Morning, everyone, and welcome to our half-year results presentation. If you are watching on Wednesday, the 4th of November , there will be a conference call for analysts and investors at 9:30 A.M. in the morning, when Alison and I will be available to answer your questions. First, I will start by updating you on our headline performance. Alison, our CFO, will then take you through the financials in detail. I will then provide an update on our strategic plans over the next 12 months, and of course, our outlook. This is an important year of execution for M&S. Four years ago, we set out our plan to protect the magic of M&S while modernizing the rest.
We called our program Reshaping M&S, with our strategy focused on creating exceptional products, driving profitable sales growth, and delivering target operating margins, all underpinned by changes in how we operate, building the M&S we need to be, and an M&S for the future. Since then, we have improved sales, profits, and returns, and built a strong investment-grade balance sheet. This year, our strategy has moved into a new phase, reinvesting for growth, investing in our products, our stores, our supply chain, and our technology infrastructure. Today, we are reporting M&S Group adjusted profit before tax of GBP 403.2 million, more than double last year. The headline number only tells part of the story, so let me break it down by each of our business areas. In Food, the strategy is working, and we have strong momentum. Sales, volume, market share, and margin are all ahead.
In Fashion, Home & Beauty, we gained market share, but we fell short of our full potential. The impact of the incident on our Fashion, Home & Beauty business lasted longer than we expected, but now that is behind us. Cost growth was more weighted to the first half, while our structural cost savings will build through the second half. Our balance sheet remains strong. We generated GBP 102 million of free cash flow from operations while increasing capital investment in the business. We closed the half with net funds, excluding lease liabilities, of GBP 375 million and a strong cash position, and we have increased the interim dividend by 16.7%. Even as we step up the investment, return on capital employed has improved to 15.3%. That gives us the capacity and the confidence to keep reinvesting in our transformation. Food sales were up 13.9%, with like-for-like sales up 11.7%.
Adjusted operating profit was GBP 288.6 million. The margin of 5.6% was ahead of our plan, despite absorbing packaging taxes and our reinvestment in value. The margin improvement in Food has been managed in the right way, because we have been investing in quality and value, and reducing our costs, and driving volume growth. None of this has happened overnight. Now for several years, we have been investing consistently in product quality, innovation, and trusted value. We have opened larger stores, and we have seen the benefits of integrating Gist into our supply chain. In the first half, we invested in lower prices and launched more than 850 new products, adding quality in, not taking quality out. The result is that we have become more of a shopping list retailer, gaining 1.5 million more new customers over the past two years, as we win a bigger share of the main food shop.
Food market share has grown consistently. We will continue to focus on our plan, but we do need to get ahead of the customer demand curve. That's why we are going to continue to invest in the right stores, supply chain capacity, and technology, which will enable us to achieve our goal to double the Food business and achieve our operating Fashion, Home & Beauty sales were up 17.5% on last year, with adjusted operating profit of GBP 150.5 million, with a margin of 7.5%. Although we bounced back from the cyber incident last year, we know we fell short of delivering our full potential in the first half. Brand health indicators were in fact strong. We gained market share in a very challenging declining market, and we still remain number one for style, quality, and value. But we were impacted by availability.
The impact of manual ordering after the incident lasted longer than we expected. So, for example, in womenswear, we did not always have the product our customers wanted. In some categories, the balance was also wrong, not enough core product with a focus on volume and value. In our channel mix, store sales were down as demand shifted online during the long, hot summer. Online now represents 35% of our sales. But still, we are only in the early days of transforming the cost base online, which means this is a more expensive channel to serve. Despite these challenges on availability in some product areas, we are now seeing a positive response as we head into autumn, especially in recent weeks when the weather has started to turn colder. The job in Fashion, Home & Beauty is bigger and more structural.
We need to change how we plan, buy, flow, and fulfill our stock end-to-end. International sales were up 22% despite disruption from the conflict in the Middle East, with operating profit up to GBP 15.3 million. Online and marketplace sales were up, and wholesale partnerships are building through a capital-light model. Ocado Retail is now profitable, with revenue up 16% and operating profit of GBP 25.6 million, driven by customer growth and better efficiency in its fulfillment centers. An important part, an important driver of Ocado growth is M&S Food. M&S Food sales were up 23%. The international business and Ocado Retail are now both moving in the right direction. I will now hand over to Alison.
