Marks and Spencer Group PLC (LON:MKS) has confirmed the terms of a £601.3mln rights issue and slashed its full-year dividend to help fund a joint venture with online grocer Ocado Group plc (LON:OCDO).
In February, M&S and Ocado clinched a deal that will give the British high street retailer a home delivery service for the first time.
M&S will pay £750mln for a 50% stake in the joint venture, which will deliver the company’s grocery products from September 2020 when Ocado’s deal with Waitrose expires.
The company had previously announced plans for a £600mln cash call to support the deal.
The group will issue 325mln new ordinary shares, representing about 20% of the existing issued share capital of M&S.
Rights issue and dividend cut to bolster balance sheet, says M&S
M&S also cut its full year dividend by 25.7% to 13.9p per share.
“The board believes that, given the high operating risk the business faces, it is important to maintain a strong balance sheet and cashflow, to provide security and underpin the changes we need to make,” it explained.
M&S added that in the next four years it has substantial debt repayments due on its bond financing and a large pension obligation to fund, on top of its investment in the joint venture.
The company said it would prefer to limit dependence on bank debt financing in “uncertain times”.
“Therefore, having considered carefully other options, we believe it is appropriate to finance the joint venture by means of a rights issue and to reduce the group's annual dividend payment to a sustainable level, which we aim to grow in line with earnings over time,” M&S said.
M&S full-year profits drop
Alongside the rights issue and dividend cut announcements, M&S reported a 9.9% year-on-year drop in pre-tax profit before adjusting items to £523.2mln for the year to the end of March 2019.
Revenue fell 3% to £10.4bn with declines in both the food business and clothing and home arm.
UK food revenue dropped 0.6%, or 2.3% on a like-for-like basis. M&S blamed the decrease partly on the timing of the busy Easter shopping period. Even adjusting for Easter, food sales fell 1.5%.
In a bid to turn around food sales, M&S reduced short-term promotions and complex multi-buy offers. It has also been trying to broaden its appeal to attract a wider range of customers and expects the Ocado joint venture to increase its grocery market share.
The UK clothing and home business saw revenue drop 3.5%, in part due to the group’s store closure programme. Like-for-like revenue in the division was down 1.6%.
M&S said its clothing range remained too wide in the year, leaving it with too much stock. However, customers have responded well to the introduction of slimmer fits and more mid sizes.
In the year ahead, the company plans to pare back clothing options and range duplication, with an improvement in size ratios, a further focus on style and fashion, and investment in value.
Further store closures planned
Following persistent struggles in the clothing and home business, M&S said it plans to close a further 85 full stores and 25 Simply Food outlets in addition to the 35 full stores closed last year.
“M&S is changing faster than at any time in my career - substantial changes across the business to our processes, ranges and operations and this has constrained this year's performance, particularly in Clothing & Home,” said chief executive Steve Rowe.
“However, we remain on track with our transformation and are now well on the road to making M&S special again."
M&S saved £100mln in costs last year as part of its restructuring plan.
Store closures to dent sales in 2019/20
For the current financial year, M&S said it expects to see some improvement in trading in each of its businesses but progress is likely to be second half weighted.
The group expects net store closures to reduce food sales by 1% and clothing and home sales by 3%.
UK operating costs are estimated to decrease by up to 1%, due to continued cost efficiencies, store closures and lower depreciation.
Capital expenditure is forecast to increase to between £350mln and £400mln, largely as a result of increased investment in stores and clothing and home logistics capacity.
Shares fell 4.2% to 259p in morning trading.
M&S in permanent turnaround mode, says analyst
“Some stocks feel like they are permanently in turnaround mode and high street stalwart Marks & Spencer certainly falls into that category," said AJ Bell investment director Russ Mould.
On the rights issue being used to finance the joint venture with Ocado, Mould said it has "not proved popular" so far and necessitated the trailed cut to the full-year dividend.
"While its food arm has done well, it is not really a supermarket, and this does beg questions of how it will translate to an online delivery model which most people currently use for their weekly shop," he said.
“Still, this enduring retail brand needed to do something to remain relevant to today’s shoppers, time will tell if this was the right response.”