Fair Review Of Burberry Group Plc During Year Finance Essay

Published: November 26, 2015 Words: 2894

Introduction:

The purpose of this report is to set out a fair review of Burberry Group plc during the year to 31st March 2010. This report is a "snapshot" of Burberry Group's business. An explanation that elucidated Burberry Group plc's financial performance is the aim of the first part of this report. Therefore, an analysis of ratio analysis and financial statement is fundamental. In the second part, the firm future prospect is presented, supported by quotations and other evidence from the annual report. And finally, an explication and evaluation of the key accounting policies which are applied by Burberry plc is covered in the third part.

Burberry Group overview

Some key data of the company is provided in this chapter of this report such as the history, the worldwide presence, the market and the competitors of Burberry Group plc.

Burberry: so delightfully British, An unusual history

Burberry was founded in 1856 when the first shop had been opened in Basingstoke, England by Thomas Burberry. Very quickly; Burberry has been well-known and it is able to diversify its product range. The creator of the gabardine proffers men, women and children a range of English lifestyle luxury apparel and accessories.

During the 1900s, Burberry started up expanding internationally.

One of the major key dates is: in 1990, the Burberry retains environments product line started to be sold with it remarkable quality. Burberry's primary distribution channel is retail. According to 2009/2010 annual report (page 4), 58% of the total revenue is generated by retail.

The most important date is in 2002, when Burberry became a public company listed on the London Stock Exchange. Finally the firm may sell shares to the public. The capital of a limited company is divided into shares. The shareholders of the company have a limited liability to the company's actions. After 2002, the Company has enjoyed of a dramatically growth, with revenues increasing over 40% and operating profits rising over than 80%.

Today, Burberry it is a luxury brand icon. The brand represents a "distinctive British sensibility", a strong international penetration.

Burberry business description

Burberry is a public company listed in the London stock Exchange, which follows the accounting cycle starting 1st June and ending on 31st March.

Currently, the firm counts 5,608 employees and has 61 subsidiaries. The company has two headquarters: in London and New York City.

According to the annual report 2009/2010, Burberry's revenue is GBP 1,280 Million. There is an increase of 6.5% over 2009 which was GBP 1,202 Million. Its net profit was GBP 81, 4 Million in fiscal year ended March 2010, as compared to the net loss of GBP 6 Million in 2009.

Burberry operated in the global luxury sector, which is estimated to be an approximately GBP 128 Billion global market. (Burberry PLC Annual Report 2009/2010 page 30).

The group operates through three business segments: retail, wholesale and licensing.

The major competitors of Burberry Group Plc. are: Polo Ralph Laurent Corporation, Hermes International SA, LVMH Moet Louis Vuitton SA, Hugo Boss AG…

Let compare Burberry's market position compare to its competitors. For this, a perceptual mapping will be useful to visual the perception of customers or potential customers.

Figure : Intuitive Perceptual Map of competing brand

Source : wepapers.com

The Burberry brand is defined by its durability and its positioning within the luxury environment. To define the brand on one word, Burberry brand is The Quality. The primary focus of the brand is "remaining true to their core brand values.

According to the Burberry Plc. Annual Report 2009/2010 page 33, its business is balanced between non-apparel (36%), womenswear (35%) and menswear (24%). In conclusion, the group have a decent demand for both apparel and non-apparel segments.

Burberry: its distribution

Burberry is present in the worldwide market, which proves its strong popularity.

Figure : store portfolio of Burberry Group

Source : invpacksep01

According to the data below, this is a table about the presence of the company.

Number of stores

Percentage of its presence

Asia pacific

141

44%

Europe

82

25%

America

84

26%

Rest of world

16

5%

TOTAL

323

100%

This table shows that Burberry has a major impact in Asia, Europe and North America. This important installation of the firm proves that the market in China is dramatically growing and that the demand of potential customer is increasing as well.

I would like to underline that the fact to possess more shops do not conclude that we get more income from this region. I would like to want to explain my point of view relying on the document below.

Figure : Retail/wholesale revenue by region

Source 3: Burberry Group: Annual Report 2009/2010

As indicated in this map, 44% of sales, accounting for £408.1 Million, according to the financial report of Burberry are generated from Europe, only 27% from Americas and 24 % from Asia Pacific.

To sum up, the most of shops are presents in Asia (44%) but it is generated only 24% of revenue from retail and wholesale channels.

