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Good day and welcome to the M&S Quarter 3 Analysts 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.
Good morning, everyone, and a happy new year.I know it's a very full morning of reporting for you today, so we'll keep things brief.I'm joined here today by Clare Pettitt, our Group Finance Director; and David Surdeau, our Interim CFO.We're delighted -- we delivered an improved performance in Q3 across both main businesses. Despite some disappointing one-off issues, U.K. retail business returned to like-for-like growth for the first time in 3 years, reflecting the progress of our transformation strategy.In Food, we sustained momentum of H1 through the actions we've taken to drive value, accelerate innovation and broaden appeal. We've continued to outperform the market with volume growth accelerating from Q2 and a particularly strong sales performance over the Christmas period with revenue up 4%. Investment in trusted value on protein and produce through the rolling program of fresh market specials and the launch of [ remarkable ] value generated significant volume growth. However, in delivering such strong sales growth and driving a faster pace of change, waste levels were higher than we would have liked. As we've said previously, our supply chain requires improvement and we're taking action, with the Vangarde trial in York being rolled out across the estate in the coming year.In Clothing & Home, we implemented a number of actions to improve availability, style and value; and executed marketing campaigns focused on hero categories such as knitwear, sleepwear and denim. As a result, we delivered a strong start to the season. Performance across the quarter in Womenswear particularly was encouraging, delivering like-for-like growth, and we anticipate that we'll broadly have held market share. However, unprecedented discounting by competitors between Black Friday and Christmas made December a challenging month. This impacted our Gifting performance, where we're also reviewing product range and store layout. Menswear underperformed due to an imbalance in sizing and fits, impacting availability, as we introduced more contemporary fits across the range with broader appeal. In addition, there was some weakness in the formal wear category, where we have high market share, albeit as we said at the Investor Day, our focus is on shifting to a growing casual wear category.Our full year guidance remains unchanged, but we are narrowing the range on margin this morning. In Food, as I've said, waste wasn't where I wanted it to be in December. And while we are taking on -- action on this with the Vangarde logistics trial, there's more to do. In Clothing & Home, this narrowing of guidance is due to our price investment and importantly shorter sale period and a strong customer response to promotions where we've had them. However, these factors should largely be offset by our ongoing cost-saving program, which is making good progress.With that, we'd now like to take your questions. Thank you.
[Operator Instructions] We'll now take our first question over the phone from Richard Chamberlain from RBC.
Can I start then with a couple on the Food side? The Food space contribution was broadly flat for the quarter. Should we expect a similar sort of space effect on Food for the remaining part of this year and the first half of next year? That's the first one. And then can you just give a bit more color on the waste and supply chain issues in Food? I'm just trying to understand to what extent they were genuinely one-off issues. I mean, I guess, isn't it the sort of nature of the business, fresh, more fresh, top-up shop? There's always a higher risk of more waste than average when sales trends are volatile. So just wondering if you can just give a bit more color to the extent that those issues are one-off.
Yes. Sure, sure, okay. So the first thing, space-wise, broadly it's the same over that period of time you've talked about. And as we get to the end of the financial year, we'll update you more on where we're headed with the footprint change program. But broadly, as it is, yes. So that's there's no more -- the -- in terms of the Food waste, the first thing to say is we had a good -- the Christmas period was strong. We did have a 4% increase in revenue. Volume was up ahead of that, and we had deliberately pushed to make sure we gain market share in those key categories. If you remember, 1 in 4 turkeys in -- fresh turkeys in the U.K. come from M&S. We went -- we really went for it. And if I'm honest, poultry sales were up by 11% in that period. The waste was literally in the 2 -- in the weeks of Christmas. It's not a long-term conversation. It was in those 2 weeks. And it's in the categories where we really, frankly, went for it in terms of revenue and with which we bought too much. I mean let's be -- make no bones about it. We bought too much. It wasn't helped by the fact that this is a funny-shaped Christmas. And again, I'm saying this for color, not because it's an excuse, but lots of people will be talking about record trading days this year because of the shape of Christmas. It's the pattern to trade was much later than normal. And as you said, in a fresh business that does make it a little bit tricky, but that's not an excuse. Frankly, we bought a little bit too much in a few categories.
