Marks & Spencer's (MAKSY) CEO Steve Rowe on Q1 2017/18 Trading Statement Conference Call (Transcript)

Marks & Spencer Group Plc (OTCQX:MAKSY) Q1 2017/18 Trading Statement Conference Call July 11, 2017 3:00 AM ET

Executives

Steve Rowe - CEO

Helen Weir - CFO

Analysts

Jonathan Pritchard - Peel Hunt

Charlie Muir-Sands - Deutsche Bank

Anne Critchlow - Societe Generale

Richard Chamberlain - RBC

Simon Irwin - Credit Suisse

Michelle Wilson - Berenberg

Andy Hughes - UBS

Mike Dennis - Lazarus

Operator

Morning ladies and gentlemen, and welcome to the M&S Q1 Trading Statement Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Steve Rowe. Please go ahead, sir.

Steve Rowe

Good morning, all. Thank you, Barbara, and welcome to the Analyst Media Call for our Q1 trading statement. Because of our packed day today, we need to keep the call to around 30 minutes. Helen is with me and we’ll take your questions following a brief overview. However, if there is anything outstanding after the call, the analyst statement and press team are available and of course happy to take your calls.

Trading in the quarter 1 was in line with our expectations and we were on track with the delivery of the plan we announced last year. Group revenue was up by 2.7%. Clothing and home sales were down 0.5% and minus 1.2 on a like-for-like basis. This was consistent with our strategy concentrating on full price sales which were up by 7% and reducing promotions. We had 27 fewer promotions in Q1 and there was no clearance sale in the quarter compared with Q1 last year.

Food sales grew by 4.5% and like-for-like sales were down by 0.1. New stores continue to perform ahead of expectations, and we’re prioritizing better ranging and stronger promotions as we move forward. International sales increased by 3.8% and we’ve now closed 28 of the 53 stores in markets we’re exiting and retained owned and franchised revenue grew by 9.4%.

Helen and I are now happy to take your questions. Thank you.

Question-And-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question today from Jonathan Pritchard from Peel Hunt. Please go ahead.

Jonathan Pritchard

Good morning, Steve. Two for me. Hi, there. You quoted this morning, Steve. You said, you’re delighted where you are on clothing. Could you just let us know which bit of it you’re very pleased with, you’re delighted with and which areas need a bit more work? And then on food, I think again 2% inflation probably in the mix, so that’s not insignificant sort of volume loss. I don’t think that’s quite where most people were in terms of forecasting. It just feels -- am I bit harsh to suggest that’s not terribly inspiring?

Steve Rowe

Okay, so let’s do with the non-inspiring bit first. I think it would be fair to say that first of all, overall, we’re in line with where we thought we’re going to be in terms of our expectations. We have got some cannibalization at this stage, you know, stay from new stores opening. And if they finish, you’ve also got some upside from year two openings. So broadly speaking, they net out what. We’ve got -- what we've done though is maintained a balance between promotion and pricing. And that’s something, we’ll look at very careful in the context of quite competitive market as we move forward.

So, we’ll be keeping a careful watch on that, but is in line with our expectations and is in line with a longer term strategy. And I think in clothing and home, you've used the word delight. I’m pleased with the progress, but let's be clear there is more to do, Jonathan. We saw full price increases again which is consistent with Q3 and Q4. We’ve continued to grow full price market share for volume market share and we’ve also continued with market share gains in store format. The dotcom number 5.8% was slightly behind the market based on the removable of promotions which were waiting in that direction.

In terms of where we sit across the BUs, every BU made full price progress, and all BUs this stage were ahead of the market on a full price basis. And we’ve got good growth in the categories we had expected. So, areas where we concentrated and on things like fit, like bras, we've just gone through 35% market share on bras and areas where we moved our essential, opening price points and things like Polo shirts, T-shirts, and then some of the contemporary items in women’s wear we’ve got absolutely right with off-the-shoulder tops, bottom tops that sort of things. So, we’re pleased, but more to do.

Operator

Thank you. Our next question comes from Charlie Muir-Sands from Deutsche Bank. Please go ahead.

Charlie Muir-Sands

Good morning. Firstly, I just wanted to clarify your comment about promotion in food. You're saying that you were less promotional in this quarter but then you might be increasing your promotions going forward again in response to that dip in volume. And then secondly, on the wires you’ve sort of quoted as saying that you’re anticipating clothing like-for-like sales returning to growth in the second half. I just wonder what kind of phasing we should be thinking about because there is still going to be taking sales out of Q2 clearance activity, that is. Thanks.

