METHODOLOGY
- Financial Analysis was done based on ratio analysis and Analyst forecasts. These helped to reveal and further analyse the strengths and weaknesses of the company and to gauge its market position.
- A critical appraisal of the company’s accounting policies was also done based on comparing this with policies used by Next, and with other similar Retail companies.
ACCOUNTING POLICIES
- Compliance, Consolidation, Assumption and Estimation policies were adopted by the Group, and Non-GAAP profit measures were also used for adjusted profit and EPS, to provide shareholder investment trends. These are all general industry wide practices.
- Preparation – Financial statements were prepared on the ‘going concern’ basis, and this is in contrast to the more realistic ‘historic cost’ approach adopted by Next and other major retail industry players, such as John Lewis Partnership, and Tesco, who base their method of measuring on their acquisition cost. Whilst M&S have positive forecasts, they have experienced a major slump in the past, and it can be argued that a more realistic view of their financial position would be invaluable to a wide range of future decisions.
- Exemptions – The Company has taken an exemption from the requirement to prepare and deliver its accounts in accordance with the Companies Act, which in itself is not generally accepted industry practice.
- Changes –‘Significant’ changes were made which have had an impact on reported amounts, e.g. an amendment to IFRS 2, which led to a charge of £12.4m being applied against the current year’s income statement.
Several other IFRS and IFRIC amendments have been issued, but have not been adopted by the Group. Amongst these are the amendment to IAS 39 – ‘Financial Instruments: Recognition and Measurement’, which is to be retrospectively implemented by the Group from April 2010.
FINANCIAL DATA ANALYSIS
- Ratio analysis will be used to analyse the financial strengths and weaknesses of the Group based on operating performance, investment and gearing ratios, used to interpret the expected level of shareholders returns, in relation to the to the associated risk. (Atrill & McLaney, 2008)
- Operating Performance (Profitability)
Tables B-1 and B-2 show the profitability ratios for M&S in comparison to Next.
Figure 1. M&S Profitability Ratios
Figure 2. Next Profitability Ratios
It can be seen from figure 1 that from 2007 to 2009, there was a reduction in ROE by 46%, similarly ROCE has reduced by 37% and the GPM by 4% (all over the same period). In comparison to Next over the same period (from figure 2), whilst similar reductions were recorded in some areas, from Table B-2 a higher ROSF was recorded (than for M&S) further highlighting the better financial health of Next in similar market conditions.
- Return to Investors
Tables B-3 and B-4 show the investor ratios for M&S in comparison to Next.
Figure 3. M&S Investor Ratios
Figure 4. Next Investor Ratios
It can be seen that the dividend is covered 1.8 times by the EPS, which has slightly decreased from 2007, with a yield of 5.3% (albeit a reduction from 2008). The basic EPS has also reduced and is much lower than Next figures, however better P/E figures are observed for M&S.
- Financial Gearing (Stability)
Tables B-5 and B-6 show the gearing (stability) ratios.
Figure 5. M&S Stability Ratios
Figure 6. Next Stability Ratios
Whilst M&S seem to be highly geared, indicating that the company is mainly financed by borrowing rather than equity, the GR has significantly reduced since 2008, indicating much better use of equity and retained earnings.
Next however are very highly geared but have achieved much higher ROSF figures than for M&S, with much better ICR figures observed for Next indicating that the level of operating profit is considerably higher than the level of interest payable (Atrill & McLaney).
MARKET REVIEW
- Tables B-7 and B-8 show the Share Price for M&S relative to Next from 2007 to 2009.
Figure 7. M&S Share Price Performance from 2007 – 2009
Figure 8. Next Price Performance from 2007 – 2009
It can be seen that M&S share prices slumped from 2007 to 2008 by about 49%, and again by about 11% to 2009 but have however increased in December 2009 indicating high expectations from the market.
The figures are also compared to those of Next, Tesco PLC and the FTSE 100 Index average, and the resulting chart, is indicated in Figure 8A below.
It can be inferred that retail companies experienced similar slumps in their share performance over the same period, mirroring the volatility and worsening of the economic crisis.
Source: MSN Money | Figure 8A. Comparative Analysis of Share Price Performance from 2007 – 2009
Tables B-9 and B-10 show the average investor return figures predicted by the financial analyst community.
Figure 9. Predicted Share Price Target
It can be seen that Analysts have however predicted future stock and P/E improvements for the Group over the next two years. However more increases are expected for Next and the retail industry average.
CONCLUSION & RECCOMMENDATIONS
- Whilst predicted improvements can be seen for M&S, this is really down to the consumer’s high confidence in the Group, in addition to improvements to product lines and pricing strategies.
- Some analysts however believe that the Group’s new appointment (Marc Bolland) means that their future performance may not be dictated by the UK market conditions. This is yet to be proven, and remains unlikely.
- The company has been seen improvements from pricing modifications in the past – efforts should therefore be on continual pricing improvements to reflect the spending health of the consumers, and efficient utilisation of resources.
- Director remunerations should also be cut down significantly to reduce costs, as these have significantly increased since last year – a period when spending should have been done with caution.
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Investors are however right to remain cautious as unpredictability in the market conditions and the effect rising employment and the VAT increase will have on already reduced disposable incomes makes performance of the Group, and the retail Industry very uncertain.
ANNEXES
- Financial Statements
- Tables and Ratios
- Bibliography
- Glossary
- Additional Supporting Material
FINANCIAL STATEMENTS
- The Financial Statements used in this report are inserted below:
Table A-1 – Statements
TABLES AND RATIOS USED
TABLES
- The following tables were used for graphical representation in this report:
Table B-1: M & S Group Operating Performance Ratios (%)
Table B-2: Next PLC Operating Performance Ratios (%)
Table B-3: M & S Investor Ratios
Table B-4: Next PLC Investor Ratios
Table B-5: M&S Financial Gearing (Stability) Ratios (%)
Table B-6: Next PLC Financial Gearing (Stability) Ratios (%)
Table B-7: M & S Group Share Price Performance from 2007 – 2009
Table B-8: Next Share Price Performance from 2007 – 2009
Table B-9: Predicted Share Price Target
Table B-10: P/E Target
RATIOS CALCULATED
- The ratios calculated in this report are as follows:
M&S
*Average Stock = Opening Stock + Closing Stock / 2 ** 2006 Closing Stock
NEXT PLC
*Average Stock = Opening Stock + Closing Stock / 2 ** 2006 Closing Stock
BIBLIOGRAPHY
MATERIAL USED
- The sources of information used for the purposes of this document include:
Table C-1 Bibliography
GLOSSARY
ABBREVIATIONS
- The abbreviations contained in this document are as follows:
Table D-1 – Abbreviations
ACRONYMS
- The acronyms contained in this document are as follows:
Table D-2 - Acronyms
ADDITIONAL SUPPORTING MATERIAL
PRESS CLIPPINGS
- Financial Times, Published 09:30 hrs 4 November 2009 – Marks and Spencer
Instant Overview of Marks and Spencer, Article from M2 Presswire, Published 27 march 2008 – HighBeam Research: Online Press Releases
OTHER COMPARATORS
- Other comparators used were:
