Clive Peeters is an Australian retailer for electrical appliances and whitegoods.
Founded in 1973 and bought by Peter Lord and Greg Smith (current managing director) in 1993, the company now operates under two brands, as Clive Peeters in Victoria, Queensland, and Tasmania, and as Rick Hart in Western Australia.
Clive Peeters offers a wide range of products such as cooking and laundry appliances, heating and cooling solutions, home entertainment equipment, computers, small electrical goods and the latest high-tech innovations. In order to make shopping for the customer as easy as possible the company has also established a big range of services such as the E-team for installations, Easy Cooking classes or Easy Photo for digital photo in-store printing.
The store number in 2008 reaches 48 with 1500 employees overall. An expansion program has been established with the objective to open a minimum of four new large stores each year. The firm's philosophy is to satisfy customers by providing a great and easy shopping experience.
Financial ratios
The business performance of Clive Peeters Limited is analysed and based on the Annual Reports for the years 2007, 2008 and 2009. Financial ratios calculated in the four key areas - profitability, efficiency, liquidity and gearing - provide a good picture of the company's financial position and performance over the 3-year period. A detailed calculation of all ratios is provided in the Appendix.
Profitability
Ratios
Gross Profit Margin
Net Profit Margin
Return on total Assets
Return on Equity
Gross profit margin
Gross profit margin is one of the key performance indicators to measure the profitability in buying and selling goods before any other expenses are taken into account. The ratio expresses the relationship between gross profit and sales as a percentage.
Overall, the gross profit ratio has shown a decline towards the end of the inspected 3-year period.
The gross profit margin remained stable between FY 2007 and FY 2008 despite the tough retail conditions in the second half of FY 2008. Cost of sales increased accordingly with sales, which resulted in a constant ratio. The increase number of stores nationally (48 in 2008) supported Clive Peeters' presence in the market and led into higher sales. The audio vision and technology segment developed positively in 2008 comprising 42% of the Company's sales mix and contributed to the positive sales development.
In 2009, the gross profit margin fell down to 24.33%. Revenue from sale of goods did not decline correspondingly with cost of sales which was mainly the reason for the decrease by 7.7%. Sales were affected by high interest rates, rising fuel costs, declining property and share markets in most states. Clive Peeters' sales in home entertainment and technology fell by 6%. Overall, the global financial crisis has worsened the retail industry and created a difficult sales environment for all retail businesses.
Net profit margin
This ratio provides information about the profit levels of a business after current costs (excluding finance costs e.g. interest and tax) have been taken into account. It is a good measure to show how effective managers run the business and can be used to compare the operational performance with other businesses. The ratio expresses the relationship between the 'net profit before interest and taxation' and 'sales' as a percentage.
Overall, the net profit margin declined significantly into a negative ratio of 1.6% at the end of the FY 2009.
Comparing FY 2007 and FY 2008, the ratio decreased down to 3.31%. Although the sales increased in 2008, Clive Peeter's acquisition of new stores increased operational costs (such as Occupancy, Administration and Sales&Marketing expenses) which affexted the net profit.
At the end of FY 2009, the negative net profit margin indicates the company's profitability problems. Revenue from sale of goods declined stronger than the cost of sales and misappropriate expenses put further pressure on the resulting negative net profit.
Return on total Assets - ROA
ROA is a fundamental measure of business performance, describing the relationship between the net profit generated and assets owned by the business. The ratio describes the relationship between 'net profit before interest and taxation' and 'average total assets' as a percentage.
The ROA declined significantly over the 3-year period.
The store expansion from 36 in FY 2007 to 44 stores in FY 2009 had an impact on the increased average of total assets by taking more inventories, plant and equipment into account. However, the net profit decreased constantly during that period and resulted overall in a steadily declining ROA ratio.
Return on Equity - ROE
Also known as 'Return on ordinary shareholders' fund - ROSF' this ratio describes how much profit has been generated with the shareholders' investments and is available to them. The ratio describes the relationship between 'net profit after taxation and preference dividend' and 'average ordinary share capital and reserves' as a percentage.
Similarly to the other ratios that include the net profit in the calculation, there was a significant decline in the ratio, especially in FY 2009 due to a negative net profit.