Okay, but you're confident that you can -- you've got the systems or whatever or processes in place to try and reduce that risk in future periods...
Yes -- no, we've talked to you guys before about the trial we started in York, Vangarde, which is essentially the simplification and change to our logistics program through store practice. And that's one part of an end-to-end transformation program in foods. We've still -- as we said before, we're going to deal with the logistics side of it. And we saw progress during -- of that during the quarter of last year. And we'll continue to roll that out in 2020, but I think the key thing here is that we know we've got more work to do. But the biggest issue was what we bought versus what we sold.
We'll now take our next question from Adam Cochrane from Citi.
Questions on the Clothing side. If given what you're talking about with the margin, et cetera, are you happy with how you're moving towards your full price stance and what we're hearing about Boxing Day sales and onwards being slightly weaker with footfall? Do we have to change the way that the clearance operates? Is that something that you're having to address? Is there any thoughts on what you can do differently in that? And when you talk about the gross margin being down because the -- you put -- the product, when you put it into sale, went through and sold through more quickly -- just an explanation really of the gross margin movement in general merchandise, please.
Okay. So the first thing is that there is a lot of moving parts in how consumers traded Q3. I'm pleased with the progress we made, and I'm particularly pleased in the progress we made in Womenswear, Lingerie, Kidswear. And as I said in the statement, more to do in Menswear. The issues that we saw as we got to December was broadly, from just before Black Friday all the way through December, discounting in the market was on unprecedented level both in terms of the scale of the discount and the breadth of the merchandise that was discounted. And that was the same online or in store. We said we're not going to play that. I believe in getting the price right the first time and giving the customers trusted value, not high/low. But we will look at how certain categories perform, particularly things like Gifting. In terms of how we saw customers react, we did see customers buy into discounts across the piece. And again, we will look at that, but the sale point is that -- if you remember, I said at the half year I intended to have less merchandise in sale. We did in -- such in the October sale. We did it again at Christmas, 12% less than last year. I would have liked it will be more than that, but December was soft. But we've gone on a program. We're going to continue to reduce terminal stock in the business and want shorter sales so that we can get back to a full price stance. And again I think that worked for us in October. We saw a stronger performance off the back of that, and we'll do it again now and in the next few sales. The consequence of that is in the short term. There isn't -- it's a little bit more expensive in the short term in terms of margin, and that's what we reflected in the guidance today. Over a period of time, I believe that is a right thing to do to deliver trusted value and a full price stance, as some of the others do in the market.
And just on the Menswear and the shape of the buy, when from a consumer perspective will that be resolved? Is it already [ getting by ], by the time we enter Spring/Summer? Or what's the time line for that to be put right?
Yes -- no. I mean the -- we have made some changes already for spring, though. I think it's up in the summer. We made a number of changes in how we're trading. Availability in total in Clothing was substantially higher than it was last year. And I can tell you that spring launch is again better than it was last year. We got the balance of the ratios wrong both in terms of the amount we bought in terms of styles and the changes to the amount of smalls that we bought versus mediums and larges. A large chunk of that are corrected. And as we speak, merchandise of more classic fit is arriving. I will review that in the next few weeks, as we get initial sales, to see whether we've got that back to the right number or not. But look, we are going to see some things -- as we try and become a little bit more contemporary in our styling and fit, we're going to get things slightly wrong. That's an example of it, but it's I don't believe this is a symbol of long-term issues in the Menswear category.
[Operator Instructions] We'll now take our next question from Simon Irwin from Crédit Suisse.
Two questions from me. I mean the first of which is can you just talk about retained sales in the business from closed stores, which kind of back-of-the-fag-packet maths would seem to have given -- should have given you 0.5%, 0.6% LFL. Are you seeing that? And the second is really can you just talk about the online performance? Because your season seems to have gone wrong as we neared Black Friday, and your online numbers still aren't good. So kind of what's wrong with that platform?
