A financial comparison on Zara and Burberry.(UK) - Essay Example

Financial Comparative Analysis of ZARA UK and BURBERRY UK Introduction: This paper examines the financial aspects that influences marketing strategies pursued by two large garment companies - Zara, UK operations and Burberry, UK. While Zara could be said to operate in the medium price market segments, with moderate growth and profitability, Burberry UK is in the luxury segment, with high margins, low costs and higher profits. "The first Zara shop opened its doors in 1975 in A Corua (Spain), the city that saw the Group's early beginnings and which is now home to its central offices. Its stores can now be found in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa." (Our Group). However, "Burberry was founded in 1856, when Thomas Burberry constructed his first outerwear pieces for the local sportsmen of Basingstoke, England. In the century and a half since then, Burberry has come to represent the standard for quality and style in outerwear, anchored by its iconic trench coats, now legendary the world over." (Overview: The Past. 1856). Respective brand positioning: It is first necessary to consider the aspects of positioning and relate strategies undertaken by these two companies - namely Zara, (UK Operations) and Burberry, UK. Positioning could be seen in terms of the market which companies wish to attract and retain, and the brand and corporate image of the companies registered in the buying patterns of consumers and clients, especially with relation to competing and rival brands. The market positioning a company adopts would depend upon a lot of factors, competitive or otherwise. Location, stocking and merchandising, dcor and ambience of showroom, staffing, whether providing rebates, etc. are important positioning strategies. Swift and Speedy delivery - Zara: In the case of Zara, operations are very swift and fast, both in terms of serving customers and also replenishing stocks, catering to the needs of the customers. Since their stock turns are good, they are able to position themselves well to meet the varied needs of their clientele. "At Zara, design is conceived as a process that is closely linked to the public. Information from our stores is constantly transmitted to a design team made up of over 200 professionals, informing them of our customers' needs and concerns." (Zara). Highest standards of excellence and elegance: However, in the case of Burberry Ltd., it is seen that it operates in the luxury segment. Burberry was established in 1856, and has had a chequered history of market vicissitudes due to fall in currencies in principle Asian markets, and market fluctuations. However, the Company has overcome all these obstacles and is now very much poised for bigger growth plans. "An icon of classic clothing, Burberry has utilized licensing and brand extensions to appeal to a younger generation of fashion-conscious customers." (Company History). It can be observed that the marketing approaches and positioning adopted by these two companies, Zara and Burberry are different. According to Zara, "The customer is the centre of our particular business model which integrates design, manufacture, distribution and sales through a wide network consisting of our own stores." (The Company). According to Burberry, "No other brand within the luxury sector enjoys a comparable platform: approach to the consumer, product breadth and global reach. Day after day, year after year, management seeks to capitalise on the opportunities inherent in this positioning." (Strategy and Mission. 1856). Inventory controls: While Zara targets the middle income segment customers with volume of sales as more important, Burberry targets exclusive luxury segments who value highest quality and servicing standards. As a result, the annual number of stock turn of Zara is higher at around 9 times when compared to Burberry at 3 times. These stock turns are important since it is directed connected with inventory controls and movement of stocks. A lower stock turn may indicate slower movement of stocks and availability of slow or non-moving stocks which needs to be eliminated as fast as possible Moreover, if the positive side of stock turns is considered, it would be good if a company could increase its stock turns while maintaining, or reducing the cost of goods sold levels. However, it would also be necessary to identify and eliminate slow-moving items in stocks that could be barriers to company's objective for maximizing number of turns and stock days. Financial analysis: It is now necessary to conduct financial profitability and ratio analysis for Zara and Burberry It is seen that the major parameters would be in terms of