Good day and welcome to the Marks & Spencer Analyst Call. This meeting is being recorded. At this time, I'd like to hand the call over to Archie Norman. Please go ahead, sir.
Good morning, everybody, and welcome to our M&S 2025 results call. Stuart is going to lead this session, and he has a few words to say by way of introduction. This is a particularly important occasion because, of course, it is Jeremy Townsend's last results call with us. Jeremy has been brilliant over the years in answering all your questions very lucidly and obfuscating where necessary. Stuart, we want to give him a chance. Alison is also here, poised to take over. Just a quick thing on when we get to the questions. It is not that we are bored by cyber, of course, we are not, but the value of the company is not in cyber. It is in the future performance, and last year's results are the best guide, we believe, to the future. Let us focus on that.
If you want to ask a cyber question, fine, but one is enough. Now, I'm hoping we'll make this call about 40 minutes long. There's a bit of flexibility, so we may not get through everybody. We will come back to you if we don't. Stuart.
Thank you, Archie. Good morning, everyone. If I could just pass my thanks on before I start to Jeremy, for his brilliant support over the last two years because it is his last week with M&S. As Archie said, we welcome Alison, who's been with us now a couple of months, fully inducted and getting to grips with the business. Thank you for joining us. I know some of you were on the media call earlier, but I do want to start by giving you my perspective on last year's performance. Of course, at the end, I'll touch on the cyber incident that happened at the start of this new financial year, and I will touch on our outlook. Let me just remind you of the key financial numbers.
Last year, we delivered a strong performance: sales of GBP 13.9 billion, growth of 6.1%, profit before tax and adjusting items was GBP 875.5 million, an increase of 22%. We grew free cash flow from operations in the year to GBP 443 million. We closed the year with net funds excluding these liabilities of over GBP 400 million, further strengthening the balance sheet. We are in good financial health and the best financial health we've been for nearly 30 years. Just touching on the businesses, firstly in food, sales are up 8.7%, with like-for-like growth at 8.6%. Food growth has now outperformed the market for over three years. Our continued investment in quality and innovation is paying off, which in turn is driving volumes and this virtuous circle that allows us to continue to invest in quality and value for our customers.
Our focus is now transforming our end-to-end food supply chain, which is critical for our future growth plans. In summary, our food business is well on track. Alex and the food team are making really good progress, and we've got a lot of headroom to grow. I believe we're well on the way to doubling the size of our food business. Now turning to fashion, home and beauty, sales grew 3.5%, like-for-like sales up 4.4%. We've outperformed the market now for three years. We continue to lead the market on value and quality, and our journey on pushing star credentials improved further, driven in particular by women's wear and men's wear. We've made good progress on product in the last few years, but our thoughts now turn to addressing the backbone of the business.
As you know, we've recently appointed John Lyttle into the role of Managing Director, and he will really help us face into the big transformation areas: supply chain, merchandise planning, ranging, and accelerating online growth. In summary, we're on track, but we know there is lots of opportunity ahead of us, so we need to knuckle down to deliver future growth. On international, it was a reset year as we planned it to be. Sales were down 8.5%, driven by tough performance in India and a softer fashion order book in franchise markets. Under Mark's leadership, the process of reset is now underway, and we are investing in trusted value across our markets. International growth continues to be an opportunity for us in the medium term. Our strategy isn't changing.
It's capital light, and we aim to be a global omnichannel business that brings the best of M&S to the world. Turning to Ocado, of course, Ocado Retail results are reported by Ocado Group. Just a brief update, sales were strong, growth of 15%, driven by M&S ranges, which grew faster at 20%. Sales growth has been encouraging, but as we know, there's lots to do to improve profitability. As a reminder from this financial year, we are consolidating Ocado Retail's results into our results as part of the terms of the original joint venture agreement. This is an accounting change only. It has no impact on our share of the business. Turning to capital investment, the progress we've made in strengthening the balance sheet now gives us the capacity to invest further in our transformation.
