Financial Reporting Analysis: French Connection Group Plc - Essay Example

? FINANCIAL REPORTING ANALYSIS: FRENCH CONNECTION GROUP PLC. REPORT AND ACCOUNTS TO 31 JANUARY Submission Financial Reporting Analysis: French Connection Group PLC Part A Question 1: What is the name of your company?  French Connection Group PLC is the company whose annual reports will be examined in this paper. Question 2: Give its principal activities.  French Connection Group PLC is a British wholesaler and retailer with stores in more than 50 countries all over the world. They specialize in fashion clothing and accessories for men, women and children as well. Apart from the French Connection brand, the group is also responsible for these international brands: YMC, Great Plains and Toast. French Connection remains the biggest contributor to their profits, bringing in more than 90% of the group’s revenues. Question 3: List the names of the members of the Board of Directors, showing the split between executive and non-executive directors. The French Connection PLC Board of Directors is made up of 3 executive Directors and 2 non-executive ones. Their details are as follows: Executive Directors: 1. Chairman and Chief Executive- Stephen Marks 2. Finance Director- Roy Naismith C.A 3. Operations Director- Neil Williams A.C.A Non-Executive Directors: 1. Claire Kent 2. Dean Murray Question 4: What does the report say about the duties of the Audit Committee?  The Annual Report of French Connection Group PLC outlines many duties of the Audit Committee. These are: 1. appointing an external auditor, 2. deciding the audit fee, 3. dealing with matters relates to resignation or discharge of the external auditors, 4. discussing the following issues with the external auditors before the commencement of the audit a. nature and scope of audit b. the cost-effectiveness of the audit c. the objectivity and independence of the external auditor, 5. reviewing any audited accounts in relation to: a. changes in accounting policies and practice b. any major adjustments that result from the audit c. the going concern assumption d. compliance with accounting standards, Stock Exchange and legal requirements, 6. discussing any issues that may arise during interim or final audits, 7. evaluating the external auditor’s management letter and management’s response to it, 8. examining the internal controls of the group before the Board of Directors publicly endorses it 9. making sure that the internal and external auditors work in tandem and are in possession of adequate resources, 10. taking into account the finding if any internal investigation and reviewing the groups policies related to operating and accounting practices, and 11. Reporting to the board on all these and other matters as defined by the board. Question 5 (a): Find the section on corporate and social responsibility and give some examples of what the company is doing to fulfil its role. According to the Annual report for 2010-2011, French Connection PLC has three major concerns when it comes to Corporate Social Responsibility. 1. the group should provide its employees and in-store customers with a safe and healthy environment 2. the groups impact on direct and indirect impact on environment should be as little as possible 3. And the suppliers’ social, employment and environmental practices must also be considered when making business decisions. In order to achieve these objectives French Connection Group PLC designs its stores and warehouses while taking into consideration the health and safety of its staff and customers. Electrical installation reviews, risk assessments and appropriate training for staff is all a part of this program. The company also decidedly manufactures products that utilize similar resources in order to make good use of the resources. Also, the power is bought from suppliers who have limited impact on the environment. Therefore, the company only buys power generated through the use of wind, bio-mass or other environment friendly resources. Question 5 (b): To what extent you do believe the company is being responsible to the wider stakeholder groups, including its employees.  The company recognizes its responsibility to the employees and other stakeholders in its Annual Report. The report states that “….employees should: be given a safe and healthy environment to work in; be given the right to free association; be paid fair wage; have freedom of association; not be forced or bonded labour; be of an appropriate age; and work only reasonable hours.” But it seems that FCUK has failed to practice what it preaches. On its website, the company advertises a full time work placement for internship on its website which is also unpaid. It seems that the company isn’t fulfilling its commitment and being fair to its employees. But it does seem to be doing well with its promises of being environmentally friendly as said above. All the packaging used for the company’s products is recycled. Although it can be said that the company is only detailing the standards in all these issues and is not doing anything by going out of its way. There is no passion for being conscientious, or for the environment, employees or any of the other wider stakeholders. Question 6 (a): From the Audit Report, who is responsible for the preparation and information in the financial statements?  According to the Audit Report for the year 2011, the directors’ of the company are responsible for the preparation of the Financial Statements. The statement of Directors Responsibilities states that they must be “… satisfied that they (the statements) give a true and Fair view of the state of affairs of the group and parent company and of their profit or loss for that period”. Question 6 (b): Who are the auditors and what audit opinion did they give?  The financial statements of French Connection PLC were audited by KPMG Audit PLC. According to the Independent Auditors Report given in the Annual Report of the company “the financial statements give a true and fair view of the state of the group’s and of the parent Company’s affairs as at 31st January 2011 and of the group’s loss for the year then ended”. the auditors go on to state that in their opinion the Group’s statements are in accordance with IFRS while the Parent Company’s statements are prepared in line with the requirements of the UK GAAP. Both are in compliance with Companies Act 2006 and Article 4 of the IAS regulation. Question 7: Read the Chairman’s Statement and/or Business and Financial Review.  (a). Is the tone uplifting or apologetic? (Provide supporting phrases)  The Chairman’s Statement outlines information on the company’s business strategy. The tone is forward looking and uplifting at the same time. According to the statement, they “achieved a considerably higher profit from the core continuing operations notwithstanding a period of major change for the group and challenging market conditions”. The tone is heartening and yet explanatory about the marginally good performance of the company as the statement regularly mentions the adverse market conditions. It further affirms that “in the context of the market we believe that our retail businesses performed reasonably well over the last year”. The pitch of the statement turns into a cautious one when talking about the future of the garment industry and French Connection PLC: “The trading environment in our main markets is likely to remain challenging! At the same time the garment industry is facing increasing raw material and manufacturing costs in an environment where selling prices remain highly sensitive to increases in the short term. We are therefore cautious in our outlook but we are comfortable that our business has the resilience and financial solidity to be in a position to benefit immediately from any recovery in the general economy.” Overall the tone of the report remained optimistic yet cautious. (b).What does the company say about its current performance?  According to the Annual Report, the company has maintained a very strong balance sheet throughout the year. Even though the economic environment is likely to remain challenging in the coming years, French Connection PLC hopes to increase its market share. The gross margin remained the same as previous year despite a decline in sales at the Europe Retail Division. In North America as well, the sales declined but Gross Margin remained consistent mainly because of increased focus on better product ranges. The company had reinstated dividend payouts during the previous financial year and is now proposing an increase to 1.5 pence per share for the full year. Profit Before Tax for the year ended 2011 was ?7.3 million as compared to the previous year’s profit of ? 0.7 million only. (c).What does the company say about it future prospects?  Then company seems optimistic and ambitious about its future. The group has been through major changes in this financial year by closing down loss making departments and companies for e.g. they sold off their Nicole Farhi line of clothing this year. For future, the French Connection Group PLC plan to concentrate on the division that brings in more than 90% of their revenue i.e. French Connection UK. The French Connection brand sells through more than 340 of its outlets worldwide, add to this the huge number of multi brand retail outlets carrying this brand and no wonder it gets the groups whole attention. In future, the group plans to intensify the sales densities in the retail store portfolio. This is only possible by making better, more fashion-forward products that are available easily. The FCUK brand has successful online presence as well, the group plans to utilize its fame on Facebook and connect better with its customers to achieve this end. The Group also intends to maintain good liquidity and capital base as both are necessary for creditor and market confidence. Question 8: Explain how the company discloses its revenues in the notes to the accounts? French Connection Group PLC measures revenue at the fair value of income/receivable minus returns and VAT. Revenue from sales is recorded in the income sheet while licensing revenue is recorded as other operating income on accrual basis. According to the Notes to the Accounts, segment profits are the most accurate indicators of the group’s performance. There are 5 reportable operating segments in the group 1. UK/Europe retail 2. UK/Europe wholesale 3. North America retail 4. North America wholesale 5. Rest of the World wholesale. These segments meet the conditions set out in IFRS 8. The report clearly identifies the types of products being sold from each segment along with the relevant profit and loss figures. It also states clearly that no single customer I responsible for more than 10% of sales figures. Question 9: Give two examples of the way that the company is run and explain why you think this adds to good corporate governance.  