Marks and Spencer has a stock turnover of 10.92 times in 2000, this increased marginally to 11.06 times in the following year. 2002 saw a greater increase in stock turnover, an increase of almost two times, from 11.06 times in 2001, to a figure of 13.01 in 2002.
The House of Fraser has much slower stock turnover than Marks and Spencer. In 2001 House of Fraser had a stock turnover of 5.57 times. This is nearly half the stock turnover that Marks and Spencer had during the same year. The results for 2002 show that although there was an increase in stock turnover, it was only minimal, an increase of 0.25 times. This gave The House of Fraser a stock turnover of 5.83 times. This is a stock turnover of more than 7 times less than Marks and Spencer.
Debtors Turnover (Times) Sales = Times
Debtors
The Debtors turnover ratio figure is used to identify the speed at which the company collects the amounts owing from its customers. The higher the turnover rate is then the better.
The results indicate that Marks and Spencer have a relatively low debtors turnover of 3.49 times in 1999. This figure is reduced to 3.21 times in 2000, the following year the figure is further reduced to 3.07 times. The year 2002 shows a slight turnaround in the results, this year the debtor’s turnover is 3.11 times.
The House of Fraser seems to have a relatively high debtor’s turnover when compared to Marks and Spencer. Their results from 2000 show that they have a debtors turnover of 22.53 times. This is almost 20 times faster than Marks and Spencer. The results show a slight increase in 2001, however, the figure decreases to 21.89 times in 2002. This is a steady trend over the three years of accounts.
Debtors Collection Period (Days) Debtors = Days
Average Sales per Day
This ratio is also used to assess the speed at which the company collects the amounts owing from its customers. The lower the figure for debtor’s collection period, then the more effective is the business credit controls system. Ideally this figure should be low, with the debtors turnover figure being high.
Results show Marks and Spencer have a debtors collection period of just over 104 days in 1999. This means that on average their customers do not pay them for over 104 days. This figure further increases to 113.82 days in 2000, and further still to 118.81 days in 2001. The collection period decreases slightly to 117.51 days in 2002, however, over the 4 years there is an increase of nearly 13 days.
The House of Fraser has a debtor’s collection period of 16.23 days in 2000. This is over 95 days faster than Marks and Spencer. The difference between the two companies increases further in 2001, when House of Fraser has a figure of 16.12 days, compared to Marks and Spencer’s 118.81 days. 2002 sees a slight increase in The House of Fraser’s debtor’s collection period. Throughout the three years of accounts, The House of Fraser has maintained a healthy debtor’s collection period of just over 16 days. This is considerably lower than the results for Marks and Spencer.
Creditors Collection Period Creditors = days
Average Purchases per Day
The creditors collection period ratio is used to assess the speed at which the business pays the amounts owed to its suppliers. A business will try to have a high creditors collection period as this means the business is holding onto it’s cash for longer, and can utilise it. The supplier usually sets the period of time allowed for payment.
Marks and Spencer have a creditors collection period of 147.34 days in 2000. There is a downward trend over the next two years, with the collection period being 138.19 days in 2001, and 126.69 days in 2002.
The House of Fraser has a lower figure than that of Marks and Spencer in 2001. Their creditors collection period for 2001 is 104.42, compared to a figure of 138.19 for Marks and Spencer in the same year. The creditors collection period for The House of Fraser also follows a downward trend, like that of Marks and Spencer. However, The House of Fraser still has a constant debtor’s collection period of 16 days, compared to Marks and Spencer’s 117 days.
Specific Expenses (%) Expenses (e.g. wages) x100 = %
Sales
This ratio can be used to highlight the % of sales taken to pay a particular expense. As both companies involved in this ratio analysis are labour intensive businesses, then wages have been used as the specific expense. This % should ideally be as low as possible.
There is a fluctuating trend in Marks and Spencer’s results for this ratio. In 1999 they had a specific expense % of 27.5%, this rose for the next two consecutive years, to give a figure of 29.7% in 2001. This figure was reduced by more than 1.5% in 2002 to give a final specific expense % of 28.27%.