The company's financial performance

A Balance sheet is a financial tool for set the value of the financial position of the enterprise which summaries the value of all assets, liabilities and equity on a specific date. It is a "snapshot" of the health a wealth of a company. According to 2009/2010 annual report (page85) of Burberry Group plc, the change in Equity since 2008 is dramatically important. The balance as at 1st April 2008 was £495.3 Million and at 1st April 2010 is £603.5 million. This improvement is especially due to a better financial decision making, therefore the company generated £82.2 million of profit in 2009 whereas in 2008, it generated £5.1 million of loss.

The cash flow statement determines the solvency of the business base on the movement in cash: cash inflow or outflow, over a period. A substantial growth of is observed between the cash flow statement of 2009/2010 and 2008/2009. At 31st March 2010 it was £262 Million and at 2009 was £ 8 Million. One of the factors of this increase is the decrease of inventories: in 2009/2010: £166.9 million compare to £262.6 million in 2008/2009, according to the Balance Sheet of the company (Annual Report page 84), therefore a reduction by 36% in inventory.

The Profit and Loss statement is an instrument to show the financial performance of a business over a given period. Therefore, determines the net profit or loss of the firm according to financial data. As mentioned in the annual report of the firm in page 82, the company generated a loss of £5.1 million in 2008/2009 and a profit of £82.2 million in 2009/2010. The result is due to an exceptional clever strategy and an important control on the cost of sales. The difference between these two successive years is about £59.8 million. This should be the result of a decrease of purchase of goods and also because the opening stocks was already high. So the company did not need to buy as much as the previous year.

"A ratio is a simple mathematical expression of the relationship of one item to another," according to Williams, Haka, Bettner, and Carcello (2006, p. 674).

The purpose is to identify aspects of a business's performance to aid decision making.

ra1

Liquidity:

The current ratio is used to measure a company's liquidity, its capacity to face short-term debt obligations. A higher ratio indicates that a company is more liquid, therefore better able to service short-term debt. The current ratio of the company is 1.45 for the fiscal year ended March 2010, which is much greater than the industry average: 2.14% but less than sector average: 0.78%. The ideal level is from 1.5 to 2. In case if the level is too high, that might suggest that too much of its assets are bound in unproductive activity. Whereas, if the level is too low, that means that the company has a major risk to not be able to pay their suppliers. Indeed, Burberry Group has a ratio of 1.45, would suggest the firm has £1.45 of assets to cover every £1 in liabilities.

The acid test ratio of the company is approximately 1. This ratio is used to quantify a company's ability to pay its liabilities using assets that are cash or very liquid. It is the ideal level. It would suggest the firm has as much cash as it owes. It is very healthy! The industry average is 1.57% and the sector's one is 0.6%.

Profitability:

The profitability measures how effectively is a firm to generate profits given sales and or its capital assets.

The gross profit margin gives to investors an idea of how well sales and cost of activities are being managed relative to sales. Burberry Group's gross profit margin is 65%. That means that for every £1 of sales, the firm makes 65p in gross profit.

The higher is better. Compare to the sector and the industry average, the Burberry Group's gross profit margin is better. This can be explained by a higher percentage of sales at full price.

The Return on Equity, it is a measurement of the profitability of a company's total capital investments or how effective a company is using its total capital invested in the business. The ROCE of Burberry's company is of 19%. That means that it uses every £1 of capital to generate 19p in profit.

Gearing:

The gearing ratio is useful to make a point about how much the company is depended from the funds of share and the funds by creditor. That means, if the ratio is too high, the company has a more important funds from the creditors, such as banks. In this case, the company would be exposed to interest rate fluctuation and have to pay back the bank with interest. However, the company should have a minimum of long term loans. The benefit of this strategy is to have a relation with banks and to do not be totally depending of shareholders. The gearing ratio of the company is 47.04%. To sum up, the company is equal balance between the total of shareholder's funds and debt funds.

Investment / shareholders:

The earning per share of the company is 35% for the year to 31st March. That means the share of the firm generates a profit of 35p for each £1. Compare to the previous year : 30%, there is a increase of 16%. (Annual report page 38).

The price earnings ratio: is one of the most useful investment tools, which show the performance of the company. "The number of year's earnings represented by market price". The company's is an amount of 59. That means an investor will

The dividend yield is "the yearly dividend as a percentage of the market price of a share". It can be define as a return on investment for a stock exchange. The dividend yield of the company is higher (2.7%) than the sector (1.03%) and the industry (1.77%) dividend yield.

The company's future perspective

According to the annual report of Burberry, "the demand for expertise and ability across the organization increases. Therefore, the firm has to be able to face it on the proper time to try its best to remain competitive. The company is very optimistic about its future.

