new territories and opened 36 new stores including our largest ever franchise store in Dubai at 52,000 sq ft. In May 2007, we opened our first store in Taiwan under a joint venture with President Chain Store Corporation. UK sales rose by 9.7% to 7.98bn (last year 7.27bn). Food sales grew by 9.7%. General merchandise grew by 9.6% with clothing up 9.2% and home up 13.1%. Group operating margins grew to 12.2%, up from 11.0% last year. Group profit before tax rose by 28.5% to 965.2m (last year 751.4m).

They saw increases in market share, both by value and volume, in all categories during the year. The share of the UK clothing and footwear market went up from 10.4% to 11.1% and in food our share ended the year on a new high of 4.3%, up from 4.1%.

The website, www.marksandspencer.com, performed well, reaching sales of over 1 00m for the first time. In March 2007, M&S launched the new website. The international business also performed well. M&S built a strong franchise operation and now have 219 stores in 34 territories. Turnover, including the eight wholly-owned stores in Hong Kong and 13 in the Republic of Ireland, rose 16.8% to 610.6m (last year 522.7m) while operating profits rose 33.2% to 87.5m (last year 65.7m).

M&S Money is benefiting from our partnership with HSBC, with share of profits more than doubling from 9.6m to 19.5m. Over three million people now use the & More credit card, relaunched during the year, and they have over 100 Bureaux de Change at the stores serving 3.8 million customers.

2008

Clothing and Home UK sales (excluding VAT) 4,059m (+1.4%) Market share of 11.0% and volume market share of 11.2% (source: TNS Worldpanel) and sales accounting for 48.9% of the UK business.

Food UK sales (excluding VAT) 4,250m (+6.9%) Food accounts for 51.1% of the UK business and have a market share of 4.3% (source: TNS Worldpanel). M&S opened 98 Simply Food stores growing the portfolio to 299 across the UK, including franchised stores in BP Connect forecourts, motorway service stations, railway stations and airports.

International Sales (excluding VAT) 713m (+16.8%) The International business accounts for 7.9% of Group turnover and has grown to 278 stores in 39 territories globally. During the year, M&S entered 4 new territories and opened 38 new stores.

In 2007/08 M&S continued to make progress against the plan. They sold more goods to more people, reporting the biggest volume increase in sales in eight

years, with volume market share in clothing and footwear at 11.2%. At the same time, they held their lead in the value market for clothing and footwear achieving 11.0% market share. Clothing and home sales were up 1.4% to almost 4.06bn. Per una also performed strongly under the leadership of George Davies, reporting sales of more than 428m.

In food, a good performance saw sales increase from 3.97bn to almost 4.25bn, and value market share remain steady at 4.3%. M&S Money continues to benefit from the partnership with HSBC, with 3.8 million customers now signed-up to an M&S Money financial product. M&S Money now has more than 3.1 million M&S Money credit cards in circulation, 114 bureaux de change in our stores, and it served 4.8 million travel money customers during the year.

2009

General Merchandise 3.9bn sales (-3.5%) With more than 1 in 10 clothing items bought from M&S, they are the UKs largest clothing retailer. They lead the market in womenswear, lingerie and menswear and have an expanding kidswear and home business. Food 4.2bn sales (-0.1%)

International 898m sales (+25.9%)

With a portfolio of owned and franchised stores, the International business is on plan to achieve 15 to 20% of Group revenues by 2010/11. In 2008/09 sales benefited from an additional 32 stores joining the chain. They now have 296 stores in 40 territories.

M&S Direct 324m sales (+19%) M&S Direct is key to improving customer convenience and service, helping them to reach a new generation of shoppers. They are on target to achieve 500m in sales by 2010/11.

2010

General Merchandise 4.1bn sales (+4.0%)* Food 4.3bn sales (+1.8%)* International 949m sales (+5.7%)* With a portfolio of over 320 owned and franchised stores in 41 territories they continue to grow the International business.

