Marks and Spencer Group PLC

LSE:MKS

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the M&S Q3 Analyst Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Steve Rowe. Please go ahead, sir.

[Steve Rowe, CEO & Executive Director]

Okay. Good morning all, and welcome to our Q3 Trading Statement Conference Call. I'm here with Helen, and you will have seen our press release that we issued this morning. I know it's a very busy day for you all, so I going to keep this on point. We had a mixed quarter. We started off with a challenging October, got better on both sides of the business in the run-up to Christmas. On Food, we invested in price before Christmas, and our seasonal lines performed strongly. But we have a lot to do to get our business back on track, and we're committed to delivering our freehold strategy. Likewise, we held firm in our policy of not discounting in Clothing & Home in a very promotional market. And over the weeks leading up to Christmas, we grew revenue both online and in-stores.We continue to accelerate the first phase of our transformation program, as I hope is evidenced by the flow of news from us this week. M&S is changing. We are reshaping our business for the future and are committed to making M&S special for our customers, employees and shareholders. I'll now take your questions.

[Operator]

[Operator Instructions] We will take our first question from Charlie Muir-Sands from Deutsche Bank.

[Charlie Muir-Sands]

I've got -- they are all quick questions. The first one is I wondered if you could share with us what your full price sales performance was in Clothing & Home over the period. Secondly, whether you could update us on what Food [indiscernible] is for you -- your retail prices was in the period and whether you think we are now at inflation peak or not. And thirdly, whether you can elaborate a bit more on what are those specific plans you've got to arrest what appears to be a bit of a market underperformance in that business per se.

[Steve Rowe, CEO & Executive Director]

Charlie, I'm going to take the last one first, which is Food performance. In total, we are gaining good market share, and Simply Food program was strong again in the quarter. But the key thing in it, I actually tried to talk about it, the issue is our ongoing underlying like-for-like performance. We had a good run into Christmas. And where we corrected prices around Christmas goods, we aim retail to bring prices down on a Christmas dinner. We had a strong performance. The issues within our like-for-like performance are numerous. The first is, say, November, we went to reshape the range, making it much more relevant to more people and to more households. The second is that we want to make sure that we got our values absolutely spot on, which is why we reduced prices in around 225 lines in the run into Christmas. And we want to make sure our organization and operation are right. We got more to do in the supply chain. As we've opened up more Simply Food, it put more pressure on our logistics operation. We've got more to do on availability and more to do on waste. And this work is ongoing, and we're not expecting to see quick results on this, but we are internally making progress, which is the key thing. In terms of the Food inflation point, and our inflation point was around about 2%.

[Helen A. Weir, CFO & Executive Director]

1.7%.

[Steve Rowe, CEO & Executive Director]

1.7%, and which is substantially below the reported number that are coming in the market, and that's part of that price correction also because we're trying to make sure that differential to the market, doesn't just carried away. There are price ceilings in food, which we got to be careful we don't cross. But that's also contributing to a slight -- like-for-like, which is slightly behind the -- versus the market. And in terms of our full-price number, our full price in the quarter were marginally down, and that's because of the shape of the sales. If you remember that we had -- we've moved the sale in Clothing & Home into the end of September, so we got reduced sales in the period at both the start and the finish. But what we did is maintain the full-price stance through Black Friday, which I think is the right thing. And we grew our businesses both in-stores and online on a full-price basis in the period into 25th of December.

[Charlie Muir-Sands]

Understood. And with the online only up 3%, is that again reflective of reduced discounting? Or why have you not seemingly benefited from the strong-channel shift that many other people in the market seem to be reporting?

[Steve Rowe, CEO & Executive Director]

Well, I think [indiscernible] is point out the differentials in our performance between stores and online number reported. But first of all, there was less sale online at the start of the quarter. The full-price performance online is stronger than that in the rest of the business. Secondly, different to the market, we've seen growth again in that period in both stores and online, and I think that's quite important. We haven't seen quite a channel shift everyone else saw, but there is a consistent differential. [ Helen ]...

