Module Name: Evaluation of future prospects CW-2

Module Code: 6AG512

Trimester: T1 2023

Student ID:

An analysis of the anticipated future performance of Marks

& Spencer

Introduction
Marks and Spencer plc (M&S) is a well-known UK retailer with a global presence that was founded in
1884. The company's guiding values are innovation, quality, value, and trust, and its goal is to become the
greenest retailer in the world. This study aims to assess the company's possibilities for success based on
internal and external factors influencing M&S's financial performance, financial status, and share price.

An evaluation of the financial results

A company's financial performance is a direct reflection of its capacity to provide revenue, earnings, and
returns for shareholders. Various ratios can be employed to assess this within the framework of M&S.
The financial performance ratios for M&S for the years 2021 and 2022 are shown in the following table,
together with the percentage change that took place between them.

Ratio % Change 2021 2022

Turnover (£ million) 18.90% 9,155 10,885
Gross profit margin (%) 8.50% 31.8 34.5
Return on equity (%) 220.50% -8.8 10.6
Operating profit to sales (%) 1866.70% -0.3 5.3
Profit before tax to sales (%) 256.50% -2.3 3.6
Profit after tax to sales (%) 227.30% -2.2 2.8
Return on capital employed (%) 1612.30% -1.3 19.66
Profit after tax to sales (%) 227.30% -2.2 2.8
Return on capital employed (%) 1612.30% -1.3 19.66
Compared to 2021, M&S's financial performance increased significantly in 2022. 18.9% growth in
turnover exceeded the industry average of 15.6% (Statista, 2021). Furthermore, the gross profit margin
increased by 8.5%, exceeding the industry average of 7.2% (Statista, 2021). Furthermore, M&S converted
negative equity returns, profitability ratios, and return on capital employed data to positive values in
2022, signifying improved productivity and earnings.

The main reasons behind M&S's enhanced financial results

M&S was badly impacted by the COVID-19 pandemic in 2021, which resulted in store closures,
employee layoffs, and higher health and safety expenses. A record loss of £201 million resulted from a
decline in the market for home and clothes goods (M&S, 2021). In response to these difficulties, M&S
enhanced the consumer experience by introducing cutting-edge items like the Per Una denim collection,
the Plant Kitchen line, and Good-move active wear. These goods expanded their consumer base, boosted
revenue, and increased market share. In addition, M&S made investments in digital channels like social
media, mobile apps, and websites to improve client loyalty and engagement. In order to improve the
company's standing and reputation, M&S also launched environmental sustainability projects such the
Plan A program, Shwopping scheme, and Sparks loyalty card (M&S, 2021).

Because of its intricate and rigid organizational structure, which makes it difficult for M&S to coordinate,
communicate, and make decisions effectively, the company suffers difficulties with organizational
management and legal compliance. Organizational simplification, manager and staff empowerment, and
the development of a performance-based culture are critical. For cost control, liability reduction, and
compliance, adherence to a variety of laws and regulations pertaining to labor, taxation, the environment,
and consumer protection is essential (M&S, 2021). M&S struggles with a high and unsustainable debt
level, which increases financial risk in terms of loan contracts and dividend policy. Refinancing and debt
repayment, combined with initiatives to raise credit scores and make financing more accessible, are
necessary to lower this risk. The dividend policy—paying dividends or holding onto earnings for future
growth—has a big impact on share price and shareholder value.

Analysis of financial position

The table evaluates M&S's financial position, based on asset, liability, and equity management, using
ratios such as current ratio (measuring liquidity), gearing ratio (measuring solvency), and long-term
liabilities (measuring financial risk). The table shows these ratios for 2021 and 2022, along with the
percentage change.

