Financial Management at Marks and Spencer - Case Study Example

 FINANCIAL MANGEMENT Introduction Marks and Spencer is one of the UK’s leading retailers with 843 stores in more than 30 countries around the world, of which 622 stores situate in UK. It sells both clothing and food items and recently started expanding the business in to other ranges like home wares and furniture. Marks and Spencer is the largest retailer offering stylish, high quality, outstanding value clothing and home products and 43rd largest retailer in the world. While the market has became stronger, it has been a good year for Marks and Spencer profits are up; its plan remained firmly on track; and it ended in 2007/08 as a stronger and more competitive business than for many years (Lord Burns-2008). Marks and Spencer has achieved a great success in the last three years and now it is in the progress focusing on core business and aiming at becoming more customer oriented and flexible business offering wide selection of quality goods. 1. Performance Analysis of Marks and Spencer Financial Performance The financial performance of Marks and Spencer during 2008 was extremely pleasing for the stakeholders. The total revenue has been increased by 5.1 % with highly strong performance in its domestic trade. But the total revenue was increased by 10.1 % in 2007 with high performance in both its home and international business. It is reported that during 2008, 4.8% of space on weighted average method has been added to the general merchandise. Both Gross Margin of 38.9% and Net Margin of 12.2% show better performance than its last year’s financial state. During 2007 profitability has been increased to 11.2% from 9.6% and 7.4% of 2006 and 2005 profitability records respectively. It shows the success achieved by Marks and Spencer in its business operation both in domestic and international trade. Marks and Spencer’s UK retail has been accounted to be £8,309.1m during 2008, but it was £7,975.5 m and £7,275 m in 2007 and 2006 respectively. The international retail trade of M&S was £522.7 m in 2006 and £610.6 m in 2007, and the international trade in 2008 has been increased further and accounted to be £712.9m. Group operating profit has also been constantly increasing for last few years. Group operating profit of its UK retail business has been accounted to be £972.9m in 2008 with a slight increase from the figure of £956.5 m in 2007. Group operating profit of its international trade has been accounted to be £116.4m in 2008 with an increase of £28.9 m from 2007’s figure of £87.5m. In short, both domestic and international trades of Marks and Spencer have been constantly increasing for last few years and getting a rather outstanding loyalty brand name among the customers. Operating profit on property disposals was £27 million but it was 1.9 million during 2007. The report also shows that the general merchandise gross margin was up by 120 basis points to 52.6% which was caused by improved buying. Net finance costs before exceptional items were increased by 4.3% after pension finance income of £58.9 million, but it was 20.8 million in 2007. Net finance cost during 2007 has been reported to be decreased to18.3% reflecting reduction in the average net debt. Earnings per share have been increased by 28.7% to 40.4p per share that reflected as a great advantage to attract more investors than before. Cash outflow has been reported to be £917.5 million in 2008 but cash inflow during 2007 was very strong as it generated a net cash flow of £ 231.1 million in 2007. In 2007, Cash inflow from continuing operating activities had been increased by £259 million. Cash inflow from continuing operation in 2008 has been decreased by £206.6 million that has reflected a higher working capital outflow. In 2007, there was reduction in cash outflow on leasehold repayments as compared to 2006 and hence it resulted to an increase in the working capital which was accounted to be £114.1 million. Non Financial Performance ‘Over 21 million people visit Marks and Spencer’s stores each week’ is noticeable and highly important in a fluctuating market where competition among groceries and other large scale retailers are fierce. Marks and Spencer’s stores in UK are highly sophisticated and are established in such a way that it can offer most convenient shopping to the customers. Both primary and secondary amenities including vehicles parking and restaurants are available at its most stores. Around 300 Marks and Spencer stores in UK have entrance cameras that can record the number of people who visit the stores. It is helpful to establish the ratios between the visits numbers and sales. In order to adjust with the ever-changing market conditions and to satisfy customers changing trends and wants it is imperative to any large scale retailer that it should take actions so as to cope with the technologies and innovations. Strategies are changed and technologies are upgraded in order to capture customer footfall more accurately. Marks and Spencer has introduced thermal image cameras in its stores that are more sensitive in picking up flow of individuals and separating groups of people as they walk into the stores (Your M&S-2008). Mystery Shopping is another strategy used by Marks and Spencer in order to evaluate the service qualities and convenient shopping possibilities. Each of the stores will be anonymously visited once a month by the experts. Marks and Spencer has created a broad approach towards customer orientation programs. ‘Marks and Spencer’s new manifesto campaign goes a step further by introducing powerful messages on provenance and healthy eating. (Your M&S-2008). Groceries and supermarkets that are producing green house gases and other dangerous emissions capable of depleting ozone and causing global warming are being always observed by general public and concerned officials. In order to ensure less pollution, Marks and Spencer has reduced carbon dioxide and other dangerous emissions produced by UK stores, Ireland stores, warehouses, business travels and logistics. It is reported that emissions are decreased by 9% from 517,000 tonnes in 2007 to 469,000 tonnes. Marks and Spencer can claim to have delivered some highly creditable achievement in reducing packaging and in extending sourcing of fair trade and organic goods. 