Last year, we continued to invest in our three strategic areas: store rotation, supply chain, and technology. Good progress was made, in particular store rotation, where the returns are ahead of our hurdle rates. This year, we'll invest in CapEx, net of disposals, of around GBP 600 million-GBP 650 million. GBP 200 million-GBP 250 million will be invested in maintenance. GBP 400 million-GBP 450 million will be invested in growth and cost-out initiatives with continued focus on our three strategic priority areas: store rotation, stepping up the pace, two new full-time stores, at least nine food stores, and two extensions. There will be more new news to come on store rotation in the coming weeks. Our second, modernizing our supply chain, investing in capacity and efficiency across both our networks, and of course, technology. We're going to use the recent disruption to leapfrog, accelerate the two-year tech plan into six months.
Before I talk about the outlook for the coming year, let me just touch on the cyber event. We are now in recovery and getting back to business. As you know, we've been working with cyber experts and official authorities, and we've been advised on what details we can and can't give. So many chief executives have called me over the last few weeks who have all been through similar events, albeit not as public. They told me, firstly, this will be one of the most challenging situations you face as a CEO. Secondly, they told me we need to watch out for burnout, whether it's myself or my team, in the first few weeks. Thirdly, they said to me, it will take longer than you would like and you would hope for. It could be a distraction in the short term.
To be honest, it has been the most challenging situation we've encountered, but we are on the road to recovery. It has come at a time when the business has been performing well. We are in a strong financial position, and that's helped us respond, and it will help us recover quickly. Just on a few facts, April started strong, continuing the momentum from last year. Of course, over the Easter bank holiday, I got a call from one of the team to say they spotted some suspicious activity. Over the last two years, we've invested in new systems and tooling, and that has been on our in-house cybersecurity team, and that has helped us spot this type of activity. That evening, we called in several cyber experts and assembled the best team to support us, including tech partners. Of course, we notified the relevant authorities immediately.
We were able to respond quickly and take the right actions immediately to keep us secure, protect our business, our systems, our customers, and our suppliers, and to keep our shops open serving customers. This did mean proactively taking our systems offline, which did result in disruption in the short term. Now we are only four and a half weeks into this incident. Sometimes it feels like four and a half months, if I'm honest. In this multi-year journey of our transformation, it is actually a short period of time. As I said, we are now getting back to business. Customers can shop in our stores as normal. All our stores are open as they have been throughout. Our food business is delivering stock as normal, and customers should find everything they want. In fashion, home and beauty stores are receiving product deliveries, and stock is flowing well.
As you know, we closed our online business. Turning these back on is quite complex, but we're making good progress with our plan, and we will start turning online orders back on within a matter of weeks. We will draw a line under this and move on to business as usual, remaining focused on our long-term strategy and transformation. Before I touch on Outlook, I wanted to take the opportunity to thank all of our customers for their unwavering support, our colleagues, and our supplier partners. Turning to Outlook, as I previously said, M&S entered the new financial year with strong momentum, with food, fashion, home, and beauty ahead of budget. Since the incident, food sales have been impacted by reduced availability, although this has already improved.
In our food business, we did incur additional waste and higher logistics costs due to the need to operate more manual processes, and that means profit has been impacted in just the first quarter. In our fashion business, sales and online trading profit has been impacted by our decision to close our online shopping. However, stores have remained resilient. We expect online disruption to continue throughout June, but only into the start of July as we then ramp up our online operations. Therefore, our current estimate before mitigation is an impact on group operating profit of around GBP 300 million for this financial year. Of course, this will be reduced by management of costs, other trading actions, and insurance recovery.
We're confident we will enter the second half with a strong customer proposition, returning to the performance we were delivering prior to the incident and the momentum we got last financial year. Having spoken to our store managers, all our colleagues across our business, there is an incredible fighting spirit and a deep sense of responsibility. All of us want to get our business back on track in our stores and online and to serve our customers even better and to the best of our ability. That is what we intend to do. I'll hand over back to Archie.
Brilliant. Thank you, Stuart. Let's go straight to questions then. Do you have James Anstead from Barclays ?
Yes. Good morning. Firstly, congratulations on the year that's just finished. Hopefully, the underlying strength of the business makes it a little bit less painful to deal with the current situation.
