Financial Analysis of Matalan PLC

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Financial Analysis of Matalan PLC

This report is based on Matalan PLC, the retail company, in conjunction with their annual reports.

a)

Matalan is a totally unique out of town retailer offering up to the minute fashion and homewares at up to half the equivalent high street price. With over 130 stores nation-wide, Matalan is currently the UK's the 5th largest fashion retailer. Its major competitor for the mid-market price range is Marks and Spencers.

John Hargreaves, the founder of Matalan, began as a market trader back in the 1970s. In the early '80s, whilst on holiday in the USA, John discovered the out of town retail concept that sold a range of food and non-food products at low prices. On his return, John decided to implement the same retail concept in the UK, so in 1985 the first Matalan Discount Club opened in Preston. Since then Matalan has grown significantly and by 1995 there were 50 stores across the UK. In 1997, in order to cope with Matalan's growth, the head office was relocated from Preston to Skelmersdale along with a new distribution centre. Matalan's success was reinforced by the flotation of the company in May 1998 and the company moved away from being Matalan Discount Club to simply Matalan, the value fashion retailer. Matalan opened it's 100th store at the start of 2000 and plans to have 200 stores by the end of 2005.

In the past year, Matalan have continued to strengthen the Matalan brand and have continued their emphasis on product development and have remained focused on cost control and improving their operating ratios. Also their clothing market share grew from 1.9% to 2.4% with increases across all major categories. The success of the Home Store range continued with market share increasing from 1.0% to 1.6%. Meanwhile trials of a number of new initiatives were launched during the year that took the brand into a financial service (Matalan Credit Card) venture with Yorkshire Bank and the Matalan From Home catalogue. However, there was one major resignation during the past year. On 27th April 2001, Angus Monro resigned his position as Group chief executive and director of Matalan PLC and its subsidiaries (www.matalan.co.uk).

In the past year, Matalan’s share price reached a high of £7.50 with a low of £3.03. At the time of writing its share price stands at £3.31.

                                        

    (Source:Yahoo Finance)

b) 

Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. We will now carry out a few financial ratios based on Matalan’s financial statements such as the profit and loss account and the balance sheet (pgs. 18 and 19 in the annual report) and where applicable compare them to their closest rival, Marks and Spencers. The M&S ratios will be calculated in the same manner/and formulas. Therefore it will just be the input values in the formula that are different, based on M&S’s financial statements (Statement found on andspencers.co.uk).

Liquidity Ratio:

Current Ratios. This ratio indicates the ease of turning assets into cash. The Current Ratio is one of the best known measures of financial strength. It is shown below:

                                Total Current Assets
Current Ratio =      ____________________    =     £109.9m /£ 101.8m = 1.1 times
                             

    Total Current Liabilities

.

 M&S: 3516.2/1981.6 = 1.8 times

From the above one can see that Matalan have a weaker liquidity position than M&S. A generally acceptable current ratio is 2 to 1. The minimum acceptable current ratio is obviously 1:1, but that relationship is usually playing it too close for comfort. If Matalan decide their business's current ratio is too low, they may be able to raise it by (Wood, 1996):

  • Paying some debts.
  • Increasing your current assets from loans or other borrowings with a maturity of more than one year.
  • Converting non-current assets into current assets.
  • Increasing your current assets from new equity contributions.
  • Putting profits back into the business

Asset Management Ratio:

Evaluating Total Assets. Indicates how efficiently your business generates sales on each pound of assets. This is a chance to think how to improve sales volume with reference to the total assets position of the company, (ACCA, 2001).

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Total Asset Turnover ratio =      Sales                      =  £586m / £234m = 2.5 times.
                                                   Total Assets

M&S: 8075.7 / 7693.4 = 1.0 times

We can see that Matalan has a higher asset turnover ratio than M&S.  However, companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover - it indicates pricing strategy. ...

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