Yes. Okay. So I'm just -- I'm looking at Fraser to do the calculations for the retained sales. Retained sales were in line with the guidance we gave you at the half year, and we sort of -- we've not changed that at all...
No, that hasn't really changed at all, the impact of sales transfer. No, not at all.
In terms of online, one thing I just want to unpack here is that it's not just the Clothing business online. And the reason I say that is one of the big impacts on the number of our online sales this year -- this quarter was actually the furniture business. And we record sales from the summer as we deliver them, and there was a decrease in the furniture business alongside many others. And that means our Clothing performance was sort of a mid-single digits and, we think, broadly ahead of the market. However, there is still much more to do. And we are working very hard on search and on how the page loads and, again, making progress. The thing I'm most pleased with, Simon, is that, second year running, Donington didn't break; and not only did it not break. We remained in proposition for the period and a competitive proposition, which I think is good. And importantly, we achieved a record level. I mean, 3 years ago, Donington was falling over, delivering 220,000 singles a day at peak. We peaked this year at 430,000 singles. So I'm pleased with the progress there, but notwithstanding that, we have got more to do.
Fine. And can I just quickly ask about guidance? I'm slightly confused as to kind of whether you're holding guidance or whether you're saying that the Food -- the additional Food waste is on -- is in addition to existing guidance.
I'm looking to one of my learned colleagues to say these in the correct words.
So this is Clare Pettitt. So what we're saying in terms of guidance on margin: I think we have already guided in a range, and what we're telling you today is we're guiding towards the lower end of that range for gross margin.
Simon, just to build on your point about Black Friday. What I would say, and this is worth looking at, the levels of discounting in the marketplace were unprecedented. And we saw a really big spike come out of the weeks -- or before Black Friday, which carried on. And by the time -- the levels of discounting and the product that was being discounted was, I think, never seen before. And we will look at that with regards to Black Friday, but I'm really clear that this business wants to have a trusted value position and first price, right price. But it is worth noting the levels of discount in the market.
We'll now take our next question from Charlie Muir-Sands from BNP Paribas.
Just sticking with the Clothing bit, to start with. I wondered if you could comment on the full price performance or rather the measure that you gave back in October and how that performed over the period for Clothing & Home. And then secondly, you've obviously flagged less stock into sale and you've only reported up to the 28th of December, so I wondered if that meant that total sales would remain under pressure from less clearance in the fourth quarter as well.
Look. So let's just deal with the sale. I mean the key thing here is we wanted to make -- move to a full price stance quickly. I want to make sure the business, yes, is more robust in its stock position. And I've been saying for a long time we want to reduce the amount of internal stock in the business. That's something that is front and center of how I will be looking at Clothing & Home. Again, second successive sale, where we have substantially reduced the amount of stock online. Yes, there might be some short-term revenue issues in the next couple of weeks. We're not seeing that yet. However, I do want to get back to a full price stance. And we saw the benefits of that, I think, in October as customers reacting strongly to the autumn ranges. And that's something I want to continue with. In terms of how we saw the full price number moving, again I'll just want to unpack that slightly. Yes, there's a slight difference. The key impacts on last year was less reduced in the quarter, which takes it down by about 1%, just short of 1%, in terms of the like-for-like. And we've also got an issue within the Home and Gifting area. I can tell you that I'm pleased with the Clothing like-for-like in the quarter. And as I said earlier, I believe that we will have held or marginally gain market share.
Fantastic. And can you comment on whether you think the sourcing outlook for the year ahead for Clothing & Home looks benign or otherwise?
In what respect, Charlie? We've got...
Well, I mean in terms of your ability to contain cost pressures from sourcing and...
One of the things I've said to you guys before is I think we have got world-class sourcing offices. And we operate in a number of territories where we have first-class teams. We continue to look actively at movement of merchandise to make sure we offset any change in currency, labor rates, et cetera, et cetera. Yes, there will be some pressure on currency, I'm sure, but we have shown that we can mitigate those over the last couple of years. We'll take the appropriate steps as we trade through the season.
