Financial Analysis Report of Marks and Spencer Group PLC 2021-2023
Financial Analysis Report of Marks and Spencer Group PLC 2021-2023
Financial Analysis Report of Marks and Spencer Group PLC 2021-2023
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EXECUTIVE SUMMARY
Marks and Spencer (M&S) plc is a major British multinational retailer with headquarters in
Paddington, London that specialises in selling clothing, beauty products, home products and
food products. It is listed on the London Stock Exchange and is a constituent of the FTSE 100
Index. M&S was founded in 1884 by Michael Marks and Thomas Spencer in Leeds. M&S
currently has 959 stores across the UK, including 615 that only sell food products, and
through its television advertising, asserts the exclusive nature and luxury of its food and
beverages. It also offers an online food delivery service through a joint venture with Ocado.
In 1998, the company became the first British retailer to make a pre-tax profit of over £1
billion and in 2023 its revenue exceeded over £11.9 Billion. (Google Finance, 2023)
The methods and policies that were used to analyse the company’s financial reports include
sources from (Marilena & Alice, 2012) for Profit and Loss Analysis, (Rashid, 2018) for Financial
Ratio Analysis and (Bhattacharyya, 2007) for Dividend Policy Review.
Various studies have considered the influence of external factors on M&S's financial
performance. Economic conditions, consumer behavior, and global events, particularly the
challenges posed by the COVID-19 pandemic, have been assessed for their impact on the
company's financial stability. From figure 11 it shows how well M&S performed during covid-
19 as their stock prices rose steadily whereas Tesco stock prices dipped heavily.
Global expansion strategies have been a focal point in analyzing M&S's financial decisions and
this has included developing local sourcing on Food with partner Al Futtaim in the Middle
East and Asia, as well as increasing the number of food products available to be shipped using
a freeze defrost model, reducing our reliance on air freight as well as joint venture
partnership with Reliance Retail in India making global expansion strategies successful.
(Marks and Spencer Group plc, 2023)
The company's performance is evaluated across various factors, including its capital
structure, profit and loss statement, balance sheet statement, profitability ratio, operational
ratio, structural ratio, and trend in the stock price chart. This report utilizes horizontal and
vertical analysis methods for the assessment.
Currently M&S have been outperforming one of their biggest rivals Tesco as explained in the
full analysis report inlcuding their net income, cash flow statement and stock price trend
throughout 2021 to 2023.
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Table of Contents
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1 Introduction
Mark and Spencer (M&S) were founded in 1884 by Michael Marks and Thomas Spencer in
Leeds. They currently have 959 stores across the UK. M&S operates as a family of businesses
each led by its own integrated management team with accountability for their divisions,
including marketing, supply chain and finance. (Marks and Spencer Group plc, 2023)
The company also provides womenswear, menswear, lingerie, kids wear, and home products;
financial services, including credit cards, payment solutions, insurances, savings, and loans;
and renewable energy services. In addition, it invests in and develops real estate properties;
operates international franchises; and provides its products online. The company also exports
its products. (Yahoo Finance, 2023)
M&S has shown great demonstration of financial stability and adaptability throughout the
three-year period despite challenges presented by a rapidly changing and competitive retail
environment, and they were able to achieve a revenue over £11.9 Billion in 2023. (FAME,
2023)
Turnover
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10
Billion (£)
0
2021 2022 2023
Turnover
Figure 1 M&S evolution of turnover over the three years from 2021-2023 (Yahoo Finance, 2023)
This report illustrates an analysis of Mark and Spencer’s financial statements, source of
finance, ratio analysis and stock price trend analysis for 3 years. As well as horizontal/vertical
trend analysis, comparison with competitors, news to be considered, and finally
recommendation based on this analysis.
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2 Literature Review
M&S is a long-established name in the retail sector and several key factors have been
explored to evaluate the company’s financial performance in this competitive landscape.
According to sources from (Rashid, 2018) which emphasizes the importance of financial
ratios in assessing a company's performance. M&S’ financial ratios, including structure,
profitability, and operational ratios, have been scrutinized to breakdown its operational
efficiency and ability to meet financial obligations as shown in figures 6, 7 and 8.
Other sources from (Marilena & Alice, 2012) state that results obtained by an enterprise
represents, for any manager, a way to measure efficiency through the profit and loss
statement and also compare it with its competitors. M&S with its industry counterparts, such
as Tesco, analysing net profit and revenue growth to provide insights into its competitive
positioning.
The dividend policy (Bhattacharyya, 2007) highlights the significance of stock prices and
dividend policies. M&S' financial decisions align with investor expectations, examining
dividend yields, stock buybacks, and overall shareholder value.
