Financial System at NEXT Plc in Relation to Its Performance - Case Study Example

NEXT PLC EXECUTIVE SUMMARY NEXT Plc has been among the renowned fashion brands offering reasonably priced women wear, men wear, kids and home wear to wide range of customers within and outside UK. NEXT Plc has been in business since 150 years and over the years, it has managed to expand its offerings as well as updating existing products with enhanced value. The assessment of the financials of the NEXT Plc in comparison with industry as well as sector portrayed considerably well thought strategy to sustain business in the competitive market. Share buyback strategy for maintaining share price and EPS of the NEXT Plc’s shares has been adopted to enhance value of the shares and shareholders. Exploring the impact from the global conditions on the performance of company being highly effective on firm understudy the report also assessed the future prospects for NEXT brand. The assessment upon developing concluding remarks suggests recommendations for business to maintain success. Recommendation includes business suggestion to expand with premium brand and adopting acquisition strategy and efforts to enhance value to gift line and sports. INTRODUCTION NEXT has been in the business for around 150 years. Group in 1982 revolutionized business and created the brand NEXT. The brand put forward the retailing business for NEXT corporate with collections of branded women wear and accessories. NEXT Plc offered affordable line of offerings with distinctive styled products. Over years NEXT expanded the range to men wear in 1984; home interiors line has been introduced in 1985; children wear were introduced in 1987; in 1988 Next Directory was introduced offering range of products for home shopping. In 1999 NEXT has launched online shopping version entitled NEXT Directory. This expansion credited NEXT Plc pioneer among the businesses offering sales services from triple modes i.e. from shops, by phone and then online. NEXT started day delivery standard and transferred almost 80% of the business online by 2001. NEXT Plc then launched ‘NEXT flowers’ followed by launch of ‘NEXT gift line’ in the year 2005 (Next, 2012). Continuing with affordable offerings with distinguished style, NEXT Plc has expanded signature brand in 2007 offering homeward and fashion. 2010 noted NEXT’s launch of NX Sports and then became official staff ware and other textile supplier for the Olympics Athletes Village (Next, 2012). Next Plc currently has 540 stores in UK while NEXT Directory is serving almost 60 counties of the world with majority of them being served directly and 14 countries being served through six partners. Success of NEXT can be gauged with fact that only NEXT Directory has 3.3 million active customers. NEXT Plc international has 170 stores in around 33 countries operated through franchise business. Brand also has 19 company owned stores in 7 countries (Next, 2012). Other areas of operation includes NEXT Sourcing, the segment responsible for designing, sourcing, buying, merchandising and quality control operations of Next Plc products. NEXT Sourcing has operation in UK as well as China, Sri Lanka, India and Hong Kong. In 2008, Next has also acquired fashion brand which is targeting younger women entitled Lipsy and the firm also generates business through property management (Next, 2012). Figure 1 shows the share of business and profits in segments of business in all of Next Corporation for the year 2013. Share price of NEXT Plc has been trading at £ 43.36 as on 11/04/2013 with market capitalization £ 6.99 billion (Next, n.d). Share price performance of Next Plc in comparison with FTSE and general retailer has been shown in the figure 2 in appendix section. With comprehensive introduction of the brand the report, herein, develops review of the NEXT brand covering following aspects: Financial performance of the NEXT brand Impact of global economic condition on NEXT brand. Future prospects for success for NEXT brand. Further, upon providing concluding remarks on the performance of the NEXT brand, the assessment also suggests recommendations. MANAGING THE ORGANISATION The Financial Statements and Current Performance NEXT Plc has managed business under four core and two other business segments. For all segments’ financial management, NEXT has set mentioned below five objectives for the successful operational (Next, 2013): Improving NEXT brand with constant addition in terms of product ranges and improved designs. With maintaining quality control, NEXT constantly attempts to infiltrate greater efficiencies in operations to develop stringent control over cost. To reap desired level of benefits from store expansion, NEXT Plc has set standard to invest in profitable retail stores only