We'll now take our next question from Anne Critchlow from Societe Generale.
I've got 2. So first of all, on the operating cost savings, it sounds as if you found some extras. I just wonder where those are coming from. And then secondly, on the Vangarde model trial stores, you added a further 85, I think, in the period. Could you tell us how they are performing compared to the rest of the portfolio, whether you're seeing the same delta as before?
Sure. So first, to the operating cost savings. I mean that's within the guidance that we gave. We're pleased with the progress we're making on cost reduction. The business, I think, over the last few years has shown a strong track record in this area. And we continue to work hard at it, albeit I still believe we've got more to do. One of the pleasing things that happened in the quarter -- we're not crowing about it, but jobs ticked off my list. We came off the mainframe. 2.5-year program that's come off the IT mainframe, which makes us more agile and cheaper. And leads to savings in the cost base, which I was really pleased with. And again, the improvements we made in Donington are starting to make our operation a little bit more efficient, but we have got more to do. And we'll continue to plug away alongside the guidance that we've given you previously. In terms of the Vangarde model, we did roll out a further 85 stores, as you've said, through our Barnsley depot. The results we saw at the start of the quarter were broadly in line with the ones we'd already given you. And we are pleased with that program both in terms of these improvements to availability and waste. What we did say, though, is that broadly we switched it off for Christmas. And that's because of a very high peak that we have during the course of December. We double our market share in the 2 weeks of Christmas, and we had to make sure that we were in the right shape for that. And we go back into the Vangarde rollout in the next week or so.
We'll now take our next question from Georgina Johanan from JPMorgan.
Just 3 brief ones from me, please. Just first of all, on Gifting, can you just remind us of the sort of weighting that, that has in this quarter and how that compares to the year overall, please? Secondly, on availability in Clothing, is it possible just to put some numbers or round numbers on that for us? Is it up a few percent into spring? Or are we talking double digit, as was the case at the start of the autumn, for example? And then finally, just in Food, particularly for those of us that are sort of less familiar with the grocery market, can you perhaps just talk a little bit about any thought of competitor reaction that you're seeing for your own price reductions in known value items and the work that you're doing there? That would be really helpful, please.
Yes, okay. So I'll deal with the last one first, if that's okay. The first thing is that our program to deliver innovation, broader appeal, better value is very much based on what we're doing. The team have got us into the most competitive position we have been in the marketplace, in frankly my memory, if I'm really honest with you. At this stage, it's difficult to say that we've seen any reaction to us, but we're not really the price drivers in the market. The Aldis and Lidls are the ones that tend to drive the prices with the Big Four rather than us. And we are focused very much on making sure we have value that is representative of the goods we sell. We're not on a race to the bottom, frankly. We are about innovation. We are about great products, and that does separate us from others. So I'm pleased with the work the team have done. You should see it come through in the volume gains that the business is making and our increase in market share, but it's an internal piece of work that we're looking at, at the moment.In terms of the Gifting weighting, I haven't got the exact number in front of me. And we might [ be able to now ], but what I can tell you is that the impact of Gifting is that we were broadly level excluding the -- what we would call the gifting categories. And that change happened predominantly in December. And if you think about the impacts of things like beauty, gifts and jewelry and stuff like that, it all happens in the 5, 6 weeks to Christmas. Now that doesn't happen for the rest of the year, although they are quite important categories at Marks & Spencer around things like Mother's Day, Valentine's Day, et cetera. But let's be clear: Gifting was one thing we're seeing a change in the marketplace. No doubt we are seeing that people are definitely purchasing a value product. We're seeing people experience experiential products. And it's interesting, though. We had record sales of things like cashmere. Women's cashmere grew by around 14%. Men's cashmere was around 14% on the year. And I think that represents a shift in what people are buying. I also think that, to a degree, discounts for Black Friday and that period in December, particularly on nonclothing items, will be having an impact here. And we'll just continue to review our range and our product stance.
