Financial Strategy of M&S and Next Plc - Essay Example

Introduction The year 2007 and onwards has not been good for the retail sector as there have been a general lack of consumer spending on the retail products. The lack of credit to retail customers have further resulted into the decline into the revenue as profitability of major retail chains such as Marks& Spencer and Next. The cumulative performance of both the firms is showing a consistent decline in the revenue as well as profitability of both the firms. This has also resulted into the decline into dividend paid out by the firms in order to maintain and sustain the current competitive pressures. This report will discuss the financial performance of M&S and Next Plc – two giants in retail industry and will discuss their performance in year 2009. Q#1 Following table is the compilation of financial ratios of the M&S and Next Plc and depicts their relative position for the year 2009. M&S Year 2005 2006 2007 2008 2009 Overall Performance ROCE (%) 24.88 23.35 24.81 21.83 10.40% Profitability Gross Profit Margin (%) 35.49 38.29 38.90 38.65 37.21 Net Profit Margin (%) 13.62 11.29 12.18 12.51 5.59% *Gross Profit on Cost (%) 55.02 62.04 63.68 60 63 Productivity Sales per Employee (£) 112,577 110,905 113,193 119,673 116,384 Asset Turnover (times) 2.65 2.44 2.28 1.25 1.26 Stock Turnover (times) 23.38 20.83 20.62 18.45 15.98 Debtors Turnover (times) 285.69 185.66 126.48 106.64 108.53 Debtors Collection Period (days) 1.28 1.97 2.89 3.42 3.36 Creditors Collection period (days) 8.98 11.36 11.04 9.18 14.38 Administration Expenses 35.49 38.28 27.52 2.447 2.644 Liquidity Current Ratio 0.65 0.57 0.53 0.59 0.6 Acid Test 0.39 0.38 0.27 0.34 0.37 Investment Dividend per Share (pence) 12.1 14 12 22.5 17.8 Capital Structure Gearing (%) 527.18 267.55 157.21 297.89 150.83 Interest Cover (times) 3.21 6.53 7.55 10.15 0.24 Next Plc Year 2005 2006 2007 2008 2009 Overall Performance ROCE (%) 65.54 62.51 57.47 14.69 33.6 Profitability Gross Profit Margin (%) 31.36 27.85 20.4 28.50% 25.75 Net Profit Margin (%) 15.49 15.19 15.45 10.60 9.47 *Gross Profit on Cost (%) 45.69 38.60 25.6 39.80 27.77 Productivity Sales per Employee (£) 52,352 54,064 52,698 NA NA Asset Turnover (times) 4.43 4.32 3.94 2.06 2.05 Stock Turnover (times) 9.48 9.59 11.65 0.095 0.63 Debtors Turnover (times) 8.19 7.48 7.01 57.780 5.77 Debtors Collection Period (days) 44.56 48.81 52.07 6 63 Creditors Collection period (days) 20.01 20.38 19.37 105 NA Administration Expenses 16.01 12.56 84.59 305.4 427.4 Liquidity Current Ratio 1.31 1.21 1.33 1.11 1.39 Acid Test 0.82 0.78 0.95 0.74 0.9 Investment Dividend per Share (pence) 41 44 44 49 56 Capital Structure Gearing (%) 144.88 231.81 346.70 405.55 491.47 Interest Cover (times) 22.36 20.78 15.45 12.80 4.32 The above table provides a detailed outlook of the key financial ratios of the two firms in year 2009 and reflects the individual performance of each firm in the retail industry. It is critical to understand that the choice of Next Plc as the closes competitor of M&S is because of the fact that both the firms are in retail clothing industry. Though M&S offer other services such as food and financial services however, its main business always remained the sale of clothing. Similarly, Next Plc is also a retail clothing giant in UK industry and as such the comparison between the two makes sense due to relative similarities between the two entities. Q#2 M&S is one of the leading retail chains in the World with more than 100 years of history of success. However, the recent performance of the firm indicates that all may not be good and future may further impair the capability of the firm to generate the consistent profitability and value for its shareholders. A brief look at the recent financial performance of the firm indicates that the profitability has drastically declined in 2009 by almost 4% as compared to year 2008. Similarly, return on equity has further declined to a level where it may not be able to support the overall expectations of the stock markets to sustain the current market prices of the shares. What is also significant to note that the firm’s asset management, leverage as well as interest coverage has further declined to a level where it may further hamper the future growth of the firm? Similarly, the performance of Next Plc, one of the leading competitors of the firm is also not satisfactory due to the current financial meltdown experienced by the firms in general. Various ratios indicate that Next Plc performed better as compared to M&S. The following section will discuss in great details of the five major categories of financial ratios for year 2009 and will make a comparison of M&S and Next Plc Liquidity Ratios The data shown in question 1 indicate that the overall performance of Next Plc is far superior to the performance of M&S. The five year’s data indicate that the liquidity ratios of Next Plc are consistently better than that of M&S despite the fact that both the firms work in the same industry. It is important to note that both the firms are in retail business therefore they tend to carry higher inventories in their stores and Godowns and as such the low quick ratio may be attributed to the overall nature of the business of the firm rather than considering as inefficiency of the management in handling the inventory. However, it still provides a better indication of the overall inventory management system is contributing in saving costs for the firm. Productivity Ratios The above ratios for five years indicate that M&S is relatively performing better as compared to its competitor. The receivable turnover in 2009 is 30.57 which converts to approximately 12 days in accounts receivables whereas the same ratio for Next Plc is 64 days which is relatively higher as compared to M&S. Such improved working capital management therefore may indicate the superiority of the firm over its competitors in terms