2. Risk Management Tools Structured brain storming method There are different methods for identifying and assessing the risks. A business owner normally needs to select most suitable method based on the context of the risk identification and level of risk management planning. The structured brain storming approach has been developed in Marks and Spencer in order to identify and assess the risk. It thus allows a range of personal knowledge and experience to be observed to identify the risks. The brain storming program is normally focused on a particular topic. At Marks and Spencer, there is a board responsible for assessing risks and systems of internal control. ‘This board is liable to monitor the effectiveness in providing shareholders with a return that is consistent with a responsible assessment and mitigation of risks. The role of executive management is to implement the policies of board on risk and control and to provide assurance on compliance with these policies’ (Your M&S-2008). Marks and Spencer has been assessing and identifying risks associated with different business situations every six months with the help of boards who review group risk profiles. This is done by a continuous process for identifying and managing difficulties faced by the group. Thus, managers from each business area should identify the risks to their concerned plans, evaluate the risks using likely hood and impact. The brain storming system for risk assessment and identification has been criticised that this system is designed to manage rather than eliminate the risks. This system can only provide reasonable but not absolute assurance against material misstatement or loss. (Your M&S-2008). This system focuses only on a particular area of the business, thus it is not having a pervasive approach towards assessing risks. Risks from all spheres of the business should be subjected to the keen observation. SWOT analysis SWOT analysis provides an observation in to internal and external environment of a firm and thus it enables to assess the risks and to manage the risks more effectively. SWOT analysis SWOT is an important tool for risk management. Environmental factors internal to the firm can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). I would recommend SWOT analysis for Marks and Spencer for risk assessment and management because it is quite pervasive and widely accepted by businesses. Strengths Increased market share and outstanding service standards can be regarded to be important strengths of Marks and Spencer. The possibilities and abilities of a Marks and Spencer to attract more customers, to provide quality cloths than any other retailer in the same market and to provide advanced technologies and amenities throughout the stores are some of its strengths. Weaknesses Marks and Spencer fails to maintain clothing market share through growth of space and focus on product in the face of growing competition. While maintaining an innovation gap over competitors, profitable sales growth has not been achieved. It also fails to attract and retain talent with the correct skills and capability for succession. (Your M&S-2008). Marks and Spencer has failed to capture an efficient international market through franchising and other modes of agency services. These are some of the weaknesses of Marks and Spencer. Opportunities Marks and Spencer has wide chances and opportunities of utilizing best course of actions so as to solve the weaknesses. It can utilize most ethnological innovations so as to get most attractions from the part of international customers. The brand loyalty it created, the reputation it achieved and the excellent retailing services it offered are its opportunities as it will help to expand and develop the business in to new possible areas. Threats There would be some threats and difficulties for Marks and Spencer as any other large scale retailer. Cut throat competition and increased trade barriers are some of the threats it faces in its international trade. SWOT analysis thus evaluates and assesses overall situations of a business through different variables of opportunities, weaknesses, strengths and threats. Instead of structured brain storming method for risk management, SWOT analysis can be used more effectively. SWOT analysis provides a pervasive approach towards the risks and difficulties within the firm. 3. Role of No-Executive Directors From the legal perspective of a Multinational company, a non-executive director is a member of the board of directors but he does not form part of the executive management team. A non-executive director is considered not to be an employee of the company. Normally an executive director performs operational and strategic business functions like managing personnel, looking after assets of the business, hiring process and entering in to contracts. Executive directors are usually appointed by the company and are paid a salary. Executive director is protected by employment law and are taxed as well. The non- executive directors of a Multinational company cannot get involved in the day to day running activities of the business. Non executive directors use their expertise and skills to offer advice and instructions to the company and they perform a role to monitor executive management. Non executive directors are expected to have two responsibilities. They should challenge and contribute to the development of the strategy of a business. They also should scrutinize the performance of management in achieving expected goals and objectives. (Wikipedia-2008) The non executive directors are expected to provide views free from any personal bias and prejudice on resources, appointments and standards of conducts. A non executive director may sometime be appointed to perform specialist role on a part time basis or for some specific activities based on their expertise. For example, a marketing specialist director may be appointed as a non executive to perform marketing operations like brand expansion, performing advertising campaign and bringing up sales promotions techniques. In