We'll now take our next question from Greg Lawless from Shore Capital.
It's the short, fat one, I'm afraid. It's Clive. A couple of -- short and fat one, and couldn't get into your skinny-line jeans. A couple questions, if I may, just briefly at the end of a busy morning. Firstly, can you give us some indication about your Food trials, Clapham and 1 or 2 other places, Abbey Centre, are going? And secondly, with respect to the estate, maybe just update us on any activity that took place around closures in Q3; and what you anticipate in terms of store closures, concepts and asset management for the remainder of the financial year, please?
Okay. Let me deal with that Food trial thing. We are pleased with what we're seeing in the Food trials. I think Stuart describes them as moving from 5 out of 10 to about 7 out of 10. We are still evaluating them, but the results, particularly from Hedge and from Clapham and the Abbey Centre, we're pleased with. And we will continue to look at those over the next few weeks and months before we start to roll it out. What I can tell you is the customer reaction has been very strong, particularly in areas like produce, where we want to become broader in our appeal. And so they seem to be doing what we want -- we're not in a position where we're going to rush these, Clive. We want to make sure there's a proper evaluation. You know and I know M&S has a bad history of calling things winning and particularly when it comes to capital spend and going away and spending a lot of money badly. I have no intention of doing that. We want to make sure we've got it absolutely right before we push this rollout and make sure that it can pay back and -- but I'm pleased so far with the results.In terms of the closure program and the footprint, we did have some movement in Q3 but quite limited in terms of opening stores, one high street store closure. We don't tend to do them during Q3. The update on future closures, we'll do in due course. We have to also be careful about consultation processes here, but the principle that we are moving ahead as we've said before and continue to close out the old part of the estate so that we can modernize the rest and make it digital, is still on track. And we will be adding to the number of closures during the course of this -- of the next financial year.
Sorry, Steve. When you say adding, is that seeing through the...
Yes, you're right, Clive. Sorry. Adding to that progressive, i.e., it's completing, finishing the existing -- continue to finish the existing program.
[Operator Instructions] We'll now take our next question from Geoff Lowery from Redburn.
Switching focus slightly. Could you just talk a bit more about International; and trying to help us understand the interplay of some quite specific end market issues, currency, presumably some of the improved product from Womenswear starting to flow into International as well? Can you help us understand what's happening there and how we think about top and bottom line developments?
Yes. Okay, this is I might ask the guys to give you a call on this with a little bit more detail. There is a lot to unpack here, but to give you a flavor of it: We continue to be pleased with the progress we're making, where we have implemented market-right pricing across the estate. And the reaction to that in the markets we trade is good. India continues to grow in-line or slightly ahead of where we wanted it to be, which is good. And then reaction to our new footprint there is also good. The -- broadly, the rest of it is in the right shape, except for a couple of areas. And we've got trading difficulties, pretty much in line with the U.K., in Ireland; and we continue to work quite hard there. That's slightly below where we wanted it to be. Hong Kong has given us some issues in terms of the disruption. And we didn't see much happen before about July, but I've got to tell you, in the last few months, Hong Kong has been a little bit painful. And then of course, just to help us out: The French went on strike quite a few times over Christmas. So we've got volatility largely due to the sort of socioeconomic factors in International, but the fact is we're broadly, in total, in line with where we said we're going to be. And I think, as we shape up next year, some of those things, we hope, will drift away. And where we've taken action to develop the format, make stock more relevant to the local markets, and prices sharper, we're getting good results.
It appears there are no further questions at this time. Mr. Rowe, I would like to turn the conference back over to yourself for any additional or closing remarks.
Thank you very much indeed. Look, we have delivered an improved performance in Q3 across both the main businesses, and I'm pleased with that. We continued to make progress with the transformation on key projects. However, there were some disappointing one-off issues in the U.K. retail business, and we'll address those. The team are around all day, should you wish to have any further queries. And I look forward to speaking to you soon.Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.