in venues capable to generate pay back within period of two years time and at 15% hurdle rate. Improving services to expand business revenue from online retailing within and outside UK. Strong focus on cash generation for meeting dual purpose of business expansion and increasing share holders’ benefit with share buyback. Analysing the performance of the company using the previous data helps in identifying how the company has performed (Gitman, 2003).Year-on- year Revenue analysis, profit and growth assessment for the segments have been presented below for assessment and it is shown graphically in the appendix section in figure 3. NEXT SEGMENT 2013 2012 Growth   Revenue Profit Revenue Profit Revenue Profit COMENTS NEXT Retail 2,196.90 331.1 2,198.10 323.7 -0.05% 2.29% Retail increased net operating margin from 14.8% to 15.1 %( AR, 2013). Segment added net 6 stores in a year with 10 additions and closure of six loss making units; hence increasing the retail space by 4% to 6,728, 000 sq.ft. Portfolio of retail business with consistent efforts has managed to bring 71% sales from stores with almost 20% profitability generation rate (Next, 2013). Negative growth in revenue has been attributed to offsetting caused by economic factors. NEXT Directory 1,196.30 302.1 1,088.70 262.6 9.88% 15.04% Directory also noted an increase in profit of almost 1.5x of increase in revenue. Increase is sourced from additional features of same day, Sunday and evening delivery services offering added current year charging £2.99 premium. Directory customers have noted an increase of 10.3% as compared to previous year with 3.5% increase in credit customers. 6.8% increase in cash customers has been observed. In addition, increased profitability is also generated from highest contribution in sales coming from full priced product sales than marked down pricing. Operating margin has been increased by 1.2% from 24.1% with increased efficiency integrations in value chain. NEXT International Retail 77.7 8.4 76.3 7.9 1.83% 6.33% 79% of the revenue is generated from franchised stores while rest comes from company owned stores internationally. Increase in revenue originally is sustained from franchised stores while company owned 19 stores in seven countries have incurred loss leading to decision to continue expansion with franchising format only. NEXT Sourcing 507.1 30.8 519 21.1 -2.29% 45.97% Contributor of around 40% of the NEXT stock, NS incurred loss in revenue due to faulty stock; however, controlled management of business chain sustained profits increase (AR 2013). Lipsy 58.6 2 58.4 1.3 0.34% 53.85% Current year performance of Lipsy is being regarded as the best performance since acquisition (AR 2013). Extensive profit contribution generated from online sales has doubled than wholesales sale of the brand (AR 2013). Property Management 212.3 12.6 195 5.6 8.87% 125.00% The exceptional increase in profits is source-able from the sales of the business property of Ventura (Next’s divested business in 2011). Excluding it, segment incurred a decline in profit by £ 2.0 million TOTAL 4,248.90 687.00 4,135.50 622.20 2.74% 10.41% (Adapted from Next, 2013) Overall revenue and profit has increased by 2.74% and 10.41% respectively for the year 2013 as compare to 2012. Dissection analysis also reveals the negative revenue growth of NEXT retail and outsourcing has been offset by other divisions. To mention, it is noteworthy that though revenue overall did not increase considerably, strengthened implementation of objectives from NEXT paved way for increased profitability. Profits before tax have increased from £ 570.3 million to £ 621.6 million with £ 38 million increase from core business operations while £ 14 million have been contributed by cost savings (Next, 2013). From the figure 4 in the appendix section it is evident that committed cost controlling efforts of the business has taken over impact of cost increasing measures. Company Performance Comparison with Industry and Sector Apart from the performance of the segments with respect to sales and revenue in order to explore the financial management of business ratio assessment has been conducted. By analysing the performance of the company and the performance of the industry help in identifying whether the company has performed well in comparison to the overall industry or not (Houston, and Brigham, 2009). Management uses the industry ratios to set their organisational targets and make efforts to achieve these targets (Lev, 1969). Industry as well as sector assessment has been taken into consideration developing reflective assessment (Reuters, 2013a): NEXT PLC Industry Sector FINANCIAL STRENGTH Quick Ratio (MRQ) 1.07 1.73 1.29 Current Ratio (MRQ) 1.48 2.39 1.62 LT Debt to Equity (MRQ) 198.39 3.98 32.32 Total Debt to