Annual report and financial statements 2008 Quality (cid:129) Value (cid:129) Service (cid:129) Innovation (cid:129) Trust What’s inside About us 1 Our plan Key performance indicators 2 Key performance indicators Business review 4 Chairman’s foreword 5 Chief Executive’s statement 9 Group Finance and Operations Director’s statement 10 Our core UK business 11 Womenswear and lingerie 11 Marketplace trends 14 Menswear 15 Kidswear 16 Home 17 Food 20 People 22 Service, IT and logistics 24 Property and store environment 26 M&S Direct 28 International 30 Plan A Your Board 32 Your Board Financial review 33 Financial review Governance 35 Group Directors’ report 39 Corporate governance statement 48 Remuneration report Financial statements 56 Auditors’ report 57 Consolidated income statement 57 Consolidated statement of recognised income and expense 58 Consolidated balance sheet 59 Consolidated cash flow information 60 Notes to the financial statements 92 Company income statement 92 Company balance sheet 93 Company statement of changes in shareholders’ equity 93 Company cash flow statement 94 Company notes to the financial statements 96 Group financial record Shareholder information 99 Shareholder information Index What’s online… This year, the majority of M&S shareholders will be clicking through to marksandspencer.com/annualreport08 to read our Annual report online. The experience will not only be a more engaging one, but a greener one, which helped us save about four million pages of paper. It’s a major step forward for us, as we move towards online becoming our main form of shareholder communication (see page 4 for details). Our annual report website now offers: (cid:129) An interactive experience We’ve created different features for you to explore, such as an interactive timeline of the year and map. (cid:129) Clear and simple navigation Making it quick and easy to find the information you need. (cid:129) View as you please There’s no need to read or print the whole report if you don’t want to – you can simply print selected pages as you view them, or download a PDF of the sections you’re interested in. The majority of the report can also be viewed on handhelds. (cid:129) A user-friendly experience The website has been designed to be accessible for people with disabilities. Key features include the ability to resize text to a larger font, tagged images, charts and graphs, and optimisation for screen readers. marksandspencer.com/annualreport08 About M&S We are one of the UK’s leading retailers, with over 21 million people visiting our stores each week. We offer stylish, high quality, great value clothing and home products, as well as outstanding quality foods, responsibly sourced from around 2,000 suppliers globally. We employ over 75,000 people in the UK and abroad, and have 622 UK stores, as well as an expanding international business. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 1 Our plan A b o u t u s In the last year, we’ve built on our plan to grow M&S into a world-class retailer that’s customer-focused, fast-moving and flexible. We work hard to ensure we offer only the highest quality products, service and shopping environments in all of our stores. Looking forward, our plan hasn’t changed, but it has broadened to focus on five key growth areas. We will: (cid:129) continue to invest in and grow our core UK retail business, by introducing new goods and services; (cid:129) strengthen our UK property portfolio; (cid:129) drive our M&S Direct business; (cid:129) expand our International business; and (cid:129) integrate Plan A (our ‘eco plan’) into every aspect of how we do business, so that we grow in a sustainable way. We will monitor and measure our performance against these objectives. In the following pages, we’ve begun this process by setting out Key Performance Indicators (KPIs). In the current difficult economic climate, our brand values – quality, value, service, innovation and trust – are more important than ever. Our commitment to these values sets us apart from our competitors, and enables us to offer our customers something truly special. 2007/08 has been a year of positive achievements, as you’ll see in the Chief Executive’s statement. Although the outlook for the global and domestic economy remains uncertain, we’re confident that we’re making good progress towards long-term growth. Food UK sales (excluding VAT) £4,250m (+6.9%) Food accounts for 51.1% of our UK business and we have a market share of 4.3% (source: TNS Worldpanel). We opened 98 Simply Food stores growing our portfolio to 299 across the UK, including franchised stores in BP Connect forecourts, motorway service stations, railway stations and airports. >read more on page 5 Total group sales £9,022m Clothing and Home UK sales (excluding VAT) £4,059m (+1.4%) We are the UK’s largest clothing retailer with a value market share of 11.0% and volume market share of 11.2% (source: TNS Worldpanel) and sales accounting for 48.9% of our UK business. >read more on page 5 International Sales (excluding VAT) £713m (+16.8%) Our International business accounts for 7.9% of Group turnover and has grown to 278 stores in 39 territories globally. During the year, we entered 4 new territories and opened 38 new stores. >read more on page 5 i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 2 MARKS AND SPENCER GROUP PLC Key performance indicators Group revenue £m Group operating profit £m £m ■ UK Retail ■ International Retail Total 2007/08 2006/07 2005/06 2004/05 2004/05 7,034.7 455.8 7,490.5 2005/06 7,275.0 522.7 7,797.7 2006/07 7,977.5 610.6 8,588.1 2007/08 8,309.1 712.9 9,022.0 9,022.0 8,588.1 7,797.7 7,490.5 £m ■ UK Retail ■ International Retail Total 2007/08 2006/07 2005/06 2004/05 2004/05 588.4 60.7 649.1 2005/06 790.1 65.7 855.8 2006/07 956.5 87.5 1,044.0 2007/08 972.9 116.4 1,089.3 1,089.3 1,044.0 855.8 649.1 Group profit before tax £m Earnings per share 2007/08 2006/07 2005/06 2004/05 1,007.1 965.2 751.4 556.1 2007/08 43.6p 2006/07 40.4p 2005/06 31.4p 2004/05 19.2p Group gross margin Market share value Clothing & footwear 2007/08 38.6% 2006/07 38.9% 2005/06 38.3% 2004/05 34.7% 2007/08 11.0% 2006/07 11.1% 2005/06 10.4% 2005/06 Womenswear 10.5 24.3 Lingerie 9.6 Menswear 4.2 Kidswear 2006/07 11.3 26.1 10.3 4.5 2007/08 11.1 24.8 10.5 4.8 Market share value Food Market share volume Clothing & footwear 2007/08 4.3% 2006/07 4.2%* 2005/06 4.1% Note: As part of TNS’ annual restatements, data can sometimes alter in prior years as they make changes to definitions or clean up the data following more detailed information. This has always been the case and any changes are typically very small adjustments. This is a process that all data providers do as a part of due diligence. * Rebased figure 2007/08 11.2% 2006/07 10.7% 2005/06 10.1% Womenswear Lingerie Menswear Kidswear 2005/06 8.8 16.7 11.2 4.4 2006/07 10.0 18.3 11.1 5.0 2007/08 10.0 17.9 13.1 5.2 The profit measures above are from continuing operations and stated before property disposals and exceptional items. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 3 A b o u t u s Average weekly footfall 2004/05 2005/06 2006/07 2007/08 19.3m* 19.8m* 21.0m* 21.4m Approximately half of M&S UK stores are fitted with entrance cameras that record the number of people who visit our stores. This known footfall is analysed so that we can establish the ratios between the visits and sales, and then apply this to stores without cameras. A total average footfall figure can then be calculated. In 2007/08 there was a change in methodology and an upgrade in technology that means we are more accurately capturing customer footfall. Previously we were under-stating our customer flow. We switched to enhanced technology – thermal image cameras that are more sensitive in picking up flow of individuals and separating groups of people as they walk into the store. We also increased the sample of annualised stores from 33 to 260, weighted to represent the whole chain. * Rebased figure Mystery shopping Each of our stores is anonymously visited once a month – twice in the case of our larger flagship stores – by a mystery shopper who evaluates service quality. In 2007/08 that was the equivalent of approximately 6,240 visits to our stores. Scores for each question are validated through an online customer survey. May June July Aug Sept Oct Nov Dec Jan Feb Mar 85 84 84 85 85 86 87 88 87 88 87 % 2007/08 84 82 82 83 82 81 79 78 2006/07 73 73 70 Operational CO2e emissions tonnes 2006/07 2007/08 2011/12 -9% We’ve reduced our carbon dioxide and equivalent emissions (CO2e) produced by our UK and Republic of Ireland stores, offices, warehouses, business travel and logistics. Emissions are down by 9% from 517,000 tonnes in 2006/07 to 469,000 tonnes, despite a 5% increase in sales-floor area. 517 469 Nil i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l Energy efficiency kWh/sq ft Waste sent to landfill tonnes 2006/07 2007/08 2011/12 2006/07 2007/08 2011/12 s t a t e m e n t s -4% 54,000 51,000 -6% 68 65 51 For Plan A performance refer to the How we do business report at marksandspencer.com/annualreport08 0 i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 4 MARKS AND SPENCER GROUP PLC Chairman’s foreword Your dividend 22.5p 8.3p 14.2p Total dividend Interim dividend Final dividend Lord Burns This is my final report to you as Chairman, and I’m pleased to report that while the market has become tougher in the second half, it has been a good year for M&S. Profits are up; our plan remains firmly on track; and we end 2007/08 as a stronger, more competitive business than for many years. As a result, we report an increase in your dividend of 23% to 22.5p and an increase in adjusted earnings per share (EPS) of 7.9% to 43.6p. The work done over the last four years in getting the basics right has enabled us to deliver good results despite difficult conditions. However, the trading environment remains uncertain and we need the right management in place to take us forward. For these reasons, the Board concluded that it would be in the best interests of the business to retain Sir Stuart Rose in a leadership role until 2011. We also wanted to prepare for a smooth transition to a new Chief Executive before Stuart’s eventual departure, and more generally, to ensure continuity in a business that has experienced a great deal of change in recent years. We decided that these objectives could best be achieved by Stuart taking up the position of Executive Chairman. He explains on page 6 how this will enable him to continue to drive the business forward, while giving others greater scope to demonstrate their talents and leadership ability. Although the decision to retain Stuart until 2011 has received widespread support, there has been some criticism of combining the roles of Chairman and Chief Executive. We remain strongly of the view that this was the only practical way to secure his extended term, and is the right decision for M&S. As I explained in detail in the letter sent to all shareholders on 3 April 2008, we have put in place a number of safeguards to mitigate the governance concerns arising from Stuart’s new role. These include the appointment of Sir David Michels as independent Deputy Chairman and the search for a new independent non-executive director is underway. We have introduced annual voting for Stuart’s reappointment starting this year, and are also considering recruiting a further new independent non-executive director. To see a copy of this letter go to marksandspencer.com/thecompany You may notice certain changes to this year’s report, resulting from the new Companies Act 2006. Shareholders were given a choice of formats in which to receive our report, and we were pleased that so many have opted to read it online, enabling us to reduce our environmental impact. With greater emphasis on online reporting, we’ve created a much improved website, which you can see at marksandspencer.com/annualreport08 I have enjoyed my time with M&S. Significant progress has been made as the business has continued to be transformed in the eyes of customers, employees and the wider world. I am confident that our strong Board, and plan for long-term growth, puts M&S on course for a successful future. Lord Burns Chairman marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 5 Chief Executive’s statement It’s been another good year for M&S, achieved in difficult circumstances. We started with a strong first half, but experienced more difficult trading conditions in the second half, largely as a result of the economic slowdown. Having completed the first phase of our recovery, we are now broadening our plan in order to take the business into the next stage of growth. In 2008/09 we will need to manage the business in a challenging economic environment, while continuing to invest for future growth. Broadening the plan In 2004 we put in place a three-part plan for renewing and reinvigorating M&S in order to secure profitable growth and build the business for the long term. Our focus was on getting the basics right, by improving the products we offer, our customer service and shopping environments. In 2007/08 we continued to make progress against the plan. We sold more goods to more people, reporting our biggest volume increase in sales in eight years, with volume market share in clothing and footwear at 11.2%. At the same time, we held our lead in the value market for clothing and footwear achieving 11.0% market share. Clothing and home sales were up 1.4% to almost £4.06bn. Per una also performed strongly under the leadership of George Davies, reporting sales of more than £428m. Sir Stuart Rose Highlights £1,007m Adjusted pre-tax profits 4.3% Increase in adjusted pre-tax profits £9,022m Group sales 5.1% Increase in Group sales UK stores International stores Flagship stores 44 Simply Food stores 167 High street stores 219 Retail park stores M&S outlets 27 33 Simply Food franchised stores Total UK stores 132 622 622 UK stores 278 International stores Bahrain Bermuda Bulgaria Croatia Cyprus Czech Republic Gibraltar Greece Guernsey Hong Kong Hungary India Indonesia Jersey Kuwait Latvia Lithuania Malaysia Malta Oman 1 1 1 4 10 10 1 35 4 8 9 14 13 6 1 1 1 4 3 1 Philippines Poland Qatar Republic of Ireland Romania Russia Saudi Arabia Serbia Singapore Slovakia Slovenia South Korea Spain Switzerland Taiwan Thailand Turkey UAE Ukraine 14 4 1 17 6 12 8 1 7 1 1 17 5 1 3 10 34 5 3 Total International stores 278 1 store opened in Libya in April 2008 A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 6 MARKS AND SPENCER GROUP PLC In food, a good performance saw sales increase from £3.97bn to almost £4.25bn, and value market share remain steady at 4.3%. M&S Money continues to benefit from our partnership with HSBC, with 3.8 million customers now signed-up to an M&S Money financial product. M&S Money now has more than 3.1 million M&S Money credit cards in circulation, 114 bureaux de change in our stores, and it served 4.8 million travel money customers during the year. Its range of financial products also includes car, home, travel, pet and wedding insurance, as well as cash ISA and unit trusts like the M&S Ethical Fund. As we take the business forward, we are broadening the plan for long-term growth. This will be achieved by continuing to invest in our core UK retail business introducing new goods and services; strengthening our UK property portfolio; driving our M&S Direct business; expanding our international business; and ensuring Plan A – our ‘eco plan’ – is integrated in everything we do. I will return to the specific steps we’re taking to achieve our objectives on page 7. First I want to review the changes we’ve made to ensure we are building on a strong foundation. Building management capability On page 4, Lord Burns explains the business rationale for my appointment to Executive Chairman. As the decision has attracted much comment, I’d like to highlight the immediate and longer-term benefits for the business. We believe in developing management talent internally, but this has been difficult for M&S in recent years, with the business experiencing considerable turbulence, followed by rapid change since the turn of the millennium. However, we now have a strong senior team in place, which has an opportunity to develop its skills – with Ian Dyson as Group Finance and Operations Director, Steven Esom and Kate Bostock appointed as Executive Directors running food and clothing respectively and Steven Sharp continuing in his role as Executive Director of Marketing. We also benefit from an expanded and talented Executive Committee (pictured on page 8). With Ian taking on significant new responsibilities, I can now focus on a more specific set of executive responsibilities, in particular product, people development, and key growth areas for the business including M&S Direct and International. My new role will also give me time to develop and mature talent within the business – a key task for any Chairman. At the same time the Board will be able to continue to drive a proven plan without distraction, in a difficult economic environment. Responding to market conditions 2007/08 was a year of two halves, with a strong start followed by a weaker performance. While we believe our second half performance is largely attributable to a deterioration in market conditions, like any retailer there are things we could have done better. For instance, although we sold significantly more volume, we under-potentialised products in the middle and top price categories – what we call ‘better’ and ‘best’ – during the key Christmas period. Although we can’t predict how severe the current downturn will be, or how long it will last, we expect its impact to be felt into 2009/10. However, we believe we have the potential to outperform the competition by planning for modest sales growth and keeping a tight control on costs and stock levels, while at the same time, driving our business using our five key values of: quality, value, service, innovation and trust. Our efforts in the last three years to re-engage with customers so they once again consider M&S as ‘great value’ for money, will support us in the years ahead. We have reviewed our pricing architecture in order to attract a broad range of customers. We are now achieving a wider price span – staying in touch with the supermarkets at entry levels, while extending our offers above and beyond other high street retailers. It will enable us to flex our ‘good’, ‘better’ and ‘best’ ranges to respond to changing customer demand, as and when the economic situation alters. We continue to invest in our stores, having completed 70% of our store modernisation programme. We plan to modernise an additional 10% of space, and open an additional 5.5% of new space in 2008/09 so that we enter a difficult period for UK retailing, with the majority of our stores looking their best and using every square foot to its full potential. April 2007 ‘Wash at 30’ campaign M&S announces campaign to wash at 30˚C, and to re-label almost 75% of its clothing ranges to include the words ‘Think Climate – Wash at 30˚C’. June 2007 Recycled schoolwear launches M&S becomes the first retailer to launch schoolwear made from recycled plastic bottles. September 2007 Saturated fat levels cut M&S cuts as much as 82% of saturated fat levels from over 500 products including sandwiches, ready meals, crisps and savoury snacks. September 2007 Big & Tall launches Offering more than 450 items online, ranging from tailoring to knitwear to casual shirts and trousers, at the same price as standard sized clothes. November 2007 A Hollywood Christmas The Christmas advertising campaign launches featuring leading man Antonio Banderas alongside the M&S leading ladies. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 7 Finally, owning 70% of our assets and having relatively low gearing means M&S has one of the strongest balance sheets in the retail sector. Ian will discuss this further on page 9. 1. Investing in our core UK business Product Our core UK business comprises the individual business units of womenswear, lingerie, menswear, kidswear, home and food. In 2007/08 we made good progress in each business unit. In womenswear and lingerie, the emphasis was on our segmentation plan, where we clarified our sub-brands (such as Autograph) to help our customers quickly and easily find what they’re looking for. Further work is needed this year to ensure customers feel comfortable in shopping for their requirements. At the same time, ranges were continually refreshed so that customers can always find something new. This adds up to what we call ‘Every Woman, Every Time’ – where we make it easier for our customers, regardless of their age, size and budget – to find clothes that are beautifully made, stylish and offer great value for money. Work to segment our sub-brands was also central to the kidswear plan, as we took important steps to win back market share. In menswear and home, changing customers’ perception of value was the focus as we competed hard on opening price points (with home prices at almost 12% below the high street average), while improving ‘better’ and ‘best’ products for the more aspirational shopper. In food, we delivered against our commitment to provide food of the highest quality without compromise, with a focus on provenance, innovation and health. Brand stretch Our brand is strong, and in 2008/09 we believe we can build on the trust it inspires to offer our customers better service and more of what they want through ‘brand stretch’. For instance, by featuring plus sizes online; offering bespoke Made to Measure shirts for men; and expanding our in-store hospitality options. Additionally, while M&S will always be essentially an ‘own brand’ business, we believe we can add significant extra value, by partnering with guest brands that complement our values. In the last year, this was predominantly with trusted technology brands in home, such as Sony and Apple. In food, where we face strong competition, customers tell us that time and convenience are key drivers. During the summer we will therefore trial the sale of up to 350 branded food products – such as Marmite, Heinz tomato ketchup and other branded ‘must haves’ – in a small number of stores. We will roll this out if successful. Service and store environments In addition to our products, we have continued to improve the quality of our service and store environments. In service, during 2007/08 our store colleagues sold record volumes, while simultaneously improving their scores in our mystery shopping programme – achieving an above average score of 86%. It’s to their credit that we continue to be seen as one of the high street’s best customer service providers. We’ve invested behind the scenes in our IT and logistics infrastructure in order to maintain service efficiency. In 2007/08, as well as delivering 13% more stock to our stores than in 2006/07, our logistics network responded to a 63% rise in volume from M&S Direct. The plan has helped us to develop faster and more efficient IT systems throughout our business. For instance, we are introducing new point-of-sale systems, including more than 2,000 new tills and 258 new hand-held terminals in-store to make stockchecking easier and more efficient. Ian will discuss this further on page 9. While our IT and logistics improvements help support our stores to run more efficiently, our store modernisation programme is improving our shopping environments (see page 24). 2. Strengthening the UK property portfolio We are undertaking one of the biggest store investment programmes in the UK; modernising and expanding our existing footage (with 70% now complete); increasing the number of stores we have; and ensuring we offer the right stores in the right locations. We will modernise a further 10% this year. January 2008 Oxfam Clothes Exchange Exchange launches to reduce the 1 million tonnes of clothing sent to landfill each year in the UK, and raise funds for Oxfam’s work to tackle poverty and injustice. February 2008 Carrier bag charging A 5p charge for food carrier bags announced, to be introduced in M&S stores from the beginning of May. All profits to go to environmental charity Groundwork. April 2008 Artificial colours and flavourings removed M&S becomes the first retailer to remove all artificial colours and flavourings from its entire food and soft drinks range. May 2008 Eco factory launch M&S suppliers launch two eco factories in Sri Lanka. They will produce per una and Autograph lingerie exclusively for M&S. A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 8 MARKS AND SPENCER GROUP PLC In order to achieve the scale of our property plan, in November 2007 we announced that we would open an additional 15% to 20% more space in the next three to four years. In 2007/08 we made significant strides against the plan, opening 38 new stores, which helped lift sales by 16.8% to £712.9m; and operating profit by 33% to £116.4m. But, like any business in this market, we need to prioritise costs. Although we will continue to invest in our store modernisation and expansion programme, this year we will particularly focus on new footage, and modernisations with extensions. See page 9. 3. Developing our M&S Direct business M&S Direct covers our e-commerce website; home catalogue; Christmas hamper delivery; flower and wine delivery; in-store ordering service; and Lunch to Go. During the year it not only became an important part of our commitment to become a multi-channel retailer, but with sales up £60m to £220m, it put us on course to reach our target of £500m annual sales by 2010/11. On our e-commerce site in particular (relaunched with Amazon in March 2007), we have recorded strong growth with visits to the website up by nearly 60%, and sales growing ahead of the market. 4. Building an International business Expanding internationally provides strong opportunities to build a broader revenue base and drive profitable growth in some of the world’s most exciting markets. In November 2007 we set ourselves a target for International to achieve between 15% to 20% of total Group revenues within the next five years (in 2007/08 it contributed 7.9%). We will do this by flexing our business model so that we expand not just through franchise partners, but also on a part-owned and wholly-owned basis. We have already signed deals in Europe with two of our existing partners, and in India where we will open around 30 to 50 new stores in the next five years. This is in addition to our plans to enter China on a wholly-owned basis later this year. 5. Keeping up momentum on Plan A Plan A, our five-year ‘eco plan’, reached the end of its first year in January 2008. We pledged to meet 100 separate Plan A commitments within five years, and so far we’ve made progress on 94. Despite the tough consumer climate, our commitment to Plan A remains, because there are compelling moral as well as commercial reasons to do so. Plan A gives us brand differentiation, and as Al Gore said, “a sustainable business can be a profitable one”. Looking ahead The next year will be tough. We will have to continue to challenge ourselves to become more efficient, drive down costs and improve our rate of return. At the same time we must maintain our investment for the long term both in the UK and overseas. I believe that we have started to achieve this. We have talented and motivated people; well-priced, quality products; a clear plan; and dedication to understanding what our customers want – all of which put us in a good position to meet the difficult market conditions that lie ahead. I would like to pay tribute to all of our staff and suppliers for their hard work this year. It has been a tough but rewarding experience, and they can take pride in their achievement. I would also like to thank Lord Burns for his support as Chairman over the past two years. He has guided the Board through some difficult discussions, always having the best interests of the Company at heart. Sir Stuart Rose Chief Executive 1 3 2 4 5 6 7 8 9 10 11 13 12 1 Clem Constantine Director of Property and Store Development 2 Steve Rowe Director of Retail 3 Nayna McIntosh Director of Store Marketing and Design 4 Carl Leaver Director of International Business 6 Ian Dyson Group Finance and Operations Director 5 Kate Bostock Executive Director of Clothing 7 Sir Stuart Rose Chief Executive 8 Steven Sharp Executive Director of Marketing 9 Steven Esom Executive Director of Food 10 Tanith Dodge Director of Human Resources 11 Andrew Skinner Director of GM Merchandising and Planning 12 Darrell Stein Director of IT and Logistics 13 John Dixon Director of Home and M&S Direct marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 9 Group Finance and Operations Director’s statement Highlights 7.9% Increase in earnings per share £1.1bn £914m Capital expenditure Returned to shareholders Ian Dyson A b o u t u s i i n d c a t o r s 2007/08 was a year in which we made good progress in moving the business forward. Earnings per share were up 7.9%. At the same time as continuing to grow our earnings, we invested £1.1bn in our business to drive future growth, and also returned £914m to our shareholders via dividends and the share buy back. i B u s n e s s r e v e w i Results Sales were up 5.1% to over £9.0bn with a robust performance in the UK boosted by almost 5% of new space, and another strong year for International, where sales were up 16.8%. Gross margin in the UK was down slightly to 43%, but good control of our costs enabled us to deliver profit growth of 4.3% overall, to £1.0bn. Our interest charge was up only 4.3%, despite a significant increase in net debt to £3.1bn, reflecting a much higher pension credit. With a low tax rate of 27% and a lower number of shares in issue, earnings per share were up 7.9% to 43.6p. Investing in the business Last year we invested £1,055m to support the future growth of the business. This investment was focused in three areas: UK property portfolio, International and supply chain and information technology (IT). We modernised a further 35% of our store portfolio to take us to 70%. This included some major developments and extensions at stores such as Edinburgh, London Colney, Cheshunt, Lisburn and Braehead. We expect to modernise a further 10% of our estate in 2008/09. We also added space in line with our strategy to develop and expand the M&S footprint in the UK. In total we added 4.8% of new space, with 3% in general merchandise (GM) and 8.7% in food, reflecting the continued roll out of our successful Simply Food format. In 2008/09 we expect to add a further 5.5% of new space. In International we continued to build our business in Ireland, and worked with our franchise partners to move the business forward. The biggest developments however, were the acquisition of controlling interests in our franchise businesses in Greece and the Balkans, and in the Czech Republic. We see substantial growth opportunities for these businesses over the coming year. Shanghai in the autumn, and in India we have signed a deal with Reliance to develop M&S throughout this fast developing nation. Underpinning our growth prospects is a plan to invest to upgrade our supply chain and our IT systems. This is a major programme that will enable us to grow our business effectively and efficiently. We will add logistics capacity in food and restructure our GM logistics, centred on the opening of fewer, larger distribution centres, beginning with Bradford in 2010/11. In IT we will implement new store systems, including POS, new trading systems and new support systems. While we are sensitive to the economic environment, we are continuing to invest to move our business forward and intend to spend between £800m and £900m in capital expenditure in 2008/09. A strong balance sheet Our strong balance sheet underpins our future plans to invest in the business and gives us resilience against difficult market conditions. Our ratios remain strong and we retain ownership of 70% of our property portfolio. The strength of our balance sheet enabled us to return more than £900m to our shareholders during 2007/08. Dividends increased by 23% and we bought back 7.4% of our share capital at a cost of £556m. As Stuart has said, 2008/09 will be tough. We will manage our business accordingly but will also not lose sight of the longer term opportunity by continuing to invest in our business. This approach will, we believe, drive value for our shareholders over time. We have also moved on in establishing M&S in the exciting markets of China and India. We will open our first store in Ian Dyson Group Finance and Operations Director i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 10 MARKS AND SPENCER GROUP PLC Our core UK business In the following pages we review our core UK business, which covers the individual business units of womenswear, menswear, kidswear, home and food, as well as our service (including IT and logistics) and store environments. Building our brand The challenge for M&S marketing is how we stay ahead of the competition, by responding to the things that matter the most to our customers. One way we’ve responded to this challenge is by evolving our well-loved and successful food and womenswear advertising campaigns. In food, we’ve retained the same broad approach, but we’ve started to respond to the issues we know our customers care about. Everyone knows that our food tastes good, so our new ‘manifesto’ campaign now goes a step further by introducing powerful messages on provenance and healthy eating. For example, our ‘mellow yellow’ ad showcased our commitment to using only free range eggs in all of our food, and ‘true colours’ told the story of how all our food is now 100% free of artificial colours and flavourings. Our womenswear ads – which feature the famous faces of Twiggy, Erin O’Connor, Lizzie Jagger, Noémie Lenoir, Laura Bailey and Myleene Klass (and at Christmas, special guest Antonio Banderas) – change with the seasons, featuring new soundtracks and locations. As with the food ads, we survey shoppers each month, and we’re encouraged by the customer feedback we’ve received. Figures from Adwatch (who analyse the impact of company advertising), show more than half of our food ads rated within the top five, and our womenswear ads continue to lead at number one. Our marketing evolved during the year, with changes made to refresh in-store décor so that it’s consistent with the look and feel of our new and modernised stores. We communicated our Plan A achievements to customers both in-store and through the relaunched Plan A section of our website at marksandspencer.com/planA. In both cases we provided details on how our customers can get involved in specific initiatives such as ‘Wash at 30’, the Oxfam Clothes Exchange and reusing carrier bags. The effectiveness of our advertising and marketing campaigns is evidenced by our ability to hold brand momentum (our brand impact and performance) despite a slowdown on the high street. In the year to come, our challenge is to maintain this momentum – with Plan A playing an important role here – and by ensuring we retain brand consistency as we expand internationally. Steven Sharp: Executive Director of Marketing Steven joined M&S in 2004. In addition to his marketing role, he is also responsible for store design and presentation as well as running the relationship with M&S Money. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 11 Womenswear and lingerie In 2007/08 we strengthened our position as the number one brand for womenswear and lingerie, despite a tough second half, by doing what we do best. From classic and tailored looks, to fast fashion inspired from the catwalk, we demonstrated that ‘Every Woman, Every Time’ is at the heart of our womenswear and lingerie plan. In short, it’s our commitment to help every woman – regardless of her age, size and budget – to find stylish clothes that are beautifully made, at great value prices. Our performance During the year, value market share in womenswear fell from 11.3% to 11.1% in the face of tough competition on the high street, strong downward pressure on prices, and a slowdown in customer spending. However, volume market share remained steady at 10.0%. We achieved this by looking closely at our price structure to ensure our competitiveness at opening price points. Marketplace trends A few of our favourite things... A b o u t u s Cashmere Selling at £49 in 2007/08 (down from £69 in 2006/07), we sold more than one cashmere item a minute during our busiest week in London’s Marble Arch store. i i n d c a t o r s Lingerie We offer 78 bra sizes, from 28AA through to 44J, and are the only high street retailer to offer machine washable silk lingerie. i B u s n e s s r e v e w i Leather From biker jackets to our famous Little Black Dress, we introduced affordable leather in line with the latest catwalk trends. In 2007/08, the retail market continued to grow, but at a slower rate than previous years. Increasing levels of debt and household bills have had an impact on consumer confidence, which is at its lowest point since 1993 (GfK research). The growing demand on disposable income has also seen customers prioritise essential bills at the expense of shopping and leisure activities. Generally, customers continue to look for more choice and convenience. As a result, the trend for shopping online has increased, partly due to greater customer confidence in payment security and delivery. Retail parks and out-of-town shopping centres have also grown in popularity, offering greater breadth of choice in products and shopping formats that fit around customers’ differing needs and busy lifestyles. Looking specifically at the clothing market, sales have been the hardest hit by the recent decline in customer confidence – slowing through the last quarter of 2007/08 and now in decline on the year (TNS market research). In a change to last year, customers have started to spend more on individual items of clothing, investing in a few key pieces that offer versatility and can be dressed-up or down. As a result, value growth is marginally ahead of volumes. The exception to this is in womenswear where customers continued to buy ‘more for less’ driven by a desire for fast fashion and multiple looks. Despite a slowdown in the housing market, there was generally strong growth in homeware sales as customers updated their homes, rather than move house. Specifically, electronic goods continued to sell well across the industry, as price deflation of the latest ‘must-haves’ made them more accessible to more people. The food market held up primarily through price inflation and customers buying more premium products. Customers have become savvy in shopping across different outlets to make the most of their food budget – carefully choosing ‘what they buy where’ from the basics, to treats. The growing trend for fresh ingredients has continued, with customers looking for key ingredients to cook from scratch, or quality products that allow them to assemble a fresh meal. The increasing profile of food sourcing and animal welfare issues, has also encouraged them to trade-up to products that are free range and organic. In the year ahead, the trading environment will be tough. Customers will feel ongoing pressure on their personal finances. In these challenging conditions, they are expected to turn to trusted, well- established brands that provide reassurance they are spending their money wisely. K e y p e r f o r m a n c e S h a r e h o d e r l i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n particular emphasis on building on the success of Autograph. We offer knitwear at prices from £9 to £49 and bras from £5 to £20, and will continue to do so. However, we want our customers to recognise our reputation for offering incredible quality and excellent cuts across all of our price points. No limits We don’t aspire to be a brand where fast fashion is all that matters, but we do want to cater for women of all ages. Limited Collection helps us do that – answering our younger customers’ demands for affordable looks from the catwalk. It’s growing faster than any other part of our womenswear business, with market share up amongst women under-35. That’s because our customers now know that if they like something at M&S they should buy it now. 12 MARKS AND SPENCER GROUP PLC In lingerie, the continual introduction of innovative products in an extended range of sizes, as well as better segmentation of our brands, helped us stay at number one with 24.8% value market share and 17.9% volume market share. An easier way to shop In 2007/08, as part of our ‘Every Woman, Every Time’ commitment, we reviewed the segmentation of our sub-brands, so that we can help our customers quickly and easily find what they’re looking for. Although this will continue in 2008/09, improvements can already be seen within Autograph (see below) and lingerie (see page 13). Competing on value and quality During the last year, we responded to market demand by becoming even more competitive at our opening price points. While this increased both our sales volume and market share volume, we recognise the opportunity to drive our ‘better’ and ‘best’ ranges – with Brand strength in Autograph Autograph stands for the best of modern and sophisticated M&S. It grew strongly in 2007/08 by offering elegant and timely pieces, in luxury fabrics and cuts, which are flexible for all lifestyles. In recent months, we’ve seen some of our customers become more interested in buying products of enduring style and quality, than in finding the lowest possible prices. In response to this trend, we have improved our quality throughout our price architecture, which means our value credentials are stronger than ever. For example in Autograph, our customers are willing to spend more on our luxury fabrics such as silks and cashmere. By driving more product choice in these fabrics, we continue to grow our Autograph business. Over the last year, we have expanded and strengthened the Autograph brand, introducing Autograph Exclusive, which offers a range of limited edition pieces such as coats and eveningwear, and Autograph Weekend, a new casual look with an American East Coast flavour. Both play an important role in our segmentation strategy and have added incremental sales to the brand. Kate Bostock: Executive Director of Clothing Kate joined M&S as Director of Womenswear in 2004, and was appointed to the Board as Executive Director of Clothing in March 2008. