Marks and Spencer : HALF YEAR RESULTS FOR 26 WEEKS ENDED 1 OCTOBER 2022

Strong trading performance

• Profit before tax & adjusting items £205.5m (2021/22: £269.4m)
• Food sales up 5.6%; strong growth in franchise & hospitality, with other categories well ahead of 19/20
• Food adjusted operating profit £71.8m reflecting value investment and cost pressures
• Clothing & Home sales1 up 14.0% with store sales up 18.8%, online up 4.9% against strong comparatives
• Clothing & Home adjusted operating profit £171.4m; reflecting strong sales growth and full price mix
• Ocado Retail loss of £0.7m (2021/22: profit £28.1m) as demand reverts and capacity grows
• International constant currency sales up 13.7%; operating profit before adj. items £39.0m
• Statutory profit before tax of £208.5m (2021/22: £187.3m)

Reshaping for growth and increasing resilience to outperform in the downturn

• Food volume outperforms market; Gist acquisition completed
• Clothing & Home rebuilding style and value, with growth in market share and profitability
• Ocado Retail driving customer growth; re-energising proposition under new leadership
• International building an increasingly global business through strong partnerships
• Accelerating store rotation; strong pipeline to FY25 of 10 new full line and 27 new food stores
• Digital and online investment driving growth; sales of third-party brands more than double
• Cost reduction and efficiency programme building for FY24
• Robust balance sheet and access to substantial liquidity

Stuart Machin, Chief Executive said:

"Trading in the first half has been robust with both businesses growing ahead of the market, reflecting the beginnings of a reshaped M&S. In Food, investment in trusted value has driven top-line growth but short-term profit has been reduced, although the acquisition of Gist gives us control of one of our biggest cost and efficiency levers. Clothing has delivered a stand-out performance from a market leading position in value with improving style credentials. The programme to renew and rotate our store estate is driving sales and quick paybacks, while the M&S App now accounts for over a third of online Clothing & Home sales. At Ocado Retail, the customer proposition is being re-energised under new leadership. Underpinning our business is an improved balance sheet with reduced debt and a strong cash position.

This progress means we face into the current market headwinds with an increased resilience and level of confidence. Looking beyond the current stormy weather, much is in our control and our mandate is clear - to step up the pace, accelerate change, drive a simpler, leaner business and invest in growth opportunities to build a reshaped M&S."

Group Results (26 weeks ended)	1 October 22	2 October21	Change vs 2021/22 (%)
Statutory revenue	£5,538.2m	£5,105.3m	8.5
Sales1	£5,563.6m	£5,112.9m	8.8
Operating profit before adjusting items	£280.7m	£363.2m	(22.7)
Profit before tax & adjusting items	£205.5m	£269.4m	(23.7)
Adjusting items	£3.0m	£(82.1)m	(103.7)
Profit before tax	£208.5m	£187.3m	11.3
Profit after tax	£166.7m	£159.9m	4.3
Basic earnings per share	8.5p	8.2p	3.7
Adjusted basic earnings per share	7.8p	12.1p	(35.5)
Free cash flow	£(215.5)m	£287.6m	n/a
Net debt	£2.93bn	£3.15bn	(7.0)
Net debt excluding lease liabilities	£0.63bn	£0.82bn	(23.2)

There are a number of non-GAAP measures and alternative profit measures (APMs), discussed within this announcement and a glossary and reconciliation to statutory measures is provided at the end. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability. Refer to adjusting items table below for further details.

¹All references to 'sales' throughout this announcement are statutory revenue plus the gross value of consignment sales excluding VAT.

OUTLOOK

As we enter what is traditionally our strongest quarter the business continues to trade well. Trading in the first four weeks of the second half is in line with forecasts, with Clothing & Home sales up 4.2%, Food sales up 3.0% and International up 4.1%.

Overall, we expect to deliver an adjusted profit before tax in FY23 for our main businesses, including Gist, similar to the expectations set out at our FY22 results. This excludes business rates relief and the prior year contribution of Russia from the base as well as Ocado Retail, which is now expected to record a loss.

Across all M&S markets it is highly likely that conditions will become more challenging in FY24. However, the far-reaching changes made over the past few years, together with a reinvigorated product offer and strong value for money credentials provide some insulation from the gathering storm. In addition, the M&S customer base has slightly advantaged demographics.

Under new leadership, steps are now being taken to accelerate migration into growth channels - online and high performing modern stores - whilst at the same time bringing forward plans to streamline the business and reduce costs. The combination of technology-driven efficiency gains, structural cost reduction, supply chain efficiency and simplification is targeted to deliver over c.£150m of cost savings in 2023/24.

The Group enters this period of uncertainty with a significantly improved balance sheet position, with very low refinancing requirements following several years of debt reduction. However, given the macro outlook the board will defer consideration of capital allocation policy and options for reinstating capital returns to shareholders until nearer the year end.

M&S FOOD SALES OUTPERFORMANCE OFFSET BY VALUE INVESTMENT AND COST PRESSURES

M&S Food outperformed the market on both value and volume, but operating profit declined. We delivered resilient sales growth of 5.6%, with LFL sales growth of 3.0%, in a period of market-wide cost and price pressure. The business generated particularly strong growth in hospitality and franchise sales compared with last year. Sales excluding these areas grew 1.9% but remain substantially ahead of pre-Covid levels in line with our strategy to broaden the reach of the business.

Operating profit before adjusting items was £71.8m as compared to £124.0m in 2021/22 excluding £19.7m of business rates relief received in the prior period. The combination of investment in value and a first half weighted increase in operating costs led to the reduction in margin to 2.2%, although this improved through the period (Q1 2.0%, Q2 2.4%).

A reduction in gross margin of 110bps reflected continued investment in quality and price.

• M&S Food did not pass through the full effect of inflation in its cost of goods. This ran at 11% in the period, which - net of cost reduction and product mix - impacted the overall gross margin by c.70bps.
• As demand patterns changed, waste and stock loss also increased at the start of the period although these have now normalised.

In addition, the business experienced significant cost growth, with overall costs up 8.4% on last year (ex-rates relief), resulting in a c.70bps reduction in margin.

• This was partly driven by the annualisation of logistics costs increases for fuel and transport in H2 last year, which impacted cost growth by c.1.0%

• In addition, the timing of investment in areas such as technology, data and digital was first half weighted adding 3.4% to cost growth

The acquisition of Gist Limited, which completed at the end of the period, should also help alleviate these cost pressures as we proceed with its integration into M&S.

Investing in trusted value: The strategy for M&S Food is always to provide higher quality, sustainably-sourced food at outstanding prices. At a time when family budgets are under stress it is a priority for us to sustain 'trusted value' and provide assurance for our customers.

• At the start of the year, 'Remarksable' value was relaunched focusing investment on everyday lines offering M&S quality at outstanding prices and the resulting demand has been very strong.
• The range also includes 'bigger packs, better value' on c.40 lines offering c.5% savings per unit volume and this month we 'locked' the prices of 100 family favourites through to 2023.
• The Dine-In programme has been expanded to include the Gastro range in an 'always on' family meal deal for four. At £12 this offers a high-quality, great-value alternative to eating out.

Accelerating the pace of innovation: During the period c.900 new products were introduced, up 4% on last year.

• Making M&S Collection the UK's leading premium tier for taste in categories such as soup and a first-to-market introduction of artisan sourdough in the in-store bakery. Overall bakery sales have grown by 26% since 2019.
• Resetting the soft drinks category over a hot summer, driving double digit growth.
• Introducing top performing new 'food on the move' products including 'falafel mezze' and 'bang bang' chicken salads.

Renewal roll-out performing well: The M&S Food strategy is to shift to larger stores in the renewal format which offers greater choice in core categories, appealing to a broader range of customers.

