The topic that I have chosen for this Research and Analysis Project (RAP) is topic number 8: "The business and financial performance of an organisation over a three year period". Having to choose this topic among others was a challenge as each of the 20 topics provided by the Oxford Brookes University is not only very interesting but also presents a massive scope for research and analysis.
In my opinion the analysis of business and financial performance of a company is one of the most important aspects of the modern day accounting profession and therefore, I decided to opt for this topic. Also, by analysing the performance of a real company, I had the opportunity to apply my theoretical knowledge, which I learned through ACCA exams, into a practical scenario. Moreover, I feel that by applying the acquired skills to a real world scenario will broaden my knowledge of various financial analysis techniques. After settling for topic 8, I had to make an equally important decision about my choice of company on which to base my RAP.
After a day of research I was convinced that Marks & Spencer Plc (M&S) would indeed be a much better company for me to analyse by taking account of the ease in accessibility of various information available for the company. Though taking everything into perspective, i.e. the availability of information, the scale of operations of the company, its impact on the socio-economic dynamics of a country, choosing M&S indeed came as a natural choice. I have worked for M&S, although in a limited scope, and have admired the company both as an employee and as a customer. But in order to effectively analyse the business and financial information of any company one needs to have access to its financial as well as non-financial data.
Since M&S is a large company, which is listed in various stock markets with operations in many countries, there would not be any dearth of information available. M&S annual reports are readily available over the websites and various other press releases and news items are easily available too. Another reason for choosing to write on this company was due to magnitude of its operations and it is highly regarded in the retail industry.
PROJECT OBJECTIVES AND RESEARCH QUESTIONS
The primary objective of this research report is to present a thorough analysis of the business of Marks & Spencer Plc and its performance over a three year period from the point of view of an investor. The period in consideration would be the three financial years from 2nd April 2007 to 28th March 2009. This will mainly be accomplished by employing a detailed ratio analysis on the financial data available for a three year period.
Only focusing on the financial aspects of a company will not provide a better and complete analysis of its performance. Therefore, this report will also focus on the non-financial aspects of M&S Plc using a strategic planning tool called SWOT analysis which will focus on strength, weaknesses, opportunities and threats inherent in the company of faced by it. The main aims and objectives of the report on which my research questions were based can be summarised as follows:
To gather, present and analyse the financial information of M&S Plc for the three year period ended 28th March 2009 in a form which can assist an investor to assess the overall financial performance and prospects of the group.
To analyse the strengths, weakness, opportunities and threats which have resulted from the adopted strategy and their impact on the company and the group as a whole.
To evaluate the effectiveness of the strategy of M&S Plc.
To assess whether the company has sufficient resources to wither the economic downturn.
To present conclusions on the analysis carried out and to give recommendations to aid a potential investor to make a well informed decision regarding investment in the company.
In addition to the above, I had to base my research on answering the following questions:
Which sources and methods should be used to collect information?
Which competitor should be selected to provide a basis for comparison with M&S?
What are the reasons for M&S being one of the leading retailers and how is it coping with what has been described as the worst recession in 50 years?
EXPLANATION OF THE OVERALL RESEARCH APPROACH
The first and foremost thing I did to gather knowledge about the company was to start reading on various news articles M&S and the UK retail industry to gain a basic idea of the company and the market in which it operates. I then rechecked the topic and made a list of the objectives for my research. I also looked into any models that could help me in carrying out the analysis. I then collected information on the methods and sources that I could use for effective secondary research. The next phase was the most important one as it required me to carry out actual, target oriented research on the topic.
Here I gave a special thought to any ethical issues relating to the research and made an effort to avoid any chance of plagiarism or collusion. With sufficient information at my disposal I carried out the actual analysis using the models identified earlier and set out conclusions at the end. Finally, I made a check list and ticked off each of my project objectives and research questions that I felt had been answered upon the completion of the project.