Thank you, Stuart. Good morning, everyone. I am here at our future food national distribution center in Daventry, our largest ever investment at GBP 340 million. We are building the capacity and automation to support a bigger Food business, improving efficiency and taking cost out so that volume growth will deliver stronger returns. We will bring our chilled and ambient operations together under one roof with greater automation, all of which will help to reduce our cost per case. It will also make deliveries more accurate and easier for our store colleagues to handle and to replenish, reducing manual work in stores and delivering improved availability to our customers. Ultimately, we are investing today to build a business that can grow more efficiently over the long- term. Let me start by taking you through today's headlines.
Total group sales were GBP 9.3 billion, up 16.2% on last year, which then converted to adjusted profit before tax of GBP 403.2 million, up from GBP 184.1 million last year. Adjusted earnings per share were 14.8p, up over 120% on last year. Free cash flow from operations was an inflow of GBP 102.2 million, having funded cash CapEx of GBP 500 million. We closed the half with positive net funds of GBP 374.7 million, up from GBP 176.1 million at this point in the prior year. Overall, adjusted return on capital employed was 15.3%, up from 12.4% in September 2025. Before I turn to the underlying performance of the individual business units, let me briefly cover the comparison with last year.
The increase in profit in both businesses reflects recovery from the cyber incident, which led to significant waste and markdown in Food, and lower online sales and additional stock management costs in Fashion, Home & Beauty. Last year's result also included insurance income, which is not repeated in the current period. On that basis, in the half year to September 2024, adjusted profit before tax was GBP 413 million, just over 2% ahead of the current period. The profit performance since then across the Food and the Fashion, Home & Beauty businesses has been markedly different. Food operating profit in the first half of this year was GBP 288.6 million, an increase of GBP 72 million, or 33%, on two years ago. The driver was top-line sales growth of 23%, ahead of the 20% growth in operating costs. That operating leverage increased the margin by 0.5 percentage point to 5.6%.
Adjusted operating profit in Fashion, Home & Beauty was GBP 150.5 million, a decline of GBP 93 million on the comparable period. Here, the driver was a small top-line sales decline of 1.7%, but a reduction in operating margin of 4.5% to 7.5%, which I will get into in a few minutes. The international business is starting to make progress, with growth in sales of 8% and an operating profit increase of GBP 5 million on two years ago. The rest of the movement largely relates to the consolidation of Ocado Retail. We now include its operating profit rather than our previous share of losses in the associate. We also include the interest on its lease liabilities, which has increased our finance costs. Before I get into the individual businesses, let me give you some context on how our cost base for the first half has changed over two years.
There are three main drivers. Firstly, inflation. Over the last two years, our cost base has absorbed an increase of GBP 135 million in the National Living Wage, higher employer National Insurance contributions, and changes to the National Insurance thresholds, alongside wider cost and energy inflation of nearly GBP 50 million. We are partly offsetting these pressures through our structural cost reduction program. This year alone, we will deliver structural savings of GBP 120 million, with the benefit of savings building throughout the year. Secondly, the cost of supporting growth, particularly the volume growth in Food and the changing shape of the Fashion, Home & Beauty business, with more sales through the online channel, and that has added an additional GBP 80 million to our cost base. Thirdly, GBP 120 million of operating costs accompanying our capital investment in the business, largely in new stores infrastructure, in logistics, and D&T.
There is also a timing effect in this half. We deliberately weighted more of our marketing activity towards the first half, so the increase in that cost will be lower over the full year. Turning now to Food. As I flagged earlier, Food has seen a strong increase in sales and profit this year, reflecting both underlying growth and recovery from the cyberattack. Sales grew by 13.9% on last year, with an increase in contribution from new stores. To give you a clearer view of underlying profitability, I will focus on the comparison with two years ago. Operating profit was GBP 289 million, up GBP 72 million ahead of two years ago, with an operating margin of 5.6%, up from 5.1% two years ago. Over these two years, sales have grown by 23%, driven by volume growth of 16%.
Gross margin was slightly down, largely reflecting the GBP 27 million Extended Producer Responsibility charge booked at the start of this year. Our discretionary investment in value was largely offset by the lowering cost program. Operating cost growth was driven by retail and logistics, reflecting the volume growth. Additionally, in retail, we had the increased colleague pay and National Insurance increases I outlined earlier. In logistics, we have needed temporary supply chain capacity to support growth ahead of our new distribution centers coming online. Digital and technology costs increased as we resumed investment in group infrastructure, including the network in our stores. Central cost growth was predominantly driven by marketing phasing, which will partly reverse in the second half. In Fashion, Home & Beauty, performance in the half was less strong. Sales grew by 17.5% on last year, but were down 1.7% on two years ago.