[Helen A. Weir, CFO & Executive Director]

Yes, I mean, if you look at the gap between our online performance and the overall performance, that's fully consistent, about 6% or 7%, so online performance by quarter, So .com is typically performing 6% or 7% better than the overall category as a whole. Obviously, with very weak October, the categories down as a whole, but the differential's broadly the same.

[Operator]

We will take our next question from Richard Chamberlain from RBC.

[Richard B. Chamberlain, Managing Director of Consumer Retail]

So a couple of questions from me, one on Food, one on Clothing, please. Look, the Food space contribution was a bit lower than I thought for the quarter. Does that reflect timing of store openings? Or does that -- are we seeing some slightly lower productivity of new space opened? That's the first one.

[Helen A. Weir, CFO & Executive Director]

No, it's nothing to do with the timing of openings in the quarter. Obviously, there are things that affect the phasing of stores, but it's -- we're not -- the new stores that we're opening continues to perform very strongly.

[Richard B. Chamberlain, Managing Director of Consumer Retail]

Okay. And the one on Clothing is, you talk about more stock going into the December sale. I wondered if you can quantify that in some way, maybe talk about whether that's going to -- whether you expect that to boost sales in Q4 or potentially be a drag. Is that going to get in the way of new stock coming into stores?

[Steve Rowe, CEO & Executive Director]

We [indiscernible] moving, if I'm going to start, when we saw [indiscernible] to be a bit more out in October. But what I wasn't going to do is change that full-price stance. And I still believe that is the right thing to do. We're trading fairly strong between November and December, and the overhang is about 10% more than last year in terms of the sales stock. In terms of materiality, it's about neutral in this quarter in terms of what it will do to sales. We'll get a little bit from reducing, possibly a little bit less than the full price in the early weeks. What I can tell you, it's clearly on plan, and it's -- we saw -- we said while the top [indiscernible] of the statement, I'm not guiding to certain change.

[Operator]

[Operator Instructions] Our next question is from Anne Critchlow from Societe Generale.

[Anne Critchlow, Equity Analyst]

A question for Helen, please. Just wondering if we could have an update on exceptional cost for the year following the tech outsourcing announcement, including the cash amount. And then secondly, a question for Steve. If you could give some highlights, lowlights, perhaps, at performance between the categories, say, men's, women's, children's, lingerie?

[Helen A. Weir, CFO & Executive Director]

Okay. In terms of [indiscernible] just sort of trying to get back in my mind in terms of the various developments. Obviously, there is the store estate program and the tech [indiscernible]. Although I think the amount of cash on that and the level of cash in the year, obviously, is probably only about GBP 10 million, GBP 15 million. I think it's about GBP 25 million overall, of which some of it will be next year, and those are our estimates at the moment. So I think we're looking at something probably at the order across all of that of maybe GBP 150 million because of the store estate and other things of that type. How much of that is in cash? Probably not that much. I'm sorry, I haven't got the papers in front of me. So it's probably 1/3, I would have talked because there will be a number of rush-outs to close -- associated with the store closures. So that's the best I have off the top of my head, but I'm sure we can provide a bit more detail. Actually, I've just been reminded by a colleague, we've also got the international cash. I forgot the international closures because obviously they are all completed now. But the vast majority of those closures that are coming through are the cash goes out this year even though we took the provision last year. So probably greater proportion of that amount would be cash than I indicated, so I would say, somewhere between GBP 100 million and GBP 150 million at least will be cash. Sorry.

[Steve Rowe, CEO & Executive Director]

[indiscernible] What I can say, with the exception of womenswear, the core divisions were all about the same. Lingerie was the strongest in terms of [indiscernible] and will continue to grow our market share in lingerie. But the other areas that were particularly hit -- it was hit by October trading period, as I've said. In terms of some of the highlights, I mean, anywhere we put value into Clothing was exceptionally good. So the GBP 17.50 would jump up with 61% on a year, GBP 14 [indiscernible], 43% on the year. I think that tells you about where the consumer is in terms of value. And it also tells you where we're getting right [indiscernible]. I think in Food, the situation is slightly different. As I said, we've corrected some prices for Christmas. We were the only retailer who to have brought the prices of Christmas dinner down, as it was down about GBP 10 a year. And we were, again, saw the #1 market share in turkey, and certainly the business grow. But within there, our collection Turkey are top tier, we've got more than 14%. Mint spice, again, driven by collection enterprise, were up 16%. So it really is a case of us continue to perform in those areas where we are especially different, but not niche. I think the thing that is -- we've got to make sure we get absolutely right is there areas where there is the less M&S differential. And candidly one of the area is strong with core vegetables, things like Brussel sprouts, and that's the thing we are going to look at.