Equity (MRQ) 230.94 8.82 53.34 Interest Coverage (TTM) 22.54 25.81 20.9 PROFITABILITY RATIOS Gross Margin (TTM) 31.48 49.83 29.59 Operating Margin (TTM) 19.59 12.66 9.39 Net Profit Margin (TTM) 14.34 7.87 7.86 EFFICIENCY RATIOS Receivable Turnover (TTM) 5.01 53.83 12.47 Inventory Turnover (TTM) 6.91 4.52 10.29 Asset Turnover (TTM) 1.89 1.47 0.98 MANAGEMENT EFFECTIVENESS Return on Assets (TTM) 27.14 11.79 8.77 Return on Investment (TTM) 46.46 17.4 12.61 Return on Equity (TTM) 200.12 18.81 13.74 (Adapted from Reuters, 2013a) Liquidity measures of the NEXT Plc are denoting considerable deviation from industry and sector. Current ratio and quick ratio, are used to analyze the liquidity performance of the company, are significantly lower than other comparatives. These ratios are important in knowing how liquid the company is and whether the company has sufficient liquid assets to meet their needs of current debt or liabilities (McLaney, 2009). This is despite fact that business has developed cash management as among the key objectives of the business. Year on year performance assessed for the measure also reflected the position presented by MQR (Most Recent Quarter). The closer the gap from the industry as well as from sector, the better it is for the NEXT Plc. It is important for the fact that range of lines NEXT offers is able to provide opportunity to competitors that are offering limited product range. Such competitors face high pressures from the market and consumers and thus this benefits the business of NEXT. Interesting findings from the NEXT’s comparison with industry and sector reveal that despite extensive variation of NEXT’s debt position with equity, company still retains strength of comparative interest coverage ratio. High debt to equity ratio is reflective of firm’s business model with low equity orientation. NEXT Plc constantly undertakes share buyback activity. It also forms reason for low current and quick ratio. NEXT Plc keeps deep consideration pertaining to prioritized utilization of cash and hence cash other than required for business development are invested in share buyback conditioned that activity results in increasing earning as well as well dividends. The activity is also in-line with firm’s strategy to retain less than 50% of total outstanding shares in market. Healthy effect of share buy back on the earning per share is also reflected in figure 5 in the appendix section. This also increases the demand of the share in the market mainly from traders that are inclined to formulate dividend based portfolio. During 2012, NEXT Plc bought back 7.5 million shares from market at an average price of £32.13. The activity incurred cost of £241 million and reduced 4.5% of share outstanding present in market (Next, 2013). This also benefited business with strong recovery in share price for year 2009 as earnings per share witnessed slight decline in contrast other companies noting steep dips due to recessions. Gross profit, operating profits and net profit margins are developed for profitability comparison of NEXT Plc with industry as well as sector. Profitability ratios are very critical as this is one of the most important aspects that investors and other stakeholders look for in an organisation (Ross, Westerfield, and Jordan, 2009). Cost of goods sold of NEXT Plc is significantly higher reducing gross profit margin as compare to industry; however, it is still comparatively higher than the sector. Closeness of the NEXT’s measure with sector is forming closer reference for comparison for the reason of wide product line having representation in textile sector. Higher operating margins are reflective of company’s strong control over value chain and hence constituting considerably high net margins in contrast to industry and sector. NEXT Plc maintains the strategy of continuity in taking measures of cost control to increase margins. Further constantly adopted measures to reduce number of loss making units, controlling cost in product sourcing and effective steps to efficiently manage inventory levels and thereby requiring working capital contributes significantly for the purpose of increasing margins. For instance, NEXT for the year 2013 and 2012 has managed inventory levels at almost 8% to 9% of sales (excluding property management contribution in revenue). Other measures contributing to increase margins include increasing hurdle rate for retail investment to 15% (Next, 2013) etc. Hence, profitability analysis of retail stores is shown in the figure 6. The other category of ratios is the efficiency ratios which present the overall efficiency of the organisation (Brealey, 2007). Efficiency measures of the business have been showing mix results with receivable turnover showing worrisome position in comparison with industry