I've got one business and one cyber question, if that's okay. Firstly, the CapEx guidance increase you're talking towards today seems quite striking given the CMD was only about six months ago. Can you talk about why that number's moved up relatively quickly? On the cyber front.
Take that, James. We'll come back to cyber. I'll touch on that first. James, just on CapEx, yes, we are planning. That has been more recent in our three-year plan. If I just break it down, of course, store rotation. We're getting some good momentum in store rotation. There is an increase in store rotation spend, whether that's renewal, new stores in particular, and there will be some new news in the coming weeks on stores and also a bit more around maintenance. That's one bucket. The second is supply chain.
We are upweighting the investment because we want to get ahead of the growth, particularly in food. Alex and the team have got some strong network plans. We have increased our spend on that. It was always our intention to increase spend on D&T. If you look at the D&T spend over recent years, if you just go back five years, already last year, we doubled that investment on OpEx and CapEx, actually. It was always our plan this year to accelerate the spend and re-look at our tech debt and our simplification around our tech structure. That is the three buckets, all with very strict hurdle rate guidelines, which you would expect. That means that gross CapEx is higher, and then the net CapEx after disposals, as we said, around GBP 650 million. We are quite confident on the returns on that investment. Jeremy, anything?
Yeah.
The thing I'd point to, James, is the returns we've been getting on the growth CapEx has been really exceptional. And the ROIC at 16.4%, considerably higher than it was three years ago at 10%. So we're confident on the returns. We're confident on the balance sheet. We are growing dividend as well. In terms of capital allocation, it totally fits with what we said at the CMD, I think.
Okay. That's very helpful. On the cyber one quickly, I think you might not want to be able to quantify the insurance offset at this early stage, but there's been a lot of press suggestion that your coverage is for up to GBP 100 million. Is that a number? I'm not asking for the actual ultimate claim, but is that right that you have insurance up to GBP 100 million?
I wouldn't want to comment, James.
Insurance, if you've ever tried to claim on insurance, it can take a bit of time. I don't want to comment on that. The thing to say with a company the size of M&S, this is a PE of one. What we're focused on, as Stuart said, is the recovery of the business. The way of valuing M&S is how well we recover, where we are at the half year, how we trade in the second half, and how we trade into 2026 and 2027. As far as we're concerned, focusing on whether we claim on the insurance and when that comes in really isn't the biggest issue. We'll get back to you on that and how we're doing on it, but it really isn't the biggest thing, and that's really something to focus on, I don't think.
Okay. Understood. That's really helpful. Thank you.
Thank you, James. Okay. Shall we go to Warwick Okines at BNP? And then we go to Clive.
Thanks, Archie. Morning. Yes. So firstly, on the sort of cyber front and following on, actually, from Jeremy's answer to that last question, what are your customers saying to you about the cyber incident? What's the reaction been? Would you generalize? I suppose it'd be brilliant to get some sort of sense of how your food sales have rebounded now that you're saying the inventory flow is sort of normalizing. That's the first question.
Thank you for that. I have to say our customers have just been unwavering in their support, and we greatly appreciate it. We look at our customer feedback every day. To be frank, the number one thing our customers are asking for is when they can shop online.
The second thing they ask for is range in their local store. They are the top two questions we get in all of our contact centers. The support has been really fantastic. Of course, what we are looking to do, I think at the very early days, it was very important that we kept our customers up to date. We really tried to do our best to do that in the very early stages and all the way through the journey. We will continue to do that. We are looking forward to telling customers when online reopens as well. To your second point on food, I think Alex and the food team have been absolutely terrific. In those early days, the way they came up with innovative ways because we had shut down our systems to get stock into stores, working with brilliant supplier partners.
Now, as we turn on all of our systems piece by piece, and that stock flow is getting a lot better. Actually, the sales have held up pretty well. Not quite as in line where we budgeted, but not far off. I am very positive that Alex and the food team are going to be very ambitious at how we come out of this and also entering the second quarter. I just had a build.