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 13 Clearer choices in lingerie Selling 50 million knickers a year (that’s nearly two pairs of knickers every second), and 25 million bras – it’s estimated that one in three women wear M&S lingerie. To meet the underwear needs and tastes of every woman, we have in the past introduced a wide range of different brands. As part of our segmentation work, we reviewed our lingerie brands, matching them to our different customer profiles, before fine-tuning our offer – cutting out duplication and filling in any gaps. We now offer five brands – Adored, Autograph, Body Solutions, Limited Collection and per una. The move to fewer brands in lingerie has given women of all ages, sizes and budgets, a clearer choice. It’s also helped us to focus on good basics at our opening price points, as well as great value across the entire offer. A b o u t u s i i n d c a t o r s Faster, fresher fashions The journey from catwalk to high street is faster than ever, with customers expecting something new and different each time they come into store. Satisfying this increasing demand poses a major challenge for any retailer. In response, we’ve adopted a phased approach to introducing new stock, which means that 25% of our womenswear will be new every five to six weeks. Within that, we have brands that release new products into stores on a three-week cycle. To make this quicker turnaround possible, we are now buying collections in two of our major brands (Limited Collection and Autograph Weekend), from our suppliers in Turkey, just eight weeks ahead. Looking ahead In 2007/08 we introduced great value at our opening price points in both womenswear and lingerie and in doing so made good progress in attracting customers in the under-35 age range. 2008/09 will be a tough year. It will be more important than ever to continually improve our ranges across all our price points, and to ensure we’re responding to trends by quickly getting new products into store. We’re now working closely with our suppliers to achieve even greater speed and flexibility, ensuring we continue to keep pace with customer demand. In store it is still important to ensure that the distinctive offering of each of our sub-brands makes the shopping experience an easy one for our customers. In the year ahead, we will push our brands even harder, for instance, by expanding Autograph gifts and introducing Autograph essentials, and by further reducing duplication and filling the gaps in our ranges. Finally, we’ll also be finding new and innovative ways to present womenswear online (see page 26). per una It was another strong year for per una. The brand enjoyed its seventh successive year of growth with sales of £429m in womenswear and lingerie. Growth came from a number of key product areas, including cardigans, dresses, jeans, macs and coats. Our capital expenditure programme positively impacted on per una sales, with the store modernisation and expansion programme increasing per una footage by 15% for the year. Online sales grew by 153%, and International sales by 40% for the year. i B u s n e s s r e v e w i Per una’s point of difference in today’s retail climate, is in giving styles the per una ‘twist’. From the lining, to the buttons, to the trims – the per una twist is the detail that makes its customers feel special. This was seen in the reintroduction of suiting, where the emphasis was on special details and quality fabrics that are part of per una’s distinct style. Following the success of suiting, per una will introduce Speziale Tailoring later in 2008. Another key moment in 2007/08 was the launch of a 25-piece capsule collection called GD25, inspired by George Davies’ 25-year career as a fashion innovator. Left: George Davis, Chairman of per una Cottoning on to Fairtrade We sell about 4.8 million Fairtrade cotton garments annually (that’s about 92,000 a week). As the first major retailer to introduce a Fairtrade cotton clothing range, which includes the popular £5 Fairtrade t-shirt, we now work with some 5,000 Fairtrade cotton farmers so they not only get a fair price for their cotton, but a Fairtrade premium that they can use to improve their working and living conditions. i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 14 MARKS AND SPENCER GROUP PLC Menswear Menswear performed well in 2007/08, despite the difficult second half. We grew and protected volume market share from 11.1% last year to 13.1%, and value market share from 10.3% to 10.5%, by competing hard on price, quality and innovation. Over the course of the year, we began to see a change of mood in the market. As we’ve seen in womenswear, some customers became less concerned about finding the lowest possible prices but more interested in the value represented by clothes of enduring style and quality. A range of prices Our strategy was to compete by having a wider price span – ensuring customers always have a broad choice of price points. Tailoring is a good example. We now offer suits in a wide range of styles, fabric and fit – from a great value ‘first suit’ at £49.50 to handmade suits at £799 that rival varieties on Savile Row. Making quality count As 2008/09 gets underway, we’ve observed a shift in priorities from some customers. Lasting quality of the kind that M&S is famous for, is appealing more to our customers as they begin to trade up, for example from a £15 linen/cotton shirt, to a £29.50 100% ultimate linen option. We’ve been doing all we can to respond to this trend, by searching for the highest quality materials, such as finer gauge merino wool and silks spun in Italy. Our menswear brands In menswear, as in womenswear, our sub-brands are important in helping customers quickly find products that match their tastes and needs. All of our three key menswear brands – Autograph, Blue Harbour and Collezione – made good progress over the last year (see below): Autograph Autograph has established its credentials as offering sharper styles and contemporary design, which helped it to achieve significant growth in 2007/08. Footwear, knitwear and tailoring are particular strengths, from designers such as the Jeffery-West team for shoes and Timothy Everest for suits. As Autograph continues to grow, we’ll have even more opportunity to bring in guest designers and faces, like we did with Take That, who featured in autumn’s Autograph campaign. Smart new ideas More than a quarter of our menswear sales come from products with ground-breaking performance benefits. From ultimate non-iron shirts, and the high street’s first machine washable formal wool trousers, to water repellent StormwearTM jeans (see above) – the M&S technical teams are continuously looking for the latest developments in textiles. New in 2007/08 were ‘climate control’ underwear, featuring temperature- regulating technology developed by NASA, and coin catcher pockets in all of our chinos. Blue Harbour Our Blue Harbour brand was reinvigorated in 2007/08. We’ve taken it back to its East Coast American roots, and in doing so, have begun to attract a younger 35 to 44 year-old customer. Collezione Inspired by Italian style, our luxury Collezione brand continued to flourish in 2007/08. We widened the choice of ‘better’ and ‘best’ options – introducing new shoes at £75, as well as wool and cashmere mix trousers at £49.50. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 15 Top of the class for innovation At M&S, quality and innovation go hand-in-hand. We believe it’s important to offer our customers things they simply can’t get from a supermarket. For example: All of our school blazers are now made from recycled polyester – consistent with our Plan A credentials. We’ve introduced iPod blazers and coats, a must- have for young music-lovers. Parents can text us their child’s details and we’ll send personalised name-tags ready to use. Autograph Offering something a bit more special, in more luxurious fabrics, with key elements including party dresses and suits, high quality knitwear and daywear separates. Kidswear In 2007/08 we made positive progress towards our long-term goal of winning back market share in children’s clothing. Achieving greater consistency across our sub-brands, pricing structure and supply base has helped us increase our volume market share from 5.0% to end the year at 5.2% and our value market share from 4.5% to 4.8%. This is underpinned by our growing share of the newborn and toddler market, and our continued position as the number one provider of schoolwear for UK families. Strong online sales, up 54% on last year, have also made an important contribution. In the year ahead, our challenge is to change perceptions, so that M&S kidswear is the first choice for style, as well as quality and price. Competing on price As in womenswear and menswear, we believe there is increasing demand for greater choice within our ‘better’ and ‘best’ categories, whilst maintaining a strong opening price point stance. In response, we’re segmenting our kidswear offer into three key areas: everyday casualwear, Autograph and Limited (see across). Our determination to compete on price and quality is clearly demonstrated by our plans to offer an entire school outfit – polo shirt, jumper and trousers or skirt – for just £6.50. We’ll also be carrying this over to online, where customers can buy complete outfits in just one click. Superheroes, super opportunities From Thomas the Tank Engine and Iron Man, to High School Musical, our character-wear performed strongly for us in 2007/08. In fact, we sell the widest range of character clothing and merchandise on the high street – featuring more than 40 different characters. In the year ahead, we’ll be focusing on our best sellers, to ensure they are represented across the entire department – from babywear to socks to pyjamas. With the support of the marketing team, our kidswear section will be themed to coincide with the launch of new movies or programmes, when popularity will be at its highest. Everyday casualwear Featuring all the junior wardrobe basics, such as jeans, t-shirts, sweats, and weekend- wear. Limited Our most fashionable range, for all age groups from newborn to 14, featuring a bold use of colour and a fast response to the latest trends. A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 16 MARKS AND SPENCER GROUP PLC Home We achieved growth in every area of home – our best performing business unit. In the face of growing pricing pressures, we continued to raise our quality standards, whilst significantly widening choice and lowering prices. Sales for the year were up by 7.9%. In addition, in August 2007, we launched our first standalone home store in Lisburn, Northern Ireland, which performed ahead of expectations. We’ll be opening two more in 2008/09. Down with prices, up with quality We’ve successfully met the challenge of price deflation, maintaining our home prices at 12% below the high street average. Far from compromising on quality, we regularly upgrade our core ranges without increasing our prices. For example, in 2007/08 we upgraded our ‘good’ 100% cotton non-iron range in bedding, to 100% Supima cotton non-iron (our mid-priced sheet), while keeping the price the same. At the upper end of the price spectrum, we have grown our Autograph branded homeware range, offering the very best of M&S quality in everything from bedding and bathrooms to furniture and home accessories. Stretching the brand, extending choice During the year we successfully trialled an extended range of electrical goods in 20 stores and online, selling market-leading brands such as Sony and Apple. We’ll be extending this range to 50 stores in 2008/09. A range of white goods, including fridges, cookers and washing machines, were introduced in Lisburn and online in 2007/08 and we will continue to expand this offer to new standalone home stores, as well as online. Almost a quarter of M&S customers shop from our home range, and we want to attract more. To do this, we will continue to widen choice within existing home areas, and move into new categories such as gardening tools. We will also be redeveloping our beauty business, while continuing to grow our online service (see page 26 for more details). Jargon-busting with M&S Customers who don’t know a megabyte from a megapixel can relax; we’ve rewritten the technology manufacturers’ instructions. When technology instructions start to get too technical, we translate them into everyday language, so that they’re not only more user-friendly, but help our customers get the most out of their product. At home with Plan A Sleep easy on our new bedding that combines both organic and Fairtrade cotton. We’re the only major retailer to ensure every light fitting we sell will accommodate energy- saving light bulbs. Branching out… we offset CO2 emissions from our deliveries by planting 10,000 trees every year. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 17 Food M&S has always been committed to being the first choice for fresh, high quality and convenient food that is ethically sourced. In achieving this, the emphasis in 2007/08 was firmly on provenance, healthy eating and innovation, as we reported continued growth for the year. In the year ahead, as well as reinforcing these values, we want to stretch the brand further, so we offer our customers greater choice and convenience. Performance In 2007/08 we grew sales by 6.9% to about £4.25bn, reflecting the contribution from new space, with the launch of 98 Simply Food stores (including 64 BP stores). Strong performance in key product areas, realignment of prices on key product lines, whilst rigorously maintaining and improving quality, also played an important role. Value market share for the year improved to 4.3%, despite increasing high street competition. In the next few years, we want to increase our market share to just over 5% of the total UK food market. We plan to achieve this growth by opening more Simply Food stores; expanding the range of food we sell in all of our stores; improving the value and quality of our lines; maintaining our lead on innovation and quality; and enhancing our store experience and hospitality offers. We continue to respond to food trends, such as cooking from scratch; Fairtrade and organic; and health awareness through the reduction of saturated fats, salt, sugar, additives and preservatives. A convenient offer In the last year, we’ve responded to customer feedback by taking steps towards becoming a more convenient food shop. Our first step was to begin opening more stores in out-of-town and retail park locations. We’ve now also recently begun to broaden our product offer so that our customers can buy more of what they want at M&S, whether cooking from scratch (see page 18); buying something partly pre-prepared; or picking up a ready meal. As part of our commitment to delivering convenience and service to our customers, we will also trial up to 350 lines of branded food and household essential items in a number of our stores in the North East of England from summer 2008. New lines include Marmite and Heinz tomato ketchup, as well as other branded ‘must haves’. Percy Pig superstar! Originally the star of our best selling sweets, Percy has become an iconic figure featuring on everything from money boxes to egg cups. We’ve now sold over 1 billion Percy Pigs, with two pigs eaten every second. His fans have also set up their very own Facebook Appreciation Society, registering more than 25,000 members. The year in numbers Some 4,000 new and improved products, including the new Food to Go sandwiches and Gourmet to Go deli salads; more than 100 newly trained wine specialists; and over 300 awards for our cheese; just a few of the numbers behind our growing food business. 3 fast facts on M&S food… 2 We work with specialist producers, nurturing smaller quality businesses at home and abroad – our artisan chocolates by Gerard Coleman are just one example. 1 We submit hundreds of products each year for independent taste testing. Products are rated on a scale of 1 to 10, with our average score being 7.8 – higher than our nearest competitor. This year we’ve achieved a few perfect 10s including our raspberry and panacotta terrine and asparagus and pecorino frittata. 3 According to independent research by Allegra, our Fairtrade coffee served in-store is the industry’s best. A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 18 MARKS AND SPENCER GROUP PLC Sustainable sourcing Sustainable sourcing is at the heart of our fish business, so that we not only protect our waters, but the communities that depend on them. In the UK we love cod, but we’re loving it to the point of extinction. That’s why we’re taking action to protect it and other endangered species. British waters provide a range of wonderful seafood to enjoy, and we’ve been working in partnership with the fishing industry to bring more options from the sea to the plate. In addition to our work in Scotland to provide sustainable farmed Lochmuir™ salmon, we’re the largest retailer of Scottish haddock, and we’ve also been working with the Cornish fishing industry. For instance, an exercise in rebranding has transformed the once unpopular pilchards fished in the shallow waters of Penzance and Mevagissey, into the summertime favourite – Cornish sardines. The product was always great – it just needed a new image. In doing this we’ve helped create a viable industry using a sustainable and under-utilised catch. At the same time, we’ve been encouraging the Cornish sardine, and other small-scale fisheries, to achieve Marine Stewardship Council (MSC) certification. We’ve also asked our suppliers to create more products using these species, such as Cornish pollack – an alternative to cod and haddock. Other projects include the National Lobster Hatchery and ‘Meet the Fisherman’ days in local stores such as Truro Lemon Quay, where skippers cook sardines on the quayside and discuss sustainable sourcing with our customers. Steven Esom: Executive Director of Food Steven joined M&S in June 2007 and was appointed to the Board as Executive Director of Food in March 2008. When it’s in season, it’s British. Everyday value As part of this move to be a more convenient place to shop, we have reviewed the prices of popular shopping basket items to ensure they are competitive. These items range from cornflakes and frozen peas, to flavoured whole roast chickens. However, we firmly believe that low prices should never be achieved through a reduction of quality. So although we’re responding to market demand on pricing, we are doing so without any loss of M&S quality or standards. The return to cooking Great food starts with great ingredients – something our ready meals have long been famous for. Now with more of our customers spending longer in the kitchen, we want to make M&S the one-stop-shop for all of their cooking needs. Our new ingredients range gives customers a choice of more than 300 new ingredients – from fresh herbs and spices like our lazy garlic and cinnamon, to bread and cake mixes – that make it easier to start cooking from scratch. And it’s easier still with the help of our M&S recipe cards. The best of British From that comfort food favourite, our outdoor bred Lincolnshire Pork Sausages, to our hand-made Somerset cheddar, we go to great lengths to source the very best speciality foods right on our doorstep. When it’s in season, it’s British. M&S is the only major retailer to stock 100% home grown asparagus in season. We’ve been working with British growers to extend the season, so it lasts from April to July – almost double the length it was five years ago. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 19 The M&S food experience Not everyone who eats in one of our stores is an M&S food customer. That’s why by improving the breadth of our in-store hospitality options, and achieving a balance between healthy eating and indulgence, we’re able to introduce new customers to our food. In fact, we’re one of the UK’s fastest growing hospitality providers, with over 12% like-for-like growth in the last year. As part of our store modernisation programme, in 2007/08 we increased our in-store hospitality offer to create a repertoire of unique breadth and quality. We now offer five in-store hospitality options, including 239 cafés, 5 restaurants, 7 delis, 34 Hot Food to Go counters and 2 M&S Kitchens. Within these new formats we’ve stretched the brand even further, for example offering kids meals in our restaurant, as well as steaks cooked to our customers’ preference. Our deli bars also offer the option of a glass of champagne and a greater volume of fresh (and raw) ingredients, such as freshly prepared salads. Internationally, we look forward to opening an M&S Café in our new Shanghai store (see page 29). Looking ahead In 2008/09 we will continue to grow our food business in line with consumer trends for cooking from scratch and healthy eating, and our programme to open more space. Provenance and ethical sourcing remain high on our agenda, and we expect the Best of British range and our expanding Eat Well range to help us make further progress in attracting a younger customer. Our Simply Food business is important here, and will work alongside our hospitality business in helping broaden our customer base. Our move to become a more convenient food shop is of increasing relevance, as we expand our ingredients and introduce branded food and household items. Simply Food We’ve expanded the presence of our Simply Food business (see page 24) so that our customers can now pick up a pint of milk, or a ready meal from 299 stores located across the country, including airports, train stations, and service station forecourts. This year we plan to open up to another 70 stores. Kids count too It’s not just food for grown- ups where health matters – we don’t believe in ‘dumbing down’ our kids’ food either. That’s why we relaunched our entire range of children’s products during 2007/08 so we could ensure every product – even treats such as our Easter eggs (see above) and birthday cakes – is completely free of artificial additives. This not only gives our customers more opportunity to enjoy asparagus, but also enables them to support farmers like John Chinn – winner of the ‘2005 Grower of the Year’ award for innovation. Additionally, all of our fresh beef comes from the UK, much of it from Scotland, and we’ve been working closely with Welsh farmers to extend the lamb season by a full two months. In 2008/09 we’ll introduce home-reared products to local stores, such as home-reared Oakham chicken in Scotland. With no legally defined industry standard for free range pork, we decided to review all of the many standards and specifications, so that we could introduce our own ‘leading standard’. As a result we now offer in a number of stores truly free range pork, which is the first step towards meeting of our Plan A commitment to convert all of our outdoor bred fresh pork to free range. All of our food is free… from artificial colours, flavourings, sweeteners and hydrogenated fats; as part of our commitment to help our customers eat well. As of 1 April 2008 we became the first retailer to remove all artificial colours and flavourings from our entire food and soft drinks range. It has taken three years to remove artificial colours and flavourings from over 900 products, with some more difficult than others. For instance, finding a natural colour from fruit and vegetable extracts to replace the vibrant pink filling of Turkish Delight. We’ve also made excellent progress in salt reduction, having reached our 2010 targets in 11 out of 15 categories, including ready meals and sandwiches. A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 20 MARKS AND SPENCER GROUP PLC People As we grow our business and invest for the future, it’s important we keep strengthening our team at every level, from the shop-floor through to management. To attract and retain the best talent in the industry, we have to demonstrate that M&S is a good employer, committed to making all our people feel valued and providing them with career opportunities and quality training. The following section reports on how we delivered against these objectives in 2007/08. Training and development Good training and a clearly defined career path are essential to our staff. That’s why we have over 7,500 people in stores who coach their colleagues so their skills are kept up-to-date. In our stores, most training takes place on-the-job, since learning is more effective in real-life situations. All new joiners complete a thorough induction and up to 26 weeks ongoing training – the longest on the high street. We also run a number of specialist training initiatives for people moving into senior management roles. Additionally, more than 4,000 people completed our Buying Academy and Food Academy courses, and we’re now trialling similar academies for womenswear and merchandising. Valued and proud to work for M&S Our staff turnover rate is among the lowest in the industry – 27% for customer assistants, and 12% for management. Moreover, some 40% of our people in the UK have been with us for at least five years, with about 680 celebrating 25 or 40 years service during 2007/08. For us, this is one of the clearest signs that we’re succeeding in making our people feel valued and proud to work for M&S. In addition to our commitment to providing quality training and rewarding our people well, we have a number of specific initiatives designed to make them feel well cared for. For instance, we provide free breast cancer screening to M&S employees and pensioners – last year we screened more than 13,000 people. The service is available from the age of 40 (10 years earlier than the NHS), and can play a potentially life-saving role by detecting cancer early. Listening to our people More than 3,500 employee representatives have been elected to sit on Business Involvement Groups (BIGs), representing staff views on matters relating to work and employment. They regularly discuss employment issues directly with company management at a local, divisional and national level. We also engage with employees through our annual YourSay survey, giving them the chance to tell us what they think about a range of issues – including job satisfaction and management performance. Rewarding our people 25,000 Employees participated in our Sharesave Schemes in 2007/08, saving between £5 and £250 a month. 11,160 Employees shared a gain of £37m from the Sharesave Scheme that matured in 2007. 40,000 Great Service Awards handed out to staff who did a particularly good job taking care of our customers. Marks & Start: breaking down barriers Many people face barriers getting into employment. For groups such as disabled or homeless people, the difficulties are obvious, but we’re also concerned with helping parents get back into work and the young-unemployed to get a job. Over the last year, we offered placements to about 650 people through the Marks & Start scheme. Recruits were teamed with an M&S ‘buddy’ to help build their confidence – with approximately 40% finding employment at the end of the work placement. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 21 Not just any graduate career… If you work hard at M&S, and take responsibility, you will be rewarded, as there are just so many opportunities to take your career to the next level. A b o u t u s More and more graduates are discovering that the M&S graduate recruitment scheme is not only a fast track to an interesting and varied career, but in some cases, also a direct route into management. Our graduate recruits benefit from an intensive training course, and are given the opportunity to build their skills in a challenging but supportive environment. They are also assigned real responsibilities from the outset, in order to help them make rapid progress within the business. For example, Katie was running one of our stores within four years. Graduates joining M&S in other roles – food technology, design, HR, buying or IT – can make similarly fast progress in their careers. Each year we employ between 150 and 200 graduates and business placement programme undergraduates. In 2007/08 we received a record 8,500 applications in just over two months. All of which helps to explain why we won four major graduate recruitment awards last year, including The Times’ ‘Graduate Employer of Choice’ for retail in 2008. Katie Wyle, Store Manager Brighton Katie Wyle started at M&S as a temporary customer assistant during Christmas 2003. The experience encouraged her to join the M&S graduate programme, and in just four years, she had proven her talent, stepping into her first store manager position. Going the extra mile Our people are passionate about what they do. They care deeply about M&S, and want to make a contribution that goes beyond just doing their job, to making a difference on issues that matter to them and their local community. Now in their seventh year, our national Employee Volunteer Awards recognise the outstanding achievements of the many hundreds of staff who fundraise and volunteer for local charities in their own time. A special mention must be made of Jean Turner and the Chester store team, who have won the group fundraising category three years running. In 2007 they did whatever it took – selling cakes, running the ‘Great North Run’ and even managing car boot sales – so they could raise more than £30,000 for a number of charities including their local children’s hospice, Hope House. Plan A Champions The environment and all things green, is a particular passion amongst our employees, which is why we’ve appointed 570 Plan A Champions in our stores and offices, to keep their colleagues updated on Plan A, and to find innovative new ideas to implement in-store. You can read more from our Leeds Plan A Champion Kate Edwards on page 30. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 22 MARKS AND SPENCER GROUP PLC Service, IT and logistics Good service continues to be a priority at M&S. In addition to training and developing our in-store staff so that they consistently perform well, we’re also investing behind the scenes to improve our logistics and IT infrastructure. This investment will allow us to efficiently run our supply chain and IT systems so that stock is managed tightly and transactions are processed effectively. Mystery shopping Each of our stores is anonymously visited once a month – twice in the case of our larger flagship stores – by a mystery shopper who evaluates service quality. In 2007/08 that was the equivalent of some 6,240 visits to our stores. We’re pleased with the outcome, as our teams achieved a new record average score – 86%. The mystery shopping programme was developed in partnership with a customer panel to help us identify where we need to support our stores with additional training. As a result the questions and scoring system accurately reflect our customers’ priorities, such as the standard of our fitting rooms. Supporting our growth Supporting our people behind the scenes, our supply chain and IT systems play a crucial part in ensuring our stores perform efficiently, and provide maximum customer satisfaction. For our supply chain, the challenge in 2007/08 was to handle significantly increased volumes, while remaining cost-effective. Despite the growth of M&S Direct, increasing sales volumes and more direct buying from our suppliers, our supply chain coped well under these pressures, delivering 13% more stock to our stores, and responding to a 63% rise in volume from M&S Direct. A more efficient future The majority of our supply chain’s physical infrastructure – the warehouses and distribution centres – has remained unchanged since the 1970s. The next major requirement is to develop a world class infrastructure that will support us not just in the UK but around the world. Having formed a strategic partnership with logistics property organisation ProLogis, we’ve been working together to build a new warehouse in Bradford (see picture below). This will play an important role in increasing the speed and efficiency of our supply chain, and further reducing costs. Teardrop trailers We became the first company in the world to adopt a revolutionary new trailer (developed by Don-Bur) whose teardrop shape will reduce our carbon footprint. With 141 trailers now on the road, our teams have achieved a 10% improvement in fuel- efficiency and a 20% reduction in CO2 emissions per garment moved. At the same time, the teardrop trailers also deliver up to 10% more load than a conventional trailer. 86% The average score in our mystery shopping programme New Bradford warehouse – computer generated image. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 23 Sold Cotton fields The t-shirts become part of the 4.8 million Fairtrade cotton garments sold by M&S annually. In-store The t-shirts arrive in our stores, are offloaded, and are put on display on the sales-floor. We use around one third of the world’s Fairtrade cotton. Our Fairtrade cotton commitment directly affects the welfare of over 100,000 small-scale farmers, and helps improve the standard of living in local communities. From hand to hanger – the ethical supply chain Delivery The t-shirts are prepped so they are ready for sale, and are loaded onto lorries so they can be transported to our stores. Factories The cotton is spun into yarn, dyed and sewn into t-shirts to the highest ethical standards. Warehouses The t-shirts arrive in our UK warehouses, and the stores order what they need. The plan has helped us to develop faster and more efficient IT systems throughout our business. For instance, we are introducing new point of sale systems, including more than 2,000 new tills and 258 new handheld terminals in-store to make stockchecking easier and more efficient. This will help us further improve service in our stores. We extended the trial of our food self-service tills across the business, as well as a first trial in general merchandise. We also made vital behind the scenes improvements with the introduction of new financial and back-office systems. Both of these changes are behind an overall increase in operational efficiency, with 97% of our tills fully operational, up from 90% two years previously. At the same time as achieving these important improvements, we also succeeded in reducing like-for-like IT running costs by 13.5%. From source to store As we expand our business internationally, we’re planning to take more control of our logistics from source to store, allowing us to monitor our stock more efficiently and improve margins. We plan to develop a modern and streamlined logistics network that consists of new overseas warehouses, as well as offshore stockholding and consolidation facilities. Remodelling our supply chain infrastructure is a major investment that will help us stay one step ahead of demand in our market for the fresh and new. Fast fashion, for example, is about to get faster still. Getting our IT in shape for growth At the same time as renewing our physical network, we have also made progress in IT. We now have an integrated company-wide IT plan; a three-year roadmap that sets out how our systems will deliver on every aspect of our business plan, both within the UK and internationally. This means, for example, that our IT strategy for China – where we are only just establishing a foothold – is already in place. Giving goes electronic at M&S During the year, we introduced the electronic M&S Gift Card. Smaller and more convenient for our customers, as well as being quicker and easier to process Gift Cards have been an important success, with over 80% transition from paper to plastic. A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 24 MARKS AND SPENCER GROUP PLC Property and store environment Over the last three years, we’ve undertaken one of the biggest store investment programmes within the UK retail sector. We are focused on increasing the number of stores we have; expanding and modernising our existing footage; and ensuring we offer our customers the right stores in the right locations. In order to achieve this, in November 2007 we announced that we are expanding our space by 15% to 20% in the next three to four years. We will also complete the modernisation of our remaining store portfolio in the next few years. A bigger and better M&S During 2007/08, we increased our total space through new openings and extensions by 815,000 sq ft, or 4.8%. We opened more than 100 new stores in the UK, ranging from a large high street store at 66,000 sq ft, to Simply Food stores of around 7,000 sq ft. We’ve made good progress against the strategy we laid out in 2006, and in the year ahead we plan to accelerate our expansion, increasing our space by a further 5.5% in 2008/09, by moving ahead on five fronts: 1 2 3 4 5 Expanding and modernising our city centre stores – in 2007/08 this included Edinburgh and Belfast and in 2008/09 we will modernise our Cardiff store. Opening bigger out-of-town and flagship stores of over 100,000 sq ft and expanding our space where we already trade – we extended London Colney and Lisburn in 2007/08 and in 2008/09 we opened a new store in Colliers Wood, with White City and Brooklands to open later in the year. Creating a better presence in retail parks – we opened seven stores in 2007/08 including Preston, Kinnaird Park and Silverlink and have several more in the pipeline including Swindon Orbital and Malvern. Examining our portfolio of high street stores to ensure they are the right size and in the right place – for example in 2007/08 we doubled the size of the Eltham store in London and relocated in Derby and High Wycombe. In 2008/09 we will open in Luton and take two stores down to one in Worcester. Building on the success of Simply Food (see below). 70% Store modernisation complete Simply Food In the last seven years, our Simply Food business has grown in the UK to 299 stores trading in a highly competitive market. We opened 26 wholly-owned stores and 72 franchised stores (64 of which are located on BP forecourts) during 2007/08, and based on their strong performance, we believe there is potential for up to 70 new wholly-owned and franchised Simply Food stores during 2008/09. 3 more green success stories to build on… 1 We recycled 75% of all construction waste in 2007/08, and aim to achieve 85% in 2008/09. 2 How we design, procure and build our stores is now clearly laid out in our Sustainable Construction Manual produced in conjunction with the Building Research Establishment (BRE). 3 Like-for-like store energy usage is down by 4%. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 25 Store modernisation We have always acknowledged that stores were in need of refurbishment, particularly those which have been in our portfolio for many years. This is important in not only helping our stores run more efficiently, but in ensuring they are bright and contemporary, with easy-to-shop food halls and, to complete the experience, a range of hospitality options. An award-winning shopping experience 1 Town Centre Retailer of the Year Award and Green Award 2007 – at the Retail and Leisure Property Awards organised by Property Week. In 2007/08 we completed work on 86 stores, (excluding franchise openings), relaunching about 5 million sq ft. This means that 70% of all our space is now in the new improved format. Inevitably the work caused some disruption in stores, but trading generally held up well, with the new format stores out-performing non-modernised stores. Our target is to modernise the remaining 30% in the next few years, with 10% planned in 2008/09. 2 Department Store Interior of the Year Award 2007 – for M&S Bluewater, against 550 other contenders, at the 10th Annual Retail Interior awards. 3 Convenience Chain of the Year for Simply Food – Checkout Magazine. A greener way to shop In September 2007, we opened the first of our new ‘eco stores’. Located in Bournemouth, we deliberately decided to modernise one of our older stores, to find out how eco-friendly we could make it. Rising to the challenge, we incorporated a wide range of eco-features – from a green roof to capture airborne pollutants and escalators running at reduced voltage, to more efficient heating, lighting and refrigeration systems. In this way, we hope to achieve energy savings of up to 55%. Following Bournemouth, we opened a further two green stores: at Silverburn in Pollok (pictured below) and a new Simply Food in Galashiels. As we continue to introduce more ‘eco stores’, we’ll be testing a number of cutting edge techniques, such as using hempcrete – which uses hemp plant fibres as the aggregate – instead of concrete. We’ll continue to trial many further innovations to ensure that as our property portfolio grows larger it also grows greener. A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 26 MARKS AND SPENCER GROUP PLC M&S Direct A new website and an extended range of products are just two of the reasons behind M&S Direct’s strong growth. M&S Direct is an important part of our commitment to becoming a multi-channel retailer. In addition to providing our e-commerce website, it also includes our home catalogue, flower and wine delivery, Christmas hamper delivery, in-store food ordering service and Lunch to Go, which delivers lunchtime platters. Sales were up £60m in 2007/08 to £220m, with M&S Direct growing faster than the market, and putting us on course to achieve our target of £500m in sales through M&S Direct by the end of 2010/11. Visits to the website were also up by nearly 60%. A new site, a new experience Relaunched at the end of March 2007, our website was designed and developed in partnership with world leaders in e-commerce, Amazon. Our customers tell us they find the new site much easier to use; a fact reflected in an independent online shopper survey by Forsee ranking the ‘Top 30’ UK online retailers. We came sixth overall and were the best performing high street retailer, ahead of competitors like John Lewis, Tesco and Next. 63% Sales increase Spoilt for choice Each year we move closer towards becoming a true multi-channel retailer, by offering our customers more ways to shop. For instance, a customer might see a sofa they like in our home catalogue, and decide to try it out in-store. They then have the choice of visiting our website, where they can see every sofa, in every fabric, size or colour combination – as many as 10,000 variations. Blooming good idea We continue to extend not just the breadth, but the quality of our online offer. For instance, we’re now bringing the luxurious quality and style of the Autograph brand to a bouquet, with the launch of Autograph Flowers in-store and online. Just like our Autograph fashion and home collections, this exclusive range of flowers will change seasonally, offering extra-long stems (60-80cm) and larger blooms in striking arrangements – from £35 for a dozen and £45 for two dozen. Each flower is individually selected by M&S Flower Specialist Claire Broomhead, so they are as competitive as those you’d buy in a florist. The Autograph brand is about effortless style and luxury and the new range of Autograph Flowers reflects this perfectly, either as a gift, or as an amazing centrepiece in the home. Claire Broomhead M&S Flower Specialist marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 27 Greener living: now easier online In 2007/08 we introduced a Greener Living section to our website so that we could make it easier for our customers to find products that will help them to do their bit for the planet. From compost bins and Hippo Water Savers to recycled fleeces and Fairtrade t-shirts, a more eco-friendly lifestyle is just a couple of clicks away. A b o u t u s i i n d c a t o r s Extending our online cellar From around just 30 lines last year, the range of wines available on our website has increased to around 550. Fifty of these are exclusive to the web and can’t be found in-store. We sell over 20 varieties of champagne with prices from approximately £100 to £240 per case. Customer response to our improved online offering has been so positive that we’re planning to launch a wine club in 2008/09. i B u s n e s s r e v e w i But there’s still plenty of room for improvement. In particular, we want to make the site more interactive. We’ve already added features such as a behind-the-scenes video interview with Lily Cole (the face of Limited Collection). Additionally, we publish beauty tips and lingerie advice from the Your M&S magazine editor Sarah Gowland. In 2008/09, we’re planning to add even more of these features, including areas for customers to post reviews and ratings of M&S products. More reasons to visit Our website offers a number of exclusive products, including a wider choice of electricals than in-store, an increased selection in clothing ranges such as per una, and our exclusive online range of affordable and contemporary furniture called Furniture to Go. Our new Made to Measure shirts service, which launched in November 2007, allows customers to design a tailor-made shirt from just £30 for delivery within 21 days. Customers simply choose their fabric, collar, cuffs, pocket, fit and monogramming, and type in their height, collar size and weight, and we’ll tailor-make a shirt specifically for them. A number of other popular features on our website include our Greener Living shop, improved wine cellar and Big and Tall range. Big and Tall I usually have to look for specialists that cater for big fellas, and then end up choosing from a small range and paying a lot more. When M&S approached me I was amazed at the offer available, with excellent quality at the same price as standard sized clothes. Martin Johnson, England Rugby Team Manager It would be hard to find space in our stores for our exclusive Big and Tall offer, but it’s a perfect fit online. As the name suggests, Big and Tall offers clothes to fit ‘big fellas’, like England Rugby Team Manager Martin Johnson who is the face of the brand. Only available online, the collection includes more than 450 items ranging from tailoring to knitwear to casual shirts and trousers. K e y p e r f o r m a n c e S h a r e h o d e r l i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n One of the most exciting examples of this new plan can be seen in India, where in April 2008 we announced our intention to open up to 50 new stores in the next five years with Reliance Retail. At the end of 2007/08 we also completed two deals in Europe with existing franchise partners. The first in February 2008 was with the Marinopoulos Group, the leading private company in Greece. Marinopoulos has been our franchise partner for 30 years and currently operates 38 M&S stores in Greece and the Balkan states, including Romania and Bulgaria, as well as Switzerland. The €50m deal to acquire a 50% share of the business will see an additional 50 new stores opened in these markets over the next few years. The second deal was signed in March 2008 with another existing franchise partner – COMS a.s – to expand in Central and Eastern Europe. With a 51% stake in the partnership, we will work to open around 30 new stores in the Czech Republic, Slovakia, Latvia, Lithuania and Estonia over the next few years. Investing in Ireland In 2007/08 we opened four new stores in the Republic of Ireland bringing the portfolio up to 17 stores in total. The pipeline of future developments is strong, and we expect to add between 30% and 40% to our footage in the next few years. 