• New stores in the renewal format achieve higher sales density and are more operationally efficient.
• During the period 7 stores were converted to the new renewal format. Food sales in the larger, full renewal format stores opened in 2021 increased 17.8% in the period.

Taking control of the M&S Food supply chain: The acquisition of Gist Limited was completed, enabling M&S to address the significant headwind of supply chain costs.

• The acquisition eliminates an onerous cost-plus management contract and gives M&S control of its Food supply chain network for the first time.
• This creates immediate benefits, removing annual management fees running at c.£25m and enables near-term productivity improvements as costs are addressed. A programme of network investment will be developed to create a modern, fit for purpose operation reflecting the unique needs of the M&S Food supply chain.

CLOTHING & HOME REBUILDING STYLE, VALUE AND PROFITABILITY

M&S Clothing & Home delivered strong growth with total sales up 14.0% and LFL sales up 13.7%. Full price sales participation was broadly level on last year and well above the historic average. Market share increased 50bps to 9.1% (source Kantar 24 weeks ended 22nd September), and we generated growth across categories and channels.

Store sales were up 18.8%. Growth was driven by stores in city centres and shopping centres reflecting the return to more normal trading patterns, although high streets continued to lag. Online sales increased 4.9% and were 32% of total Clothing & Home sales, with continued strong growth in traffic and increased average order values, partly offset by higher returns rates.

Operating profit before adjusting items was £171.4m as compared to £128.4m in 2021/22 excluding business rates relief of £27.8m received in the prior period, an increase of 33%. Strong first half net margins of 9.8% reflect the rebound in store sales, a steady full price mix and operating leverage due to sales growth.

Value for money and style improving with shape of buy: M&S Clothing & Home continues to perform well on indicators of improved value for money and style, with value perception leading the market, and style perception steadily increasing.

• The shape of buy has been improved, by removing duplication and deepening core product programmes while also investing in emerging growth categories such as Kidswear and brands.
• Womenswear grew sales 15% in the period despite 5% fewer options and the overall business had 276 lines achieving sales over £1m in the first half. Sales in these lines are up 25% on 2021/22.

Strong growth in formal and event driven categories:

• Womenswear generated particularly strong growth in dresses, which were up by more than 50% and the 'holiday shop' also grew strongly.

• Men's formal shirts and smart wear were also up by more than half, reflecting improved availability and customers' focus on key occasions such as weddings, while casual sales also grew.

Clothing & Home renewal format encouraging: During the period a full line renewal store was opened in Stevenage, with the nearby legacy store in Welwyn Garden City closing.

• The store features a more intuitive layout with all key departments visible from the entrance and a redesign including fitting rooms, lighting, navigation and flexible feature displays.
• Technology runs throughout the store, including self-service checkouts in Clothing & Home, digital click and collect, digital ordering in the café, and increased use of RFID to reduce loss, improve stock accuracy and efficiency.
• The store outperformed its business case in its first three months of operation. It is attracting a younger shopper profile, over indexing on kidswear, home and beauty and has high levels of cross shopping.

Initial steps to unlock supply chain cost opportunity: Today, the Clothing & Home supply chain has an end-to-end cost to serve of c.15% which affords a substantial opportunity for efficiency by transforming stock flow from source to shelf and rapid replenishment back to shelf for returns. This includes:

• Changing from a near 100% singles picking and singles delivery process to one where a high proportion of product is delivered in full launch and ratio packs whilst continuing to reduce the proportion of hanging products towards carton fill.
• Holding more stock upstream and at source and reducing multiple handling of stock which adds labour cost, traps stock and drives markdown.
• Maximising the use of omni-channel capacity and capability to fulfil online orders. A same-day click and collect pilot was recently launched in 15 stores.
• Improving returns processes to ensure returned stock is back on sale at pace, increasing revenue recovery and availability. Already this process has reduced from an average of 20 days to less than 10.

OCADO RETAIL RE-ENERGISING UNDER NEW LEADERSHIP

Ocado Retail revenue declined 4.2% and the contribution to group share of net loss was negligible at £(0.7)m.

Re-energising the customer proposition under new leadership: During the pandemic, Ocado Retail experienced very strong trading conditions, which translated into a strong profit performance.

• Following this period of demand distortion, a renewed attention is now required to reinforce Ocado Retail's unrivalled proposition of market leading quality, service and choice underpinned by M&S Food.
• The business is now operating under a new leadership team focused on restoring the core of the customer proposition. Initial steps include the relaunch of the group's platform and front-end website later this year and improved collaboration with M&S Food to make more of the combined offer.

	M&S financial period
2022/23	Q1	Q2	H1
Average orders per week (k)	385	374	380
Retail revenue (£m ex VAT)	557.5	531.5	1,089.0

Notes: Retail revenue comprises revenues from Ocado.com and Ocado Zoom

Strong growth in new customers: Market conditions for all online food companies are still normalising after the pandemic and as a result basket sizes have reduced with the customer order pattern having shifted back towards the end of the week.

• Despite the decline in revenue, customer growth was strong at 17% as was growth in average orders per week at 5% as customers reverted to smaller baskets and sought greater value in response to inflationary pressures.
• M&S's share of Ocado baskets performed well, increasing their participation in sales, reflecting the value of M&S product in difficult times.

Increased fixed costs and short-term headwinds: As previously reported, increased fixed costs because of CFC capacity expansion combined with higher fulfilment and delivery costs, including sharp increases in the cost of utilities and dry ice weighed on margin.

• The impact of increased fixed costs will diminish as the CFCs ramp-up;
• As online demand receded so competition for customer acquisition intensified leading to unusually high marketing costs, although these should be mitigated over time.

Capacity for substantial growth: The overall result in the near term reflects a combination of post pandemic reversion, increased capacity and cost inflation, the majority of which is expected to be temporary.

• These pressures are impacting on all online food businesses but the strong continuing customer growth at Ocado Retail together with the unexploited potential in the extended range and M&S offer illustrate the future potential.
• There is substantial scope for medium-term growth as the customer proposition is reset and as a result of the more efficient CFC pick operation.

DRIVING IMPROVED PRODUCTIVITY THROUGH STORE ROTATION

The objective for the M&S store estate is to create a more focused group of high productivity full line stores, fit for omni-channel retailing and a growing pipeline of bigger, fresher, Food locations with high quality click and collect services. New stores generate higher sales productivity and profitability and are lower cost to operate.

Rotation improves the quality of earnings: As with most retailers M&S has few stores which make a cash loss on a rent adjusted basis. However, we continue to have a tail of low productivity stores, with contribution margins in Clothing & Home well below the estimated average of c. 22% and well below estimated incremental online margins at c. 26%. As a result, rotation out of the tail can improve profitability in the medium term due to the increased contribution of new stores and the recapture of sales online at a higher margin. To achieve our stated profit and growth objectives, rotating into fewer high productivity modern omni channel stores is critical and we aim to accelerate this programme.

Grasping nettles to accelerate change: In the full line estate, the aim is to accelerate a five-year plan to reduce the net store base which currently totals 248 stores down to c.180 through closures and relocations. During the first half 2 new full line stores opened at Colchester and Stevenage and 3 were closed.

In the M&S Food estate, the ambition is to open up to c.100 new Food stores in new locations over the next five years in the bigger, fresher Food format of 12-15,000 square feet with good access and parking. During the first half 3 of these new Simply Food stores opened at Banbridge, New Milton and Wyvern Derby.