M&S stock prices have increased significantly from 2021 to 2023 as shown in figure 11.
As the business generates an improved operating performance with investment grade credit
metrics, the Board plans to restore a modest dividend to shareholders, starting with an
interim dividend. (Marks and Spencer Group plc, 2023)
Figure 2 M&S Dividend Per Share (Extract) (Marks and Spencer Group plc, 2023)
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3 Performance of Marks and Spencer
Capital structure refers to the way a company finances its operations and growth by utilizing
various forms of capital, including equity and debt. It represents the mix of these different
funding sources and how they contribute to the overall financial structure of the
organization. Capital structure is the mixture of debt and equity financing (Niu, 2008).
We can see from the figures shown below that internal funds have improved over the years
from 35.8% in 2021 to 43.7% in 2023. Although, the majority portion of the capital structure
is covered by long term debts, the business has been able to reduce it to 49.4% in 2023,
showing massive improvement in the structure over the past 3 years.
Debt financing £ £ £
Equity Financing
Based on the financial disclosures, it is evident that in 2021, 57.4% of M&S's financing is
sourced from long-term debts, with a comparatively modest 35.8% derived from
shareholders’ funds. Notably, in the subsequent period from 2022 to 2023, they have
successfully boosted shareholders’ funds by 7.9% and reducing long-term debts by 8%. This
strategic shift indicates a commendable improvement in financial efficiency over the past
three years, showing enhanced liquidity management.
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3.3 Profit & Loss Statement Vertical Analysis
TESCO
2023 (£) 2022 (£) 2021 (£)
Total Revenue 65,762,000 100% 61,344,000 100% 57,887,000 100%
Cost of Revenue 62,101,000 94.4% 56,711,000 92.4% 54,111,000 93.5%
Gross Profit 3,661,000 5.6% 4,633,000 7.6% 3,776,000 6.5%
Operating Expense 2,136,000 3.2% 2,060,000 3.4% 1,843,000 3.2%
Operating Income 1,525,000 2.3% 2,573,000 4.2% 1,933,000 3.3%
Interest Income 85,000 0.2% 9000 0.01% 15,000 0.03%
Interest Expense 647,000 0.9% 652,000 1.1% 695,000 1.2%
Pre-tax Income 1,000,000 1.6% 2,033,000 3.3% 636,000 1.1%
Tax Provision 247,000 0.4% 510,000 0.8% 104,000 0.2%
Net Income 745,000 1.1% 1,481,000 2.4% 5,954,000 10.3%
Figure 4 M&S and TESCO Vertical Analysis of Profit & Loss Statement (Extract) (Yahoo Finance, 2023)
Recorded results are noted in the Profit and Loss Account that explains how they are
obtained for each activity, and help to make decisions at management level in order to
coordinate the whole business activity. (Marilena & Alice, 2012)
M&S net income trajectory from 2021 to 2023 is notably positive, transitioning from a net
loss of £198,000 to a magnificent net profit of £363,400, representing an impressive nearly
300% increase over the three-year period. On the other hand, Tesco’s net income
significantly dropped by 87% across the 3 years. This shows how much M&S has improved
over the years which can be attributed, in part, to the growth in revenue, escalating from
£9.1 billion in 2021 to £10.8 billion in 2022, and an impressive £11.9 billion in 2023.
The remarkable increase in net income for M&S, compared to Tesco, can be attributed to a
significant distinction in their cost of revenue. Tesco's cost of revenue constitutes over 90%
of their total revenue, whereas M&S keeps it below 70%. This substantial variance allows
M&S the financial flexibility to reinvest in its operations, resulting in a higher net income and
improved cash flow. This strategic approach positions M&S favourably for sustained growth
and continued financial success.
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3.4 Financial Statement Vertical Analysis
The balance sheet is a snapshot of the firm’s assets, liabilities, and stockholders’ equity for a
particular date. (Titman, Keown, & Martin, 2021)
The analysis of financial data reveals a notable increase in cash and cash equivalents for M&S,
rising from £674,000 in 2021 to £1,067,900 in 2023, representing an approximately 58%
surge. This improvement indicates enhanced liquidity, allowing the company more control
over its liabilities and debts.
Simultaneously, there is a consistent upward trend in inventory levels. This strategic rise not
only empowers M&S to better meet market demand but also provides effective sales
management capabilities.
A noteworthy aspect is the substantial reduction in long-term liabilities. This not only signifies
commendable financial progress but also contributes significantly to the company's overall
financial strength.
