The JD Sports Fashion - Case Study Example

The JD Sports Fashion JDsports fashion is a public limited company. It deals with distribution and retail of branded sportswear and fashion wear. The company was established in 1981 in bury United Kingdom. The company has expanded from then to trade in other countries. It has more than 100 stores across four countries. It provides customers with the latest products from various brands. The company distributes and retails the following brands JD sportswear - It is regarded as the leading retailer of its own brand sports and casual wear as well as fashionable brands. It combines brands recognised worldwide like the Nike and the adidas. The organization has also its own strong brand labels which it distributes. This brand labels are Cabrini Mackenzie and the dutter of st George. JD has also been introduced to the European market. It has opened its first five stores in France and recently in France at a town called Granada. SIZE? - This was first established to trial edgier grands when it later introduced them to the mass market using the JD fascia. It is segmented as an independent retailer with each store having its own loyal catchment. Scotts - this targets the older generation, has more fluent male consumers offering brands like Fred pery, the original adidas and original penguin. BANK it is targeted at the young male and female, it sells fast fashion brands such as super dry, blonde & blonde, pauls boutique, lipsy and jack & Jones as well as its own brands like ribbon and raving tone. The bank fascia is fast expanding in the United Kingdom. The plans for bank are to open to continue expanding to other countries. Blacks - it is an established of specialist outdoor footwear apparel and equipment. It was acquired in January 2012. Blacks have two strong brands in peter storm and euro hike. It also sells international third party brands like north face and the berghaus. Cecil gey it is a pure menswear fashion. It provides a new opportunity to the group to become the first choice retailer in the United Kingdom for this product. The current store offers very strong mixture of brands including Hugo boss, Ralph Lauren polo, diesel and Store Island. Chausport - It was acquired in May 2009. It sells brands like Nike adidas le coq sportif and the redskins which are popular in the French market CHAMPION - This venture was acquired in April 2011. It is one of the leading sport apparel and footwear. It has more than 20n stores in town’s centers and shopping zones The group has other retail and distribution companies such as sprinter sportswear, kukri, kooga, ccc Canterbury, gethe label, Nicholas deakins and focus international. This report will focus on the financial statements of the JD fashion wear holding. It will provide a good benchmark as well as the insight to the performance of the group as a whole in respect of the financial statements. Solvency, liquidity, profitability, efficiency and gearing ratios to be used Gauging the performance of the business The increase (decrease) of cash Increase or decrease of cash is prepared in the statement of changes in equity. The statement indicates the way a business have raised money. It also indicates how the money has been used during a particular period. The statement is an analytical tool. This is the ability to meet all the expenses in the next near future. A business is considered to be of good value if it generates more finances than it spends. The changes in equity statement have three parts. The investment part shows the performance of the investments of the business. This is important as it helps to indicate which investments are doing well. This will help in making future decisions concerning similar cases of investments. The financing part indicates how funds are raised by the business and how returns will be allocated if any. Investors use this part to know if they will reap dividends from a company they have invested in (Theodore 2003). However using cash to determine the performance of the business is not satisfactory because business operations have a lot of activities which can indicate the performance. Cash shows the liquidity position of the company. A company can have less available cash for use but have a lot of investments. This investments can realize cash if disposed. There is a lot of funds tied up in investments. Therefore cash do not represent a good measure of company’s performance. The profit (loss) The profit or loss statement shows the income of a business and how it has been used, if there is any amount remaining as profit. It helps in gauging the efficiency of the business in terms of its operations. Low profit margin indicates the business is not doing well. Management can lower the costs e.g. administration expenses or either raise its revenues. The statement helps to know weak areas and how it can improve. It is not a good measure of company performance. It does not take in to account the company investments and liquidity position of the company. It is prepared on historical bases failing to recognize the current position of company. It only concentrates on revenues and expenses ignoring the other aspect of the business. It fails to take in to account the debt used by the business to finance its activities (Ningning 2010). The cash flow statements The statement has three parts, the operating activities, the investing activities and the financing activities. The operating activities, company shows an decrease of net cash from operating activities. This emanates from a number of things like reorganization of current warehouse operations, impairment of noncurrent assets, gain on disposal of joint venture; dividends received from joint venture. These happened in the current year but did not happen in the previous year of trade. There are also some activities which happened in the last trading tear but did not happen in the current trading year for example the impairment of investment property. These changes made for the difference in net cash from operating activities. The investing activities, the company acquired an investment in the current year of trade. It also paid cash consideration of the investment (goodwill). The company received dividends from a joint venture. The amount of net cash in investing activities decreased. This means that the company made several investment activities (Luo 2011). The financing activities, the company had only two activities in the financing activity. It paid dividends to its shareholders and also sold some shares in its subsidiary to non controlling interest. The company paid high dividends. This is because it was not repaying interest on loans and other borrowings. The company had no any