As highlighted by Angela Ahrendts, the chief executive officer of Burberry Group, "the Group's primary objectives are the continued evaluation and building of the Burberry Brand, and ensuring the Company remains firmly on a path of sustained, profitable growth over the long term". One of the most well-known icons in the world, the company is seeking to increase the penetration of the brand. Knowing that the demand for expertise from potential consumer is increasing, the company cannot take advantage of this situation. Therefore, Burberry Group is preparing to response to this demand.

In addition, John Peace, the chairman of Burberry Group has mentioned in the annual report about a major key for the marketing strategy by the joining to the Group's Board of Director of John Smith, Chief Executive of BBC Worldwide, in December. The following quotation from John Peace letter is important to be referred: "John's understanding of brands in combination with his media expertise will contribute to Burberry's future advancement. In this situation, Burberry possesses a treasure concerning his advertising policies.

The company is envisaged to accelerate the investment in 2010/2011.

Burberry has switched its goal by opening from 20 to 30 new stores situated especially in Americas and Asia Pacific. Knowing that the revenue generated from Asia Pacific has been doubled in last five years. This decision has been taken because of the future impact of China in the luxury market. Indeed, according to the Chinese Academy of Social Sciences, in five years, China will be the world's largest market for luxury products. As explained in a blue paper published in Beijing, a prediction that by 2015, the value of China market for luxury goods will be worth £9.3 billion.

Having the risk of losing its luxury icon of an extraordinary quality and knowing that the senior managers and design team have a major influence in the efficacy of the company; Burberry plc has to continually innovate its products.

For instance, the firm is planned to invest in advertising in India during the year to 31st March 2011.

As announced on the 17th February 2010 by Thomson Reuters, a well-known company based in United Kingdom, which offers news service and former financial market data, the economic situation of Spain is very critical, that is why, Burberry Company decided to restructure in Spain. This decision will affect the company in the year to 31st March 2011 by a trading loss of about £10 million.

International accounting standards

As stated in the auditor's report of Burberry plc's annual report that all sets of financial statement have been elaborated in accordance to the IFRSs Regulation (International Financial Reporting Standards). The main advantage of the IFRSs is "that it would enable the international capital markets to assets and compare inter -company performance in a much more meaningful, effective and efficient way than is presently possible".

Let start by the analysis of IAS 16: Property, plant and equipment (PP&E). "An item of PP&E should be recognized, i.e. its cost included in the balance sheet as an asset, only if its cost can be measured reliably and it is probable that future economic benefits associated with the item will flow to the entity". According to IAS 16, the cost of an item of PP&E includes its purchase price, import duties and non-refundable purchase taxes. The IAS 16 permits two kinds of treatment to the Property Plant and Equipment (PPE), the cost model and the revaluation model.

In the cost model is the asset is valued at the historical cost less accumulated depreciation based on the net book value of the PPE in the balance sheet, whereas in the revaluation model, the asset is re-valued instead of the using the historical cost and the depreciation and impairment is charged on the re-valued amount.

As mentioned on the annual report of Burberry plc page 90, the firm used the cost model.

The accounting treatment for inventories is prescribed by IAS 2. IAS 2 defines as a current asset "held for sale in the ordinary course of business", in the process of production for such sale, in the form of materials or supplies to be consumed in the production process". The inventory value is an important factor in the balance sheet and in the profit and loss statement of a company. There are three different way to calculate the value of the inventory.

The first one is the FIFO principle:" First In, First Out". Therefore, the first material entries will be the first served out of stock.

The second one is the LIFO principle. "Last in, First Out". The rule of this principle is the complete reverse one from the FIFO principle. However, this principle is not permitted by IAS 2.

And the last one is the Average Cost principle by dividing the total cost of units by the number of units.

According to the annual report of Burberry Group, the company is based on the FIFO principle because compare to the Average Cost principle, FIFO is more suitable. Indeed, the main issue of the Average Cost principle is that a permanent re-evaluation of the average cost of inventories. That means, for every purchase, the company has to re-calculate the average cost of inventories due to a permanent change of the prize of goods buying by the company.

Attention is paid to IAS 7: cash flow statement. The purpose of IAS 7 is to provide historical changes in cash and cash equivalents of a business. In other words, it is a record of all inflows and outflows movement in cash of the company over a period.

There are two different methods to elaborate a Cash Flow statement, the direct and indirect method.

In the direct method, "gross cash payments and gross cash receipts are both disclosed". According to THE BOOK, "IAS 7 encourages entities to use the direct method, on the grounds that it provides information which may be useful in estimating future cash flows and which is not available under the indirect method".

There are three activities which are concerning by the Cash Flow statement: operating, investing and financing activities.

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