The fashion industry has been facing a global economic crunch which has made even the most well-to-do customers to cut down their discretionary spending. Fashion retailers are re-structuring their business strategies so as to help them in tackling the new market situations and seek for directions to optimise balance between cost and value as they offer quality to their customers.
The market is declining amidst tougher competition as business has been forced to seek new directions because of the world's economic meltdown. Many fashion retailers have streamlined their operations because of the difficult economic climate. Squeezed margins have made companies to seek new ways to create a competitive advantage in order to add value for customers. Balancing between creativity, quality, value and price is a big challenge that is being faced by most clothing retailers.
The effect of falling GDP have brought about downward pressure on consumer spending and confidence and this has negatively affected several business performance, and at the same time has caused downwards in asset prices which enables acquisition of resources. Declining aggregate demand will also lead to business exits, especially among new firms (Geroski et al. 2007), which will enable higher market shares for surviving firms.
Despite the effort of the government towards rescuing the global financial situation, there had been no good news on the ground of the fashion industry. The purchasing power of fashion retailers are being affected by lack of liquidity and shortage of credit from banks. Many companies have passed through significant drop in sales due to the current recession. So much wealth has suddenly disappeared and can never be replaced overnight. The recession is almost over and so the economy will soon start growing again but many clothing stores are badly hit. The question now is; who will survive?
NEXT (mid-market retailer) and Burberry (luxury market retailer) are among several other UK clothing fashion retailers that are faced with this problem of economic meltdown. Their success during the recession will be measured by comparing both with their financial performance in the UK clothing market. This financial performance however, is determined by their retail strategies, current positioning, current state of the economy and other external factors such as demographics and the exchange rate for purchases which is mainly caused by the recession.
NEXT PLC
NEXT is positioned firmly in the middle mainstream fashion market, targeting 25-45 year olds who are fashion followers. (Next, 2009) NEXT company logo is 'next' in lower case which was updated in 2007/08 (Verdict, 2009)
NEXT is one of the leading UK clothing retailers offering stylish, good quality products in clothing, footwear, accessories and home products through three main channels of distribution;
NEXT Retail- a chain of more than 500 stores in the UK and Eire
NEXT Directory- a direct mail catalogue and transactional website with more than 2 million active customers
NEXT International, with more than 170 stores overseas. (Next, 2009)
Other businesses in the Next group include:
NEXT Sourcing, which designs, sources and buys Next branded products; and
Ventura, which provides customer services management to clients wishing to outsource their customer contact administration and fulfilment activities (Next, 2009)
NEXT make use of standalone Lime stores in other to capitalise further on its existing product line and take a bigger slice of the large, growing UK value clothing market. (Verdict, 2009)
BURBERRY
Burberry is an internationally recognised luxury brand with a worldwide distribution network.
From its founding in 1856 when Thomas Burberry constructed his first outerwear garments for the sportsmen of Basingstoke, England, Burberry has become a leading luxury brand with a global business.
The Burberry brand is defined by its:
Authentic British heritage
Unique democratic positioning within the luxury arena
Founding principles of quality, function and modern classic style, rooted in the integrity of its outerwear
Globally recognised icon portfolio: the trench coat, trademark check and Prorsum horse logo
The business built upon this brand is distinguished by:
Multi-category competency: womenswear, menswear, non-apparel and childrenswear - with innovative outerwear as the foundation
Channel expertise in retail (including e-commerce), wholesale and licensing
Global reach: operations in markets throughout the world, with a balance across major geographic regions
A unified, passionate and seasoned management team (Burberry, 2009)
LITERATURE REVIEW
According to Posthumus, et al, (2000), Financial statements are prepared to give an overview of an enterprise's financial performance over a certain time period. The three essential elements of the financial statements are balance sheets which indicate performance on a specific date, the income statement which indicates performance over a period of time and the cash flow statement which provides information on the cash that is generated and utilised in respect of all financial resources during the period under review.
Financial ratios are used to compare and evaluate the performance of a company and another. "A financial ratio indicates the relationship between two sets of items on the income statement and balance sheet"(Posthumus et al, 2000, p. 3) A financial ratio analysis will be performed on these two clothing firms, NEXT and BURBERRY using their balance sheets and profit and lost accounts.