[Operator]

[Operator Instructions] We will take our next question from Michelle Wilson from Berenberg.

[Michelle Wilson, Analyst]

Just a couple of questions from me. First of all, in terms of food pricing, is that price reinvestment done now? And do you feel your -- just the pricing is kind of reset? Or is there more still to do? And in terms of this plans for Food in general, what's the kind of mid-term plans now for Food space roll-out? Should we assume -- I know you've already guided down on the space for the current year, how should we think about the next years going forward?

[Steve Rowe, CEO & Executive Director]

If I say the first thing and then, perhaps, Helen can talk about space. In the price investment, we're finished now. We've got to continue, as I said earlier, we've got a number of things to do in Food to continue to push on the like-for-like. We need to make sure that our value is sharper, particularly where there is less of a differential between our products and other people. And we'll continue to do that in this quarter. We need to make sure that we're getting better on our availability, which [ impact ] in availability terms and I'm not happy with that at the moment. We need to make sure we've got our logistics and supply chain right. And in doing so, we need to come back down hard on waste. So there's plenty to do in Food. And the price investment point is one part of the jigsaw, and we're not finished.

[Helen A. Weir, CFO & Executive Director]

Yes, and in the other question related to space, we've looked -- we've done a review of the Food pipeline. Obviously, a number of the stores that we've got next year are already exchanged from the point of view of contract, and so it's hard to change those. The other point that I'd make is that about half of the stores that we actually opened are franchise stores, and those [ hoping] still continuing to roll out. So if you think we were probably originally looking at something around 90 to 100 stores for next year, that would have been our owned stores, roughly about 50 stores of those would probably cutting back by about 1/3. So it's probably about 20 stores fewer next year than we would have otherwise opened in terms of our own stores. What that means in terms of our overall space growth is we've been running at probably 4%, 5% in terms of the contribution of new stores to space growth. That will clearly come down, so I think you're probably looking at something that's more like 2%, 3%, in terms of space growth, that sort of reduction because, obviously, our stores are relatively larger in terms of new space compared with the franchise stores. We're still -- there's still a little bit -- some movement in terms of the pipeline next year, and we're having a number of conversations with landlords because one of the things we're also focused on is making sure that we get the right configuration of the stores that we want as well for ease of use.

[Michelle Wilson, Analyst]

Right. That's very helpful. And just a final question. What's your consumer barometer telling you about the consumer heading into 2018?

[Steve Rowe, CEO & Executive Director]

Consumer barometer says the consumer remains under pressure and either is becoming more and more cautious in their outlook. You can see that coming through pretty much in every area of -- across the U.K. spending. And the spend is under pressure with inflation coming through. In Food, it's an immediate hit on the wallet. But it's coming through elsewhere as well. And what we're seeing is I think I've described the consumer sentiment before, it's fragile and quite volatile, and that's continuing.

[Operator]

And our next question is from Andrew Hughes from UBS.

[Andrew Hughes, Managing Director and Head of the Pan]

I had a question, just moving on to the Clothing & Home space. Are there positive space contribution in Q3? We keep expecting it to go negative, but it seems to sort of hanging in there, that space add. When is going to be the first quarter when it goes negative? Is that going to be Q4? Or is it really going to be into FY '19?

[Helen A. Weir, CFO & Executive Director]

It'll either be Q4. I think it's more likely to be Q1. I mean, the reality is we've obviously got a pipeline in stores that we are committed to opening some time ago, the ones that opened in the first half is [ got back ] that opened in Rushden Lakes, which is doing extremely well -- and obviously, the stores that we closed, we closed in about July. So I think you'll start seeing probably an inflection point this quarter or at the very beginning of next.