Shareholders' issued capital remained stable over the three years, but the size of the retained earnings varied each year. The lowest profit was retained in 2009 due to the financial circumstances.
Earnings per share have declined from 10.7 cents per share in 2007 to a loss of 7.1 cents per share in 2009. Hence, the income for shareholders has declined drastically towards the end of the FY 2009.
Efficiency
Ratios:
Average asset turnover period
Average inventory turnover period
Debtors turnover period
Creditors turnover period
Average asset turnover period
The asset turnover measures how efficient a company uses its asset to generate revenue. The calculated period in days provides information about the time until an asset brings revenue to the business.
year
2007
2008
2009
Turnover period (days)
142
153
175
Asset turnover (times)
2.58
2.39
2.09
The number of assets in the company increased significantly in FY 2008 and remained on a high level in FY 2009. However, sales did not increase correspondingly which caused the rising number of days for the asset turnover. This indicates that Clive Peeters' strategy in using assets productively should be reviewed.
Average inventory turnover
This ratio describes how long inventory is being held before being sold.
year
2007
2008
2009
Turnover period (days)
94
107
117
Inventory turnover (times)
3.89
3.42
3.14
The inventory turnover decreased constantly. This indicates the growing number of inventories has not been managed efficiently enough and that there is room for improvements.
Sales have not been initiated correspondingly with the inventories. A reason might be that the new stores need a certain time to secure their market position and customer demands in the new areas. Additionally, the economic situation with rising interest rates, record fuel costs, costs for food etc. dampened the customer demand for this period.
Debtors' turnover period
year
2007
2008
2009
Turnover period (days)
7.84
8.03
8.92
Clive Peeters is a retailer of domestic goods, which means that customers pay their goods directly in cash or on short-term credit. According to the annual report, the average credit on sales is 7 days. The slightly higher number of days can be explained by taking debtors into consideration which pay on average after 45 days. The global financial crisis might have had an impact on the duration until payments can be proceeded by the debtors.
Creditors' turnover period
year
2007
2008
2009
Turnover period (days)
59
64
70
The significantly higher number of days until the company has made its payments indicates Clive Peeters' weakening financial situation. In 2009, suppliers received their money 11 days later than in FY 2007.
Liquidity
Ratios:
Working capital
Acid test ratio
Working capital
Also known as the 'current ratio', this ratio describes the short-term financial position of the company.
year
2007
2008
2009
Current ratio
1.22
1.37
1.43
The ratio shows that Clive Peeters can cover the short-term liabilities.
Both current assets and current liabilities grew over the three years, reaching the highest levels in FY 2008. Because assets (mainly inventory) grew slightly faster in comparison to the liabilities (mainly trade payables), from a technical view of point Clive Peeters' short-term liquidity has even improved.
However, as discussed previously in the asset turnover section, the high inventory levels are not being used efficiently. The current ratio looks only at quantities and not qualities, which might give a wrong picture of the real liquidity.
Acid test ratio
The acid test ratio provides a more truthful picture of the company's liquidity by taking only the real liquid assets and liabilities into consideration. Inventories are excluded from liquid assets as they usually cannot be converted into cash immediately without a loss of value.
year
2007
2008
2009
Acid test ratio
0.36
0.42
0.46
The results show Clive Peeters' dependence on its inventories, which is normal for a retailer. Inventories are not immediately transformable into cash, but they can still be transformed over time. Although the acid test results in an improving liquidity, the same quality/quantity limitations apply as for the current ratio. It is doubtful that Clive Peeters can cover its liabilities in a short time.
Financial Gearing
Financial gearing
This ratio describes how a business finances its operations, whether from outside parties or mainly through shareholders.
year
2007
2008
2009
Gearing ratio
4.00%
29.03%
36.31%
Clive Peeters has shown a conservative gearing behavior due to high equity levels.
In 2007, the company enjoyed a very low gearing ratio as the non-current liabilities were significantly lower in comparison to equity. The reason for the ratio increase in FY 2008 and FY 2009 was mainly that short-term borrowings from the bank of $30 million were converted into long-term borrowings (for a period of three years). Also, a lower amount of retained profits in FY 2009 reduced the equity and increased the ratio. Overall, the company maintained a conservative financial gearing behavior remaining lower than industry norm.
