Marks and Spencer Group plc (MKS) Earnings Call Transcript & Summary

Hello, and welcome to the Marks and Spencer Group Fixed Income Call. I will shortly be handing over to Eoin Tonge, who will introduce the Q&A session. Eoin, please begin.

Thank you, and good afternoon, everyone. It's nice to have you here to our fixed income call. I'm going to just have a quick intro to the results that we announced this morning, and then we'll move on to Q&A. I'm joined here with -- by Emma Harris, our Director of Group Finance; James Rudolph, our incoming Group Treasurer, and Dan Brook, our outgoing Group Treasurer and some of our Investor Relations team. Then the -- so just to kind of have a quick kind of run-through of our results. Obviously, the year that's gone, it was quite a dramatic year on -- for all of us. And obviously, that span all the way through the first lockdown right through towards the end of the third lockdown in the U.K. So obviously got a huge impact on results. And you'll see that in them, where we had group revenue down 12%, but actually, pleasingly, we posted a profit before tax and adjusting items of GBP 41.6 million, which in the context of everything that was drawn out, we're pretty happy that it was a performance that we could term resilience. And we also used the opportunity in the year to really progress the transformation of the organization. We genuinely feel we're emerging from the crisis in a stronger and leaner way. And hopefully, you'll start to see that over the coming year and years to come and I'm sure I'll answer a fair amount of questions on that. And the one thing I would obviously point out in the result is the strong performance in -- on cash. We had -- as well as reducing our CapEx, which obviously, most organizations did through at the beginning of the crisis. We also had a very strong working capital performance, which drove a reduction of net debt over the period of GBP 435 million. So obviously, that leaves us in a pretty decent place from a liquidity perspective, with over 1.5 billion of headwind against the facilities. So a good place to be as we look to recover from the crisis. We gave a little bit of guidance this morning around how we think the year might shape up. I think it's probably fair to say, I think all of us are a little bit unclear exactly how the recovery is going to be. But we're -- we have a central case, which assumes the gradual return to more normal customer behavior in both our Clothing & Home and our hospitality and franchise businesses in Food. And we started off pretty well in this financial year, but I think it's probably fair to say the first few weeks are, I'm not sure, the best data point given that the -- it's still trying to settle down as a business -- sorry, exception of the market post the lockdown. And so -- but our center case is to generate a profit before tax and adjusted items of between GBP 300 million and GBP 350 million. And our ambition is to continue to further reduce debt despite the fact that we expect our CapEx to normalize back to levels at the pre-pandemic levels so that we invest in our transformation. And indeed, the priority for us is to invest in that transformation, which would be investing in omnichannel capability, investing in our supply chain and in our store rotation and maintenance of our store estate. We're very clear this morning on our capital allocation thinking in that -- our priority is investing in transformation. After that, we will seek to recover our balance sheet metrics consistent with investment grade. And as we do that, we will then assess the reintroduction of dividend payments, and we've been clear that we think that will be unlikely in the current year. So that's a very short intro. I'm sure people have got much more detailed questions on individual business performance. So with that, I'll hand it back to you, Dmitry, for Q&A.

[Operator Instructions] Our first question comes from the line of Chris Roberts with BNP Paribas.

I've got a couple of questions, just sort of, I guess, refining a couple of points you've actually mentioned. So in terms of pre-pandemic CapEx levels, just to be absolutely clear, is there a number you can give us? I mean should we be thinking of sort of, I don't know, GBP 220 million to GBP 250 million annually, roughly? Is that kind of what you mean? That's the first question. The second question was on the working capital. And like I can certainly see what you mean. It looks like the working capital performance has been very strong, indeed. Actually, more so than I was expecting. Is there any further to go in that? Or do you think you've kind of done what you can in terms of bringing cash out of working capital? And very last question. You talk about getting back to sort of an IG context or IG metrics. To be absolutely clear, what metrics are you talking to? Are you talking -- I mean, do you have a sort of a net debt-to-EBITDA number in mind for what that means to you? If you could be a bit more specific about that, that would be very helpful.