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3.5 Profitability Ratios
Profitability ratios assess a company's ability to earn profits from its sales or operations,
balance sheet assets, or shareholders' equity. (Investopedia , 2024)
The improvement in return on shareholders' funds observed between 2021 and 2023
signifies that an impressive rise in revenue was able to attract a greater number of investors
and subsequently increasing funds. Additionally, the data points to successful business
strategies, contributing to higher efficiency as evidenced by the rise in return on capital
employed and total assets. This efficiency has translated into a higher net profit margin over
the three years, indicating successful market expansion initiatives.
The operating ratio is a measure of efficiency that is used by management to determine day-
to-day operational performance. (Corporate Finance Institute , 2024)
From the figures it can be deduced that operations have increased efficiency over the years
as per the net asset turnover and fixed asset turnover which has both increased by 0.43 and
0.42 respectively over the 3-year period. Furthermore, the substantial rise in interest cover
from 2021 to 2023 signifies enhanced capability to meet interest obligations through
operating profit. While there is a marginal decline in debtor turnover, the slight increase in
stock turnover suggests a positive trend in cash flow generation.
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3.7 Structure Ratios
Structure ratios are financial ratios that measure a firm’s long-term stability and
structure. (Maurya, 2020)
M&S current ratio and liquidity ratio has slightly increased overtime through 2021 to 2023
however it is still less than 1 indicating that the business may be facing difficulty meeting its
short-term liabilities. They may need to rely more on external funds. On the other hand,
gearing ratio has decreased significantly by 54% from 2021 to 2023 implying that the
business has become more financially stable by paying off long term debts and that there is
an increased equity in their capital structure.
Cash flow statement is a document that shows the money coming into and going out of a
company during a particular period. (Cambridge Dictionary , 2024)
Despite a minor dip in cash flow from operating activities between 2022 and 2023, there is
still a significant 35% rise compared to the figures in 2021. There has been a fall in net cash
flow due to a steep rise in investing activities over the 3 years. The higher expenditure relates
to opening of new stores, investment in supply chain on food infrastructure together with
spend on upgrading vehicles and higher investment in food planning systems (Marks and
Spencer Group plc, 2023).
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3.8 Cash Flow Statement Analysis (Continued)
Tesco
Figure 10 Annual Cash Flow graph of M&S and Tesco (Google Finance, 2023)
We can see from this annual cash flow graph that from 2021 to 2023 Tesco has been
struggling to generate a positive cash flow whereas M&S have accumulated a high margin of
over £400 Million in cash in 2021 and 2022.
The only reason M&S have resulted to a negative cash flow in 2023 is due to high investment
activities in the business as shown in figure 8 as they have increasing spending on
infrastructure and supply chain to improve efficiency of the business for the long term.
M&S’ acquisitions, investments and divestments were driven principally by the payment of
£102.8m relating to the acquisition of Gist, net of cash received. The business generated free
cashflow of £63.6m, resulting in a further reduction of net debt. (Marks and Spencer Group
plc, 2023)
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3.9 Analyse Stock Price Trend
Figure 11 Stock Price Chart Trend of M&S and Tesco till December 2023. (Google Finance, 2023)
In 2021, M&S demonstrated a rise in stock value, while Tesco experienced a significant drop,
suggesting M&S's resilience during the challenges posed by Covid-19 compared to Tesco's
apparent struggles.
By 2023, M&S's growth strategies yielded impressive results in 2023, marked by a substantial
valuation increase of +7.35, amounting to +GBX 18.66. In contrast, Tesco's increase was
+0.37 at +GBX 1.07. This achievement for M&S can be attributed to strategic capital
investments, emphasizing volume growth in key channels, modernised supply chain
management and structural cost reductions. (Marks and Spencer Group plc, 2023). These
initiatives not only increased their market share but also contributed to the significant surge
in stock prices from 2021 to 2023.
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4 Evaluation
Through the comprehensive analysis, it is evident that Marks and Spencer (M&S) have
exhibited consistent financial improvement in recent years, outperforming one of its primary
competitors, Tesco. This positive trajectory indicates a promising outlook for M&S, making it
a compelling choice for financial investors seeking potential growth and stability in their
portfolios. The strategic implementations have allowed M&S to grow financially and
improved their net income over the years and get in level with their biggest rivals as shown in
the stock price trend shown in figure 11.
Tesco
Figure 12 Income Statement summary of M&S and Tesco 2023 (Google Finance, 2023)
We can see from figure 12 that M&S have achieved a higher yield in not just revenue but net
income as well by +18% , whereas Tesco’s net income has dropped significantly by almost -
50% in 2023.