Steve Rowe

Okay. So, let just on the wires alone, what I actually said was that, I would expect us to move further towards like-for-like growth, later in the year as we start to come out of the balance of promotional stance last year. We’ve got and that we’ve taken one stand out issue which was worth about two points. We’ve got another sale that we’re taking out in August, which in next quarter is also going to worth about that number, but we’ve got more to do. And there are promotions in Q3 that I still want to exit as a couple of online ones we’re -- where we tested -- done since last year. There is some gifting promotions that I want to do with, but what I’m expecting to see is the trajectory of full price sales will continue, that’s the way we’re playing it.

And I would like to just move closer to like-for-like gains as we get more like-for-like in our history.

So, I think that’s really where we’re saying, and all that of course is dependent that’s be clear on the market and economy which is quite volatile at the moment. In terms of promotion in foods, yes, we’ve got to get the balance right between pricing and promotions in a competitive market. And I think probably, if I was -- I’m critical of our sales this quarter, I think in a couple of areas we’ve not been sharpening up on our promotions in that market. And we’re just keeping a very close on it. But overall, our trajectory on foods remains the same. We’re pleased with the 70 food store opening and the way that we’re trading them.

Charlie Muir-Sands

But were you less or more promotional in Q1 in food?

Steve Rowe

Yes, we were less promotional in Q1. And I think we probably should have been a little bit more promotional in the competitive market we were in.

Operator

[Operator Instruction] We will take our next question from Anne Critchlow from Societe Generale. Please go ahead.

Anne Critchlow

In food, you say -- hi, there. You say you’re improving your ranging. What are the issues that you have with that at the moment? And what you're expecting to see with that?

Steve Rowe

Yes. Again and I think this is one where the team moved in the right direction in principle that we chased down a little bit waste where we should we’ve been wasting the part. I think in a few stores, we are able to simplify the range and we’re just making sure we get that range sharp as we move forward. And I think we just want to make sure we get the balance right and all these promotions times, waste times, capital times availability to make sure that we’re in the right shape of customers. But they are execution of things I think we can concentrate on with the team.

Anne Critchlow

Thanks very much. And then just a quick follow-up on the cannibalization, you said, it's netting off with the benefit from the year two openings. But are we talking about whole percentage points there, like a couple of percent?

Helen Weir

No, no, it's nothing. It’s not as much, it probably about three quarters, so it's about 0.7 something like that. As I said, the two between net offs, so you’ve got the obviously cannibalization when we open new stores is a little bit ahead of what we expect because of the performance of the stores is ahead of what we expected. So, that’s not a surprise. And then you’ve got the maturity curve coming through, we got super growth on the new stores and as we’ve said the two are broadly offsetting.

Operator

Thank you. Our next question comes from Richard Chamberlain from RBC. Please go ahead.

Richard Chamberlain

I just wanted to one on -- hi, good morning. One on clothing, one on food, please. So, Steve just the full price closing out 7%, just wondering if you can put that into context a little bit, I mean how much of the range now is seen lower prices versus a year ago? And then food, it sounds like you’re working on improving the ranging in store. I wonder if you can give just a little bit more color on that. Is that still sort of systems driven with space range display or is this that something else going on there, so just a bit more color on ranging in food please?

Steve Rowe

Yes. Sure. Okay, so clothing and home, the pricing we’ve not quite anniversaried yet the major change that we did in September last year, we’ve got plenty of that. So, we’re still seeing principally that we’ve got about 2.5, 2,700 lines reduced in price by around 18%. And having said that, I am going to ask Helen in a minute to talk about the achieved prices because there's some interesting things in achieved prices on clothing and home, but we’ve still got that in the mix. And frankly, we’re not -- and I said you before, we don’t intend to move our pricing position in the market. We've worked really hard to become competitive. We are managing to maintain our margin in terms of the guidance we’ve gave by efficiencies and lower reductions and that’s the position we’re going to take at this stage. So absolutely on track with pricing and no major changes expected.

In terms of food, I think in a couple of areas, I’ll be giving example, I think in terms of things like pricing. I think we can’t back a little bit hard in terms of some waste lines in stores, I think it left us with a suboptimal range in some stores, if I am honest. And I want to make sure we get the balance right between that waste and availability and ranging. And is that micro level of detail, but, yes, we got to go through with the team to make sure we got it right on a store-by-store basis. So, it’s not a systems-led team of course, but what we will do, use the systems we’ve got, which we’re exploiting quite well over the last few years, SRD and the acute availability system to make sure we get the shape right. But, yes, so this is micro stuff here. Helen, do you want to talk about the price mix?