Looking at the results from The House of Fraser it is clear that they have a fast increasing trend. In 2000 they had a figure of 30.75%, which when compared to Marks and Spencer in the same year was higher. This % rose slightly in 2001, however, the main increase came in 2002, the same year that Marks and Spencer reduced their specific expense %. This left The House of Fraser with a 2002 figure of 40.77%. In 2002 Marks and Spencer had a specific expense % that was 12.5% less than their rivals did.
LIQUIDITY
Current Ratio Current Assets: Current Liabilities
Current ratio is used to show the amount of current assets available to cover any current liabilities. The ratios is presented in a format that shows the current liabilities value at £1.
The results of the ratio analysis show that Marks and Spencer have an increasing trend over the four years. In 1999, the ratio was 1.65:1, this increased gradually to 1.72:1, and 1.77:1 over the next two years. The biggest increase comes in 2002, when the current ratio is 2.15:1. This is an increase of 0.5 over the four years of results.
The House of Fraser has less encouraging results. The results for 2000 show that they have a ratio of 0.82:1, although there is a very slight increase over the next two years, the 2002 result is only 0.91:1. This is nearly 42% less than Marks and Spencer’s current ratio in 2002.
Acid Ratio Current Assets – Stock: Current Liabilities
Although similar to the current ratio, the acid ratio may give differing results. This is down to the fact that the value of stock is taken out of the equation. The main purpose for this being that some businesses may have stock that may not be quickly converted into cash.
Marks and Spencer have an acid ratio of 1.4:1 in 1999, this increases slightly to 1.5:1 in 200, and even more slightly in 2001. Like the results for the current ratio, Marks and Spencer experienced a more dramatic rise in 2002. This left them with a 2002 result of 1.96:1. The rate of this increasing acid ratio trend is almost identical to the increasing trend of their current ratio.
The House of Fraser has an acid ratio of 0.23:1 in 2000. Marks and Spencer have a figure of over 1.5:1 for the same year. There is no real change in performance over the next two years. This leaves them with a 2002 acid ratio of 0.26:1, well down on that of Marks and Spencer.
Gearing Ratio Long-term Loans x100 = %
Capital Employed
The gearing ratio shows the % of capital employed that is covered by long term loans. An example of a long-term loan that is relevant to this report would be a mortgage. This ratio is very important not only for the business, but for banks, when considering and further loans. It assesses the borrowing of the company.
Marks and Spencer have a gearing ratio of 17.92% and 18.91% in the years 1999 and 2000. This figure slightly increases the following year, to give a 2001 result of 24.67%. The main change comes in 2002, when the gearing ratio jumps another 50% to 76.59%. This is a very dramatic increase, and a figure that should give concern.
Conclusion
This section of the report will investigate any positive or negative trends that have arisen in the ratio analysis for Marks and Spencer. Extensive research will be carried out in order to explain any trends.
The results for the return on capital employed (R.O.C.E) ratio for Marks and Spencer highlight a number of issues. As the results show, there are no real changes in the R.O.C.E from 1999 – 2001. However, the results for 2002 show nearly a 100% increase in R.O.C.E. A final figure of 20.89% is healthy. The rate is much higher than the rate available at a bank (7%). This may be due to a number of factors. In late 2001, the chairman, Luc Vandevelde set out a number of objectives in a recovery programme, one of the major objectives of this re structuring programme has been the aim to return capital back to the company by selling or closing its European stores (Farndon, 2002. Daily Mail). By selling off large numbers of loss making European stores, the company has been able to reduce the volume of money owed to creditors, and has thus reduced the capital employed. The sale of these stores led to a figure for total capital employed in 2002 of only £3.081 million. This is a reduction of over £1.5 million in a year. The reduction comes by the fact that there is a far smaller capital expenditure in 2002, in fact they made money, where as in 1999, when the European expansion started, capital expenditure was £628.1 million. The results in 2002 show that Marks and Spencer started to recoup capital that was previously employed. This inevitably leads to a higher R.O.C.E. Also, the figure for cost of sales for 2002 is at its lowest point over the four-year period. This makes a very big difference to the ratio. A reduction in capital employed, and an increase in sales will give an increase in R.O.C.E.