The current pipeline of new openings over the period to FY25 includes 10 full line stores and 27 Food stores and the business continues to actively market for new opportunities. New stores are being secured on strong terms, with short leases and they are generating substantially improved sales productivity compared with legacy locations and quick paybacks on the net capital invested. For instance, 2 stores were opened in H1 2021/22 at Paisley and Sears Solihull. Following 12 months of trading, both are outperforming their business cases and paying back the net capital invested in just over 2 years.

Our recent experience confirms that the programme can be accelerated by growing the pipeline of replacement stores, and recapturing sales online and in existing nearby stores, whilst also managing the cost-effective exit from legacy locations and leases. During the period, we started a programme to increase recapture of sales from closure stores to nearby stores and online by increasing customer data capture and targeted marketing. In some cases, once we have exited a legacy store, it is possible to sell the freehold or long leasehold, while in others a residual liability remains to the end of the lease term. However, we believe there are early signs our property development team can reduce exit costs for these sites.

Using technology to lower cost to serve: New stores offer a better shopping environment with omni-channel services including improved click and collect and returns and better use of RFID to manage stock. At the same time our new full-line stores that opened in 2019/20 and 2020/21 have a 130bps lower cost to serve than the average full-line store due, amongst other things, to the reduced need for costly singles replenishment given the increased rate of sale and increased rates of self-checkout and contactless returns.

Progress in asset management: Our property asset development programme should generate capital to support our balance sheet from redeveloping or co-developing high value sites such as Marble Arch, Sauchiehall Street Glasgow, and Hammersmith.

The Planning Inquiry into the Marble Arch redevelopment is progressing, and the business is very confident that the proposed solution will produce an outstanding environmental and aesthetic outcome that will be critical to the restoration of the western precinct of Oxford Street which is in decline.

INVESTING IN DATA, DIGITAL AND OMNI-CHANNEL SERVICE

During the last three years M&S has invested substantially in developing its ability to interact with customers seamlessly online and in store and whilst enabling them to have product delivered or returned through multiple different channels. We have created a customer data engine containing a significant volume of data and attributes relating to our customer base, quadrupled the number of active app users to c.4m, relaunched and grown the Sparks loyalty programme to c.16m members and invested in developing data science capabilities across M&S.

These improvements have required substantial foundational investment of more than £200m, largely expensed through the P&L. However, this has supported the substantial growth of online sales and is now starting to deliver sales traction through increased personalisation and a better online and in store experience.

Investment has been made in day-to-day activities such as running the website, payment processing, Sparks giveaways and staffing, and research into personalisation. This accounts for c.40-50% of current year spend. In addition, growth investment is focused on:

• Digital product development in the current year including scaling use of the M&S App, new drop ship capability, enhanced stock visibility and the enhancement of the click and collect and returns experience.
• Sparks and personalisation developments including the new delivery pass and Sparks Plus membership and a new decisioning and recommendation platform.
• Data and data science development including the migration to our new enterprise data platform and training.

Moving to an omni-channel shopping experience: The objective of the digital investment is to enable personalised customer interaction to encourage customers to use all our sales channels and services. Known customers who shop with M&S through both the online and store channels spend significantly more than single channel customers, while those with four digital relationships through Sparks, M&S Bank, M&S.com and the App spend even more.

Digital relationships	Annual customer spend (£)	Retention Rate
Unknown	82	41%
One	200	68%
Two	427	80%
Three	813	96%
Four	1431	99%

Driving growth through the App: Customers using the M&S App account for almost a third of spend and we are able to sustain a more timely and relevant dialogue with App users across all our products and services.

• Our objective is to double M&S App usage with a long-term target of 10m users. Over the first half year active App users grew to c.4m at period end vs c.3m last year, with the App now accounting for over 32% of Clothing & Home online sales.
• To drive further growth the business is working towards launching a single digital identity across all M&S related touch points from M&S.com to Sparks, to M&S Bank and eventually including Ocado Retail. The goal is to make the M&S App indispensable to customers and to improve marketing efficiency across the business.

Becoming an attractive partner for brands: The combination of over 30m M&S customers, substantial customer data and engagement alongside omni channel purchase and return opportunities provide a highly attractive potential platform for third party brand partners.

• From minimal activity three years ago Clothing, Home & Beauty brands sales more than doubled to over £70m in the period and important new partners such as Clinique and Dune were added. In the new year, a broader sports offer will be launched.
• A curated approach is driving new customers, frequency and increased spend, while ensuring that majority of orders also contain an M&S product.
• To accelerate growth, drop-ship capability is being introduced, which will remove the costly manual processing of brands through the M&S network and improve customer service.

Increasing personalisation: The business is starting to generate substantial value from the customer data platform by personalising offers and product recommendations, making repeat purchase recommendations and using personalised language.

• For instance, 'frequently bought together' recommendations which show products most typically bought alongside the product just added to basket, are estimated to be worth an incremental £20m of revenue in the programme to date.
• In Food we have demonstrated the ability to drive an incremental £6m of revenue including from 'why not try' offers in recent testing.
• It is anticipated 20-25% of all digital interactions will be personalised this year and we estimate that personalisation will generate more than £100m of annualised incremental revenue for the business. Returns are validated through controls such as 'a/b testing' or creating 'hold-out/control groups' of similar customers to measure performance/returns.

Making it easier to pay and spend at M&S: Our objective is to provide customers with multiple options to pay at M&S and access to appropriate credit opportunities. Sparks Pay was recently launched, creating a digital credit account for Sparks members in a simple one-click payment journey.

BUILDING GLOBAL M&S THROUGH STRONG PARTNERSHIPS

International revenue increased 13.7% at constant currency and the business generated an operating profit before adjusting items of £39.0m as compared with £35.9m in 2021/22, which included a contribution of £2.0m from Russia, which we have now exited.

Strong rebound in Clothing & Home: Growth was driven by Clothing & Home sales in key markets including India, where revenue doubled following the effects of Covid lockdowns on the business last year. Food sales were adversely impacted by the exits from the majority of our operations in France and our chilled offering in the Czech Republic as well as on-going Brexit-related disruption in the Republic of Ireland. On a constant currency basis, overall store sales were up 19%, while online sales declined 9%, but were still up c.150% on pre-Covid levels.

Driving growth with key partners: We have an ambitious programme of expansion with Reliance Retail through our India joint venture. This includes increasing the product offer in growth categories such as Kidswear, the global roll-out of Sparks, and continuing to seek opportunities for new space with 3 new store openings in the period. Partner demand in the Middle East and Asia was also robust with orders recovering from the impact of Covid lockdowns last year, and as the business invested in trusted value.

Improving operations in Europe: European online sales declined reflecting subdued demand, although stores performance was robust. Consignment trading with partners has now commenced and plans are well advanced for EU-based fulfilment from a new logistics centre in Croatia, increasing speed to market and reducing cost.

Recovering profitability in the Republic of Ireland: The business in the Republic of Ireland generated a strong sales performance in Clothing & Home, but the Food business continued to be impacted by substantial costs and disruption related to EU border processes. In time, the continued investment in automation and substitution with Irish-sourced product will mitigate some of these costs. To support the growth of the core business an agreement has been signed for a five-store shop-in-shop trial with roadside retailer Applegreen.

OUTLOOK

FY23

As we enter our traditionally strongest quarter, the business continues to trade well. Trading in the first four weeks of the second half is in line with forecasts, with Clothing & Home sales up 4.2%, Food sales up 3.0% and International up 4.1%.

We are set up well for the peak trading period with improved ranges, a strong pipeline of new product and improved value positioning in both businesses. Although there are continued expected pressures on spend and unseasonably warm weather is delaying the change to autumn/winter buying, we think the peak period will present a lot of opportunity for the business with the added benefit of the unusually timed Football World Cup.

Costs will continue to be elevated although we will annualise some cost increases seen in last year's Q3. We have good visibility of all material cost increases for the balance of the year.