Stuart. Warwick, just building on what Stuart said, our number one focus has been on the customer. Just because where the systems were, what was very hard was to see where the product was in the chain. The number one focus on availability does mean we have had a bit of waste. Where the impact is in the 300 has been on gross margin and waste.
You're going to see the impact much more on waste than on sales. That's where we're going to have an impact in the first half, just to be absolutely clear on this. I was amused by the we ran an opinion poll about two weeks ago on how customers felt about cyber. Roughly speaking, came up with the conclusion that 52% of customers have never heard of cyber. We live in this world, but out there, people are getting on with their daily life.
Okay. Thanks, Warwick. Shall we go to Clive Black from Shore Capital ?
Good morning, Archie and team. Congratulations, Jeremy, on your career today. Hope Leeds United do not make your retirement miserable.
Thank you, Clive.
Congratulations to the team, actually, on the results, echoing James Anstead comments. Just two questions.
First of all, I think for me, one of the most telling figures in the statement was the rise in return on capital. I just wonder, A, what you thought the big drive, do you understand the drivers of that? In terms of your elevated CapEx, does it shape where you're going to allocate your money and should we expect return on capital to rise further, therefore, which becomes a bit virtuous? I will not ask about the cyber incident, but once you're through all this, should shoppers notice much of an evolution in your fashion? I forgot the acronym now, FPM or whatever it is, FHP. Should they notice a difference online when you come back on stream? Is there a progression that you're able to engineer? Thank you.
Clive, I will hand over to Jeremy with some of the figures.
At a high level, obviously, the return on capital, in particular in some of our plans around store rotation, are very strong. That just gives us more confidence. We're very strict on signing off store investment. It's a really robust process, but we will be investing more in store rotation. The paybacks are very strong. The new formats resonate with customers. Do not forget, as I always say, we're playing 25 years catch-up in investing in our legacy store estate. That is one point. On the general point, we've called it fashion, home, and beauty. It was something probably about six weeks ago when I had the team together and said, "We're going to rename clothing fashion." That really came from being in a store where customers were saying to me, "Why do you call it denim? Why don't you just say jeans?
Why is it called clothing?" We are leading this. It is a small piece of work, i.e., talking customers' language. I think to your question, the work Maddie, Mitch, and the team are doing on style, quality, but value, all three are just important, will resonate. It is a bit of a shame the last few weeks. The new launch products online would have been outstanding, but we will catch up. The team are very, very focused on bringing customers the best range as quick as possible. Jeremy, a bit more on CapEx.
Yeah. The easy answer to the ROIC is the profits have increased from GBP 453 million in 2022-2023 to GBP 875 million. We have just been driving the asset base much harder. On top of that, we have been delivering really strong returns. You know Liverpool ONE very well.
We've reduced the space in Church Road store by 40%, and we've increased the sales by 40%. It is that combination of fantastic returns on those new full-line stores, fantastic returns on those Simply Food stores, and really good returns on the renewals, as well as that level of improved profitability. The challenge and the trick is going to be continuing to deliver returns on that growth CapEx and maintaining the estate. With the GBP 600-650 million, we're keeping the maintenance where we said. We've got to maintain the business, but delivering returns and really delivering disciplined returns on that investment. As Stuart said, we've got some quite exciting pipeline coming through, which we'll talk about in the following weeks. The expectation would be we can drive that ROIC further by driving further profitability, plus increased returns on that growth CapEx.
Okay. Very good. Thank you.
Thank you.
Thanks, Clive. Shall we go to Georgina Johanan and JP Morgan, and then we'll go to Kate Colbert?
Hi. I've got a few, please. The first one, I appreciate the situation with sort of tariffs and whatnot is very fluid. If you could share anything that you're hearing from your suppliers at the moment, please, in terms of perhaps better negotiations and prices in China, but also, maybe more importantly for you, in terms of where the prices are sort of going up exponentially in Bangladesh. Any color on that would be helpful. My second question, please correct me if I'm wrong, but I understand from the materials that you're not planning sort of incremental investment in cybersecurity over and above what you were previously planning for.
Perhaps you could just clarify that and also help us understand how much of a step up you were planning for already, please. Thank you.