INFORMATION GATHERING
Sources used and reasons:
Annual accounts of Marks & Spencer Plc: They are the most important source of financial data on which the key ratios are based and are vital in analysing the financial situation of the company and can also be used for Trend-Analysis.
Annual accounts of Next Plc: These are used to calculate the key ratios of Next Plc. They are essential to this report as they act as a yardstick to draw comparative analysis of M&S with Next.
The official M&S website: The website provides access to AGM reports, final accounts and strategy of M&S Plc. The information from this website has been used contentiously in my project as it could be favourably biased towards the company.
Financial Analysts' reports: These reports provide an impartial analysis of the current situation, future prospects and the feasibility of the decisions made by the company. Moreover, websites such as that of The Economist and Financial Times and databases such as FAME and Datamonitor provide useful data, financial ratios and commentary on the senior management's policies/strategies over the concerned period.
Newspapers/Media: Articles and commentaries published in newspapers such as Financial Times provide expert analysis on the strategic decisions made by the directors and often have a significant impact on the share price of a company. The Independent and The Guardian newspapers provide up to date financial news.
Text Books and Student Accountant Magazine: The study texts published by Kaplan Publishing UK for ACCA syllabuses and Student Accountant magazine of ACCA were a part of my background reading and have aided me greatly in generating useful ideas as to the formation and analysis of this report.
METHODS USED TO COLLECT THE INFORMATION
LIBRARY RESEARCH: This basically involved the following two activities
General reading: This mainly involved reading different articles, newspapers, magazines, books and journals to understand the company and the environment in which it operates.
Specific reading: This involved going through different databases and reports to get specific information about M&S and Next Plc. Some of the specific reading material included the following:
FAME Database (Financial Analysis Made Easy): This provides detailed financial data on companies registered within the UK such as annual accounts, ownership information and key ratios of the two companies.
DATAMONITOR (Electronic Database): It provided me with detailed non-financial information that I needed on Marks & Spencer from a source that avoided bias and was also reliable. Libraries used for general and specific reading include: British Library and City Business Library.
WEBSITES USED: As mentioned earlier, the official websites of M&S and Next were used for the purpose of information gathering. Other websites used include www.economist.com; www.ft.com; www.guardian.co.uk and www.telegraph.co.uk.
MEDIA: Bloomberg, BBC and other news channels provided information on current business affairs and the general prevailing economic conditions.
LIMITATIONS OF INFORMATION GATHERING
The information used in this report has been collected from various sources and using various different methods. Hence, it may have limitations some of which are highlighted below:
Some information was collected from M&S website which may be favourably biased towards the company. Some sources of information may contain research carried out with different objectives than this RAP. It is difficult to judge whether such information should be used for the purposes of this RAP or not. The financial statements of the company may be a bit favourably biased towards the company as through these the company aims to present itself in the best possible manner.
ETHICAL ISSUES THAT AROSE DURING INFORMATION GATHERING AND HOW THEY WERE RESOLVED
Some of the ethical issues that arose during information gathering and the way they were resolved is as follows:
One issue that arose was of plagiarism. As most of my research is from secondary data, there was a risk of plagiarism if any information that was used was not properly referenced. For this I took special care. I clearly identified and attributed any thoughts or quotations which were not my own at the points where they occur in my RAP and used the Harvard Referencing System to eliminate beyond any possible doubt any chance of plagiarism. Another ethical issue that arose was of potential collusion. One of my colleagues requested me to carry out research together with him as he had to do a similar research project for his university. By carrying out the research together it would have taken less time, but it would have resulted in collusion. This issue was easily resolved as I did not consent to carrying out the research together with him or to sharing my research with him.
ACCOUNTING AND BUSINESS ANALYSIS TECHNIQUES USED AND THEIR LIMITATIONS
RATIO ANALYSIS
Ratio analysis is one of the main accounting techniques of financial analysis to evaluate the financial position and performance of a company. It involves comparison and calculation of a number of profitability, liquidity, efficiency, gearing and investor ratios which in turn paint a thorough picture of the company's performance over a period of time.
