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Edited Transcript of MKS.L earnings conference call or presentation 6-Nov-19 9:00am GMT

Half Year 2020 Marks and Spencer Group PLC Earnings Presentation

London Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Marks and Spencer Group PLC earnings conference call or presentation Wednesday, November 6, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Archie J. Norman

Marks and Spencer Group plc - Non-Executive Chairman

* Humphrey Singer

Marks and Spencer Group plc - CFO & Executive Director

* Steve Rowe

Marks and Spencer Group plc - CEO & Executive Director

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Conference Call Participants

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* Anne Critchlow

Societe Generale Cross Asset Research - Equity Analyst

* Charlie Muir-Sands

Exane BNP Paribas, Research Division - Research Analyst

* Clive W. Black

Shore Capital Group Ltd., Research Division - Head of Research

* Geoffrey Frith Ruddell

Morgan Stanley, Research Division - MD

* Michael Benedict

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Richard B. Chamberlain

RBC Capital Markets, Research Division - MD of Consumer Retail

* Simon Bowler

Numis Securities Limited, Research Division - Analyst

* Simon William George Irwin

Crédit Suisse AG, Research Division - Director

* Tony Shiret

Whitman Howard Limited, Research Division - UK General Retail Analyst

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Presentation

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [1]

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Okay. Good morning, everybody. Great to see a pretty good gathering of people today.

In a moment, Steve is going to say a few words positioning the results. Humphrey is going to take us through the gory financial detail; hopefully, not too gory. And then Steve is going to talk about where we are in the transformation program.

When we drafted the statement and first showed it to my nonexecutive directors, the headline was "transformation beginning to bear fruit." And the non-execs said, "Not a lot of fruit in these results," so we deleted fruit and changed it to "transformation happening at pace." But I think although the results reflect, of course, the challenges we had in the early part of the year, and Steve can talk about those, what you will detect today is that there's more of a bounce in the step in the business generally. There's things happening that we haven't seen happening for years. The pace of change is greater than it's been for years. And I want you to know that I personally feel that the last 3 months has been the best 3 months not in -- necessarily in trading terms, but in terms of where we're headed as a business, certainly of my tenure over the last 24 months. So that's why you will detect today we feel we're talking about an improving situation.

Steve?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [2]

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Thank you very much, Archie.

Welcome to the Marks & Spencer interim results. It's so good to see so many familiar faces, particularly after we've just held our Investor Day at the beginning of October. Now most of you are -- as I said, are familiar with that transformation journey, but just to remind you, we are deep in that first phase of restoring the basics, part of the 3- to 5-year program to make M&S special again. And I think it's fair to say that Food is certainly on track, maybe a little bit ahead of where we thought and really at the end of that first phase, but with still more to do, but we're making up for lost time in Clothing & Home. And I said I thought we were about 18 months behind. We've worked really hard in the summer to make up that lost time and improve our trading performance. We remain focused on these key 9 work streams, which are the foundation of that first phase. You've seen already before. And frankly, we're not moving on until we complete the job. This is not a case of we finished the first phase and we're just going to flip without finishing the jobs. We are going to make sure we have made every single stone, foundation stone, right in this business. And within that, my #1 priority is quite clear. It's getting deep under the bonnet of Clothing & Home and making sure we fix it once and for all.

Now we said there's a huge amount of change. And look, the half 1 numbers are not what I want. They look pretty in many areas. Food is on track, and we've had positive like-for-like growth in both volume and revenue, in fact ahead of the top 5 and for the first time in several years. We've done a great deal of work on the range, on pricing, on getting rid of tricksy promotions and making the offer more relevant to a broader family-based customer. And importantly here we're well on the way to securing our half of the Ocado deal, and our plans to transfer our merchandise onto the site are on track. Clothing & Home, we were behind, and that shows up in the numbers of the first half. However, we'd also said to you that we were targeting our autumn launch to illustrate substantial changes in style, in fit, in how we buy. And I think you can see that, and certainly our customers are telling us that.

In terms of cost savings, in these results you'll see GBP 75 million of the cost savings in the first half, and we're well on track to deliver the GBP 350 million of cost savings we talked about last year.

So a great deal of transformation, delivery at pace, but much more to do.

I'm going to hand over to Humph to talk you through the numbers.

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Humphrey Singer, Marks and Spencer Group plc - CFO & Executive Director [3]

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Thanks, Steve. Cheers.

Yes, just a quick whisk through the numbers. Just to remind people: We are now in the glorious world of post IFRS 16, so all the numbers you now see are on that basis.

Sales and profits are down, but just to be clear, the IFRS 16 impact on the first half, we estimate, has been about GBP 7 million. So we're not running parallel sets of books. You'd probably be surprised if we were, but we estimate that the impact would have been a positive GBP 7 million. And we thought it would have been GBP 7 million better if we hadn't gone to IFRS 16. And we expect the full year effect of that to be a negative GBP 10 million, so for the analysts with their models, you might want to adjust accordingly.

Statutory profits, you can see, are up quite substantially, as the transformation charges in this period have come down versus where we were a year ago. Quite a bit of the programs are nearing completion now. Debt is down. I've shown both post and pre IFRS 16, so GBP 4.13 billion, down 3.7%. That should be down 8% if you looked at it on a -- without having capitalized the leases. And dividends, as we've previously indicated, down 40% to 3.9p when we reset that earlier in the year.

Turning to Food, a better, as Steve said, probably better than we expected, performance; strengthening in the second quarter, especially if you look on the chart where you adjust for Easter. So you can see how we transitioned from Q1 to Q2 in a positive way. And it's clear that the investments in trusted value is translating into quite strong volume growth, and Steve will cover quite a lot of that later. In terms of the effect of stores opening and closing, we opened 5 stores in the period and also had a couple of renewal stores, which again Steve will talk about later. And that was greater than the closure impact, but they're quite similar now in Food.

Gross margins were down, again as you can see on the chart. So we've continued to reduce the complex promotional investments and we've managed to take cost out. Going the other way, we've got inflationary pressures that we are experiencing, and we have invested quite substantially in price. And the net effect of those two is 20 bps down in the half.

So overall, I think, some quite encouraging results in Food.

Clothing & Home was clearly a difficult half. Sales were down 7.8%, largely driven by the like-for-like declines of 5.5% and then on top of that, obviously, some effect from store closures. Margins were down, a combination of factors, including some inflationary pressures in our sourcing costs with labor and materials in some of our overseas sourcing locations, some investments in price for customers and some action that the management took around shortening the sale period and ending up doing a deeper cut on that shorter sale period, but that was a conscious decision. Again, Steve will cover that in more detail later.

Dotcom did grow and it was ahead of the markets, but we weren't satisfied with that performance. It was a weaker market, but we would hope for more growth in the future from dotcom. We had traffic growing, but our ability to convert reduced, and basket size was down. And in part, that reflected how we attracted the traffic. So we had to do a lot more buying, as you might say, of the traffic. And we need to improve our SEO. I mean there's a lot we need to improve, but that is one particular one to call out.

So overall a difficult first half in Clothing & Home.

Operating costs, going the other way, were down over 3%, which was a good result, but there is some phasing. You'll see when I come to it later that, but our guidance for the year, whilst it has increased in terms of the level of cost saving that we expect to take, it's not as high as 3%. We've had continuing benefits from a whole host of cost programs, and that has offset the inflationary pressures that we see and the slightly negative effect from channel shift as you do grow more into the dotcom channel. Where does it come from? Kind of everywhere. As I've said before actually, we need to call out 3 areas in particular: retail, some quite substantial changes in the organization structures there and the efficiency of the retail operation and the maintenance contracts and a whole host of things going on within that stores environment. We've reduced the size of the warehouse network, closing warehouses and opening newer ones that are operating efficiently. And we've reduced and transferred support overheads in the center into the business units, and that has also created some savings.

In addition to that to call out, depreciation has been quite significantly down in that first half at around GBP 40 million. So some of that is assets coming to the end of their life. So if you go back, for those of you who have been watching this company for a while, you will know there were some really quite material CapEx investments a number of years ago, and they are now finally beginning to get to the end of their accounting life. And we did have a write-off of a systems investment in the first half a year ago, circa GBP 10 million. So I'm not expecting, we're not expecting that depreciation decline to be quite as big in the second half. It will still be down, but not as material as GBP 40 million.

So overall we're pleased with a 3.3% cost saving in the circumstances of the trading environment. Of course, that was entirely the right thing to do, but we're very mindful to make sure these programs are long-term sustainable efficiencies rather than short-term cuts.

International performance was, I would say, mixed and some of the patterns I talked about when we were last here, but India continues to be a growth market for us and we're very encouraged by the performance there. Ireland, consistent really with the U.K., had a difficult period with some difficult trading. So that's the sort of the detail behind the owned markets. In the franchise markets, a couple of things have happened to drive that sales and profit performance. One is continuing to deliver market-right pricing and getting the full year effects of those investments that we've made. We are seeing encouraging volume uplifts pretty much in all the markets where we've done that, so the long-term profitability prognosis is good, but in the short term, you are investing.

And then our partners are getting more efficient about how they manage their stock. And of course, for us supplying into them, that can create, as it has done in the first half and we expect it to continue somewhat in the second half, a reduction in our shipments to them. So retail sales continue to be, in many markets, strong, but as they get more efficient at turning their stock, we're selling less into them. That is a good thing for the system and therefore for us ultimately, to have more efficient partners.

Turning to the profit bridge that I think I will share.

So gross profit is down really in Clothing & Home, as you can see, slightly up in Food, with a significant cost saving, but not completely offsetting that gross profit position.

Just to call out 1 or 2 of the other areas of the business. So bank, a little bit down. So if you peel back the onion on that, we have had to take some reasonably significant bad debt provisions. So we're now under IFRS 9, with forward economic guidance being the mantra looking ahead to what the bank expects in terms of the economic environment and particularly with all the uncertainty around Brexit that was pretty extreme -- well, still is quite interesting, but certainly at the half year was. So we've had to take and HSBC bank has had to take some additional bad debt provisions. That will be relatively volatile as we go forward, depending on things like where we end up with Brexit. Underlying all that, how is the business trading? Actually a small core credit business that's growing a bit. So a small increase on our core credit business. So actually some of the metrics on how the business is performing are positive.

On interest, which is favorable, we had a benefit, a small benefit, from a currency swap and some improvement in the lease interest costs that we've now got in our interest number post IFRS 16. We had more cash sat on the balance sheet post the rights issue, but we did issue a new bond and we're running that for a short period of time. At the same time, there's a [400] bond that matures in the next couple of weeks. So those 2 things, the cash and the new bond, largely offset. And the upside was really from the currency swap and the lease.