Georgina, I'll start. I haven't got much news on tariffs. There isn't much flowing through from our supplier partners, to be honest with you. Obviously, we expected a small benefit with the India tax tariff impact, but it's not significant. It's small. I think the only other thing that isn't related to tariffs that is a positive for us, not this year, but will be next year, is the new SPS agreement. This has been incredibly hard work and bureaucratic and cumbersome. Removing all the certification and checks and the barriers between GB and NI and Republic of Ireland will be a benefit. I know it's not tariff-related, but that is going to be a benefit for us.
On your cyber and tech question, let me just give some context. We recruited a new head of cyber, actually, just over a year ago. We looked at this as every company does. Actually, we've invested significantly, firstly, in sourcing the skill base. That headcount has gone up quite considerably, actually, in the last three years. We have been strengthening the cyber team. When I explain that, what I really mean is more than treble the resource in three years. We have been doing that. The other thing we've been doing in the last 12 months is investing in new tooling. We started to do that a year ago when we did some simulation testing. Actually, that is why we were managing to detect this over that Easter weekend. That is good news because, actually, on timescales, some companies can take six days.
Other CEOs who have spoken to me, actually, some of this has been in their system for months without detection. For us, it was pretty quick. We have been investing in headcount. On cyber spend, we have actually trebled the spend in the last four years. We have been investing. What I would say, of course, the first thing on my mind, in fact, I was reading an email just to bring this to life. It was a year ago yesterday when I wrote to our new head of cyber and said, "Following this update, let's be very clear. It's a priority. Whatever resources and spend you need, it will be agreed. Do not hold back." That was literally a year ago yesterday. Of course, we are going to be very sensitive to this.
I do want to make sure everything we're doing is the right thing. We have never held back money for technology. We were very clear, even before my leadership as CEO, that we had legacy store estate and legacy tech systems. We have been investing heavily over many years, and we will continue to do that in this capital allocation work.
Okay. Sorry. Sorry.
May I just ask a quick clarification? Because perhaps I've misunderstood something. There have been a number of stories in the press suggesting that these gangs, or whatever the appropriate term is, were actually in your system since February. Are you saying that is categorically not the case and they were only in the system in late April?
Georgina, those stories are not correct to our knowledge. You'll hear lots about cyber.
The number of self-appointed experts jumping up in the media, we hear all of this, but some of it you could take with a pinch of salt. We've had to independently check, don't forget. By the way, yeah. By the way, look, Stuart's point is that the best defense is to modernize your systems. It's the complexity and the legacy estate that gives you more difficulty in responding. We've been planning to accelerate that program anyway, as Stuart has said, and we said at CMD, and we'll bring some of that forward even more rapidly now. You can never be impermeable, but hopefully, we'll be more resilient going forward. It's been double-checked, triple-checked by external parties, and it was in the dates we said in April in this new financial year. We did detect it pretty quick.
Let's go on. Kate Colbert from Investech.
Thanks very much. Morning, everyone. Three questions, if I can. The first question, just coming back to James's CapEx question, the increase to GBP 600 million-650 million of CapEx in the current year, should that be something we should assume continues for the next couple of years? The second question is just on the clothing and home gross margin, and the improvement you saw was very good in the last year. Is that something you think is sustainable and could be moved on a touch further in the year?
Okay. Let's take those two. Maybe let's take those two. Jeremy, on CapEx.
Yes. Kate, I would assume that is a run rate given that we are going to be investing in food capacity, and we are looking to invest in the stores. And clothing and home, that was largely driven by FX.
It slightly depends on online and store mix. If FX rates stay where they are, I would say that it's a sustainable level. It depends on where FX goes. There we go.
I think that's a very good answer. I don't like to get too consumed by gross margin, though, because we are going to invest, continue our investment in value, but we're in good shape.
Okay. Perfect. Yeah. My final question is just a bit of a cheeky personal one on cyber. Am I going to be able to buy my son's school uniform online in July, as usual?
Yes. If not, I'll deliver it to you.
Thank you, Stuart. That's the sort of service I expect. Thank you.