Clive Peeters' has calculated the gearing ratio differently using only net debt for the calculation (2007: 21%, 2008: 37%, 2009: 63%). In FY 2009, the company has exceeded the industry gearing norm of 50-60% and initiated plans to overcome this problem. Cash misappropriations caused by an employee have put considerable pressure on the company, and had further impact on the increasing gearing ratio.
Clive Peeters' economic Sustainability
Clive Peeters' philosophy is to make everything easy for the customer, suppliers and staff. The main objectives to achieve this are a national store expansion plan with more innovative products. Despite the successful development over two decades, Clive Peeters faces increasing financial problems in 2009 which challenge the company's sustainability.
Various plans have been developed to increase customer satisfaction and loyalty:
First main objective: pursue a nationwide store expansion program to guarantee sufficient presence in the market and easy accessibility for customers.
Offering of more and innovative products.
Staff training to ensure a positive buying experience for customers who can be served by competent employees.
Better service: An E-team consists of installers and computer experts who set u home entertainment systems and help with technical problems.
Online website to follow the buy-online trend.
Competitive pricing.
Unfortunately, some of these objectives have been too optimistic and others were not met at all. The financial ratio analysis shows that Clive Peeters business model was risky and simply not successful at the end of 2009:
PROFITABILITY
EFFICIENCY
Gross profit margin ↘
Net profit margin ↘
Return on Assets ↘
Return on Equity ↘
Asset turnover ↘
Inventory turnover ↘
Debtors turnover ↘
Creditors turnover ↘
LIQUIDITY
GEARING
Current ratio â†-
Acid test ratio â†-
Gearing ratio â†-
Economic sustainability
The years 2007 and 2008 have shown quite promising results for Clive Peeters. In the second half of FY 2008, however, retail conditions started to become challenging. Cost of sales grew slightly faster than the revenue which reduced the profitability of the operations. Sales were affected by rising interest rates, high fuel costs and declining housing and market shares.
The acquisitions of more stores nationwide and increased inventory levels have caused higher debt for the company. The management has made the decision for this risky approach while continuous sales growth was expected to cover the expansion expenses. Nevertheless, these inventories could not be sold fast and efficiently enough, which can be concluded from the declining inventory and asset turnover. Although the strategy for inventory management has been reviewed and improved in 2008, the benefits could not be seen at the end of FY 2009 due to the high level of liabilities. Since inventories have been financed through further debt and trade payables, the gearing ratio also increased significantly.
The store expansion has also turned out to be more difficult as expected, especially in New South Wales. Operations of a new store in Sydney showed only slow improvements.
In August 2009, the management revealed that an employee misappropriated $19 million from the company over a period of two years. The misappropriations caused significant profit declines and affected the company's expansion and advertising plans. The management failed to detect the accounting irregularities over the whole period of time which shows a clear failure of right administration.
Product sustainability
Clive Peeters missed also the idea to offer discounts to customers to stimulate demand for its products. Instead, the company's products often turned out to be more expensive than the competitors'. The promise of competitive pricing could therefore not be fully kept which weakened customer loyalty. In 2009, the home entertainment and technology sector fell by 6%, mainly due to the fact that competitors such as JB Hi-Fi offered the same products for a cheaper price. While demands for technology (Plasma TV, LCD TV) were constantly increasing Clive Peeters could not make this sector profitable enough. Sales numbers for air conditioning were also disappointing since this product has always been a big contributor for profit making.
Services such as online selling facilities or an in-house digital photo printing are not really innovative at that point of time anymore when Clive Peeters decided to enhance these services. Especially online websites has become essential for every business in the retail industry. Clive Peeters' investments in an advanced IT infrastructure were therefore necessary and right to do.
Another problem is that Clive Peeters does not provide niche products that would enhance the competitive advantage against competitors. The company is trying to provide a similar product range as bigger companies (Harvey Norman) and specialises in the product range of smaller companies (E&S trading). This puts the company in a difficult sales position.