Adjusting items, quite a lot smaller this half in terms of the P&L charge. It's lower, as initiatives have completed. And there's a lot of detail in the notes to the accounts about that and the future of those. Stores continues to attract charges, and as you know, that will continue into the future as we continue to roll out that store closure program. We've initiated some programs within our central support functions. We provided for those. We've got the usual charges around PPI, which of course finished finally in terms of the consumer-facing elements to it in the summer, in August, but the effects of the bank paying out on that will continue for a while yet. And we had the reversal of a provision we've previously taken on some employee-related matters that benefit us -- benefited us in this first half. So overall a relatively small charge compared to history.

Turning to CapEx. I would say, relatively low levels to where this business has ambition to invest deliberately. We need to do those investments at the right time. You've heard me say that before. We are, as I mentioned earlier, trialing some renewal store investments. When we've got those right, of course, we will start to roll some of that out. And I would expect the CapEx number in the future to rise not to excessive levels but to more, I would say, reasonable levels for their scale and size of business. We're encouraged by the test-and-learn activity we're doing in those trial stores, but it's very early and on a relatively small number of stores. And in this particular period of time, we've done less new stores than we had a year ago, just to call out that variance year-on-year.

So my cash chart has got a little bit more complicated post IFRS 16 with some more bars. I'm trying to make this clear for you, so feedback from those that are having to understand this would be welcome.

So I'm starting effectively with an adjusted [EBITDA] to take and then show cash lease payments as the next bar. So that's not how they will appear, of course, in IFRS 16. Those cash lease payments would appear both in interests and then buried somewhere in movements in net debt. I've had to adjust to the far right-hand side of the chart to get back to the reported numbers. So you can see there the decrease in lease debt that happened in the first half, a combination of paying down our obligations. So that's the GBP 90 million offset by some new lease commitments as we opened stores or renew leases, GBP 56 million going the other way. But it feels to Fraser and I as if it's clearer to -- in effect, to unwind IFRS 16 somewhat and show that cash lease payment. For those that want more detailed conversations on that, of course, afterwards, happy to do that.

Not to miss the main point really, which is whilst we've generated free cash here, it is lower than it was a year ago, a combination probably of 3 big things. One is our EBITDA numbers are obviously down quite materially year-on-year, both the operating profit, but also with depreciation moving quite materially. So that's the single biggest item. Working capital has been adverse for us this year, particularly when compared to last year. So just to unpack that a bit because there's quite a lot of timing issues in that: So last year, we started the year with a lot of clothing stock and therefore did not have to build as much stock in that first half a year ago. This year, we started more normal position, if anything, actually slightly light on stock. And that tied in some of our availability issues in the early part of the year, so we've had to build a lot more stock in clothing this year. So that's really just a reflection on an unusual half 1 last year and probably a "bigger than ideally we would have had" stock build this year because we started the year with lower stocks. On top of that -- that's one item. On top of that, we've also got just some timing issues on nonmerchandise payments to some of our suppliers, more of which landed in this half than in the half a year ago, again just timing issues. And finally, another effectively one-off issue around tax. So like everybody that pays U.K. tax. The HMRC has accelerated the pace at which they collect that tax, and that effect has landed this year. We've had 3 staged payments in this half. We only had 2 in the half 1 in the prior year. So that's really the explanation for what is that minus GBP 67 million on working capital.

After dividends, net debt is up by GBP 63 million, but actually we are down, as I said on my first chart, versus a year ago. So we overall in the longer-term context have a declining net debt position. The other thing, of course, is our first half is not the -- normally the cash-generative -- the biggest cash-generative half. We get a lot more of our money in the second half with Christmas.

And then finally from me, the guidance. We have changed 1 or 2 things here.

So just -- so the short-term really timing of the store closure program, it means that the impact has been lower. The negative impact on sales and gross profit has been lower, so I changed the guidance there to being broadly level on Food; and now minus 2%, not minus 3%, in Clothing & Home. Just to confirm: There is no change to the total plan and that continues. It's just the timing in this particular half and my projection for what will happen in the second half. Clothing & Home margin clearly was down quite materially in the first half, both the buying margin and the -- as I mentioned earlier, the deeper, shorter sale periods. We expect that to not be as adverse in the second half. We've somewhat cleared the decks in the first half, so we've -- but we have overall moved the guidance to somewhere between 25 and 75 bps down for the year.

As I mentioned earlier, cost has been a really strong thing in the first half. That will abate slightly in the second half, but overall we're now moving up the cost saving guidance from 0% to 1% to 1% to 2%. And CapEx, moved that down, to reflect what we now forecast for this particular year, to GBP 300 million to GBP 350 million. Like I say, there's a longer-term prognosis there which says we will have things that we're very happy to invest behind and will generate returns, but we'll do it when it's the right time to do it.

And with that, I will hand back over to Steve. Thank you very much.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [4]

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Thank you, Humph, for that another detailed and thorough overview of the impact of IFRS 16.

And for those of you who want more detail on the slide, please do ask Humph and Fraser.

What I want to do next is take you through the 9 priorities as we outlined in the transformation program and talk to you about what's happened in the half and what's happening next.