Ratio analysis helps in the following ways:
It simplifies the comprehension of financial statements. It provides a fairly complete picture of the various changes in the financial condition of a business.
It facilitates in making inter-company comparison and highlights the factors which are commonly associated with successful and unsuccessful firms.
It helps in making investment decisions by looking at various ratios, as mentioned above.
The details of each of these ratios are mentioned in the Analysis segment of the Research Report and their definitions provided in the Appendix.
LIMITATIONS OF RATIO ANALYSIS
Ratio analysis has a number of limitations which are as follows:
Companies may adopt differing accounting policies from each other. Different methods of depreciation will lead to different accounting profit figures and hence it may not be appropriate to draw conclusions of the two ratios without making suitable adjustments.
Although ratio analysis aid in providing clues to the company's performance or its financial position but on their own they cannot show whether performance is good or bad and therefore, they need to be carefully interpreted to draw meaningful conclusions on which informed decisions could be made. Furthermore, comparisons need to be made with the 'best in the business' or with industry standards.
The figures in a company's latest annual accounts is likely to be several months out of date and may not provide most current and best indication of its performance.
Different businesses may have different sizes and hence may enjoy different levels of economies of scale. Comparisons of such businesses using ratio analysis may not be appropriate as smaller business may not enjoy facilities which are available to large ones (e.g. bulk discounts, extended credit periods, etc).
Inflation could render the comparison of financial results misleading if compared over longer time period as financial figures will not be within the same level of purchasing power. Improving trend of various ratios could indicate that the company is performing well but if accounted for inflationary changes it may paint a different picture.
SWOT ANALYSIS
A SWOT analysis is carried out in this Research Report as the main business technique used to analyse internal and external factors which have an impact on the company. It carries out an assessment of a company's strengths and weaknesses which relate to internal factors such as resource and capabilities. It also assesses the opportunities and threats that may arise in the future. This involves an analysis of external factors such as the economic environment and the industry structure.
SWOT analysis provide a simple four box framework which facilitates in understanding the strength and weaknesses of the organisation and enables the development of strategic thinking. (MANUAL ACCA PAPER P3: Business Analysis (2009))
LIMITATIONS OF SWOT ANALYSIS
One major shortcoming with the SWOT analysis is that although it emphasises the importance of the four elements associated with the organisational and environmental analysis, it does not address how the company can identify the elements for their own company. Many organisational executives may not be able to determine what these elements are, and the SWOT framework provides no guidance. For example, what if a strength identified by the company is not truly a strength? While a company might believe its customer service is strong, they may be unaware of problems with employees or the capabilities of other companies to provide a higher level of customer service.
ANALYSIS
Company overview
Marks and Spencer started as a small stall in 1884 in Leeds, UK where all products were sold for a penny. Since then the company has established itself as a leading UK retailer of clothing, food and homeware which is world renowned for its quality, value for money and its customer services (M&S, 2008). During the late 90s and the early years of 2000, M&S experienced deteriorating financial performance due to fierce competition, poor supply chain management, inferior products and ineffective cost management. However, when Sir Stuart Rose took charge as the CEO in 2004 M&S has regained its lost spark and established itself as the leading brand. M&S is traditionally called a 'bell-weather' of the UK retailing industry, which means that if M&S is struggling then hard times are ahead for the whole sector.
Analysis of the financial position of M&S Plc requires a glance at M&S's long term strategy in addition to a detailed look at the financial accounts of the group. Moreover, a three year trend analysis and intercompany comparison with Next Plc coupled with a SWOT analysis provides a reasonably realistic view of the performance of M&S over the three year period ended 28th March 2009. The analysis of M&S's performance is as follows:
Key strategies
Increasing the pace of change and operational execution in the business
Accelerating towards becoming a multi-channel retailer, focusing all our actions on the customer, whichever channel they wish to use
Driving the international business, particularly China, India and Southern and Eastern Europe, balancing investment and returns; and
Reinvigorating the brand communication with customers, highlighting our ethical and sustainability objectives.