A group of ratios that highlight a number of problems for Marks and Spencer are the productivity ratios. When compared to the results of the ratio analysis of The House of Fraser, Marks and Spencer’s results are poor. A ratio from the productivity group of ratios is the asset turnover ratio. This ratio shows the number of times the assets utilised by the business have been covered by sales. Both Marks and Spencer and The House of Fraser are in the retail sector, so it would be expected that the results should follow the same trends. This is not true for this ratio. On average, Marks and Spencer has an asset turnover of half of The House of Frasers. This means that Marks and Spencer generate fewer sales in relation to their assets than The House of Fraser does. Although Marks and Spencer are currently downscaling their portfolio (Colvil, Marks and Spencer press release, Dec 2001), they still have a very large number of capital items. These may not be utilised properly, or efficiently. In order for Marks and Spencer to start to improve this ratio, improvements need to be made on warehouse and store usage. Marks and Spencer are currently working towards solving unproductive assets. One of the key points in the company’s revival was to release property from the company’s portfolio. This not only generates cash (£348 million was recently generated as part of a structured sale and leaseback of property); it also deals with the problem of low returns from capital assets (in this case, retail stores). In Torquay for example, a store was recently closed down as it was deemed that it was “no longer commercially viable”. Regional Manager, Anthony Hemmerdinger commented that the closing was part of a “wide-ranging and detailed strategic review, which heralds significant changes to the Company’s strategy and structure”. The main problems faced by smaller stores such as this one, are that many of the local customers have started to shop at bigger shopping centres. As a result, smaller towns are losing out on trade. The closing of unproductive assets such as the store in Torquay, and stores across Europe should have a positive effect on the asset turnover of Marks and Spencer.
One of the major recommendations as laid out in the Marks and Spencer's Group Strategy (March 2001) is the “more intensive use of space”. The main concept behind this is to reallocate selling space to higher growth product areas to maximise returns per square foot. This is one of the many steps currently being used to improve asset turnover. Another method being introduced by Marks and Spencer to improve asset turnover is to improve the efficiency of their many warehouse units. Roger Holmes, chief executive explains that where as previously there would be many warehouses for children’s wear, now there is just one central warehousing unit. In the long term, this will have a dramatic increase in asset turnover, as this one central warehouse will be more productive than having many other warehouses that are not used to their capacity.
The results of Marks and Spencer's stock turnover ratios for the year 2000 2001 and 2002 all look very good when compared to those of The House of Fraser. However, it would be expected that Marks and Spencer would have more favourable stock turnover ratios than their rivals would, as Marks and Spencer stock perishable goods. Any company stocking perishable goods would be expected to have a higher stock turnover due to the limited shelf life of foods. This stock turnover would be ideally higher than Marks and Spencer's is at present, even when considering the fact that a large amount of Marks and Spencer’s turnover comes from the sale of clothing items. One main causes of poor stock turover is overstocking. This is something Marks and Spencer have been guilty of in the past, sometimes having large quantities of stock left on their shelves for long periods of time. The chief executive of Marks and Spencer, Roger Holmes, admitted in early November this year that the group had bought in too much women’s wear. The annual winter sale in 2000 cost Marks and Spencer in the region of £109 million, one of the key factors in this was the fact that they had to put in the region of £400 million of unsold stock in the sales. This highlights a great overstocking problem. They were also guilty of overestimating sales children’s wear, leading to excess stock. One of the main problems with the unsuccessful European expansion on Marks and Spencer was the poor clothing sales. The cultural difference between England and some of our European counterparts led to poor sales, especially in women’s wear. Garments such as Marks and Spencer's elasticated trousers, and cardigans did not really hit off in France, and the lingerie was also deemed not ‘racy’ enough for France, leading to masses of unsold stock being left on shelves or in warehouses for long periods of time. As Robert Colvil, finance director stated “the French operation alone-lost £28 million in 1999”, much of this was due to a combination of overstocking and poor sales.