[Andrew Hughes, Managing Director and Head of the Pan]

Right, okay. And you're still seeing good, sort of, flowback from closed stores. I think you are quite pleased with that in...

[Helen A. Weir, CFO & Executive Director]

Yes, yes. It continues to get ahead of expectations, as we described at the half year.

[Andrew Hughes, Managing Director and Head of the Pan]

Right, okay. Just one last thing as well in -- others have mentioned the very weak gifting market. I mean, is it that you weren't affected by that? Or is it just too small to make much of a difference?

[Steve Rowe, CEO & Executive Director]

No, we've got some big market shares in gifting areas, and we actually had quite good gifting season, frankly, with one area of exception, that was in beauty packaged gift, that sort of combination gifts. And I think that's probably the area a lots of other people have sort of struggled as well. But [ our actual whole ] Christmas gifting we're pleased with.

[Operator]

We will take our next question from Georgina Johanan from JPMorgan.

[Georgina Sarah Johanan, Analyst]

Just 2 from me, please. Firstly, just on the Clothing & Home gross margin, I appreciate your reiterating guidance there, but obviously, there's 10% more stock going into the sale year-on-year. So if you could just, kind of, give a bit more color on why we don't see gross margin -- sort of incremental gross margin pressure there. Perhaps that was in line with your internal expectations or, indeed, clearance rates are better? Second question, just on Food, please. So I appreciate what you're saying about where there's less differential versus some of your competitors. Obviously, maybe you need to be a bit more competitive on price. But are you actually concerned that there's an increasing proportion of your range, where there's less differential? Because obviously, we've seen some quite encouraging commentary from one of the discounters and some of the Big Four around their premium ranges this year. So just anything you could share on that would be really helpful, please.

[Steve Rowe, CEO & Executive Director]

Do you want to take the margin question?

[Helen A. Weir, CFO & Executive Director]

Yes, so I'll take up the margin first. Yes, you're right, I mean, as Steve commented, we have a bit more -- 7% more stock into the percent of sale, and that was both more than last year and also more than expectation as a result of the difficult month of October that we spoke about earlier. However, there are some current debate in things that would also go against [indiscernible] selling-through well, so we're pleased with the way that it sold-through in the sale. But also we have been slightly better buying margin coming through. We've been running ahead by and large, and do we continuously come through. That's both in terms of the actions that our buying teams are taking and also some of the currency is a little bit better than we had previously planned for. So net-net, so it means we're not changing the guidance that we've given.

[Steve Rowe, CEO & Executive Director]

In terms of the Food structure within the market, lots of people talk about [indiscernible] is doing well. But we can't see that coming through in terms of an impact to us. We have got to be careful, but the differential between our products and everyone else is worth the money, and that's important. But the areas that we see more difficult [ spending on the ] commodity item is the KVIs. And as I said -- talked earlier about brussels sprouts, we have core vegetables that were down on the year for us. On the flip side of that, specialty turkeys' collection, turkey is 14% up on the year. So I think it's about making sure that we can continue to maintain the differential -- an invisible differential to the customer. And I don't think it's about top tier per se. People [ who are ] coming for us, it's for something that is special and different. We've got to make sure that, that range is relevant, though, and that's why I mean -- when I talked to the half year about not getting carried about some of the, sort of niche products we had perhaps earlier in the summer.

[Operator]

Our next question is from Simon Bowler from Exane.

[Simon Bowler]

Another question just around the Food business, if it's okay. So it's based on kind of cutting prices on 200 lines in the most recent period. Is your perception that consumers are noticing that that's a significant enough range cut for consumers to notice that and that are owed to your value perception on those ranges? Or do you think what you're saying necessitates a kind of a sharp overall price cut across those kind of key value items?