finance commitment. The company reports a huge decrease in cash and cash equivalent. It reported a difference of $76692 millions. This shows that the company made a lot of cash commitments during the current trading period. It increased some finance commitments like increasing the in trade and other payables. The company made several investments which ware costly and contributed in the decrease of cash and cash equivalents for the current period. The total cash and cash equivalent at the end of the year also shows a huge decrease from$81204 million to $28762 million. The investments made by this company during the year will make the company to be stable in future as it will earn dividends from the investments. This will make it to be more stable financial. The liquidity position of the company has become unstable because of the little cash and cash equivalent at the end of the period although the company does not have long term debt instruments to repay in the current period. The management should balance on making investments and saving some finances to meet current financial needs. This will avoid the company being geared. The liquidity position of the company has worsened as compared to the previous period. The profitability ratios The profitability ratios indicate how well the company is using its resources to generate profit and maximize the shareholder value. The company needs to make good use of its assets and other resources in order to keep afloat and for survival. Gross profit margin – the company have a gross profit margin of 0.5 or 50%. This is a good indication of the company operations. It shows that the company has generated enough revenue to cover the cost of sales and enough margins to cover other company expenses. The cost of sales has consumed half of the sales leaving a profit margin of half the sales to cover the expenses. Though the company has a half margin of the sales it is not making enough in generating revenue. The gross profit margin of 0.5 is high. The company can cut down on costs or increase its revenues. Operating profit margin – this show how much is left after the expenses have been deducted. It shows how much the company is able to cover its expenses. The company has an operating profit margin of 0.06 or 6%. This ratio is considered to be low. The company sales are not yet enough to cover the company expenses in full and provide a good return to the company equity holders. For a company to survive, it needs to make investments which the company cannot sustain because of low return. The shareholders may have to undergo dividends or the company sacrifice making investments to pay dividends. Net profit margin – it measures the amount left from sales after all expenses and cost of sales has been deducted. The company has a net profit margin of 0.05 or 5%. The company is making profit of 5% of the revenue it generates. The company is not efficient enough as this profit margin is considered to be very low. The profit cannot be able to sustain the company especially in difficult periods. The company cannot provide dividends to the shareholders and retain some money to make investments. The net profit margin is low as compared to the required rate of 20%. The company can minimize its spending and cut own expenses. The efficiency ratios Inventory turnover ratio - This ratio shows if the company has excess or inadequate inventories. Inventories are very important as they are the one sold to make revenue for the company. If the company produces inventory of poor quality it will affect the sales. The company has inventory turnover of 20.2. This is not a good indication of how the company is converting the inventories in to sales. The company can improve by accelerating the sales. Total assets turnover – This ratio indicates how the company is managing the trade receivables, the management of the receivables. The company has a ratio of 3.0. This indicates how the company the company is utilizing the company assets in generation of income. This ratio is below the market rate, although it is good in respect of the company performance. Fixed assets turn over - this ratio shows how the company has used its fixed assets to make generate revenue. The company has a ratio of 7.1. The fixed assets are contributing seven times to generate sales. This is a good utilization of the fixed assets. Full exploitation of the fixed assets to makes revenue provides good returns and also no idle capital for the company. This is o very good indicator of the company performance. The growth ratios Growth in a company is experienced through the decrease of debt to finance its activities, the increase of assets and the stability of the equity of the company in how it pays dividends to the shareholders. The company through the debt to assets ratio shows that it uses debt to finance its assets in equal measure (0.1). This increases the gearing position of the company because of using a lot of debt. The debt to equity ratio of 0.6 implies that the company uses 40% debt and 60% equity. This is a good measure and stabilizes the company liquidity position. The interest coverage ratio of 3.7 implies that the company is earning enough o cover the cost of finance. The company grew in its operations as compared from the last period. The use of equity to finance its investments rather than debt indicates that the company has a strong financial base. Conclusions The company performance as indicated by the ratios analyzed has grown though at a very slow growth than the investors would want. The continuous use of debt by the company to finance its investments increases the gearing position as shown by a considerable decrease of the cash and cash equivalent of the company and also the net profit. This will change in the coming periods as the company will start realizing returns on the investments it made the current year. References Tao L., Xiaojing, G. & Ningning Z., 2010 The principal component analysis and evaluation of financial performance for enterprises based on cash flow information. Advanced Management Science ICAMS 2010 IEEE International Conference on, 3, p.291-296. Luo, Y., 2011. Designs of Company’s Cash Flow Indicators Case Analysis. 2011 International Conference on Management and Service Science, p.1-4. Available at: http://ieeexplore.ieee.org/xpl/articleDetails.jsp?arnumber=5998457. Hanks, V., 2000. The Value of Cash Flow. The Motley Fool, p.1-4. Available at: http://www.fool.com/dripport/2000/dripport000608.htm. M Theodore F & Denfk P. 2003. Measuring Cash-to-Cash Performance. The International Journal of Logistics Management, 14(2), p.83-92. Available at: http://dx.doi.org.proxy1-bib.sdu.dk:2048/10.1108/09574090310806611. Read More