16.8% Sales increase 28 MARKS AND SPENCER GROUP PLC International In 2007/08 we announced plans to grow our International business to between 15% and 20% of total Group revenues within the next five years. We’re pleased to report strong progress towards this goal. Not only have we expanded our franchise operation, but we have also entered into partnerships in some of the world’s most dynamic emerging economies. A growing contribution In 2007/08 our International business contributed over 7.9% of total Group turnover. At £712.9m, sales were up 16.8% on last year, and operating profit was up 33% to £116.4m. During the year, we increased our overseas stores by 38 bringing the total to 278, and increased our space by over 18% to almost 266,400 sq m. In 2007/08 we entered Lithuania, Serbia, Taiwan and Ukraine, taking our global reach to 39 territories. A flexible business model Our expansion to date has been primarily through franchising which remains our preferred model for smaller or particularly challenging markets. Looking ahead though, we intend to invest our own capital to increase returns to our shareholders. In some cases we will invest alongside partners who will bring local knowledge and expertise. In other markets we may choose to go it alone. Expanding in India One of the world’s fastest growing economies, India is expected to become the world’s fifth largest consumer market by 2025 (McKinsey). With an estimated 350 million middle-class consumer base by 2015, India presents an exciting opportunity for growth. Whilst we have traded in India for a number of years through a franchise agreement, in view of the long term opportunity, we set out to find a new partner who could help us grow in the market. One organisation stood out from the crowd, and in April 2008 we entered into a partnership with Reliance Retail, subject to the approval of the Indian Government’s Foreign Investment Promotion Board and certain other conditions. Reliance has great strength in technology, logistics and property in India. With a 51% stake in the venture, we will work with Reliance to open around 50 new, stores in the next five years. The new stores will sell a wider range of products than previously, and at lower prices, including a full range of clothing and homeware, and a growing number of products sourced from local suppliers. IND IA April 2008 51% 30-50 Deal signed with Reliance Retail Stake in partnership New stores in the next five years marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 29 Global emerging markets 55 stores CENTRAL AND EASTERN EUROPE 50 new stores across the region in the next few years LATVIA LITHUANIA POLAND CZECH REP. SLOVAKIA SWITZERLAND HUNGARY UKRAINE SLOVENIA CROATIA ROMANIA SERBIA BULGARIA RUSSIA A b o u t u s GIBRALTAR GREECE TURKEY MALTA CYPRUS TENERIFE GRAN CANARIA 88 stores MEDITERRANEAN CHINA SOUTH KOREA i i n d c a t o r s TAIWAN HONG KONG THAILAND PHILIPPINES MALAYSIA SINGAPORE INDONESIA i B u s n e s s r e v e w i INDIA 14 stores 76 stores INDIAN SUBCONTINENT FAR EAST We expect to open a further 30 to 50 stores in the next five years First flagship store in Shanghai to open later this year A global fashion brand From Singapore to Switzerland, we work with our overseas partners to ensure brand consistency. Our International merchandisers work closely with our UK-based buying teams to ensure the products selected reflect the key M&S looks for the season. Our advertising and branding has also proven to be highly relevant overseas. For instance, we are replicating our holiday campaign throughout Europe and the rest of the world this summer. A foothold in China Drawing on our experience in Hong Kong – where we have eight wholly-owned stores and have been trading for 20 years – in November 2007 we announced our intention to enter the Chinese market on a wholly-owned basis. Having secured a 4,836 sq m store in Shanghai, we look forward to opening our first store in China – a new flagship for M&S in Asia. We will adapt our ranges, introducing smaller sizes into womenswear and 2-inch shorter sleeve shirts in menswear, as we do in Hong Kong. We’ll also stock the Asia special – redcurrant puffs – in the food section. Looking ahead… While the economic outlook remains uncertain, our International business model gives us an opportunity to build a broader revenue base and drive profitable growth in some of the world’s most exciting emerging markets. We have a strong pipeline of International openings planned for 2008/09, demonstrating the important role that International will play in positioning M&S for future growth. i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n 17 stores MIDDLE EAST KUWAIT BAHRAIN QATAR UNITED ARAB EMIRATES SAUDI ARABIA OMAN A taste of Britain In 2007/08 we started to freeze our ready meals for international sale and have launched a range of 70 lines in eight countries. The new category has been well received, and we are presently working on extending the range and the numbers of stores carrying the lines. The frozen ready meals, which include pizzas, rhubarb crumble and traditional marinated curries, are prepared in the UK and join the growing range of 1,200 ambient products already on sale in a number of overseas stores. Our ambient products include a number of everyday items, and traditional British favourites, such as shortbread biscuits. K e y p e r f o r m a n c e S h a r e h o d e r l 30 MARKS AND SPENCER GROUP PLC Plan A Plan A is our five-year ‘eco plan’ to address some of the key social and environmental challenges facing M&S. We pledged to meet 100 separate Plan A commitments within five years, and so far we have made progress on 94 of the 100 commitments. By 2012 M&S will: (cid:129) become carbon neutral with minimal offsetting; (cid:129) send no waste to landfill from our operations; (cid:129) extend sustainable sourcing; (cid:129) set new standards in ethical trading; and (cid:129) help customers and employees live a healthier lifestyle. We’re committed to Plan A, because it’s the right thing to do. There’s also a powerful business case. Plan A not only gives us distinction in a crowded marketplace, but challenges us to increase efficiencies, and Banish the bag continually seek new and better ways of doing business, so that we can achieve the ambitious targets we have set ourselves. Climate change Despite opening more than 100 new stores in 2007/08, we cut our total CO2 emissions from our stores, offices and warehouses by nearly 50,000 tonnes. We achieved this 9% decrease on last year by switching an additional 21% of our electricity to renewable sources. We also improved our energy efficiency by 4%, and started sourcing electricity from farm-based wind turbines and an anaerobic digestion facility which generates power from food waste. Because around 60% of our carbon footprint is generated by our suppliers, and a further 30% by our customers, we’ve been looking closely at how we can encourage our suppliers to reduce their CO2 emissions. For example, we encouraged the development of low carbon supplier factories (see story to right). The carrier bag initiative has been a big hit with our customers who want to do their bit to make a difference. We can’t wait to start working with Groundwork in Leeds so we can begin to see changes here in the local area. One of our highest profile projects in 2007/08 was undoubtedly our decision to introduce a food carrier bag charge of 5p in all of our UK stores, with profits funding local environmental projects run by our partner Groundwork UK. Initial trials in more than 50 M&S stores in Northern Ireland and the South West, showed around a 70% drop in plastic carrier bag usage, and raised over £80,000 to create and improve green spaces in local neighbourhoods. If M&S customers continue at this rate, we’ll save over 250 million bags from landfill every year. Kate Edwards, Plan A Champion for Leeds store Kate joined M&S as customer assistant in 2003 at the Blackburn store before moving to the Leeds store in 2004. As a Plan A Champion, on top of her everyday job as store operations manager, it’s her role to motivate some 350 staff to ‘think green’. She’s pictured with the M&S cotton shoppers. Green from top to bottom We worked in collaboration with two suppliers – MAS Holdings and Brandix – to launch two eco clothing factories, which will use 40% less energy and half as much water as typical supplier factories. From July, customers can buy lingerie made from these factories, under our Autograph and per una labels. We hope to open a similar plant later this year in Wales. Wash at 30 As part of the Climate Group’s ‘Together’ campaign, we’re encouraging our customers to save energy by washing their laundry at 30ºC. By introducing ‘Think Climate – Wash at 30’ labels in 70% of our clothes and on our washing powder, we’ve seen the number of washes now done at 30ºC increase by 23% to 31% since April 2007. That’s a total reduction of 25,000 tonnes in CO2 emissions. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 31 Fairtrade commodity crops such as sugar and tea. Additionally we are extending our Fairtrade ranges of jams. The Fairtrade premium improves the standard of living in the local communities funding the building of schools, healthcare clinics and transport links. Health One of our most significant achievements for the year is our commitment that all food produced after 1 April 2008 is now entirely free of artificial flavours and colouring. Originally, we planned to only do this with our children’s food, but having completed this work by September 2007, we decided to extend it to all foods. Page 19 details our greatly increased range of Eat Well healthier options, as well as our excellent progress in salt reduction. Plan A: next steps We’ve achieved a great deal, and learned even more during our first full year as a Plan A business. But we know that there’s a lot to do if we are to achieve our five-year targets. Plan A isn’t perfect, and we revisited our ethical trading commitments to make them stronger. We will continue to review our progress and where we need to, change our commitments to meet emerging issues. In 2008/09 we will develop better, more robust systems for gathering the data we need to evaluate and improve our Plan A performance. We’ll also be working harder than ever to develop partnerships that communicate our messages or help us to find innovative solutions. For more detailed information, please visit our Plan A website at marksandspencer.com/planA or download our 2007/08 How we do business report at marksandspencer.com/annualreport08 Waste Right across our business, we’ve been finding new ways to ensure that by 2012 we send zero waste to landfill from our own operations. We’ve seen a 6% reduction in the amount of waste sent to landfill, as a result of improving the recycling of our construction waste (see page 24), and collecting 122 million clothing hangers to reuse and recycle – over double the amount collected last year. In January 2008, we launched the M&S and Oxfam Clothes Exchange – calling on customers to dig deep into their wardrobes to help fight poverty. Customers taking M&S items to an Oxfam store will help reduce the 1 million tonnes of clothing going to landfill each year, and in doing so will receive a £5 (€7) M&S discount voucher to spend on purchases of £35 (€50) or more. One of the biggest challenges we face is to reduce our packaging, but without making our products susceptible to damage, or in the case of food, reducing their freshness. In 2007/08 we reduced the weight of packaging around each Easter egg by nearly 20%. At the same time, we’ve increased the amount of our food packaging that is recyclable to 70%. Sustainable raw materials During the year we converted all our toilet rolls, kitchen rolls and tissues to either Forestry Stewardship Council (FSC) certified or recycled paper. We also used FSC materials for more than 50% of our range of Christmas greeting cards (over 30 million in total) as well as our publications for customers, including the ‘Your M&S’ magazine. In total 62% of current wood materials used in M&S products are: FSC certified, certified by another independent organisation, or recycled (excluding fabrics). Fair partner We use around one third of the world’s Fairtrade cotton. We are working with local communities and organisations around the world, such as the Fairtrade Foundation, to increase the availability of this and other A b o u t u s Fancy a cuppa? Already, 100% of the tea and coffee we sell is Fairtrade; and we’re pleased to have recently launched a new range of single origin Fairtrade coffees from Rwanda, as part of Fairtrade Fortnight. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l Award-winning work 1 We were awarded the World Environment Center’s (WEC) 24th Annual Gold Medal for International Corporate Achievement in Sustainable Development, for linking sustainability with our supply chain, operations and customers. 2 3 4 We were named joint leaders in the Marine Conservation Society’s supermarket league table on responsible fish sourcing. We won the RSPCA ‘Good Business’ award for animal welfare in fashion for the third consecutive year. We were named Compassionate Supermarket of the Year for 2007 – not just because all of our eggs are free range, but because we only sell UK reared veal which meets high animal welfare standards. 32 MARKS AND SPENCER GROUP PLC Your Board On 10 March 2008 we announced that with effect from 1 June 2008, Lord Burns will stand down as Chairman, Sir Stuart Rose will be appointed Executive Chairman and Sir David Michels will be appointed Deputy Chairman whilst continuing his role as senior independent director. Sir David Michels will become Chairman of the Nomination Committee on 1 June 2008. Lord Burns Chairman ▲ (Chairman) Appointed in October 2005, becoming Chairman in July 2006. Age 64. Lord Burns will retire as Chairman on 1 June 2008. He is Chairman of Abbey National plc and Glas Cymru Ltd (Welsh Water) and a non-executive director of Banco Santander SA and Pearson Group plc. He is a former non-executive director of Legal & General plc and The British Land Company plc and a former Chairman of the National Lottery Commission. He was Permanent Secretary to HM Treasury from 1991 to 1998 and Chief Economic Advisor from 1980 to 1991. He was appointed a Life Peer in 1998. Sir Stuart Rose Chief Executive ▲ Appointed in May 2004. Age 59. Stuart will be appointed Executive Chairman on 1 June 2008. He is a non-executive director of Land Securities plc and Chairman of Business in the Community. Stuart began his career in retail at Marks & Spencer in 1972 before going on to the Burton Group in 1989. He left the Group following the demerger in 1997. Stuart was Chief Executive of Argos plc in 1998 and later became Chief Executive of Booker plc. Before rejoining Marks & Spencer as Chief Executive in 2004 he was Chief Executive of Arcadia Group plc from 2000 until 2002. Stuart was knighted in the New Year Honours List this year, for his services to the retail industry and corporate social responsibility. Kate Bostock Executive Director, Clothing Appointed in March 2008. Age 51. Kate joined Marks & Spencer in October 2004. Previously Kate was Product Director for Childrenswear at Next before joining Asda in 2001 as Product Director for the George brand covering all areas of clothing and footwear. She was responsible for the launch of the stand-alone George concept and the launch of the George brand globally. Ian Dyson Group Finance and Operations Director Appointed in June 2005. Age 45. Ian was appointed Group Finance Director in June 2005, becoming Group Finance and Operations Director in March 2008. Ian was formerly Finance Director of The Rank Group plc. Prior to this he was Group Financial Controller of Hilton Group plc. He joined Hilton from Le Meridien, a division of Forte plc, where he had been Finance Director. His early career was spent with Arthur Andersen, where he qualified as a Chartered Accountant in 1986 and was promoted to a Partner of the firm in 1994. Ian was a non-executive director of Misys plc until September 2005. Steven Esom Executive Director, Food Appointed in March 2008. Age 47. Steven is a non-executive director of The Carphone Warehouse Group plc. He joined Marks & Spencer in June 2007 from Waitrose where he had been the Managing Director. Steven joined the John Lewis Partnership in 1996 as Director of Buying at Waitrose. He spent his early career at J Sainsbury’s in various buying roles. In 1993 Steven was appointed Buying and Merchandising Director for Texas Homecare, later becoming Vice-President – Global Merchandising at Hilton International. Steven Sharp Executive Director, Marketing Appointed in November 2005. Age 57. Steven joined Marks & Spencer in May 2004. He started his career with Bejam in 1978, progressing to the Argyll Group and became Marketing Director of Asda in 1987. He joined the Board of Debenhams in 1989. He later became Marketing Director of the Burton Group, Booker plc and Arcadia Group plc. Steven is a non-executive director of Adnams plc. He is a Fellow of the Chartered Institute of Marketing, The Marketing Society and The Royal Society of Arts, as well as a visiting Professor of Glasgow Caledonian University. Steven is a special advisor to the Tate Members’ Council. Sir David Michels Senior Independent Director ❋ ● ■ ▲ Appointed in March 2006. Age 61. David will be appointed Deputy Chairman and Chairman of the Nomination Committee on 1 June 2008. He was appointed senior independent director in September 2006. He is senior independent director of easyJet plc, and is also a non-executive director of Strategic Hotels & Resorts and Jumeriah Group, Dubai. He is resigning as a senior independent director of The British Land Company plc and was a non-executive director of RAB Capital plc until 18 April 2008. David spent his early career employed by Grand Metropolitan, Ladbrokes and Stakis before rejoining Hilton/Ladbrokes in 1999 as Chief Executive, becoming Chief Executive of Hilton Group plc from 2000 to 2006. David was knighted in June 2006. Jeremy Darroch Non-Executive Director ❋ ▲ ● (Chairman) Appointed in February 2006. Age 45. Jeremy was appointed Chairman of the Audit Committee in September 2006. He was appointed the Chief Executive of British Sky Broadcasting Plc in December 2007 having been the Chief Financial Officer since 2004. Jeremy was previously Group Finance Director and Retail Finance Director at Dixons Group plc. He spent 12 years at Procter & Gamble in a variety of roles, becoming European Finance Director for their Healthcare division. He qualified as a chartered accountant with Deloitte Haskins and Sells. Martha Lane Fox Non-Executive Director ❋ ● ■ ▲ Appointed on 1 June 2007. Age 35. Martha is a non-executive director of Channel 4 Television and a Trustee of the charity Reprieve. She is founder of a chain of private room karaoke clubs, Lucky Voice, and of her own grant giving foundation, Antigone. Martha is also a director of mydeco.com. She co-founded lastminute.com in 1998, taking the Company public in March 2000, remaining on the Board until the company was purchased by Sabre Holdings in 2005. Martha is also a patron of CAMFED. Steven Holliday Non-Executive Director ❋ ● ■ ▲ Appointed in July 2004. Age 51. Steven was appointed Group CEO of National Grid plc at the end of 2006, having at different times been responsible for the UK Electricity and Gas businesses. He was formerly an executive director of British Borneo Oil and Gas. Previously, he spent 19 years with the Exxon Group where he held numerous senior positions. His international experience includes a four-year spell in the US. Steven has also developed business opportunities in countries such as China, Australia, Japan and Brazil. Louise Patten Non-Executive Director ❋ ▲ ■ (Chairman) Appointed in February 2006. Age 54. Louise was appointed Chairman of the Remuneration Committee in January 2007. She is non-executive Chairman of Brixton plc, a non-executive director of Bradford & Bingley plc and a senior adviser to Bain & Co. Louise began her career at Citibank and remained in financial services until 1993 when she joined Bain & Co as a Partner. She was formerly a non-executive director of Hilton Group plc, GUS plc, Somerfield plc and Harveys Furnishings plc. Graham Oakley Group Secretary and Head of Corporate Governance Independent ❋ ● Audit Committee ■ Remuneration Committee ▲ Nomination Committee marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 33 Financial review A b o u t u s Revenue 2008 2007 Total Like-for-like Operating profit UK Retail £8,309.1m £7,977.5m +4.2% -0.5% International Retail £712.9m £610.6m +16.8% +6.6% 2008 2007 Total UK Retail £972.9m £956.5m International Retail £116.4m £87.5m +1.7% +33.0% Revenues Total revenues were up 5.1% driven by new space in the UK and strong performance in our International business. UK revenues were up 4.2% in total with like-for-like decline of 0.5%. The performance in the first half of the year was strong, despite the unseasonable weather and significant disruption from our modernisation programme. However, in the second half of the year the deterioration in the economic environment and consumer spending had an adverse impact on our performance. During the year, we added 4.8% of space (on a weighted average basis), 8.7% in food and 3.0% in general merchandise. International revenues were up 16.8% with good performances in both owned and franchised stores, up 15.5% and 18.7% respectively. This was driven by both strong like-for-like performance and 38 new store openings. Operating profit Operating profit before property disposals and exceptional items was £1,089.3m, up 4.3%. In the UK, operating profit before property disposals and exceptional items was up 1.7% at £972.9m. The UK gross margin was 0.4 percentage points down on the year at 43.0%, mostly due to a greater proportion of food sales in the overall mix. General merchandise gross margin was level on the year at 52.6%, with further improvement in primary margin being offset by higher markdowns. Food gross margin was 0.1 percentage point lower than last year at 33.9% due to higher waste and the growth in franchised Simply Food stores which generate a lower gross margin. The net operating margin for franchised stores is above that achieved by owned Simply Food stores. UK operating costs were up 4.3% to £2,630.0m. A breakdown of UK operating costs is shown below: 52 weeks ended 29 March 2008 £m 31 March 2007 £m % increase/ (decrease) Retail staffing Retail occupancy Distribution Marketing and related Support Total before bonus Bonus 834.8 841.4 383.8 144.6 408.9 819.5 750.4 329.7 137.5 394.6 2,613.2 16.8 2,431.7 91.0 Total including bonus 2,630.0 2,522.7 + 1.9 + 12.1 +16.4 + 5.2 + 3.5 + 7.5 – 81.5 + 4.3 Despite the step up in space growth, retail staffing costs were well controlled, in response to the more difficult trading environment experienced over the year. Our mystery shop scores, which measure the quality of service in stores, continue to be very strong. The increase in retail occupancy costs reflects both space growth and the increased depreciation related to the modernisation programme. Increase in distribution costs reflects growth in both general merchandise and food volumes, as well as furniture order deliveries. Growth in marketing expenditure reflects higher in-store marketing costs due to new store openings and modernisations. Support costs, which include non-store related overheads, were well controlled. We will be paying a bonus of £16.8m for 2007/08 (last year £91.0m). The level of bonus payment reflects performance against our original operating plan. The UK operating profit includes a contribution of £28.3m (last year £19.5m) from the Group’s continuing economic interest in M&S Money. International operating profit before property disposals was £116.4m, up 33.0%, reflecting the strong sales performance of the business. Owned store operating profits decreased by 2.0% to £44.5m, largely due to the Republic of Ireland where operating results were affected by new store opening costs, and start up losses relating to Taiwan. Franchise operating profits grew by 70.8% to £71.9m reflecting strong sales and margin performance. Profit on property disposals Profit on property disposals was £27.0m (last year £1.9m). This relates to proceeds from the sale of stores where we have relocated, or plan to relocate at a later date. Exceptional items The exceptional pension credit of £95.0m (last year £nil) has arisen due to the changes made in the terms of the UK defined benefit plan relating to how members’ future benefits build up from 1 October 2007. To the extent that members have chosen the option to limit their future pensionable salary increases in line with inflation, there is a past service credit to reflect the impact of adjusting their projected final pensionable salaries. Net finance costs Net interest payable was up 15.8% at £113.8m (last year £98.3m) reflecting an increase in the average net debt for the year. Consequently, net finance costs before exceptional items were up 4.3% after pension finance income of £58.9m (last year £20.8m) and the unwinding of the discount on the partnership liability to the pension scheme. Despite widening credit spreads within the debt capital markets and rising short-term LIBOR rates the Group’s average cost of funding remained level on the year at 5.9%. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 34 MARKS AND SPENCER GROUP PLC Financial review continued Taxation The taxation charge reflects a pre-exceptional effective tax rate of 27.0% for the full year (last year 29.4%). The decrease reflects a restatement of UK deferred tax liabilities resulting from the reduction in Corporation tax rates on 1 April 2008, and a prior year credit. The 2008/09 tax rate is expected to be 28.0%. Earnings per share Adjusted earnings per share from continuing operations, which excludes the effect of property disposals and exceptional items, increased by 7.9% to 43.6p per share. The weighted average number of shares in issue during the period was 1,671.3m (last year 1,688.6m). Dividends The Board is recommending a final dividend of 14.2p per share. This will result in a total dividend of 22.5p, an increase of 23.0%. This reflects a base uplift of 15% on the prior year dividend plus the growth in adjusted earnings per share. In 2008/09 the Board will return to its existing policy of growing dividends broadly in line with adjusted earnings per share. Share buy back In November 2007 we announced our intention to purchase up to 10% of the Company’s issued share capital, using the authority given by shareholders at the AGM in July 2007. As at 29 March 2008, we had bought back a total of c126m shares for cancellation, for a total consideration of £555.9m. This represents 7.4% of the shares in issue in July 2007. We intend to complete the 10% buy back programme during the summer of 2008. Capital expenditure Investing in the business continues to be a key part of our strategy. Capital expenditure for the year was £1,054.5m compared with £792.4m last year. Group capital expenditure Actual 2006/07 Actual 2007/08 £m 750 600 450 300 150 0 479 536 120 114 27 l a n o i t a n r e t n I 52 e c n a n e t n a M i i n a h c l y p p u S l y g o o n h c e t d n a e m m a r g o r p i n o i t a s n r e d o M s e r o t s w e N 203 e m m a r g o r p i n o i t a s n r e d o M s e r o t s w e N 162 106 i n a h c l y p p u S l y g o o n h c e t d n a e c n a n e t n a M i 48 l a n o i t a n r e t n I The increased spend on the modernisation programme reflects a record 35% of our space being developed or modernised, including of a number of significant projects such as Belfast, Edinburgh, London Colney, Braehead and Cheshunt. Capital expenditure on new stores was up to £203.1m reflecting the increase in new space coming on stream. We stepped up the investment in our supply chain and technology with the roll-out of the POS system in stores and investment in further distribution capacity. Cash flow and net debt The Group reported a net cash outflow of £917.5m (last year inflow £231.1m). Cash inflow from continuing operations decreased by £206.6m, reflecting a higher working capital outflow due to the timing of pension payments, the 2006/07 bonus, increased investment in inventories and leasehold prepayments in respect of new stores. Cash outflow on capital expenditure, net of disposals, was £927.4m (last year £710.5m) reflecting increased investment in our modernisation programme, as well as more aggressive new space growth. We generated £91.6m during the year from the disposal of properties. On 28 February 2008, the Group acquired Board control and 50% of the issued share capital of the Marinopoulos Group, located in Greece, Bulgaria, Croatia, Romania, Serbia and Switzerland for cash consideration of £38.1m, transaction costs of £0.8m and net cash acquired of £2.0m. On 20 March 2008, the Group acquired 51% of the issued share capital of COMS a.s., located in the Czech Republic, Latvia, Lithuania and Slovakia for cash consideration of £10.6m, transaction costs of £0.8m and net cash acquired of £1.9m. Pensions At 29 March 2008 the IAS 19 net retirement benefit surplus was £483.5m (last year deficit £283.3m). The change is due to a £95m decrease in the liabilities arising from the change in the UK defined benefit plan, as well as the increase in the discount rate used to calculate the liability at the year end in accordance with the accounting standard. The year end discount rate, which was 6.8% (last year 5.3%), reflects corporate bond rates at the year end and has led to a significant reduction in the IAS 19 calculation of the pension liability for accounting purposes at 29 March 2008. The partnership liability to the Marks & Spencer UK Pension scheme of £723.2m (last year £496.9m) relates to the amortising liability in respect of the obligations to the Marks & Spencer UK Pension Scheme. The increase in the liability is due to the decision by the Group to pre-fund £200m of its annual contributions to the pension scheme, by placing £400m of additional properties into the partnership established with the Pension Scheme in 2007. The impact of the transaction will be to increase the annual distribution out of the partnership to the pension scheme by £21.9m for the 14-year period from July 2009. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 35 Group Directors’ report A b o u t u s Business review The Companies Act 1985 requires the Company to set out in this report, a fair review of the business of the Group during the financial year ended 29 March 2008, including an analysis of the position of the Group at the end of the financial year, and a description of the principal risks and uncertainties facing the Group (known as a ‘Business review’). The information that fulfils the Business review requirements can be found in the following sections of this report. All the information detailed in these sections is incorporated by reference into this report and deemed to form part of this report: (cid:129) Chairman’s foreword on page 4; (cid:129) Chief Executive’s statement on pages 5 to 8; (cid:129) Group Finance and Operations Director’s statement on page 9; (cid:129) Financial review on pages 33 and 34; (cid:129) Principal risks and uncertainties on pages 44 and 45; (cid:129) Key performance indicators on pages 2 and 3; and (cid:129) Environmental, employee and social and community matters on pages 30 and 31 and within the How we do business report available on our website at marksandspencer.com/annualreport08 Pages 35 to 38 inclusive (together with the sections of the Annual report incorporated by reference) consist of a Group Directors’ report that has been drawn up and presented in accordance with, and in reliance upon applicable English company law and the liabilities of the directors in connection with that report shall be subject to the limitations and restrictions provided by such law. Principal activities Marks and Spencer Group plc is the holding company of the Marks & Spencer Group of companies (the ‘Group’). We are one of the UK’s leading retailers, with over 21 million people visiting our stores each week. We offer stylish, high quality, great value clothing and home products, as well as outstanding quality food, responsibly sourced from around 2,000 suppliers globally. We employ over 75,000 people in the UK and abroad, and have 622 UK stores, including Simply Food franchised stores, as well as an expanding international business. Profit and dividends The profit for the financial year, after taxation, non-equity dividends and minority interests amounts to £821.7m (last year £659.9m). The directors have declared dividends as follows: Ordinary shares Paid interim dividend of 8.3p per share (last year 6.3p per share) Proposed final dividend of 14.2p per share (last year 12p per share) Total ordinary dividend, 22.5p per share (last year 18.3p per share) £m 140.1 217.9 358.0 The final ordinary dividend will be paid on 11 July 2008 to shareholders whose names are on the Register of Members at the close of business on 30 May 2008. Share capital and control (i) Structure The information in this section is given pursuant to section 992 of the Companies Act 2006 and is correct as at 29 March 2008. The Company’s authorised share capital was £800,000,000 divided into 3,200,000,000 ordinary shares of 25p each and there were 1,586,478,423 ordinary shares in issue. The ordinary shares are listed on the London Stock Exchange and can be held in certificated or uncertificated form. The rights and obligations attaching to the Company’s ordinary shares, in addition to those conferred on their holders by law, are set out in the Company’s Articles of Association, a copy of which can either be viewed on our website marksandspencer.com/thecompany or obtained by writing to the Company Secretary, or from Companies House in the UK. The holders of ordinary shares are entitled to receive the Company’s report and accounts, to attend and speak at general meetings of the Company, to appoint proxies and to exercise voting rights. Changes to the Company’s Articles must be approved by special resolution of the Company. New Articles are being proposed at this year’s Annual General Meeting (AGM) which include a number of changes, some of which may impact on the rights, obligations, restrictions on transfer or voting rights attaching to those shares. Explanatory notes relating to these changes are included in the appendix to the Notice of Meeting booklet which accompanies this report. Interests in voting rights Information provided to the Company pursuant to the Financial Services Authority’s (FSA) Disclosure and Transparency Rules (DTRs) is published on a Regulatory Information Service and on the Company’s website. As at 6 May 2008, the Company had been notified under DTR5 of the following significant holdings of voting rights in its shares: Brandes Investment Partners, L.P (21.03.07) Capital Research and Management Company (11.04.08) Legal & General Group plc (26.03.08) Ordinary shares 111,595,173 86,833,000 72,771,104 % of share capital 6.57% 5.47% 4.57% Nature of holding Indirect Interest Indirect Interest Direct Interest i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 36 MARKS AND SPENCER GROUP PLC Group Directors’ report continued The Board is responsible for the management of the business of the Company and may exercise all the powers of the Company subject to the provisions of relevant statutes and the Company’s Memorandum and Articles of Association. For example, the Articles contain specific provisions and restrictions regarding the Company’s power to borrow money; provisions relating to the appointment of directors, subject to subsequent shareholder approval; delegation of powers to a director or secretary or committees of one or more persons; and subject to certain exceptions, a director shall not vote on or be counted in a quorum in relation to any resolution of the Board in respect of any contract in which he/she has an interest which he/she knows is material. There are no known arrangements under which financial rights are held by a person other than the holder of the shares. Shares to be acquired through the Company’s share plans rank equally with the shares in issue and have no special rights. As far as the Company is aware, there are no persons with significant direct or indirect holdings of voting rights in the Company other than as set out in the paragraph entitled ‘Interests in voting rights’ on page 35. Significant agreements – change of control There are a number of agreements to which the Company is party that take effect, alter or terminate upon a change of control of the Company following a takeover bid. Details of the significant agreements of this kind are as follows: (cid:129) the £400m Medium Term Notes (MTNs) issued by the Company to various institutions on 28 March 2007 under the Group’s £3bn Euro Medium Term Note (EMTN) programme contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of an MTN may require the Company to prepay the principal amount of that MTN; (cid:129) the £250m puttable callable reset notes issued by the Company to various institutions on 11 December 2007 under the Group’s £3bn EMTN programme contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of an MTN may require the Company to prepay the principal amount of that MTN; (cid:129) the $500m US Notes issued by the Company to various institutions on 6 December 2007 under section 144a of the US Securities Act contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of such a US Note may require the Company to prepay the principal amount of that US Note; (cid:129) the $300m US Notes issued by the Company to various institutions on 6 December 2007 under section 144a of the US Securities Act contain an option such that, upon a change of control event, combined with a credit ratings downgrade to below sub-investment level, any holder of such a US Note may require the Company to prepay the principal amount of that US Note; (cid:129) the £1.2bn Credit Agreement between the Company and various banks dated 13 August 2004 contains a provision such that, upon a change of control event, unless new terms are agreed within 60 days, the facilities under that agreement will be cancelled with all outstanding amounts becoming immediately payable with interest; and (cid:129) the agreement between HSBC and the Company relating to M&S Money dated 9 November 2004 (as amended and restated on 1 March 2005) contains a clause such that, upon a change of control of the Company, any new owner would be obliged to give undertakings to HSBC in respect of the continuation of the agreement, negotiate revised terms or terminate the agreement. The Company does not have agreements with any director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company’s share schemes and plans may cause options and awards granted to employees under such schemes and plans to vest on a takeover. (ii) Issue of new ordinary shares During the period, 12,447,224 ordinary shares in the Company were issued as follows: (cid:129) 114,556 shares under the terms of the 1997 Executive Share Option Scheme at prices between 358p and 557p; (cid:129) 66,030 shares under the terms of the 2000 Executive Share Option Scheme at prices between 215p and 350p; (cid:129) 2,054,623 shares under the terms of the 2002 Executive Share Option Scheme at prices between 270p and 353p; and (cid:129) 10,212,015 shares under the terms of the United Kingdom Employees’ Save As You Earn Share Option Scheme at prices between 156p and 559p. (iii) Purchase of ordinary shares The Company was authorised by shareholders, at the July 2007 AGM, to purchase in the market up to 170 million shares, representing 10% of the Company’s issued share capital, as permitted under the Company’s Articles. The Company engages in share buy backs to create value for the shareholders, when cash flow permits and there is not an immediate alternative investment use for the funds. The Company announced on 6 November 2007 that it would begin a share buy back programme to purchase up to 10% of the Company’s issued share capital. Since then and up to 19 May 2008, the date of this report, 127,017,902 of the Company’s ordinary shares, with a nominal value of 25p each, were bought back and cancelled, representing 7.5% of the Company’s issued share capital at 10 July 2007, the date of the 2007 AGM. An up-to-date summary of all transactions is available on our website. This standard authority is renewable annually and approval will be sought from shareholders at the 2008 AGM to renew for another year. It is the Company’s present intention to cancel any shares it buys back, rather than hold them in treasury. Board of directors The membership of the Board and biographical details of the directors are given on page 32 and are incorporated into this report by reference. Martha Lane Fox was appointed to the Board as a non-executive director on 1 June 2007. Jack Keenan retired from the Board on 10 July 2007. On 10 March 2008 the Company announced a number of Board and senior management changes. Lord Burns will retire as Chairman with effect from 1 June 2008. Sir Stuart Rose will be appointed Executive Chairman from 1 June 2008. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 37 A b o u t u s Kate Bostock was appointed to the Board as an Executive Director of Clothing and Steven Esom was appointed to the Board as Executive Director of Food on 10 March 2008. Details of these changes are set out on page 39 of the Corporate governance statement and are incorporated into this report by reference. Directors’ indemnities The Company maintains directors’ and officers’ liability insurance which gives appropriate cover for any legal action brought against its directors. The Company has also granted indemnities to each of its directors and the secretary to the extent permitted by law. Qualifying third party indemnity provisions (as defined by section 234 of the Companies Act 2006) were in force during the year ended 29 March 2008 and remain in force, in relation to certain losses and liabilities which the directors (or secretary) may incur to third parties in the course of acting as directors (or secretary) or employees of the Company or of any associated company. Directors’ interests The beneficial and non-beneficial interests of the directors and connected persons in the shares of the Company are shown on page 52. Options granted under the Save As You Earn (SAYE) scheme and Executive Share Option Schemes are shown on pages 54 and 55. Further information regarding employee share schemes is given in note 12 to the financial statements. Related party transactions Internal controls are in place to ensure that related party transactions involving directors, or their connected parties, are conducted on an arm’s length basis. Directors’ responsibilities The directors are obliged under company law to prepare financial statements for each financial year and to present them annually to the Company’s members in the Annual General Meeting. The financial statements, of which the form and content is prescribed by the Companies Act 1985 and applicable accounting standards, must give a true and fair view of the state of affairs of the Company and the Group at the end of the financial year, and of the profit for that period. The directors are also responsible for the adoption of suitable accounting policies and their consistent use in the financial statements, supported where necessary by reasonable and prudent judgements. The directors confirm that the above requirements have been complied with in the financial statements. In addition, the directors are responsible for maintaining adequate accounting records and sufficient internal controls to safeguard the assets of the Group and to prevent and detect fraud or any other irregularities, as described more fully in the Corporate governance statement on page 46. Directors’ responsibility statement pursuant to DTR4 The directors confirm that, to the best of their knowledge: (a) the Group and Company financial statements in this report, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, IFRIC interpretations and those parts of the Companies Act 1985 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Group taken as a whole; and (b) the management report contained in this report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face. Audit information Each director confirms that, so far as he/she is aware, there is no relevant audit information of which the Company’s auditors are unaware and that each director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Employee involvement We have maintained our commitment to employee involvement throughout the business. Employees are kept well informed of the performance and objectives of the Group through personal briefings, regular meetings, email and Chief Executive broadcasts at key points in the year to all head office employees and store management. These are supplemented by our employee publications including Your M&S magazine and DVD presentations. More than 3,500 employees elected onto Business Involvement Groups across every store and head office location represent their colleagues in two-way communication and consultation with the Company. They have continued to play a key role in a wide variety of business changes. The thirteenth meeting of the European Council took place last July. This Council provides an additional forum for informing, consulting and involving employee representatives from the countries in the European Community. Directors and senior management regularly visit stores and discuss with employees matters of current interest and concern to the business. Share schemes are a long-established part of our total reward package, encouraging and supporting employee share ownership. In particular, over 25,000 employees currently participate in Sharesave, the Company’s all employee Save As You Earn scheme. Full details of all schemes are given on pages 49 and 50. We maintain contact with retired staff through communications from the Company and the Pension Trust. Member-nominated trustees have been elected to the Pension Trust Board, including employees and pensioners. We continue to produce a regular Pensions Update newsletter for members of our final salary pension scheme and our M&S Retirement Plan. Equal opportunities The Group is committed to an active Equal Opportunities Policy from recruitment and selection, through training and development, appraisal and promotion, to retirement. It is our policy to promote an environment free from discrimination, harassment and victimisation, where everyone will receive equal treatment regardless of gender, colour, ethnic or national origin, disability, age, marital status, sexual orientation or religion. All decisions relating to employment practices will be objective, free from bias and based solely upon work criteria and individual merit. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 38 MARKS AND SPENCER GROUP PLC Group Directors’ report continued Political donations It is our policy not to make donations for political purposes in the UK, to EU political parties or to incur EU political expenditure. Accordingly, the Company and its subsidiaries did not give any money for political purposes in the UK nor did they make any donations to EU political organisations or incur any EU political expenditure during the year. Under the provisions of the Political Parties, Elections and Referendums Act 2000, shareholder authority is required for political donations to be made or political expenditure to be incurred by the Company or any of its subsidiaries in the EU and disclose any such payments in the Annual report. The legislation gives a wide definition of what constitutes political donations and political expenditure, including sponsorship, subscriptions, payment of expenses, paid leave for employees fulfilling public duties and support for bodies representing the business community in policy review or reform. At the 2006 AGM shareholders gave a limited authority (£100,000) to the Company and each of the six principal employing companies to make political donations or to incur political expenditure in the EU (which would not ordinarily be regarded as political donations) as a precautionary measure, to allow the Company to continue supporting the community and such organisations without inadvertently breaching the legislation. This authority will expire in 2010. Going concern After making enquiries, the directors have a reasonable expectation that the Company and Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they have adopted the going concern basis in preparing the financial statements. Auditors Resolutions to reappoint PricewaterhouseCoopers LLP as auditors of the Company and to authorise the Audit Committee to determine their remuneration will be proposed at the 2008 AGM. Annual general meeting The AGM of Marks and Spencer Group plc will be held at the Royal Festival Hall, London on 9 July 2008. The Notice is given, together with explanatory notes, in the booklet which accompanies this report. By order of the Board Graham Oakley, Group Secretary London 19 May 2008 The Group is responsive to the needs of its employees, customers and the community at large and we are an organisation that endeavours to use everyone’s talents and abilities to the full. Employees with disabilities It is our policy that people with disabilities should have full and fair consideration for all vacancies. During the year, we continued to demonstrate our commitment to interviewing those people with disabilities who fulfil the minimum criteria, and endeavouring to retain employees in the workforce if they become disabled during employment. We will actively retrain and adjust their environment where possible to allow them to maximise their potential. We continue to work with external organisations to provide workplace opportunities through our innovative Marks & Start scheme and by working closely with jobCentrePlus. Creditor payment policy For all trade creditors, it is the Group’s policy to: (cid:129) agree the terms of payment at the start of business with that supplier; (cid:129) ensure that suppliers are aware of the terms of payment; and (cid:129) pay in accordance with its contractual and other legal obligations. The main trading company, Marks and Spencer plc, has a policy concerning the payment of trade creditors as follows: (cid:129) general merchandise payments are received between 16 and 23 days after the stock was delivered; (cid:129) food payments are received between 18 and 25 days after the stock was delivered; and (cid:129) distribution suppliers are paid monthly, for costs incurred in that month, based on estimates, and payments are adjusted quarterly to reflect any variations to estimate. Trade creditor days for Marks and Spencer plc for the year ended 29 March 2008 were 15.3 days, or 10.2 working days (last year 14.7 days, or 9.8 working days), based on the ratio of Company trade creditors at the end of the year to the amounts invoiced during the year by trade creditors. Market value of properties The last formal valuation of the Group’s properties was carried out in September 2006. Taking into account movements in the Group’s property portfolio since that date, the directors are of the opinion that the market value of the Group’s properties, at 29 March 2008 exceeded their net book value (including prepayments in respect of leasehold land) of the fixed asset and leasehold properties by approximately £1.0bn. Charitable donations During the year, the Group made charitable donations to support the community of £15m (last year £13.9m). These principally consisted of cash donations of £5.4m (last year £3.8m) which includes our ‘Marks & Start’ community programme, Breakthrough Breast Cancer, Save The Children, World Wildlife Fund, and local community donations, £1.9m (last year £3m) of employee time, principally on Marks & Start and school work experience programmes, and stock donations of £7.5m (last year £6.6m) to a variety of charities including Shelter, FareShare and The Birth Defects Foundation. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 39 Corporate governance statement A b o u t u s The Board is committed to achieving success for the Company by building a sustainable business for the long term, generating shareholder value through consistent profitable growth whilst making sure that our customers can always trust us to do the right thing. This statement explains our governance policies and practices and provides insight into how the Board and management run the business for the benefit of shareholders. The governance rules which apply to all UK companies listed on the London Stock Exchange are found in the Combined Code on Corporate Governance which was updated by the Financial Reporting Council in June 2006 (the ‘Code’). A detailed account of how the Company has applied the Code’s principles and how we comply with its provisions can be found on our website at marksandspencer.com/thecompany The Board The Board’s role is to: (cid:129) provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enables risk to be assessed and managed; (cid:129) set the Company’s strategic aims, ensuring that the necessary financial and human resources are in place for the Company to meet its objectives and review management performance; and (cid:129) set the Company’s values and standards and ensure that its obligations to its shareholders and others are understood and met. All directors are individually briefed on appointment, on the duties they owe as directors to the Company. During the year, the directors have been briefed on their new statutory duties as set out in the Companies Act 2006, which came into effect on 1 October 2007. The central duty is the duty to act in good faith and in a way most likely to promote the success of the Company for the benefit of its members as a whole. In fulfilling this duty, directors should have regard (amongst other matters) to the likely consequences of any decision in the long term; the interests of employees; the need to foster business relationships with suppliers, customers and others; the impact of operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly between members of the Company. The non-executive directors play a key governance role in protecting shareholders’ interests. They are independent and bring an external dimension to the Board, whilst complementing the skills and experience of the executive directors through their range of knowledge, experience and insight from other sectors. In January 2007 we announced Plan A, our business wide ‘eco plan’ setting out our ambitions to change the way we operate over the next five years. We are committed to our principles of Quality, Value, Service, Innovation and Trust. Trust is earned from others as a result of our commitment to long-held values and the way we behave. Our Code of Ethics is available on our website. It outlines the behaviours that M&S expects from its employees, whether they are dealing with our customers, suppliers, shareholders or colleagues. This includes acting in a professional manner with honesty and integrity at all times and following Company policies and procedures. It also sets out guidelines on the environment, fraud and financial reporting, the management of conflicts of interest and how to raise concerns about possible improprieties in financial reporting or other matters. Senior managers sign their acceptance of the Code of Ethics each year and ensure it is applied in their areas of responsibility. New Board structure On 10 March 2008 we announced Board and senior management changes. We stated that Lord Burns would stand down as Chairman from 1 June 2008, when Sir Stuart Rose would be appointed Executive Chairman. On 3 April 2008 Lord Burns wrote to shareholders setting out the detailed reasons behind the Board’s decisions. A copy of this letter is available on our website. The Board has taken this decision, cognisant of its prime objective to ensure the Company’s ongoing commercial success, and has put in place balancing controls to mitigate the governance concerns: (cid:129) limited period of appointment of combined Chairman and Chief Executive until July 2011; (cid:129) appointment of Sir David Michels as Deputy Chairman; (cid:129) clear specification of duties of Executive Chairman and Deputy Chairman to ensure proper division of responsibilities and balance of power; (cid:129) appointment of two new executive directors and increased responsibility for the Group Finance and Operations Director; (cid:129) recruitment of an additional non-executive director to ensure a majority of independent directors on the Board. Following that appointment, the Board will consider the appointment of a further non-executive; and (cid:129) annual voting by shareholders for Sir Stuart Rose’s reappointment as a director starting at the 2008 AGM. The Board unanimously believes that the overall arrangements represent a sensible way forward and provide a sound transitional governance structure leading to the appointment of a new Chairman and separate Chief Executive by summer 2011. The new structure will ensure continuity of leadership, strengthen the Board and streamline the organisation. This will focus everyone on business performance during a period of significant trading uncertainty and it addresses investor concerns over succession. Consultation with shareholders The Code states that: “If exceptionally a Board decides that a Chief Executive should become Chairman, the Board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report”. In the period leading up to the announcement on 10 March 2008 of the Board and senior management changes, the Board considered how best to communicate with shareholders. The changes proposed as part of the new governance and management structure were wide-ranging and not only included the appointment of the Executive Chairman and Deputy Chairman but two new Board appointments, the extension of the Finance Director’s role and a large number of senior management appointments, as well as news of the departures of several members of the senior management team. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 40 MARKS AND SPENCER GROUP PLC Corporate governance statement continued In light of these proposed changes and their sensitivities the Board was concerned about the risk of leaks and did not consult major shareholders in advance. The Board was unanimous and clear that the proposed changes, taken as a whole, were in the interests of shareholders, customers and employees. The Board was also clear that whatever consultation was undertaken in advance of an announcement, its deliberations would nonetheless be subject to comment and scrutiny. The Board also knew that it would, rightly, be obliged under the Code to explain why it was proposing to combine the Chairman and Chief Executive roles and to answer questions from any shareholders with concerns. Since the announcement, Lord Burns has consulted with a number of principal investors and shareholder representative bodies and he and Sir David Michels have met with those who had requested a meeting. A letter was also sent to all shareholders on 3 April 2008 setting out the detailed reasons behind the Board’s decisions. Division of responsibilities The Board has reviewed and agreed a clear specification of duties under the new Board structure to ensure a proper division of responsibilities and balance of power. The Deputy Chairman will have joint responsibility with the Executive Chairman, for the agenda and the overall Board structure and composition. He will chair the Nomination Committee, provide leadership for the non-executive directors, be responsible for monitoring Board effectiveness and lead on corporate governance issues. Sir David Michels has committed to spend sufficient and significant time in his role as Deputy Chairman. He is resigning from the Board of The British Land Company PLC and resigned from RAB Capital PLC on 18 April 2008 in order to ensure that he can fulfil his commitments. In addition, the non-executive directors will meet independently at least twice a year to keep the governance structure under review to ensure appropriate safeguards are in place to protect shareholder interests. Board balance and independence On 29 March 2008 the Board comprised 11 directors: the Chairman, Chief Executive, four executive directors and five non-executive directors. On 1 June 2008 the Board will comprise 10 directors: the Executive Chairman, non-executive Deputy Chairman, four executive directors and four further non-executive directors. A full list of the directors, with details of their biographies and committee membership, is given on page 32. The Board concludes that each non-executive director is independent in character and judgement and will keep under review whether there are relationships or circumstances which are likely to affect, or could appear to affect, independence. The principal roles of the Executive Chairman, Deputy Chairman and non-executive directors are set out below: Executive Chairman (cid:129) to ensure the Board achieves its full potential to build a sustainable business for the long term, generating shareholder value through consistent, profitable growth whilst making sure that our customers always trust us to do the right thing; and (cid:129) to act within delegated authority from the Board for all aspects of the management of the Group, which includes developing appropriate business strategies for Board approval and achieving timely and effective implementation. During the period of combined Chairman and Chief Executive: to keep the Deputy Chairman regularly informed on all matters that may be of importance to the Group, including its current performance and progress; and to monitor performance of the executive directors in their increased responsibilities, whilst focusing on the strategic growth areas of the business. Deputy Chairman and Senior Independent Director (cid:129) to lead on all governance issues including conducting the annual review of Board effectiveness and ensuring that the performance of individual directors is kept under review; and (cid:129) to provide a communication channel between the Chairman and non-executive directors and, when required, principal shareholders including representative bodies. During the period of combined Chairman and Chief Executive: to monitor the effectiveness of the role of Executive Chairman; independently to lead the succession process for the appointment of a Chief Executive by 2011; and to maintain contact with principal investors and representative bodies on a regular basis, keeping the Board informed. Non-Executive Directors (cid:129) to bring an independent and external dimension to the Board’s activities and play their part in relation to strategy, performance, risk and people; and (cid:129) within the spirit of partnership and mutual respect on the unitary board, to support, constructively challenge and monitor the executive team. During the period of combined Chairman and Chief Executive: to keep the governance structure under review to ensure appropriate safeguards are in place to protect shareholder interests. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 41 A b o u t u s Information and professional development The Chairman ensures that the directors receive accurate, timely and clear information. They receive regular updates on business performance against the annual operating plan and investment decisions, together with business reports and presentations from senior management at Board meetings. Directors are encouraged to update their skills, knowledge and familiarity with the Group through their initial induction, ongoing participation at Board and Committee meetings, meeting employees at store locations and elsewhere and are kept up-to-date on the views of customers and shareholders. The Board is regularly updated on governance and regulatory matters. Graham Oakley as Group Secretary acts as a sounding board to the Chairman and individual directors. He supports the Chairman in ensuring the Board functions effectively and fulfils its role. He is secretary of the Audit, Remuneration and Nomination Committees and also heads the Corporate Governance Group, which supports the Board and its committees, as well as providing advice on a range of issues to commercial colleagues. From 1 June 2008 the Group Secretary will have an additional reporting line to the Deputy Chairman to assist him in fulfilling his governance duties. There is an established procedure whereby the Board or any of its Committees may take independent professional advice when appropriate. Any individual director, wishing to do so in the furtherance of their duties, may also take independent professional advice through the secretary at the Company’s expense. Directors are granted an indemnity from the Company in respect of liabilities incurred as a result of their office. In respect of those matters for which they cannot be indemnified, the Company maintains appropriate liability insurance for the benefit of directors. Board performance The performance of the Board is a vital component of the Group’s success and the Board is keen to ensure that the annual review of its performance builds on the previous year’s results to ensure a continuous process. In September 2007 the Board approved an action plan based on the key themes from the 2006/07 review of process, people, strategy and performance measures. The action plan also referred to the new statutory directors’ duties, to address these as an integral part of Board performance. The Board agreed to conduct the 2007/08 review ‘in house’ and that it be led by Lord Burns. In January 2008 each director completed a questionnaire to rate collective performance over some 20 questions with free text boxes for comments. The Chairman then reviewed an unattributed executive summary, highlighting key outcomes which he has subsequently discussed with individual directors. Some of the outcomes achieved in 2007/08 following the 2006/07 review: (cid:129) a greater focus on the long-term growth prospects of the business leading to the announcement in November 2007 of our priorities for the next five years. Whilst continuing to invest in our core business we have ambitious plans for our UK property portfolio, M&S Direct and International businesses and Plan A; (cid:129) regular reviews of the bench strength of senior management and future skills and composition of the Board, leading to the new governance and management structures announced on 10 March 2008. Succession planning will continue to be a priority and from 1 June 2008 Sir David Michels, Deputy Chairman, will chair the Nomination Committee; and (cid:129) introduction of an online Board portal to provide a more secure, efficient and flexible method of delivering Board papers and easy access to information for induction and ongoing development. From 1 June 2008 Sir David Michels as Deputy Chairman will lead the Board’s review of its performance. He will also hold meetings with the non-executive directors, without the executive directors present, to monitor and reflect on the effectiveness of the new governance structure and to appraise the performance of the Executive Chairman. Individual performance The performance of the executive directors was reviewed individually by the Chief Executive against set objectives. Remuneration is directly linked to these reviews and determined by the Remuneration Committee. Similarly, the Chief Executive’s performance was reviewed by the Chairman. The Senior Independent Director reviewed the Chairman’s performance against a set of previously agreed objectives. The performance of the non-executive directors was reviewed individually by the Chairman. This year’s questionnaire also invited each director to comment on the individual performances of themselves, other directors and the Chairman. Under the new Board structure from 1 June 2008 the Deputy Chairman will review the performance of the Executive Chairman, taking into account the views of the non-executive directors. Committee performance The process for reviewing the effectiveness of the Committees in 2007/08 has been to combine ongoing reviews with a simple questionnaire led by each of the respective chairmen. The Audit and Remuneration Committees undertook a review looking at their methods of operation and processes and combined this with the use of questionnaires which were conducted in March 2008. An executive summary was produced for the Chairman of each Committee which they discussed with their respective Committee members. Succession planning and senior leadership development During the year successional planning reviews were held by the Board and the Nomination Committee resulting in key appointments to the Board and senior management. We made important organisational changes, promoting existing talent and bringing in new people, to ensure we have the right skills in key areas of focus over the next three years. Senior leadership development remains a priority. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 42 MARKS AND SPENCER GROUP PLC Corporate governance statement continued Board committees The principal Board committees are the Audit, Remuneration and Nomination Committees. The written terms of reference of each committee can be found on our website. Audit Committee The Audit Committee comprises four independent, non-executive directors: Jeremy Darroch (Chairman), Martha Lane Fox, Steven Holliday and Sir David Michels. Martha joined the Board and became a member of the Committee on 1 June 2007 to replace Jack Keenan who retired on 10 July 2007. The Audit Committee assists the Board in fulfilling its oversight responsibilities and its primary role is to monitor the integrity of the financial statements and other information to shareholders; to review the systems of internal control and risk management; to maintain an appropriate relationship with the Company’s external auditors; and to review the effectiveness and objectivity of the audit process. It met four times during the year reviewing a number of internal audits relating to key business processes and the principal risks and uncertainties facing the Group. The Committee received updates on the governance process around business change initiatives and reviewed the Code of Ethics and whistleblowing returns. Private meetings have been held separately with the external auditors and internal audit. The Board has satisfied itself that at least one member of the Audit Committee has recent and relevant financial experience and is confident that the collective experience of the members enables them to act as an effective Audit Committee. The Committee also has access to the financial expertise of the Group and its auditors and can seek further professional advice at the Company’s expense, if required. The Board has appointed a new Head of Internal Audit and Risk, Claire Combes, who joined the Company on 6 May 2008. Following the departure on 31 July 2007 of the previous Head of Internal Audit, John Federer, the function has been led by the two Audit Managers who have had direct access to the Audit Committee Chairman. The Committee keeps under review the independence and objectivity of the external auditors, PricewaterhouseCoopers LLP (‘PwC’), including the review of any audit fee proposals and non-audit fees. An engagement and fee approvals process is in place which requires prior approval from the Committee for certain engagements. On occasions, the nature of non- audit advice may make it more timely and cost-effective to select PwC, who already have a good understanding of the Group. PwC may also be appointed for consultancy work, but only after rigorous checks, including competitive tender, to confirm they are the best provider. PwC is also subject to professional standards which safeguard the integrity of the auditing role performed on behalf of shareholders. Arrangements have been made, in conjunction with PwC, for audit partner rotation in accordance with the recommendations of the Auditing Practices Board. The lead audit engagement partner, Ranjan Sriskandan, has been in place since 2003/04 and is being succeeded by Stuart Watson with effect from 2008/09. As authorised by shareholders at the AGM on 10 July 2007, the Audit Committee determines the level of remuneration for the external auditors on behalf of the Board. Details of this year’s fees are given in note 4 to the financial statements. Remuneration Committee The Remuneration Committee comprises four independent non-executive directors: Louise Patten (Chairman), Martha Lane Fox, Steven Holliday, and Sir David Michels. Martha joined the Board and became a member of the Committee on 1 June 2007 to replace Jack Keenan who retired on 10 July 2007. It met five times during the year. The Remuneration Committee’s primary role is to recommend to the Board the remuneration strategy and framework, giving due regard to the financial and commercial health of the Company and to ensure that executive directors and senior management are fairly rewarded for their individual contributions to the Company’s overall performance. The remuneration of the non-executive directors is determined by the Chairman and the executive directors. The Remuneration report is set out on pages 48 to 55 as required by the Directors’ Remuneration Report Regulations 2002. Nomination Committee The Nomination Committee comprises Lord Burns (Chairman), Sir Stuart Rose and all five independent non-executive directors: Jeremy Darroch, Martha Lane Fox, Steven Holliday, Sir David Michels and Louise Patten. Martha joined the Board and became a member of the Committee on 1 June 2007 to replace Jack Keenan who retired on 10 July 2007. From 1 June 2008 Sir David Michels, Deputy Chairman, will chair the Committee to replace Lord Burns who will retire on that date. The Nomination Committee’s primary role is to ensure that appropriate procedures are in place for the nomination, selection, training and evaluation of directors and for successional plans. It reviews the Company’s Board structure, size, composition and successional needs, thereby keeping under consideration the balance of membership and the required blend of skills, knowledge and experience of the Board. Appointments are made on merit and against objective criteria to ensure that the Board maintains a balance of skills and experience. It met twice formally during the year and succession planning sessions were held by the Board and the Nomination Committee to consider Board and senior management changes. Under the Company’s Articles of Association, all directors seek election at their first Annual General Meeting following appointment and all directors are required to offer themselves for re-election at least every three years. Under the new Board structure from 1 June 2008 we have announced that Sir Stuart Rose will retire and seek re-election by shareholders on an annual basis, commencing in 2008, rather than on the usual three-year cycle. On 10 March 2008 we announced the appointment with immediate effect of two new executive directors, Kate Bostock and Steven Esom, as well as changes to the senior management team. The Board was keen to ensure a proper mix of top talent, combining new recruits and existing employees. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 43 A b o u t u s Consideration was given when recruiting below Board level as to whether further progression on the Board was possible, as demonstrated by the promotion of two new executive directors and the increased responsibility given to Ian Dyson as Group Finance and Operations Director. On 22 May 2007 we announced the appointment of a new non-executive director, Martha Lane Fox, with effect from 1 June 2007. This followed a search by an external search consultancy commissioned by the Nomination Committee. The candidates were shortlisted by the Chairman and the Chief Executive and the preferred candidate then seen by a wider group of directors. A search led by Sir David Michels on behalf of the Committee is currently under way for a new non-executive director which is being conducted through an external search consultancy. Attendance The following table sets out the number of meetings of the Board and its governance committees during the year and individual attendance by Board and committee members at those meetings. Directors who were unable to attend Board or committee meetings reviewed the relevant papers and provided comments prior to the meeting to the Chairman, or Committee Chairman, as appropriate. Name of Director Lord Burns, Chairman Sir Stuart Rose, Chief Executive Executive Directors Kate Bostock (appointed 10 March 2008) Ian Dyson Steven Esom (appointed 10 March 2008) Steven Sharp Non-Executive Directors Jeremy Darroch Martha Lane Fox (appointed 1 June 2007)1 Steven Holliday2 Jack Keenan (retired 11 July 2007) Sir David Michels3 Louise Patten A = Maximum number of meetings the director could have attended. B = Number of meetings the director actually attended. Group Board B Audit Committee B A Remuneration Committee B A Nomination Committee B A 9 9 1 9 1 9 9 6 8 3 6 9 – – – – – – 4 3 4 1 4 – – – – – – – 4 2 3 1 2 – – – – – – – – 3 5 2 5 5 – – – – – – – 2 4 2 3 5 2 2 – – – – 2 1 2 1 2 2 2 2 – – – – 2 – 2 1 2 2 A 9 9 1 9 1 9 9 7 9 3 9 9 1 Martha Lane Fox was unable to attend meetings of the Board on 8 February 2008, the Audit and Remuneration Committees on 27 February 2008 and the Nomination Committee on 29 February 2008 as she was in hospital. 2 Steven Holliday was unable to attend meetings of the Audit and Remuneration Committees on 15 May 2007 and the Board on 5 November 2007 due to overseas commitments with National Grid plc. 3 Sir David Michels was unable to attend meetings of the Board on 9 and 21 May and 5 November 2007; the Audit Committee on 15 May and 31 October 2007; and the Remuneration Committee on 15 and 21 May 2007 due to overseas business commitments already planned prior to his appointment to the M&S Board. Accountability and audit The Group’s overriding corporate objective is to maximise long-term shareholder value whilst exceeding the expectations of our customers, employees and partners. In doing so, the directors recognise that creating value is the reward for taking and accepting risk. The Board has overall responsibility for the Group’s approach to assessing risk and systems of internal control, and for monitoring their effectiveness in providing shareholders with a return that is consistent with a responsible assessment and mitigation of risks. This includes reviewing financial, operational and compliance controls and risk management procedures. The role of executive management is to implement the Board’s policies on risk and control, and to provide assurance on compliance with these policies. Independent assurance is provided by internal audit, which operates across the Group, and the external auditors. All employees are accountable for operating within these policies. Because of the limitations that are inherent in any system of internal control, this system is designed to manage, rather than eliminate, the risk of failure to achieve corporate objectives. Accordingly, it can only provide reasonable but not absolute assurance against material misstatement or loss. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 44 MARKS AND SPENCER GROUP PLC Corporate governance statement continued Risk assessment Every six months the Board reviews the Group Risk Profile – the tool that drives risk assessment and action planning. This is supported by an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. As an integral part of planning and review, managers from each business area and major projects: (cid:129) identify the risks to their plans; (cid:129) evaluate the risks using likelihood and impact; and (cid:129) document the actions being taken to manage those risks. This process has been in place for the year under review and up to the date of approval of the Annual report and accounts. It has been regularly reviewed by the Board and accords with the Internal Control Guidance for directors on the Code produced by the Financial Reporting Council. Principal risks and uncertainties There are risks and uncertainties which could impact the Group’s long-term performance. The risk assessment process is designed to identify, manage and mitigate business risk. The table below gives examples of activities across Group functions to mitigate against risks and uncertainties identified. The Board considers that these are the most significant risks to achieving business goals. The risks listed do not comprise all those associated with Marks & Spencer and are not set out in any order of priority. Additional risks and uncertainties not presently known to management, or currently deemed to be less material, may also have an adverse effect on the business. Risk Impact Examples of mitigating activities PRODUCT: We aim to provide a wide choice of great value, high quality clothing, food and home products, which are all sourced and made responsibly. Clothing We fail to maintain clothing market share through growth of space and focus on product in the face of increased competition in tougher trading conditions See pages 11 to 15 Food We fail to deliver profitable sales growth while maintaining an innovation gap over competitors See pages 17 to 19 Adverse effect on financial results Lost market share and customer loyalty Adverse effect on financial results Lost market share and customer loyalty (cid:129) New and better product, exploiting areas of opportunity (cid:129) Tracking of customer perceptions of product (cid:129) A supply base that enables future growth with emphasis on best value and speed to market (cid:129) New and better space offering to make clothing more accessible to our customers (cid:129) Store specific cataloguing and effective stock management to put the right stock in the right stores for our customers (cid:129) Plan A initiatives, eg ethical sourcing (cid:129) Continual product and technical innovation to maintain competitive advantage (cid:129) Continued emphasis on fresh food credentials (cid:129) Independent quality assessment of key food lines (cid:129) Tracking of customer perceptions of product (cid:129) A supply base that enables future growth and further strengthens our food credentials (cid:129) Food more accessible to our customers through new owned and franchised stores (cid:129) Plan A initiatives, eg differentiated raw materials marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 45 A b o u t u s Principal risks and uncertainties continued Risk Impact Examples of mitigating activities PEOPLE: As we continue to grow our business and invest for the future, it’s important we keep strengthening our team at every level from shop floor through to management. We fail to attract, develop and retain talent with the correct skills and capability for succession See pages 6 and 20 and 21 Inability to develop and execute business plans Competitive disadvantage (cid:129) New senior management structure in place (cid:129) A focus on senior leadership development and succession (cid:129) Competitive reward packages (cid:129) Buying Academies in head office and coaches in stores (cid:129) Graduate recruitment and development (cid:129) Employee communication (cid:129) Tracking of employee satisfaction surveys (cid:129) Tracking of customer perceptions of service i i n d c a t o r s M&S DIRECT: We are further developing our M&S Direct business as an important part of our commitment to becoming a multi-channel retailer. We fail to deliver sales growth by failing to meet customer expectations See pages 26 and 27 Adverse effect on financial results (cid:129) Capability to grow sales via new products and new customers (cid:129) A focus on improved order fulfilment and customer service Lost market share and customer loyalty i B u s n e s s r e v e w i INTERNATIONAL: We have ambitious plans to grow our International business through expanding our franchise operation, entering into partnerships and developing wholly-owned businesses in emerging economies. We fail to grow our International business successfully through franchise operations, partnerships or wholly-owned businesses See pages 28 and 29 Adverse effect on financial results (cid:129) A focus on appropriate resource required to integrate new ventures (cid:129) New operational and financial processes in place to Damage to brand support growth of International businesses (cid:129) Strong relationships forged with key stakeholders PLAN A: We launched our five-year ‘eco plan’ in January 2007 to address challenges across five areas: climate change, waste, sustainable raw materials, fair partner and health. We fail to deliver, measure or communicate performance against our Plan A commitments See pages 30 and 31 Lost stakeholder trust and confidence (cid:129) Governance in place to achieve our commitments, including a new Director of Plan A Damage to brand (cid:129) Performance reporting further developed (cid:129) Plan A integrated into day-to-day operation including Plan A Champions throughout head office and stores (cid:129) Open dialogue with stakeholders developing our mutual understanding of the challenges we face i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 46 MARKS AND SPENCER GROUP PLC Corporate governance statement continued Internal control The Board maintains full control and direction over appropriate strategic, financial, organisational and compliance issues. It has delegated to executive management the implementation of the systems of internal control within an established framework. The Board has put in place an organisational structure with formally defined lines of responsibility and delegation of authority. There are also established procedures for planning, capital expenditure, information and reporting systems, and for monitoring the Group’s businesses and their performance. These include: Plans and policies (cid:129) communication of the Group’s strategy, objectives and targets; (cid:129) annual operating and capital plans and future projections; (cid:129) operating policies and procedures; (cid:129) clearly defined capital investment control guidelines; (cid:129) review of treasury policies by the Board; and (cid:129) review of social, environmental and ethical matters by the How we do business Committee. Competent people (cid:129) appointment of employees of the necessary calibre to fulfil their allotted responsibilities; and (cid:129) clear roles and accountabilities with regular performance reviews. Monitor and control (cid:129) review by operating divisions of their plans with the relevant executive directors prior to submission to the Board for approval, including identification and assessment of risks; (cid:129) monthly comparison of operating divisions’ actual financial performance against budget; and (cid:129) regular consideration by the Board of year-end forecasts. Regulatory update (cid:129) reporting of accounting and legal developments; and (cid:129) regular briefings on latest best practice corporate governance to the Board. Assurance On behalf of the Board, the Audit Committee examines the effectiveness of the Group’s: (cid:129) assessment of risk by reviewing evidence of risk assessment activity and a report from internal audit on the process undertaken; (cid:129) systems of internal control, primarily through approving the internal audit plan and reviewing its findings, reviews of the Annual and Interim financial statements and a review of the nature, scope and reports of the external audit; (cid:129) action plans taken, or to be taken, to remedy any significant failings or weaknesses identified; and (cid:129) action plans in place to manage significant risks. The Audit Committee has completed its review of the effectiveness of the Group’s systems of internal control during the year, which are in compliance with the Turnbull Guidance 2005. It confirms the necessary action plans to remedy identified weaknesses in internal control are in place and have been throughout the year. Internal audit’s work is focused on areas of priority as identified by the Group Risk Profile and in accordance with an annual audit plan approved each year by the Audit Committee and by the Board. The Board receives a full report from internal audit each year on the department’s work and findings and regular interim updates on specific issues. The Audit Committee monitors and assesses the role and effectiveness of the internal audit function on behalf of the Board. The external auditors are engaged to express an opinion on the financial statements. They review and test the systems of internal financial control and the data contained in the financial statements to the extent necessary to express their audit opinion. They discuss with management the reporting of operational results and the financial position of the Group and present their findings to the Audit Committee. Relations with shareholders Communication We are committed to ongoing engagement with shareholders and have a well-established cycle of communication based on the Group’s financial reporting calendar. This includes our preliminary results in May, Annual report in June, half year results in November and Interim management statements in January and July. Our website provides up-to-date information including simultaneous webcasts of our financial results and AGM presentations; regulatory announcements; Annual reports; corporate governance and share price information and answers to frequently asked questions. Following shareholder approval in July 2007, the website is now our principal means of communicating with investors. Institutional investors Our investor relations department is the focal point for contact with our institutional investors and is in regular contact with them as well as with analysts and brokers during the year. Our Chairman, Chief Executive and Group Finance and Operations Director play key roles in our relationship with major shareholders and the presentations of full and half year results are attended by all the executive directors. The Senior Independent Director is also available for shareholders as required. An investor relations summary is produced for each Board meeting and each year the Board receives feedback from independent advisers on institutional investor views of management and Company performance, based on the results of their extensive survey. From 1 June 2008 the Deputy Chairman will maintain contact with principal investors and representative bodies on a regular basis, keeping the Board informed. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 47 A b o u t u s Private investors Private investors own a high percentage of our shares compared to most other large UK companies. The Board is also interested to know their views and we make a special effort to ensure communications and policies are appropriate to their needs. They can contact us in writing, by email at chairman@marks-and-spencer.com, or by telephone on 0845 609 0810 for shareholder queries and 0845 302 1234 for customer queries. In January 2008 we consulted with shareholders on electronic communication – nearly 40,000 shareholders confirmed that they wished to continue to receive hard copy documents, such as the Annual report. The remainder will be notified when the Annual report is available on our website. However, all shareholders will continue to receive an AGM Notice of Meeting, together with key financial and governance information to enable them to vote. Postage-paid topics cards are sent with the AGM Notice of Meeting giving shareholders further opportunity to make their views known to us. The three most frequently raised topics are addressed at the meeting and a summary of all comments is given to the Board and directors of each business unit. Our registrars, Equiniti, continue to enhance their services for shareholders through their website at shareview.co.uk. This offers a number of capabilities ranging from electing to receive communications electronically to checking shareholdings and dividend information online. Many shareholders are also customers and each year we send them Spend and Save vouchers to use in our stores. These are very popular, and in spring 2008 the offer was extended to technology products and online shopping. Annual General Meeting The AGM is an important event in our corporate calendar and is well attended by shareholders. Prior to the meeting an exhibition is hosted by our senior retail and business managers. The meeting commences with a business presentation and then the Chairman, Chief Executive and other members of the Board answer questions raised by shareholders. All directors are present, including the Chairman of the Audit, Remuneration and Nomination Committees. Shareholders are then invited to vote on the resolutions contained in the Notice of Meeting, which is sent to them at least 20 working days beforehand. The business presentation, voting results and a summary of the questions raised and answers given at the meeting are made available on our website. Since 2004 voting at the meeting has been conducted by poll, using the electronic Votenow system, rather than on a show of hands. This gives a more democratic result as all shares represented at the meeting and those lodged before the meeting are included on a one share, one vote basis. Our registrars record all proxy votes received up to 48 hours prior to our AGM and report the votes ‘For’, ‘Against’ or ‘Vote withheld’ to the Chairman prior to the meeting. These votes are included in the indicative poll result screened at the meeting. The final results are announced via the London Stock Exchange. In 2007 votes cast represented 53.5% of the ordinary share capital. All resolutions were passed with votes ‘For’ resolutions ranging from 94.7% to 99.9%. The next AGM will be held on Wednesday 9 July 2008 at the Royal Festival Hall in London. In addition to routine resolutions, shareholders will be asked to vote on the adoption of new Articles of Association enabling us to benefit from the recent changes brought about by the Companies Act 2006. Compliance with the Combined Code The Company complies with all the provisions of the Code with the following exceptions: (cid:129) throughout the year ended 29 March 2008: the Board did not fully consult major shareholders in advance of our announcement on 10 March that our Chief Executive would become Chairman from 1 June 2008 (A.2.2); and (cid:129) from 1 June 2008: the role of Chairman and Chief Executive will be exercised by the same individual (A.2.1) and our Chief Executive will become Chairman (A.2.2). Our reasons for departure from the Code are set out on page 39. Governance of the Group’s pension schemes The Group operates a defined benefit scheme for all employees with an appointment date prior to 1 April 2002 and a defined contribution scheme open to those joining the Company on or after 1 April 2002. More information is given in note 11 on pages 70 to 72. The Board of the Pension Trust (‘Trustee Board’) manages the assets of the pension scheme which are held under trust separately from those of the Group. The Board comprises Tony Watson as independent Chairman and Law Debenture Trust as independent Trustee, together with five company representatives and five member representatives. The Trustee Board has reviewed the external auditor appointment and appointed KPMG LLP in place of PricewaterhouseCoopers LLP with effect from February 2008. In 2007, 89.6% of the proxy votes received were lodged through the CREST system. We encourage private investors to register their vote before the meeting on the website at sharevote.co.uk or by proxy card. The Trustee Board has also carried out a review of its own performance through questionnaire responses, one-to-one discussions and collective agreement of areas of focus for future development. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 48 MARKS AND SPENCER GROUP PLC Remuneration report This Remuneration report has been prepared on behalf of the Board by the Remuneration Committee. In all its activities, the Remuneration Committee has adopted the principles of good governance as set out in the Combined Code and complies with the Listing Rules of the Financial Services Authority, the relevant schedules of the Companies Act and the Directors’ Remuneration Report Regulations 2002. These regulations require the Company’s auditors to report on the ‘Audited information’ in the report and to state that this section has been properly prepared in accordance with the regulations. For this reason the report is divided into audited and unaudited information. The Remuneration report is subject to shareholder approval at the Annual General Meeting (AGM) on 9 July 2008. Part 1: Unaudited information Remuneration Committee Who makes up the Remuneration Committee? During 2007/08, the Committee comprised the following non-executive directors: (cid:129) Louise Patten (Committee Chairman); (cid:129) Martha Lane Fox (appointed on 1 June 2007); (cid:129) Steven Holliday; (cid:129) Sir David Michels; and (cid:129) Jack Keenan (retired on 10 July 2007). There were five meetings of the Committee during the year under review and attendance at the meetings is detailed in the Corporate governance statement on page 43. What is the remit of the Remuneration Committee? The Committee has a remit covering the total remuneration of the executive directors of the Company, ensuring that the most talented individuals are recruited, motivated to deliver results and retained. The remit includes the following: (cid:129) setting the senior remuneration strategy and framework for the top levels in the organisation; (cid:129) ensuring that executive directors and senior managers are fairly rewarded for their individual performance and contribution to the overall Company results; (cid:129) reviewing and approving the remuneration and terms and conditions of employment, including any terminations, for executive directors and senior managers; (cid:129) approving the design and targets for any annual incentive schemes that include the executive directors and senior managers; (cid:129) agreeing the design and targets, where applicable, of all share incentive plans for approval by shareholders; and (cid:129) assessing the appropriateness and subsequently the achievement of performance targets related to any share incentive plan. The Committee takes into account the financial and commercial health of the organisation when considering its approach to total remuneration. The Committee has appointed Hewitt New Bridge Street as external advisors and invites internal support from the Company Chairman, Chief Executive, Group Secretary and Head of Senior Remuneration. The Chairman and Chief Executive are not present for any discussions that relate directly to their own pay and benefit awards. The Committee regularly reviews external data produced through a number of surveys and bespoke benchmarking data, including those published by Hewitt New Bridge Street, Monks PwC, Towers Perrin and Watson Wyatt. What is our remuneration framework? The remuneration framework is simple and transparent, aligning the reward of our executive directors and senior managers to that of shareholders through a package highly geared towards share incentive plans. The key components are: (cid:129) salary and benefits; (cid:129) Annual Bonus Scheme with a compulsory deferred share element; and (cid:129) Performance Share Plan (PSP). The following charts show the balance of the package split between pay at risk and fixed pay for on-target and maximum performance. The Committee considers that the balance of fixed and variable pay is appropriate to the external market. Expected value of future annual remuneration package for executive directors ‘On-target’ performance ‘Maximum’ performance 4 3 2 1 1 Long-term incentives 46% 2 Salary 36% 3 Annual cash bonus 9% 4 Pension 9% 4 3 2 1 1 Long-term incentives 77% 2 Salary 10% 3 Annual cash bonus 10% 4 Pension 3% The value placed on long-term incentives comprises the expected cash value to executives after three years, discounted back to its present value, of (i) bonus compulsorily deferred into shares and (ii) performance shares awarded under the Performance Share Plan. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 49 A b o u t u s What are the pay and benefits received by the Board? Chairman’s remuneration The Chief Executive and other members of the Board determine the Chairman’s salary. It reflects the level of commitment and responsibility of the role. The fee has not increased since 1 April 2007 (£450,000, as reported in last year’s Remuneration report). The Chairman used approximately 25% of his net fees to purchase shares in the Company up to and including March 2008. The Chairman does not receive any other benefits except employee product discount and the provision of a driver and fleet vehicle. Non-executive directors’ remuneration The fees for non-executive directors are determined by the Chairman and executive directors and are paid in cash. The levels are set to ensure the Company attracts individuals with the necessary key skills and experience, recognising the responsibility and time commitment required to complete the roles. The fees are not performance related and are not pensionable. The fees comprise: (cid:129) Basic annual fee: (cid:129) Committee Chairman: £55,000 £12,000* (cid:129) Committee membership: £6,000* *Audit and Remuneration Committees only. The emoluments table on page 53 reflects the fees paid during the year to each non-executive director. There are no other benefits except employee product discount. Executive directors’ remuneration Salaries and benefits are determined by the Remuneration Committee. Basic salary is normally reviewed annually and any increase awarded from 1 January. The Committee takes into account a number of factors when reviewing these, including: (cid:129) salary levels in comparably-sized FTSE 100 companies and major retailers; (cid:129) economic climate, market conditions and Company performance; (cid:129) the level of pay awards in the rest of the business; and (cid:129) the role and responsibility of the individual directors. As part of the annual review process, in January 2008, Sir Stuart Rose, Ian Dyson and Steven Sharp received an increase based on the above factors. No further increases have been made to Sir Stuart Rose or Steven Sharp as a result of the Board changes announced in March 2008. However, Ian Dyson received an additional increase due to his expanded responsibilities as Group Finance and Operations Director, effective 10 March 2008. Kate Bostock and Steven Esom were both appointed to the Board on 10 March 2008 and their current salaries are shown together with all other executive directors in the Contract terms table on page 51. All the executive directors receive a 25% salary supplement in lieu of pension. Life assurance for executive directors who are not in the Group’s Pension Schemes is provided through a separate policy and the value of this benefit is included in the emoluments table, under Cash allowance and benefits on page 53. Other benefits include a car or car allowance and driver and are shown as part of the Cash allowance and benefits in the emoluments table. Employee product discount is also received but no specific value is placed on this all-employee benefit. What are the current short-term and long-term incentive schemes? Annual Bonus Scheme – short-term incentive Deferred Share Bonus Plan – long-term incentive The Annual Bonus Scheme is reviewed each year and designed to drive profitability and sales across the whole organisation. The bonus potential for executive directors is 60% of salary for on-target performance and 250% of salary for maximum performance. There is a compulsory deferral of any bonus paid into shares for all senior managers. Further details of the Deferred Share Bonus Plan can be found in note 12 to the financial statements on page 75. Bonus scheme outcome of 2007/08 The targets set for 2007/08 were extremely challenging in a very difficult trading year for retailers. As a result, the very stretching Corporate Profit Before Tax (PBT) target set at the start of the year was not reached and therefore the executive directors will not receive any bonus payment under this scheme in 2008. Some senior managers and other employees in Head Office and Retail will receive a bonus as they have delivered local sales and profit targets in accordance with the scheme rules. Bonus scheme for 2008/09 The scheme remains in principle unchanged, with bonus potentials still at 60% to 250% of salary for executive directors. Sir Stuart Rose, Ian Dyson and Steven Sharp will continue to be measured entirely on PBT targets. Kate Bostock and Steven Esom will have bonus targets based 50% on PBT, with the remaining 50% based on the achievement of profit and sales in their respective business areas i.e. clothing and food. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l Performance Share Plan (PSP) – Long-term incentive This remains the primary long-term incentive for the ‘Top 100’ managers in the organisation. The plan normally allows for awards up to 200% of salary, although up to 400% of salary may be awarded to recognise exceptional performance or to address key retention issues. s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 50 MARKS AND SPENCER GROUP PLC Remuneration report continued The performance targets are based on adjusted earnings per share (EPS) over a three-year period. EPS has shown substantial growth over the time since the first grants were made in July 2005. The first awards under this plan will vest in full in July 2008 as the Company has significantly outperformed the challenging EPS targets that were set. The Committee has reviewed the use of alternative performance measures but considers that EPS is still the most effective measure of management performance, in addition to being simple to understand and a transparent measure of the Company’s success and shareholder return. In 2007, four awards were made in excess of 200% of salary, recognising exceptional performance. The Committee is likely to award a very small number over 200% in 2008 to ensure retention of key individuals. The targets for 2008 awards have been set by the Remuneration Committee following consultation with our 10 largest investors, in addition to the ABI and RREV. The principle of splitting the performance targets as adopted last year will continue, with any element of an award over 200% having a more stretching target. While the Company’s financial performance continued to improve in 2007/08, and we are confident in its long-term growth prospects, the short-term economic outlook means that it is likely to be much more difficult to achieve such high growth in the next few years. To this end, the Committee considers that the EPS ranges set for the 2008 awards are at least as challenging as the previous EPS ranges were when they were set. Before any 2008 PSP awards in excess of 200% of salary vest, the Committee will first satisfy itself that it is reasonable to approve vesting of the awards, taking into account the Company’s actual performance over the three-year performance period as well as EPS performance. The targets for all awards are: Award 2005 2006 20072 20073 20082 20083 Average Annual EPS Growth in excess of Inflation (RPI) 20% vesting 100% vesting Adjusted EPS for start of scheme1 8% 5% 4% 4% 3% 3% 15% 12% 10% 12% 6% 8% 22.2p 31.4p 40.4p 40.4p 43.6p 43.6p 1 The base EPS figure for 2005 Awards was 23.5p, which was the adjusted EPS figure for 2004/05 on a proforma basis. The figure has been restated to 22.2p as the Group is now reporting under IFRS. Full details of EPS are described in note 8 to the financial statements on page 68 of the Annual report. 2 Awards up to 200% of salary. 3 Awards between 200% and 400% of salary. Executive Share Option Scheme – Long-term incentive No grants have been awarded under the Executive Share Option Scheme for the year under review. Whilst the Company can still make awards under the scheme adopted at the 2005 AGM, there is no intention currently to use the scheme on a regular basis. The Committee will review the use of the scheme and may grant awards if it is appropriate to do so. The final outstanding options will vest in full in June 2008 having achieved their EPS targets. The targets were based on adjusted EPS growth measured from the date of grant to the most recent financial year end as follows: (cid:129) RPI plus an average of 3% per annum for 50% of each grant; and (cid:129) RPI plus an average of 4% per annum for the remaining 50% of each grant. Executive directors (excluding Steven Esom) have options granted in 2004 under the 2002 scheme which met their targets in 2007 and are exercisable in full as shown in the table on page 55. All-Employee Share Schemes – Long-term incentive The Company has offered a Save As You Earn (SAYE) scheme called Sharesave since 1981. The scheme was renewed by shareholders at the 2007 AGM for a further 10 years. Executive directors can also participate in this scheme. Details of participation by executive directors in Sharesave are given in part 2 of this report. The scheme is subject to HMRC rules which limit the maximum amount saved to £250 per month. When the savings contract is started, options are granted to acquire the number of shares that the total savings will buy when the contract matures, at a discounted price set at the start of the scheme. Options cannot normally be exercised until a minimum of three years has elapsed. What are the current service contracts and terms of employment? Chairman Lord Burns was appointed Chairman on 11 July 2006, and will retire from the Board on 31 May 2008. His service agreement requires 12 months’ notice from the Company. The agreement contains a phased payment clause in line with executive directors’ contracts. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 51 A b o u t u s Deputy Chairman Sir David Michels is appointed Deputy Chairman with effect from 1 June 2008, and will continue in his role as Senior Independent Director. On appointment to his new role, Sir David will have an agreement for service which requires six months’ notice by either party (currently three months). Non-executive directors The non-executive directors have agreements with the Company for an initial three-year term, which are terminable on three months’ notice by either party. Jack Keenan retired from the Board on 10 July 2007. Martha Lane Fox joined the Board on 1 June 2007. Executive directors Sir Stuart Rose is appointed Executive Chairman with effect from 1 June 2008. All senior managers, including executive directors, have service contracts. These contracts can be terminated by the Company giving 12 months’ notice and by the employee giving six months’ notice. Sir Stuart Rose will remain on the same contract terms when he is appointed Executive Chairman. The Company retains the right to terminate the contract of any executive director summarily, in accordance with the terms of their service agreement, on payment of a sum equivalent to the contractual notice entitlement of 12 months’ salary and specified benefits. In the case of all current executive directors, the Company reserves the right on termination to make phased payments which are paid in monthly instalments and subject to mitigation. Entitlement to participate in share schemes ceases on termination. Contract terms and current annual salaries/fees for all members of the Board Name Chairman Lord Burns Chief Executive Sir Stuart Rose Executive directors Kate Bostock Ian Dyson Steven Esom Steven Sharp Non-executive directors Jeremy Darroch Martha Lane Fox Steven Holliday Sir David Michels2 Louise Patten Date of appointment Notice period/ unexpired term Basic salary/fee1 £000 Committee member fee £000 Committee chair/SID fee £000 Current annual salary/fee £000 01/10/05 12 mths/6 mths 31/05/04 12 mths/6 mths 10/03/08 12 mths/6 mths 27/06/05 12 mths/6 mths 10/03/08 12 mths/6 mths 08/11/05 12 mths/6 mths 01/02/06 01/06/07 15/07/04 01/03/06 01/02/06 3 mths/3 mths 3 mths/3 mths 3 mths/3 mths 3 mths/3 mths 3 mths/3 mths 450 1,130 500 675 535 565 55 55 55 55 55 – – – – – – 6 12 12 12 6 – – – – – – 12 – – 12 12 450 1,130 500 675 535 565 73 67 67 79 73 1 From 1 January 2008 for Sir Stuart Rose and Steven Sharp and 10 March 2008 for Kate Bostock, Ian Dyson and Steven Esom. 2 Sir David Michel’s basic fee will increase to £245,000 per annum on 1 June 2008 on his appointment to Deputy Chairman. This fee is inclusive of all committee memberships and his continuing role as Senior Independent Director. In addition, the notice period for his agreement will increase to six months for both parties. What is the shareholding policy for executive directors? The current shareholding policy for executive directors was introduced from 1 June 2002. All executive directors are required to hold a defined percentage of salary (200% for Chief Executive and 100% for all other executive directors) within a five-year period from their date of appointment. The relevant salary is at date of appointment and the share market value is measured at the current date. Currently, all executive directors have either met, or are on target to meet, their required shareholding. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 52 MARKS AND SPENCER GROUP PLC Remuneration report continued What are the directors’ interests in the Company? The beneficial interests of the directors and connected persons in the shares of the Company are shown below. Options granted under the SAYE scheme and the Executive Share Options Scheme and shares awarded under the Deferred Share Bonus Plan and Performance Share Plan are shown in Part 2 of this report. Further information regarding employee share option schemes is given in note 12 to the financial statements starting on page 75 of the Annual report. There have been no other changes in the directors’ interests in shares or options granted by the Company and its subsidiaries between the end of the financial year and 6 May 2008, one month prior to the Notice of the Annual General Meeting, other than that noted below in respect of Lord Burns. No director had an interest in any of the Company’s subsidiaries at the beginning or end of the year. Name Kate Bostock Lord Burns1 Jeremy Darroch Ian Dyson Steven Esom Martha Lane Fox Steven Holliday Sir David Michels Louise Patten Sir Stuart Rose Steven Sharp Ordinary shares as at 29 March 2008 Ordinary shares as at 1 April 2007 or at date of appointment 71,086 46,951 2,000 100,000 24,360 15,000 2,500 28,750 8,000 750,416 83,643 71,086 12,275 2,000 60,000 24,360 – 2,500 4,000 8,000 500,416 28,473 1 Lord Burns bought 3,856 shares on 1 April 2008 under the terms of his appointment, being the purchase of shares on a quarterly basis, using approximately 25% of his net fee from the Company, increasing his shareholding to 50,807 ordinary shares. What are the executive directors’ external appointments? The Company recognises that executive directors may be invited to become non-executive directors of other companies and that such appointments can broaden their knowledge and experience, to the benefit of M&S. The individual director retains the fee. Below are the details of the executive directors’ external appointments: Steven Esom Sir Stuart Rose Steven Sharp Fee £49,500 £55,000 £21,771 Company Carphone Warehouse Group plc Land Securities Group plc Adnams plc Performance graph This graph illustrates the performance of the Company against the FTSE 100 over the past five years. The FTSE 100 has been chosen as it is a recognised broad equity market index of which the Company has been a member throughout the period. Performance, as required by legislation, is measured by Total Shareholder Return which is share price growth plus any dividends paid. ) £ ( l e u a V 300 250 200 150 100 50 0 29 Mar 03 3 Apr 04 2 Apr 05 1 Apr 06 31 Mar 07 29 Mar 08 The above graph looks at the value, at 29 March 2008, of £100 invested in Marks and Spencer Group on 29 March 2003 compared with the value of £100 invested in the FTSE 100 Index over the same period. The other points plotted are the values at the intervening financial period-ends. Marks and Spencer Group FTSE 100 Index Source: Thomson Financial marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 53 A b o u t u s Part 2: Audited information 1 Directors’ emoluments Chairman Lord Burns Chief Executive Sir Stuart Rose1 Executive directors Kate Bostock2 Ian Dyson3 Steven Esom4 Steven Sharp5 Non-executive directors Jeremy Darroch Martha Lane Fox Steven Holliday Sir David Michels7 Louise Patten Directors retiring from the Board during the year Jack Keenan8 Former directors9, 10 Total Salary/ fee £000 450 1,070 32 542 34 535 73 56 67 79 73 22 – Cash allowance and benefits6 £000 3 305 7 156 10 166 – – – – – – – Bonus £000 – – – – 250 – – – – – – – – Total 2008 £000 453 Total 2007 £000 339 1,375 2,302 39 698 294 701 73 56 67 79 73 22 262 – 1,151 – 1,165 61 – 60 68 58 68 251 3,033 647 250 4,192 5,523 1 Sir Stuart Rose received a salary increase from £1,050,000 to £1,130,000 effective from 1 January 2008. No bonus was earned in 2007/08. 2 Kate Bostock was promoted to the Board on 10 March 2008 at a salary of £500,000. No bonus was earned as an executive director in 2007/08 under the Annual Bonus Scheme. £280,000 was earned in 2007/08, prior to her appointment to the Board, as part of a three-year cash bonus retention arrangement. If earned, the remaining two instalments of this bonus arrangement will be paid in 2008/09 and 2009/10. Her Cash allowance and benefits include a 25% supplement on her salary earned above the Pension Scheme cap as she was a member of the Retirement Plan during the year. In addition, the Company’s contribution into the Retirement Plan for 2007/08 for the period when she was an executive director was £1,153. 3 Ian Dyson received a salary increase from £525,000 to £565,000 effective from 1 January 2008. On 10 March 2008 his salary was increased to £675,000 to reflect his increased responsibilities as Group Finance and Operations Director. No bonus was earned in 2007/08. 4 Steven Esom was promoted to the Board on 10 March 2008 at a salary of £535,000. No bonus was earned as an executive director in 2007/08 under the Annual Bonus Scheme. A one-off bonus of £500,000 was earned in 2007/08 as part of his contractual agreement on recruitment, of which 50% is deferred into shares for three years. These shares will be granted on 9 June 2008. 5 Steven Sharp received a salary increase from £525,000 to £565,000 effective from 1 January 2008. No bonus was earned in 2007/08. 6 The elements included in the Cash allowance and benefits column of the table are described in detail in the Executive directors’ remuneration section on page 49 and have been audited. 7 In addition to the fees disclosed in the above table, the Company meets a due proportion of Sir David Michel’s general office and administration costs that relate to his Marks and Spencer Board duties. In the year under review, this amounted to £10,000. This arrangement will cease on his appointment to Deputy Chairman on 1 June 2008. 8 Jack Keenan retired from the Board on 10 July 2007. 9 The total for 2006/07 included the cost of supplying a driver and fleet vehicle to ex-Chairman Paul Myners. For 2007/08 the costs incurred by the Company were nil. 10 The £262,000 in 2008 (£251,000 in 2006) relates to payments to former directors under the Early Retirement Plan. Under this plan, the Remuneration Committee could, at its discretion, offer an unfunded Early Retirement Pension, separate from the Company pension, which was payable from the date of retirement to age 60. With effect from 31 March 2000, the Early Retirement Plan was withdrawn but payments continue for awards made before this date. The former directors are James Benfield who received £82,148 (£78,686 in 2007) payable until 22 April 2009, and Derek Hayes who received £76,422 (£73,202 in 2007) payable until 19 November 2008. The pension scheme entitlement for Clinton Silver is supplemented by an additional unfunded pension paid by the Company which, for 2008, was £103,233 (£98,873 in 2007). i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 54 MARKS AND SPENCER GROUP PLC Remuneration report continued 2 Directors’ interests in long-term incentive schemes Directors’ Share Schemes Chief Executive Sir Stuart Rose Performance Share Plan1 Deferred Share Bonus Plan2 Total Executive directors Kate Bostock Performance Share Plan1 Deferred Share Bonus Plan2 Total Ian Dyson Performance Share Plan1 Deferred Share Bonus Plan2 Total Steven Esom Performance Share Plan1 Restricted Share Plan3 Total Steven Sharp Performance Share Plan1 Deferred Share Bonus Plan2 Restricted Share Plan3 Total Maximum shares receivable at 31 March 2007 or date of appointment Date of award Shares awarded during the year Maximum Shares shares vested receivable at 29 March during 2008 the year Market value on date of award (p) Earliest date of vesting 25/07/05 19/07/06 05/06/07 05/06/06 05/06/07 473,868 663,755 – 35,125 – – – 594,395 – 222,898 – – – – – 473,868 663,755 594,395 35,125 222,898 358.75 25/07/08 572.5 19/07/09 706.6 05/06/10 550.0 05/06/09 706.6 05/06/10 1,172,748 817,293 – 1,990,041 25/07/05 19/07/06 05/06/07 05/06/06 05/06/07 117,073 157,205 169,827 25,404 28,985 498,494 – – – – – – 25/07/05 19/07/06 05/06/07 05/06/06 05/06/07 234,146 331,878 – 48,579 – – – 297,197 – 111,449 – – – – – – – – – – – 117,073 157,205 169,827 25,404 28,985 498,494 234,146 331,878 297,197 48,579 111,449 358.75 25/07/08 572.5 19/07/09 706.6 05/06/10 550.0 05/06/09 706.6 05/06/10 358.75 25/07/08 572.5 19/07/09 706.6 05/06/10 550.0 05/06/09 706.6 05/06/10 614,603 408,646 – 1,023,249 05/06/07 05/06/07 25/07/05 19/07/06 05/06/07 05/06/06 05/06/07 24/06/05 141,522 70,761 212,283 234,146 331,878 – 64,772 – 90,000 – – – – – – 141,522 70,761 212,283 706.6 05/06/10 706.6 05/06/10 – – 297,197 – 111,449 – – – – – – 90,000 234,146 331,878 297,197 64,772 111,449 – 358.75 25/07/08 572.5 19/07/09 706.6 05/06/10 550.0 05/06/09 706.6 05/06/10 352.0 24/07/07 720,796 408,646 90,000 1,039,442 1 The number of performance shares is the maximum (100%) of the award that could be receivable by the director if the EPS performance conditions are fully met, as outlined on page 50. 2 Full details of the Deferred Share Bonus Plan are set out in note 12 to the financial statements on page 75. 3 Steven Sharp and Steven Esom were awarded these shares before they were appointed executive directors. Steven Sharp’s shares vested on 24 July 2007 at a market price of 642.5p. Full details of the Restricted Share Plan are set out in note 12 to the financial statements on page 75. There have been no lapses for any of the above plans during this financial year. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 55 A b o u t u s 2 Directors’ interests in long-term incentive schemes continued Directors’ Share Option Schemes Maximum options receivable at 31 March 2007 or date of grant appointment Date of Options granted during the year Options Maximum options exercised/ lapsed receivable during at 29 March 2008 the year Option price (p) Option period Chief Executive Sir Stuart Rose Executive Share Option Scheme1 SAYE Total Executive directors Kate Bostock Executive Share Option Scheme1 SAYE Total Ian Dyson SAYE Total Steven Esom SAYE Total Steven Sharp Executive Share Option Scheme1 SAYE Total 20/07/04 979,825 4,613 25/11/05 984,438 24/11/04 249,627 2,679 25/11/05 252,306 25/11/05 23/11/07 4,613 4,613 1,856 1,856 20/07/04 302,593 24/11/04 104,010 2,679 25/11/05 – – – – – – – – – – – – – 409,282 – – 979,825 4,613 – – 984,438 – 249,627 2,679 – – 252,306 – – – – 4,613 4,613 1,856 1,856 – 302,593 – 104,010 2,679 – – 409,282 347.0 349.0 20/07/07–19/07/14 01/01/11–30/06/11 336.5 349.0 24/11/07–23/11/14 01/01/09–30/06/09 349.0 01/01/11–30/06/11 517.0 01/01/11–30/06/11 i B u s n e s s r e v e w i 347.0 336.5 349.0 20/07/07–19/07/14 24/11/07–23/11/14 01/01/09–30/06/09 1 The Executive Share Options have all been held for three years and can be exercised under the scheme rules; the option price is below the market value on 29 March 2008 for all options; the performance criteria attached to the Executive Share Options Scheme is described on page 50. There have been no exercises or lapses for any of the above schemes during this financial year. The market price of the shares at the end of the financial year was 396.25p; the highest and lowest share prices during the financial year were 749.0p and 356.25p respectively. For both the Directors’ interests in long-term incentive schemes tables, the explanation of the performance criteria attached to the Performance Share Plan and the Executive Share Option Scheme on page 50 have been audited. Approved by the Board Louise Patten, Chairman of the Remuneration Committee London 19 May 2008 i i n d c a t o r s i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 56 MARKS AND SPENCER GROUP PLC Auditors’ report Independent auditors report to the members of Marks and Spencer Group plc We have audited the group and parent company financial statements (the ‘financial statements’) of Marks and Spencer Group plc for the year ended 29 March 2008 which comprise the Consolidated and Company income statements, the Consolidated and Company balance sheets, the Consolidated and Company cash flow statements, the Consolidated statement of recognised income and expense, the Company statement of changes in shareholders’ equity and the related group and parent company notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Remuneration report that is described as having been audited. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual report, the Remuneration report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements and the part of the Remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Group Directors’ report is consistent with the financial statements. The information given in the Group Directors’ report includes that specific information presented in Key performance indicators and Business review that is cross referred from the Business review section of the Group Directors’ report. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We review whether the Corporate governance statement reflects the Company’s compliance with the nine provisions of the Combined Code (2006) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read other information contained in the Annual report and consider whether it is consistent with the audited financial statements. The other information comprises only the Key performance indicators, the Business review, the Financial review, the Corporate governance statement, the unaudited part of the Remuneration report, the Group financial record and the Shareholder information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Remuneration report to be audited. Opinion In our opinion: (cid:129) the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s and the Parent Company’s affairs as at 29 March 2008 and of the Group’s and the Parent Company’s profit and cash flows for the year then ended; (cid:129) the financial statements and the part of the Remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation; and (cid:129) the information given in the Group Directors’ report is consistent with the financial statements. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 19 May 2008 marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 57 Consolidated income statement A b o u t u s Revenue – continuing operations Operating profit – continuing operations Finance income Finance costs Analysed between: Before exceptional finance costs Exceptional finance costs Profit on ordinary activities before taxation – continuing operations Analysed between: Before property disposals and exceptional items Profit on property disposals Exceptional pension credit Exceptional finance costs Income tax expense Profit on ordinary activities after taxation – continuing operations Profit from discontinued operation Profit for the year Attributable to: Equity shareholders of the Company Minority interests Basic earnings per share Diluted earnings per share Basic earnings per share from continuing operations Diluted earnings per share from continuing operations Non-GAAP measure: Adjusted profit before taxation (£m) Adjusted basic earnings per share from continuing operations Adjusted diluted earnings per share from continuing operations 52 weeks ended 29 March 2008 £m 52 weeks ended 31 March 2007 £m 9,022.0 8,588.1 1,211.3 64.4 (146.6) 1,045.9 33.8 (143.0) (146.6) – 1,129.1 1,007.1 27.0 95.0 – (112.6) (30.4) 936.7 965.2 1.9 – (30.4) (308.1) (277.5) 821.0 – 821.0 821.7 (0.7) 821.0 49.2p 48.7p 49.2p 48.7p 1,007.1 43.6p 43.2p 659.2 0.7 659.9 659.9 – 659.9 39.1p 38.5p 39.1p 38.5p 965.2 40.4p 39.8p Notes 2, 3 2, 3 5 5 5 4 3 2, 11 5 6 7 8A 8B 8A 8B 1 8A 8B Consolidated statement of recognised income and expense 52 weeks ended 29 March 2008 £m 52 weeks ended 31 March 2007 £m Profit for the year Foreign currency translation differences Actuarial gains/(losses) on retirement benefit asset/deficit Cash flow and net investment hedges – losses deferred in equity – recycled and reported in net profit – amount recognised in inventories Tax on items taken directly to equity Net gains not recognised in the income statement Total recognised income and expense for the year Attributable to: Equity shareholders of the Company Minority interests 821.0 21.3 605.4 (33.5) 1.3 2.4 (185.7) 411.2 659.9 (14.0) (8.6) (7.4) 10.7 2.1 24.5 7.3 1,232.2 667.2 1,232.9 (0.7) 1,232.2 667.2 – 667.2 i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 58 MARKS AND SPENCER GROUP PLC Consolidated balance sheet Assets Non-current assets Intangible assets Property, plant and equipment Investment property Investment in joint venture Other financial assets Retirement benefit asset Trade and other receivables Derivative financial instruments Deferred tax assets Current assets Inventories Other financial assets Trade and other receivables Derivative financial instruments Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Derivative financial instruments Borrowings and other financial liabilities Partnership liability to the Marks & Spencer UK Pension Scheme Current tax liabilities Provisions Non-current liabilities Borrowings and other financial liabilities Partnership liability to the Marks & Spencer UK Pension Scheme Retirement benefit deficit Trade and other payables Derivative financial instruments Provisions Deferred tax liabilities Total liabilities Net assets Equity Called-up share capital – equity Share premium account Capital redemption reserve Hedging reserve Other reserve Retained earnings Total shareholders’ equity Minority interests in equity Total equity As at 29 March 2008 £m As at 31 March 2007 £m Notes 13 14 15 16 17 11 18 22 24 17 18 22 19 20 22 21 21 23 21 21 11 20 22 23 24 305.5 4,704.0 25.0 9.6 3.0 504.0 410.0 18.2 – 194.1 4,044.5 25.1 9.3 3.0 – 247.0 – 11.6 5,979.3 4,534.6 488.9 48.8 307.6 18.4 318.0 1,181.7 416.3 50.9 196.7 2.4 180.1 846.4 7,161.0 5,381.0 976.6 35.1 878.6 50.0 37.5 11.1 1,043.9 8.3 461.0 – 87.3 5.7 1,988.9 1,606.2 1,936.5 673.2 20.5 191.2 – 14.6 372.1 1,234.5 496.9 283.3 87.6 0.2 16.8 7.3 3,208.1 2,126.6 5,197.0 3,732.8 1,964.0 1,648.2 26, 27 27 27 27 27 27 396.6 231.4 2,199.9 (36.9) (6,542.2) 5,707.9 1,956.7 7.3 424.9 202.9 2,168.5 (4.4) (6,542.2) 5,397.1 1,646.8 1.4 1,964.0 1,648.2 The financial statements were approved by the Board and authorised for issue on 19 May 2008. The financial statements also comprise the notes on pages 60 to 91. Sir Stuart Rose, Chief Executive Ian Dyson, Group Finance and Operations Director marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 59 Consolidated cash flow information A b o u t u s 52 weeks ended 29 March 2008 £m 52 weeks ended 31 March 2007 £m Notes Consolidated cash flow statement Cash flows from operating activities Cash generated from operations – continuing – discontinued Tax paid Net cash inflow from operating activities Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired Disposal of subsidiary, net of cash disposed Capital expenditure and financial investment Interest received Net cash outflow from investing activities Cash flows from financing activities Interest paid Exceptional interest paid Other debt financing Equity dividends paid Other equity financing Net cash outflow from financing activities Net cash inflow/(outflow) from activities Effects of exchange rate changes Opening net cash Closing net cash 29A 29B 25 29C 29D 29E 1,236.0 – (166.2) 1,442.6 0.7 (150.8) 1,069.8 1,292.5 (46.4) – (924.6) 4.8 (966.2) (88.9) – 954.5 (343.6) (556.2) (34.2) 69.4 1.5 47.0 – 48.8 (712.8) 13.2 (650.8) (123.4) (21.6) (479.2) (260.6) 9.2 (875.6) (233.9) (1.5) 282.4 47.0 30A 117.9 Reconciliation of net cash flow to movement in net debt Opening net debt Net cash inflow/(outflow) from activities (Decrease)/increase in current financial assets (Increase)/decrease in debt financing Debt financing net of liquid resources disposed with subsidiary Debt financing net of liquid resources acquired with subsidiaries Fair value movement on derivatives Partnership liability to the Marks & Spencer UK Pension Scheme (non-cash) Exchange and other non-cash movements Movement in net debt Closing net debt 52 weeks ended 29 March 2008 £m 52 weeks ended 31 March 2007 £m (1,949.5) 69.4 (2.8) (954.5) – (29.6) – (199.0) (28.9) (1,729.3) (233.9) 2.6 479.2 (16.8) – 67.0 (495.6) (22.7) (1,145.4) (220.2) (3,094.9) (1,949.5) i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 60 MARKS AND SPENCER GROUP PLC Notes to the financial statements 1 Accounting policies Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The following IFRS, International Financial Reporting Interpretations Committee (IFRIC) interpretations and amendments have been adopted in the financial statements: IFRS 7 – ‘Financial Instruments: Disclosures’ and the complementary amendment to IAS 1 – ‘Presentation of Financial Statements – Capital Disclosures’ were issued in August 2005 and have introduced revised and additional disclosures. This implementation has had no impact on the results or net assets of the Group. IFRIC 11 – ‘IFRS 2 – Group and Treasury Share Transactions’ was issued in November 2006. It clarifies the guidance for applying share-based payment arrangements to the separate financial statements of each group company. It is required to be implemented by the Group from 30 March 2008. It has had no material impact on the results or net assets of the Group but has led to a prior year adjustment in the Company’s financial statements. IFRIC 14 – ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ was issued in July 2007. It limits the recognition of a defined benefit asset when minimum funding requirements exist within a plan. It was implemented by the Group from 1 April 2007 and had no material impact on the results or net assets of the Group. The following IFRS, IFRIC interpretations and amendments have been issued by the International Accounting Standards Board during the year but are not yet effective and have not been early adopted by the Group: IFRIC 13 – ‘Customer Loyalty Programmes’ was issued in June 2007. It explains how entities that grant loyalty award credits should account for their obligations to provide free or discounted goods or services to customers who redeem such award credits. It is required to be implemented by the Group from 30 March 2008 and will have no material impact on the results or net assets of the Group. IFRS 3 (Revised) – ‘Business Combinations’ was issued in January 2008. It addresses the guidance for applying the acquisition method of accounting. It is required to be implemented prospectively by the Group from 4 April 2010. IAS 1 (Revised) – ‘Presentation of Financial Statements’ was issued in January 2008. It affects the presentation of owner changes in equity and of comprehensive income. It does not change the recognition, measurement or disclosure of specific transactions and other events required by other IFRS. It is required to be implemented by the Group from 29 March 2009. Amendment to IAS 27 (Revised) – ‘Consolidated and Separate Financial Statements’ was issued in January 2008. The amendments relate primarily to accounting for non-controlling interests and the loss of control of a subsidiary. It is required to be implemented by the Group from 4 April 2010. Marks and Spencer Scottish Limited Partnership has taken exemption under paragraph 7 of the Partnership and Unlimited Companies (Accounts) Regulations 1993 (SI 1993/1820) from the requirement to prepare and deliver accounts in accordance with the Companies Act. A summary of the Company’s and the Group’s accounting policies is given below: Accounting convention The financial statements are drawn up on the historical cost basis of accounting, except as disclosed in the accounting policies set out below. Basis of consolidation The Group financial statements incorporate the financial statements of Marks and Spencer Group plc and all its subsidiaries made up to the year-end date. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by the Group. Subsidiary undertakings are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiary undertakings acquired during the year are recorded using the acquisition method of accounting and their results included from the date of acquisition. The separable net assets, both tangible and intangible of the newly acquired subsidiary undertakings are incorporated into the financial statements on the basis of the fair value as at the effective date of control. Results of subsidiary undertakings disposed of during the financial year are included in the financial statements up to the effective date of disposal. Where a business component representing a separate major line of business is disposed of, or classified as held-for-sale, it is classified as a discontinued operation. The post-tax profit or loss of the discontinued operation is shown as a single amount on the face of the income statement, separate from the other results of the Group. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Revenue Revenue comprises sales of goods to customers outside the Group less an appropriate deduction for actual and expected returns, discounts and loyalty scheme voucher costs, and is stated net of Value Added Tax and other sales taxes. Sales of furniture and online sales are recorded on delivery to the customer. Exceptional items Exceptional income and charges are those items that are largely one-off in nature and create significant volatility in reported earnings and are therefore reported separately in the income statement. Dividends Final dividends are recorded in the financial statements in the period in which they are approved by the Company’s shareholders. Interim dividends are recorded in the period in which they are approved and paid. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 61 A b o u t u s 1 Accounting policies continued Pensions Funded pension plans are in place for the Group’s UK employees and the majority of employees overseas. The assets of these pension plans include a property partnership interest and various equities and bonds. The equities and bonds are managed by third-party investment managers and are held separately in trust. Regular valuations are prepared by independent professionally qualified actuaries in respect of the defined benefit schemes. These determine the level of contribution required to fund the benefits set out in the rules of the plans and allow for the periodic increase of pensions in payment. The service cost of providing retirement benefits to employees during the year, together with the cost of any benefits relating to past service, is charged to operating profit in the year. A credit representing the expected return on the assets of the retirement benefit schemes during the year is included within interest. This is based on the market value of the assets of the schemes at the start of the financial year. A charge is also made within interest representing the expected increase in the liabilities of the retirement benefit schemes during the year. This arises from the liabilities of the schemes being one year closer to payment. Capitalised software development costs are amortised on a straight-line basis over their expected economic lives, normally between three to five years. Property, plant and equipment A Land and buildings The Group’s policy is to state property, plant and equipment at cost less accumulated depreciation and not to revalue property for accounting purposes. B Interest Interest is not capitalised. C Depreciation Depreciation is provided to write off the cost of tangible non- current assets (including investment properties), less estimated residual values, by equal annual instalments as follows: (cid:129) freehold land – not depreciated; (cid:129) freehold and leasehold buildings with a remaining lease term over 50 years – depreciated to their residual value over their estimated remaining economic lives; (cid:129) leasehold buildings with a remaining lease term of less than 50 years – over the remaining period of the lease; and (cid:129) fixtures, fittings and equipment – 3 to 25 years according to the estimated life of the asset. The difference between the market value of the assets and the present value of accrued pension liabilities is shown as an asset or liability in the balance sheet. Assets are only recognised if they are recoverable. Residual values and useful economic lives are reviewed annually. Depreciation is charged on all additions to, or disposals of, depreciating assets in the year of purchase or disposal. Any impairment in value is charged to the income statement. Actuarial gains and losses are recognised immediately in the statement of recognised income and expense. Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Intangible assets A Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisitions over the Group’s interest in the fair value of the identifiable assets and liabilities (including intangible assets) of the acquired entity at the date of the acquisition. Goodwill is recognised as an asset and assessed for impairment at least annually. Any impairment is recognised immediately in the income statement. Upon disposal of a subsidiary the attributable goodwill is included in the calculation of the profit or loss arising on disposal. Goodwill written off to reserves under UK GAAP prior to 31 March 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. B Brands Acquired brand values are held on the balance sheet at cost and amortised on a straight-line basis over their estimated useful lives. Any impairment in value is recognised immediately in the income statement. C Software intangibles Where computer software is not an integral part of a related item of computer hardware, the software is treated as an intangible asset. Capitalised software costs include external direct costs of material and services and the payroll and payroll-related costs for employees who are directly associated with the project. D Assets held under leases Where assets are financed by leasing agreements where the risks and rewards are substantially transferred to the Group (finance leases) the assets are treated as if they had been purchased outright, and the corresponding liability to the leasing company is included as an obligation under finance leases. Depreciation on leased assets is charged to the income statement on the same basis as owned assets. Leasing payments are treated as consisting of capital and interest elements and the interest is charged to the income statement. All other leases are operating leases and the costs in respect of operating leases are charged on a straight-line basis over the lease term. The value of any lease incentive received to take on an operating lease (for example, rent-free periods) is recognised as deferred income and is released over the life of the lease. Investment properties Investment properties are recorded at cost less accumulated depreciation and any recognised impairment loss. Leasehold prepayments Payments made to acquire leasehold land are included in prepayments at cost and are amortised over the life of the lease. Share-based payments The Group issues equity-settled share-based payments to certain employees. A fair value for the equity-settled share awards is measured at the date of grant. The Group measures the fair value of each award using the Black-Scholes model where appropriate. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 62 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 1 Accounting policies continued The fair value of each award is recognised as an expense over the vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. The level of vesting is reviewed annually; and the charge is adjusted to reflect actual and estimated levels of vesting. Inventories Inventories are valued at the lower of cost and net realisable value using the retail method, which is computed on the basis of selling price less the appropriate trading margin. All inventories are finished goods. Foreign currencies The results of overseas subsidiaries are translated at the weighted average of monthly exchange rates for sales and profits. The balance sheets of overseas subsidiaries are translated at year end exchange rates. The resulting exchange differences are dealt with through reserves and reported in the consolidated statement of recognised income and expense. Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Foreign currency assets and liabilities held at the balance sheet date are translated at the closing balance sheet rate. The resulting exchange gain or loss is recognised within the income statement. Taxation The tax charge comprises current tax payable and deferred tax. The current tax charge represents an estimate of the amounts payable to tax authorities in respect of the Group’s taxable profits and is based on an interpretation of existing tax laws. Deferred tax is recognised on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base at tax rates that are expected to apply when the asset is realised or the liability settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is not recognised in respect of: (cid:129) the initial recognition of goodwill that is not tax deductible; and (cid:129) the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction does not affect accounting or taxable profits. B Investments and other financial assets Investments and other financial assets are classified as either ‘available for sale’, ‘fair value through profit or loss’ or ‘held to maturity’. They are initially measured at cost, including transaction costs, with the exception of ‘fair value through profit and loss’. Where securities are designated as ‘fair value through profit or loss’, gains and losses arising from changes in fair value are included in net profit or loss for the period. For ‘available for sale’ investments, gains or losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net profit or loss for the period. Equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured by other means are held at cost. ‘Held to maturity’ investments are measured at amortised cost using the effective interest method. Investments in subsidiaries are held at cost less impairment. Dividends received from the pre-acquisition profits of subsidiaries are deducted from the cost of investment. C Classification of financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. D Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. E Loan notes Long-term loans are held at amortised cost unless the loan is hedged by a derivative financial instrument in which case hedge accounting treatment will apply. F Trade payables Trade payables are stated at their nominal value. Deferred tax assets are only recognised when it is probable that taxable profits will be available against which the deferred tax asset can be utilised. G Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Deferred tax liabilities are not provided in respect of undistributed profits of non-UK resident subsidiaries where (i) the Group is able to control the timing of distribution of such profits; and (ii) it is not probable that a taxable distribution will be made in the foreseeable future. Financial instruments Financial assets and liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. A Trade receivables Trade receivables are recorded at their nominal amount less an allowance for any doubtful debts. Derivative financial instruments and hedging activities The Group primarily uses interest rate swaps and forward foreign currency contracts to manage its exposures to fluctuating interest and foreign exchange rates. These instruments are initially recognised at fair value on the trade date and are subsequently remeasured at their fair value at the balance sheet date. The method of recognising the resulting gain or loss is dependent on whether the derivative is designated as a hedging instrument and the nature of the item being hedged. The Group designates certain hedging derivatives as either: (cid:129) a hedge of a highly probable forecast transaction or change in the cash flows of a recognised asset or liability (a cash flow hedge); marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 63 A b o u t u s 1 Accounting policies continued (cid:129) a hedge of the exposure to change in the fair value of a recognised asset or liability (a fair value hedge); or (cid:129) a hedge of the exposure on the translation of net investments in foreign entities (a net investment hedge). Underlying the definition of fair value is the presumption that the Group is a going concern without any intention of materially curtailing the scale of its operations. For those of the Group’s derivative instruments stated at fair value, the fair value will be determined by the Group applying discounted cash flow analysis using quoted market rates as an input into the valuation model. In determining the fair value of a derivative, the appropriate quoted market price for an asset held is the bid price, and for a liability issued is the offer price. At inception of a hedging relationship, the hedging instrument and the hedged item are documented and prospective effectiveness testing is performed. During the life of the hedging relationship, effectiveness testing is continued to ensure the instrument remains an effective hedge of the transaction. In order to qualify for hedge accounting, the following conditions must be met: (cid:129) formal designation and documentation at inception of the hedging relationship, detailing the risk management objective and strategy for undertaking the hedge; (cid:129) the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk; (cid:129) for a cash flow hedge, a forecast transaction that is the subject of the hedge must be highly probable; (cid:129) the effectiveness of the hedge can be reliably measured; and (cid:129) the hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout its life. A Cash flow hedges Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and any ineffective portion is recognised immediately in the income statement. If the firm commitment or forecast transaction that is the subject of a cash flow hedge results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged items affect net profit or loss. B Fair value hedges For an effective hedge of an exposure to changes in the fair value, the hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry in profit or loss. Gains and losses from re-measuring the derivative, or for non-derivatives the foreign currency component of its carrying amount, are recognised in profit or loss. C Net investment hedges Changes in the fair value of derivative or non-derivative financial instruments that are designated and effective as hedges of the net investments are recognised directly in equity and any ineffective portion is recognised immediately in the income statement. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the period. The Group does not use derivatives to hedge income statement translation exposures. Critical accounting estimates and judgements The preparation of consolidated financial statements requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below: A Impairment of goodwill The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary. B Impairment of property, plant and equipment Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations prepared on the basis of management’s assumptions and estimates. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l C Depreciation of property, plant and equipment Depreciation is provided so as to write down the assets to their residual values over their estimated useful lives as set out on page 61. The selection of these residual values and estimated lives requires the exercise of management judgement. s t a t e m e n t s D Post-retirement benefits The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions which include the discount rate, inflation rate, salary growth, mortality and expected return on scheme assets. Differences arising from actual experiences or future changes in assumptions will be reflected in subsequent periods. See note 11 for further details. i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 64 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 1 Accounting policies continued E Refunds and loyalty scheme accruals Accruals for sales returns and loyalty scheme redemption are estimated on the basis of historical returns and redemptions and these are recorded so as to allocate them to the same period as the original revenue is recorded. These provisions are reviewed regularly and updated to reflect management’s latest best estimates, however, actual returns and redemptions could vary from these estimates. Non-GAAP performance measures The directors believe that the adjusted profit and earnings per share measures provide additional useful information for shareholders on the underlying performance of the business. These measures are consistent with how business performance is measured internally. The adjusted profit before tax measure is not a recognised profit measure under IFRS and may not be directly comparable with adjusted profit measures used by other companies. The adjustments made to reported profit before tax are to exclude the following: (cid:129) exceptional income and charges – These are largely one-off in nature and therefore create significant volatility in reported earnings; and (cid:129) profits and losses on the disposal of properties – These can vary significantly from year to year, again creating volatility in reported earnings. 2 Segmental information The Group’s primary reporting segments are geographic, with the Group operating in two geographic areas being the UK and International. The International segment consists of the Marks & Spencer owned businesses in the Republic of Ireland, Hong Kong, Taiwan, Greece, a number of other Balkan states, Switzerland, the Czech Republic, Slovakia, Latvia and Lithuania, together with franchised operations. The geographic segments disclose revenue, operating profit and segment assets and liabilities by destination and reflect management responsibility. Within each geographic segment the Group sells both food and general merchandise and secondary segment disclosure is given for revenue. Given that both food and general merchandise are sold from the same locations it is not practical to provide segmental information on operating assets and capital expenditure at this level. The geographic segment results are as follows: Revenue 2007 £m 2008 £m Operating profit Segment assets Segment liabilities 2008 £m 2007 £m 2008 £m 2007 £m 2008 £m 2007 £m UK Retail Before property disposals and exceptional items Profit on property disposals Exceptional pension credit1 International Retail Owned stores2 Franchised stores Before property disposals (Loss)/profit on property disposals Total Total non-operating assets/(liabilities)3 Total assets/(liabilities) 8,309.1 – – 7,977.5 – – 972.9 28.0 95.0 8,309.1 7,977.5 1,095.9 426.7 286.2 712.9 – 712.9 369.5 241.1 610.6 – 610.6 44.5 71.9 116.4 (1.0) 115.4 956.5 0.2 – 956.7 45.4 42.1 87.5 1.7 89.2 9,022.0 8,588.1 1,211.3 1,045.9 6,514.4 4,988.4 (1,928.0) (1,811.4) 397.1 295.7 (77.7) (61.7) 6,911.5 249.5 5,284.1 96.9 (2,005.7) (3,191.3) (1,873.1) (1,859.7) 7,161.0 5,381.0 (5,197.0) (3,732.8) 1 The exceptional pension credit has arisen due to changes in the UK defined benefit plan relating to how members’ benefits build up from 1 October 2007. To the extent that members have chosen the option to limit their future pensionable salary increases to inflation there is a past service credit to reflect the impact of adjusting their projected final pensionable salaries. 2 Owned stores consist of the Marks & Spencer owned businesses in the Republic of Ireland, Hong Kong, Taiwan and, since 29 February 2008, Greece, a number of other Balkan states and Switzerland, and since 20 March 2008, the Czech Republic, Slovakia, Latvia and Lithuania, which were included in franchised stores up to that date (see note 25). 3 Non-operating assets and liabilities include balances in respect of financing and taxation. Revenue originates in the following geographical segments: United Kingdom £8,595.3m (last year £8,218.6m) and International £426.7m (last year £369.5m). The value of goods exported from the UK, including shipments to international subsidiaries, amounted to £499.7m (last year £438.0m). Included within UK Retail is an operating profit of £28.3m (last year £19.5m) in respect of fees received from HSBC in relation to M&S Money. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 65 A b o u t u s 2 Segmental information continued Other segment items: Revenue General merchandise Food Expenditure on intangible assets excluding goodwill (see note 13) Expenditure on property, plant and equipment (see note 14) Amortisation (see note 13) Depreciation (see note 7, 14) 3 Expense analysis Revenue Cost of sales Gross profit Selling and marketing expenses Administrative expenses Other operating income Profit on property disposals Exceptional pension credit (see note 2, 11) Operating profit United Kingdom International £m £m 2008 Total £m United Kingdom £m International £m 2007 Total £m 4,059.3 4,249.8 8,309.1 491.7 221.2 712.9 4,551.0 4,471.0 4,002.8 3,974.7 9,022.0 7,977.5 423.9 186.7 610.6 4,426.7 4,161.4 8,588.1 83.7 919.9 21.3 281.7 – 83.7 46.5 – 46.5 50.9 – 14.6 970.8 21.3 296.3 718.9 14.2 258.4 27.0 – 10.1 745.9 14.2 268.5 2008 £m 2007 £m 9,022.0 (5,535.2) 3,486.8 (1,912.7) (534.5) 49.7 27.0 95.0 8,588.1 (5,246.9) 3,341.2 (1,779.2) (584.1) 66.1 1.9 – 1,211.3 1,045.9 The cost of sales above represents cost of inventories recognised as an expense in the year. The selling and marketing expenses and administrative expenses in the table above are further analysed in the table below: Employee costs (see note 10A) Occupancy costs Repairs, renewals and maintenance of property Depreciation and amortisation Other costs Operating expenses Selling and marketing expenses £m Admini- strative expenses £m 920.4 366.9 79.0 285.9 260.5 1,912.7 230.1 64.8 19.8 31.7 188.1 534.5 2008 Total £m 1,150.5 431.7 98.8 317.6 448.6 Selling and marketing expenses £m 928.8 310.5 55.4 264.4 220.1 2,447.2 1,779.2 Admini- strative expenses £m 245.3 62.4 19.1 18.3 239.0 584.1 2007 Total £m 1,174.1 372.9 74.5 282.7 459.1 2,363.3 i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 66 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 4 Profit before taxation The following items have been included in arriving at profit before taxation: Net foreign exchange gains Depreciation of property, plant, and equipment – owned assets – under finance leases Amortisation of intangibles Profit on property disposals Operating lease rentals payable – property – fixtures, fittings and equipment Exceptional pension credit (see note 2, 11) Exceptional finance costs (see note 5) 2008 £m (8.0) 290.4 5.9 21.3 (27.0) 167.5 8.4 (95.0) – 2007 £m (3.7) 266.8 1.7 14.2 (1.9) 143.4 7.2 – 30.4 Included in administrative expenses is the auditors’ remuneration, including expenses for audit and non-audit services, as follows: Statutory audit services Annual audit of the Company and the consolidated accounts Audit of subsidiary companies Non-audit-related services Other services pursuant to legislation Tax advisory services Other services 2008 £m 2007 £m 0.3 0.8 1.1 0.3 0.4 0.1 0.8 0.3 0.8 1.1 0.1 0.2 0.2 0.5 In addition to the above, fees in respect of the annual audit of the Marks & Spencer UK Pension Scheme were £nil (last year £0.1m). 5 Finance income/costs Finance income Bank and other interest receivable Pension finance income (net) (see note 11E) Finance income Finance costs Interest on bank borrowings Amortisation of issue costs of bank loans Interest payable on syndicated bank facility Interest payable on medium term notes Interest payable on securitised loan notes Interest payable on finance leases Dividend on non-equity B shares Unwinding of discount on partnership liability to the Marks & Spencer UK Pension Scheme Before exceptional finance costs Exceptional finance costs1 Finance costs Net finance costs 2008 £m 5.5 58.9 64.4 1.6 0.3 30.0 84.0 – 3.4 – 27.3 146.6 – 146.6 82.2 2007 £m 13.0 20.8 33.8 4.1 1.5 6.8 77.5 19.0 2.2 0.2 1.3 112.6 30.4 143.0 109.2 1 Last year exceptional finance costs represented the unamortised transaction costs, a one-off make-whole premium and the cancellation of the swaps arising on the redemption of £317.2m of secured bonds. These bonds were redeemed in order to release properties for use in the limited partnership with the Marks & Spencer UK Pension Scheme. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 67 A b o u t u s 6 Income tax expense A Taxation charge Current tax UK corporation tax at 30% (last year 30%) – current year – current year tax on exceptional finance costs – prior years Overseas current taxation Total current taxation Deferred tax (see note 24) – current year – prior years Total deferred taxation Total income tax expense B Taxation reconciliation Profit before tax Taxation at the standard UK corporation tax rate of 30% (last year 30%) Depreciation, charges and other amounts on non-qualifying fixed assets Other income and expenses not taxable or deductible Tax on exceptional finance costs not deductible Overseas profits taxed at lower rates Impact of change in UK corporation tax rate Adjustments to tax charge in respect of prior periods Total income tax expense 2008 £m 2007 £m 123.0 – (13.1) 109.9 7.5 117.4 184.0 6.7 190.7 308.1 2008 £m 1,129.1 338.7 0.6 (1.3) – (6.8) (16.7) (6.4) 308.1 172.4 (6.5) 6.1 172.0 7.5 179.5 108.2 (10.2) 98.0 277.5 2007 £m 936.7 281.0 5.4 (1.0) 2.6 (6.4) – (4.1) 277.5 The post-exceptional effective tax rate was 27.3% (last year 29.6%) and the pre-exceptional effective tax rate was 27.0% (last year 29.4%). The change in the standard UK corporation tax rate to 28% from April 2008 has resulted in a deferred tax credit of £16.7m, reducing the total effective tax rate by 1.5%. 7 Discontinued operation On 28 April 2006, the Group disposed of Kings Super Markets Inc to a US investor group for US$61.5m excluding cash in the business at the date of disposal. Depreciation of £0.3m incurred last year in the period before disposal has been excluded from the segmental disclosures in note 2. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 68 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 8 Earnings per share The calculation of earnings per ordinary share is based on earnings after tax and the weighted average number of ordinary shares in issue during the year. The adjusted earnings per share figures have also been calculated based on earnings excluding the effect of property disposals and exceptional items. These have been calculated to allow the shareholders to gain an understanding of the underlying trading performance of the Group. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has only one class of dilutive potential ordinary shares being those share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year. Details of the adjusted earnings per share are set out below: Earnings after tax Profit from discontinued operation Earnings after tax – continuing Property disposals (net of tax) Exceptional pension credit (net of tax) Exceptional finance costs (net of tax) Adjusted earnings after tax – continuing Weighted average number of ordinary shares in issue Potentially dilutive share options under Group’s share option schemes Weighted average number of diluted ordinary shares A Basic earnings per share Basic earnings per share Profit from discontinued operation per share Basic earnings per share – continuing Property disposals per share Exceptional pension credit per share Exceptional finance costs per share Adjusted basic earnings per share – continuing B Diluted earnings per share Diluted earnings per share Profit from discontinued operation per share Diluted earnings per share – continuing Property disposals per share Exceptional pension credit per share Exceptional finance costs per share Adjusted diluted earnings per share – continuing 2008 £m 821.7 – 821.7 (27.0) (66.5) – 728.2 2007 £m 659.9 (0.7) 659.2 (1.4) – 23.9 681.7 million million 1,671.3 16.0 1,688.6 26.3 1,687.3 1,714.9 pence 49.2 – 49.2 (1.6) (4.0) – 43.6 pence 48.7 – 48.7 (1.6) (3.9) – 43.2 pence 39.1 – 39.1 (0.1) – 1.4 40.4 pence 38.5 – 38.5 (0.1) – 1.4 39.8 marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 69 A b o u t u s 9 Dividends Dividends on equity ordinary shares Paid final dividend Paid interim dividend 2008 per share 2007 per share 2008 £m 2007 £m 12.0p 8.3p 20.3p 9.2p 6.3p 15.5p 203.5 140.1 343.6 154.6 106.0 260.6 In addition, the directors have proposed a final dividend in respect of the year ended 29 March 2008 of 14.2p per share amounting to a dividend of £217.9m. It will be paid on 11 July 2008 to shareholders who are on the Register of Members on 30 May 2008. In line with the requirements of IAS 10 – ‘Events after the Balance Sheet Date’, this dividend has not been recognised within these results. 10 Employees A Aggregate remuneration The aggregate remuneration and associated costs of Group employees were: Wages and salaries Social security costs Other pension costs Share-based payments Employee welfare and other personnel costs Ex-gratia costs Capitalised staff costs Aggregate remuneration Details of key management compensation are given in note 32D. B Average number of employees UK stores – management and supervisory categories – other UK head office – management and supervisory categories – other Overseas Total average number of employees 2008 Total £m 930.8 62.3 103.1 29.0 35.7 10.5 (20.9) 2007 Total £m 931.3 75.7 111.9 27.3 32.5 5.1 (9.7) 1,150.5 1,174.1 2008 2007 5,267 62,820 5,235 64,074 2,599 927 3,776 2,396 850 3,316 75,389 75,871 If the number of hours worked was converted on the basis of a normal working week, the equivalent average number of full-time employees for continuing operations would have been 52,276 (last year 52,670). C Directors’ emoluments Emoluments of directors of the Company are summarised below. Further details are given in the Remuneration report on pages 48 to 55. Aggregate emoluments The emoluments exclude payments to former directors of £262,000 (last year £307,000). 