[Steve Rowe, CEO & Executive Director]

Yes, look, so I think there's a couple of things there. Where we took action before Christmas, we took it really around the Christmas dinner. Things like party food, we pulled down across the 225 lines, we pulled the prices down by around 10%. I've talked about turkey is already up. Our volume in turkey was up substantially about 9%. Mince pies, we were 16% up on the year. And party food, particularly we lowered the prices, we're up 16% as well. So I think we've got the numbers right. I think what we got to do more work on is some of those middle-tiered prices. Our KVI is actually benchmarked to the big 4. I think we're pretty clear on most. But it's about making sure that there's right prices across the whole architecture, and that's the work we're talking into now.

[Simon Bowler]

Okay. And is your hope in terms of funding those price cuts, some of the opportunities both your medium term around the kind of organization operational cost side of things will be sufficient to be able to fund those price cuts? And is that how you're looking to manage this through?

[Steve Rowe, CEO & Executive Director]

Yes, we look at our range of options here, but importantly, we have got programs on value engineering and that sort of thing. But we've also got the operational cost savings I talked about at the half year. And we'll make sure that we balance out the use of those savings in margin and in price.

[Operator]

And our next question, it's from Darren Shirley from Shore Capital.

[Clive Black, Head of Research]

You got the short fat one, it's Clive. Two questions, if I may. On the Food side of things, it looks like Waitrose has underperformed over the festive period. Does it suggest that the discounters might be starting to lap up against Marks & Spencer now in Food in the U.K.? And in that respect, given that it was a premium Christmas across all fixtures, you are more vulnerable to that particular channel now, taking up Steve's points about KVIs? And secondly, a lot of the spiel about the great and the good old Christmas 2017 has suggested it's an online Christmas. How would you characterize the M&S' online capabilities relative to the market now? And what do you think are the priorities for that channel for your business?

[Steve Rowe, CEO & Executive Director]

Okay, perfect. So I think in terms of where the market is performing, certainly, the discounters are approaching to the market across the pace. And we can see that particularly on those KVI lines. We have continued to grow that or better and best ranges, but we've got to get that probably better and absolutely right, it's going to be relevant, and it's going to have a differential that is worth [ the relating ] charge. We got some of that right, and got it right around Christmas, and we haven't actually got it all right in our core range. And that's a little bit more to do. I believe that if we get that development right, and as I said, we're working on that, we get that pricing structure right. And then I think it's most about the price. And I think that we can make sure we have got a differential offer to the market. In terms of our online capability, it's fair to say we have not performed perhaps as strongly in terms of the total number on the documents as the market would suggest. However, the key thing here is our shape was different [indiscernible]. We've actually got growth in the last few months into Christmas. We got growth in both channels, which is slightly different to the market. And I think it would be fair to say that whilst we got need to work and [indiscernible] there is more to do to make it a leading-edge proposition that would allow us to compete in the future in the digital world. There are a number of days where we had to manage the proposition in terms of delivery to the customer. There are a number of days where we had to cut the output of Donington to preserve the proposition to the customer and make sure we weren't late. And whilst we can perform, we can't let the thing run freely. So we've got to make sure our speed of sale gets better, our speed of distribution gets better, we get more flexible around the online capability. And that's an important part of us becoming digital first. And yes, these announcement where we started to restructure the IT division and partnership with [ TCX ] is an important part of that digital first program and is an important part of the cost savings that we are going to achieve through doing that.

[Clive Black, Head of Research]

And then at front end, Steve, should British customers notice a materially different online proposition in 3, 6, 9, 12 months? Or is it 36 months or what?

[Steve Rowe, CEO & Executive Director]

On front end, we continue to make improvements all the time. And maybe in terms of sort of step-change, where we will -- I think that's a longer-term thing, probably more in the 18 months arena because it would -- one of the things we want to do is make sure that our front end is compatible with every single device. At the moment, one of the things we have to do is every time we change the proposition, we have to change it on for mobile, for tablet and for desktop. The new technology really put into that over the next 6 to 9 months is about making sure changes go through to match it with every device. And that's the sort of thing that will make it easier to browse for our customers and give us faster speed. And we've also got to make sure that our search engine capability, both external and things like Google, is up to speed. We have to restrict that in the last few weeks, Christmas, the nice demand. And also in terms of the search while you're on the site, so it would really easy to navigate to the product you want. And the more a customer shop online, both quicker and more effective it has to be in that. Again, we're working on continue it but we want to make some changes there, larger changes in 6 to 9 months' time.