Overall, we expect to deliver an adjusted profit before tax in FY23 for our main businesses, including Gist, similar to the expectations set out at our FY22 results. This excludes business rates relief and the prior year contribution of Russia from the base as well as Ocado Retail, which is now expected to record a loss.

Our expectations for capital expenditure for the year remain unchanged. We anticipate around £400m of spend across the three primary investment areas of technology, supply chain and the store estate.

Setting up for FY24

We expect market conditions to become more challenging in FY24. The combined impacts of the cost-of-living squeeze and the most marked rise in the cost of doing business for many years are creating pressure on margins industry-wide.

All parts of the retail sector will be affected, and this will result in unviable capacity leaving the industry, creating opportunities for the leaner players who remain. We believe that the M&S positioning and the accelerated change underway, give scope for greater resilience and we are very confident the business will emerge with a strengthened market position and prospects for growth.

Relative position of M&S customer and proposition

In highly uncertain market conditions, there is a large variation in plausible forecasts for customer demand. Whilst we are therefore planning on a material contraction in market demand the M&S customer may prove more resilient than some market commentators assume. Overall M&S has a broad base of over 30m customers with on average, slightly higher incomes and age demographics in both Clothing & Home and Food. A high proportion of these are in above average paid jobs or retired. Despite the recovery in demand since the pandemic and return to travel these age groups shielded more and many retain a savings cushion affording some resilience to the headwinds.

Clothing & Home has market share positions of more than 15% in categories which are less acutely exposed to discretionary spend, such as leggings, underwear, sleepwear and school uniforms. Collectively these accounted for over 60% of Clothing & Home sales in the past year more than twice their overall position in the clothing market. The M&S Food business has higher market shares in convenience shopping missions, which means its customer proposition offers additional value beyond the weekly grocery shop.

Categories	M&S Market Share1
Bras	35.6%
Other underwear (Women's)	35.4%
Knickers	29.8%
Women's Nightdresses/shirts	21.8%
Men's nightwear	21.4%
Men's underwear	21.3%
Men's casual trousers	20.7%
Men's separates	20.0%
Tights	20.0%
Women's formal trousers	18.9%

¹Kantar 52 week rolling data to 22 September 2022

A strengthened value position in both businesses

M&S Food offers great value alternatives for customers seeking to save money by reducing eating out. For those scratch cooking, the relaunched Remarksable value range offers everyday lines with M&S quality at competitive prices compared with mainstream supermarkets. While the 'always on' Dine-In offers restaurant quality prepared food for a family of four for just £12.

Alongside this, Clothing & Home has made great strides on value for money since 2018 and now leads the market according to external benchmarks of customer perception, with a substantially larger proportion of the clothing range below £30 than is the case for key peers.

Substantial scope for cost savings

The M&S business is undoubtedly heading into tougher times. But the pace of change has never been greater. Already, more than c.£150m of cost savings have been identified and targeted in FY24 from areas including efficiency of retail operations and the supply chain, optimisation of technology and digital spend and simplification of the organisation. This will be supplemented longer-term by shifting volume into growth channels and rotating the store portfolio.

As outlined, in the Clothing & Home supply chain costs are higher than some industry benchmarks, with potential for optimisation across multiple areas including the returns cycle, store replenishment processes and reconfiguring packaging to reduce handling and shipping costs.

Food supply chain secondary logistics costs have risen by c. 60% over the past four years from 3.7% to 4.9% of sales. In September, the acquisition of Gist Limited was completed enabling M&S Food to take control of its logistics network for the first time, eliminating management fees and enabling the removal of duplicated overheads and other productivity initiatives.

We are also assessing the potential benefits of shared transport fleets across Clothing & Home and Food, to move to more efficient refrigeration and accelerate the in-store LED lighting programme.

Stronger balance sheet with substantial access to liquidity and limited refinancing requirement

The Group enters this period of uncertainty with an improved balance sheet position after several years of reducing debt. As at the end of the half year, the business had cash of c.£770m and committed facilities of £850m. There is limited unsecured refinancing required in the next few years with £199m bonds outstanding to be repaid in December 2023 and £350m in June 2025. The lease liability has also reduced, with visibility for potential further improvements.

For further information, please contact:

Investor Relations:

Fraser Ramzan: [phone]

Media enquiries:

Corporate Press Office: [phone]

Investor & Analyst presentation and Q&A:

A pre-recorded investor and analyst presentation will be available on the Marks and Spencer Group plc website from 7:30am on 9 November 2022.

Stuart Machin, Katie Bickerstaffe and Eoin Tonge will host a Q&A session at 9.45am on 9 November 2022:

Attendees must register in advance of the call. Registration link here

A recording will be available for 48 hours after the call using the following details:

UK Freefone: 0800 032 9687

UK Direct: 0207 136 9233

Replay Global Access link here.

Passcode: 54226499

Fixed Income Investor Conference Call:

This will be hosted by Eoin Tonge, Chief Finance Officer, at 2pm on 9 November 2022:

Attendees must register in advance of the call. Registration link here

A recording will be available for 48 hours after the call using the following details:

UK Freefone: 0800 032 9687

UK Direct: 0207 136 9233

Replay Global Access link here.

Passcode: 74011905.

HALF YEAR FINANCIAL REVIEW

Financial Summary

26 weeks ended				52 weeks ended
	1 Oct 22 £m	2 Oct 21 £m	Change vs 21/22 %	2 Apr 22 £m
Group statutory revenue	5,538.2	5,105.3	8.5	10,885.1
Group sales	5,563.6	5,112.9	8.8	10,909.0
UK Food	3,317.5	3,143.0	5.6	6,639.6
UK Clothing & Home	1,749.7	1,534.6	14.0	3,332.2
International	496.4	435.3	14.0	937.2
Group operating profit before adjusting items	280.7	363.2	(22.7)	709.0
UK Food	71.8	143.7	(50.0)	277.8
UK Clothing & Home	171.4	156.2	9.7	330.7
International	39.0	35.9	8.6	73.6
M&S Bank and Services	(0.8)	(0.7)	14.3	13.0
Share of result in associates and joint ventures	(0.7)	28.1	(102.5)	13.9
Interest payable on lease liabilities	(55.7)	(58.9)	(5.4)	(115.6)
Net financial interest	(19.5)	(34.9)	(44.1)	(70.5)
Profit before tax & adjusting items	205.5	269.4	(23.7)	522.9
Adjusting items	3.0	(82.1)	(103.7)	(131.2)
Profit before tax	208.5	187.3	11.3	391.7
Profit after tax	166.7	159.9	4.3	309.0
Basic earnings per share	8.5p	8.2p	3.7	15.7p
Adjusted basic earnings per share	7.8p	12.1p	(35.5)	21.7p
Dividend per share	-	-		-
Net debt	£2.93bn	£3.15bn	(7.0)	£2.70bn

Notes:

There are a number of non-GAAP measures and alternative profit measures ("APMs") discussed within this announcement, and a glossary and reconciliation to statutory measures is provided at the end of this report. Adjusted results are consistent with how business performance is measured internally and presented to aid comparability of performance. Refer to the adjusting items table below for further details.

Group results

Group sales were £5,563.6m. This was an increase of 8.8% versus 2021/22, driven by Food sales up 5.6%, Clothing & Home sales up 14.0% and International sales up 14.0%. Statutory revenue in the period was £5,538.2m, an increase of 8.5% versus 2021/22. The Group generated an adjusted profit before tax of £205.5m and a statutory profit before tax of £208.5m.

The Group benefited from Covid-related UK business rates relief of £47.5m in 2021/22, which was not repeated this year.

Statutory profit before tax includes total net credit for adjusting items of £3.0m.

