Annual report and financial statements 2006 www.marksandspencer.com/businesssummary2006 WHAT’S INSIDE... WE ARE ONE OF THE UK’S LEADING RETAILERS, 01 WITH OVER 15 MILLION PEOPLE VISITING OUR Chairman’s statement STORES EACH WEEK. 03 We offer stylish, high quality, great value clothing and home Chief Executive’s review products, as well as outstanding quality foods, all responsibly 08 sourced from suppliers we trust. We employ 65,000 people Operating review and have over 450 UK stores, as well as a flourishing 08 Clothing and Home international business. 12 Food 15 International 16 Our stores 17 Our people 18 Responsible retailing 19 Your directors 20 20 Financial review 26 Group directors’ report CLOTHING AND HOME FOOD INTERNATIONAL 32 Corporate governance UK SALES (EX. VAT) UK SALES (EX. VAT) SALES 40 Remuneration report £3,644.4m (+0.0%) £3,630.6m (+7.0%) £522.7m (+14.7%) 49 Auditors’ report 50 Consolidated income We are the UK’s largest clothing Food accounts for 49.9% of Our International business statement retailer. Clothing represents 45.2% our UK business and we have a comprises wholly-owned stores, 50 Consolidated statement of our UK business. In 2005/06, market share of 3.2% (source: in the Republic of Ireland and of recognised income we re-launched Menswear TNS). In 2005/06, we re-launched Hong Kong, and 198 M&S and expense ‘Autograph’, expanded our the additive and preservative-free branded franchise stores 51 Consolidated balance Womenswear ‘Autograph’ offer ‘Marks & Spencer Cook!’ range, worldwide, including 22 stores sheet and introduced a ‘per una’ range extended ‘Eat Well’ to over 1,000 opened in 2005/06. In March, 52 Consolidated cash flow in Lingerie and ‘Girls Boutique’ in products and started to sell only we agreed the sale of Kings Super information Childrenswear. Home represents Fairtrade coffee. We have 144 Markets, the US supermarket 53 Notes to the financial around 4.9% of our UK turnover ‘Simply Food’ stores across the UK. chain, for £35.4m ($61.5m) in the statements and offers great value, stylish last part of the programme to 95 Company financial furniture and home products. refocus the business. statements 100 Group financial record See pages 8-11 for more detail. See pages 12-15 for more detail. See page 15 for more detail. 103 Index 104 Shareholder information FINANCIAL HIGHLIGHTS GROUP SALES GROUP OPERATING PROFIT* GROUP PROFIT BEFORE TAX* 2006 2006 2006 £7.8bn £855.8m £751.4m 2005 £7.5bn 2005 £649.1m 2005 £556.1m EARNINGS PER SHARE RETURN ON EQUITY CASH FLOW (ADJUSTED)* 2006 2006 2006 31.4p 52.3% +£550.5m 2005 19.2p 2005 35.0% 2005 -£104.5m * Before exceptional items and asset disposals. Marks and Spencer Group plc www.marksandspencer.com/chairmansstatement2006 01 Chairman’s statement Last year we continued to deliver the plan we set out in 2004 to return to growth. We have made progress. However, there is more to do and more value to deliver. Paul Myners YOUR DIVIDEND In the last two years, the Group has I would like to thank our many shareholders undergone a period of significant and for their unwavering support during this necessary change under Stuart Rose’s able period and welcome those new to the share and inspiring leadership. register. We are also delighted that we will be sharing our success with all employees 14.0p Stuart joined us in May 2004. The Group at every level in the Group next month. Our and our share price had been reward scheme this year includes a one-off Total dividend underperforming for several years and discretionary bonus for our customer we were facing an unsolicited offer from assistants of up to £500 each. Revival Acquisitions. Chairing any major public company is an 4.8p Stuart has a profound understanding of this honour, but chairing M&S is a special First half dividend extraordinary business. From day one, it privilege. Few companies enjoy the sort of was clear he knew the issues that needed relationship we have with our customers – to be addressed. He drew up a plan, a relationship summed up so well by the assembled the team to implement the plan, ‘Your M&S’ campaign. That makes our work 9.2p and then got on with it, in a tireless and as directors fulfilling, but it comes with a focused manner. particular responsibility: we can never afford Final dividend to be complacent. The improvements seen in 2005/06, a direct result of this approach, have been We remain committed to our values – reflected in our share price and a two-thirds Quality, Value, Service, Innovation and Trust. increase in earnings per share to 31.4p per These have a growing resonance as more share (last year 19.2p), a record level for and more people look