Marks and Spencer Group PLC

LSE:MKS

Earnings Call Transcript 2019-Q3

[Operator]

Good day, and welcome to the Marks & Spencer Q3 Analyst 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]

Thank you very much. Good morning, all. And for those of you I haven't seen, can I wish you a Happy New Year. Welcome to our Q3 trading statement conference call. I have Humphrey here with me and Archie, and we're happy to take your questions shortly. You will have seen from the release this morning that we just issued, the figures, and I know it's an extremely busy day for you all, so I won't go through the numbers. What I do want to do is take a few minutes to highlight a couple of points. Q3 was challenging. Market conditions were tough, particularly in November when footfall and online visits both dropped significantly. And we ended the year with consumer confidence 5 points lower than where it started. Retail is at the front end of this, and this makes our ongoing transformation even more vital. Given all of this, our top line numbers are what we expected to be given at the stage we are now, transformation. And our performance was steady on the first half. The measures that we are taking to improve M&S under this transformation plan, such as restoring trusted value in both of our businesses by [ shelving ] prices, reducing the number of promotions, and lessening clearance sales and improving our ranges are essential changes. And we can see some early signs of encouragement on the back of them.And what we did -- and we are doing exactly what we said we would do. On Clothing, we promised to reduce our stockholding and hold our nerve in a very competitive market. The results are 25% less stock into sale, no Black Friday participation, and a clearance sale that started as planned in stores on Boxing Day. On Food, we said we would lower prices and drive volume. As promised, 227 of our Food products were cheaper in the quarter than last year, and we saw solid volume growth over the key Christmas period. We also stripped out complex and confusing promotions. In fact, we ran 37 fewer promotions in December alone. We said we would start to drastically improve our operational performance in Castle Donington and we did. Following a light-touch investment earlier in the year, we've hugely improved our service to customers, and remained in proposition throughout peak for the first time.Nevertheless, there is much more to do. And we remain committed and are on track with our plans despite the ongoing pressures in the market. We are maintaining our full year guidance. Christmas was a huge team effort. And the early signs that we are seeing would not have been possible without our strengthened and empowered leadership team that we've put in place. We thank everyone in all of our teams for their hard work and dedication over Christmas and into 2019. We'll now take your questions.

[Operator]

[Operator Instructions] We will now take our first question from Anne Critchlow of Société Générale.

[Anne Critchlow, Equity Analyst]

My first question is really about the -- was about the fast-selling lines that you had. You had a great campaign on the Must-Have items. Do you feel that you had sufficient volume behind those lines or do you think there were missed opportunities and you could do better on that in the future?

[Steve Rowe, CEO & Executive Director]

As I said, we didn't have enough. Availability is still one of the key challenges in the business, and we've got a lot of work to do to improve the supply chains in both Clothing & Home and Food. And frankly, in both areas, in advertised lines, we didn't fulfill the potential we had. I'm delighted with the reaction to both advertising campaigns, particularly the Must-Haves, but we've got to do more, and we need to make sure we've got enough of the merchandise when we're advertising it.

[Operator]

We would now move to our next question from Andrew Hughes of UBS.

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

Yes, I had a couple of questions. One, if you could give us any indication on full price sales in Clothing & Home? How that proportion has moved, one would assume it's sort of going up or likely to go up, given your comments about stock into sale. And the second one was on the impact of space closure. I think you're still looking for 4% lower space in Clothing & Home. And your space effect in Q3 was down 2.4%. Is that roughly the sort of ratio? So it's the -- sort of the underperforming stores, or quite sharply underperforming stores, which are ones that are being closed, and that's the sort of reasonable ratio going forward?

[Steve Rowe, CEO & Executive Director]

Yes. And you're absolutely right, Andrew. We are closing out stores that tend to have, by their very nature, a lower return per square foot, and therefore although we've closed out that sort of 4%, you're not going to see that come through directly in sales. And you can see the effect particularly in Clothing & Home, whether that 2.4% changes to the like-for-likes on the basis of closures. And we're on schedule with that program. We said we would accelerate it based on market conditions in May last year, and we've done that. And we are still seeing good transfer rates between closed stores and existing stores. In terms of Food costs...