And we'll start with Food because Food really shows us, I think, where we can go as we start to make changes within the transformation program. It's a plan that Stuart outlined some 18 months ago, and we've been delivering consistently within that team. We've started with full and thorough category reviews; investment in price, some 400 lines in key areas again this autumn, areas that are really important for family shoppers, milk, chicken, bread, produce, core items for any weekly shop. And we've introduced fresh market specials, transforming how customers are seeing our price ranges. I mean, just to give you an example of the impact of these: We had a stack of mangos in the store at 65p. Volumes went up by sevenfold, and it's transformative to M&S. And we're working across different innovation, as of course M&S has always got special and different lines, but the innovation focus has been again on making us more relevant more often to those families. If you take the Cook With ranges we've just launched, which is about helping people and making it simpler to cook family meals; and Plant Kitchen, picking up on the trend for more vegan food. And all of those are resonating with our customers, and we've gained customers this autumn. And that's been backed up with family-based marketing campaigns. You will have seen the Britain's Got Talent campaign, where 8 million customers viewed those ads. And the Little Shop program of collectibles was picked up by more than 0.75 million customers over the summer.

We're going to continue to improve the performance in these areas. And as we look forward, we feel confident in the range development. We want to make sure those prices remain sharper, and that's one of the key factors. George outlined at the Investor Day the systematic program that we have in place to take GBP 200 million out of our COGS by 2023 to facilitate that investment. And you can see on the slide really how we break that down: We've got joint business plans with our key suppliers in place to make sure they're clear how we can build volume and how that volume can translate into efficiency and better values for our customers. We're broadening the range; and you can see how that works in our renewal stores, particularly in Clapham. We've got low market shares relatively in produce and in groceries, and that emphasis has been picked up [all in those] stores and as we broaden the ranges, again making sure the emphasis is on a broader family-based shop. Stuart often talks about protecting the magic and modernizing the rest. You can see that in our recent innovation, the best-ever ranges we've just launched, again, focused on the family, but continuing to really keep us ahead of the competition. And when we talk about Christmas, I've munched my way through quite a bit of it with the team, better values, better product. We're looking forward to a good year.

And the combination of these things, a new footprint, a broader footprint, probably gives us the opportunity to build those market shares and bring that innovation to places like ambient and frozen, where we haven't before.

In Clothing & Home, look, the market was weak, yes. There was disruption in the market, yes, but we should be really clear our performance is due to our own execution or failure to execute. There's no getting away from that. I could say that we're talking about similar conversations in the past, and we are, to a degree: too many lines, not enough depth of buy, poor availability, slow reaction to trade. And we saw that coming through, and we talked about that throughout the start of the summer and through in September. We talked, though, about the fact we're seeing better product coming through in the first collections of the new management team of Wes and Jill particularly. We've been making sure we make the most of that as we get into this autumn season.

We had a drop in margin. That was deliberate. As Fraser said, I shortened the sale in the summer, took more aggressive price cuts to clear the merchandise and make way for full-price sales. And you can see that come through in our more recent trading, and we've worked tactically to overcome poor planning processes and poor visibility of stock. I've taken immediate action with the management team and how we're trading it. We're very clear on what we've got to do to get this business back on track. Now all of that action over the summer was very tactical, but what it meant was we traded hard at the sale, cleared up summer merchandise, halved the stock into the September sale and moved into Autumn/Winter clean and with a full price proposition. And that's what's come through in our results in October.

What next? Well, continuing to reduce the options. This autumn's option count is more than 12% down on the year and it needs to be further cut, and it will be. We've put more into core merchandise, in the areas where we have #1 market shares, in denim, in cashmere, in bras, in lingerie, in Schoolwear. Our top 20 lines in every department are up over 20% on the year. And we're continuing to focus on the big areas where the customers know we offer great product and great value. The team worked really hard to improve style and fit, and you can see that coming through in the response from our customers. Our scores on every measure have improved here. And again as we focus here on more family-based customer and slightly younger customer, you can see that in the way our marketings move through. And our new launch of Per Una has a slightly fresher feel to it than before.

Tactically, we're improving our availability in every area, and we're speeding up our supply chain. By the time we get to the end of next week, there'll be 30% more deliveries going through our stores. And availability in every department is improved on last year, but particularly in Womenswear where we're seeing the benefit.

Now we've had an encouraging start to H2. One swallow doesn't make a summer. Let's be really clear. And by the way, we've been here before. And I've been here lots of times, but I am pleased with the response to the merchandise. We've gone from a position where the market was weak, but we were weaker, to a position where the market is strong, and now we're in-line. It's the swing in our performance that I'm pleased with more meeting. We've got a long way to go. This phase of autumn is really about self purchase. We're not even into the big investment purchase, coats and boots. That happens now. And then of course, we've got that Christmas gifting, but we are buying with more depth and more confidence as we move into spring and again focusing on those market-leading areas.

In terms of online, the market was flat. It's been the worst 6 months in the online market for a long time. We were marginally ahead of that, but a long way short of the progress that we'd been making up until this second half -- this first half. Now there are a number of reasons for that. The first is that we continued to drive traffic, and traffic grew by more than 8%. That's good, but we drew it not by direct traffic, but by paid search, by mobile and also by e-mail. Now the fact is that this converts to a much lower rate than direct. You can see that come through in the shape of our orders. Some of that is a market trend as people move more to shopping on mobiles and desktops and tablets, but some of it is about how we drove the traffic.