For full details on adjusting items and the Group's related policy, see notes 1 and 3 to the financial information.

UK: Food

UK Food sales increased by 5.6%, driven by recovery of our franchise and hospitality businesses following the disruption of the pandemic, as well as higher average selling prices. Excluding franchise and hospitality, sales grew 1.9%.

Change vs 21/22 %		Q1	Q2	H1
Food		6.6	4.5	5.6
Food like-for-like sales		3.4	2.5	3.0
Food ex franchise and hospitality		1.9	1.9	1.9

M&S Food reported sales do not benefit from a direct online grocery presence, with these sales instead reported through Ocado Retail.

26 weeks ended	1 Oct 22		2 Oct 21	Change vs 21/22 %
Footfall, m (average/week)		10.2	9.5	7.4
Transactions, m (average/week)		8.8	7.4	18.9
Basket value inc VAT (£)		14.5	15.9	-8.8
Total sales ex VAT £m1		3,317.5	3,143.0	5.6

¹Includes M&S.com

Transactions increased year-on-year, driven by the recovery of our hospitality and franchise businesses. However, given the typically smaller basket size of transactions in these parts of our business, this has led to a reduction in overall basket value.

Sales vs 2021/22 (%)	Q1	Q2	H1		Sales vs 2021/22 (%)	Q1	Q2	H1
Retail parks	7	3	5		Franchise travel (rail/air/roadside)	114	47	72
Simply Food	2	3	2		City centre	20	14	17
High street	3	1	2		Total	45	26	35
Franchise fuel	-	4	2
Total	3	2	3

26 weeks ended	1 Oct 22 £m	2 Oct 21 £m	Change vs 21/22 %
Sales1	3,317.5	3,143.0	5.6
Operating profit before adjusting items	71.8	143.7	-50.0
Operating margin	2.2%	4.6%	-240bps

¹'Sales' is equal to revenue within the Food business.

The Food business in total generated operating profit before adjusting items of £71.8m compared with £143.7m in 2021/22, with last year's result benefitting from £19.7m of UK business rates relief.

The table below sets out the drivers of the movement in Food operating profit margin before adjusting items.

Operating profit margin before adjusting items	%
2021/22	4.6
Gross margin	(1.1)
Store staffing	0.2
Other store costs	(0.7)
Distribution and warehousing	(0.5)
Central Food costs	(0.3)
2022/23	2.2

• Gross margin decreased c.110bps primarily driven by cost inflation and investment in price. Higher stock loss added to margin pressures, although this improved over the period. These impacts were partly offset by an improved margin mix from our recovering hospitality business.
• Store staffing costs decreased c.20bps, primarily driven by retail restructuring efficiencies enabled by technology improvements in store, partly offset by investment in colleague pay rates.
• Last year, the Food business received c.£19.7m business rates relief from the UK government which was not repeated this year. This, along with inflation in electricity, gas and other store running costs, drove a c.70bps increase in other store costs (c.60bps relating to rates relief).
• Distribution and warehousing costs increased c.50 bps as a result of investment in colleague pay rates and higher fuel, partly offset by productivity efficiencies and lower utilisation of agency workers.
• Central Food costs increased c.30bps, driven by investments in technology, data and digital initiatives, including cloud and other supporting infrastructure, as well as marketing spend.

Ocado Retail Ltd

The Group holds a 50% interest in Ocado Retail Ltd ("Ocado Retail"). The remaining 50% interest is held by Ocado Group plc ("Ocado Group"). Half Year Results are consistent with the quarterly results reported by Ocado Group on behalf of Ocado Retail for the quarterly periods ended 29 May 2022 and 28 August 2022.

		Q1	Q2	H1
Revenue growth vs 2021/22 (%)		-9.8	2.7	-4.2
Active customers (k)		867	946	907
Average orders per week (k)		385	374	380

Notes: Retail revenue comprises revenues from Ocado.com and Ocado Zoom. Average orders per week refers to results of Ocado.com

Revenue declined -4.2% over the 26 weeks to 28 August 2022. While active customer and order numbers have grown, basket sizes have continued to decline to pre-pandemic levels and as consumers seek value-for-money items in the inflationary environment. Revenue performance in the second quarter improved as we annualised the closure of our Erith CFC (customer fulfilment centre) after the fire in July 2021.

£m	26 weeks ended 28 Aug 22	26 weeks ended 29 Aug 21	Change %
Revenue	1,089.0	1,136.3	-4.2
EBITDA before exceptional items	9.8	80.7	-87.9
Exceptional items	31.2	3.4	817.6
Depreciation and amortisation	(28.5)	(19.3)	47.7
Operating profit	12.5	64.8	-80.7
(Loss)/profit after tax	(1.3)	56.3	-102.3
M&S 50% share of (loss)/profit after tax	(0.7)	28.1	-102.5

Exceptional items are defined within the Ocado Group plc Annual Report and Accounts 2021.

Ocado Retail EBITDA before exceptional items was down, reflecting the smaller baskets, under-utilised CFC capacity and higher fulfilment and delivery costs. These offset a reduction in administration costs reflecting the release of management long-term incentive provisions given current trading.

Ocado Retail recognised £31.2m of net exceptional items before tax, predominantly relating to the insurance income for Andover and Erith CFCs (£26.4m) and amounts relating to a change in accounting treatment for one of our CFCs (£6.8m) offset by costs relating to the development and introduction of IT systems as we transition away from Ocado Group IT services, tools and support (£1.9m).

As a result of lower EBITDA and net exceptional costs, M&S Group share of Ocado Retail loss after tax was £(0.7)m.

UK: Clothing & Home

Clothing & Home sales increased 14.0% with continued recovery of store sales back towards pre-Covid levels, and a robust performance by the online business.

Change vs 21/22 %	Q1	Q2	H1
Clothing & Home sales	18.2	10.3	14.0
Clothing & Home like-for-like sales	17.6	10.2	13.7
Clothing & Home stores sales	24.3	14.0	18.8
Clothing & Home online sales	7.0	2.9	4.9
Clothing & Home statutory revenue	17.1	9.2	12.9

To enable greater insight into these movements, we are providing further detail on the performance of each channel.

Online

26 weeks ended	1 Oct 22		2 Oct 21	Change vs 21/22 %
Traffic (m)1		204.0	182.9	11.5
Conversion (%)2		7.0	7.3	(30) bps
Average order value inc VAT pre returns (£)		59.4	55.6	6.8
Returns rate (%)		30.3	25.6	(470) bps
Sales ex VAT £m		554.1	528.4	4.9

¹Traffic: the number of site visits to M&S.com and the app.

²Conversion: the number of orders as a % of the number of site visits.

Following strong performance last year, online sales remained solid with growth throughout the period despite a tough market backdrop. Average order value grew almost 7% reflecting higher average selling prices, largely driven by mix.

The online returns rate increased year-on-year due to the introduction of third-party brands which have a higher returns rate and changes in product mix and customer behaviour. However, compared to a pre-covid returns rate of 28.8%, the increase is driven predominantly by the increase in third-party brand sales.

Stores

26 weeks ended		1 Oct 22		2 Oct 21	Change vs 21/22 %
	Footfall, m (average/week)		4.4	3.7	18.9
	Transactions, m (average/week)		1.7	1.6	6.3
	Average basket value inc VAT pre returns (£)		37.7	35.0	7.7
	Sales ex VAT £m		1,195.6	1,006.2	18.8

UK Clothing & Home store sales increased 18.8%, with all store formats seeing an improvement in sales year-on-year, also supported by higher average selling prices and mix. Average weekly footfall was up 18.9% following Covid restrictions lifting during Q1 last year, contributing to an increase in transactions.