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

Do you have a number on that?

[Steve Rowe, CEO & Executive Director]

No, we don't disclose that number, but we're on schedule with our plans to date. In terms of the Food price sales, it's a funny quarter. So the actual reported number of Food price sales is nudging down, the mix is because of a change to our categorization in terms of sale at the start of the season, and our Friends & Family promotion. But the -- and so we were slightly up in promotional sales because of that. Reduced was down and had an impact of about 2.8%.

[Operator]

Our next question comes from Rebecca McClellan of Santander.

[Rebecca Anne McClellan, Equity Analyst]

Just one question on your vouchering activity in Food over Christmas in particular. Was that in line with normal levels in previous years or -- because it seems fairly sort of -- obvious, I don't know what the word is. So was it in line with normal levels, or did you make a step up in terms of vouchering?

[Steve Rowe, CEO & Executive Director]

No, we're actually slightly less than last year in terms of our vouchering and our promotional sales across the piece were down in Food. Again, as we've taken on more promotion, a lot of the confusing promotions our customers are not appreciating. So no, it was less, and what we really intended to do and we did, was to make sure we changed the price acquisition on key lines as we move towards more trusted value proposition, and the customers reacted well to that particularly at Christmas. But we've got more to do and we want to complete that program soon as we go through the spring.

[Operator]

We will now move to our next question from Richard Chamberlain of RBC.

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

Yes. A couple of questions, please. On the Food side, Steve, there seems to be a general trend in the market still towards convenience. Convenience has been outperforming. Is that something that you've seen? I mean, in particular has the Simply Food estate been outperforming the Food offer in the mall around mainline stores on a like-for-like basis?

[Steve Rowe, CEO & Executive Director]

It depends where those Simply Foods are, the Simply Foods in retail parks have done reasonably well, the ones in the high street are suffering, and so where the high street footfall is. And what we can tell you is that baskets on shopping basis are continuing to drop. And if you're -- at shopping mall frequency. And what we've seen is higher conversion rates from our customer base. I inform you, what we're also starting to see at the end of the period, is that volume growth that we're looking for in terms of volume-adjusted prices. So that longer-term trend moving away from big [ retail ] shops, yes, we're still seeing that.

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

Okay. And on the Clothing, the online sales was better than I expected. Is that -- what sort of trends are you seeing now online in terms of transaction frequency, basket size, I guess, product return rates? I think you mentioned dresses in the statement. Can you give any color there around sort of trends you're seeing online?

[Steve Rowe, CEO & Executive Director]

Right, well, first of all, the truth remains that the movement online is really what we predicted. At the end of the quarter, we had 22.5% of our business online. Bear in mind we've said want to get to about 1/3 online in 3 to 5 years, and we're on track to do that. We performed ahead of the market and as we started to make improvements to the website, particularly around things like photography, search optimization, and importantly, new products -- product download pages which can gain speed by lessening -- by moving it forward. We've seen some increase in traffic, but the key really for us is the conversion where more customers are shopping with us once they're on the site. The basket size is actually down, and we're seeing a trend -- and we're obviously seeing the return rates nudging up.

[Operator]

Our next question comes from Tony Shiret of Whitman Howard.

[Tony Shiret, UK General Retail Analyst]

A couple of things. Can you give us some sort of idea on Clothing & Home? How your sort of sale structure between good, better, best was year-on-year? And second thing, sort of slightly looking forward, can you give us some insight into how you're buying for autumn-winter 2019? So I presume that's where you're buying at the moment.

[Steve Rowe, CEO & Executive Director]

Yes. In terms of how we're buying, autumn '19, we're buying in line with our budgets. We don't give out specific seasonal guidelines. And we're looking at really in terms of a slight increase in -- a continued increase [ in all ], and so the value proposition is good. And what we saw this year was a slight increase again in the good part of our business. We're running at just over 20% there. And we've seen that slip out margin now better and best, but that's really in line with the shape of that pricing proposition. And the customers at the moment are looking for value, and we're providing that.