these cases, a non executive director can improve the effectiveness at relatively less cost and can provide valuable business relations in regard to brand expansion, advertising and sales promotion. Nonexecutives are seen as ‘guardians’ of the corporate good and act as ‘buffers’ between the executive directors and the company’s outside shareholders, i.e. they monitor executive actions and question executive decisions and are required to ensure that the company is acting in a ‘responsible’ way and in the best interests of the shareholders and other stakeholders. (Christopher Pass- 2002) Non executives are regarded to be an important guarantee of integrity and accountability of multinational companies. The main role the non executive directors can play is that the interests of those who invest in the company will be safeguarded by the presence of non executive directors as they can exercise independent judgement. In Marks and Spencer, executive directors have central duty to act in good faith and in a way most likely to promote the success of the business. For performing this prime duty, they should give extreme concerns over consequences of any decisions in the long run, employees interests and need to foster business relationship. The non executive directors of Marks and Spencer play a vital role to protect share holders’ interests. They are appointed to bring an external dimension to the board. They have duty in regard to analysis of financial reviews and analyzing investment possibilities in the business. 4. Recommendations From the financial analysis of Marks and Spencer it can be seen that investors can expect a fair return from the investment in the company as there was constant increase in the rate of dividends available to the share holders. ‘Sales were increased by 5.1% to over 9.0%bn with a robust performance in the UK boosted by almost 5% of new space, and another strong year for international, where sales were up 16.8%. it shows a greater possibility to the shareholders to expect a fair return on their investments’ (Your M&S -2008). There was 7.9% increase in earnings per share from last year. Capital expenditure was accounted to be £1.1 bn. The aggregate amount of £914 m was returned to share holders. It is highly important to the investors to look at the business through the perspective of net working capital aspects. Net working capital is the business’s life blood. Every business man’s fundamental task is to help keep net working capital flowing and to use the cash flow to generate maximum profits. Net working capital is a measure of both a company’s efficiency and its short term financial ability. It is the difference between current assets and current liabilities. Current assets being more than current liabilities results in positive net working capital which means that the business is able to pay off its short term liabilities. If current assets do not exceed current liabilities, then the business may run in to trouble in paying back the creditors in short run and it may result in to bankruptcy. A continuous decrease in the working capital ratio over a long period of time could be a sign that the business’s sales and hence accounts receivable also are decreasing. A business always needs to make sure that it has enough liquid assets to meet any immediate payments. Thus, net working capital analysis, especially for a share market investor, is the easy measure to assess a business more accurately and its ability to stay long in the market. By analyzing the financial status of Marks and Spencer it can be seen that there was a net cash flow of £917.5 million. Same time, cash inflow from continuing operations has been decreased by £206.6 million reflecting a higher working capital outflow due to the timing of pension payments and increased investments in inventories and leasehold prepayments in respect of new stores’ (Your M&S -2008). This gives a very clear picture of the working capital levels of the business. The higher working capital outflow can be regarded to be poor performance of the business and hence the investors can take decisions easily on investments. But, at the same time, from the view point of Warren Buffet; the most successful investor alive, it can be considered in a different way. According to him, net working capital gives an idea about the basic operational efficiency of a business. An increase in the working capital can be considered as cash outflow because money that is tied up in inventory or is still owed by customers to the business cannot be used elsewhere in the business to pay off any of its requirements and hence it does not earn returns. Even if the business does not operate in the most efficient manner due to slow collections from debtors, it will show an increase in the working capital. It led Buffett to look at non-cash working capital which is the difference between non-cash current assets and current liabilities. A business which sells stocks below its net working capital is most likely to be unprofitable. Marks and Spencer’s financial status also can be viewed with the help of ‘owner earnings’ method of financial analysis. ‘Owner earnings’ is basically cash flow available for shareholders. It can be calculated as net income + (depreciation+ amortization) – capital expenditure – additional working capital needs. It adds back depreciations and amortization to the net income which in turn gives the exact picture of cash flow, or more technically ‘net working capital’ available in a business. ‘Owner earning’ doesn’t consider capital expenditures that must be spent on new equipment, repairing or upgrading plant so as to maintain economic position. Thus an investor who wants to assess Marks and Spencer can either use Net working capital analysis strategy or ‘owner earning’ method as they give an accurate cash flow available in the business and hence investors can take decisions so easily. Conclusion This paper provides financial and non financial performance of Marks and Spencer with the help of journals and company profiles. It also gives a detailed description of risk managements and the tools for risk assessment. 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