to make careful the Group. choices about where they shop and what they buy. On the strength of this, we are proposing a final dividend of 9.2p per share (last year This year we have worked to tell our 7.5p), providing a total dividend for the customers even more about how we go year of 14.0p (last year 12.1p), an increase about our business through the ‘Look of 15.7%. behind the label’ campaign. We are proud of the sort of company M&S is – both highly With dividend cover now restored to over commercial and responsible. We are two times, the Board’s future policy is to determined to keep it that way. grow dividends broadly in line with adjusted earnings per share growth for each half of I said last year that we had some important the financial year. This will enable our work to do to make sure the Board was shareholders to participate fully in the properly structured. There have been growth of the business and provide clarity significant changes. on our approach to future dividend determination. 02 Marks and Spencer Group plc Charles Wilson, executive director, left in honed in a successful career in academia, the October 2005. During his time with the Civil Service and, latterly, business, including Group, Charles played a central role in his Chairmanship of Abbey National. helping us to cut costs, work that was critical in beginning to return M&S to health The plan Stuart and I set out when we first and which is now deeply embedded in our spoke to shareholders in July 2004 is being processes. I express appreciation to implemented and remains intact. Today, Charles, on behalf of the Board, for the part M&S is in better shape. But there is still he played in creating a strong foundation much more to do. for growth. Last year in Clothing and Home, we worked We also said goodbye to Anthony Habgood, hard on restoring our competitiveness, who stood down as non-executive director engaging with our suppliers to improve to give more time to other business value, styling and the amount of new and interests. Kevin Lomax will be leaving the exciting product across our ranges. In Food, Board on 31 August 2006, having served we continued to focus on offering high as a director for six years and Senior quality, innovative products. This is Independent Director since July 2004. beginning to contribute towards improved I would like to thank them for their customer perceptions, market share and contribution. financial performance. We were pleased to see Ian Dyson and At the same time, we extended our store Steven Sharp become executive directors. refurbishment trial and continued to open We are also delighted that Louise Patten, new mainline and ‘Simply Food’ stores. Jeremy Darroch and David Michels have brought their varied and broad experience Finally, improved service remained a priority. to the Board as new non-executives. We undertook our biggest ever customer service training programme. We also The Board now has the necessary balance overhauled pay rates and improved career of skills. I am confident that challenges planning for customer assistants. This will to the executive directors from the non- help us attract and retain the best people executives will focus on the right issues for our business. and will be conducted in a constructive and collegiate manner. In 2006/07, we are continuing to build on the progress we made last year, working to To ensure that the Group has a highly offer great product, in great stores through capable executive team, our remuneration great service. packages need to be competitive. We are recommending changes to the Annual We are clear about what we have achieved. Bonus Plan and Performance Share Plan, But we are equally clear that, at a time of which I ask you to support. intense competition, there can be no let-up in the work to return M&S to profitable Bonus targets remain extremely demanding. growth. Over half of any bonus awarded would be paid in shares, which must be held for three We must remain focused on our main task – years. We are committed to rewarding to create value for shareholders by success, not failure and directors’ contracts developing a trusted brand and delighting are subject to a clear obligation to mitigate customers with superior product at prices cost to M&S. which offer real value. These changes continue to align I wish my colleagues all the best in directors’ rewards with the long-term continuing this work during 2006/07 interests of shareholders. and beyond. The AGM in July will be my third and last as Chairman. Terry Burns will become your new Chairman after the meeting. I know that he will provide the Board with effective leadership.