[Tony Shiret, UK General Retail Analyst]

Okay. But in line with your sort of inventory reduction, I mean is that going to flow through? When's that going to be sort of done in terms of SKU count reduction? If we look at the number of pieces you buy for next autumn-winter, is that going to be sort of flat year-on-year, other things being equal?

[Steve Rowe, CEO & Executive Director]

No. So we'll continue with the program, Tony, and doing a number of things, first of all, reducing the number of phases. Again, we'll cut that back. And secondly, we will continue to reduce the SKU count. And thirdly, the overall level of inventory we want to pull down as well. That program's ongoing. And what we see is, if I'm really honest with you, despite the fact we reduced the terminal stock at Christmas, it's the best one we've had for 5 years, and we can still do more. And again, that's part -- an important of the transformation of our buying capability.

[Tony Shiret, UK General Retail Analyst]

Okay. And the 20% you said on good, what was that last year?

[Steve Rowe, CEO & Executive Director]

It was sort of about [ 3.5 ] better than last year.

[Operator]

Our next question comes from Simon Irwin of Crédit Suisse.

[Simon William George Irwin, Director]

I was a bit late on the call, so apologies if this has been asked. But with 3 months potentially until the -- until Brexit, how confident are you in your preparations, particularly around the Food business?

[Steve Rowe, CEO & Executive Director]

I'm going to hand that to Humphrey because he's been chairing our Brexit committee.

[Humphrey Singer, Chief Finance Officer & Executive Director]

So listen, we've been at this for a while, contingency planning. I would say, we definitely ramped up our planning, and in some cases, taken modest amounts of action. Looking at things like long-life products and inventory levels, nothing dramatic, but certainly we think are prudent in the circumstances and also we're keen to see a resolution to the current uncertainty.

[Simon William George Irwin, Director]

And what's your kind of best estimate of what that would do, particularly to food prices?

[Humphrey Singer, Chief Finance Officer & Executive Director]

I don't think we're in the business of trying to predict how that might flow through. Although, clearly, if the tariff regime changed significantly, that is probably going to result in a degree of food price inflation. But it's very, very hard for me to predict now. It depends on how the deal or no deals pan out.

[Simon William George Irwin, Director]

Okay. And are there any parts of your nonfood business which you think will be impacted materially?

[Humphrey Singer, Chief Finance Officer & Executive Director]

It's much less of a material effect in the Clothing & Home side. There are some effects. We do source some products, for example, from Turkey, but it's more limited than the short supply chain, quite largely sourced in European food side.

[Operator]

Our next question comes from Geoff Lowery of Redburn.

[Geoff Lowery, Partner of Non]

A couple of questions around Food, please. The first is, when we look at your Food business, do you think your December performance is a guide to your run rate or the quarter as a whole? And secondly, when I think about deflation versus volume response, do you feel that flat volume in response to a couple of points of deflation is an adequate degree of elasticity?

[Steve Rowe, CEO & Executive Director]

We'll start with the first one first. We saw an improved performance going through the routine Christmas trading periods. That's important for us and our customers. We double our market share, and customers come to us for something special and different. I'm pleased with the reaction of volume, let alone prices, but no, it's too early to call. We've got a lot of work to do. We're still in the process of resetting the category, both in terms of product, promotion, availability and cataloging. And we won't have completed that until the middle of spring. There's some interesting signs, but we have got a lot more to do.

[Operator]

Our next question comes from Simon Bowler of Numis.

[Simon Bowler, Analyst]

Just one and a kind of quick one on the Food business as well. You've kind of previously commented around kind of bit seeing kind of more resilience in kind of key value items, as well as the kind of the -- kind of high price truly differentiated items and kind of the bit in the middle, being [ better served a little bit more in ], was that kind of a consistent pattern across the last quarter as well?

