Country Road Limited: Industry Analysis and Business Strategy - Case Study Example

Title: Country Road Limited (CTY): Industry Analysis and business strategy Dated: August 31, 2009 Industry Analysis Country Road Limited (CTY) engages in the design, sourcing, retail, licensing, and wholesale distribution of apparel, homeware, and related accessories in Australia and New Zealand. The company offers apparel for men, women, and children. The company is formulating its business plans and strategies as to cope with the rising trends at the global level in the field. The apparel and homeware market is greatly influenced by the trends as are being formulated in Europe and United Sates of America. United Kingdom in Europe alone is contributing 23% of the European's market share and CTY is taking stock of the situation through the introduction of necessary changes in the market and designing strategies of the company so as to compete with the competitors successfully. The company has shifted its operational strategy as from low marketing expenses that is from the level of 8927 million $ in the year 2005 to the level of 10430 million $in the year 2008 which has a direct impact on the generation of revenue in favor of the company that is from the level of 211230 million $ in 2005 to the level of 293198 million $ in the year 2008. Similarly, the adoption of a global approach for running the affairs of the company, the company has earned a gross profit of 173543 million $ during the year 2008 as compared to that of 106457 million $ during the year 2005. Domestic Strategy: The company is well aware of its domestic needs as to compete with all other competitors in the Australian and New Zealand market. The company is executing its business through 74 departmental concession outlets and 57 stand alone stores. The company is headquartered in Richmond, Australia. The Group has a set of stores as are located in New South Wales, Northern Territory, Queensland, South Australia, Tasmania, Victoria and Western Australia. The company is always on the leading role as premium stockists of homewares and apparel in Australia. The company has started as a small manufacturer but has expanded its business and has diversified to take the position as a leading wholesaler/ retailer in the Australian market through the operations. The company has earned a net profit during the year 2008 as 9759 million $ in 2008 as compared to that of 2945 million $ in the year 2005. The total assets of the company has also increased as in the shape of cash and cash equivalent as from the level of 50577 million $ in the year 2005 to the level of 69989 million $ in the year 2008. Competitors and the Company's Strategy: The strategy as adopted by the company at the domestic market proved to be successful as through the adoption of administrative, business and marketing strategies as to compete with the competitors like pacific brands (PBG), fantastic (FAN) and David Jones (DJS) in the wholesalers and retailers in the Australian market in the fields of apparel and homewares. Country Road Ltd. The will revisit its operational strategy in the coming years so as to concentrate into the profitable sectors like the promotion of the company's products in the domestic markets for ensuring necessary revenue and to introduce the newly designed products and services as in the international market for the expansion and diversification of the company's operations at the global level. The company is executing its business as through competing with other major competitors in the fields of wholesale/ retail like warehouse group (WHS), the Reject Shop (TRS), Automotive Group (AHE) and Pacific brands with the adoption of an innovative and unique business strategy as based on cooperation and understanding with other competitors as on profitable basis. The company has opted for running the companies business as on partnership and franchised basis with alternative strategies for making the business in the profitable zone. The Global Strategy: The main objective of the industry analysis is to explore the current status of the Country Road Limited (CTY) who has begun as a niche women's shirting business in 1974 as a Australian company has attained the status of a global company with its operations in New Zealand and South Africa so as to promote its products in the global market for earning necessary revenue for the sustainability and profitability of the company in the fields of lifestyle brand, renowned for simply stylish, high-quality apparel, accessories, and homewares. The objective will be helpful for running the companies businesses in the new markets in the United States of America and in the emerging Asian markets. The company has earned a book value of it's per share as 1.1013 in the year 2008 as compared to that of 0.732 in the year 2005. The company has adopted the following measures for competing with the competitors during previous 5 years of its operations as to achieve the major objective of the company that is to execute the business as on sustainable. The major objectives of the company can be listed as under: (a) the expansion of the company's business at the global level like in New Zealand, South Africa, United States of America and the emerging Asian markets so as to expand the company's business at the global level for the introduction of the company’s products for the generation of the revenues through diverse sources, (b) the company has become a fully controlled retail brand as a translation with an objective to earn maximum revenues for the company like the opening of stores in David Jones and Myer has affected the top line of the company and to improve sale performance as can be witnessed in the year 2008, (c) the company has designed high quality products with diversification so as to attract the customers for making the