Ratio % Change 2021 2022

Current ratio 33.30% 0.69 0.92
Gearing ratio (%) -26.80% 179 131
Long-term liabilities (£ million) -10% 4,173 3,754

According to the table, M&S's financial situation has improved in 2022 compared to 2021. The
company's current ratio has increased by 33.3%, over the 0.8 industry average (Statista, 2021).
Additionally, the business has reduced its gearing ratio by 26.8%, which is less than the 150% industry
average (Statista, 2021). Additionally, the corporation has lowered its long-term obligations by 10%,
indicating a drop in both debt and financial risk.

Analysis of financial position

The rise in sales and profits has increased the company's working capital and cash flow. The increased
production of operating cash allowed for the timely payment of short-term liabilities like accruals, taxes,
and trade payables. The company maintained adequate cash reserves in addition to trade receivables,
inventories, and inventory. The improved profitability reduced the need for outside funding and raised
shareholders' equity and retained earnings (M&S, 2021).

Through operational and organizational restructuring, which included steps like store closures, workforce
reductions, and contract renegotiations, the company's costs and liabilities were successfully reduced.
While the closure of underperforming stores decreased fixed costs like rent, utilities, and maintenance, a
smaller staff translated into fewer variable costs like labor, salary, and benefits. Contract and lease
discussions resulted in a decrease in long-term liabilities, including bonds, pensions, and loans (M&S,
2021).

The corporation was able to reduce interest payments and improve its credit rating through debt
refinancing initiatives like the issuance of new bonds and shares. The funds obtained through these
measures also improved cash flow by reducing the company's gearing ratio and making it simpler to pay
down current debt. The enhanced credit rating reduced borrowing costs and increased the company's
access to finance (M&S, 2021).

Analysis of Share Price

A company's share price is a reflection of stock market performance analysis and investor outlook on
future prospects. Important ratios are included in the assessment in the case of M&S:

 The metric known as earnings per share (EPS) is used to evaluate the profitability and growth
potential of a company. It represents net income distributed to each share.
 Dividends: This figure indicates the amount of cash sent to shareholders and offers details on the
company's dividend policy and shareholder value.
 Dividend payout ratio: By showing the percentage of net income dispersed as dividends, this ratio
offers data on dividend stability and retention rate.

The table displays the M&S share price ratios for the years 2021 and 2022 along with the related
percentage changes.

Ratio % Change 2021 2022

Earnings per share (pence) 2.55% -10.1 15.7
Dividends (pence) 0% 0 0
Dividend payout ratio (%) 0% 0 0

The table shows that M&S's 2022 share price performance was better than its 2021 performance. The
company's earnings per share has increased by 255.4% as compared to the industry average of 200%
(Statista, 2021). Furthermore, the company has maintained a zero dividend policy, which means that for
the previous two years, it has not distributed any dividends to its shareholders.

Main reasons why M&S's share price performance has improved:

The COVID-19 pandemic's unfavorable effects caused the company's share price to drop by 40% in 2021.
This decline was caused by a number of causes, including declining revenue and profitability, erosion of
market share, and economic uncertainty. The negative impact of the Brexit deal on the company's supply
chain and trade with the European Union led to a low share price of 97.5 pence in October 2021 (Yahoo
Finance, 2021).

However, in 2022, the company's share price showed a notable uptick, increasing by a whopping 60%.
This upturn in financial measures was attributed to stronger liquidity and solvency as well as increased
revenues, profits, and returns. This spike was fueled by optimistic market sentiment and confidence in the
company's anticipated expansion and recovery; as a result, the share price reached its highest level since
2018 in November 2022, at 156 pence (Yahoo Finance, 2021).

The company's strategic initiatives helped to bolster its competitive position. Key initiatives including the
Ocado joint venture, British Airways alliance, and market development in India and China helped the
company increase its market share, clientele, and global reach. The implementation of several strategies
such as the transformation program, cost-cutting plan, and capital-raising plan contributed to the
simultaneous improvement of productivity, efficiency, and financial stability. Furthermore, M&S (2021)
observes that the establishment of innovation hubs, digital acceleration, and sustainability objectives
strengthened the company's commitment to innovation, distinctiveness, and reputation.