2008 £000 2007 £000 3,930 5,369 i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 70 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 11 Retirement benefits The Group provides pension arrangements for the benefit of its UK employees through the Marks & Spencer UK Pension Scheme. This has a defined benefit section, which was closed to new entrants with effect from 1 April 2002, and a defined contribution section which has been open to new members with effect from 1 April 2003. Further details of the pension scheme can be found on page 34. The defined benefit section operates on a final salary basis and at the year end had some 24,000 active members (last year 27,000), 58,000 deferred members (last year 57,000) and 39,000 pensioners (last year 37,000). At the year end, the defined contribution section had some 8,000 active members (last year 7,000) and some 1,000 deferred members (last year 1,000). The Group also operates a small funded defined benefit pension scheme in the Republic of Ireland. Retirement benefits also include a UK post-retirement healthcare scheme and unfunded retirement benefits. Within the total Group retirement benefit cost of £44.2m, excluding the exceptional pension credit, (last year £91.1m) £28.0m (last year £78.0m) relates to the UK defined benefit section, £11.7m (last year £8.6m) to the UK defined contribution section and £4.5m (last year £4.5m) to other retirement benefit schemes. A Pensions and other post-retirement liabilities Total market value of assets Present value of scheme liabilities Net funded pension plan asset/(deficit) Unfunded retirement benefits Post-retirement healthcare Net retirement benefit asset/(deficit) Analysed on the balance sheet as: Retirement benefit asset Retirement benefit deficit 2008 £m 2007 £m 5,045.5 (4,542.3) 5,227.5 (5,487.0) 503.2 (1.3) (18.4) 483.5 504.0 (20.5) 483.5 (259.5) (1.2) (22.6) (283.3) – (283.3) (283.3) B Financial assumptions A full actuarial valuation of the UK defined benefit pension scheme was carried out at 31 March 2006 and showed a deficit of £704.0m. The financial assumptions for the UK scheme and the most recent actuarial valuations of the other post-retirement schemes have been updated by independent qualified actuaries to take account of the requirements of IAS 19 – ‘Retirement Benefits’ and IFRIC 14 – ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ in order to assess the liabilities of the schemes. Rate of increase in salaries Rate of increase in pensions in payment for service – pre-April 1997 – between April 1997 and July 2005 – post-July 2005 Discount rate Inflation rate Long-term healthcare cost increases 2008 % 3.1 to 4.5 2.8 3.5 2.4 6.8 3.5 8.5 2007 % 3.7 2.6 3.0 2.3 5.3 3.0 8.0 The amount of the surplus varies if the main financial assumptions change, particularly the discount rate. If the discount rate increased/decreased by 0.1% the IAS 19 surplus would increase/decrease by c.£100m. C Demographic assumptions The demographic assumptions are in line with those adopted for the last formal actuarial valuation of the scheme. One of the most significant demographic assumptions underlying the valuation is mortality. The post-retirement mortality assumptions are based on an analysis of the pensioner mortality trends under the scheme for the period to March 2006 updated to allow for anticipated longevity improvements over the subsequent year. The specific mortality rates used are based on the PMA92 and PFA92 tables, adjusted to allow for the experience of scheme pensioners. The life expectancies underlying the valuation are as follows: Current pensioners (at age 65) – males – females Future pensioners (at age 65) – males – females 2008 years 21.0 23.5 21.9 24.3 2007 years 21.0 23.5 21.9 24.3 marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 71 11 Retirement benefits continued D Analysis of assets and expected rates of return The major categories of assets and as a percentage of total plan assets are: A b o u t u s Property partnership interest UK equities Overseas equities Government bonds Corporate bonds Cash and other The expected long-term rates of return are: Property partnership interest UK equities Overseas equities Government bonds Corporate bonds Cash and other Overall expected return 2008 £m 506.6 792.1 1,116.6 465.4 2,058.5 106.3 2007 £m 495.3 826.0 1,385.3 363.0 2,153.0 4.9 2008 % 10 16 22 9 41 2 2007 % 9 16 27 7 41 – 5,045.5 5,227.5 100 100 i i n d c a t o r s 2008 % 6.0 8.3 8.3 4.6 6.0 5.0 6.7 2007 % 5.5 8.4 8.4 4.7 5.3 5.5 6.6 i B u s n e s s r e v e w i The overall expected return on assets assumption is derived as the weighted average of the expected returns from each of the main asset classes. The expected return for each asset class reflects a combination of historical performance analysis, the forward-looking views of financial markets (as suggested by the yields available) and the views of investment organisations. Consideration is also given to the rate of return expected to be available for reinvestment. At year end, the UK scheme indirectly held 479,356 (last year 463,964) ordinary shares in the Company through its investment in an Aquila Life UK Equity Index Fund. E Analysis of amount charged against profits Operating cost Current service cost1 Curtailment gain Exceptional pension credit Finance cost Expected return on plan assets Interest on scheme liabilities Net finance income Total 1 Includes £11.7m (last year £8.6m) in relation to defined contribution plans. 2008 £m 2007 £m 106.1 (3.0) (95.0) 8.1 (342.7) 283.8 (58.9) (50.8) 113.9 (2.0) – 111.9 (282.0) 261.2 (20.8) 91.1 i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 72 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 11 Retirement benefits continued F Scheme assets Changes in the fair value of the scheme assets are as follows: Fair value of scheme assets at start of year Expected return on scheme assets1 Employer contributions2, 3 Contributions from scheme members Benefits paid Actuarial loss Exchange movement Fair value of scheme assets at end of year 2008 £m 5,227.5 342.7 111.1 1.0 (220.4) (422.6) 6.2 2007 £m 4,606.2 282.0 611.3 – (191.8) (80.4) 0.2 5,045.5 5,227.5 1 The actual return on scheme assets was a loss of £79.9m (last year gain of £201.6m). 2 The contribution for 2006/07 includes the additional contribution of the property partnership interest of £500.1m transferred into the UK defined benefit pension scheme on 14 March 2007 and cash contributions of £57.7m paid in March 2006 plus £40.3m paid in April 2007 to increase contributions from 15.8% to 27.0%. 3 This year the Group has agreed to pre-fund £200.0m of its annual contribution to the UK defined benefit pension scheme for the next three years by contributing to the Trustee rights to further income of the property backed partnership. Additional properties with a current market value of approximately £400.0m have been put into the partnership to facilitate the transaction. The prepayment is in respect of annual contributions to the UK scheme at the rate of 24.3% of pensionable salaries up to 30 September 2008 and then 23.7% up to the next full actuarial valuation. It is estimated that approximately £76m of the prepayment will relate to the year ended 28 March 2009. G Retirement benefit obligations Changes in the present value of retirement benefit obligations are as follows: Present value of obligation at start of year Current service cost Curtailment gain Exceptional pension credit Interest cost Contributions from scheme members Benefits paid Actuarial gain Acquisition of subsidiary Exchange movement Present value of obligation at end of year Analysed as: Present value of pension scheme liabilities Unfunded pension plans Post-retirement healthcare Present value of obligation at end of year H Cumulative actuarial gains and losses recognised in equity Loss at start of year Net actuarial gains/(losses) recognised in the year Loss at end of year I History of experience gains and losses Experience adjustments arising on scheme assets Experience (losses)/gains arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial gains/(losses) recognised in equity 2008 £m (422.6) (61.5) 1,089.5 605.4 2007 £m (80.4) 18.8 53.0 (8.6) 2006 £m 454.3 20.0 (643.6) (169.3) 2008 £m 5,510.8 106.1 (3.0) (95.0) 283.8 1.0 (220.4) (1,028.0) 0.4 6.3 2007 £m 5,401.1 113.9 (2.0) – 261.2 – (191.8) (71.8) – 0.2 4,562.0 5,510.8 4,542.3 1.3 18.4 5,487.0 1.2 22.6 4,562.0 5,510.8 2008 £m (935.6) 605.4 (330.2) 2005 £m 77.4 (24.0) (131.5) (78.1) 2007 £m (927.0) (8.6) (935.6) UK GAAP 2004 £m 401.9 (30.3) (157.8) 213.8 Fair value of scheme assets Present value of scheme liabilities Pension scheme asset/(deficit) 5,045.5 (4,542.3) 5,227.5 (5,487.0) 4,606.2 (5,381.3) 3,956.8 (4,611.0) 3,634.2 (4,280.1) 503.2 (259.5) (775.1) (654.2) (645.9) marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 73 A b o u t u s 12 Share-based payments The charge for share-based payments for the year was £29.0m (last year £27.3m). Further details of the option and share schemes that the Group operates are provided in the Remuneration report on pages 48 to 55. A Save As You Earn Share Option Scheme Under the terms of the scheme, the Board may offer options to purchase ordinary shares in the Company once in each financial year to those employees who enter into an HM Revenue & Customs (HMRC) approved Save As You Earn (SAYE) savings contract. HMRC rules limit the maximum amount saved to £250 per month. The price at which options may be offered is 80% of the average mid-market price for three consecutive dealing days preceding the offer date. The options may normally be exercised during the period of six months after the completion of the SAYE contract, either three or five years after entering the scheme. i i n d c a t o r s Outstanding at beginning of the period Granted Exercised Forfeited Expired Outstanding at end of the period Exercisable at end of period Number of options 33,241,616 7,716,437 (10,212,015) (2,207,700) (93,578) 28,444,760 948,372 2008 Weighted average exercise price 2007 Weighted average exercise price Number of options 40,403,625 327.6p 517.0p 6,569,527 234.8p (11,814,068) (1,637,012) 450.7p (280,456) 235.2p 403.1p 262.9p 33,241,616 726,615 261.6p 559.0p 232.4p 325.5p 258.0p 327.6p 243.4p i B u s n e s s r e v e w i For SAYE share options exercised during the period, the weighted average share price at the date of exercise was 535.2p (last year 698.8p). The fair values of the options granted during the year have been calculated using the Black-Scholes model assuming the inputs shown below: Grant date Share price at grant date Exercise price Option life in years Risk-free rate Expected volatility Expected dividend yield Fair value of option 2008 2007 3-year plan 5-year plan 3-year plan 5-year plan Nov 07 646p 517p 3 years 4.6% 21.6% 2.7% 167.5p Nov 07 646p 517p 5 years 4.6% 25.2% 2.7% 201.8p Nov 06 698p 559p 3 years 5.4% 21.5% 2.2% 200.6p Nov 06 698p 559p 5 years 5.3% 27.5% 2.2% 247.8p Volatility has been estimated by taking the historic volatility in the Company’s share price over a three- or five-year period. The resulting fair value is expensed over the service period of three or five years on the assumption that 20% of options will lapse over the service period as employees leave the Group. Outstanding options granted under the UK Employees’ SAYE Scheme are as follows: Options granted January 2000 January 2001 January 2002 January 2003 January 2004 January 2005 January 2006 January 2007 January 2008 Number of options Weighted average remaining contractual life (years) 2008 2007 2008 2007 Option price – 338,682 – 371,017 4,078,721 3,703,910 7,164,101 5,434,588 7,353,741 161,410 3,948,712 227,479 3,495,809 4,484,581 6,834,424 7,713,616 6,375,585 – 28,444,760 33,241,616 – 0.3 – 0.3 1.3 2.1 2.1 3.0 4.0 2.6 0.3 1.3 0.3 1.3 2.2 2.3 3.1 4.0 – 2.5 223p 156p 250p 283p 228p 280p 349p 559p 517p 328p i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 74 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 12 Share-based payments continued B Executive Share Option Scheme Under the terms of the Executive Share Option Scheme, last approved by shareholders in 2005, the Board may offer options to purchase ordinary shares in the Company to executive directors and senior managers at the market price on a date to be determined prior to the date of the offer. No further options may be granted under any schemes other than the 2005 scheme. No awards have been made under the 2005 scheme. Further details are set out in the Remuneration report on page 50. Performance targets are assessed over a three-year period from the date of grant with no ability to retest any grants. Once options have vested they can be exercised during the period up to 10 years from grant date. Outstanding at beginning of the period Exercised Forfeited Expired Outstanding at end of the period Exercisable at end of the period Number of options 12,017,117 (2,235,209) (152,698) (5,692) 9,623,518 8,444,937 2008 Weighted average exercise price 341.2p 341.0p 348.6p 527.0p 341.0p 339.4p Number of options 18,135,466 (5,522,018) (589,781) (6,550) 12,017,117 3,537,471 2007 Weighted average exercise price 333.5p 316.6p 334.8p 458.0p 341.2p 328.4p For executive share options exercised during the period, the weighted average share price at the date of exercise was 645.5p (last year 632.3p). The resulting fair value is expensed over the expected service period of five years on the assumption that 30% of options will lapse over the service period as employees leave the Company. Outstanding options granted under all Executive Share Option Schemes are as follows: Options granted 1984 Scheme June 1997 1997 Scheme June 1998 November 1998 June 1999 2000 Scheme September 2000 June 2001 December 2001 2002 Scheme June 2002 November 2002 June 2003 November 2003 February 2004 July 2004 November 2004 June 2005 Number of options Weighted average remaining contractual life (years) 2008 2007 2008 2007 Option price – 5,692 161,863 7,425 98,880 232 135,989 71,658 659,465 47,150 1,502,053 36,109 33,111 4,831,318 859,684 1,178,581 247,778 7,425 127,521 3,445 196,303 74,161 760,394 66,980 1,975,461 77,078 33,111 6,236,497 868,599 1,336,672 9,623,518 12,017,117 – 0.2 0.6 1.2 2.5 3.3 3.7 4.2 4.7 5.2 5.7 5.8 6.3 6.7 7.2 5.9 0.2 1.2 1.6 2.2 3.4 4.2 4.7 5.2 5.6 6.2 6.6 6.8 7.3 7.6 8.2 6.8 527p 557p 404p 358p 215p 256p 350p 350p 353p 297p 270p 270p 347p 337p 352p 335p marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 75 A b o u t u s 12 Share-based payments continued C Performance Share Plan The Performance Share Plan is the primary long-term incentive plan for approximately 100 of the most senior managers and was first approved by shareholders in 2005. Under the plan, annual awards, based on a percentage of salary, may be offered. The extent to which the awards vest is based on adjusted earnings per share growth over three years. The value of any dividends earned on the vested shares during the three years will also be paid on vesting. Further details are set out in the Remuneration report on page 49. Awards under this scheme have been made in each year since 2005. During the year, 3,414,413 shares (last year 3,511,040) were awarded under the plan. The weighted average fair value of the shares awarded was 704.0p (last year 572.9p). D Deferred Share Bonus Plan The Deferred Share Bonus Plan was introduced in 2005/06 as part of the annual bonus scheme for approximately 450 of the most senior managers. As part of the bonus scheme, the managers are required to defer a proportion of any bonus paid into shares which will be held for three years. There are no further performance conditions on these shares, other than continued employment, and the value of any dividends earned during the deferred period will be paid on vesting. During the year, 2,182,379 shares were awarded under the plan in relation to the 2006/07 annual bonus. The fair value of the shares awarded was 706.6p. E Restricted Share Plan The Restricted Share Plan was established in 2000 as part of the reward strategy for retention and recruitment of senior managers who are vital to the success of the business. The plan operates for senior managers below executive director level. Awards under the plan are made as part of ongoing reviews of reward packages, and for recruitment. The shares are held in trust for a period of between one and three years, at which point they are released to the employee, subject to them still being in employment. The value of any dividends earned during the restricted period will also be paid at the time of vesting. During the year, 328,165 shares (last year 38,622) have been awarded under the plan. The weighted average fair value of the shares awarded was 604.6p (last year 578.0p). F United Kingdom Share Incentive Plan The Share Incentive Plan is a discretionary, all-employee plan, approved by HMRC, under which Freeshares may be allocated by the Company. The last award was made in June 2003, which will vest in June 2008. G Share Matching Deal Plan The Share Matching Deal Plan was introduced in 2006 for those employees who were eligible to receive a cash-only bonus. The scheme was not open to those employees who participated in the Deferred Share Bonus Plan. The Plan allows employees to invest a proportion of their bonus in shares of the Company. These investment shares must be held by the participant for three years, during which time they will receive dividends. At the end of the three-year holding period, if the participant is still in employment with the Company, and still holds the investment shares, they will receive one matching share for every four that they bought. During the year, 26,603 (last year 41,086) matching shares have been awarded under the Share Matching Deal Plan, at a fair value of 609.3p (last year 596.4p). H Marks and Spencer Employee Benefit Trust The Marks and Spencer Employee Benefit Trust (the Trust) holds 8,795,896 (last year 4,767,449) shares with a book value of £60.0m (last year £28.1m) and a market value of £34.9m (last year £32.3m). These shares were acquired by the Trust in the market. In addition, the Trust has entered into a call option to purchase up to 8.1 million of the Company’s shares. The Trust used funds provided by Marks and Spencer plc to meet the Group’s obligations. Awards are granted to employees at the discretion of Marks and Spencer plc and shares are awarded to employees by the Trust in accordance with the wishes of Marks and Spencer plc under senior executive share schemes, including the Restricted Share Plan. Dividends are waived on all of these plans except for the Deferred Bonus Share Plan and Restricted Share Plan where dividends are paid via a Dividend Reinvestment Plan for awards made in the form of forfeitable shares. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 76 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 13 Intangible assets At 2 April 2006 Cost or valuation Accumulated amortisation Net book value Year ended 31 March 2007 Opening net book value Additions Transfers Disposals Amortisation charge Closing net book value At 31 March 2007 Cost or valuation Accumulated amortisation Net book value Year ended 29 March 2008 Opening net book value Additions Acquisition of subsidiaries Transfers Amortisation charge Closing net book value At 29 March 2008 Cost or valuation Accumulated amortisation Net book value Goodwill £m Brands £m Computer software under development £m Computer software £m 69.5 – 69.5 69.5 – – – – 69.5 69.5 – 69.5 69.5 48.4 – – – 117.9 117.9 – 117.9 80.0 (8.0) 72.0 72.0 – – – (5.3) 66.7 80.0 (13.3) 66.7 66.7 – – – (5.4) 61.3 80.0 (18.7) 61.3 42.3 (27.0) 15.3 15.3 0.3 25.9 (0.1) (8.9) 32.5 51.2 (18.7) 32.5 32.5 18.6 0.6 12.5 (15.9) 48.3 82.9 (34.6) 48.3 6.7 – 6.7 6.7 46.2 (25.9) (1.6) – 25.4 25.4 – 25.4 25.4 65.1 – (12.5) – 78.0 78.0 – 78.0 Total £m 198.5 (35.0) 163.5 163.5 46.5 – (1.7) (14.2) 194.1 226.1 (32.0) 194.1 194.1 132.1 0.6 – (21.3) 305.5 358.8 (53.3) 305.5 Goodwill of £69.5m relates to the acquisition of per una, which was acquired in October 2004. £34.3m of goodwill relates to the acquisition of Marks and Spencer Marinopoulos B.V. in February 2008 and a further £14.1m of goodwill was recognised in March 2008 on the acquisition of COMS a.s. Goodwill is not amortised, but tested annually for impairment with the recoverable amount being determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rate, growth rates and changes in income and costs. The Group prepares discounted cash flow forecasts based on financial forecasts approved by management covering a three-year period, which takes account of both past performance and expectations for future market developments. Cash flows beyond this three-year period are extrapolated using a growth rate of 2.0%, which does not exceed the long-term average growth rate for the Group’s retail businesses. Management estimates the discount rate using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to retail businesses. A pre-tax discount rate of 9.5% has been used. Brands consist of the per una brand which is being amortised on a straight-line basis over a period of 15 years. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 77 A b o u t u s 14 Property, plant and equipment At 2 April 2006 Cost Accumulated depreciation Net book value Year ended 31 March 2007 Opening net book value Exchange difference Additions Reclassification from investment property (see note 15) Transfers Disposals Depreciation charge Closing net book value At 31 March 2007 Cost Accumulated depreciation Net book value Year ended 29 March 2008 Opening net book value Exchange difference Additions Acquisition of subsidiaries Transfers Disposals Depreciation charge Closing net book value At 29 March 2008 Cost Accumulated depreciation Net book value Fixtures, fittings and equipment £m Assets in the course of construction £m Land and buildings £m Total £m 2,392.2 (82.2) 3,287.1 (2,061.8) 2,310.0 1,225.3 40.5 – 40.5 5,719.8 (2,144.0) 3,575.8 2,310.0 (2.7) 63.9 13.2 8.8 (6.4) (13.9) 1,225.3 (1.6) 578.7 – 27.3 (10.7) (254.9) 40.5 (0.2) 103.3 – (36.1) – – 3,575.8 (4.5) 745.9 13.2 – (17.1) (268.8) 2,372.9 1,564.1 107.5 4,044.5 2,468.2 (95.3) 3,653.3 (2,089.2) 2,372.9 1,564.1 107.5 – 107.5 6,229.0 (2,184.5) 4,044.5 2,372.9 18.4 82.6 18.0 11.8 (73.8) (8.5) 1,564.1 10.1 692.8 11.5 110.8 (5.2) (287.8) 107.5 5.9 195.4 0.2 (122.6) (0.1) – 4,044.5 34.4 970.8 29.7 – (79.1) (296.3) 2,421.4 2,096.3 186.3 4,704.0 2,525.2 (103.8) 4,473.3 (2,377.0) 2,421.4 2,096.3 186.3 – 186.3 7,184.8 (2,480.8) 4,704.0 The net book value includes land and buildings of £42.2m (last year £43.7m) and equipment of £35.6m (last year £16.4m) where the Group is a lessee under a finance lease. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 78 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 15 Investment property Cost At start of year Reclassification to property, plant and equipment At end of year Depreciation At start of year Reclassification to property, plant and equipment Depreciation charge At end of year Net book value 2008 £m 25.3 – 25.3 0.2 – 0.1 0.3 25.0 2007 £m 38.6 (13.3) 25.3 0.1 (0.1) 0.2 0.2 25.1 The investment properties were valued at £31.7m (last year £34.3m) as at 31 March 2008 by qualified professional valuers working for CB Richard Ellis, Chartered Surveyors, acting in the capacity of external valuers. All such valuers are Chartered Surveyors, being members of the Royal Institution of Chartered Surveyors (RICS). The properties were valued on the basis of market value. All valuations were carried out in accordance with the RICS Appraisal and Valuation Standards. As the investment properties are held at depreciated historical cost, this valuation has not been reflected in the carrying value of the assets. The Group received rental income of £1.5m (last year £1.7m) in respect of these investment properties. 16 Investment in joint venture At start of year Share of profit At end of year 2008 £m 9.3 0.3 9.6 The joint venture represents a 50% equity interest in Hedge End Park Limited, a property investment company incorporated in Great Britain. The partner in the joint venture is J Sainsbury plc. In relation to the Group’s interest in joint ventures, the assets and liabilities are shown below: Non-current assets Current assets Current liabilities Net assets 2008 £m 2.7 7.2 (0.3) 9.6 2007 £m 9.0 0.3 9.3 2007 £m 2.6 7.1 (0.4) 9.3 marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 79 A b o u t u s 17 Other financial assets Non-current Unlisted investments Current Listed UK securities Unlisted investments 18 Trade and other receivables Non-current Other receivables Prepaid pension contributions (see note 21) Prepaid leasehold premiums Other prepayments and accrued income Current Trade receivables Less: Provision for impairment of receivables Trade receivables – net Other receivables Prepaid pension contributions (see note 21) Prepaid leasehold premiums Other prepayments and accrued income 2008 £m 3.0 43.5 5.3 48.8 2007 £m 3.0 46.2 4.7 50.9 2008 £m 2007 £m 13.5 124.0 270.1 2.4 410.0 87.9 (3.3) 84.6 32.9 76.0 10.9 103.2 307.6 1.4 – 242.8 2.8 247.0 69.0 (1.1) 67.9 51.9 – 7.6 69.3 196.7 Trade receivables that were past due but not impaired amounted to £12.6m (last year £24.1m). 19 Cash and cash equivalents Cash and cash equivalents includes short-term deposits with banks and other financial institutions, with an initial maturity of three months or less and credit card debtors receivable within 48 hours. The carrying amount of these assets approximates their fair value. The effective interest rate on short-term bank deposits is 5.4% (last year 4.9%); these deposits have an average maturity of 26 days (last year three days). 20 Trade and other payables Current Trade payables Other payables Social security and other taxes Pension contributions payable Accruals and deferred income Non-current Accruals and deferred income1 2008 £m 2007 £m 226.9 425.5 56.1 – 268.1 976.6 259.7 327.8 49.6 40.3 366.5 1,043.9 191.2 87.6 1 Includes the fair value of the put option £52.2m (last year £nil) exercisable on 4 April 2013 (see note 27); and contingent consideration for the acquisition of COMS a.s. £4.0m (last year £nil) payable by April 2010 (see note 25). i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 80 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 21 Borrowings and other financial liabilities Current Bank loans, overdrafts and commercial paper1 Syndicated bank facility2 Finance lease liabilities Partnership liability to the Marks & Spencer UK Pension Scheme Non-current 6.375% £375m medium term notes 20113 5.875% £400m medium term notes 20123 5.625% £400m medium term notes 20143 6.250% US$500m medium term notes 20174 7.125% US$300m medium term notes 20374 6.875% £250m puttable callable reset medium term notes 20373, 5 Finance lease liabilities Partnership liability to the Marks & Spencer UK Pension Scheme Total 2008 £m 2007 £m 257.4 615.0 6.2 878.6 50.0 928.6 382.0 421.4 398.8 253.0 151.1 252.9 77.3 159.7 296.9 4.4 461.0 – 461.0 381.3 397.5 398.5 – – – 57.2 1,936.5 673.2 1,234.5 496.9 2,609.7 1,731.4 3,538.3 2,192.4 1 Bank loans, overdrafts and commercial paper includes a £5.0m (last year £5.0m) loan from the Hedge End Park Limited joint venture (see note 16). 2 Relates to a £1.2bn committed bank revolving credit facility set to mature on 26 March 2013. 3 These notes are issued under Marks and Spencer plc’s £3bn European Medium Term Note Programme and all pay interest annually. 4 Interest on these bonds is payable semi-annually. 5 These notes include an investor put and issuer call option exercisable in December 2012. During the year the Group issued new bonds totalling £638m in both the US$ and sterling debt capital markets. On 6 December 2007 the Group issued under rule 144A of the U.S. Securities Act US$500m of notes out to 2017 and US$300m of notes out to 2037 at fixed rates of 6.250% and 7.125% respectively. These notes have been swapped back into sterling proceeds and pay fixed sterling rates of 7.034% and 7.238% respectively. These cross currency swaps have been designated as cash flow hedges in relation to the US$ notes. In addition on 13 December 2007 the Group issued £250m of puttable callable reset notes at a coupon rate of 6.875%. The Group’s right of call within these notes can be assigned which provides a discount of 0.75% per annum until December 2012, giving a net interest rate for the first five years of 6.125%. If called at that date, these notes will continue to exist until December 2037 at an underlying rate of 4.54% plus the applicable credit spread at that time. At year end, the Group had a committed syndicated bank revolving credit facility of £1.2bn set to mature on 26 March 2013. This facility contains only one financial covenant being the ratio of earnings before interest, tax, depreciation, amortisation and rents payable to interest plus rents payable. In addition the Group entered into a £400m credit agreement set to expire on 13 February 2009 with an option to term out for a further year. This facility has the same financial covenant as the main £1.2bn facility. The Group also has a number of undrawn uncommitted facilities available to it. At year end, these amounted to £155m (last year £155m), all of which are due to be reviewed within a year. At the balance sheet date a sterling equivalent of £615m (last year £297m) was drawn under the committed facilities and a further £29m (last year £19m) was drawn under the uncommitted facilities. Finance leases The minimum lease payments under finance leases fall due as shown in the table opposite. It is the Group’s policy to lease certain of its properties and equipment under finance leases. The average lease term for equipment is five years and 125 years for property. Interest rates are fixed at the contract rate. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent payments. The Group’s obligations under finance leases are secured by the lessors’ charges over the leased assets. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 81 A b o u t u s 21 Borrowings and other financial liabilities continued Partnership liability to the Marks & Spencer UK Pension Scheme The partnership liability to the Marks & Spencer UK Pension Scheme of £723.2m (last year £496.9m) relates to the amortising liability in respect of the obligations of the Marks and Spencer Scottish Limited Partnership to the Marks & Spencer UK Pension Scheme. Last year the Group agreed a plan with the Pension Scheme Trustee to address the majority of the deficit by transferring properties with a current market value of £1.1bn into a partnership established by the Group. A limited interest in this partnership was contributed to the pension scheme on 13 March 2007. The Group retains control over these properties, including the flexibility to substitute alternative properties. The properties held in the partnership have been leased back to Marks and Spencer plc. The pension scheme is entitled to a distribution from the profits of the partnership of £50m per annum for 15 years from July 2008. The Group has the right to buy out the Trustee’s partnership interest at any point for an amount equal to the net present value of the remaining annual distributions due to the pension scheme. This year the Group has agreed to pre-fund £200.0m of its annual contribution to the Marks & Spencer UK Pension Scheme for the next three years by increasing the value of the Scheme’s interest in the property partnership. To meet this £200.0m contribution of value, the Group has placed additional properties into the partnership with a current market value of approximately £400.0m. These properties have been leased back to Marks and Spencer plc and the fixed annual distribution made out of partnership profits to the pension scheme will be increased by approximately £21.9m for the remaining 14 year period. Each year the total obligation will reduce as payments are made to the pension scheme by the partnership and an interest charge will be taken to the income statement representing the unwinding of the discounted obligation at an implied average interest rate of 5.7% (last year 5.3%). The fair value of this liability was £706.6m (last year £495.3m). Maturity of borrowings and other financial liabilities The contractual maturity of the Group’s non-derivative financial liabilities and derivatives is as follows: Bank loans, overdrafts and commercial paper bank facility £m Syndicated Medium term notes £m £m Partnership liability to Finance the M&S UK Pension Scheme £m lease liabilities £m Total £m Derivative assets £m Derivative liabilities £m Timing of cash flows Within one year Between one and two years Between two and five years More than five years (159.7) – – – (296.9) – – – (69.9) (69.9) (584.7) (868.5) (7.1) (8.2) (11.3) (196.0) – (50.0) (200.0) (500.0) (533.6) (128.1) (796.0) (1,564.5) (159.7) (296.9) (1,593.0) (222.6) (750.0) (3,022.2) 558.5 18.5 – – 577.0 (564.6) (18.6) – – (583.2) Effect of discounting At 31 March 2007 – – 415.7 161.0 253.1 829.8 (159.7) (296.9) (1,177.3) (61.6) (496.9) (2,192.4) Total £m (6.1) (0.1) – – (6.2) Timing of cash flows Within one year Between one and two years Between two and five years More than five years (257.4) – – – (112.6) (615.0) – (112.6) – (1,088.9) – (1,866.5) (11.6) (19.2) (26.2) (214.9) (50.0) (1,046.6) (203.7) (71.9) (215.7) (1,330.8) (719.0) (2,800.4) 643.4 90.7 84.8 747.3 (663.7) (90.9) (83.0) (736.4) (257.4) (615.0) (3,180.6) (271.9) (1,056.6) (5,381.5) 1,566.2 (1,574.0) (20.3) (0.2) 1.8 10.9 (7.8) Effect of discounting At 29 March 2008 – – 1,321.4 188.4 333.4 1,843.2 (257.4) (615.0) (1,859.2) (83.5) (723.2) (3,538.3) This table does not include trade and other payables (see note 20). i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 82 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 21 Borrowings and other financial liabilities continued Financial liabilities After taking into account the hedging derivatives entered into by the Group, the currency and interest rate exposure of the Group’s financial liabilities is as set out below excluding short-term payables and the COMS a.s. put option: Currency Sterling Euro Hong Kong dollar Fixed rate £m Floating rate £m 2008 Total £m Fixed rate £m 2,665.9 – – 2,665.9 673.0 192.5 6.9 872.4 3,338.9 192.5 6.9 1,735.8 – – 3,538.3 1,735.8 Floating rate £m 289.7 159.5 7.4 456.6 2007 Total £m 2,025.5 159.5 7.4 2,192.4 The floating rate sterling and euro borrowings are linked to interest rates related to LIBOR. These rates are for periods between one and three months. As at the balance sheet date and excluding finance leases but including the partnership liability, the fixed rate sterling borrowings are at an average rate of 6.0% (last year 5.8%) and the weighted average time for which the rate is fixed is 10 years (last year 8.5 years). Interest rate analysis The effective interest rates at the balance sheet date were as follows: Committed and uncommitted borrowings Medium term notes Finance leases Partnership liability to the Marks & Spencer UK Pension Scheme 2008 % 5.5 6.2 5.0 5.7 2007 % 4.8 5.9 4.4 5.3 22 Financial instruments Treasury policy and financial risk management The Group operates a centralised Group treasury function to manage the Group’s funding requirements and financial risks in line with the Board approved treasury policies and procedures, and their delegated authorities. The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources and various items, such as trade debtors and trade creditors, that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. Group treasury also enters into derivative transactions, principally interest rate and currency swaps and forward currency contracts. The purpose of these transactions is to manage the interest rate and currency risks arising from the Group’s operations and financing. It remains the Group’s policy not to hold or issue financial instruments for trading purposes, except where financial constraints necessitate the need to liquidate any outstanding investments. The treasury function is managed as a cost centre and does not engage in speculative trading. The principal financial risks faced by the Group are liquidity/funding, interest rate, foreign currency and counterparty risks. The policies and strategies for managing these risks are summarised as follows: A Liquidity/funding risk The Group’s funding strategy is to ensure a mix of funding sources offering flexibility and cost effectiveness to match the requirements of the Group. Operating subsidiaries are financed by a combination of retained profits, bank borrowings, medium term notes and committed syndicated bank facilities. In addition to the existing borrowings, the Group has a Euro Medium Term Note programme of £3bn, of which £1.5bn (last year £1.2bn) was in issuance as at the balance sheet date. Short-term borrowings are backed by a £1.2bn five-year committed syndicated bank facility, of which £615.0m (last year £296.9m) was drawn down at the balance sheet date. In addition the Group entered into a £400m credit agreement set to expire on 13 February 2009 with an option to term out for a further year. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 83 A b o u t u s 22 Financial instruments continued B Interest rate risk The Group is exposed to interest rate risk in relation to the sterling, US$, euro and Hong Kong dollar variable rate financial assets and liabilities. The Group’s policy is to use derivative contracts where necessary to maintain a mix of fixed and floating rate borrowings to manage this risk. The structure and maturity of these derivatives correspond to the underlying borrowings and are accounted for as fair value or cash flow hedges as appropriate. At the balance sheet date, fixed rate borrowings amounted to £2,665.8m (last year £1,735.8m) representing the public bond issues and finance leases, and amounting to 75% (last year 79%) of the Group’s gross borrowings. C Foreign currency risk Transactional foreign currency exposures arise from both the export of goods from the UK to overseas subsidiaries, and from the import of materials and goods directly sourced from overseas suppliers. Group treasury hedge these exposures principally using forward foreign exchange contracts progressively covering up to 100% out to 18 months. Where appropriate hedge cover can be taken out longer than 18 months with Board approval. The Group is primarily exposed to foreign exchange in relation to sterling against movements in US$ and euro. i i n d c a t o r s Forward foreign exchange contracts in relation to the Group’s forecast currency requirements are designated as cash flow hedges with fair value movements recognised directly in equity. To the extent that these hedges cover actual currency payables or receivables then associated fair value movements previously recognised in equity are recorded in the income statement in conjunction with the corresponding asset or liability. As at the balance sheet date the gross notional value in sterling terms of forward foreign exchange sell or buy contracts amounted to £619m (last year £456m) with a weighted average maturity date of seven months (last year six months). i B u s n e s s r e v e w i The Group does not use derivatives to hedge balance sheet and profit and loss translation exposures. However, the translation exposures arising on the overseas net assets are hedged with foreign currency debt. As at the balance sheet date, €243m (last year €234m) and HK$107m (last year HK$113m) currency debt was hedging overseas net assets. The Group also hedges foreign currency intercompany loans where these exist. Forward foreign exchange contracts in relation to the hedging of the Group’s foreign currency intercompany loans are designated as held for trading with fair value movements being recognised in the income statement. The corresponding fair value movement of the intercompany loan balance results in an overall £nil impact on the income statement. As at the balance sheet date, the gross notional value of intercompany loan hedges was £80m (last year £128m). Gains and losses in equity on forward foreign exchange contracts as of 31 March 2008 will be released to the income statement at various dates over the following 19 months (last year 14 months) from the balance sheet date. D Counterparty risk Counterparty risk exists where the Group can suffer financial loss through default or non-performance by financial institutions. Exposures are managed through the Group treasury policy which limits the value that can be placed with each approved counterparty to minimise the risk of loss. The counterparties are limited to the approved institutions with secure long-term credit ratings of A+/A1 or better assigned by Moody’s and Standard & Poor’s respectively. Limits are reviewed regularly by senior management. The credit risk of these financial instruments is estimated as the fair value of the assets resulting from the contracts. The Group has very low retail credit risk due to transactions being principally of a high volume, low value and short maturity. The Group does not have any material exposures to concentrations of credit risk with any one counterparty. The maximum exposure to credit risk at the balance sheet date was as follows: trade receivables £85m (last year £68m), other receivables £46m (last year £53m), cash and cash equivalents £318m (last year £180m) and derivatives £37m (last year £2m). i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 84 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 22 Financial instruments continued E Sensitivity analysis The table below illustrates the estimated impact on the income statement and equity as a result of market movements in foreign exchange and interest rates in relation to all of the Group’s financial instruments. The Group considers that a 1% +/- movement in interest rates and a 10% weakening or strengthening in sterling represents reasonable possible changes. However, this analysis is for illustrative purposes only. The impact in the income statement due to changes in interest rates reflects the effect on the Group’s floating rate debt as at the balance sheet date. The impact in equity reflects the fair value movement in relation to the Group’s cross currency swaps. The impact from foreign exchange movements reflects the change in the fair value of the Group’s transactional foreign exchange cash flow hedges and the net investment hedges at the balance sheet date. The equity impact shown for foreign exchange sensitivity relates to derivative and non-derivative financial instruments hedging net investments. This value is expected to be fully offset by the retranslation of the hedged foreign currency net assets leaving a net equity impact of zero. The table excludes financial instruments that expose the Group to interest rate and foreign exchange risk where such risk is fully hedged with another financial instrument. Also excluded are trade receivables and payables, and the COMS a.s. put option. At 31 March 2007 Impact on income statement: gain/(loss) Impact on equity: gain/(loss) At 29 March 2008 Impact on income statement: gain/(loss) Impact on equity: gain/(loss) Derivative financial instruments Current Options – held for trading Forward foreign exchange contracts – cash flow hedges – held for trading Non-current Cross currency – cash flow hedges Forward foreign exchange contracts – cash flow hedges 1% decrease in interest rates £m 1% increase in interest rates £m 10% weakening in sterling £m 10% strengthening in sterling £m 3.2 – 6.5 4.1 – (8.0) – (15.5) (3.2) – (6.5) 3.3 2008 Assets £m Liabilities £m Assets £m 12.4 5.0 1.0 18.4 16.9 1.3 18.2 (12.4) (21.8) (0.9) (35.1) – – – – 1.4 1.0 2.4 – – – – 6.6 – 12.7 2007 Liabilities £m – (8.3) – (8.3) – (0.2) (0.2) During the year, the Group held a number of cross currency swaps to redesignate fixed rate US$ debt to fixed rate sterling debt. The attributes of these derivatives matched the characteristics of the underlying debt hedged. The amounts reported as options held for trading in derivative assets and liabilities represent the fair value of the call option with the puttable callable reset notes mirrored by the fair value of the sold option to have this call assigned. Fair value of financial instruments With the exception of the Group’s fixed rate bond debt and the partnership liability (see note 21), there were no material differences between the carrying value of non-derivative financial assets and financial liabilities and their fair values as at the balance sheet date. The carrying value of the Group’s fixed rate bond debt was £1,859.2m (last year £1,177.3m), the fair value of this debt was £1,740.7m (last year £1,162.9m). Capital policy The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a capital structure that optimises the cost of capital. In order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 85 A b o u t u s 23 Provisions At 2 April 2006 Provided in the year Released in the year Utilised during the year Exchange differences At 31 March 2007 At 1 April 2007 Provided in the year Released in the year Utilised during the year Exchange differences At 29 March 2008 Analysis of total provisions: Current Non-current Total provisions UK restructuring £m Overseas restructuring £m 19.3 2.0 (1.1) (6.1) – 14.1 14.1 11.5 (3.2) (4.2) – 18.2 9.0 – – (0.5) (0.1) 8.4 8.4 0.1 (2.0) (0.3) 1.3 7.5 2008 £m 11.1 14.6 25.7 Total £m 28.3 2.0 (1.1) (6.6) (0.1) 22.5 22.5 11.6 (5.2) (4.5) 1.3 25.7 2007 £m 5.7 16.8 22.5 The provision for UK restructuring primarily relates to costs of closing Lifestore, restructuring of the Direct operation and head office restructuring. The provision for overseas restructuring costs primarily relates to future closure costs in respect of discontinued operations in Continental Europe. The non-current provisions relate to closure costs of discontinued operations in Continental Europe, the closure of Lifestore operations and the restructuring of the Direct operation and are expected to be utilised over a period of 10 years. 