of handling its inventories as well as managing the overall receivables of the firm. What is also however, significant to note that the Next Plc sales may be attributed to this higher credit period being given to its customers? Generous credit extension policy often results into increased increase in sales for the firms and this factor seems to be dominating factor in overall increase in Next’s sales. This factor also outlines that despite the fact the market is really suppressed, the management of M&S has been superb as for as the management of its working capital is concerned however, what is also significant to note that anticipating the changes in the economy, the firm may have developed an strategy of curtailing its inventory stocks as well as must have focused on improving its collection policy besides offering few discounts through different promotional programs. Profitability Ratios In terms of profitability, the performance of Next is far superior as compared to the performance of M&S. There is a difference of almost 4% between the net profitability of both the firms and as such Next Plc has been more successful in terms of generating profits as compared to M&S. It is also however, important to understand that M&S is a relatively diversified firm with presence in different sectors apart from retail clothing. The impact of the performance of the business segments such as M&S Finance as well as its food business may have also contributed to decline in the overall profitability of the firm. Similarly, M&S is relatively more mature business with a rich history of consolidation whereas Next is a relatively young brand that can engage into more aggressive marketing as compared to M&S thus earning more profit. The above data also indicate that the firm’s profitability has remained stagnant and as such there may be very little probability of improving the profitability of the firm at least in the near future. Gearing Interest coverage is relatively low for M&S as compared to Next however; the total debt to equity as well as long term debt to equity is higher for Next. Higher leverage may be considered as an indication of the increased risk profile of the Next. Interest coverage is low for M&S indicating the overall decline in the ability of the firm to repay its debts. The interest coverage of 0.24 as compared to 4.32 times for Next indicates that M&S may move forward towards default on its obligations due to lack of cash flows generated to pay back the firm’s debts. Overall Performance of the Firm Considering the figures presented in question 1, it is clear that the performance of M&S has considerably declined as compared to its competitors. This decline in performance can be attributed to the overall decline in the aggregate demand as well as low consumer spending in UK. The current financial crisis has seemed to played major role in deteriorating performance of the firm and as such the performance may further increase as the economic trends start to improve. It can also be inferred from above data that the firm’s internal efficiency has remained intact i.e. all its efficiency ratios are better than its competitor thus illustrating that the firm’s internal management is quite remarkable and only external factors seemed to have contributed towards the declining performance of the firm. Q#3 UK’s retail sector was one of the most important contributories in the development of the economy of the country. However, recent economic downturn has resulted into the drastic decrease in overall consumer spending as well as the aggregate demand indicating that all may not be entirely well for the retail industry in particular. In recent times, the biggest threat faced by almost every firm is the recession that has engulfed most of the developed world including UK, US and France. The overall growth projections are relatively low for the year 2010 whereas the prospects of recovery are really low as many believe that UK economy will start to pick up moderately in 2010. The recent credit crunch has further resulted into the decline in the overall consumer spending causing a serious decline into the aggregate demand for almost every product and service available in the market. Further, since there was also subprime crises where the overall construction activity and purchase of new homes decreased drastically, the overall demand for the services of the firm have declined and may further decline till the current financial meltdown prevail. Till the housing markets start to pick up there are strong indicators that the overall demand for the kind of services offered by the firm will remain depressive. UK has ageing population and with the passage of time the overall requirements for shelter will increase thus creating further room for the services of the firm in future. Religious sentiments are not so strong in UK however, UK is considered as one of the most diversified countries as many immigrants and residents belong to different religious groups and are thriving in UK society. Overall standard of living is really good in the society and as a result of this; the overall consumption is greater as compared to other societies of the world. However, it is critical to note that the social factors, in current scenario, must be viewed from the perspective of the economic factors also. Due to recent economic meltdown various social norms and practices have relatively changed and as such the overall impact of social factors. If we consider the historical performance of the stock prices of the firm, since 2007, are in decline with slight recovery in year 2009 despite the fact that the firm has posted not very healthy results.1 The above social and economic factors are therefore not only affecting the retail industry as a whole but also M&S. The trends may remain suppressive at least in near future and firm, in general and retail sector in particular, may face stiff challenges