Presentation of Results:
1. Change in share price
1.1 The share price on the 2nd of January 1998 was 583.5p. At the time of Philip Green’s offer in May 2004 the share price was 276p, indicating a dramatic fall of 307.5p per share.
1.2 The sharpest fall in share price was experienced from the beginning of 1998 to the end of 2000, as can be seen in appendix 1. On the 14th December 2000 the share price had reached a low of 184p but it was then raised to 422.5p in May of 2002, where the increase levelled off and started to drop once again. Two years later the decrease had brought the share price to 276p.
1.3 Philip Green made his first offer in May 2004; the share price at this time was 276p. Following this offer a huge rise in share price was experienced in a short time period so that on the 7th of July 2004 each share was valued at 385p. This represented in appendix 2.
2. Ratios to represent financial situation
2.1 The gross and net profit margin shows the improved efforts by Marks and Spencer in recent years to improve efficiency. The higher the percentage figure the superior the company is in turning revenue into profit. In 2000 the company’s gross and net profit margin was 31.8% and 6.6% respectively. In 2004 this had changed to 36.6% and 9.9%.
2.2 In the same period Marks and Spencer’s profitability has increased from 6.3% to 9.4%
2.3 Due to the increased efficiency of being able to turn a greater percentage of turnover into profit shareholders have seen a greater earnings and dividend per share return. The earnings per share ratio has increased from 9.6p in 2000 to 24.2p per share in 2004. Likewise, dividend per share has increased from 9p to 11.5p in the same time period.
2.4 As regards to capital expenditure the figure goes down from £450.6m in 2000 to £290.5m in 2002. The figure then rises again and in 2004 the capital expenditure is £433.5m.
3. Reasons to support changes in share price and ratios
3.1 The huge decline in share price between 1998 and mid-2004 can be attributed to the fact that the business structure was not up to standard in some areas. One of these reasons is that the company had been too top heavy in the boardroom and there was more hierarchy than what should have proved desirable.
3.2 The company had a centralised buying system, thus increasing costs and operating in a deficient manner. Evidence to support this viewpoint can be seen by the fact Marks and Spencer was incurring a £14 cost for an item which should have only cost £4 to make.
3.3 Overseas operations, for example, those in Canada and Germany were not proving a success.
3.4 High street conditions have become a lot tougher since 1998 and competition has increased greatly. Before this time many retailers tended to avoid Marks and Spencer due to its dominance but according to Mr Hyman many have ‘set up shop in Marks’ backyard’ in recent years and have shown confidence to take on Marks and Spencer head on. Retailers such as Next and Debenham’s are good examples.
3.5 Due to the effort made to accomplish the expansion plans between 1998 and 2000 the company underestimated the impact of the external environment.
3.6 Management operations were inefficient and did not consider the changing market conditions. There was almost no turnover at senior level.
3.7 In recent years firms have had to adapt and become more customer-driven in its objectives. However, Marks and Spencer has always tended to be more product-driven and has therefore found it difficult to adapt, thus in the meantime losing a degree of competitive advantage.
Conclusion: The company has always, quite rightly, portrayed itself as the number one retailer in its market but during the past few years this has been brought into question with the increased competition it has experienced. This has been a by-product of the success experienced by retailers such as Next and Debenhams and also due to the expansion of its product portfolio. Not only has there been increased competition but also it has become apparent that Marks and Spencer operations have lacked efficiency in recent years. Such problems include poor management, a deficient hierarchical structure, a product-driven approach, an inability to experience the same success in foreign countries and an overall inefficient way of conducting business, a good example being its centralised buying system. As a direct result, profitability has been affected, which can be seen from the ratios and this in turn has led to a huge drop in share price. Changes had to be made and were. It was not until late 2000 that these changes improved the financial outlook of the company by rising share price and improving certain ratio figures. Having said that, it appears that from the research undertaken that even though a steady increase is being made it will still be a long time before share price rises to that experienced before 1998.
References:
University approved case study reading material booklet.
Atrill & McLaney Financial Accounting for Non-specialists, (2003), Thomson.
-Visited on 14th March 2005
-Visited on 14th March 2005
Appendix 1: http://production.investis.com/mands/intchart/
Appendix 2: http://production.investis.com/mands/intchart/
Andrew Powell Ratio Analysis Report – Marks and Spencer Page