All company’s businesses in this division performed better this year compared to last year, with the exception of Continental Europe’s Marks and Spencer stores which increased their losses.
Financial Services division
The company offers financial services such as account cards, personal loans, unit trust management, life assurance and pensions.
This year the company started accepting credit cards in its stores and sales transactions on the M&S charged card fell from 26% of total sales to 22%. The overall impact on charge card profitability was reduced by the inter-company receipt from UK Retail of £16.2 m and a reduction in operating expenses.
Shareholders disappointment
Here is an overview of last year’s news and events that would be of the interest of any present or future company’s shareholder.
In late May of 2000 M&S announced the cut of its dividend for the first time ever as it reported a sharp fall in profits. With a letter to all shareholders, the executive chairman Luc Vandevelde asked shareholders to be patient as the new management transforms the group from a traditional retailer into ¨a multi-channel retailer with unique customer understanding¨. We cannot compromise our future investment capacity, he said. He pointed out that the total dividend payout represents the group’s entire profit for the year 2000, but said that it meant that the company would not need to borrow to cover the dividend.
Two months later, Marks & Spencer PLC's executive chairman Luc Vandevelde said that five months into his new job he is "more convinced than ever" that the company will turn around, but stressed shareholders will have to be patient as there are no quick fixes.
Addressing 1,400 shareholders and 600 guests at the retailer's annual meeting, Vandevelde asked to be judged over a three-year period. He said his mission was to deliver sustainable growth. "You must recognise it will take some time to achieve this growth and translate it into added value." But Vandevelde avoided any promises of M&S returning to its historic levels of profitability. "I can't and I won't give you a forecast of future profit levels."
His words, though, were not enough to appease some shareholders. "Why has the board in the main got (pay) increases? They have failed," said one to loud applause, and added: "I blame Peter Salsbury largely. He is the chief executive." The shareholder asked Vandevelde to get Salsbury to say if he felt he deserved his pay increase last year. However, the chairman refused - "I think it would be unfair for Peter to answer that question."
In a largely good-natured annual meeting the typical theme of most other gripes was M&S' perceived failure to be selling what its customer want. "I rather feel most of your directors are sitting in ivory towers on Baker Street looking at balance sheets and not what the customers want," said one. Another declared: "M&S gives the impression its buyers have no idea how many people in this country are overweight and are not beautiful."
The shareholders disappointment and failure of previous years strategies was translated into the announcement of a new M&S top management team, at September 18 of 2000. Executive chairman Luc Vandevelde assumed the responsibilities of Chief Executive from Peter Salsbury. Peter Salsbury resigned the board and left the company. Nevertheless, two weeks after shares in M&S dipped below £2 for the first time in its history.
Investors service companies ratings were not promising, as well. Before the end of the year, Moody’s downgraded the company’s senior debt rating saying that the downgrade reflected its expectation that the management’s plan to restore M&S’s franchise quality ´´will face significant challenges in the highly competitive UK retail environment, and that the company’s financial measures are unlikely to recover meaningfully in the short term´´.
Three months later, at March 29 of 2001, date of the announcement of M&S wide-ranging strategic review, Standard & Poor ratings agency lowered its long-term ratings on M&S to ´AA minus´ from ´AA´ and placed its long and short-term ratings on the company on creditwatch with negative implications saying that the group’s performance continues to disappoint.
FIGURE-2: M&S’s share price evolution
Mean Recommendation Conversion Table
New Group Strategy and Structure
Following a wide-ranging and detailed strategic review of its business, the Board of M&S announced in March 29 of 2001 significant changes to the Group strategy and structure. The highlights of this new plan are:
a) Total focus on UK retail
The Company will return to selling only own brand products and brands exclusive to M&S so it can guarantee customers the quality, value and service they have come to expect. Central to the recovery plan is the delivery of significant improvements in product appeal, availability and value thereby rebuilding the relationships with core M&S customers.
➢ Recovery plan for Clothing
The Company has plans to regain the confidence of its customers in the quality
and fit of its clothing. It will sharpen pricing by rebalancing the price architecture, extending the range of entry-price merchandise and communicating this clearly to customers.
➢ Expansion in growing product areas such as Food, Home and Beauty
M&S Foods continues to perform well and has earned customers' trust for providing quality, innovation and convenience. The business is a key platform for future growth and the Company is considering opportunities to expand its reach through new locations and selling channels.
The Home business is growing strongly, with home furnishings and gifts the fastest growing product areas. Beauty, albeit relatively small, is also growing rapidly. Both of these areas offer promising opportunities for development and will be expanded.
➢ Acceleration of store renewal programme
Accelerate Store Renewal Programme: M&S will accelerate the rollout of the successful elements of its new concept format under a plan to refurbish more stores faster and at lower cost. Two-thirds of its retail space (120 stores) will be completed by the end of the coming financial year, benefiting the majority of M&S's customers.
➢ More intensive use of space
Selling space will be reallocated to higher growth product areas to maximise returns per square foot. In total, 600,000 sq ft will be reallocated within the year to areas such as the new Clothing range supplied by George Davies, Home, 50 new Beauty Shops, and 30 new Coffee Shops.
➢ Being closer to the customer
In order to be more customer oriented, some stores in big cities will be opened 24 hours per day. By other hand, 125 stores in the UK will be modernised in order to create a more atractive, easy-to-shop environment for our customers. These stores represent two thirds of total UK stores. Modernisation investments will amount £100 million.
With all changes, the company expects to raise the operating profit in the UK by 10% aproximately (£40 million) per year.
b) Value realisation, cost cutting measures and closure of loss-making businesses
In order to focus all its efforts on the recovery of the UK business, Marks & Spencer intends to divest or close non-core businesses and assets, subject to consultation with its employees.