In addition to that, I have poked a bit deeper into our website. I can tell you our search engine optimization is not good enough, much more to do. We need to tidy the sites up and be clearer about how customers can get to the products they want quickly. We've introduced an internal search engine team, which we didn't have before. And we're moving fast to make the right -- make changes. In addition to that, the website was affected by the same problems in our stores: lack of availability, lack of depth in buying. That has also seen a substantial improvement as we've moved into the autumn season.

What's next? Well, some of these actions have already taken place. We've introduced Clearpay to our payments. This means that customers can stagger payments for merchandise, something that others already do. We've introduced Bloomreach as an internal search tool, which is optimizing search in every category, and this AI process learns all the time and helps customers get to the merchandise more quickly. And the work that Jeremy Pee is doing, our Chief Digital and Data Officer, in building a data lake from the many data puddles that M&S has got is progressing well. And he's in the process of reevaluating all our sparks and making sure we're ready to launch a new loyalty program at the beginning of next year. He's bringing both digital and data capabilities together to make sure we're in the right shape for the future.

In terms of where we are in terms of store rollout, the first thing is we've made solid progress here. Now we have changed the flight of our store closure program. It's marginal -- so I've got the wrong slide. The international business. We've made good progress here too. As Humph said, the retail sales here are strong, and we should recognize that. In every market, but Ireland, we're ahead of last year. Our website performance is more than 20% up. And we've continued to launch local-language websites in many countries, and we're going to launch a new one in India in the next few months. Our Indian business is really strong, growing more than 15%. And I was there literally 2 weeks ago visiting 6 of our shops, and I can tell you we really are driving the business hard. And you can see the impact of localized merchandise, local-sourced merchandise for the local population transforming how the customers think about us.

Market-right pricing is driving volume in every market, but it is bringing down the average selling price. And you can see that in our numbers, but the biggest impact on our franchise numbers was in fact the destocking that Humph talked about. Al-Futtaim, our primary partner in the Middle East, took over our Saudi business last year. They've made great progress in making sure the business is fit for the future, but that does mean centralizing stocks and bringing stock levels down. It's good for us and it's good for the partner in the long run, but it is making a difference to the numbers right now.

What's next? Well, back to India again, we're going to accelerate the growth in India, more store openings, another 13 this year; the website, I've already mentioned, which will be our own and takes us off third-party sites. And we'll be driving more local websites in every country we operate.

In terms of our supply chain, well, look, Clothing & Home made good progress on the fabric of the supply chain. I think would be fair to say. We closed 4 warehouses. We opened Welham Green, which is operating well. We've ramped up Castle Donington. We said it got through Christmas. We continued to ramp up the operation there, introducing a new mezzanine which will help us get through this Christmas peak. We still haven't got it fast enough or cost-effective enough, and that work will continue as we move into the next year. In Food, we talked to you about the Vangarde program, which is rolled out across our Barnsley depot, another 85 stores, now taking to 91 stores under this program. We're seeing improvements in speed, availability and waste, but we're still learning how to optimize it before we roll it out across the chain. And we won't do that now until we get into quarter 4.

Well, what's next here? Well, further improvements in that single-tier network. We've got to get it faster and lower cost. It's still taking too long to move merchandise through the system in both areas. And the Food program is substantial. One depot has to roll across the whole estate and then into our franchises. This is a big focus for both teams, but also a big opportunity, both in terms of revenue and the cost base.

Now in terms of the store estate, we made good progress. There were 17 closures, which was broadly on schedule. We've got greater than 20% recapture, again in line with our plans. And we started to see how we can reshape the estate with new stores and new formats. We opened our first store in a west country for more than 11 years, and that's trading well. And you've seen the new formats in Clapham and in Hempstead Valley for Food, where customer reaction has been excellent. These illustrate more of the opportunity for Food. And we'll continue to develop the format for Clothing & Home, making it more digital and more relevant to our customer base. With the Food [trials], the next stop is Hedge End, a larger format. And we'll be able to see exactly how we react on that broader range of goods. In Clothing & Home, we've got trials, which the first phase will be out before November and we'll continue with that after Christmas.

And we're going to be more active with our asset base. The team is now in place. And although there's no announcement today, I can tell you they're making good progress on what we need to do with our store estate. All of this needs careful planning, though. We won't rush it. We're going to do it properly, but there is an awful lot of work underway.

In terms of the cost savings, I'm pleased with the GBP 75 million that we achieved in half 1. This is great progress on a number of work fronts across the whole business. The scale of change here is substantial, whether it be our offices, closure of our Manchester office, our costs in London, small programs adding up to a considerable amount. We've got more efficiency coming through in stores. Sacha talked to you about the technical innovations we've got with things like Microsoft Teams, the use of Honeywells and how we're changing the way we manage stock and replenishment in store. This is making a substantial difference, and there's more of this to come. In addition, we've given store managers more access to their P&Ls than they've ever had before, making them accountable for the small details. And this is changing how they work and how they think about profit of their store.

What's going to happen next? Well, those programs continue. You can expect the same level of savings in H2, again a broad range of programs. We are well on track to achieve that GBP 350 million we talked about in a 3-year period without the impact of the store closure program.

And all of this is underpinned by the change in our culture and leadership. It's been key to delivery, and again we're making progress here. We're building out the leadership teams in every single business area. And if you took the top 100 or so people in the organization: About 40% of those are new in the last 18 months. We've slimmed down the central functions and we continue to do that. There'll be more emphasis on that in the next 6 months. And we're starting to deliver that full functional accountability in Clothing & Home and Food we've been talking about for the last year. Those teams next will have greater authority with property decisions and shaping their road map.