Thank you.
Very good. Thank you, Kate. Shall we go to Izabel Dobreva at Morgan Stanley?
Hello.
Congratulations on your results and, in particular, the balance sheet health, which gives you a lot of options in managing the impact now. I have two questions. My first one is just on the pace of transformation. Given that IT spend and infrastructure is understandably moving up the priority list, how should we think about the pace of transformation on the other strategic initiatives? The supply chain, the fortress program, the store venues. Could you give us a little bit of a comment there in terms of the pace of transformation for this year?
I think if I just kick off, actually, it has not really changed a lot. If you go back to the capital allocation of this year, the split between stores, D&T, and supply chain, the only thing we are upweighting, which we already had in our plan, is really D&T.
That was already in our plan. We outlined that at the Capital Markets Day last year. We did not give a figure on it, but we did emphasize it is going to be a big year of change. We are bringing forward some of that change whilst we are disrupted. There will be some new news in the coming weeks on store rotation. It is good news. Therefore, you will see why there will be an increase in capital on that. Supply chain, we had already laid out, particularly Alex's plan in food. It is really business as usual. As we are in such good shape around the balance sheet, it was always our plan to get that timed one year, two years, three years, and then accelerate spend, particularly after we had proven case studies around achieving a good return on capital and hurdle rates. Anything, Jeremy?
No, I think there's a slight re-prioritization of the IT just in the immediate future, understandably. Otherwise, it's all systems go, and we're going to come out of this year stronger than ever.
Okay. It's basically full steam ahead, and once you're reopened, you can take advantage of that. I had a second question just on the point around the customers requesting more range in the local stores. Could you comment how the stores in clothing are trading? Are you having any stock flow issues or any issues around rebooting the right range and sizes into the stores with term processing? Could you comment on that?
To be honest with you, we've always had an opportunity, I would say, on that. I know it's something top of John's mind.
In the recruitment of John, John has to really start to focus around our supply chain, our merchandise planning, and our online business. I know he's already getting his head around it. In the short term, in this disruption, our smallest range stores have not been the best. Let's just be really frank about it. We did our stock flow, but it really hit our largest stores. Therefore, in our medium, we call it grade three, but never mind. We have performed under our expectation over the last few weeks, but we'll get back on track. I think ranging will be something John will talk about at the Capital Markets Day because it goes back to that backbone of our fashion, home, and beauty business.
Okay. Thank you, Izabel. Now, I think we're cracking on.
Let's go to Adam Cochrane at Deutsche Bank, and then we'll come to Geoff Lowery at Redburn. Adam.
Morning, guys. Just two quick questions. In terms of harking back to the last financial year, it might be in the results, but I might have missed it. How did online and store profitability develop within clothing and home over the year? I know there's an opportunity for you to increase online margins. I'm assuming right now, probably not the topic of talk about. Is that something? How did the two evolve last year? Secondly, on international, I think it might be one where we're still waiting for more information. Is there opportunity to take the better quality and price M&S product that's selling so well and just put it through online aggregators across Europe, as we've seen some others do? Thanks. Okay.
We'll come back to that second question. Online margin. Adam, thank you. I mean, the first thing I would say is the split between store sales. If you look at the total of 4.7 for the year, store sales were 1%. Online sales were 13%. That's the first thing. The online margin was a bit softer than we were expecting, but that's because of our investment mainly in digital and technology. Now, that will continue in the next 12 months, but I know it's firmly on John's mind on how we're going to get a much improved online margin, I would say, in years two and three from now. That would be the top line response.
There is some other softening in the online margin, mainly because our brands, actually 43 brands, grew very well, 32% up on the previous year, and that just softened the margin rate slightly. I think we're going to be in good shape in the long term online. This opportunity of disruption has also helped us to focus on range, profitability, costs. We'll accelerate a bit of that cost in this first half, and then we'll be back on track. What's the second question? Oh, I lost track. It was international and opportunities of trade. International. I think, Adam, on international, I mean, the plan has really played out how we predicted. India is something we need to look at in more detail. You may recall that I paused all investment in India, and we slowed down.