(M&S Annual Report 2009)
An analysis of the strengths, weaknesses, opportunities and threats relating to M&S has been carried out as follows to show the impact of retail industry and the general economic environment on the company.
STRENGTHS
Market Share
M&S is the UK's largest clothing retailer, where more than 1 in 10 clothing items is bought from M&S (M&S Annual Report 2009). Although value market share declined but M&S is still the UK's leading clothing retailer holding a healthy market share of 10.7% by value and 11.2% by volume in general merchandise.
Strong brand image
The M&S brand commands a strong loyalty especially from the UK consumers, which has enabled it to wither the economic downturn. The strong brand image has also helped the company to diversify into new markets like Personal Finance and electrical goods. M&S brand has been at the heart of its success throughout its existence. Overall, the strong brand image has further facilitated the company's growth strategy by allowing the company to penetrate new markets, while maintaining a strong control of its existing ones. According to Kate Bostock, the executive director of clothing, M&S brand is the number one in womenswear on the High Street (M&S Annual Report 2009).
Effective marketing
M&S had been marketing itself aggressively over the past several years. It has introduced slogans such as 'Quality Worth Every Penny' and 'Your M&S', the advertising had been customer focused (M&S Annual Report 2009). This had the effect of the customer loyalty even in the times of recession. The TV advertisements have been particularly potent and have involved celebrities such as Twiggy, Myleene Klass, Laura Bailey and Take That (M&S, 2007).
Furthermore, the executive team of M&S is very experienced with CEO Sir Stuart Rose at the helm of affairs. He had been widely praised of having turn around the once dwindling business of M&S since his arrival in the May 2004. In the same year he had ward off several hostile take-over bid from Philip Green. http://business.timesonline.co.uk/tol/business/article788500.ece (accessed 23rd October 2009)
WEAKNESSES
Declining financial performance
M&S performance slipped over 2007 Christmas period. While all retailers did badly, M&S was particularly exposed. As at the time of writing, the share price was 361p with the 52-week low of 367p and high of 759p, which means that M&S has lost more than 50% of its value during the year (Sunday Times, 2008). Similarly, the price/earnings ratio of 9.4 is much lower than that of its competitors. P/e ratio is the major indicator of investor confidence in a company (Arnold, 2002).
Possible loss in brand value
In order to attract price conscious shoppers M&S started cutting prices and trying to be all things to all people. This may devalue the brand and the company has been allotting more floor space to its 'outstanding value' line (The Economist, 2008).
Poor corporate governance
The company was harshly criticised for promoting CEO Stuart Rose to chairmanship as well, fuelling accusations of poor corporate governance, lack of transparency and segregation of duties. The move infuriated many large investors. (The Independent, 2008)
http://www.independent.co.uk/news/business/news/investors-attack-ms-plan-to-make-rose-chairman-794061.html (accessed 24th October)
http://bizcovering.com/major-companies/a-case-study-on-marks-and-spencer/
OPPORTUNITIES
Developing new markets
Developing markets such as India and China presents great opportunities for M&S and its brand to grow even further. Whereas in the UK market M&S have been facing stiff competition, it could thrive in new markets and capitalise on its brand power.
Targeting Younger Generation
M&S had traditionally been targeting a middle aged customer. This had the effect of alienating the younger customer base. An opportunity arises for M&S that it design and promote trendier clothes to cater to younger customers.
Online food distribution
Online food sales are a great opportunity as well, since online margins are higher though it would require large initial investments into setting up distribution channels. http://www.dailymail.co.uk/news/article-1220159/Marks--Spencer-looks-online-food-shopping-boost-sales.html accessed 23rd October 2009
.