Sales vs 2021/22%	Q1	Q2	H1
City Centre	49	31	39
Shopping centre	42	22	31
Retail Park	19	13	16
Outlet	20	9	14
High Street	8	7	7
Total Clothing & Home stores	24.3	14.0	18.8

Total Clothing & Home

The Clothing & Home business in total generated an operating profit before adjusting items of £171.4m compared with £156.2m in 2021/22, with last year's result benefitting from £27.8m of UK business rates relief.

26 weeks ended	1 Oct 22 £m		2 Oct 21 £m	Change vs 21/22 %
Statutory revenue before adjusting items	1,724.3		1,527.0	12.9
Sales	1,749.7		1,534.6	14.0
Operating profit before adjusting items		171.4	156.2	9.7
Operating margin	9.8%		10.2%	-40bps

The table below sets out the drivers of the movement in Clothing & Home operating profit before adjusting items for the total segment and by channel.

Operating profit margin before adjusting items	Total %		Online %	Stores %
2021/22	10.2		10.2	10.1
Gross margin	(1.5)		(2.9)	(0.9)
Store staffing	0.4		0.4	0.8
Other store costs	(0.5)		0.3	(0.4)
Distribution and warehousing	0.9		0.4	0.7
Central Clothing & Home costs	0.3		(1.5)	0.8
2022/23	9.8		6.9	11.1

Overall across the Clothing & Home cost base, the impact of inflation and investments has been offset by increased leverage from the sales increase year-on-year, leading to favourable movements in costs as a percent to sales.

• Gross margin decreased c.150bps partly driven by headwinds in raw materials, the unhedged portion of currency purchases and freight. The growth in our third-party brands business, which is predominantly online, also has an additional dilutive impact on gross margin.
• Store staffing decreased c.40bps primarily driven by retail restructuring efficiencies enabled by technology improvements in store, partly offset by the investment in colleague pay rates.
• Last year, the Clothing & Home business received c.£28m business rates relief from the UK government which was not repeated this year. This, along with inflation in electricity, gas and other store running costs, partially offset by better cost leverage from higher sales drove a c.50bps increase in other store costs (c.160bps relating to rates relief). Both these cost pressures more heavily impact our stores business.
• Distribution and warehousing decreased c.90bps, as better cost leverage from higher sales, along with a favourable delivery mix offset cost inflation and increased expenditure to service third party brands.
• Central Clothing & Home costs decreased c.30bps driven by better cost leverage from higher sales. This offset increased investment in technology, data and digital initiatives and additional costs to support brands. These investments are all heavily weighted to our online business when allocated by channel.

International

International sales increased 13.7% at constant currency ("CC"), driven by a strong recovery in India after the easing of Covid trading restrictions and solid growth in the Middle East. Our European business was impacted by challenging economic trading conditions, with the rationalisation of markets across France and Russia and a highly promotional online market, partly offset by strong store performance in Ireland.

Store sales increased 19% as we annualise on FY22 Q1 lockdowns across India and Ireland and

customers return to pre Covid buying habits. Online sales decreased 8.6% but remain in substantial growth on 19/20.

Change vs21/22%	Q1 CC	Q2 CC	H1 CC	H1 Reported
Total sales	16.9	10.9	13.7	14.0

26 weeks ended Sales1	1 Oct 22 £m	2 Oct 21 £m	Change vs 21/22 %	Change vs 21/22 CC %
Clothing & Home	365.7	296.9	23.2	22.3
Food	130.7	138.4	(5.6)	(5.0)
Total	496.4	435.3	14.0	13.7
Memo: Online sales	78.4	85.3	(8.1)	(8.6)

¹'Sales' is equal to revenue within the International business.

The strong Clothing & Home sales performance was driven by post-Covid recovery in India and Ireland, which was heavily impacted by lockdowns last year, and strong shipments to the Middle East, despite the exit from Russia.

Food sales declined due to the exits of the majority of our French franchise business and the chilled business in the Czech Republic, and the continuing impact of EU-related border issues on the island of Ireland. Excluding France, sales were level with 2021/22.

Operating profit before adjusting items was up 8.6% to £39.0m, showing strong recovery and resilience despite market exits and continued EU-border related headwinds.

The table below sets out the drivers of the movement in International operating profit margin before adjusting items.

Operating profit margin before adjusting items		%
2021/22		8.2
Gross margin		0.9
Store staffing		0.5
Other store costs		(1.5)
Distribution and warehousing		(0.2)
Central International costs		-
2022/23		7.9

• Gross margin increased c.90bps largely driven by recovery of Clothing & Home store sales post-covid in India and Ireland, improving margin mix.
• Store staffing decreased c.50bps due to better fixed cost leverage from higher sales.
• Last year, the International business received government relief in owned markets and rent concessions in India which were not repeated this year (c.£6.5m). This, along with rising energy prices, resulted in a 150bps increase in other store costs.
• Distribution and warehousing increased c.20bps primarily driven by cost inflation and higher operational and administrative costs.
• Central Internationalcosts increased in line with sales as stores returned to a fully operational state post lockdowns.

M&S Bank and Services

M&S Bank and Services loss before adjusting items was up £0.1m to £(0.8)m. An increase in the bad debt provision due to the deterioration of the macro-economic environment was only partly offset by an increase in the demand for travel money and an increase in credit card sales.

Net finance cost

26 weeks ended				52 weeks ended
	1 Oct 22 £m	2 Oct 21 £m	Change vs 21/22 £m	2 Apr 22 £m
Interest payable	(37.9)	(44.7)	6.8	(85.1)
Interest income	8.5	6.9	1.6	9.6
Net interest payable	(29.4)	(37.8)	8.4	(75.5)
Pension net finance income	14.2	6.4	7.8	13.2
Unwind of discount on Scottish Limited Partnership liability	(2.4)	(1.7)	(0.7)	(4.4)
Unwind of discount on provisions	(1.9)	(1.8)	(0.1)	(3.8)
Net financial interest	(19.5)	(34.9)	15.4	(70.5)
Net interest payable on lease liabilities	(55.7)	(58.9)	3.2	(115.6)
Net finance costs before adjusting items	(75.2)	(93.8)	18.6	(186.1)
Adjusting items included in net finance costs	112.2	(0.9)	113.1	5.6
Net finance costs	37.0	(94.7)	131.7	(180.5)

Net finance costs before adjusting items decreased £18.6m to £75.2m. This was driven by higher pension finance income due to the higher IAS 19 pension surplus in March 2022 compared with March 2021, as well as lower interest on our outstanding bonds as a result of the partial buyback of our 2023 and 2025 maturities in May 2022.

Group profit before tax and adjusting items

Group profit before tax and adjusting items was £205.5m, down 23.7% on 2021/22. The profit decrease was largely due to a decline in Food and Ocado Retail, offset by an increase in Clothing & Home and International operating profits.

As a reminder, Group profits in H1 2021/22 benefitted from £47.5m UK business rates relief.

Group profit before tax

Group profit before tax was £208.5m, up £21.2m on 2021/22. This includes a net credit for adjusting items of £3.0m (2021/22: charge of £82.1m).

Adjusting items

The Group makes certain adjustments to statutory profit measures in order to derive alternative performance measures (APMs) that provide stakeholders with additional helpful information and to aid comparability of the performance of the business. For further detail on these charges/gains and the Group's policy for adjusting items, please see notes 1 and 3 to the financial information.