That was following my trip, where actually I thought we were just opening too many stores, and we needed a bit more rigor in the store program. Mark has absolutely arrested that decline in India, but we are going to do a bit of a review on what India means. That is point one. That is where the majority of softening was. Point two on international, we had all of our partners together in Dubai, actually, and I attended with some of the leadership team. The passion from our partners was terrific. What Mark has done is consolidated some of our franchise partners. We have looked at new territories, so new markets to enter. We are not rushing. As you know, it is our franchise partners that put their capital in place, not our capital. We did look at our own markets. We only own Greece and Czech.
We did actually purchase the whole of Greece. It was for a small number, only because that enables us to have a strategic review of what we want to do with that country. The other thing that I think is exciting, more for the medium term, is some of the wholesale agreements that we've got across different markets like the U.S. It's not the big thing for short term, but there is some exciting work in development in the medium term. Yeah. We've actually got a review of this at the board strategy day. We have. I don't know. There'll be more news to come, I'm sure.
Thank you. Shall we go to Geoff Lowery, and then we'll go to Monique Pollard at Citibank? Geoff from Redburn.
Morning. Thank you. Just one question.
You've obviously written down the value of your Ocado stake despite the very strong sales growth. What's changed in your thinking about the profitability profile there, and what's the path and time scale towards break-even from your perspective? Thank you.
Hi, Jeff. It's Jeremy. This is a pretty technical accounting adjustment, so I wouldn't overly read into it. It still values the business at a pretty substantial number. When the accounts come out, you'll see it gives it an enterprise value of about GBP 1.3 billion. So it's a pretty substantial number and in line with actually quite a lot of analysts' football field evaluations. The path to profitability isn't that far away from where we were previously. I think the drop through from the current sales number has been a little bit disappointing compared to what we'd expected.
We're still not getting the logistics working the way we'd have liked. There's more to work with ORL and Ocado in terms of getting those efficiencies, but we are getting some traction on that. I still think we're probably 18 months away. I think in the five-year cash flows, it's probably not next year, but the year after, we're looking towards profitability. The cash generation, the FD at ORL is very good on cash. We haven't seen significant cash outflows in the year, but maybe a bit of cash outflow next year, but nothing substantial. He's very good on CapEx. I think we're making good progress. I'd like to think if it's not next year, the year after next, we should be moving into profit.
Okay. Thank you, Geoff. Now, we're running down the clock a bit.
We'll go to Monique Pollard at Citibank and then Anne Critchlow and then just see what we've got in terms of time there. Yeah, Monique.
Morning. Thank you for taking my questions. I've just got two. The first one was just one on pricing. I guess if I think about the cost savings that you're expecting over the next three years, the GBP 200 million, so let's say it's about GBP 70 million a year, this year, you've obviously got the extra GBP 120 million in wages and national insurance, another GBP 20 million in packaging levies from the second half. Also conscious you've already sort of exceeded to pass your targets, your margin targets.
Should I think about the idea of being X anything to do with cyber, underlying margins could take a bit of a step back this year unless there is some pricing going through, or do you think there is just more operating leverage that is going to come in and offset some of those costs?
Good question. Yeah. No, it is a very good question. I mean, just to start there, I would be more focused on the cash. And the reason I say that is, as a team, we talk about the cash sales and the cash margin as well, much rather than the rate. And the reason I do not really change the guidance we set out at the Capital Markets Day, which was 10% for fashion, home, and beauty and four, although I did say above four and above 10, is all to give us the opportunity to drive volume.
I think in summary, the rate may change as we invest in quality and invest in price, but the cash should always go up. That is really our strategy, and that is really what has been on our mind in the next phase of the plan.
Yeah. I will build on what Stuart just said. I think the food team have done a fantastic job there in driving both cost savings in gross margins to try and manage waste, and they will continue to try and do that. You are not trying to manage the margin through pricing, not taking prices down, so providing value to customers to drive volumes up and getting leverage through that. All of that margin increase has been through volume leverage, and that gives you the opportunity to take prices down further.