Sure. No problem, Chris. Thank you very much. Good question. So on CapEx, what we said is that we expect to go back to pre-pandemic levels. I actually comment it with '19/'20. In '19/'20, we spent GBP 329 million. So I think that's probably as good as an indication as sort of the type of levels we think we're going to move back to. On working capital, well, I think -- I mean, as good as the guess it's probably -- I don't believe it as good as the guess. But if I'd be a bit more specific as that in the financial year, we've just come into and we -- there will be some unwind of the working capital benefit that we got in 2021. But actually, we've got other working capital optimization to go after, which will probably offset that. So I'm not expecting much of a move on working capital in '21, '22. But I still think there's a fair bit of optimization to go after. If I think of -- and all of it is commensurate with our strategy. If you look at particularly on stock management in our 2 core businesses, we're moving quite determinably to try and reduce our stock levels in Clothing & Home to move to more open-to-buy type of approach and also reduce options. So that's going to be happening over a number of years. And also in Food, although the quantum isn't as significant. We are also moving to more just-in-time approach on our ambient side of things, which does give us some opportunity to reduce stock levels. And on the payable side of things, there's still a little bit to go on optimization. There's a little bit of plus and minuses, I would say, on the payable side. So the short answer is, I think we'll be in kind of not much movement in working capital in '21, '22 or maybe a little bit more to go after beyond that. And on the IG metrics, yes, I mean our target metric is net debt to EBITDA, and it's the aim to get that in and around 3x. And that's the focus. And as you'll see, obviously, we've made good progress on debt, probably better progress than any of us really expected. And we're continuing to focus on that. But the big driver is going to be a recovery in profitability, which will go part of that way in '21, '22 with the -- well, the guidance drove case that we painted. But obviously, that's only part of the way.

Our next question comes from the line of Vicki Gedge from PIMCO.

Congratulations on the results. I just wondered if I could ask you a bit more about the performance since stores have reopened. So in the commentary this morning, you said the online growth has remained strong. I was wondering if you could give us a sense of how the store like-for-likes have performed? Were they positive versus pre-pandemic? And maybe give us a bit of sense of how that performance compared to when stores reopened last June, July? Is the pent-up demand stronger this time than it was last year?

Yes. I mean, I think we -- so the -- we've had 6 weeks exactly of -- close on 7 weeks now actually of trade. And since April 12, we've had a very strong performance in Clothing & Home. And overall, Clothing & Home has been ahead of '19/'20 levels, which is pretty stunning recovery from obviously where it's been. Store is not quite positive. Online is still being kind of held up, has been quite so, quite strong. And the -- I mean, I think it's probably fair to say it's a stronger performance than we would have predicted because, obviously, as I said, our base case is that the recovery will happen more over time. But if you look at the numbers in the last few weeks, you think we've already recovered. But I have to assume that a lot of that is pent-up demand and some pull forward. And obviously, that is a pretty significant performance. On the Food side of things, the growth has also been very strong. We had a particularly good performance coming out of March through Easter and continuing on. And pleasingly, that's all been in our core categories, which has continued to be very, very strong. And not just at events actually. Events have been strong like, for example, Easter has been very good, but also since then. And of course, the idea would be that we retain that core category strength and add back to it and return in convenience trade as and when city center and office work starts to return. Now we're not calling out a full recovery of that even in this financial year. And then the other thing we're calling for recovery on is our hospitality business, which gets reported in our Food numbers, which is basically our café business. We're one of the largest café businesses in the U.K. and, obviously, that's been shut for a long period of time. So we'll see how that kind of reopens. But then it's obviously very pleasing to be ahead of your central case, but I'm being very careful to manage people's expectations to say that this is pretty -- it's a very odd period. And there's still a lot to work through in terms of a steady down of consumer behavior.

That's helpful. And maybe just then on the full year guidance on that. You've talked about normalization of sales and the costs coming back in obviously quicker than that. How do you think about that phasing? I know it's a bit of like having a crystal ball, but are you -- in your base case, are you thinking it takes sort of 3 months or 6 months to get back to normal? Just trying to understand how you're buying for like autumn, winter? How you fall ahead of that? What are you assuming kind of in the back end of the year? Is that an interest of time to get back to normal?

Yes. I mean, I think it's more like a recovery over 6 months. It's how we've thought about our central case. The -- I think we're -- it's very hard to call what this summer is going to be like because we just -- no one really knows, and the whole kind of stay vacations could be a positive for us. And vacations could be a positive for us, but we just have to see how all that goes. I think we're hopeful for a more kind of steady recovery into our Q3, which is obviously a very important quarter for us. And then a more kind of return to normal in Q4. That's what our kind of central case really is, if I look at the numbers. So we'll just have to see how that goes. And that includes -- that's really kind of relevant for Clothing & Home and for hospitality and, to a certain extent, franchise in boot, is what I just said in terms of kind of the pace of recovery. Does that answer your question, Vicki, or any more?