Helen Weir

Yes. Just in terms of the price mix. I mean we haven’t quite, excuse me fully annualized the investment and price. So on a like-for-like basis, our prices are down about 3%, still year-on-year. However, particularly, because we didn’t have a sale in the quarter, they achieved prices up by about 3%. So, full price volumes like-for-like down about 2%, but because of the absence of the sale overall achieved price up by about 3.

Operator

There are no further questions left in the queue at this time. [Operator Instructions] We will take our next question from Pradeep Pratti from Credit Suisse. Please go ahead.

Simon Irwin

Hi, it’s actually Simon Irwin here. No one’s asked about the international business, which I guess is still quite material. Can you just give us a bit of color on that and whether there are any changes around exit plans and costs and things like that?

Steve Rowe

Obviously, I'll try to take the first one and then Helen can take the second. I mean as I said in May prelims, the teams done a great job. We remain on track with our closure program. We finished with our consultation in all markets and the closure program is commencing as we speak. We’ve closed out, as I said now the 28 stores. We will start our closure programs in sort of Western Europe and progress those through and will be complete on track, I would expect around the end of October-November. So Helen, do you want to talk about?

Helen Weir

Absolutely, I mean, in terms of overall costs, we’re tracking in line with our expectations that might be a little bit lower, but we still got a few leases that we have to go on negotiation on. So, I would that moment sort of things that the estimate that we've given is the best. Obviously, performance of our own retained and franchised stores is up 1.5%. So, we’re seeing good performance as Steve said coming in from that.

Simon Irwin

And just around that area. I mean, which markets are good or otherwise within the retained business?

Helen Weir

Yes. We’re seeing, I mean, we continue to see strong growth in India. I mean, the stores in India are quite small, if you compare them with the UK store. But we're seeing double-digit growth coming through. In some say, some of it is a result of new openings, but actually we're also getting double-digit just like-for-like coming through there, so the stores start small, but they grow big, overall and over a longer period of time. So, India is working well for us. We’ve also seen a slight improvement comeback in Hong Kong, which has been a difficult market for some time.

You’ll be aware with the reduction in Mainland tourists going over to Hong Kong. But we’re seeing good growth coming through there in part also because we’ve expanded our chilled food offer. So, we’ve seen strong growth coming through there and what’s interesting, I was hearing yesterday, I think we've recently started shipping bacon over to Hong Kong, and we’ve done a 1,000 packs a week and stuff like that. So, what we found is quite a strong market is we’re able to expand our chilled food offer in Hong Kong. So, those are probably the two markets I'd call out is being to give a little bit of color to where we've got some of the strongest performance.

Simon Irwin

Okay. And without asking you for any kind of guidance for next year, but as you kind of presumably buying now for spring summer next year. Are you still finding that there is potential to get lower, if low pricing year-on-year to offset the dollar? Or is it becoming increasingly difficult to kind of carve out as buying gains -- sorry, with the pound, obviously?

Steve Rowe

Yes, and without giving any guidance whatsoever. But we’ve said that we will continue to seek efficiencies in our supply chain that we will continue to source appropriately and make the most of our buying efficiencies. I've said to you before, we're going to see those in all of those offices now. And I am clear, the capability that we’re building in those buying offices are strong. What we’re able to do is to quite agile about where we’re sourcing from, so we actually got the dollar coming through with opportunities this autumn, for example, because the tariff rate from Sri Lanka comes down by 7%. And so, we’ve got to balance out where we’re sourcing things from.

What I’ve seen this year is a bit of movement, we’ve seen a bit of movement into lower cost places, which is again while I’ve said we’re going to do. We put a little bit more into Bangladesh and put a little bit less into China, and we’ll continue to play that game as we trade forward. So, at the moment, I feel that again our trajectory of being able to maintain our price -- competitive prices in the market without causing a lot of inflation on.

Operator

Thank you. Our next question comes from Michelle Wilson from Berenberg. Please go ahead.

Michelle Wilson

Just a couple of quick ones for me. First of all, you mentioned the volatile economic environment at the moment. Do you have any more detail on what shoppers are telling you from your shopper surveys around consumer confidence? And then just a question on the food performance, is there any difference in performance between your Simply Food stores and the mixed use stores on the food side?