26 weeks ended				52 weeks ended
	1 Oct 22 £m	2 Oct 21 £m	Change vs 21/22 £m	2 Apr 22 £m
Strategic programmes - UK store estate	(26.3)	(58.1)	31.8	(161.4)
Strategic programmes - Organisation	(14.6)	1.9	(16.5)	14.3
Strategic programmes - UK logistics	-	(1.7)	1.7	21.9
Strategic programmes - International store closures and impairments	-	-	-	0.4
Store impairments and other property charges	(36.3)	-	(36.3)	60.0
Acquisition of Gist Limited	(24.4)	-	(24.4)	-
Remeasurement of contingent consideration including discount unwind	112.2	(0.9)	113.1	5.6
Amortisation and fair value adjustments arising as part of the investment in Ocado Retail Limited	(7.0)	(25.4)	18.4	(32.5)
M&S Bank charges	(1.0)	(1.0)	-	(16.0)
Franchise restructure	0.4	(11.9)	12.3	(41.3)
Directly attributable (gains)/expenses resulting from the Covid-19 pandemic	-	15.0	(15.0)	17.8
Adjustments to profit before tax	3.0	(82.1)	85.1	(131.2)

Adjusting items were a net credit in the period of £3.0m.

A charge of £26.3m has been recognised in relation to store closures identified as part of UK Store Estate rotation plans. The charge reflects a revised view of latest store exit routes, assumptions underlying estimated store closure costs, as well as charges relating to the impairment of buildings and fixtures and fittings, and depreciation as a result of shortening the useful economic life of stores.

A non-cash charge of £14.6m has been recognised within the organisational change strategic programme relating to the updating of assumptions regarding the sub-let of previously closed Merchant Square offices.

A non-cash charge of £36.3m has been recognised in relation to store impairments, driven by an increase in discount rate as a result of changes in the macro-economic environment.

A charge of £24.4m has been recognised relating to the acquisition of Gist to transform our supply chain; £18.2m of charges relate to the settlement of our pre-existing relationship with Gist Limited and there were £6.2m of other costs, predominantly £5.7m of transaction costs incurred.

A credit of £112.2m has been recognised in the period, representing the revaluation of the contingent consideration payable of £190.7m (£156.3m plus interest) for the investment in Ocado Retail Limited. Whilst we have reflected a change in the fair value of the final contingent consideration liability, we are discussing the matter with Ocado Group plc and a range of outcomes is possible.

A non-cash charge of £7.0m has been recognised with respect to the amortisation of intangible assets acquired on the purchase of our share in Ocado Retail partly offset by the related deferred tax credit.

Charges of £1.0m have been incurred relating to M&S Bank, primarily due to the insurance mis-selling provision.

In 2021/22, the Group announced the restructure of our franchise operations in France in response to increased EU border costs and recognised a charge for £10.3m of closure costs. Following finalisation of costs, £0.4m of the provision has been released, with no future costs currently expected.

Taxation

Taxes on income in the interim period are accrued using the tax rate that would be applicable to expected total annual earnings, adjusted for actual tax on adjusting items.

The taxation charge in the income statement for the half year is based on the forecast full year tax rate on profit before adjusting items of 24.8% (last half year 12.4%; last full year 18.2%). This is higher than the UK statutory rate primarily due to the impact of the recapture of tax relief on SLP distributions, which have resumed in the year, and non-taxable Ocado losses.

The effective tax rate on adjusting items is 303.3% (last half year 7.2%; last full year 9.6%). This has been distorted by the £(112.2)m credit relating to the remeasurement of the Ocado contingent consideration. Excluding the Ocado contingent consideration remeasurement would reduce the ETR on adjusting items to 9.0%.

Overall, the effective tax rate on (loss)/profit before taxation was 20.0% (last half year 14.6%; last full year 21.1%).

Earnings per share

Basic earnings per share was 8.5p (2021/22: 8.2p), due to the increase in profit year-on-year. The weighted average number of shares in issue during the period was 1,962.4m (2021/22: 1,957.6m).

Adjusted basic earnings per share was 7.8p (2021/22: 12.1p) due to lower adjusted profit year-on-year.

Cash flow

26 weeks ended				52 weeks ended
	1 Oct 22 £m	2 Oct 21 £m	Change vs 21/22 £m	2 Apr 22
Adjusted operating profit	280.7	363.2	(82.5)	709.0
Depreciation and amortisation before adjusting items	250.6	253.9	(3.3)	510.7
Cash lease payments	(174.0)	(173.1)	(0.9)	(344.3)
Working capital	(148.8)	111.5	(260.3)	239.7
Defined benefit scheme pension funding	(36.9)	(36.3)	(0.6)	(36.8)
Capex and disposals	(183.6)	(125.5)	(58.1)	(213.5)
Financial interest and taxation	(85.4)	(52.6)	(32.8)	(87.6)
Acquisitions, investments, and divestments	(98.7)	(17.8)	(80.9)	(41.4)
Employee-related share transactions	15.0	18.7	(3.7)	39.1
Share of (profit)/loss from associate	0.7	(28.1)	28.8	(13.9)
Adjusting items outflow	(35.1)	(26.3)	(8.8)	(61.8)
Free cash flow	(215.5)	287.6	(503.1)	699.2
Dividends paid	-	-		-
Free cash flow after shareholder returns	(215.5)	287.6	(503.1)	699.2
Opening net debt excluding lease liabilities	(420.1)	(1,110.0)	689.9	(1,110.0)
Free cash flow after shareholder returns	(215.5)	287.6	(503.1)	699.2
Exchange and other non-cash movements excluding leases	7.2	(1.6)	8.8	(9.3)
Closing net debt excluding lease liabilities	(628.4)	(824.0)	195.6	(420.1)
Opening net debt	(2,698.8)	(3,515.9)	817.1	(3,515.9)
Free cash flow after shareholder returns	(215.5)	287.6	(503.1)	699.2
Decrease in lease obligations	109.9	107.9	2.0	216.0
New lease commitments and remeasurements	(141.6)	(38.2)	(103.4)	(100.6)
Exchange and other non-cash movements	17.3	4.4	12.9	2.5
Closing net debt	(2,928.7)	(3,154.2)	225.5	(2,698.8)

The business had a free cash outflow of £(215.5)m, largely driven by lower EBITDA generation, a working capital outflow, increased capital expenditure and the acquisition of Gist. For further detail on working capital movements and capex and disposals refer to the sections below.

Defined benefit scheme pension funding of £36.9m reflects the agreed SLP interest distribution to the pension scheme.

Increased financial interest and tax payments of £32.8m were principally due to the resumption of UK corporation tax payments in the period. No UK corporation tax was paid in the comparative period due to utilisation of FY21 tax losses.

Acquisitions, investments and divestments were driven principally by the payment of £95.4m relating the acquisition of Gist, net of cash received.

Employee-related share transactions decreased due to a reduction in anticipated colleague incentive scheme charges.

Adjusting items cash outflow was £35.1m. This included £20.0m relating to the exit of the Russian franchise business, £11.9m relating to the UK store estate strategy, £1.8m for the Gist acquisition transaction fees and £1.0m relating to the M&S Bank insurance mis-selling provisions.

Working capital

The business had a cash outflow from working capital of £148.8m which was higher than anticipated due to phasing. This partly related to a decrease in payment terms for our Clothing & Home suppliers as anticipated. In addition, stock increased over the period in our Clothing & Home, Food and International businesses driven by both cost price inflation and increased units as we build our holding in advance of the peak trading period across all our main businesses.

Alongside this, quicker supply chain lead times than last year in Clothing & Home resulted in early arrival of stock. However, overall in Clothing & Home, despite the higher stock value at cost, units are lower than pre-covid levels.