Factors Responsible for Financial Performance

Internal Factors
The size and variety of the company's operations: Marks and Spencer (M&S) is a well-known food
and apparel retailer with a loyal customer base. It struggles, nevertheless, to hold onto its market share
and profitability, particularly in the home and apparel sectors. To meet its financial goals and strategies, it
must strike a balance between product innovation, quality, and value as well as efficiently manage
expenses, productivity, and efficiency (M&S, 2021).

The condition and longevity of the resources: The size and cost of M&S's store network have an impact
on its operational flexibility, solvency, and liquidity. To optimize the use and returns of its fixed and
current assets, including cash, trade receivables, and inventories, it must manage them properly. To
increase its operational effectiveness and delivery, it must also make investments in the upkeep and
enhancement of properties like warehouses, distribution hubs, and online platforms (M&S, 2021).

The organization's compliance and structure: M&S faces challenges with an intricate and inflexible
organizational structure that impedes coordination, communication, and decision-making. It must
streamline operations, give managers and staff more authority, and promote a culture that values
performance. In order to control expenses, minimize liabilities, and guarantee compliance, it must also
abide by a number of legal requirements pertaining to labor, tax, environmental, and consumer protection
(M&S, 2021).

The policies regarding debt and dividends: Due to its excessive and unmanageable debt load, M&S is
more financially vulnerable. To lessen the load, it must refinance, pay off its debt, raise its credit score,
and gain access to financing. Additionally, it must decide whether to pay dividends or hold onto earnings
for future growth. These decisions will have a big impact on the company's share price and shareholder
value (M&S, 2021).

External Factors
Financial and economic circumstances: Economic and financial issues affecting Marks and Spencer
(M&S) include GDP growth, inflation, interest rates, exchange rates, consumer expenditure, and
confidence. These factors have an impact on the demand, sales, costs, and revenues for M&S's products
and services. The corporation must adapt to changing economic conditions and mitigate risks such as
those associated with the COVID-19 pandemic and the Brexit deal, both of which have a detrimental
influence on its performance and position (M&S, 2021).

Industry and market competition: M&S confronts fierce competition from other food and clothing
businesses who offer comparable or better products at lower rates, with more options and higher quality.
To maintain its competitive edge and market position, M&S must differentiate itself by providing
innovative, convenient, and sustainable products and services. Improving online presence, delivery, and
distribution is critical for attracting and maintaining clients, leading to increased market share and
profitability (M&S, 2021).

Customer preferences and behavior: M&S must keep up with changing client preferences and
behavior, which affects demand and sales of its products and services. Meeting online and digital
customers' expectations for convenience, variety, and customization is critical to keeping them from
switching to other brands or platforms (M&S, 2021).

Societal and environmental factors: M&S should incorporate sociological and environmental elements
such as environmental consciousness, ethical consumerism, and health and wellness trends when
promoting the brand, improving customer engagement, loyalty, and retention, and molding customer
behavior and preferences (M&S, 2021).

Conclusions and recommendations

According to the analysis, Marks and Spencer (M&S) will see significant recovery in 2022 and is headed
for future success. An emphasis on innovation, strategic objectives, and customer experience leads to
improved financials. M&S can succeed in the retail industry by using its advantages and resolving its
problems.
Industry rivalry, shifting consumer habits, and unstable economic conditions are among the difficulties.
To guarantee ongoing success:

1. Boost Market Share and Profitability in Home and Clothes:

• Provide younger consumers with trendier, more reasonably priced products.

• For ease, enhance online presence and delivery.

2. Enhance Financial Health and Operational Efficiency:

• Simplify the supply chain and organizational structure.

• Take care of debt issues to maintain financial stability.

3. Increase R&D spending to support innovation and product differentiation.

• Expand the line of own-brand goods.

• Offer incentives such as the Sparks loyalty card.

M&S can maintain growth and solidify its competitive position by strategically addressing these issues.

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