[Steve Rowe, CEO & Executive Director]

Look, what we're seeing, Simon, rather quickly, there is some change in the mix because of the way we changed our promotions. We've moved promotions on items where we've perhaps overpriced, we've put trusted values into place, and that is changing some consumer behavior. I think it's a bit early for us to say whether or not the mix in terms of price gearing will change in the long term.

[Operator]

[Operator Instructions] And we will now take our next question from Tom Musson of Liberum.

[Wayne Mervyn Brown, Research Analyst]

It's actually Wayne from Liberum. But just following on from Geoff's question on elasticity on Food. Clearly, and you mentioned earlier that conversion has increased. Well you would expect conversion to increase when footfall is always challenging. But the question is really around newness, as well as versus price investments. I think new innovation within Food seems to have -- seems to be lower year-on-year. I think you can generally get that sense when you're walking through the stores. So price investment, clearly you've done that now, is that a continuing theme for 2019? And what kind of innovation or investment is going to be put into Food to properly address some of those volume concerns? Because I think the elasticity point is a very good one, I'm not necessarily sure if I was clear on your answer on that one, too.

[Steve Rowe, CEO & Executive Director]

Yes. Just look, we've reduced prices on a number of key lines. We'll continue to do that. The key thing is, our customer base, our [indiscernible] for lots of people. We know that it will take some time for them to see through -- when the new values in products come through comprehensively in terms of volume. So at this stage, I'm not expecting to see a substantial change in the volumes and the elasticity. You would expect that we would get it as customers become more and more aware of those prices. In terms of newness, there was slightly less newness this year, that was planned and deliberate. I think though a bit too far with the development of new product. And we had some very successful new lines, the Best Ever Steak Pie, it went straight into the top 10 lines. The Porn Star Martini, the fastest ever cocktail we've launched. And in the Christmas lines Prosecco Pudding, we just couldn't keep on the shelves, and that was one of the favorites that we advertised on TV. So we were pleased with the development in program, and we'll continue to innovate in the Food category in the way that we always have.

[Wayne Mervyn Brown, Research Analyst]

Okay. And any comments necessarily on the competition that's coming through from your Home delivery businesses, et cetera? Is the aggregation of what is coming through from quite a number of different competitors actually targeting your core customer base? Are you seeing that as an issue which needs addressing in 2019?

[Steve Rowe, CEO & Executive Director]

Look, we're very clear that there is a long-term trend to online shopping, both in Clothing & Home and Food. We've continued to watch it very carefully. What you've got to remember that we have a very different shopping mission, [ 80-odd percent ] Of our business is done for today/tonight and we're big in categories like food on the move, and we're big in travel destinations, [indiscernible] to us. And it's something we keep a very careful eye on, and we're looking at carefully. But our proposition at this stage is not appropriate for that online.

[Operator]

We will now move to our next question from Michelle Wilson of Berenberg.

[Michelle Wilson, Analyst]

Two from me, please. Just first of all on the Clothing & Home gross margin guidance. I know, you said all of your guidance is unchanged for the full year, but you do flagged that there's 25% lower stock into sale. And also as far as I could see, M&S didn't participate in Black Friday this year. So I just want to understand, is that all just in line with the expectations you had at the start of the year? And could you also explain the reasoning behind the decision not to participate in Black Friday?

[Steve Rowe, CEO & Executive Director]

Yes. Well, first of all, that is in line with our plans. We said we weren't going to take part in Black Friday, and we're not going to. If we want to have trusted value in the business, you cannot have one day of promotions where you in fact transform your prices. We see that as pulling sales forward from different periods. We traded differently to the rest of the -- to who obviously took part, and we think it's the right thing to do. It's part of making sure we've got a first time right price and giving our customers the value they need. So in line with our plans.

[Michelle Wilson, Analyst]

Okay, great. So neither of those things have an impact on the flat to 50 bp gross margin...

[Steve Rowe, CEO & Executive Director]

No. Margins [ remain the same ].

[Michelle Wilson, Analyst]

Great. And then the second question on the Food business. And you've mentioned the positive volume growth over the period. Are you able to quantify the volume growth or the average price change over the period?