However, excluding the impact of our exit from furniture in 2025, sales were flat over the two-year period. Nonetheless, growth in this first half was below our expectations. We outperformed a market which was down 5.5%, despite cyber-related availability disruption in the first quarter of this year. Unseasonably hot weather throughout the half drove a heavily promotional market and affected our mix of core and seasonal clothing. Store sales were GBP 1.3 billion, down 5.2% on two years. Excluding furniture, online sales grew by over 11% on two years ago and reached 35% of total sales. That online sales growth brings higher fulfillment costs and puts pressure on the operating margin. The sales performance flowed through to gross profit broadly as we would expect. The bigger impact, though, was at the operating margin level.
With sales lower than two years ago, the business's limited operating leverage becomes clear, and that is part of what our transformation plans need to address. Too little of our cost base is truly variable for costs to be able to fall in line with sales. Retail and logistics costs together accounted for 2 percentage points of pressure on the operating margin. Online orders cost more to fulfill than store sales, including picking orders in stores and moving stock between distribution centers. Digital and technology cost growth reflects the operating costs associated with capital investment in the systems needed to run the business. The increase in marketing costs is largely a timing effect. We deliberately front-loaded the year's marketing activity into the first half, so cost growth will be lower over the full year.
Overall, therefore, a 1.7% decline in sales has translated into a 4.5% reduction in the operating margin, which underlines why improving the cost model in FH&B is so important. Finally, international operating profit was GBP 15 million for the period, with margins improving to 4.9% from 3.7% two years ago, and this is despite disruption from the conflict in the Middle East. Growth was driven primarily by our Fashion, Home & Beauty franchise business, food wholesale, and online marketplaces. Ocado Retail delivered adjusted operating profit of GBP 26 million compared with a GBP 3 million loss last year, with operational efficiencies improving their operating margin. Ocado Retail sales grew by 16% on a comparable basis, largely due to significant growth in new customers and better retention of existing customers. M&S sales on Ocado are up 23% at 31% of the Ocado Retail basket.
Outside of day-to-day cost discipline, we have two further focus areas when it comes to costs. Firstly, structural savings. To date, we have sustainably removed GBP 450 million of costs and remain on track to deliver GBP 600 million by FY 2028. We delivered GBP 59 million in the first half of this year as part of our FY 2027 target of more than GBP 120 million, with good line of sight to the remaining GBP 150 million needed to reach the GBP 600 million target, and our work will continue beyond that. Secondly, disciplined capital investment to drive growth and remove cost so that investment delivers stronger returns. CapEx before disposals increased, driven by supply chain and digital and technology investment, partly offset by lower property spend. Key investments included Daventry, Avonmouth, and Lichfield distribution centers, new food stores, and upgrades to our technology and online capabilities.
In line with our previous guidance, full-year CapEx net of disposals will be about GBP 750 million. On cash flow, free cash flow from operations was an inflow of GBP 102 million after funding cash CapEx of over GBP 500 million, which included over GBP 100 million of payments for expenditure accrued last year. Working capital generated an inflow compared with an outflow of GBP 334 million last year, and will now normalize to pre-incident levels. Net funds, excluding lease liabilities, were GBP 375 million for the period, up from GBP 338 million at last year end. We had GBP 1.1 billion in cash and equivalents on the balance sheet at the half year, which gives us the capacity to both invest in the business and to deliver returns to shareholders. To summarize, the first half reflects recovery from last year's disruption, but performance across the business remains uneven.
Food delivered exceptionally strong sales and profit growth. Fashion, Home & Beauty improved on last year, but remains below our expectations, with its current cost model putting pressure on margins. International improved profitability despite Middle East disruption, while Ocado Retail improved efficiencies and grew profit. Cost growth was first half weighted, with structural savings more weighted to the second half. For the full year, we expect food margins ahead of FY 2025 and progressive improvement in Fashion, Home & Beauty profitability. Group adjusted profit before tax is therefore expected to be in line with current market expectations. Thank you, and I will now hand you back to Stuart.