Steve Rowe

I’ll try to take the first one and maybe Helen can take the shape of chain conversation. The economic thing, the customer is quite volatile and what do I mean by that, they are shopping very much for today they quite lied at the moment. And to give you an idea without getting too granular, we’re seeing fluctuations on a weekly basis in departments like men's knitwear from sort of plus 50 to minus 20 on a weekly basis, depending on weathers. So, they’re really are shopping for today.

In terms of how they feel, our surveys are not dissimilar to the GfK one. And the consumer confidence overall, how they feel about themselves, is actually reasonably robust albeit it came down by about 5 or 6% over the last few weeks. I think the key thing about that is we’ll have to see how that pans out when we get back from the summer and the summer holidays.

In terms of how they feel about the economic environment though, they still feel less robust about that as we move forward. And again that came down by about 4% or 5% in the last survey and we’ll keep a careful eye. But the key thing is, we’ve got self help story and what we continue to do is trade the business in the right way to set us with a sustainable foundation for growth in the future and that means making sure we’ve got the right prices and the merchandizing and the right availability and the right environment in store. We’re sticking to that at the moment.

Helen Weir

Let me pick up, you’re taking about the shape of the chain and the performance as far as food is concerned. I think I mean typically we look at Simply Food full line and which is the mixed used and also franchised. Actually over the last period, we’ve seen a strong performance come through on franchise. In part of because we've reopened the store in Waterloo Station which is a very important store for us with a lot of volumes. So that’s one of the things that’s driving that, also we’ve had more franchise openings, so that we’ve got more stores in the maturity. But they tend to be the fastest growing.

Our Simply Foods tend to be in the middle simply because they tend to be more newer stores and the full line mix you tend to have a slightly below average sales growth in part because they tend to be the older store and therefore the ones that are more cannibalized. But even within the full line, we get a bit of a mix because retail part tend to grow or grow more quickly than the older high street stores. So, there is not -- we’re not seeing significant changes in shape, I would say. You’ll see Simply Food and franchise growing faster simply because they tend to have more maturity growth coming through and also less deflection generally.

Operator

Thank you. Our next question comes from Andy Hughes from UBS. Please go ahead.

Andy Hughes

I had a question on your comments on terminals stock being significantly down. Where are we now in terms of the long-term average? Are we still above that? Are there still plenty more to do? And point of the question is really you know is there enough stock? Is there enough weight of sales stock to keep the customer interested or could you actually start to impact on footfall over those month?

Steve Rowe

So, just to give you view, we came down obviously in Q3, Q4 was 22% down, I’m estimating that will be around 17% down of sales over this spring, summer period. But it means and because you’ve got only one summer sales, this summer sales we’re just having which started today is about 6% up from the year on a one single sale basis, but the total season terminal stock is well down. And so what we’re seeing, and I think Helen alluded to this when we met in May is that low, we’ve got less sales in the period, when we do have one, we’ve enough stock in the mix and the nice little spike in terms of our trading and promotional mix. I don’t think we talk about how that were last time Helen?

Helen Weir

Yes. No, that’s exactly right, I mean in -- March and it helped with the clothing and home margin, if you remember at the year end. The sales we did in March, we actually saw better sales through and we had lower markdown than we had expected. So, what we are seeing is fewer sales, but the customer response is greater. We’re not sort of seeing any lack of interest there. If I think about, obviously we had no sales in Q1, though the level of pent up demand, as Steve said, the sales therefore the stock would now going into the July sales is up. But if you look at April plus July last year versus July this year, it’s overall down up to 17%.

And as I look forward to the rest of the Q2, last year, we had an August sale, we won’t be having one this year, but we’ll have a bigger September sale. So, yes the total quantity of residual stock that goes into the sales is less, but because we’ve got fewer sales, if you remember we had nine, two years ago, we’re now going to be running with four. Each of the sale events in and off themselves is actually as big, if not larger than some of the ones we had previously.

Andy Hughes

Okay, interesting. And so, the mechanics of that, if early phase stock doesn’t sell well instead of just clearing it on the floor of the store, you actually ship it back to DC and then bring it out again. Is that how it works now?

Steve Rowe

No, not necessarily. In the nicest positive way out, there is any elasticity of price conversation, we’ll have a look at what is the price mix within it and we’ll take our choices. I mean in the nicest way we trade in the business. And if I look this, we get the odd line that doesn’t work and we'll wait it will. I’ll just nudge it down in price, but what we’re not doing is blanket promotions where we had 20% of knit wear or 20%, if I can take one line down by couple of pounds to save us the movement of stock around the business and that’s what we do. And we don’t do it, if we don’t -- we don’t have to take 50% of it, which is what you have to do when you put something into a sale.