The results of the ratios for debtor’s turnover and debtors collection period highlight a number of significant differences between Marks and Spencer and The House of Fraser. Marks and Spencer had a debtor’s turnover in 1999 of 3.49 times, and a collection period of over 104 days. The result for 2002 is 3.11 times and a collection period of over 118 days. This is poor, especially when considering that The House of Fraser’s results for debtor’s turnover are all over 20 times, and their collection period is a constant 16 days over the three years of accounts. The normal credit period offered to customers by a company is in the region of 30 days. As the results show, Marks and Spencer are well behind the normal time span. These poor results show poor credit control on behalf of Marks and Spencer. Marks and Spencer offer their customers a store card. This store card enables customers to purchase gods on credit and pay for them over a long period of time. One of the reasons for the poor debtor’s turnover is the slow payment from customer who posses a store card. The House of Fraser also offers their customers a store card, and it may be down to the fact that they have a slightly higher class of customer that they are paid quicker. The unfavourable debtor’s turnover and collection period can lead to poor cash flow. A poor payback of money owing to the company limits the cash available to invest with. Marks and Spencer are currently in the process of investing large sums of money into their current stores. For example in an ongoing process started in July 2002, Marks and Spencer invested £27 million in the redevelopment and rejuvenation of their Scottish stores. Simeon Piasecki, head of the renewal programme, also announced in April 2002 that the company intends to renew 100 stores in England at a cost of £40 million. Although the bulk of this money will come from the sale of the European stores, a reduction in debtor’s collection period would increase the rate at which money comes into the company.
The results for the creditors collection period also indicate that Marks and Spencer may face cash flow problems. The ideal situation for a company to have is for their debtor’s collection period to be a short period of time, and their creditors collection period to be a long period of time. This ensures that there is no danger of having to pay out money before receiving any money. Marks and Spencer actually has a more favourable creditors collection period than The House of Fraser. However, this is spoilt by the fact that the debtor’s collection period is so poor. Although Marks and Spencer have seen their creditors collection period have a slightly declining trend over the last three years, the result for 2002 of over 117 days is still high. Marks and Spencer would find it hard to increase this figure any considerable amount; in fact they should aim to consolidate the period of time as it is at present.
The results of the current ratio for both companies highlight a number of differences. Marks and Spencer were below the national average (1.8:1) for the years 1999-2001, however they turned this round to give a current ratio of 2.15:1 in 2002. This is far more favourable than that of their competitors, their ratio has increased over the 3 years, however, and it is still less that half the national average. One of the main reasons for the major increase in the result of Marks and Spencer's current ratio in 2002 is the sale of European stores. The sale of these stores has increased the value of money in the bank by nearly £400 million (£154.4 million in 2001, £543.4 in 2002). The increase in the cash in the bank has a knock on effect of increasing the total of the value of current assets. The total of current liabilities has also fallen almost £300 million since 1999. The combination of this and the increase in current assets has led to an improved current ratio. The sale of the 38 stores in Europe in 2001 not only saved the company from ever increasing losses; it also raised much needed cash.
Marks and Spencer also enjoy a favourable acid ratio. This ratio is well above the national average of 0.8:1, and also considerably higher than the result for The House of Fraser. It would be expected that Marks and Spencer's acid ratio would be very good for 2002 as the value of stock in 2002 is reduced by over £125 million. This shows that they have more than enough current assets to cover their current liabilities.