As a business, our focus is on taking costs out in operating costs. That is where I am sure Alison is going to be focusing on taking structural costs out below gross margin. That gives us the opportunity to do even more on prices. That is where we are going to be. To offset the impact of the cyber issue, we are definitely not going to be dying through it through price increases. It is going to be through taking further structural costs out increases. That is where the focus of business is going to be in the following years. Our cost gap program is also there to mitigate the increase in national insurance and EPR or ERP, whichever way around it is. We have already got that baked into our plans.
Understood.
The last question I had was just a quick one on whether you're seeing any positive benefit to your store sales for fashion, home, and beauty segment, given the lack of online and just given your commentary that the customers have been so supportive and the brand is so loved, whether there's been any benefit. I know you said the store sales have been resilient.
I use that word because it is a very good question because in some stores, of course, they've started to outperform. In truth, knowing that in our fashion, home, beauty business, 36% of our sales also is online, obviously, we're not going to fully offset that. Overall, it's okay. It's resilient, but it hasn't been recapturing a lot of that online.
As I say, our online operations will be up in a matter of weeks, and we intend to accelerate once we reopen.
Very clear. Thank you.
Okay. Thank you very much. Now, we're nearly out of time. With apologies to those people who have not got in, we'll get back to just taking the names off the screen in front of me. Let's go to Anne Critchlow from Berenberg, and then we'll draw a line.
Good morning. Thanks. I've got two questions as well. Just following up on your point about the alignment of food standards between the EU and the U.K., do you think this could bring back opportunities in food beyond the U.K.? I recall you had to pull out of fresh food in France, for example.
I'll answer that one first before your next questions, Anne.
I read an article the other day watching it was one Prime Minister, Margaret Thatcher, promoting Marks & Spencer many years ago, and it was Princess Diana in a store in the Champs-Élysées in France. Archie said to me, "Have you got ambitions like every previous chief executive to be on the Champs-Élysées?" He glared at me as he said it. I said, "Under no circumstances." He said, "Good." He walked away. In joking aside, the most important thing is, look, we have a Republic of Ireland business that's actually a very strong business. Profit-wise in food, not as strong. Very profitable in fashion, home, and beauty. This will help us. In Northern Ireland, we have very high market share in food.
Of course, with Brexit and the huge bureaucracy around shipping products to our Northern Ireland business, we even started to pull back investment. This is a business that has double the market share of our average food business. With this agreement, we are very supportive. I have to also say Alex has been quite instrumental in helping shape this as well. We are pleased with it because it does mean in our Republic of Ireland and Northern Ireland business, we will flow product better. It will be better for customers on availability, and we will be back on track. It really is next year, by the way, not this year. As for anything else, we are not going to get too excited on food internationally. Internationally, we do think food is an opportunity in wholesale, but really, it is our fashion, home, and beauty business.
Okay. Great. Thanks.
The second question was, could you remind us, please, what percentage of your clothing relates to basic items that could probably be sold through at full price? Of the remainder, the more sort of seasonal fashionable product, do you think you would overwinter that, or do you think you would mark it down this summer? Anything unsold?
I have to be honest, Anne, we have not done all the numbers yet because we have been operating on limited systems. If you say half of our range is everyday items and therefore is pretty safe and we just carry it on, that is the most important point. The rest, of course, is more seasonal. Even that, I think how we have bought this year is pretty safe. Our full-price sales last year were about 80%. I do not really want to get into heavy discounting.
John Lyttle, when he started, one of his first objectives was actually how do we move to no sale. I'm going to have to let him off that for his first year because we will have to think about sale. Everyone has a sale. We'd just like to eventually move away from that. We have been flowing more stock international. That's something we're looking at. We are going to do that. We are going to maximize our outlets, and we will have a sale more or less in line with last year, but we do have to rework the numbers over the coming weeks, to be honest with you.
Okay. Thank you. Thanks very much. Look, thank you, everybody, for joining us and for lots of good questions. I'm going to call it all there because we've got to crack on with the day.
Apologies to those who didn't get in again. We'll talk in the day, hopefully, and catch up whenever you want. Really appreciate your time.