French Connection Group PLC has carried out its Corporate Governance duties to the full extent. The company firmly believes in Board’s leadership. According to Corporate Governance guidelines, the Board of Directors is custodian of the group’s mandate and identity. The Board f Directors French Connection Group PLC strives to provide their organization with a vision and develop goals and plans to achieve it. Therefore, the organization remains responsive to economic realities and changes. During the financial year 2011, there were 11 board meetings which were duly attended by all the board members. Another aspect of fulfilling Corporate Governance responsibilities is by being accountable to the shareholders. Timely communication with shareholders, brokers and analysts is ensured. All these groups are welcome to conduct one-on-one meetings with the executive and non-executive directors. These regular meetings along with Director’s accountability assure shareholders and stakeholders of the culture of transparency and responsibility inside the organization. Question 10: Non-current assets – describe the methods by which the main classes of non-current assets are depreciated.  The non-current assets of the group include Deferred Tax Assets, Investments in Joint Ventures, Intangible Assets and the, biggest of them all, Property Plant and Equipment. In the statement of income, PPE is stated at the cost (including expenses on acquisition of asset plus capitalized borrowing costs) less accumulated depreciation and impairment losses. Property plant and equipment are depreciated on a Straight line basis over the projected useful lives of the assets. Question 11: What provisions and amounts thereto does the company report at its period end? What are the criteria required to be followed under IAS 37 in order to recognize a provision?  IAS 47 states that a provision must be recognized if a present obligation has risen as a consequence of a past event, its payment is probable and the amount to be paid can be projected reliably. During the previous financial year, the group estimated ?8.7m were reported as restructuring provision. For 2011, ?7.2 million were utilized or credited to Profit and loss statement after the closure of a majority of stores in Japan and US. Therefore only 1.5 million were recognized as provision for the financial year 2011. Part B Question 1 (a): Using the income statement and statement of financial position (balance sheet) choose ten financial ratios of your choice and calculate these for both the current and previous year. (Show your formulae and figures used in your calculations)  1. Current Ratio: Current asset / Current liabilities For 2011: ?100m/45.7m = 2.188:1 For 2010: ?109.8m/56.9m =1.930:1 2. Quick Ratio: Quick Assets – Current Liabilities For 2011: ? (100.0-40.3) m/45.7m = 1.306m For 2010: ? (109.8-40.8) m/56.9m = 1.213m 3. Working Capital : Total Current Assets - Total Current Liabilities For 2011: ? 100m-?45.7m = 54.3m For 2010: ?109.8m-?56.9m = 52.9m 4. Gross Margin Ratio = Gross Profit / Net Sales For 2011: ?110.6m/?213.8m= 0.517:1 For 2010: ?109.1m/?212.5m=0.513:1 5. Inventory Turnover =:Cost of Sales/ Ending Inventory For 2011: ?103.2m/ 40.3m =2.561 times For2010: ?103.4m/40.8m = 2.534 times 6. Net Profit Margin Ratio : Net Profit Before Tax / Net Sales For 2011: ?8.9m/213.8m = 0.042:1 For 2010: ? (9.0) m/212.5m = -0.042:1 7. Return on Assets = Net Profit Before Tax / Total Assets  For 2011: ?8.9m/118.4m = 0.075 times For 2010: ? (9.0) m/130.0m = -0.069 times 8. Net Working Capital to Sales Ratio: Current Assets – Current Liabilities/Sales For 2011: ?100.0m-45.7m/213.8m = 0.254:1 For 2010: ?109.8m-56.9m/ 212.5m = 0.249:1 9. Payout Ratio: Dividend Per Share/ Earnings Per Share For 2011: ?1.0p/7.5p = 0.133:1 For 2010: ?0.5p/1.5p = 0.333:1 10. Total Debt to Equity Ratio: Total Debt/ Total Shareholder’s Equity For 2011: ?46.6m/71.8m = 0.649:1 For 2010: ?57.7m/72.3m = 0.798:1 11. Question 1 (b): What do the ratios calculated for the two years tell you about how the company has been performing?  Ratio Analysis of the group financial statements suggests as overall improvement from the previous year for 2011. Even though the Return on Assets remained negative for 2010, 2011 was the year of recovery for the company. Current and quick ratios suggest that company is financially viable even through the tough times. The directors claim of having enough cash at their hands without any long term liabilities. Working capital also improved over the year. 2010 was a tough year for the company as it dealt with losses as well as some major reorganization, but despite that the dividend pay-out ratio remained stronger in comparison to 2011; this step was taken perhaps in order to inspire shareholder confidence. Part C Question 1: Find recent press information about the company. Together with your analysis of Part B above, use this information to consider, in your view, how well your chosen company is placed in its particular market? In your analysis you should also consider relevant micro and macro-economic factors. The latest press releases about French Connection group only bring good news. In September of 2011 the company announced its store opening in Vietnam on a 215 sq. km area (Crescent Mall, 2011). In such times of financial hardship, this is indeed good news that a company is doing so well that its thinking about expanding into new markets. Also, in October of 2011, FCUK announced a brand new line of horror inspired clothing in the Indian market (Fiber2Fashion, 2011). These press releases make it apparent that the company is very well geared and tuned to market needs. FCUK is working hard to make place in unusual markets, places other than Europe and US, as it has found a niche, a dearth of branded clothing companies that are affordable too. Bibliography Crescent Mall. 2011. Sound Bite - French Connection. [Press release]. September 30, 2011, Available at: [Accessed 30 December 2011]. French Connection, 2011. Annual report 2010-2011. [Online] Available at: [Accessed 30 December 2011]. Fiber2Fashion. 2011. FCUK unveils Victorian horror fashion tees. [Press release]. October 10, 2011, Available at: [Accessed 30 December 2011]. Read More