Thank you, Alison. Now, let me turn to our strategy and what our reinvestment means for each part of our business. The first half marked the start of our reinvesting for growth program. As Alison outlined, we expect to invest around GBP 750 million this year in stores, supply chain, and digital and technology. Around 2/3 goes to Food, with the balance to Fashion, Home & Beauty. In Food, the job is to build the capacity to keep growing our top line at a lower cost per case. We opened, renewed, or extended space in 17 Food stores in the half. New Food stores are now on average twice the size they were five years ago, supporting the full weekly shop. Sales in the former Homebase sites opened in Poole, Godalming, and Abingdon in this period are performing very well.
In supply chain, operations are starting at Avonmouth, our first new distribution center as part of the new strategy, and this is expected to provide extra capacity through our Christmas trading peak. At Daventry, the walls are built and the fit-out is starting. Together, these investments will give us more than 30% additional capacity at a lower cost per case, supporting growth into the 2030s. In Fashion, Home & Beauty, our job is to realize this potential by building profitability and modernizing the end-to-end backbone of the business. We started our Food transformation mid-2018, so in Food, of course, we are further ahead. In Fashion, Home & Beauty, we are still at the foothills of the transformation journey. There are several parts to the end-to-end transformation, which John and the leadership team will be presenting at our next Capital Markets Day next Tuesday. First, plan and buy.
We are rolling out a new planning platform and modernizing our core systems to improve availability, inventory management, and stock flow. Our sourcing work is focused on improving buying margin in core ranges whilst also reducing our lead times. Second, stock flow and fulfillment. The acquisition of Lichfield will add automated online capacity and reduce split shipments and costs. Improvements at Castle Donington will also help increase efficiency. Third, returns. A dedicated return center in Sheffield will reduce the time and cost of handling our returns. Put simply, we need to turn more of the demand we already have into profitable sales at a lower cost to serve. Our partnership with Sephora, both in stores and online, will create a new beauty destination. It will also broaden our appeal and drive more cross-shopping. Across M&S, we completed 18 store investments in the first half.
As I stand here today in Pantheon, only 41% of our stores are in a new or renewed format, and that is almost all in Food. We started our Food renewal program in 2019, and that shows the significant opportunity in the years ahead as we modernize the rest of our store estate. In Fashion, Home & Beauty, we are at the very start of renewal, with this store, Pantheon, being the first new store format for Fashion, Home & Beauty. This is our test bed for what renewal could be, and this store is already trading up over 27%. We are at the very start, and we are testing this format in Liverpool and Cheshire in the second half. We have also relaunched Sparks, focused on rewarding customers for shopping more at M&S rather than just relying on blanket promotions. We are bringing M&S Financial Services rewards into Sparks too.
The aim is pretty simple, to give customers more reason to shop with us more often. Now, let me say a few words on cost. When we first set out our transformation plan, we didn't expect the onslaught of regulatory and cost headwinds we now face. Extra taxes last year totaled GBP 140 million, including GBP 50 million in employer National contributions, GBP 35 million for EPR, and wage pressures of over GBP 50 million through the higher National Living Wage. Our cost-out program is more critical than ever. So far this year, we've delivered GBP 60 million, and we have more than GBP 60 million to deliver in the second half. Overall, we've taken GBP 450 million of cost out the business over the past three and a half years.
We have to be ruthlessly focused on this program as well as our reinvestment program, so we don't just protect and grow M&S for the short- term, but for many, many years ahead. Food continues to outperform the market, and we expect full-year margins to be ahead of two years ago. In Fashion, Home & Beauty, the market remains subdued. The latest market share just released highlighted the market is down for the 19th consecutive period. If you look at the last six months alone in fashion, GBP 1 billion of sales have come out of the market, and that's pretty significant. For us, just in October, however, we've seen a small improvement in performance, and we're back into growth versus two years ago. Availability has recovered, and the actions are underway, supporting a progressive improvement in both sales and profitability.
Therefore, overall, we expect full-year adjusted profit before tax to be in line with current market expectations. To sum up and close, I would say our first half performance was satisfactory. Food outperformed. Fashion, Home & Beauty didn't meet its full potential, but we're confident in a better second half. We have a clear plan, a strong balance sheet, and our strategy is unchanged. Thank you to all of our colleagues for their hard work, especially from recovering from our cyber incident last year. And a special thank you to all of our customers because you have been unwavering in your support. We are now looking forward to delivering an unforgettable Christmas. Thank you.