in terms of meeting their revenue as well as profitability targets. Further, the current financial meltdown may also result into the some permanent changes that can take place within the UK society which will forever change the consumption patterns as well as spending habits of the consumers. M&S specifically therefore need to focus on retaining its existing markets by creating strategies which can provide it necessary market penetration to achieve the desired results. Q#4 The recent performance of Marks & Spencer indicates that the firm is witnessing slow growth in its clothing and food business. (Paler, 2009).2 It is argued that the firm has evolved itself in a manner where it can readily change itself from a traditional firm to a robust firm with lot of changes that has to take place. It is important to note that the recent financial performance of the firm indicates that there will be focus on decreasing costs.(BBC,2009). The firm has itself concluded that its recent surge has been the result of improved buying strategies as well as more focus is placed on the inventory management practices. Buying management has been further streamlined and it is expected that the same will further be streamlined in a manner which can allow the firm to achieve better cost advantage in terms of buying. This will therefore further allow firm to pass on this benefit to its customers in the form of lower prices and hence improved profitability and revenue in the future. Further, it is also important to understand that M&S has already started different discount schemes as well as other promotional campaigns which will further allow the firm to present low priced products to its customers in more unique and innovative manner. It is expected that the firm will further intensify its efforts to create more unique promotional schemes in order to attract and retain its customers.(Rowedder,2009). What is also significant to understand that the firm also needs to streamline its debt management policy. Though its debt as percentage of its equity is relatively low as compared to Next Plc however, it is still in higher bracket thus increasing its overall risk profile at relatively higher level. In such situation, the next move by the firm can be either consolidation of the overall debt of the firm or the firm may pay off its liabilities in order to shed the burden of increasing debt. It is however, critical to understand the firm often avail debt in order to enjoy certain benefits such as interest tax shields etc besides improving the value of the firm. However, increasing levels of debt may increase the overall debt profile of the firm and as such the overall risk increases. In current scenario where banks are reluctant to lend to even their prime customers, an impaired capacity to repay the debt may increase the chances of the bankruptcies of the firms. M&S’s interest coverage is relatively low indicating that the firm’s capacity to pay off its debts may further decrease. As such the firm may not only further cut its costs but also consolidate its debts in order to improve its risk profile. What may also be anticipated is the move to buy back the shares of the firm because the overall future growth prospects may further push the prices of shares down thus allowing the firm’s management to buy back its shares at relatively low price in the open market.(Glowrey,2009). Recommendations The above data and discussion indicate that all may not be entirely good for the firm and as such the performance may further decline in the near future despite the efforts of the firm to manage its inventories in better manner as well as improving its buying strategies. In order to overcome this situation, firm has to undertake more radical changes in its overall policy and strategic management practices. It is generally believed that the inventories within the retail industry are within the control of most the firms however, what is significant to understand that the firm may need to further control their costs of purchasing and as such the focus shall be on improving the buying strategies. There is also a need for the consolidation and better management of the debt of the firm as the overall debt to equity is relatively large and M&S has to curtail or reduce its debt in a manner that can balance its debt profile and allow it to achieve better investor expectations in the market. Lastly, it is also important to understand that the firm is more prone to the external environment which is largely out of its control. However, in order to overcome the depressed demand, firm may offer discounts to its customers which could further attract the customers and increase their purchasing power. Christmas season is nearing which is traditionally the high consumption season therefore M&S has to develop and implement more unique promotional programs to attract new and existing customers back into its fold. References 1. Glowrey, M (2009) Sell into Marks & Spencer buy-bac Investors Chronicle, Available: http://www.investorschronicle.co.uk/Tips/Sell/MiniTips/article/20091126/6afe0546-d9a5-11de-8cfd-00144f2af8e8/Sell-into-Marks--Spencer-buyback.jsp Last accessed 3rd December, 2009 2. M&S to close stores and cut job (2009) BBC, Available: http://news.bbc.co.uk/2/hi/business/7814987.stm Last accessed: 2nd December, 2009 3. Marks and Spencer reveals worst performance for three years (2008) Yorkershire Post, Available: http://www.yorkshirepost.co.uk/businessnews/Marks-and-Spencer-reveals-worst.4550271.jp Last accessed: 20th November, 2009 4. Paler, N (2009) Marks & Spencer’s performance has ‘bottomed Citywire.com, Available: http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=359443 Last accessed 19th November, 2009 5. Rowedder, C (2009) Marks & Spencer Chops Costs as Sales Slide The Wall Street Journal, Available: http://online.wsj.com/article/SB123131339519260431.html Last accessed 3rd December, 2009 Read More