Marks and Spencer Analysis

An analysis of the results of

For the year ended 2nd April 2006

Report devised and prepared by

Duncan Williamson

www.duncanwil.co.uk

May, June and July 2006

3rd Edition

Marks and Spencer Analysis

Introduction

This article concerns Marks and Spencer and came about following the publication of their annual financial results.

There is nothing extraordinary about the results apart from two things!

* They were very big news in the business and ordinary press

* They have been prepared under International Financial Reporting Standards rather than under UK Financial Reporting Standards

The second point took me a little by surprise for the simple reason that it didn't seem to cause a fuss. I expected a few more explanations by accountants and analysts over the restatement of 2005's results and the potential impact on 2005 and 2006 and beyond of the application of IFRS. Of course, M&S published comparative figures for the IFRS based results for the latest year and they restated the previous year as they should.

However, I seem to be the only person who is worried or concerned or bothered in the slightest about the potential for smoke and mirrors lying behind some or all of what was revealed.

Why am I worried? Well, M&S is still trying to work its way out of a fairly tough trading period and coming at the end of the transition to IFRS I wanted to hear what analysts thought about what I was worried about.

This is the second edition of this article and the final section brings us right up to date by discussing the M&S executive bonus scheme that helps to explain why there has been no explanation by M&S over the introduction of International Financial Reporting Standards based accounting results.

Finally, I include a question from the AGM that reflects some of the concerns I raise here: I also include the official M&S answer.

Background

In 1999 the stock market valuation of Marks and Spencer was £19 billion. Today, 8th June 2006, it stands at £8.94 billion. Now, isn't that part of the reason why Philip Green was prepared to buy the company for around £9 billion? So much potential growth in the company!

In 1997 profits at M&S peaked at just over £1 billion on sales of £8 billion: something like half of the entire UK population wears M&S underwear. By 1997 half of us shopped at M&S every week.

Analysis of Marks and Spencer Interim Unaudited Accounts for the year ended 2nd April 2006

© Duncan Williamson www.duncanwil.co.uk duncan@duncanwil.co.uk

Page 2 of 20

M&S introduced refrigerated TV dinners to the UK, they were the first to sell pre packed sandwiches and, believe it or not, the first ever pre prepared chicken Kievs came from M&S. Innovators or what?

Sir Richard Greenbury was the man in charge of M&S from 1991 and he oversaw the company at its zenith and then he oversaw it slide into its darkest period ever.

The dark times, aptly named the gray times, arrived in the Autumn of 1998 when M&S started selling things that no one wanted to buy: their gray range. Profits plummeted; they budgeted for a 10% increase in overall sales growth but the company actually shrank in that period.

M&S built its business on the back of high quality, British made, value for money items. Because of the competition they faced, they began to source £2 billion of their merchandise abroad. They did it in stages but just look at the size of that purchasing budget: £2 billion, just from abroad!

Competition in general was hitting hard at this time but M&S were more conscious than anyone that to convert an idea or a need into a brand new fully functioning shop was a 5 to 8 year process. Catching up and correcting was going to take a lot of time.

Rather than pulling together, the Board started to fall apart from around 1996 and onwards.

Greenbury was due to retire in 1996 but since there was no succession strategy, they fudged the issue and appointed four, yes four, joint Managing Directors. Given the nature of the beast, it should have come as no surprise that at least one of these four people would jockey for position.

The jockey turned out to be Keith Oates, the Financial Director. After a while of jockeying, Oates made a grab for power by writing to the non executive directors on the board saying that Greenbury should be replaced as CEO by, well, himself! Greenbury was on board an aeroplane to India at the time. Greenbury dashed home to solve the problem and Oates was sacked.

Peter Salisbury was appointed as CEO to Greenbury's Chairman at the end of November 1998 and that, too, proved disastrous. Salisbury flexed his muscles. Salisbury and Greenbury just didn't get on.

In December 1999 M&S aired its first ever television advertisement: another disaster, As they chose to use a slightly too large and naked women to sell the company!

Luc Van der Velde was the next manager in the hot seat: he became known as the first man at the top who knew nothing about the merchandise that lay at the heart of the business. It didn't stop the company paying him a total of something like £3.2 million over the course of his tenureship.

Analysis of Marks and Spencer Interim Unaudited Accounts for the year ended 2nd April 2006

© Duncan Williamson www.duncanwil.co.uk duncan@duncanwil.co.uk

Page 3 of 20

Van der Velde was guilty of managing by short termism but he was credited with introducing the Per Uno and Simply Food ranges, which were successful.

Philip Green appeared as the predator in June 2004 and this is when he made his £9 billion cash bid for the entire company. He tried and tried but failed to secure the company.

Stuart Rose now appears: he became the latest man at the top: a retailer of several decades' standing, at least. Rose

* Sold the financial services subsidiary of the company

* They bought out the Per Uno range rather then franchising it