A balance sheet is used to report the position of financial statement at the close of a business in a given day, detailing the values of assets and liabilities at the date and offering considerable scope for the analysis of the relationship between the different classes of assets and liabilities. (Pendlebury and Groves, 1994) Therefore, the balance sheet shows how a business is being funded and how these funds are being used.
It is very important to calculate profitability ratio as pointed out by Posthumus et al, (2000), that the main objective of any business is to make profit and so profitability ratios indicates how well investment in the business entity is doing. Gross profit margin, net profit margin and the return on equity are used to calculate profitability. These are calculated as follows:-
Gross Profit Margin = Gross profit * 100
Turnover
Turnover = Sales
Gross Profit = Turnover - Cost of Sales
The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold.
Net Profit Margin
=
Net Profit
x 100
=
Profit before Interest and Taxation
x 100
Turnover
Turnover
Net Profit = Gross Profit - Expenses
Return on equity = net profit after interest and tax x 100
Average ordinary shareholders' equity 1
Liquidity ratio is used to measure the enterprise's ability to fulfil short term commitments. The two liquidity ratios are the current ratio and the acid ratio. (Posthumus, et al, 2000) They are calculated thus:-
Current ratio = current assets
Current liabilities
The ratio of current assets, excluding stock, to current liabilities, is often referred to as the 'quick ratio'. (Atkinson, et al, 2001) This is defined as:-
Quick (acid test) ratio = current assets - stock
Current liabilities
The working capital ratio provides an indication of the likely amount of working capital required when sales increase. Working capital is represented by current assets minus current liabilities. (Stone, 2001)
Working capital is therefore calculated thus:-
Working capital = Current Assets - Current liabilities
//
stock + debtors + cash
According to (Pendlebury and Groves, 1994), it is examine the means by which a company finances its operations as they can be financed partly by bank loans or shareholders, this is referred to as debt and equity. The relationship between debts and equity gives a measure of the gearing of a company.
Gearing ratio is used to measure the proportion of a company's total capital that is borrowed, and it is calculated as follows:-
Gearing ratio = Debt x 100
debt + equity
The capital employed is the total amount of capital the company has at any time. It is the same as the shareholder's equity and it is a figure that balances on the balance sheet.
The providers of equity do not enjoy a fixed reward each year but are entitled to the residual profits after all other payments including interest charges have been met and this varies according to the fortunes of the company. If gearing ratio is high, the proportion of the borrowed company's money will be high and the financial risk perceived by ordinary shareholders will be great. A company with a high gearing ratio is in a very dangerous situation because if interest rates are going up, their interest payable bill will be rising fast, with no corresponding increase in sales revenue therefore profit will suffer. (Pendlebury and Groves, 1994)
APPENDIX 1: NEXT PLC FINANCIAL ANALYSIS
31/01/2009
th GBP
31/01/2008
th GBP
31/01/2007
th GBP
Turnover
3,271,500
3,329,100
3,283,800
Cost of Sales
-2,363,000
-2,380,000
-2,372,300
Profit (Loss) before Interest
479,600
541,400
511,500
Interest Paid
-50,800
-43,300
-33,100
Fixed Assets
686,800
651,200
588,600
Gross Profit
908,500
949,100
911,500
Profit margin (%)
13.11
14.96
14.57
Administration Expenses
-427,300
-413,800
-405,400
Current Assets
1,090,500
979,200
982,400
Current Liabilities
-708,100
-1,042,500
-738,500
Operating Profit
477,400
535,900
506,100
Number of Employees
36,973
39,155
36,999
Total Other Income & Int. Received
2,200
5,500
5,400
Retained Profit(Loss)
195,900
244,900
227,900
Taxation
-126,500
-144,200
-146,900
Dividends
-106,500
-109,200
-103,600
Trade Creditors
205,253
175,120
174,536
Trade Debtors
492,967
478,844
467,829
Shareholders' Funds
156,700
-79,200
189,300
Long Term Liabilities
912,500
667,100
643,200
Interest Received
1,300
4,300
4,000
Bank & Deposits
47,800
56,000
121,700
Stock & W.I.P.