Andy Hughes

Right.

Helen Weir

Yes. So, we try and trade it through during the season albeit maybe mark it down a bit during the season to nudge the prices, as Steve said. What we don’t do is, we don’t uplift stock and take it back to the DC and then ship it out again. That just isn’t the economic.

Andy Hughes

Yes. Yes. Okay. And just one last follow-up on line in the food, I think your phrase was it was something like tiny, tiny trial. I think you said at the prelims. Is that trial got tiny a bit bigger since time as in Whole Foods?

Steve Rowe

Not at all, I mean in a nice and positive way, we concentrate in our business. So, we actually said very, very, very small and it's still very, very, very small. But again on schedule, the team has done a good job in comparing where we are and we’re going all the [near-term] as I mentioned and we’re looking at and analyzing very carefully.

Helen Weir

But, it's very, very, very, very small. Okay. Thanks, Andy.

Andy Hughes

There’s another very in there, isn’t it?

Helen Weir

That was even smaller --.

Operator

Thank you. Our next question comes from Mike Dennis from Lazarus. Please go ahead.

Mike Dennis

I’ve got three questions. First one is on home. Could you talk a bit about that growth rate and what the participation now is within the 852 million? The second one on sparks, what happened this quarter in terms of customer recruitment? And lastly, it seems previously under all the other quarters as you talked about basics and items like bras where you’ve got 35% market share and you sort of said the pricing we’re doing, wouldn’t really affect these categories because we’ve got such a large market share and yet it seems. Those are the exact categories where you’ve grown lots of market share. So, I was wondering, are there any other areas in your business like that? And also, are there other areas where you’d want them to grow in that direction that you’ll sort of disappointed where you would like to see more market share? Thank you.

Steve Rowe

Okay. So I am going to do those questions backwards, if that’s all right. In terms of where we’re growing, there are number of things that have driven that. In some areas, I think the opening price points is some of more basic items T-shirts, Chinos, Polo-shirts, I think it would be fair to say that we’ve driven by price point and that couldn’t be mixed as continued to improve, which is what expected. I think the other areas in things like bras, the real driver there has been the focus we’ve had on servicing stores and fit as well as of course [in both places and the product] price. And so, we got a combination of different things driving the sales in those areas.

So, we’re clear, there is always more to do and there are individual in the business that I would like to see move faster. I think and we’ve got to this work on dress range, for example. I think we need to do a bit more work on some men's casual wear, as I said at the end of the year. I think, we also going to continue to focus on fit and tailoring. But I’m pleased with where we are today and we are sort of on track with the improvement, I wanted in those places. In terms of Sparks, we’ll continue to recruit customers to Sparks throughout the quarter, I think we’ve just got to about 6 million now and we’re continuing to evolve proposition. And again, more of that promotional spend will be going that way much more targeted to customers in terms of building lifetime value with this. And then the home growth, Helen, we don’t break that out?

Helen Weir

We don’t break it out, I think it’s broadly around about 10% of the total, but I think you want to mean, the participation is around about 10% of the total, continues to perform well.

Mike Dennis

Right, so, home is improved there because previously it was around 9%?

Helen Weir

I said there was around about 10%, I think 9% then it's around about 7%. It probably is -- it's probably around about 9% as well.

Steve Rowe

Yes. And then lastly, we said the home is one of the things we’re looking as an opportunity, it’s an area where we have relatively low market share. And so I think, if you look -- we’re looking very carefully at the opportunities within home in areas like bedding, bathroom, and kitchens, which play right to our strength. And I guess that we didn’t that mix you is -- is relatively small. Helen said, 9% to 10%.

Helen Weir

It's benefited in the quarter because we have the Easter home event, which obviously fell in Q1. So, it takes a slightly greater proportion in Q1 and in the other quarters. And they continue to perform well, as Steve said, it's one of our areas to focus going forward.

Operator

Appears there are no further questions left in the queue. I’ll hand the conference back over to your host for any additional or closing remarks.

Steve Rowe

Thank you very much, Barbara. Thank you all for taking part in the call. I think in summary look, we’re on track with where we thought we’re going to be with the plans that we laid out last year. I’m pleased to say the customer reactions in Clothing & Homeware, and our growth strategy in Simply Food continues to be on track. But we’re not complacent about this. There is more to do. We’ve got another sale to come out in the next quarter and more promotions to come out and the market remains volatile and competitive, but this is a self-help story. And our guidance remains unchanged. Thank you very much.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation. You may now disconnect.