24 Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 28% (last year 30%) for UK differences and the local tax rates for overseas differences. The movements in deferred tax assets and liabilities (after the offsetting of balances within the same jurisdiction as permitted by IAS 12 – ‘Income Taxes’) during the period are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. Deferred tax assets/(liabilities) At 2 April 2006 Credited/(charged) to the income statement Credited/(charged) to equity At 31 March 2007 At 1 April 2007 Credited/(charged) to the income statement Credited/(charged) to equity At 29 March 2008 Fixed assets temporary differences £m Accelerated capital allowances £m Pension temporary differences £m Other short-term temporary differences £m (95.0) 4.4 – (90.6) (90.6) 13.7 – (76.9) (85.0) (18.2) – (103.2) (103.2) (41.4) – (144.6) 251.5 (71.4) 3.4 183.5 183.5 (150.5) (172.4) (139.4) 12.4 (12.5) 22.0 21.9 21.9 (12.9) (15.1) (6.1) Total UK deferred tax £m 83.9 (97.7) 25.4 11.6 11.6 (191.1) (187.5) (367.0) Overseas deferred tax £m (6.1) (0.3) (0.9) (7.3) (7.3) 0.4 1.8 (5.1) Total £m 77.8 (98.0) 24.5 4.3 4.3 (190.7) (185.7) (372.1) In arriving at the deferred tax on fixed assets, credit has been taken for capital losses with a tax value of £53.0m (last year £57.0m). No deferred tax is recognised on the unremitted earnings of overseas subsidiaries. As the earnings are continually reinvested by the Group, no tax is expected to be payable on them in the foreseeable future. Undistributed profits of overseas subsidiaries amount to £295.1m (last year £226.7m). The Group is claiming UK tax relief for losses incurred by some of its current and former European subsidiaries. In the light of continuing litigation, no asset has been recognised in respect of these claims. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 86 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 25 Acquisitions Book values Net assets at fair value (100%) Net assets acquired Cash consideration Contingent consideration Transaction costs Total consideration Goodwill arising on acquisition Marinopoulos B.V. £m COMS a.s. £m 9.2 9.2 4.6 38.1 – 0.8 38.9 34.3 2.6 2.6 1.3 10.6 4.0 0.8 15.4 14.1 Total £m 11.8 11.8 5.9 48.7 4.0 1.6 54.3 48.4 Marinopoulos B.V. On 28 February 2008, the Group acquired Board control and 50% of the issued share capital of Marks and Spencer Marinopoulos B.V. for cash consideration of €50.0m and transaction costs of £0.8m. The Marinopoulos group, located in Greece, Bulgaria, Croatia, Romania, Switzerland and Serbia, was previously a franchise partner of the Group and is a retailer of general merchandise and food. The fair values currently established for the acquisition are provisional due to the proximity of the date of acquisition to the Group’s reporting date. The acquisition has contributed £4.8m to sales and a £0.4m loss to operating profit in the period since the acquisition. If the acquisition of the Marinopoulos group had been completed on the first day of the financial year, Group sales for the year would have been £9,052m and Group profits attributable to equity holders of the Company would have been £824m. COMS a.s. On 20 March 2008, the Group acquired 51% of the issued share capital of COMS a.s. for cash consideration of €13.6m and transaction costs of £0.8m. The COMS group, located in the Czech Republic, Latvia, Lithuania and Slovakia, was previously a franchise partner of the Group and is a retailer of general merchandise and food. The fair values currently established for the acquisition are provisional due to the proximity of the date of acquisition to the Group’s reporting date. The acquisition has contributed £nil to sales and £nil to operating profit in the period since acquisition. If the acquisition of the COMS group had been completed on the first day of the financial year, Group sales for the year would have been £9,034m and Group profits attributable to equity holders of the Company would have been £822m. The sale and purchase agreement includes call and put options over the remaining 49% of the share capital of COMS a.s. exercisable in five years time. The fair value of the put option (£52.2m) has been recognised as a liability at 29 March 2008 (note 20 and note 27). On an undiscounted basis this liability has a value of £81.0m. Goodwill has arisen on the acquisitions of Marks and Spencer Marinopoulos B.V. and COMS a.s. due to the opportunities to facilitate a faster rate of growth and greater operating efficiency that do not meet the criteria for recognition as an intangible asset at the date of acquisition. 26 Share capital Shares 2008 £m Shares 2007 £m Authorised ordinary shares of 25p each 3,200,000,000 800.0 3,200,000,000 800.0 Allotted, called-up and fully paid ordinary shares of 25p each At start of year Shares issued on exercise of share options Shares purchased in buy back At end of year 1,699,773,100 12,447,224 (125,741,901) 424.9 3.1 (31.4) 1,682,437,014 17,336,086 – 1,586,478,423 396.6 1,699,773,100 420.6 4.3 – 424.9 Issue of new shares 12,447,224 (last year 17,336,086) ordinary shares having a nominal value of £3.1m (last year £4.3m) were allotted during the year under the terms of the Company’s schemes which are described in note 12. The aggregate consideration received was £31.6m (last year £44.9m). Share buy back 125,741,901 (last year nil) ordinary shares having a nominal value of £31.4m (last year £nil) were bought back and subsequently cancelled during the year in accordance with the authority granted by shareholders at the Annual General Meeting in July 2007. The aggregate consideration paid was £555.9m (last year £nil). marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 87 A b o u t u s 27 Statement of changes in shareholders’ equity At 2 April 2006 Profit for the year attributable to shareholders Dividends Foreign currency translation Shares issued on exercise of employee share options Redemption of B shares Purchase of own shares held by employee trust Purchase of call option for Company’s shares Actuarial loss on retirement benefit deficit Deferred tax on retirement benefit deficit Deferred tax on share schemes Charge for share-based payments Cash flow and net investment hedges – losses deferred in equity – recycled and reported in net profit – amount recognised in inventories – tax on fair value gains Ordinary share capital £m 420.6 – – – 4.3 – – – – – – – – – – – Share premium account £m Capital redemption reserve £m Hedging reserve £m Other reserve1 £m Retained earnings2, 3 £m 162.3 – – – 40.6 – – – – – – – – – – – 2,113.8 – – – – 54.7 – – – – – – – – – – (8.0) – – – – – – – – – – – (7.4) 10.7 2.1 (1.8) (6,542.2) – – – – – – – – – – – – – – – 5,057.2 659.9 (260.6) (14.0) – (54.7) (18.4) (17.3) (8.6) 4.0 22.3 27.3 – – – – Total £m 1,203.7 659.9 (260.6) (14.0) 44.9 – (18.4) (17.3) (8.6) 4.0 22.3 27.3 (7.4) 10.7 2.1 (1.8) At 31 March 2007 424.9 202.9 2,168.5 (4.4) (6,542.2) 5,397.1 1,646.8 i i n d c a t o r s i B u s n e s s r e v e w i At 1 April 2007 Profit for the year attributable to shareholders Dividends Foreign currency translation Shares issued on exercise of employee share options Shares purchased in buy back Purchase of own shares held by employee trust Put option for acquisition of minority interest4 Actuarial gain on retirement benefit asset Deferred tax on retirement benefit asset Deferred tax on share schemes Charge for share-based payments Cash flow and net investment hedges – losses deferred in equity – recycled and reported in net profit5 – amount recognised in inventories – tax on fair value gains 424.9 – – – 3.1 (31.4) – – – – – – – – – – 202.9 – – – 2,168.5 – – – (4.4) – – – (6,542.2) – – – 5,397.1 821.7 (343.6) 21.3 1,646.8 821.7 (343.6) 21.3 i F n a n c a i l 28.5 – – – – – – – – – – – – 31.4 – – – – – – – – – – – – – – – – – – (33.5) 1.3 2.4 (2.7) – – – – – – – – – – – – – (555.9) (31.9) (52.2) 605.4 (172.4) (10.6) 29.0 – – – – 31.6 (555.9) (31.9) (52.2) 605.4 (172.4) (10.6) 29.0 (33.5) 1.3 2.4 (2.7) r e v e w i G o v e r n a n c e At 29 March 2008 396.6 231.4 2,199.9 (36.9) (6,542.2) 5,707.9 1,956.7 1 The ‘Other reserve’ was created as part of the capital restructuring that took place in 2002. It represents the difference between the nominal value of the shares issued prior to the capital reduction by the Company (being the carrying value of the investment in Marks and Spencer plc) and the share capital, share premium and capital redemption reserve of Marks and Spencer plc at the date of the transaction. 2 Cumulative goodwill of £nil (last year £nil) arising on the acquisition of subsidiaries has been written off against retained earnings. 3 Includes a cumulative £18.4m gain (last year £2.9m loss) in the currency reserve. 4 Fair value of the put option over the 49% minority interest in the share capital of COMS a.s. 5 Amounts recycled and reported in net profit have all been recorded in cost of sales. i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 88 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 28 Contingencies and commitments A Capital commitments Commitments in respect of properties in the course of construction 2008 £m 2007 £m 182.8 265.8 B Other material contracts In the event of a material change in the trading arrangements with certain warehouse operators, the Group has a commitment to purchase property, plant and equipment, at values ranging from historical net book value to market value, which are currently owned and operated by them on the Group’s behalf. C Commitments under operating leases The Group leases various stores, offices, warehouses and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. Total future minimum rentals under non-cancellable operating leases expiring: Not later than one year Later than one year and not later than five years Later than five years and not later than 25 years Later than 25 years Total The total future sublease payments to be received are £70.5m (last year £68.8m). 29 Analysis of cash flows given in the cash flow statement A Cash flows from operating activities – continuing Profit on ordinary activities after taxation Income tax expense Interest payable and similar charges Interest receivable Operating profit Increase in inventories (Increase)/decrease in receivables Payments to acquire leasehold properties (Decrease)/increase in payables Exceptional operating cash outflow (see note 29F) Depreciation and amortisation Share-based payments Profit on property disposals Exceptional pension credit Cash generated from operations – continuing B Cash flows from operating activities – discontinued Last year £0.7m cash was generated from the discontinued operations of Kings Super Markets Inc. 2008 £m 2007 £m 17.9 90.4 2,223.6 1,492.4 10.6 57.4 1,778.3 1,527.6 3,824.3 3,373.9 52 weeks ended 29 March 2008 £m 821.0 308.1 146.6 (64.4) 1,211.3 (54.4) (33.5) (47.6) (61.9) (2.5) 317.6 29.0 (27.0) (95.0) 52 weeks ended 31 March 2007 £m 659.2 277.5 143.0 (33.8) 1,045.9 (42.8) 12.5 (13.5) 136.6 (4.2) 282.7 27.3 (1.9) – 1,236.0 1,442.6 marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 89 29 Analysis of cash flows given in the cash flow statement continued C Capital expenditure and financial investment A b o u t u s Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of intangible fixed assets Sale of non-current financial assets Sale/(purchase) of current financial assets D Other debt financing Cash inflow from borrowings Drawdown of syndicated bank facility Redemption of securitised loan notes Redemption of medium term notes Issue of medium term notes Decrease in obligations under finance leases Redemption of B shares E Other equity financing Shares issued on exercise of employee share options Shares purchased in buy back Purchase of own shares held by employee trust Purchase of call option for Company’s shares F Exceptional operating cash flows UK restructuring costs Closure of Lifestore Closure of European operations 52 weeks ended 29 March 2008 £m (958.4) 91.6 (60.6) – 2.8 (924.6) 8.7 317.6 – – 631.7 (3.5) – 954.5 31.6 (555.9) (31.9) – (556.2) (2.2) – (0.3) (2.5) 52 weeks ended 31 March 2007 £m (666.9) 2.9 (46.5) 0.3 (2.6) (712.8) 21.6 296.4 (319.6) (818.2) 397.5 (2.2) (54.7) (479.2) 44.9 – (18.4) (17.3) 9.2 (2.8) (0.7) (0.7) (4.2) Additions to property, plant and equipment during the year amounting to £23.5m (last year £13.6m) were financed by new finance leases. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 90 MARKS AND SPENCER GROUP PLC Notes to the financial statements continued 30 Analysis of net debt A Reconciliation of movement in net debt Net cash Bank loans (see note 21) Less: amounts treated as financing (see below) Cash and cash equivalents (see note 19) Net cash per cash flow statement Current financial assets (see note 17) Debt financing Bank loans, overdrafts and commercial paper treated as financing (see above) Syndicated bank facility (see note 21) Medium term notes (see note 21) Finance lease liabilities (see note 21) Partnership liability to the Marks & Spencer UK Pension Scheme (see note 21) Debt financing Net debt B Reconciliation of net debt to balance sheet At 1 April 2007 £m (456.1) 323.0 (133.1) 180.1 47.0 50.9 (26.6) (296.4) (1,167.2) (61.6) (495.6) (2,047.4) (1,949.5) Cash flow £m Acquisitions £m Exchange and other non-cash movements £m At 29 March 2008 £m (393.3) 326.3 (67.0) 132.5 65.5 (2.8) (8.7) (317.6) (631.7) 3.5 – (954.5) (891.8) (22.0) 22.0 – 3.9 3.9 – (22.0) – – (7.6) – – – 1.5 1.5 0.7 (871.4) 671.3 (200.1) 318.0 117.9 48.8 – – (13.3) (17.8) (57.3) (614.0) (1,812.2) (83.5) – (199.0) (694.6) (29.6) (25.7) (230.1) (3,261.6) (227.9) (3,094.9) Balance sheet and related notes Cash and cash equivalents Current financial assets (see note 17) Bank loans, overdrafts and commercial paper (see note 21) Syndicated bank facility (see note 21) Medium term notes (see note 21) Finance lease liabilities (see note 21) Partnership liability to the Marks & Spencer UK Pension Scheme (see note 21) Interest payable included within related borrowing Total net debt 2008 £m 2007 £m 318.0 48.8 (257.4) (615.0) (1,859.2) (83.5) (723.2) (3,171.5) 76.6 180.1 50.9 (159.7) (296.9) (1,177.3) (61.6) (496.9) (1,961.4) 11.9 (3,094.9) (1,949.5) marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 91 A b o u t u s 31 Foreign exchange rates Euro US dollar Hong Kong dollar Weighted average sales rate Weighted average profit rate Balance sheet rate 2008 1.40 2.01 15.62 2007 1.48 1.88 14.77 2008 1.41 2.01 15.61 2007 1.47 1.88 14.77 2008 1.26 1.99 15.52 2007 1.47 1.96 15.31 32 Related party transactions A Subsidiaries Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Company and its subsidiaries are disclosed in the Company’s separate financial statements. B Hedge End joint venture A loan of £5.0m was received from the joint venture on 9 October 2002. It is repayable on five business days’ notice and was renewed on 1 January 2008. Interest was charged on the loan at 5.25% until 31 December 2007 and 5.5% thereafter. C Marks & Spencer Pension Scheme Details of other transactions and balances held with the Marks & Spencer Pension Scheme are set out in note 11. D Key management compensation Salaries and short-term benefits Post-employment benefits Termination benefits Share-based payments Total 2008 £m 8.1 0.4 0.4 12.3 21.2 2007 £m 9.6 0.4 – 6.7 16.7 Key management includes the Directors, the Group Secretary and only those members of key management who are members of the Executive Committee. Further information about the remuneration of individual directors is provided in the Remuneration report. During the year, key management have purchased goods at the Group’s usual prices less a 20% discount. This discount is available to all staff employed directly by the Group in the UK. E Other related party transactions Supplier transactions occurred during the year between the Group and a company controlled by a close family member of Kate Bostock, who became a director during the year. These transactions amounted to £5.4m during the year (last year £5.2m) with an outstanding trade payable of £0.1m at 29 March 2008 (last year £0.2m). The company was a supplier prior to Kate’s employment by the Group. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 92 MARKS AND SPENCER GROUP PLC Company income statement Other operating income Operating profit Income from shares in Group undertakings Finance costs Profit for the year attributable to shareholders Company balance sheet Assets Non-current assets Investments in Group undertakings Current assets Trade and other receivables Total assets Liabilities Current liabilities Amounts owed to Group undertakings Trade and other payables Total liabilities Net assets Equity Called-up share capital – equity Share premium account Capital redemption reserve Merger reserve Retained earnings Total equity 52 weeks ended 29 March 2008 £m 0.1 0.1 344.0 – 344.1 52 weeks ended 31 March 2007 £m – – 260.6 (0.2) 260.4 Notes C2, C3 C4 Notes 2008 £m 2007 (restated) £m C6 9,147.4 9,135.6 0.2 0.1 9,147.6 9,135.7 2,584.6 1.0 2,060.8 0.9 2,585.6 2,061.7 6,562.0 7,074.0 C7 C7 C7 C7 396.6 231.4 2,199.9 1,397.3 2,336.8 424.9 202.9 2,168.5 1,397.3 2,880.4 6,562.0 7,074.0 The financial statements were approved by the Board and authorised for issue on 19 May 2008. The financial statements also comprise the notes on pages 94 and 95. Sir Stuart Rose, Chief Executive Ian Dyson, Group Finance and Operations Director marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 93 Company statement of changes in shareholders’ equity Profit attributable to shareholders Dividends Capital contribution for share-based payments Shares purchased in buy back Shares issued on the exercise of employee share options Change in shareholders’ equity Opening shareholders’ equity as previously reported Prior year adjustment (see note C7) Opening shareholders’ equity Closing shareholders’ equity Company cash flow statement Cash flows from operating activities Cash generated from operations Net cash inflow from operating activities Cash flows from investing activities Dividends received Net cash inflow from investing activities Cash flows from financing activities Interest paid Shares purchased in buy back Redemption of non-equity B shares Shares issued on exercise of employee share options Drawdown of intercompany loan Equity dividends paid Net cash outflow from financing activities Net cash inflow from activities Cash and cash equivalents at beginning and end of year 52 weeks ended 29 March 2008 £m 344.1 (343.6) 0.5 11.8 (555.9) 31.6 (512.0) 52 weeks ended 31 March 2007 £m 260.4 (260.6) (0.2) 13.3 – 44.9 58.0 6,984.5 89.5 6,939.8 76.2 7,074.0 7,016.0 6,562.0 7,074.0 52 weeks ended 29 March 2008 £m 52 weeks ended 31 March 2007 £m 0.1 0.1 0.9 0.9 344.0 344.0 260.6 260.6 – (555.9) – 31.6 523.8 (343.6) (344.1) – – (0.2) – (54.7) 44.9 9.1 (260.6) (261.5) – – A b o u t u s i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 94 MARKS AND SPENCER GROUP PLC Company notes to the financial statements C1 Accounting policies The Company’s accounting policies are the same as those set out in note 1 of the Group financial statements, except as noted below. Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. C2 Employees The Company had no employees during the current or prior year. Directors received emoluments in respect of their services to the Company during the year of £822,000 (last year £751,000). The Company did not operate any pension schemes during the current or preceding year. C3 Auditors’ remuneration Auditors’ remuneration in respect of the Company’s annual audit has been borne by its subsidiary Marks and Spencer plc and has been disclosed on a consolidated basis in the Company’s consolidated financial statements as required by section 227A of the Companies Act 1985. C4 Finance costs Dividends of £nil (last year £0.2m) were paid in respect of non-equity B shares. C5 Dividends Dividends on equity ordinary shares Paid final dividend Paid interim dividend 2008 per share 2007 per share 2008 £m 2007 £m 12.0p 8.3p 20.3p 9.2p 6.3p 15.5p 203.5 140.1 343.6 154.6 106.0 260.6 In addition, the directors have proposed a final dividend in respect of the year ended 31 March 2008 of 14.2p per share amounting to a dividend of £217.9m. It will be paid on 11 July 2008 to shareholders who are on the Register of Members on 30 May 2008. In line with the requirements of IAS 10 – ‘Events after the Balance Sheet Date’, this dividend has not been recognised within these results. C6 Investments A Investments in Group undertakings Beginning of the year as previously reported Prior year adjustment (see note C7) Beginning of the year restated Additional investment in subsidiary End of year Shares in Group undertakings represent the Company’s investment in Marks and Spencer plc. 2008 £m 9,046.1 89.5 9,135.6 11.8 2007 £m 9,046.1 76.2 9,122.3 13.3 9,147.4 9,135.6 marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 95 A b o u t u s B Principal subsidiary undertakings The Company’s principal subsidiary undertakings are set out below. A schedule of interests in all undertakings is filed with the Annual Return. Marks and Spencer plc Marks and Spencer International Holdings Limited Marks and Spencer (Nederland) BV Marks and Spencer Marinopoulos BV Marks and Spencer (Ireland) Limited Marks and Spencer (Asia Pacific) Limited Marks and Spencer Simply Foods Limited Marks and Spencer Marinopoulos Greece SA M.S. Insurance L.P. Marks and Spencer Investments Limited St Michael Finance plc Marks and Spencer Finance plc Marks and Spencer Chester Limited Marks and Spencer SCM Limited Per Una Group Limited Marks and Spencer Scottish Limited Partnership 1 Marks and Spencer plc is a general partner. Principal activity Retailing Holding Company Holding Company Holding Company Retailing Retailing Retailing Retailing Financial Services Finance Finance Finance Property Investment Procurement Procurement Property Investment Country of incorporation and operation Great Britain Great Britain The Netherlands The Netherlands Republic of Ireland Hong Kong Great Britain Greece Guernsey Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Proportion of voting rights and shares held by: Company A subsidiary 100% – – – – – – – – – – – – – – – – 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% –1 The Company has taken advantage of the exemption under section 231(5) of the Companies Act 1985 by providing information only in relation to subsidiary undertakings whose results or financial position, in the opinion of the directors, principally affected the financial statements. C7 Statement of changes in shareholders’ equity At 2 April 2006 as previously reported Prior year adjustment At 2 April 2006 restated Profit for the year attributable to shareholders Dividends Capital contribution for share-based payments Shares issued on exercise of employee share options (see note 12) Redemption of B shares At 31 March 2007 At 1 April 2007 Profit for the year attributable to shareholders Dividends Capital contribution for share-based payments Shares purchased in buy back Shares issued on exercise of employee share options (see note 12) At 29 March 2008 Ordinary share capital £m 420.6 – 420.6 – – – 4.3 – Share premium account £m 162.3 – 162.3 – – – 40.6 – Capital redemption reserve £m 2,113.8 – 2,113.8 – – – – 54.7 Merger reserve £m 1,397.3 – 1,397.3 – – – Retained earnings £m 2,845.8 76.2 2,922.0 260.4 (260.6) 13.3 Total £m 6,939.8 76.2 7,016.0 260.4 (260.6) 13.3 – – – (54.7) 44.9 – 424.9 202.9 2,168.5 1,397.3 2,880.4 7,074.0 424.9 – – – (31.4) 3.1 396.6 202.9 – – – – 28.5 2,168.5 – – – 31.4 1,397.3 – – – – 2,880.4 344.1 (343.6) 11.8 (555.9) 7,074.0 344.1 (343.6) 11.8 (555.9) – – – 31.6 231.4 2,199.9 1,397.3 2,336.8 6,562.0 Prior year adjustment Following the implementation of IFRIC 11 – ‘IFRS 2 – Group and Treasury Share Transactions’, the opening balance sheet at 2 April 2006 has been restated to recognise £76.2m of capital contribution to the subsidiary in respect of equity-settled share-based payment transactions. C8 Related party transactions During the year, the Company has received dividends from Marks and Spencer plc of £344.0m (last year £260.6m) and has increased its loan from Marks and Spencer plc by £523.8m (last year £9.1m). The outstanding balance was £2,584.6m (last year £2,060.8m). There were no other related party transactions. i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 96 MARKS AND SPENCER GROUP PLC Group financial record The figures for 2005 to 2008 are prepared under IFRS. The figures for 2004 are UK GAAP figures presented in the same format as the 2005 to 2008 figures. Profit on ordinary activities before taxation – continuing operations 1,129.1 Income statement Revenue – continuing operations Operating profit – continuing operations UK Retail International Retail Total operating profit Net interest payable Pension finance income/(charge) Analysed between: Before property disposals and exceptional items Profit/(loss) on property disposals Exceptional pension credit Exceptional finance costs Exceptional operating costs Income tax expense Profit after taxation Profit from discontinued operations Minority interests Profit attributable to shareholders Balance sheet Non-current assets Intangible assets Property, plant and equipment (including investment properties) Joint venture and other financial assets Retirement benefit asset Trade and other receivables Deferred tax assets Non-current assets Current assets Total assets Current liabilities Non-current liabilities Retirement benefit deficit Other non-current liabilities Total liabilities Net assets IFRS 2008 52 weeks £m IFRS 2007 52 weeks £m IFRS 2006 52 weeks £m IFRS 2005 52 weeks £m UK GAAP 2004 53 weeks £m 9,022.0 8,588.1 7,797.7 7,490.5 7,728.1 1,095.9 115.4 956.7 89.2 1,211.3 1,045.9 (141.1) 58.9 1,007.1 27.0 95.0 – – (130.0) 20.8 936.7 965.2 1.9 – (30.4) – 784.5 65.6 850.1 (121.9) 17.5 745.7 751.4 (5.7) – – – 528.0 70.1 598.1 (104.4) 11.4 505.1 556.1 (0.4) – – (50.6) 738.6 45.0 783.6 (45.7) (15.2) 722.7 746.1 18.7 – – (42.1) (308.1) (277.5) (225.1) (150.1) (225.1) 821.0 – 0.7 821.7 659.2 0.7 – 659.9 520.6 2.5 – 523.1 355.0 231.2 – 586.2 497.6 54.7 – 552.3 IFRS 2008 £m IFRS 2007 £m IFRS1 2006 £m IFRS1 2005 £m UK GAAP 2004 £m 305.5 4,729.0 12.6 504.0 428.2 – 5,979.3 1,181.7 194.1 4,069.6 12.3 – 247.0 11.6 4,534.6 846.4 163.5 3,614.3 12.3 – 242.8 83.9 4,116.8 1,142.1 165.4 3,624.8 9.0 – 211.2 73.0 4,083.4 832.3 – 3,497.6 10.0 – 1,779.3 203.5 5,490.4 2,086.7 7,161.0 5,381.0 5,258.9 4,915.7 7,577.1 (1,988.9) (1,606.2) (2,017.0) (1,237.4) (1,919.9) (20.5) (3,187.6) (283.3) (1,843.3) (794.9) (1,243.3) (676.0) (2,044.7) (669.5) (2,533.7) (5,197.0) (3,732.8) (4,055.2) (3,958.1) (5,123.1) 1,964.0 1,648.2 1,203.7 957.6 2,454.0 1 Non-current deferred tax assets have been restated by £48.4m in 2005 and 2006 due to a change in accounting policy (see note 25). marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 97 A b o u t u s Cash flow Cash flows from operating activities Generated from operating activities Taxation paid Cash flows from operating activities Cash flows from investing activities Acquisitions and disposals Capital expenditure and financial investment Interest received Cash flows from investing activities Cash flows from financing activities Interest paid1 Non-equity dividend paid Other debt financing Equity dividends paid Other equity financing Cash flows from financing activities Net cash inflow/(outflow) from activities 1 2007 includes £21.6m of exceptional finance costs. IFRS 2008 52 weeks £m IFRS 2007 52 weeks £m IFRS 2006 52 weeks £m IFRS 2005 52 weeks £m UK GAAP 2004 53 weeks £m 1,236.0 (166.2) 1,443.3 (150.8) 1,197.5 (101.5) 1,601.8 (166.7) 1,069.8 1,292.5 1,096.0 1,435.1 (46.4) (924.6) 4.8 (966.2) (88.9) – 954.5 (343.6) (556.2) (34.2) 69.4 48.8 (712.8) 13.2 (650.8) (145.0) – (479.2) (260.6) 9.2 (875.6) (233.9) – (266.3) 12.9 (253.4) (142.8) – (420.0) (204.1) 55.8 351.1 (113.5) 15.4 253.0 (116.5) (2.8) 757.1 (236.9) (2,265.1) (711.1) (1,864.2) 131.5 (176.1) 666.5 (220.4) 446.1 51.3 (317.4) 14.4 (251.7) (61.2) (3.0) 413.6 (247.1) (66.6) 35.7 230.1 i i n d c a t o r s i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i f n o r m a t i o n K e y p e r f o r m a n c e S h a r e h o d e r l 98 MARKS AND SPENCER GROUP PLC Group financial record continued Key performance measures Gross margin1 Net margin1 Gross profit Revenue Operating profit Revenue IFRS 2008 52 weeks IFRS 2007 52 weeks IFRS 2006 52 weeks IFRS 2005 52 weeks UK GAAP 2004 53 weeks 38.6% 38.9% 38.3% 34.7% 35.4% 13.4% 12.2% 10.9% 8.0% 9.9% Net margin excluding property disposals and exceptional items 12.1% 12.2% 11.0% 8.7% 10.2% Profitability1 Profit before tax Revenue 12.5% 10.9% 9.6% 6.7% 9.4% Profitability excluding property disposals and exceptional items 11.2% 11.2% 9.6% 7.4% 9.7% Basic earnings per share1 Basic earnings Weighted average ordinary shares in issue 49.2p 39.1p 31.3p 17.6p 24.2p Earnings per share adjusted for property disposals and exceptional items1 Dividend per share declared in respect of the year 43.6p 22.5p 40.4p 18.3p 31.4p 14.0p 19.2p 12.1p 24.7p 11.5p Dividend cover Profit attributable to shareholders Dividend payable 2.3x 2.1x 2.2x 2.9x 2.1x Return on equity2 Profit attributable to shareholders Average equity shareholders’ funds 45.6% 46.3% 50.0% 35.1% 25.2% Retail gearing2 Retail debt + net post-retirement liability Retail debt + net post-retirement liability + retail shareholders’ funds 64.0% 59.1% 68.8% 76.2% 44.7% Retail fixed charge cover Operating profit before depreciation and operating lease charges 5.3x 5.9x 4.9x 4.1x 7.3x Fixed charges3 Net debt4 (£m) Capital expenditure5 (£m) 1 Based on continuing operations. 3,094.9 1,949.5 1,729.3 2,147.7 1,994.7 1,102.9 792.4 337.7 229.4 433.5 2 Retail shareholders’ funds for 2005 and 2006 have been restated to recognise £48.4m of additional tax assets and reserves, following the change in external interpretation of IAS 12 – ‘Income Taxes’. 3 Fixed charges are defined as net interest payable and operating leases payable. 4 Excludes accrued interest. 5 2008 includes £48.4m of goodwill. marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 99 Shareholder information A b o u t u s Ordinary shares As at 29 March 2008, there are 223,128 holders of ordinary shares whose shareholdings are analysed below. We also have a further 38,000 investors holding shares via our Corporate nominee. Size of shareholding 1 – 500 501 – 1,000 1,001 – 2,000 2,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – 1,000,000 1,000,001 – Highest Total Number of shareholders 110,900 45,179 34,569 23,065 5,848 2,907 472 188 223,128 Shareholders are further analysed as follows Type of owner Private holders Institutional and corporate holders Total Percentage of total shareholders Number of ordinary shares Percentage of ordinary shares 49.70 20.25 15.49 10.34 2.62 1.30 0.21 0.09 22,118,506 33,575,904 49,132,796 70,303,326 40,471,985 68,418,477 165,817,566 1,136,639,863 1.39 2.12 3.10 4.43 2.55 4.31 10.45 71.65 100.00 1,586,478,423 100.00 Financial calender Record date to be eligible for the final dividend 30 May 2008 AGM – Royal Festival Hall, London 9 July 2008 Final ordinary dividend for the year to 29 March 2008 to be paid 11 July 2008 Half year results to be announced 4 November 2008* Record date to be eligible for the interim dividend 14 November 2008* 212,856 10,272 223,128 95.40 4.60 334,217,456 1,252,260,967 100.00 1,586,478,423 21.07 78.93 100.00 Interim ordinary dividend to be paid 9 January 2009* *provisional dates Further information on many of the topics covered in these pages can be found under the ‘Investor’ section of our website. Shareholder vouchers We currently send a booklet of discount vouchers to our shareholders each year. At present there is no minimum holding requirement to receive these, you just need to be a shareholder at the qualifying date, which is normally the dividend record date prior to mailing. The vouchers for 2007/08 were distributed in January and were valid throughout February and March 2008. Dividends Shareholders are able to choose how they receive their dividends: (cid:129) direct to their bank account;† (cid:129) paid in foreign currencies; (cid:129) reinvested in M&S shares; or (cid:129) paid by cheque. †M&S preferred option The quickest and most efficient way to receive your dividends is to have them paid direct to your bank account. It saves waiting for funds to clear and reduces the paper and postage we use. Those selecting this payment method receive a consolidated tax voucher at their registered address each January. However, we are able to send a tax voucher with each payment if preferred. To change how you receive your dividends either log on to shareview.co.uk or contact Equiniti. Company website In July 2008 we will be launching our new corporate website. This will provide a number of interactive features and a greater wealth of information. Shareholders can be kept up-to-date with the latest news, as well as watch recordings of past AGMs and our financial results presentations. Our AGM is again being broadcast live on the internet and details of how to view this are included in the Notice of Meeting. The directors are responsible for the maintenance and integrity of the financial information on our website. This information has been prepared under relevant accounting standards and legislation. We welcome feedback on the website. Please email comments to chairman@marks-and-spencer.com Electronic communication Registering for online communication gives shareholders more control of their shareholding. The registration process is via our registrars’ secure website shareview.com. Once registered shareholders are able to: (cid:129) elect how we communicate with them; (cid:129) amend their details; (cid:129) amend the way dividends are received; and (cid:129) buy or sell shares online. This doesn’t mean shareholders can no longer receive paper copies of documents. We are able to offer a range of services and tailor communication to meet our shareholders’ needs, mailing hard copy documents to those who request them. Informed choices, aligned to new technology will reduce the amount of paper, print and postage we use. Together, we can minimise waste and our impact on the environment. For further information go to the Investor section of our website. i i n d c a t o r s K e y p e r f o r m a n c e i B u s n e s s r e v e w i i F n a n c a i l r e v e w i G o v e r n a n c e i F n a n c a i l s t a t e m e n t s i n f o r m a t i o n S h a r e h o d e r l 100 MARKS AND SPENCER GROUP PLC Shareholder information continued Electronic shareholding Shareholders can hold shares electronically in our Corporate nominee account. This: (cid:129) gives increased security for personal details; (cid:129) removes the need for a share certificate; and (cid:129) provides share dealing at competitive rates. For further information please contact our registrars, Equiniti. Half year results Our half year results will be available on our website in November 2008. Lost shareholders As announced at last year’s AGM we are taking a more pro- active approach to return unclaimed funds to shareholders who have failed to keep their details up to date. We launched a search programme with Trust Research Services (TRS), who specialise in reuniting people with their unclaimed assets. Working closely with TRS and our registrars, Equiniti, we have been able to return unclaimed dividends amounting to over £1m, and put these shareholders or beneficiaries back in touch with 2 million shares. Further information can be found on our website. Shareholder security Shareholders are advised to be wary of any unsolicited advice, offers to buy shares at a discount, or offers of free reports about the Company. Details of any share dealing facilities that the Company endorses will be included in Company mailings or on our website. More detailed information can be found at fsa.gov.uk/consumer ShareGift Shareholders with a small number of shares, the value of which makes it uneconomical to sell, may wish to consider donating them to the charity ShareGift (Registered charity no. 1052686). The Company and its shareholders are active supporters of ShareGift donating over £200,000 to date. Find out more about ShareGift at sharegift.org or by telephoning ShareGift on +44 (0)20 930 3737. American Depositary Receipts (ADRs) The Company has a Level 1 ADR programme. This enables US investors to purchase Marks & Spencer American Depository Shares (ADS) in US Dollars ‘over the counter’. Each ADS represents two ordinary shares. In February 2008 we changed our ADR sponsor from JP Morgan Chase Bank NA to Deutsche Bank Trust Company Americas. For further information, please contact Deutsche Bank email: DB@amstock.com website: adr.db.com Toll-free for callers within the US: 1 866 249 2593 For those calling outside the US: +1 (718) 921 8137 How we do business An update on Plan A, our five-year ‘eco plan’ to address key social and environmental challenges facing M&S, is available online at marksandspencer.com/annualreport08 Unsolicited mail The Company is obliged by law to make its share register publicly available should a request be received. As a consequence, some shareholders may receive unsolicited mail. To limit the amount of unsolicited received, please contact: The Mailing Preference Service (MPS) DMA House, 70 Margaret Street, London W1W 8SS Alternatively, register online at mpsonline.org.uk or call the MPS Registration line on 0845 703 4599. The mailing preference service is an independent organisation which offers a free service to the public within the UK. Registering with them will help stop most unsolicited consumer advertising material. Registered office and Head office Waterside House, 35 North Wharf Road, London W2 1NW Registered in England and Wales (No. 4256886) Telephone: +44 (0)20 7935 4422 Group Secretary and Head of Corporate Governance Graham Oakley Registrars Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA Telephone: 0845 609 0810 and outside the UK: +44 (0)121 415 7071 Further information For additional copies of the Annual report or Summary financial statements go to marksandspencer.com/annualreport08 Alternatively, call 0800 591 697 Large print and audio files can be downloaded from our website. Contact us email us at chairman@marks-and-spencer.com Customer queries: 0845 302 1234 Shareholder queries: 0845 609 0810 (outside the UK) +44 (0)121 415 7071 marksandspencer.com/annualreport08 Index A Accounting policies Acquisitions Audit Committee Auditors’ remuneration Auditors’ report Authorised share capital B B shares Balance sheet Board Bonus Borrowing facilities Brand Page 60 86 42 66 56 86 87 58, 92 32 33, 49, 53 80 10 C Capital commitments Capital expenditure Cash flow statement Chairman’s foreword Charitable donations Chief Executive’s statement Clothing Corporate governance statement Cost of sales Critical accounting estimates 88 34, 65, 98 59, 93 4 38 5 11 39 65 and judgements Customers 63 3 D Deferred tax 62, 67, 85 Depreciation 61, 65, 77 Derivatives 62, 84 Diluted earnings per share 68 Directors’ emoluments 53, 69 Directors’ interests 52, 54 Directors’ responsibilities 37 Discontinued operation 67 98 Dividend cover Dividend per share 4, 34, 35, 69, 94, 98 E Earnings per share Employees Environment Exceptional items Executive team 2, 9, 34, 68, 98 20 7, 24 33, 64, 65, 66 8 F Finance costs/income Finance leases Financial assets Financial instruments Financial liabilities Financial record Financial review Fixed charge cover Food Footfall Foreign exchange rates Page 66, 94 61, 66, 77, 80, 81, 82, 90 79 62, 82 80 96 33 98 17 3 91 G Gearing Geographic segments Going concern Goodwill Group directors’ report 98 64 38 61, 76, 86, 87 35 H Hedging reserve Home I Income statement Intangible assets International Financial Reporting Standards International retail Inventories Investment property J Joint venture K Key performance indicators Key performance measures L Like-for-like sales 87 16 57, 92 76 60 5, 8, 28, 64 58, 62 78 78, 91 2, 3 98 33 M Major shareholders Margin (gross) Marketplace Market share Minority interest Modernisation programme Mystery shopper M&S Direct M&S Money 35 2, 9, 33, 98 11 2 57, 58 24 3, 22 26 6 N Page 34, 59, 90, 98 Net debt Nomination Committee 42 Non-GAAP performance measures 64 O Occupancy costs Operating assets Operating leases Operating liabilities Operating profit 65 64 61, 66, 88 64 2, 33, 57, 64, 92 P Partnership liability Pensions Plan A Prepaid leasehold premiums Principal risks and uncertainties Property, plant and equipment Property valuation Provisions 34, 81 34, 61, 70 30 79 44 77 38 85 R Related party transactions Remuneration Committee Remuneration report Reserves Retained earnings Return on equity Revenue Risk assessment 91, 95 42, 48 48 87, 98 87, 95 98 2, 33, 57, 64 44 S Segmental information Service Share-based payments Shareholders’ equity Shareholder information Share capital Share issues Share options Simply Food Sourcing & supply chain Statement of recognised income and expense Stores Subsidiary undertakings 64 7, 22 73 87, 95 99 86, 95 36, 86 50, 54, 73 19, 24 22 57 5, 7, 24 95 T Taxation Total shareholder return Trade and other payables Trade and other receivables 62, 67, 85 52 79 79 marksandspencer.com/annualreport08 This report is printed on Revive uncoated, a 100% recycled paper made from post-consumer collected waste. Revive uncoated is manufactured to the certified environmental management system ISO 14001. Designed by Likemind www.likemindgroup.com Printed by Royle Corporate Print