Unfortunately, in 2008, the global financial crisis reached Australia's businesses in many sectors. Borrowing money from banks became very difficult if the balance sheet did not promise positive outcomes. The National Australian Bank has initially shown trust in Clive Peeters business development and even exceeded the due date for a debt repayment. With the financial crisis, the bank could not support the company any longer.
Conclusion
Overall, Clive Peeters' poor risk analysis for the expansion program, inefficient cash and inventory/store management, and failure in coorporate administration has put the business into a very difficult position. The economic crisis has further increased the company's inability to repay its debts. The timing for an expansion program was simply not right. Competitors have effectively used the opportunity to gain customers through better pricing and advertising.
However, a management change with a new business model and the absence of the global financial crisis might have avoided such a difficult financial position.
Calculations
Profitability
Gross profit margin
The ratio is expressed in percentage and calculated as following:
Gross profit margin = x 100
2007: Gross profit margin = x 100 = 26.36 %
2008: Gross profit margin = x 100 = 26.38 %
2009: Gross profit margin = x 100 = 24.33 %
Net profit return (before interest and taxation)
Calculation is as following:
Net profit before income tax
+ Interest expense (Finance costs)
Net profit return (bef. Int. & tax)
2007: 19,415 + 1,408 = 20,823
2008: 14,694 + 3,011 = 17,705
2009: -11,346 + 3,421 = -7,925
Net profit margin
The ratio is expressed in percentage and calculated as following:
Net profit margin = x 100
2007: Net profit margin = x 100 = 4.55 %
2008: Net profit margin = x 100 = 3.31 %
2009: Net profit margin = x 100 = - 1.60 %
ROA - Returned on total Assets
The ratio is expressed in percentage and calculated as following:
ROE = x 100
2007: ROA = x 100 = 11.74 %
2008: ROA = x 100 = 7.93 %
2009: ROA = x 100 = -3.34 %
ROE - Return on Equity
The ratio is expressed in percentage and calculated as following:
ROE = x 100
2007: ROE = x 100 = 18.14 %
2008: ROE = x 100 = 13.02 %
2009: ROE = x 100 = -12.10 %
Efficiency
Average asset turnover period
The ratio is expressed in number of days and calculated as following:
Average asset turnover period = x 365
2007: x 365 = 142 days
2008: x 365 = 153 days
2009: x 365 = 175 days
Asset turnover is calculated as following:
Asset turnover =
2007: 365/142 = 2.58 times
2008: 365/153 = 2.39 times
2009: 265/175 = 2.09 times
Average inventory turnover period
The ratio is expressed in number of days and calculated as following:
Average inventory turnover period = x 365
2007: x 365 = 94 days
2008: x 365 = 107 days
2009: x 365 = 117 days
Inventory turnover is calculated as following:
Inventory turnover =
2007: 365/94 = 3.89 times
2008: 365/107 = 3.42 times
2009: 265/117 = 3.14 times
Average debtors turnover
The ratio is expressed in number of days and calculated as following:
Average debtor settlement period = x 365
2007: x 365 = 7.84 ≈ 8 days
2008: x 365 = 8.03 ≈ 8 days
2009: x 365 = 8.92≈ 9 days
Debtor turnover is calculated as following:
Debtor turnover =
2007: 365/7.84 = 46.54 times
2008: 365/8.03 = 45.43 times
2009: 265/8.92 = 40.91 times
Creditors' turnover period
Since purchases are not provided in the income statement, cost of sales serve as a good approximation. The ratio is expressed in number of days and calculated as following:
Average debtor settlement period = x 365
2007: x 365 = 58.71 ≈ 59 days
2008: x 365 = 63.17 ≈ 64 days
2009: x 365 = 69.96≈ 70 days
Liquidity
Working Capital - Current ratio
Current ratio =
2007: Current ratio = = 1.22
2008: Current ratio = = 1.37
2009: Current ratio = = 1.43
Acid test ratio
Acid test ratio =
2007: Current ratio = = 0.36
2008: Current ratio = = 0.42
2009: Current ratio = = 0.46
Gearing
Gearing ratio
Gearing ratio =
2007: Gearing ratio = = 4.00 %
2008: Gearing ratio = = 29.03 %
2009: Gearing ratio = = 36.31 %