[Steve Rowe, CEO & Executive Director]

Yes. I mean, the average price over the period was down just over 2%. There is a bit of shape to that in the back half. The same is true with volume. We said slightly lower volume at the start of the quarter. And as we moved into the peak period where we made substantial change, we saw some increase in volume. But broadly, volume was flat throughout the period. And as I said earlier, we've changed those prices. I would expect it to take some time for the customers to see those and get used to the change in the promotional cadence.

[Michelle Wilson, Analyst]

Okay, great. So volume flat over the period, but positive in the kind of end -- towards the end of the period?

[Humphrey Singer, Chief Finance Officer & Executive Director]

In December, yes.

[Steve Rowe, CEO & Executive Director]

Yes.

[Operator]

[Operator Instructions] Our next question comes from Paul Rossington of HSBC.

[Paul Rossington, Analyst]

Apologies, I missed the beginning of the call as well. Just on the online performance in nonfood. Can you say what has improved operationally there to allow you to get to plus 14%? One presumes Castle Donington is performing better. Apologies if that question has already been asked.

[Steve Rowe, CEO & Executive Director]

Well, first of all, it's in line with the trend that we see overall in the market, although we did perform ahead of the market in Clothing. And some of that is down to the changes that we made on the website, both in terms of presentation of merchandise, the search engine optimization, and indeed things like [indiscernible] in Womenswear, and that's why Womenswear grew ahead of the other businesses. In terms of cost of Castle Donington, there's some low-level capital investment earlier in the year, which we talked about, to increase capacity. And for the first time ever, Castle Donington, we didn't have to change the proposition, and we're pleased with the progress we made.

[Operator]

Our next question comes from Adam Cochrane of Citi.

[Adam Gareth Cochrane, Director]

A quick one. On the marketing, I know you've made the shifts towards more digital and away from the sort of big TV campaigns. Is that something that you've been pleased with over the -- over the period?

[Steve Rowe, CEO & Executive Director]

Yes. And 2 things. First of all, I mean I think the consumers are seeing through some of these big blockbuster campaigns. We've got fantastic products, and we thought it was actually rather good to focus on product, both in Clothing & Home, and in Food. And we're delighted with the uptake of -- in sales, I mean actually, in fact, I've said earlier, the Prosecco Pudding we couldn't keep on the shelves, and the Holly lines, many of those sold out. And if anything, that's an opportunity for us next year. But yes, we see that transfer into digital marketing and that transfer to product marketing as the right thing to do.

[Humphrey Singer, Chief Finance Officer & Executive Director]

I think, we'll take one more question. I know you've got other calls to go to.

[Operator]

And we will now take our last question from Geoff Ruddell of Morgan Stanley.

[Geoffrey Frith Ruddell, Managing Director]

Just a very quick question following up from Andy's one. Could you just give us an update on where you are in terms of your thinking on space? I'm not talking about this quarter or next quarter, but over the next 3 or 4 years. And how much space you are going to be taking out? Is your -- I mean, obviously, you set it out in the past, but are those thoughts changing?

[Steve Rowe, CEO & Executive Director]

No. That's -- the first thing is that we need to make the change. We said we would close 100 stores, we are on track to do that. And we've accelerated that program, which is the right thing to do based on the conditions that we've actually seen. What I can say though is that yes, they're not going to stop, you're going to make mistakes in the past, and the retail environment continues to change and we will tune our estate accordingly, having some [ closure of store ], et cetera. But we will continue to develop the business as we see fit for trading conditions.

[Geoffrey Frith Ruddell, Managing Director]

And so the 100 stores, by when?

[Steve Rowe, CEO & Executive Director]

Broadly, we've accelerated that, and I think it will be about around 1.5 years, but just over 40% will go through the program at the moment. Guys, we're conscious you've got a busy morning. Thank you very much indeed for your questions. If you have anything further you wish to follow up, the teams are available [ to take any calls ] but thank you again for your participation.

[Operator]

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