products as a success among the customers, (d) The industrial strategy as adopted by the company has proved to be a successful strategy for the execution of the plans of the company so as to achieve the vision of the company as designed for ensuring sustainability and profitability as in favor of the company. Companies operating in the consumer sector are distinguished by the discretionary or staple nature of their product offering. Consumer discretionary companies are generally regarded as being cyclical as they tend to provide earnings leverage to levels of consumer spending in the economy. Source: IRESS The Consumer sector is on an expansion spree and hence the Equity capital rising in the form of follow-up rising is very high in the past two financial years (IRESS, Appendix 3). The total market capitalization of the consumer sector is at $151 B which is 14% of the total Australian Industry. As the consumer discretionary is vulnerable to the changing disposable income of the public, no apparel stocks except the billabong are found in the top 100 stocks in the 12 month performance till jun-09 on the S&P ASX Discretionary index which includes 232 companies and a market capitalization of $151B(Appendix-2). Business Strategy Analysis: The companies are executing their businesses as on the basis of the adoption of a specific business strategy so as to ensure fulfillment of the approved objectives o the companies as to achieve revenue targets with the utilization of available resources both financial and human resources as on optimum basis for the achievement of maximum benefits as in favor of the company. Analysis of the business strategy as adopted by the company: The Country Road Limited has adopted a business strategy as based on the activities and operations of the companies with the utilization of resources (inputs) for the synthesis and delivery of goods services (outputs) with an intention to create (De Wit & Meyer 2005). The company has adopted the strategy as to achieve competitive advantage with the creation of value added goods of superior quality for the buyers. The Australian apparel market was characterized by the low quality products with high cost and, therefore, the products were not available at the competitive rates. The company has adopted a strategy to enhance the competitiveness of the employees through enhancing their capacity so as to deliver the services as on profitable basis. The brand Image of the Country Road is a big asset for the company. A mixed business strategy was adopted by the company for the execution of the company's businesses as on profitable basis with key features, the production of goods and services with low cost, enhancing the capacity of the employs so as to deal with the emerging trends in the markets, diversifications of the operation of company at he global level and the adoption of an aggressive marketing strategy so as to attain the highest revenue in favor of the company. All these steps have increased in the efficiency and performance of the company in the year 2008 compared to the year 2007 from 39% to 48% with the adoption of the above mentioned strategy and controlling the expenses properly. The strategy has helped the company to compete with the competitors through the expansion and diversification of the business in the fields of wholesale/ retailers for offering the services and goods to the customers. The price to book value ratio is 3.2 which on power with the sector average as reflected in the appendix-1. The following table will illustrate the company's performance as a direct result of the adoption of a mixed strategy by the company: Sales 1H 06/07 1H 05/06 Change % Total Sales ($m) 107.9 104.2 3.5% Total retail sales ($m) 90.6 79.7 13.7% Wholesale sales ($m) 17.3 24.5 -29.3% Source: www.countryroad.com.au The above company statement clearly states that the sales in the wholesale outlets are decreasing. Hence wholesale outlet is no longer a profitable channel for the Country Roads business. Hence, the company migrated completely from the wholesale/retail business to a retail only business with 74 concession outlets in the department store environment and 57 stand alone stores. This facilitates the company to have a full control of the brand and the consumer interface. The cessation of wholesale and the creation of a retail only business model is a significant strategic move for the business which simplified the systems and processes and allowed to regain complete control by opening 39 concessions in Myer and 34 in David Jones. The company is expanding its business in the overseas markets as well. The company started operations in South Africa through the stores of Woolworth holdings Ltd., Which has a controlling stakeholder in the company. The company continuously tries to expand the category as well. It introduced sleepwear and sweats range in the previous financial year. Sustainability of the profits as earned by the company: The strategy as adopted by the company will ensure sustainability of the profits to be generated with the adoption of the strategy. The company has an opportunity to attack current niche sector of the retail market with the provision of high quality women cotton shirts, children's wears and other fabric products with modern design and colors as are acceptable in the market. The existing trends of the revenues, gross profits, and profits before and after taxes and the net profit as witnessed from the year 2005 to 2008 are an indication that the profit earning trends will continue in the coming years, too. Future outlook of the company: As per the vision of the company to become a fully controlled retail only brand, country road took its first step in exiting the wholesale business and started concentrating more on retail in the year 2006. The expansion in the retail channel by opening