THREATS
Risk of loosing younger customer base
Currently, M&S target group are older customers many over the age of 45. This may be risky as today's 20-30 year olds will still remain trendy after 10-20 years and might be reluctant to shop in M&S, especially taking into account people's obsession to look younger these days. Although the company is trying to appeal to younger customers but it needs to do more as trendier rivals such as Next will eat into this market segment.
Cash tied customers
As the economic downturn continues, there are increasing number of customers who are now turning to cheaper retailers such as Primark. M&S faces threat of losing its current market dominant market share as a leading clothes retailer.
Threat from other premium food retailers
M&S touts itself as a premium food retailer but it is coming under increasing threat from other competitors who are offering premium quality food such as Waitrose or Tesco Finest.
Succession problems
The current CEO of Marks & Spencer Sir Stuart Rose is to step down from his position of the chief executive and his term expires in 2011 as a chairman. Failing to find a suitable CEO could turn the company into disarray and financial difficulties which Stuart Rose several years to turn around the company to its once dominant position in the clothes retailing market. Even if a suitable candidate is found but the transition from the old leadership to the new leadership is not smooth then it could have severe consequences for the company. The key stakeholders of the company are in the dilemma whether to seek candidate internally or externally. (Guardian 2009) 4th October
http://www.guardian.co.uk/business/2009/oct/04/succession-planning-itv-marks-spencer
Possible investor revolt
Accusation of poor corporate governance have damaged the reputation of the retailer and dent investors' confidence in it as Sir Stuart Rose took the position of chairman while being CEO of the company at the same time. Under the UK's Corporate Governance Codes it is advised that the role of chairman and that of the chief executive order be kept separate.
http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article3638573.ece.
RATIO ANALYSIS
SALES REVENUE GROWTH
The sales revenue increased by a small 5.5% from the year 2007 to 2009 and a negligible 0.4% from the year 2008. This shows the grim market conditions faced by an up-market retailer. This growth has largely been due to the significant expansion by the company in the overseas market. There has been an increment of 47.0% from 2007 to 2009 in the international market and 25.9% from 2008. Although the international market only comprises 9.9% of the total revenue. But nonetheless this significant growth has proven that the company is pursuing its key strategy of expansion of its international business.
As opposed to M&S, Next has struggled to grow over the three years from 2007 and in 2009 its revenue shrunk back to even below that of 2007. Consumer spending have been tight and this is reflected in Next's revenue figures. While M&S, in order to maintain its market share has slashed prices and promoted it 'outstanding value' products more.
PROFITABILITY RATIOS
Gross profit margin
It can be inferred that gross profit margin (GPM) for Next, has stayed fairly constant (27.8% in 2007 and 27.7% in 2009). Although in absolute terms the GPM has fallen. Likewise, GPM for M&S remained steady throughout the three years from 2007. It was 38.9% in 2007 to 37.2% in 2009. The economic downturn and prevailing recession inflicted a pressure upon profit margins for both companies during the last two years. Marks & Spencer celebrated its 125th birthday on the month of May 2009 by selling about 2 million items at the price of a single penny and they called this a 'Penny Bazaar'. (http://www.dailymail.co.uk/femail/article-1181381/Penny-Bazaar-2009-M-S-turns-clock-offering-million-items-1p-each.html)
The company also had 20% discount day sale to allure recession hit shoppers to spend more in the M&S UK stores.
http://www.telegraph.co.uk/finance/financetopics/recession/3512248/MandS-planning-second-one-day-sale-as-high-street-becomes-hooked-to-discounts.html
Both of these factors contributed to lower gross profit margins. Although M&S has showed improved performance relative to Next in this regard as it enjoyed superior supplier relationships. (M&S, 2008)
OPERATING PROFIT MARGIN (OPM)
The operating profit margin in 2007 was 12.2% which fell by 2.6 percentage points in 2009. Since the year 2007, the OPM margin dropped by a significant 2.6%. This was largely due to the increase in retail occupancy, which are the energy costs and higher distribution costs which in turn was due to higher fuel prices. Although the marketing costs were lower as the company sought to cuts back on promotional and TV campaign with fewer ads running.