Yes. No, that's really helpful.

I mean the one thing I probably didn't say enough this morning, I'd probably just remind people here is that, that guidance is assuming no further lockdown. I mean if there's a further lockdown of some description, obviously, that does change the game quite a bit for everyone. But we'll all have to see.

[Operator Instructions] We appear to have a follow-up question from Vicki.

Sorry, I'll carry on as there are no other questions. I just wondered on the store transformation. So the detail was really helpful in the report today. I just wondered -- I think I saw -- I wasn't on the Q&A this morning, but I think I saw the headline that you were looking at a 10-year horizon. So I was just wondered, is that sort of -- is it going to take 10 years for you to get to the 180 store target in Clothing & Home? Is the 50% target of online Clothing & Home baked into that? Is that all going to take 10 years to achieve? Or is that something you're trying to get them more quickly? Just to understand how quickly is -- because the business or the message from Marks was there's a bit more urgency, getting back into growth and kind of moving on with that reshaping and transforming the business. But I just wondered on how quickly can you actually move on the store side?

Yes. I think -- so the modeling is done over a 10-year period. And it's -- I mean, quite detailed modeling. It assumes a CAGR reduction of 6% of store -- Clothing on store footprint sales, so i.e., kind of a sort of a permanent move in channel shift. So that kind of gives you a target point of what a Clothing & Home space requirements would be -- in physical Clothing & Home space requirements would be. And then we obviously overlay that on top of our regions and indeed our very different leases as well. So the demanding has done over 10 years. The pace to which we move really is driven by a number of factors. It's driven by the availability of alternative locations. The -- what our kind of picture and view of how we recapture sales once you move from a site. The dark costs of the lease that you might exit because so there might be certain situations, which we explained in our statement, where you come out of a store before the lease ends and you leave that store vacant while you relocate to another store. Now I would appraise the return on that project in the totality. I want the totality in terms of the impact of both the recapture of trade and the dark store costs. And sometimes, you might be okay to accept a return that's a little bit suboptimal if you've got available location, which is really attractive. So I think we're going to look to try and move faster, but it will be governed by quite a strict financial framework. And there are 2 things I'd say here is, I mean, the urgency is definitely real because we're actually scheduling to open up 17 new full-line stores over the next few years, which is, I think the most we've done for almost 10 years. Almost 10 years, yes. So -- and that's relocations, so in Maine. So it's basically moving from a store that's either on the wrong pitch, what I mean by picking a pitch, the wrong part of town or the wrong time or the wrong type of building, and to a better building that's going to be more effective and more efficient. And the other thing I would say is 2027 is an important enough year for us because we've got a lot of lease closures in 2027. So and -- sorry, lease terminations on '22 to '27. So that is a reason why the kind of 10 years pivot around that date because that's when we will be seeking to come out of a lot of those leases. So it's very detailed, as you can imagine, it is. But I think it's -- and clearly, some of the assumptions we use will change over time. But as it sounds today, we're very clear in doing terms of exactly which stores we're going to want to invest in and which stores we're less likely to invest in, which is actually the most important -- one of the most important things.

Pretty helpful. That's very helpful. And so the 50% target is like a 10-year expectation, it's not a 3 to 5 years in terms of split online?

Well, we -- on our -- if I'd just be a bit more kind of clear, our online target is actually greater than 40% in the next 3 years. I've modeled using -- it actually -- the assumption goes to 50-50 by 2025, '26. That's modeling to sort of to assume that we're going to use more efficient store space.

Okay. We appear to have no further question at this time. So I'll hand back to the speakers for any final comments.

Sure. So well, thanks very much. I mean I'll take not many questions, meaning that our statement was well understood. But obviously, you've got people who you need to -- you know whom to contact, if you've got any follow-up questions after this call. I hope you enjoyed it. I think just in summary perspective, we feel the business is kind of moving into a different phase. We're feeling pretty decent shape from a balance sheet perspective to enter into that phase. Still have got a fair bit of work to do, and there are certain things that are still outside of our control. But we have to navigate through, which is predominantly the unwind of the effects of the pandemic, but we're in good shape on the things that we can control. But thank you for listening to me today.

This now concludes today's call. Thank you all for joining. You may now disconnect your lines. Thank you.