[Operator]

[Operator Instructions] We will take our next question from Geoff Lowery from Redburn.

[Geoff Lowery, Partner of Non]

Could you talk a bit more about international and what is driving the growth in the go-forward business? And can you remind us how much of the target loss reduction you are going to deliver this year and what the incremental benefits of the loss reduction should be in the March '19 fiscal year?

[Steve Rowe, CEO & Executive Director]

All right, Geoff. So look, the shape of international business is as follows. What we've done is by October, we've closed out all of the owned markets that I had suggested which will carry about a GBP 40 million of loss. And therefore, we're seeing a step change in the profitability there. The ongoing revenue -- the constant currency revenue in the markets continue, both franchise and owned, was about 6.5%. And we had some strong performance. Some of that is driven by the fact that our availability in Clothing & Home for international launch is pretty substantial. And we're seeing customer -- our franchise customers, particularly, put in more stock early and then are actually able to repeat it in season, which we haven't been able to do before, it's good news. In terms of the fiscal breakdown next quarter, I can see my colleagues scratching their heads at the moment.

[Helen A. Weir, CFO & Executive Director]

Okay, so I mean, basically, the losses on the exit businesses in the first half of this year were about GBP 1.5 million, so there's not much more benefit that we'll be seeing in the first half of next year. So it'll all be -- we saw a benefit of about GBP 20-plus million in the first half of this year. Similar figure in the second half of this year, but not much more to come through next year, so most of it is in current financial year.

[Operator]

[Operator Instructions]

[Steve Rowe, CEO & Executive Director]

It appears we've got no more questions.

[Operator]

Sir, we do have some questions. We'll take our next question from [ Daniel Fari Jones ] from [ Campaign ].

[Unknown Analyst]

Just got a question about the Christmas-marketing campaign, if you wanted to achieve and how successfully have you done that?

[Steve Rowe, CEO & Executive Director]

[indiscernible] This is really M&S, but very simply, we had a good Christmas campaign. Well, we got our customers in the Christmas spirit. They talked about the fact that it encouraged their friends and family and Christmas fun in gifting. I said earlier, we had a good seasonal gifting. It got a number of awards, and we are very pleased with how it came out, and the said outline in the season was the Paddington Bear store, so we're pleased with that.

[Operator]

And our next question is from Pradeep Pratti from Credit Suisse.

[Pradeep Pratti, Vice President and Equity Analyst]

Two questions, please? First, could you talk a little bit about the performance of your core versus occasional customers, both in clothing and in Food? And the second one is, what's the rate of food cannibalization of this year? I think last year it was probably around 0.5% to 0.7%?

[Steve Rowe, CEO & Executive Director]

Okay. In terms of core and occasional, its core and occasional customers, it's different by both channels. What I can tell you is that in Clothing & Home arena, we actually grew our customer base for the first time in a number of years, and I'm pleased with that, and that was even people moving up. And we're seeing people move up in the latter in terms of change of shape. In Food, we've got a sort of -- the top customer was very engaged in Christmas, but we've got to be careful about their core shopping habits, where they have been a little bit more promiscuous as they were. And the sort of loss of revenues coming across all 3 areas in terms of the like-for-like basis. But again here, when we got in new stores, we've seen the new stores performed strongly.

[Helen A. Weir, CFO & Executive Director]

Yes, and the cannibalization is in fact about 0.5%. As previously, it's pretty much offset by the maturity growth that we see from the stores that are in year 2 or year 3. So I don't -- it's not having any impact -- or material impact on the figures.

[Steve Rowe, CEO & Executive Director]

Thanks very much, indeed. [indiscernible] we got no further phone calls, and I know you guys have got a very busy day. If you got any further questions, the team are on hand all day, but thank you very much for taking the time out to listen to our call this morning.

[Helen A. Weir, CFO & Executive Director]

Thank you.

[Steve Rowe, CEO & Executive Director]

Thank you. Bye-bye.

[Helen A. Weir, CFO & Executive Director]

Bye-bye.

[Operator]

That will conclude today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.