In comparison, Next's OPM had been higher throughout the years in consideration implying implying that core business operations were profitable. OPM increased from 15.5% to 16.1% in 2008 due to Next's inflated product prices, though it dropped by 1.4% in the following year.
NET PROFIT MARGIN (NPM)
In the year 2007, the profit after tax was £659.9m representing 7.7% of the turnover. 2008 was a good year for M&S where its pre tax profit was over £1.1 billion and its NPM was 9.1%. The NPM margin from 2008 to 2009 faired a little better than the OPM through the same years. OPM dropped by 3.8% points whereas the NPM dropped by 3.5% points. This is possibly due to significantly lower corporation charge in 2009 than that in 2008.
Once again M&S has performed poorly in comparison to Next. Next had an average NPM of about 10% while M&S average NPM was 7.5%.
ASSET TURNOVER
Asset turnover measures management's efficiency in generating revenue from net assets utilised by the business. (Manual: ACCA Paper F7: Financial Reporting (2008))
Next's asset turnover was 5.58 in 2007 which dropped to 5.11 and subsequently dropped to 4.76 in 2009. This means that in the year 2009 Next generated £4.76 for every pound invested in non-current assets. Although this asset turnover trend had been declining during the three year under analysis but Next had been a better performer as compared to Next.
Marks & Spencer asset turnover had been pretty abysmal, it declined slightly from the year 2007 (1.89) to 2009 (1.54). Though 2008 was a good year in terms of sales but due to heavy capital expenditure the asset turnover still declined to 1.51, M&S invested £1.1bn in 2008. As it can been seen from the financial statements, the sales revenue in 2009 dropped 0.44% but also at the same time the capital expenditure was reduced significantly to £652m which led to a slight increase in the asset turnover. Furthermore, non-trading stores worth £58.3m were sold off. Another reason for M&S having a poor asset turnover ratio is due to the fact that the company has a massive land portfolio and has investments in land and buildings worth over £2.4bn. Having freehold land and buildings always proves beneficial to the company as when the time of need arises where the company is finding hard to raise equity capital then it could always seek loan from bank or other financial institutions by keeping these lands as collateral.
RETURN ON CAPITAL EMPLOYED (ROCE) AND RETURN ON SHAREHOLDERS' FUNDS (ROE)
ROCE is a fair indicator of the profitability as it presents a picture of the profit of a company in comparison to the amount of the assets used to earn that profit. It is a combination of operating profit margin and asset turnover. The decreasing profit trend in M&S has been translated to the ROCE for M&S. Since 2007 ROCE has deteriorated considerably, from 27.7% in 2007 to 17.6% in 2009. Lower ROCE is also due to growing recession which adversely impacted Christmas sales in 2008 and 2009 and turnover did not increase as substantially as expected (Keynote, 2008; The Economist, 2008).
LIQUIDITY RATIOS
CURRENT RATIO
The current ratio measures the adequacy of the current assets to meet the company's current liabilities. According to Atrill and McLaney (2007), minimum liquidity ratio should be 1:1, however, the ratios for M&S and Next presents a different picture. Though both the current and quick ratios have been improving for M&S since the year 2007 (from 0.53 to 0.60 and 0.27 to 0.37) but they are still well below the recommended ratios for companies that represent improved liquidity position. However, for companies operating in retail industry it is considered normal for them to have low current and quick ratios.
EFFICIENCY RATIOS
INVENTORY TURNOVER DAYS
Efficiency ratios measure the efficiency with which the business manages its assets and liabilities. From the calculations it is evident that the inventory turnover days have deteriorated. It took 29 days to sell stock in the year 2007 which increased by two days on year on year basis. This reflects the economic downturn M&S is facing where it is finding hard to sell to cash strapped customers.