And of course, Ocado joins that family of accountable businesses, and the Food team working very hard to make sure that's integrated properly. The focus really is about making us a leaner operation that's focused on core business areas.

So in summary.

It's been a difficult half in Clothing & Home. We lost time, but what you can see is the possibilities of this business starting to take shape; the performance in Food; and when we get it right, the scale we can achieve in our clothing business. We've got commercial change across the business in full swing. You can see that in Food with the volume growth, and you can see it coming through in better product. We're going to trade hard in Clothing & Home, tactical changes as we start to build a program of core category management and deal with those operational issues that have bugged us for so long. And when we look at the renewal stores, I think they give us something to focus on about potential for a broader business, a different business in the future. We continue to deal with that real estate and make sure we've got a store estate that's fit for the future. And we started work on the asset base, which is so vital to us in the future.

And we're resetting the organizational culture. That will be how we behave, how we work or our cost base. I think we said it in the statement, and Archie said it right at the top: This is far-reaching change delivered at pace faster than I've ever seen in the organization, but we feel that change and transformation is starting to bite.

We'll now take your questions.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [5]

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Very good. Thank you. Before we start questions, just to mention Stuart is here, so feel free after the meeting to buttonhole him and ask him about Food. I can assure you and reliably inform you, he won't hold back.

The -- now on questions, could we just keep them succinct? And please just remind us who you are, where you hail from, anything else important we should know about you. And we'll take, we can, one question at a time. I know somebody want to have a second bite of the cherry. That's fine, but let's take one at a time because otherwise we'll forget what you asked. Yes, start in the front, and then we'll work our way through.

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Questions and Answers

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Charlie Muir-Sands, Exane BNP Paribas, Research Division - Research Analyst [1]

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It's Charlie Muir-Sands from Exane. Related to your store closure program, you made that reference to a new team making good progress in reviewing the asset base. Do you think that there's more to go for, therefore, after the 110 full-line stores that are currently part of the slate for closure? And I noted in the footnotes that the remaining budget for making the existing closures has moved from GBP 100 million up to GBP 160 million. I wonder if you could talk about what are the drivers of that.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [2]

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Okay. So the first thing is I think I've been fairly consistent now. We're closing 100, 110 stores; and this is catch-up for probably 15 years of not churning the estate. We should have been doing this on an ongoing basis. Many of our competitors do. The one thing I'm sure of is, when we finish the 110 in this program, that is not the end of the closure program, but I'd like to think about it more as a churn program. It's about making sure we build an estate that's fit for the future and we have our stores in the right shape in the right locations to service our customers. And so we'll see churn, but we'll also see openings. And you'll see that particularly in Food, but also in full-line stores. Do you want to talk about that?

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Humphrey Singer, Marks and Spencer Group plc - CFO & Executive Director [3]

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Yes. So the -- nothing really has materially changed. So actually we're saying up to GBP 680 million. IFRS 16 had the curious effect of reducing that cost of closure program and adjusting items because some of them moved elsewhere. So yes, it's up to GBP 680 million. And previously, we had GBP 100 million to go. Now we've got GBP 160 million, but it's an estimate. It will depend very much over the next couple of years exactly what we do in each of those stores. And as I say, nothing material actually has changed in our estimates.

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Charlie Muir-Sands, Exane BNP Paribas, Research Division - Research Analyst [4]

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So that GBP 160 million would have been a higher figure if we'd still been under IAS 17.

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Humphrey Singer, Marks and Spencer Group plc - CFO & Executive Director [5]

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Yes. So the GBP 680 million turned into GBP 620 million, so no, sorry, to your question. So the GBP 680 million turned into GBP 620 million. We're now saying up to GBP 680 million, but nothing material has changed in our view. And it's an estimate, anyway.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [6]

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Okay. We'll pick it up later. Yes...

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Richard B. Chamberlain, RBC Capital Markets, Research Division - MD of Consumer Retail [7]

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Richard Chamberlain, RBC. A couple for me, please. I see the Clothing buying margin was down, wasn't it, slightly in the first half presumably despite a favorable currency tailwind. And I just wondered if you can give some expectation of how you see that panning out in the second half. And the second one is just on the cost savings program. It seems to be running ahead of plan. What are the reasons for that? And should we expect -- or what's the potential for that to be extended in the future?

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Humphrey Singer, Marks and Spencer Group plc - CFO & Executive Director [8]

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Yes. So currency will be, we expect, in the second half a very modest tailwind, but it's not material. And in terms of the cost program, it's going well. We think we'll probably be about 80% done by the end of this financial year against that GBP 350 million. And I suspect it will get reset again for going for more, but that's not what we're going to talk about today. So it's going well, but there's a hell of a lot more to do.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [9]

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Okay. Clive?

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Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [10]

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Clive Black from Shore Capital. I'd like to go back to your opening comments, if I may, Archie. And you said the last 3 months or so had been the more enjoyable of your time at M&S, I think. What's the substance behind that statement, the meaning of it?