stores in David Jones and Myer has affected the top line of the company and an improved sales performance can be noticed in the year 2008. In future the company will look like a successful company in Australia in the fields of design, sourcing, retail, licensing, and wholesale distribution of apparel, homeware, and related accessories. Future Outlook of the Company: The company will diversify its operations including the emerging sectors of furniture and similar house accessories, food and food products, execution of the businesses as on partnership basis, the adoption of a franchised and outsourcing strategy with the company's brand name, the introduction of e-marketing, e-business and e-commerce tools for running the affairs of the company as on profitable basis with strengthening the key success factors as already achieved by the company and to reduce the potential threats as are being witnessed by the company while executing its businesses. The company will serve as a model business company for all other business tycoons in Australia and other world's major markets for running their business affairs as on successful basis. Major success factors are given below: Key success Factors Apart from that, the company is also looking at managing the inventory properly and reducing the cost of the business by sourcing the inventory from various sources and by reducing the marketing expenses. The impact of recession can be faced by the company only by taking up measures towards cost leadership. Hence the company Country Road is looking at cost leadership as its strategy to counter recession. Source: company Annual Reports a) The marketing expenses are almost flat because of the initiative taken by the Country Road to curtail the expenses to retain the cost leadership. b) The revenues are continuously growing and a high growth can be seen in the year 2008 due to expansion into new stores c) The gross profit is growing due to both increase in the revenues and proper inventory handling and controlling the expenses. d) As the company is looking at controlling the expenses by proper sourcing of the inventory the operating profit increase can be observed. This can also be observed in the increase in the asset turnover ratio in the year 2008 to 2.7 from 2.3 Key risk factors: The key risk factor involved in the company’s initiative to become cost leaders in the market place is the foreign exchange risk. The company is sourcing it materials from other nations which has a foreign exchange risk which has to be handled properly. The company is taking proper hedging to balance the risk involved. Company Analysis: 1. Accounting Analysis The following things are observed in the accounting analysis of the company. 1) Different exchange rates are followed for different balance sheet element in the exchange rate translation like a) Transactions are recorded at the exchange rate ruling at the date of the transaction b) Non-monetary items are measured in terms of historical cost using the 2) Inventories are valued at the lower cost and net realizable value is calculated as the estimated selling price in the ordinary course of business 3) The new amendments to the Australian Accounting Standards like AASB 123 which came into effect on 1 January 2009 relating to borrowing costs which states that “all borrowing costs associated with a qualifying asset be capitalized” is not incorporated into the reporting of the company as the group does not have borrowing costs associated with the qualifying assets of the company. 2. Financial Analysis: The financial analysis of the company is done by calculating some ratios of the company by taking the financials statements of the past four years. Hence the financial statements of the company of the years 2008-2005 are taken for analysis. Dupont Analysis   PBIT/Sales (efficiency) Sales/Assets (Assets turnover) Profit before tax/PBIT (interest burden) Profit after tax/profit before tax (tax burden) assets/equity (Leverage) ROE 2008 0.048315473 2.70198688 0.9891289 0.69647445 1.550415065 14% 2007 0.039527612 2.33559957 0.965857758 1.846747879 1.494253873 25% 2006 0.019912228 2.4539121 0.790478492 0.985325589 1.570673443 6% 2005 0.017649008 2.47969102 0.788626609 1.00170068 1.684243826 6% Dupont Analysis is done by taking four parameters namely the efficiency, Asset turnover, interest burden, tax burden, leverage. Based on the five parameters the ROE of the company is calculated. a) There is an increase in the efficiency of the company in the year 2008 compared to year 2007 from 39% to 48% which mainly because of controlling the expenses properly b) The asset turnover ratio has recorded a very good increase in the year 2008 by reducing the inventory and handling the inventory c) There is a slight increase in the interest burden and leverage in the year 2008 d) The ROE is consistent and progressing even in the tough times of recession because of the steps taken by the company to become cost leaders.   2008 2007 2006 2005 Book value per share 1.013366708 0.99934258 0.781236084 0.73160618 Earnings per share 0.1413 0.2459 0.0467 0.0426 CAGR ( compound annual growth rate) 9% CAGR of earnings per share 35% Price to earnings ratio 23.00070771 price to book value ratio 3.207131215 4. Application The high price-earnings ratio shows the investor confidence the stocks of the company. The company is on an expansion spree and is opening its operations in overseas South Africa. References: 1. http://www.corporateinformation.com/Company-napshot.aspx?cusip=C03601820 2. http://www.woolworthsholdings.co.za/investor/annual_reports/ar2008/country/cr.asp 3. www.countryroad.com.au and company annual reports of the years 2008,2007,2006,2005 4. Prasanna Chandra, “Investment analysis and portfolio management” by Tata McGraw Hill. 5. O’Reilly “ Securities analysis and portfolio management” Read More