and sector. Measures taken to improve this position are reflected in NEXT’s special attention to increase cash customers as compared credit ones. Year on year position of customers for the NEXT Directory is shown in figure 7 in appendix. Further, attempts to improve turnover are also present. NEXT has been increasing offering to delivery of order with reducing time such as same day, evenings etc hence increasing customers’ convenience resulting in increasing the sales and number of active customers. High inventory turnover points to company’s compliance of objective to offer constantly increased customer offerings. Further, the results of NEXT Plc measure to increase the profitability of the stores while reducing cost has also increased asset turnover of business as compared to competitors. Hence, more than 70% of the stores producing 20% of profitability are healthy representative of NEXT Plc's measure. Therefore, cost control measures as well as increasing earnings per share have resulted in impressive measures for the NEXT’s performance on ROI and ROE taking it to multiples lead than industry as well as sector. The Impact of the Global Economy The impact of global financial crises on the entire economy worldwide has been also felt by the NEXT Plc. Former Chairman and CEO, David Jones, declared the economic condition in 2008 as world’s worst retail recession (BBC, 2008). Further, reduced consumer spending as well as euro-debt crisis which is increasing uncertainty and the level of unemployment in the economy has also been reflected on the business results of NEXT. 2012 collected disappoints for analyst with respect to NEXT missing sales forecast and increased diversion of customers towards marked down products than full priced product. The economic impact was so high that even the environmental factor of snow could not gear up purchase sentiment among customers (Shannon, 2012a). Therefore, along self explanatory factor of business being dependent on consumer discretionary spending; results of NEXT Plc also asserted the fact. However, NEXT has constantly made efforts to increase consumer attraction to the product. In the recession period NEXT Plc acquired fashion brand Lipsy. Further, to outpace the impact that was expected to hit retail market such as reduction in sales in certain areas due to customers’ displacement to Olympic Village resulting in reduced spending (Shannon, 2012b); NEXT managed to support business financial results from gaining the Olympics staff dresses and textile related requirement orders (Next, 2012). Impact of world economy resulting in exchange rate factors has benefitted NEXT considerably. For instance, the retail profits increase received positive impact of 0.3% from exchange rate factors. Similarly 1.0% in Directory profits is generated from the economic factors of exchange rate (Next, 2013). Hence, aligning to the extensively varying dynamics of consumer discretionary spending; NEXT Plc managed company economy around increasing profitability as well as controlling cost factors. Example is given in the figure 8 in the appendix. Hence, economic conditions alignment with business economics has been core reason behind the success of NEXT PLC. Future Prospects of the Company Deep connections with consumer discretionary spending has required business to develop strategy based on the consumer prospects in future. Reduced support for public and private finances as well as increased inflation has been core of concern for NEXT Plc. Future forecasts for the inflation considered relevant is shown in figure 9 in the appendix. Such forecasts that points rising gap between wages and inflation rate requires business to remain abreast to manage sales. NEXT has developed future forecast ranging, with great caution, 1% to 4% rise in sales (AR 2013). Overall forecast for the business is shown in figure 10 in appendix. These forecasts are based on the company’s expectation for the price to remain stable as it notes to be so currently and aligned with Bank of England forecast on inflation, in accordance with the CEO Simon Wolfson statement (Reuters, 2013b). Future prospects for the NEXT Plc as noted by the analysts at Reuter for sales, EPS and Dividends percentages for the next one, three and five years are shown in the figure 11. One year sales growth estimate from analysts at Reuters is approximate to the estimates of the company. Hence, future one year prospects are sizeably favourable for the company. Furthermore, if the firm continues to maintain the cost control efforts within value chain, rise in profitability in future will strengthened position of the brand higher among competitors. CONCLUSION NEXT Plc has been among renowned brands in the fashion industry offering products to the customers of UK and 60 