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [11]

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Well, firstly, I don't regard the purpose of my tenure at M&S necessarily to enjoy myself or enjoying myself if the business turns around. And -- but we're all here in the business of delivering change and pace. And I do -- I just do feel in the last 3 months we've seen more pace, more decisiveness we've seen after a very frustrating period in Clothing & Home watching the business progressively struggle to make progress and to reshape itself. We've seen -- with Steve now got his head under the bonnet and spanners and screwdrivers at work, we've seen stuff happening faster. And I just think that everywhere in M&S inside there's an impatience to see things move forward, and people want to see it. They've got an appetite for decisive change for right or wrong. And internally that's what it feels like. We've also got, I should mention -- Steve, we have work in progress on this, but we have got some very good people coming into the business at all levels. I mean Stuart's team is substantially new, anyway. But right across the business. And one of the things I might worry about M&S is -- given our history and given where we are, is can we still attract good people to the business. Our experience is we're getting world-class people, and they want to be part of the project. Thank you. Now are we going to get an Andy Hughes memorial question? I think we should.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [12]

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Yes, I think we should.

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Unidentified Participant, [13]

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No, I think not, [somehow], for once.

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Humphrey Singer, Marks and Spencer Group plc - CFO & Executive Director [14]

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He's not died yet, Archie.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [15]

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It's Anne Critchlow from SG...

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [16]

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We'll come back to you, [Andy].

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [17]

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You can summarize at the end.

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Unidentified Participant, [18]

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(inaudible).

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [19]

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Could you tell us, please, what happened to ASPs in the first half in Food and Clothing & Home?

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Humphrey Singer, Marks and Spencer Group plc - CFO & Executive Director [20]

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So Clothing & Home's were down about 4%. Fraser is nodding, so I've remembered that correctly.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [21]

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And we've got ASP decreases in both areas, as we sharpened value. So we've had 400 lines in Food we've taken down, really key lines. I mean that's because this is milk, chicken, bread, really key commodity lines that really are going to attract the consumer. And we sharpened up -- continued to sharpen up prices in Clothing & Home. And at the same time, I said that we're going to trade it hard. I am. And if we got merchandise which is not achieving the rate of sale I expect, I'll take the price down. And we've been doing that and trading it through the season.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [22]

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Okay. And then one more question. Are you ready yet to tell us how your operating cost base splits between Food and Clothing & Home, now that you've got separate P&Ls there?

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Humphrey Singer, Marks and Spencer Group plc - CFO & Executive Director [23]

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Short answer is no. So there is more -- there's been quite a lot of discussion and debate in the last number of months about the best way to do that, and that's still work in progress.

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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [24]

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It's Geoff Ruddell, Morgan Stanley. Can I just follow up from that about whether you would end up having a separate property division as a sort of income -- as a sort of profit center in itself? And also following on from that, is there chance -- I mean obviously you're not ready to name individual property developments yet, but is property development potentially a material source of profits or cash generation for the business over the next 4 or 5 years?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [25]

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Look, in terms of the [property view], we said what we would do is take what has been a very passive property business. We don't want to be outside of the business. We want to remember we are a retailer, but make it more assertive, make it drive harder. And we're looking at how that works best at the moment. We've got a team in place which -- a team of asset managers. They've started to look at how we use it. We are still evaluating all of the opportunities. What we do know is there's about 20 substantial opportunities within the portfolio for potential development in the future.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [26]

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Let me just comment, Geoff, on your question about to what extent is the property a separate business. I think this is a good debate to have. Many years ago when I was at Kingfisher, we -- because we had a much more substantial property base in relation to the market value of the company, we separated out and called it Chartwell Land. And I think that was the right thing to do. I would say that, but the -- it's fair to say, at the time, the market didn't give us much recognition for it. Now in our case, if you actually look at our property, we have far more liabilities than we have assets. And we shouldn't get carried away. I mean the asset base is not that large by the stance of other companies. If we separated out, we just need to bear in mind that quite a lot of that property is intrinsically related to the operating of the retail companies. And our major competitors, I mean we look at people like Tesco, Asda, Sainsbury's, et cetera, they have -- you're looking at 60% to 80% freeholds. And they don't separate out. So we just need to think about how does that set us up versus the competition. And how do you treat a lot of the properties where, particularly in Clothing & Home, the challenge in Clothing & Home is related to where they trade. We are going to change a lot of those properties. Actually if you were an independent retail business and the property side of the business wanted to develop the company or develop the store, you would look at that as a shared development. So it's not plain vanilla. That's a long-winded way of saying we're thinking about how we should treat the property best, but it's not straightforward. There will be -- so as Steve said, there will be some development. You ask whether it will release cash. In the short term, it could absorb some cash too, but that's -- it's a great question of how we do it and who we partner with and so on. We don't want -- we're not a -- we know we're not a property development company, but there's potential there.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [27]

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It's Simon Irwin from Crédit Suisse. Can you just talk about the retained sales from closed stores and particularly how they split between neighboring stores and online given the disappointing performance of the online in the full -- in first half? And given the slower growth in online across the market, do you think your long-term targets are still appropriate?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [28]

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So we're going to do that backwards. The long-term target, we think, is still -- I mean people are still talking about online clothing in the U.K. being somewhere between 29% and 40% in that time span. And we know that others, notably Next, they are somewhere in the region of 48% already, to go with the heritage of business. So we think that is achievable and is the right shape for the business to be in. Now how fast that market moves, we'll see. I mean it has flattened out for everybody over the last period. And there is a change of behavior as people shop more on mobile than they do on desktop, but I think everyone would agree, in the medium term, it's not going to change. I mean that trajectory is set.