In comparison, Next's stock turnover had been significantly higher throughout the years in consideration. Next's increasing selling prices adversely affected consumer spending and stock turnover increased by 6 days to 49 from 2007 to 2009. While on the other hand M&S adopted a moderate pricing policy during recession hence customers have a greater preference for its products (Financial Times, 2009).
CREDITOR DAYS
The ratio represents the credit period taken by the company from its suppliers. From the calculations in Appendix 2 it is evident that, Next has been paying off liabilities rather slowly (at 96 days in 2007). During 2008, Next took 24 days less to pay off creditors primarily due to rising revenues. However, in 2009 the creditor days increased by 3 days. Compared to Next, M&S had been paying its creditors much quicker, 23 lesser days in 2007. The average credit period taken by M&S dropped by 9 days in 2008 but this rose to 69 days in the following year. This perhaps could be the reason of increased cash and cash equivalents. One possible explanation of this increasing creditor day ratio could be that the company in this time of recession is trying to keep hold of cash and investing in the business.
GEARING RATIOS
CAPITAL GEARING
Next appears highly geared, it depicted a significant rise in gearing from 359% in 2007 to negative 1452% in 2008. This is due to considerable reduction in retained earnings that reduced by 19% in 2008 together with persistent borrowings which exceeded shareholder funds. Gearing ratio augmented as Next borrowed excessively for financing store expansion which increased long term debts. As gearing is exceeding 100% it indicates substantial bankruptcy risk for Next.
Gearing ratio for M&S also indicates that, investments are mostly financed by borrowing rather than shareholder funds. Gearing increased from 157% in 2007 to 209% in 2008 when borrowings exceeded shareholder funds. The rise of gearing in 2008 is explained by heavy borrowing of £235.3m in the year 2008. M&S gearing ratio has been significantly lower over the three years from 2007, though it shows a similar increasing trend as Next.
M&S have relied on debt financing to fund its expansion strategies. From the company's consolidated statement of cash flows it is evident that in 2008, it issued medium-term notes worth £631.7m together with a drawdown bank loan of £317.6m. Even though M&S gearing also exceeded the 100% benchmark for high risk companies, it is better-off than Next as it has greater shareholder funds and retained earnings and utilising them effectively. M&S therefore, entails lower bankruptcy risk compared to Next as it has over £5.7bn of retained earnings to pay off its debts.
INTEREST COVER
Interest cover indicates the ability of a company to pay interest out of the profits generated. The interest cover for Next was 15.3x in 2007 which gradually decreased to 9.4x in the year 2009. But even then, this is pretty healthy rate as such companies with high interest cover are deemed to be less likely to default on interest payments. Next's high pricing strategy has lead to greater profit margins and thereby providing enough operating before interest and tax to pay off the interest. In comparison, M&S interest cover rate was about half that of Next (7.3 times) and it has shown a continuous downward trend. M&S had been trying to increase its market share at the expense of lower margins, which is translated to its decreasing interest cover. Though interest cover of 4 times in 2009 is still well above the threshold of 1.5 times but M&S should look to decrease its burden of debt expense.
INVESTORS RATIOS
SHARE PRICE
Share Price Chart 1.jpg
The above chart indicates that closing share prices for both companies deteriorated from 2007 to 2009 due to economic uncertainties. Worsening economic crisis resulted in M&S share price to drop from 676.50p in 2007 to 265.25p in 2009;causing a significant reduction in share price, of approximately 61%. Similar trend was observed for Next, where share price declined from 1946p in 2007 to 1097p in 2009; reporting a decline of approximately 44%. Compared to M&S, Next's share price declined by a much lower percentage and shares were traded at relatively higher prices from 2007 to 2009. In the year 2009 the maximum share price for Next was 1522.0p, while for M&S the share price peaked to 417.0p.
EARNING PER SHARE (EPS) & DIVIDEND PER SHARE (DPS)
The dividend per share and the earnings per share are of utmost significance to the shareholders and the potential shareholders of a company. While DPS gives a view of the immediate returns that an investor can expect on his/her investment; the EPS, which is widely regarded as the most important indicator of a company's performance, shows the potential returns on investments and the future value of the stock of the company.