The fact that Marks and Spencer and The House of Fraser both operate in the retail sector would suggest that their ratios would follow the same trends. Although this is true for a number of the ratios, the results show that Marks and Spencer are out performing their competitors. This is largely due to the change in structure of the company over recent years. After moving towards becoming a major multinational company in 1999, profits dropped considerably. For example the European stores the company owned made a loss of over £100 million in just two years (Financial Times, January, 2002). The decision by the chairman, Luc Vandevelde and his team to move out of Europe, re-group and restructure seems to have saved the company. As he announced the news of the sell off of European stores in 2001, shares rose immediately by 17.5p, to close at 266.5p (Daily Mail, March 2001). Careful and well researched changes to the layout, structure and strategy of the company have resulted in old customers are now flocking back to the stores. Roger Holmes, head of UK retail for Marks and Spencer echo’s these comments. “We had lost market share of adult clothing – but our recent trading has given us confidence that we are regaining this lost share” Profits and share prices are increasing, the current share price is 351p, a major increase on what the price was in the previous three years.
Recommendations
Although Marks and Spencer seem to be well on the way to a full recovery from a disastrous few years, there are a number of key areas in which they can improve. This section will identify these areas, and give an explanation of how they can improve.
Looking at Marks and Spencer's asset turnover ratios over the four years identifies a weakness. The results are half those of their competitors. One of the major causes of bad asset turnover is the poor utilisation of a company’s assets. In Marks and Spencer's case, this may be stores, warehouses and even factories. When looking at the productivity of stores, Marks and Spencer could improve the asset turnover by identifying any stores that are under achieving. Once these stores are identified, then a number of methods can be used to improve the situation. The most dramatic option would be to close the store. As mentioned earlier in the report, this is an approach already successfully adopted by Marks and Spencer, both at home and abroad. The closure of an unproductive store in Torquay in March 2001 is a relevant example to this. It is important Marks and Spencer continues to evaluate the productivity of their assets. A store that is not productive will bring down the asset turnover, and will be bad for the company. A less dramatic option would be to look into how the store is lay out. More room could be allocated to clothing within the store; selling space could be reallocated to growth product areas. This would have the effect of increasing returns per square foot. The selling, or leasing of their less productive assets also has the effect of increasing capital. The company announced in December 2001 that they were hoping to raise £331 million by the sale and leaseback of some of their assets.
Marks and Spencer own a large number of warehouses. It is essential that these warehouses be used to their full capacity. It may be wise to sell off a number of the smaller warehouses and build a larger one. This will generate capital, which can be used to further invest in new projects. The effect on the cost of logistics in reducing the number of warehouses would also be beneficial.
Stock turnover is another area in which Marks and Spencer can improve their results, they currently they have a stock turnover of around 13 times. This could be improved in a number of ways. One of the changes that could be made is to simply reduce the levels of stock being held. High levels of unused stock decrease the stock turnover ratio. By reducing the levels of stock being held, the company could also improve asset turnover. This would be due to the fact that less warehouses would be needed, giving Marks and Spencer the opportunity to sell or lease these unwanted assets. When dealing with the clothing market, Marks and Spencer have to be aware of seasonal and fashion trends. A problem they have faced in the past is that they have overestimated demand for a particular season of clothing range. This inevitably leads to surplus stock. There are many external factors affecting the seasonal demand. For instance, this winter seasons demand was less than expected due to the late summer that Britain experienced. Customers were still buying summer wear, or were simply waiting to buy their winter wear until they felt the weather changed. The year 2000 saw Marks and Spencer putting £400 million of unsold stock in the winter sales, this caused a great loss in revenue. This problem could have been avoided with a more efficient purchasing system. By changing the purchasing system to a ‘just in time’ system, the chances of being left with surplus stock would be greatly reduced. Fashion trends are changing constantly. The company needs to be more flexible with the volume and style of clothing they stock. People are much more fashion conscious than they used to be, it is essential for the credibility of a company that they are consistently at the height of fashion.
The results for the debtor’s collection period for Marks and Spencer are very worrying, especially when compared to The House of Fraser. Marks and Spencer need to dramatically reduce the collection period in order to avoid any problems in the future. Marks and Spencer currently offer their customers the option of having a store card. Although in theory, this is a good idea, especially form a marketing perspective; it can cause many problems in the long run. Customers can leave payment for long periods of time. This leads to Marks and Spencer not being paid for stock they no longer own, and should have been paid for