I -- in terms of the recapture, we don't record the recapture into online from those businesses. So the recapture we talk about in this meeting is purely store-to-store recapture, which is greater than 20% which we've outlined before and is ahead marginally of where we thought it was going to be. But there's huge amount of variation now, I've got to tell you. Where we've seen our remote stores close, I can tell you it's less than 5%. You -- it's places like[Wellington]. We -- it just didn't travel, but there are others where it's been substantial. Warrington Gemini -- Warrington to Warrington Gemini, it's been substantial.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [29]

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Yes. Let's keep going.

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [30]

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Yes. Tony Shiret from Whitman Howard. Just carrying on the digital theme, this sort of cost of customer acquisition theme you're talking about. I mean, can you tell us sort of how much the cost of customer acquisition, paid-for acquisition has gone up by year-on-year? So we're sort of seeing some of this elsewhere as well. I just wonder whether it's you think it's a sort of a market-driven phenomenon, i.e., Google making it harder for SEO and forcing you into paid customer acquisitions. That's the first one. And secondly...

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [31]

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Let's hit that one. And we can [get back to you], yes.

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [32]

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Yes. Fine.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [33]

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Now, Tony, no, I mean, I haven't got the exact number with me. It's up for the year, though. I mean in double-digit terms. So I'll get you the exact number. Some of that was deliberate, though. I mean we want to make sure we are protecting where we lead. And we're compensating really for some bad search work inside of own website, I mean. So it's one of the things that Google was very clear. If you set your website up to optimize for customer search terms, you're doing well. If you don't, you don't. And there are areas where we had not done that as well as I'd like. We changed that now, but we've been, if you like, supporting that with paid search. The problem with supporting with paid search is you don't get the conversion rates, and that's why we've also been supporting it with e-mail.

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Tony Shiret, Whitman Howard Limited, Research Division - UK General Retail Analyst [34]

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And just a sort of small follow-up on that request. If you are going to hit a big percentage of your Clothing & Home sales online, could you start to provide us with some metrics in terms of online KPIs that virtual retailers provide? That would be very helpful. And sorry. The actual question was in terms of the profitability of online in terms of the relative levels of gross margin versus in-store and the OpEx and thereby profit margins of online versus in-store. Can you give us something on that?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [35]

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Well, look, we don't break that out. I mean, broadly speaking, we -- it depends how you look at the incremental nature of the online business in terms of the buying group and things like that. But what you tend to see is a lot of the customer reductions that you receive in the online business, which we do at the moment, offsets the higher cost of distribution that we have. And so it's broadly similar.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [36]

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It's not a straightforward question. Remember about 60% of our online sales are picked up in the store. So there's some complexity to how you look at the P&L, but I think we would say internally that online sales are roughly as profitable as the average of store sales, roughly speaking, and something [to that] maybe. I don't...

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [37]

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No. No. The difference is that logistics costs versus almost the estate cost. And that's where you balance them out.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [38]

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Can we come back here?

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Simon Bowler, Numis Securities Limited, Research Division - Analyst [39]

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It's Simon Bowler at Numis. Just one quick question with regards to the Food business, where obviously we saw quite a nice inflection point come through in terms of growth there. Was there any delta between the Simply Food and the full-line estate in terms of that performance, I guess, either on sales or on gross margin?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [40]

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There is some, but bear in mind that our best-performing stores tend to be our biggest stores and some of our more modern-out towns. What we are seeing, of course, is the closure program in the high streets and reduction in our performance in the high street, which affects Food's as much as it does Clothing. So there is some delta.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [41]

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Okay. Any more questions? We'll take -- let's just take one more and then we can break, yes.

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Michael Benedict, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [42]

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Michael Benedict from Berenberg. Your peers at Next have suggested that, with so much competition in the U.K. market, market share declines are inevitable for private label. Do you feel the same for M&S Clothing & Home, that is?

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [43]

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Our market share has been declining for a period, but that's largely self inflicted, in my opinion. I think what we've shown is, where we focused properly on our #1 categories, we can see growth. And we've got a record market share in bras of 37.2%. We're the #1 in jeans at 12% and growing by just over 30% this autumn. We're #1 in the U.K. for knitwear at 20%. Our cashmere is growing in Womenswear by 14% and in Menswear by 50%. So I think, when we do focus on it, we can get it right, but this is a business with an awful lot of self help. And I think there could be some recovery of those market shares in the medium term.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [44]

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Okay. Should we break that? We're all happy to stay around and have a chat.

Just to conclude. I hope you get the impression from that, that there's a lot of confidence inside the business now, which there hasn't been previously. I think stuff is happening, and you'll see that not just through this presentation, but in the weeks ahead. And what gives us -- part of what gives us that confidence is that where we've done things right. And probably we are talking in the last very few months. The demand and the customer recognition is -- I was going to say instant, but it's very rapid indeed. So there are real illustrations, particularly in Clothing & Home, obviously Food is on a faster track, but particularly in Clothing & Home where, where we've reshaped the buy, where as Steve says we've done the right thing with cashmere or whatever, you can actually see spectacular uplifts in sales. It doesn't mean we are seeing spectacular uplifts across the board, but it does illustrate what could happen if we continue to make progress.

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Steve Rowe, Marks and Spencer Group plc - CEO & Executive Director [45]

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Yes.

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Archie J. Norman, Marks and Spencer Group plc - Non-Executive Chairman [46]

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All right. Thank you.