other countries. Women ware, men ware, kids as well as home ware offered in the wide range of styles at affordable prices has made NEXT choice of many. Further along with increased product lines at affordable prices, NEXT has also introduced signature brand. Continuous expansion has been managed with effective management of the financials. Four core and two other units of business are being managed with objectives of increasing profitability and developing strong control over cost. Financial assessment of NEXT Plc has also been reflecting keenly eyed financials programming where excess of finance than required for business development is returned to share holders, increasing value of shares as well as shareholders. Business units making loss have also been well offset by other units. In addition efforts to add value to business, NEXT in order to consistently enhance the overall benefits for shares and shareholders has adopted strategy of share buyback and hence, business ability to retain its position among competitor. RECOMMENDATION Business assessment of NEXT Plc has provided extensive insight about the strong business conditions financially. Dissection of the business financials also asserts that NEXT has been constantly reviewing its position to strengthen competitive position. Hence, it is strongly recommended that business shall continue adhering attention to the strategies aimed at increasing value addition to products and investors. In addition, following recommendations are suggested to NEXT for enhanced future prospect: Strengthen control over receivables to improve performance. Increase efforts to expand online operations in markets initially then continue with retail expansion. Also enhance gift and sport line. NEXT is advised to launch premium brand for its products increasing value of the brand. Economic conditions are witnessing increasing level of polarization in customer segments; therefore, premium brand will be value addition to portfolio. Increasing market existence with acquisition of small well established brands in local and international market. List of References BBC. (2008). JJB hit by retail recession. Available from http://news.bbc.co.uk/2/hi/business/7637111.stm [Accessed 10 April 2013] Brealey, R. A. (2007). Principles of corporate finance. New Dehli, Tata McGraw-Hill Education. Gitman, L. (2003). Principles of Managerial Finance. Boston, Addison-Wesley Publishing. Houston, F., and Brigham, F. (2009). Fundamentals of Financial Management. Ohio, South-Western College Pub. Lev, B. (1969). ‘Industry averages as targets for financial ratios’. Journal of Accounting Research, pp. 290-299. McLaney, E. (2009). Business Finance: Theory and Practice. Pearson Education: New Jersey. Next. (2012). Business overview. Available from http://www.nextplc.co.uk/about-next/business-overview.aspx [Accessed 10 April 2013] Next. (2013). Next Plc results for the year ending January 2013. Available from http://www.nextplc.co.uk/~/media/Files/N/Next-PLC/pdfs/reports-and-results/2013/full-year-results-jan-2013.pdf [Accessed 10 April 2013] Next. (n.d.). Share Price. Available from http://www.nextplc.co.uk/financial-information/share-price.aspx [Accessed 10 April 2013] Reuters. (2013a). Next PLC. Available from http://www.reuters.com/finance/stocks/financialHighlights?symbol=NXGPF.PK [Accessed 10 April 2013] Reuters. (2013b). BRIEF – Next says input prices stable. Available from http://www.reuters.com/article/2013/01/03/next-brief-idUSWLA724320130103?type=companyNews [Accessed 10 April 2013] Ross, S., Westerfield, R., and Jordan, B. (2009). Fundamentals Of Corporate Finance Standard Edition. New York, McGraw-Hill. Shannon, S. (2012a). Next sees tough year ahead after holiday sales disappoint. Bloomberg. Available from http://www.bloomberg.com/news/2012-01-04/next-sees-tough-year-ahead-after-holiday-sales-disappoint.html [Accessed 10 April 2013] Shannon, S. (2012b). Olympics hurt London store sales as shoppers stay away from city. Bloomberg. Available from http://www.bloomberg.com/news/2012-08-01/olympics-hurt-london-store-sales-as-shoppers-stay-away-from-city.html [Accessed 10 April 2013] Appendix Figure 1: Segments of businesses of NEXT Figure 2: Share price of NEXT and FTSE (Next, n.d) Figure 3: YoY Revenues and profits of NEXT (Next, 2013) Figure 4: Cost Savings (Next, 2013) Figure 5: Share buyback (Next, 2013) Figure 6: Store profitability (Next, 2013) Figure 7: Year on year position of customers for the NEXT Directory (Next, 2013) Figure 8: Increasing profitability and cost saving (Next, 2013) Figure 9: Future forecasts for the inflation (Next, 2013) Figure 10: Overall forecast for the business (Next, 2013) Figure 11: Sales, EPS and Dividends percentages for the next one, three and five years (Reuters, 2013a) Read More