➢ Intention to close Continental European subsidiaries except the Irish ones
The Company intends to close its loss-making business in Continental Europe (France, Germany, Belgium, The Netherlands, Luxembourg and Spain), affecting some 3,350 jobs. That business was not a success. In the last three years it has lost nearly £100 million, with a loss of £34 in the last 12 months. The stores were too big and the company hadn’t properly understood the markets before investing in them.
The Company's business in the Republic of Ireland is growing fast and profitably (£22,6 million in profits in 2001), therefore Marks & Spencer remains firmly committed to this business.
The budget of the sales price of these sales is £450 million, without considering the exceptionel charges of the restructuring, which have been included in the P&L of 2001. By other hand, during the year 2002 there will be some additional exceptionel charges (£26,4 million) in connection with the discontinued operations.
➢ Sale of profitable Brooks Brothers and Kings Super Markets in the US
The company also intends to dispose of its two profitable United States businesses, Brooks Brothers and Kings Super Markets. These operations do not provide an appropriate platform for future international expansion by Marks & Spencer.
The budgeted price of these sales are £550 million and £275 million respectively.
➢ Franchising of business in Hong Kong
The Company's 10 stores in Hong Kong will be sold to become a franchise. The budget of the sale amounts to £110 million. The franchise business, spanning 30 countries and operating with appropriate formats and strong local partners, continues to be successful.
➢ Intention to close Direct catalogue business in UK
Marks & Spencer intends to close its loss-making catalogue business including a dedicated call centre and fulfilment centre, with about 690 jobs affected in total. Although the joint Clothing and Home catalogue will be discontinued, Marks & Spencer is committed to maintaining its e-commerce web site: www.marksandspencer.com, as well as a Home brochure and a range of services including flower delivery. Last year losses of the direct catalogue unit have amounted £38,6 million. The budgeted cost of closing this unit is £35,5 million and has been included in the P&L of 2001.
➢ Release value from almost half the property portfolio
To reduce the dilution from the relatively low returns from property investment, M&S intends to release value from almost half of its extensive property portfolio (78 stores). That means that the company will rent instead of owning the property in which it operates. They are going to use the sale and lease back type of financing. Ownership of stores in prime locations will be retained to maintain maximum operational flexibility as well as capturing future increases in capital value. The budgeted price of these sales are £348 million.
➢ Cost cutting
To reduce the costs of goods sold using less suppliers and using foreign suppliers, mainly from Asia. At present UK suppliers represent 70% of total purchases. This % will be reduced till 25%. This measure will allow to reduce sales price and to increase profit.
To reduce general and administrative costs at the headquarters, where 350 jobs will be reduced.
With all this cost cutting measures, M&S plans to increase the operating profit by £100 per year.
c) Improved capital structure
➢ Working capital reduction
Another set of measures will pursue to reduce the investment in inventories by 10%. That means a reduction of £90 million.
➢ Return £2 billion of cash to shareholders by the end of March 2002
To create a more efficient capital structure and improve the potential for a faster rate of earnings growth Marks & Spencer intends to return £2 billion to shareholders by the end of March 2002. The release of value from almost half the company’s property portfolio and the sale of international subsidiaries will finance this decision. Following the return of cash to shareholders, Marks & Spencer will retain the financial strength and flexibility to fund future growth.
Financial Impact
The benefits to trading profit from the closure of the European subsidiaries and the changes to Direct will be about £50m in a full year. These measures will give rise to exceptional charges in the current year of £250 m to £300 m, in addition to the £42m already announced at the company’s Interim results for the cost of satellite closures in the UK. Some two thirds of the £250 to £300 m will be cash items covering closure costs and future trading losses.
Impact on People
While recognising the imperative to streamline Group operations, the Board of M&S expressed its understanding and regret for the painful effect this will have on the people involved. The total number of roles directly affected by the changes announced are estimated to be as follows:
Business Area Potential Reduction in Roles
Continental Europe 3350
Direct 690
Head Office 350
TOTAL 4390
Commenting on these developments Luc Vandevelde, Chairman and Chief Executive, said: "These changes put in place a clear, thorough and urgent plan for recovery based on the UK business. At the heart is a determination to restore an unquestioned reputation with our customers for quality, value, service and innovation. By creating a simpler more focused organisation we will be able to get on with what we do best, to be better positioned to deliver faster recovery and, in time, seize new opportunities both in the UK and abroad. We are confident that both customers and shareholders will benefit as a result. We recognise these changes will be painful for some of our people. We very much regret this but the decisions have not been taken lightly. They are essential to building a stronger future for Marks & Spencer."
Vandevelde conceded that with the benefit of hindsight he should have taken radical action earlier. "It is always easy in hindsight to say ´had I known six months ago what I know now, yes I would have done it earlier´. But it does take time to understand thoroughly the strategic strengths and weaknesses of a company of the size of M&S" he said.
QUESTIONS
1. From the point of view of an analyst:
- Identify the main strengths and weaknesses of M&S Plc.
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Which strengths and which weaknesses do you believe that the strategy plan announced the 29th of March of 2001 took more into account? Forecast a P&L and a Cash Flow Statement for the year 2002.
- Do you agree with these measures?
2. From the point of view of an investor:
- Would you invest in shares of M&S Plc?
- What would you do if you already were a M&S’s shareholder?
This case study has been written by Georgios Karaliopoulos and Oriol Amat, Department of Economics and Business, Universitat Pompeu Fabra (Barcelona). Some data relating restructuring costs have been forecasted by the authors of this case.
Before taxes and exceptional items made predominantly to provide for the costs of corporate restructuring, announced on 29 March 2001.
M & S has 2.867.384 thousands of shares owned by 403.847 shareholders.
Graph and data taken from