318,700
319,100
281,800
Profit (Loss) before Tax
428,800
498,100
478,400
Profit (Loss) after Tax
302,300
353,900
331,500
Profit (Loss) for Period
302,400
354,100
331,500
Source: Fame, 2010
APPENDIX 2: BURBERRY FINANCIAL ANALYSIS
31/03/2009
th GBP
31/03/2008
th GBP
31/03/2007
th GBP
Turnover
1,201,500
995,400
850,300
Cost of Sales
-535,700
-377,700
-329,000
Profit (Loss) before Interest
-2,700
207,400
162,500
Interest Paid
-13,400
-11,700
-6,200
Fixed Assets
383,300
364,800
326,000
Gross Profit
665,800
617,700
521,300
Profit margin (%)
-1.34
19.66
18.38
Administration Expenses
-665,100
-416,500
-365,300
Current Assets
742,400
588,400
423,700
Current Liabilities
-546,800
-436,200
-330,400
Operating Profit
-9,900
201,700
157,000
Number of Employees
3,869
3,646
Total Other Income & Int. Received
7,200
5,700
5,500
Retained Profit(Loss)
-57,700
87,800
73,700
Taxation
11,000
-60,500
-46,100
Dividends
-51,700
-47,400
-36,500
Trade Creditors
54,643
62,500
56,842
Trade Debtors
146,484
136,300
86,195
Shareholders Funds
437,100
390,000
408,948
Long Term Liabilities
39,600
21,700
22,400
Interest Received
7,200
5,700
5,500
Bank & Deposits
252,300
127,600
131,400
Stock & W.I.P.
262,600
268,600
149,800
Profit (Loss) before Tax
-16,100
195,700
156,300
Profit (Loss) after Tax
-5,100
135,200
110,200
Profit (Loss) for Period
-6,000
135,200
110,200
Source: Fame, 2010
ANALYSIS
This section presents sample calculations, summary data and an analysis performed on the ratios and themes of these two clothing firms, NEXT and BURBERRY using profitability, liquidity, working capital and gearing. Graphs are plotted to clearly explain debtor days, stock days and stock days.
SAMPLE FINANCIAL RATIO CALCULATIONS - NEXT PLC
YEAR 2009:
Turnover = 3271500
Gross profit = 3271500 - 236300 = 908500
Gross profit margin = 908500 x 100 = 27.77
3271500
Net profit = 908500 - 427300
Net profit margin = 481200 x 100 = 48120000 = 14.71
3271500 3271500
Current ratio = 1090500 = 1.54
708100
Quick ratio = 1090500 - 318700 = 771800 = 1.09
708100 708100
Current assets = 318700 + 492967 + 47800 = 859467
Working capital = 859467 - 708100 = 151,367
Gearing = 912500 x 100 = 91250000 = 85.34
912500 + 156700 1069200
Sales per day = turnover = 3271500 = 8963.1
365 365
Debtor days = debtors x 365 = 492967 x 365 = 55
Credit Sales for year 3271500
Creditor days = creditors x 365 = 205253 x 365 = 22.9
Cost of goods sold per day 3271500
Stock per day purchased = cost of goods sold = 236300 = 6473.97
365 365
Stock turn = cost of goods sold = 2363000 = 7.41
Stock 318700
Stock days = 365 = 365 = 49.26
Stock turn 7.41
APPENDIX 3: ANALYSIS RESULT FOR NEXT PLC
YEAR
2009
2008
2007
Gross profit margin (%)
27.77
0.93
27.73
Net profit margin (%)
14.71
80.42
15.16
Current ratio (%)
1.54
0.94
1.33
Quick ratio (%)
1.09
0.63
0.95
Current assets
1,279,000
1,042,200
1,046,700
Working capital
151,367
-188,556
-160464
Gearing (%)
85.34
89.39
77.26
Sales per day
8963.1
9120.82
8996.71
Debtor days
55
52.5
52
Creditor days
22.9
19.2
19.4
Stock per day purchased
6473.97
6520.55
6499.45
Stock turn
7.41
7.46
8.42
Stock days
49.26
48.93
43.35
SAMPLE FINANCIAL RATIO CALCULATIONS - BURBERRY
YEAR 2009:
Turnover = 1201500
Gross profit = 1201500 - 535700 = 665800
Gross profit margin = 665800 x 100 = 55.41
1201500
Net profit = 665800 - 665100
Net profit margin = 700 x 100 = 70000 = 0.06