AN ASSESSMENT OF THE LIQUIDITY OF M&S FROM 2006 TO 2010

Liquidity Ratios: Assess the ability of the company to service short-term liabilities as they fall due (i.e. short-term survival of the business). They are concerned with a firms ability to generate enough cash to continue in existence. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Common liquidity ratios include the current ratio and the quick ratio. A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. Between 2006 and 2010, M&S holds a healthy current ratio between 1.6 and 2.1 and a quick ratio between 1.4 and 1.8. This shows that M&S is in a strong and healthy position to generate liquidity and meet its short term obligations.

ECONOMIC FACTORS AND GROWTH PROSPECTS

The economical factors that could affect the business of marks and Spencer are inflation, unemployment, income, interest rate, economic growth, exchange rate and price of factors of production. These factors are to be considered and taken care of while they are operating for their business. However relative recession and proof industry can be adopted to face the above mention factors. (Jain, 2010) Currently the economic outlook is very uncertain and this is more than likely to affect retail sales, as people do not have the spare cash to spend on luxury items such as clothing and food luxuries. Marks & Spencer have been hit by this and have recently closed a number of stores and have had to make job cuts of 2% of their 70,000 staff. And also to show what affect the recession has had, they took the decision to have two days of 20% discounts in the run-up to Christmas. They have also recently introduced a 20% of all Wine and Champagne to keep up with their competitors. Marks & Spencer have had to change the way they market themselves so that they can try and stay ahead of the recession. Following the appointment of Marc Bolland, M&S has reported an increased focus on creating greater differentiation across its sub brands and increasing the role of the M&S brand both of which are positive moves for the retailer. Rejuvenating its portfolio of own brands is a good strategy, as it will enable M&S to create distinct brands which can target different customer groups more effectively and should limit the amount of overlap in ranges which remains an issue for the retailer. (Datamonitor, 360) M&S is rebuilding its international presence after selling many of its overseas assets in the wake of poor performance in its core market at the start of the decade. Today M&S has a presence (through local subsidiaries or franchises) in 42 territories across Europe, Asia, and the Middle

East. The retailer is looking to take on leased stores on mainland Europe with the first store in Paris which opened in November 2011. M&S is positioned seventh in the global department store market with a share of 3.2%. It is the leading department store operator in the UK with a 31.5% market share and second in Europe behind El Corte Ingls. (Datamonitor 360, 2011) M&S has pushed forward with its international expansion in the past two years, utilizing various expansion methods such as franchising and joint ventures. The retailer has achieved the most rapid expansion via its franchise business, with 24 new franchise stores opened in 2010/11 alone. This is a low risk option and has been adopted to enter countries such as Egypt, Russia and Turkey. It is advisable for M&S to continue its use of franchising to enter slightly riskier markets as it reduces the investment required, though profits are compromised. While other international retail markets are facing economic challenges, careful identification of new markets suitable for further expansion will secure a healthy new revenue stream and make the retailer less exposed to the difficult British retail market where it is a mature player and growth opportunities are more limited. (Datamonitor 360, 2011)

References
BBC News | BUSINESS | Marks & Spencer profits top expectations. (2012). [ONLINE] Available at: http://news.bbc.co.uk/1/hi/business/96531.stm. [Accessed 6 April 2012]. Datamonitor., (2012). Marks & Spencer profile. [ONLINE] Available at: http://360.datamonitor.com.ezproxy.westminster.ac.uk/Product?pid=CM00206004&view=d0e37. [Accessed 11 April 2012]. Jain. S., (2010). Marks and Spencer - PEST and Information Systems case study. MARKS AND
SPENCER - PEST AND INFORMATION SYSTEMS CASE STUDY . [ONLINE] Available at:

http://www.santoshjain.com/2010/11/marks-and-spencer-pest-and-information.html. [Accessed 7 April 2012]. Marks & Spencer | Investors | Reports & publications |., (2010). [ONLINE] Available at: http://corporate.marksandspencer.com/investors/reports_publications/2010. [Accessed 6 April 2012]. Wood. Z., (2009) A new face, but the same old problems at M&S | Business | The Observer . [ONLINE] Available at: http://www.guardian.co.uk/business/2009/nov/22/bolland-marksspencer-problems. [Accessed 7 April 2012].