Capital expenditure

		26 weeks ended 1 Oct 22 £m		26 weeks ended 2 Oct 21 £m	Change vs 21/22 £m
UK store remodelling			26.0	27.5	(1.5)
New UK stores			20.8	19.3	1.5
International			5.5	5.0	0.5
Supply chain			16.0	14.9	1.1
IT and M&S.com			40.1	23.0	17.1
Property asset replacement			42.3	20.8	21.5
Capital expenditure before property acquisitions and disposals			150.7	110.5	40.2
Property acquisitions and disposals			-	(2.2)	2.2
Capital expenditure			150.7	108.3	42.4
Movement in capital accruals			32.9	17.2	15.7
Capex and disposals as per cash flow			183.6	125.5	58.1

Group capital expenditure before disposals increased £40.2m to £150.7m compared to 2021/22 due to increased investment in property asset replacement and technology.

UK store remodelling costs related principally to 7 Renewals during the half as well as upgrades to Clothing & Home space.

Spend on new UK stores primarily related to opening of 2 new Full Line stores (Stevenage and Colchester) together with 3 new Simply Food stores.

Supply chain expenditure reflects continued investment in our underlying base food infrastructure together with spend on upgrading vehicles and other technology.

IT and M&S.com spend includes costs related to technology replacement and upgrades in stores, continued investment in website development and digital capabilities and further spend on upgrading supply chain infrastructure.

Property asset replacement has increased in the current year versus 2021/22, primarily driven the timing of spend last year, which was weighted towards the second half the of the year due to an in-depth review of the estate being carried out in H1 post the pandemic. This includes roof works and replacement of fridges, freezers, boilers, lifts and escalators.

Capital accruals were higher at the end of 2021/22 compared to 2020/21, as capital expenditure normalised towards pre-pandemic levels after a year in which we had constrained spend for cash conservation measures. This has resulted in a higher cash outflow for capital expenditure in the period.

Net debt

Group net debt increased by £229.9m since the start of the year driven by the free cash outflow and a net increase in lease liabilities.

New lease commitments and remeasurements in the period were £141.6m, largely relating to 5 new UK leases, the consolidation of Gist Limited lease liabilities, lease additions in India, and UK property and logistics liability remeasurements. This was offset by £109.9m of capital lease repayments.

The composition of Group net debt is as follows:

26 weeks ended				52 weeks ended
	1 Oct 22 £m	2 Oct 21 £m	vs 21/22 £m	2 Apr 22 £m
Cash and cash equivalents	772.7	951.9	(179.2)	1,197.9
Medium Term Notes	(1,396.0)	(1,680.6)	284.6	(1,529.5)
Current financial assets and other	110.9	92.6	18.3	99.4
Partnership liability	(116.0)	(187.9)	71.9	(187.9)
Net debt excluding lease liabilities	(628.4)	(824.0)	195.6	(420.1)
Lease liabilities	(2,300.3)	(2,330.2)	29.9	(2,278.7)
- Full-line stores	(902.1)	(944.8)	42.7	(919.5)
- Simply Food stores	(699.8)	(719.4)	19.6	(712.8)
- Offices, warehouses and other	(484.5)	(466.9)	(18.0)	(449.5)
- International	(213.9)	(199.1)	(14.4)	(196.9)
Group net debt	(2,928.7)	(3,154.2)	225.5	(2,698.8)

Our medium term notes include five bonds, with maturities out to 2037, and the associated accrued interest. During the period we bought back part of the 2023 and 2025 bonds, reducing our near-term liquidity draws. The full breakdown of our maturities is as follows:

Bond and maturity date	Value (£m)
Dec 2023, GBP	199
Jun 2025, GBP	350
May 2026, GBP	300
Jul 2027, GBP	250
Dec 2037, USD	194
Total principal value	1,293
Other1	103
Total carrying value	1,396

¹Includes accrued interest and foreign exchange revaluation

Full-line store lease liabilities include £209.7m relating to stores identified as part of the UK store estate strategic programme. Of the remaining full-line stores lease liability, the liability-weighted average lease length is c.26 years, although the average lease term to break is shorter at c.20 years. However, these average lease lengths are skewed by five particularly long leases we hold, with the longest of these having 134 years remaining. These five leases, with a combined lease liability of c.£108m, are not deemed probable for closure in our UK store estate programme as they are currently trading well in locations we wish to remain in. Excluding these five leases, the average term to break of leases outside the programme is c.16 years.

Simply Food store lease liabilities include £24.9m relating to stores identified as part of the UK store estate strategic programme. Of the remaining lease liability, the average lease length to break is c.10 years.

Within offices, warehouses and other lease liabilities, £144.0m relates to the sublet lease on our Merchant Square offices. Average lease length of all other offices and warehouses to break is c.8 years.

International leases relate primarily to India (c.£105m) and Ireland (c.£65m). Average lease length to break in India is close to nil, as the majority of these leases are past the break point, and so we have the flexibility to exit these at any time on several months' notice. Average length to lease break or expiry in Ireland is c.8 years.

Pension

At 1 October 2022, the IAS 19 net retirement benefit surplus was £840.0m (2021/22: £734.2m). There has been a decrease of £198.2m from the start of the year largely driven by revisions of discount and inflation rates since the start of the period.

The most recent actuarial valuation of the Marks & Spencer UK Pension Scheme was carried out as at 31 March 2021 and showed a funding surplus of £687m. This is an improvement on the previous position at 31 March 2018 (statutory surplus of £652m), primarily due to lower assumed life expectancy. The Company and Trustees have confirmed, in line with the current funding arrangement, that no further contributions will be required to fund past service as a result of this valuation (other than those already contractually committed under the existing Marks and Spencer Scottish Limited Partnership arrangements).

The pension scheme is fully hedged for movements in gilt yields. However, on an IAS 19 basis there is an inherent basis risk to the scheme valuation, with the pension assets moving with underlying movements in rates and scheme liabilities exposed to movements in corporate bonds. In a normal period, this always results in some dislocation between movements in the scheme assets and liabilities. However, the recent economic volatility, particularly in bond markets, led to a larger dislocation. Nevertheless, there has been no material worsening of the scheme's overall funding position.

Subsequent to the end of the period, the Company agreed to provide the scheme with a £250m short term liquidity facility to meet excess collateral calls, as a result of the market volatility. The facility has not been used and remains undrawn and expires on 19 January 2023.

Liquidity

At 1 October 2022, the Group held cash balances of £772.7m (Full year 2021/22: £1,197.9m). In the period, as part of our approach to liability management, the Group bought back c.£150m of bonds due for maturity in 2023 and 2025.

The Group currently has an unused £850m revolving credit facility which is due to expire in June 2025. With the facility undrawn, the Group now has liquidity headroom of £1.6bn.

Dividend

At the full-year results in May 2022, we stated that the board would consider the scale and timing of a resumption of dividend payments closer to the year end. Consistent with that announcement, we have not declared a dividend at these results.

Statement of financial position

Net assets were £3,013.3m at the period end, an increase of 3.3% since the start of the year largely due to free cash generation.

Important Notice:

Statements made in this announcement that look forward in time or that express management's beliefs, expectations or estimates regarding future occurrences and prospects are "forward-looking statements" within the meaning of the United States federal securities laws. These forward-looking statements reflect Marks & Spencer's current expectations concerning future events and actual results may differ materially from current expectations or historical results. Any forward-looking statements are subject to various risks and uncertainties, including, but not limited to, failure by Marks & Spencer to predict accurately customer preferences; decline in the demand for products offered by Marks & Spencer; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of Marks & Spencer's brand awareness and marketing programmes; general economic conditions including, but not limited to, those related to the Covid-19 pandemic or a downturn in the retail or financial services industries; acts of war or terrorism worldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets. For further information regarding risks to Marks & Spencer's business, please consult the risk management section of the 2022 Annual Report (pages 45-54).

The forward-looking statements contained in this document speak only as of the date of this announcement, and Marks & Spencer does not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

- Ends -

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09 Nov 20222022Corporate