By the end of the year 2007, the EPS for the Next's shares at the end of the financial year was 144.3p which increased by approximately 15.5% to 166.6p. This rise suggests that the growth in the earnings of the company has been at a higher level than the growth in shareholders equity.
But as the margins deteriorated the EPS dropped by 6.5% to 155.7p in the following year. A similar trend could be observed in the EPS of M&S, it rose by 25.8% from the year 2007 when it enjoyed healthy profit but as the company tried to maintain its market share in the economic downturn it had to invest in its margin. This resulted in the EPS of 32.3p representing a drop of 34.3% from the preceding year.
PRICE TO EARNINGS RATIO (P/E)
From the investors perspective P/E ratio is another important ratio. It represents the number of years of earnings it will take to payback the purchase price of the share. It could also be interpreted as how much the investors are willing to pay per pound of earnings. http://www.bized.co.uk/compfact/ratios/investor12.htm (accessed 22nd October 2009)
M&S's P/E ratio was higher than Next even though its share price was lower
Consequently, Next's P/E ratio was higher as its share prices are relatively higher than M&S; hence Next's shares appear to yield higher returns and attract investors. Nonetheless, P/E ratios for both companies have declined since 2006 implying that investors might be unwilling to invest in company shares if the trend persists (Yorkshire Post, 2008). However, Next is highly geared compared to M&S and share prices might fall even further as investors perceive higher risk of investing in Next's shares. EPS for Next and M&S increased from 2006 onwards as both companies reported rising after tax profits which exceeded growth in number of outstanding shares. The primary reason for rising EPS in 2007 for both companies pertains to a rising ROCE value which reduced in the subsequent year. Compared to Next, M&S has lower EPS during 2008 so from an investment point of view, investors might be more willing to invest in Next's shares.
CONCLUSION
It could be concluded from the above analysis that Marks and Spencer like Next is confronted with deteriorating financial performance. Its UK profits were down by 33% in the year to 28th March 2009. In view of the declining performance, the group finance and operations director Ian Dyson is leading a change program called '2020 - Doing the Right Thing' (M&S, 2009). Some of the poor performance could be attributed to the economic recession. As the UK's largest clothing retailer and with a premium food offer, M&S is bound to be affected by consumers who are looking to cut their spending. Clothing dropped by 4.1% and although M&S fared better in kidswear and lingerie, the major menswear and womenswear clothing lines continue to cause problems.
Food sales comprises 49.9% of the turnover for M&S but it has been facing stiff competition as consumers turn to cheaper rivals such as Sainsbury who offer good quality food. In order to fend off competition M&S has been making substantial investment in margin and having a strong promotional stance. On the brighter side, M&S online channel, M&S Direct, has seen a substantial increase of 19% (M&S, 2009) with sales amounting £324m. It now delivers to over 73 countries worldwide and is targeting to reach M&S Direct sales to £500m by 2010/11 (M&S October 2009)
http://corporate.marksandspencer.com/media/press_releases/International/InternationalDelivery
Although part of Sir Stuart's original strategy was to change the culture of the company (a strategy which he states has been achieved), M&S still appears to be chasing retail trends rather than setting them, as was once the case. The speed of change must accelerate fast if the retailer is to fight off greater competitive threats to its customer base from the likes of Sainsbury and Next. If Ian Dyson can deliver on this aim then he will go a long way towards proving himself a worthy successor to Sir Stuart Rose.
M&S must take account of consumer's purchasing capacity and investing in margin by having aggressive pricing strategies could erode turnover. M&S must revise its investment decisions and utilise existing resources efficiently to maintain its competitive edge. Expansion plans can escalate financial costs and will lead to more borrowing, therefore M&S must wisely invest in projects which will lead to greater productivity.