1201500 1201500
Current ratio = 742400 = 1.36
546800
Quick ratio = 742400 - 262600 = 479800 = 0.88
546800 546800
Current assets = 262600 + 146484 + 252300 = 661384
Working capital = 661384 - 546800 = 114584
Gearing = 39600 x 100 = 3960000 = 6.84
39600 + 539300 178900
Sales per day = turnover = 1201500 = 3291.78
365 365
Debtor days = debtors x 365 = 146484 x 365 = 44.5
Credit Sales for year 1201500
Creditor days = creditors x 365 54643 x 365 = 16.6
Cost of goods sold per day 1201500
Stock per day purchased = cost of goods sold = 535700 = 1467.67
365 365
Stock turn = cost of goods sold = 5357000 = 2.04
Stock 262600
Stock days = 365 = 365 = 178.92
Stock turn 2.04
APPENDIX 3: ANALYSIS RESULT FOR BURBERRY
YEAR
2009
2008
2007
Gross profit margin (%)
55.41
62.06
61.31
Net profit margin (%)
0.06
20.21
18.35
Current ratio (%)
1.36
1.35
1.28
Quick ratio (%)
0.88
0.69
0.83
Current assets
554,500
417,900
303,600
Working capital
114,584
96,300
36,995
Gearing (%)
6.84
4.2
5.38
Sales per day
3291.78
2727.12
2329.59
Debtor days
44.5
49.9
37
Creditor days
16.6
22.9
24.4
Stock per day purchased
1467.67
1034.79
901.37
Stock turn
2.04
1.41
2.2
Stock days
178.92
258.87
165.91
APPENDIX 5: COMPARISON OF CURRENT RATIO FOR NEXT AND BURBERRY
current ratio
From the above analysis, there is a significant increase in the current ratio of NEXT after a drop in 2008, as for BURBERRY, there is no much different between the increase after the drop in 2008. This shows that NEXT is improving better than BURBERRY thereby leaving them at lesser risk.
APPENDIX 5: COMPARISON OF DEBTOR DAYS FOR NEXT AND BURBERRY
DD
The above analysis shows that BURBERRY is cutting down on their debtor days while there is a constant increase in NEXT debtor days which might affect their suppliers as their debt payment days might be longer, also their lenders will be cautious while lending them money.
APPENDIX 5: COMPARISON OF STOCK DAYS FOR NEXT AND BURBERRY
SD
NEXT stock has proved more consistent with lesser stock days unlike BURBERRY that are inconsistent which shows bad stock management.
CONCLUSION
NEXT and BURBERRY operates as clothing retailers but with completely different market strategies. BURBERRY is said to be a luxury brand focusing more on product quality while NEXT even as they focus on product quality make use of fast fashion. From the above analysis, both companies are making their way out of the ongoing economic meltdown although not without struggle.
The above analysis shows that NEXT have high gearing while BURBERRY has low gearing, therefore NEXT and their shareholders are at a very high risk as interest payments will be high and dividends low. However, BURBERRY should be cautious as their gearing is too low and so will affect growth rate while NEXT will keep growing faster as they are using Debts to grow. NEXT have increasing turnover and liquidity ratios and decreasing stock days and creditor days while BURBERRY has had a constant decrease in liquidity ratios, but has maintained debtor and creditor days, increasing stock days and turnover.
From this financial ratio analysis, NEXT has done better than BURBERRY in many aspects and so it is obvious that NEXT (mid-market retailer) is more successful during the recession and so will emerge more successfully after the recession than BURBERRY (luxury market retailer).