In addition to the notable enhancement in net profit margin, M&S has demonstrated
improved operational ratios over time, evident in Figure 7. The rising interest cover indicates
increased capability in meeting interest obligations, enhancing financial stability. Moreover,
the rise in the gearing ratio, as depicted in Figure 8, signifies M&S's ability to repay more
long-term debts. These positive trends in operational metrics contribute to a stronger
financial position, showcasing M&S as a prudent investment choice for financial investors.
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5 Other Issues
There's recent news that Ocado might take legal action against M&S if they don't make the
full payment for their online food partnership. About five years ago, Ocado and M&S signed a
deal for Ocado to sell M&S food online. M&S paid over £560 million upfront and owes an
additional £190.7 million if certain targets are achieved. However, M&S argues that Ocado
hasn't met those goals. (Jordan, 2024)
Ocado’s co- founder has also claimed that the company deserves the full payment even
though M&S may not agree. On the other hand, spokesperson for M&S argued that the
criteria for the performance payment was not met however they would still like to address
the issue in a constructive way where both parties are satisfied. (Onita, 2024)
When M&S struck a deal to buy half of the Ocado Retail joint venture in 2019, as part of its
move into the online delivery sector, it agreed to pay an initial £562m with a final payment of
£190m to be made based on whether the tie-up met certain performance targets. During
2023, Ocado failed to meet the targets that would have automatically led to the payment
being made, with accounting rules estimating that the payment should come to just £28m.
(Jordan, 2024)
However, Ocado said in its accounts that that arrangement stated that targets could be
adjusted if management had to take decisions or actions that differed from the assumptions
when the deal was struck. It said the criteria for the final payment should be revised to
consider “significant decisions and actions” taken during the Covid-19 pandemic. (Onita,
2024)
M&S Spokesman said: “M&S remains committed to the turnaround strategy for Ocado Retail
and our focus is on working with them and Ocado Group to deliver it. “On the specific issue
of the contractual contingency payment, our advice is that the financial performance of
Ocado Retail means the criteria for the performance payment was not met. “On Thursday,
the Ocado group revealed that its pre-tax loss for the year was reduced after it secured
£187m from a settlement with its Norwegian rival Auto Store after a case in the high court.
Group revenues increased by 9.9% to £2.8bn over the year, with this figure largely driven by
the company’s technology solutions business, which enjoyed 44% growth to £420.5m for the
year. (Onita, 2024)
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6 Conclusion and Recommendation
As the fund manager, I would recommend that £300,000 would be a highly beneficial
investment in M&S as they are constantly growing. Their revenue and net income have
grown with long term debts also being stabilized resulting to stock prices to go up by a huge
margin over the recent years. Their operational ratios also prove that the business has been
constantly becoming more efficient as shown in figure 7. As compared to one of their main
rivals Tesco, we can see from the figures that M&S have been outperforming them in almost
every category including net profit margin and cash flow.
M&S grocery market share increased by 3.6% outperforming all major full line supermarkets.
There was also a 40% growth in sales for casual dress in 2023 from 2022 resulting in gaining
top 3 US market share. M&S have greatly invested in modernised supply chain, accelerating
store rotation and renewal, improved digital experience for customers, and structurally
reducing costs. (Marks and Spencer Group plc, 2023)
Although they are facing some disputes with Ocado, they may be resolved as M&S aims to
constructively come to an understanding as soon as possible as stated by their spokesperson.
The ongoing dispute resolution efforts align with the company's strategic vision and indicate
a focus on maintaining fruitful business relationships.
Cost reduction measures, as part of structural changes, contribute to financial resilience. The
ongoing efforts to streamline operations and reduce costs not only optimize resource
allocation but also fortify the company's financial position. This fiscal plan is crucial for
weathering economic uncertainties and sustaining growth over the long term and to tackle
inflation in the future.
Additionally, M&S's emphasis on a modernized supply chain and the acceleration of store
rotation and renewal initiatives exemplify a forward-looking approach. The modernized
supply chain not only enhances operational efficiency but also positions them to adapt swiftly
to market fluctuations. The commitment to store rotation and renewal reflects an
understanding of the importance of a fresh and appealing retail environment, contributing to
customer satisfaction and loyalty. (Marks and Spencer Group plc, 2023)
The positive trajectory observed in M&S's financials, market share, and strategic investments,
combined with its approach to dispute resolution, gives confidence in the £300,000
investment. The long-term potential for substantial returns is underscored by M&S's
adaptability, strategic foresight, and ongoing commitment to operational excellence.
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