profits, growth, liquidity, stock turns and overall working capital days, which are significant in garment industry. It is also proposed to dwell also on certain aspects of capital gearing and interest payment ratios. Since Zara is part of the Inditex Group of Spain, no separate accounting for dividend payments or taxation has been considered as in all probability, it is being consolidated in group accounts. Five year Statement of Zara, UK Unit Particulars 2003 2004 2005 2006 2007 Turnover 67789 100971 133603 155325 202234 Cost of Sales 24402 43635 55816 64447 82757 Growth rate 48.94% 32.31% 16.25% 30.20% COS/Turnover 36% 43% 42% 41% 41% Oper. profits 3797 -2072 371 -10,991 -435 Profit ratio 5.61% -2.05% 0.27% -7.07% -0.21% Cur.Assets Stock Debtors Cash Total current assets Current assets minus stock 2717 2004 843 3949 6846 1383 5719 11066 4619 7790 10013 6764 9586 10255 6571 5564 12178 21404 24567 26412 2847 8229 15685 16,777 16826 Curr.liabilities 1740 3565 3310 4311 3445 Current ratio CA+ Stock/CL 3.19:1 3.41:1 6.46:1 5.69:1 7.66:1 Acid test ratio CA- Stock/CL 1.63:1 2.30:1 4.73: 1 3.89 :1 4.88: 1 Sales / day Turnover/365 186 277 366 426 554 Debtors /day Drs/ sales /day 11 25 30 24 19 Particulars 2003 2004 2005 2006 2007 COGS/day 67 120 153 177 227 Creditors/day 26 30 22 24 15 Stock turn times/year 9 11 10 8 9 Stock turn days 41 33 37 44 42 Working capital days Stock days Debtors days Credit. days 41 11 -26 33 25 - 30 37 30 - 22 44 24 -24 42 19 -15 Net WC days 26 28 45 44 46 Five year statement of Burberry Ltd (000m) Particulars 2003 2004 2005 2006 2007 Turnover 593600 675800 715500 742900 850300 Cost of Sales 261300 284200 291300 296800 329000 Growth rate - 13.84% 5.87% 3.82% 14.45% COS/Turnover 44% 42% 40.71% 40% 38.69% Oper. profits 85100 138800 164400 157000 156300 Profit ratio 14.33% 20.53% 22.97% 21.13% 18.38% Cur.Assets Stock Debtors Cash Total current assets Current assets minus stock 83800 86300 86600 89500 86100 158700 102500 91600 169900 124200 89400 113700 149800 86300 131400 256700 334300 364000 327300 367500 172900 244800 261500 203100 217700 Curr.liabilities 32000 38000 34300 28000 56800 Current ratio CA+ Stock/CL 8.02 :1 8.79:1 10.61:1 11.69:1 6.47:1 Acid test ratio CA- Stock/CL 5.4:1 6.4:1 7.6:1 7.2:1 3.8:1 Sales / day Turnover/365 1626 1851 1960 2035 2329 Debtors /day Drs/ sales /day 53 47 47 44 37 Particulars 2003 2004 2005 2006 2007 COGS/day 716 779 798 813 901 Creditors/day 45 49 43 34 63 Stock turn times/year 3 3 3 2.3 2.1 Stock turn days 117 114 128 152 166 Working capital days Stock days Debtors days Credit. days 117 53 -45 114 47 -49 128 47 -43 152 44 -34 166 37 -63 Net WC days 135 112 132 162 140 Growth rate of Zara as compared to Burberry: The average growth rate of Zara during the period under study is 32% whereas for the same period the growth registered by Burberry is 9,49%. This is understandable since Zara caters to a larger clientele while Burberry is focused on selected and exclusive customers in luxury brand markets. This compares favourable with the industry averages in both segments. However, Zara has shown more consistent growth figures compared to Burberry, which has experienced roller coaster rides during this period. Comparisons between operating profit rates: The profits of Burberry being in the luxury segment market show great deal of consistency at around 20% which may increase in future years. However, this rate of profitability could not be achieved by a smaller segment company like Zara, which is part of the giant Spanish garment giant, Inditex. However, it is seen that in the year, the position would be better. "Spanish retail group Inditex, who own high street Zara fashion chain, said on Tuesday that net profits in the first nine months of the year had risen 28 per cent compared to last year and that trading in the fourth quarter was in accordance with expectations." (Profits Rise for Zara. 2004). Liquidity positions of Zara and Burberry: It is also necessary that garments sectors like Zara and Burberry who operate on cash, and not credit, should have high liquidity in order to finance investments and opening of new shops, refurbishments and funds needed for stock replenishments according to customer needs. High liquidity could also mean that debtors are paying on time and creditors being paid so. Liquidity could be seen in terms of Current & Quick ratios. Current ratio includes stock, which strictly does not mean liquid stock, since stock may not always be readily converted into cash. Quick ratio excludes stock and could thus be seen as more appropriate test of liquidity. The average Current ratio of Zara is 5:1 and acid test ratio 3:1, which is acceptable. The acceptable level is 1:1 and sector average is 0.8. In the case of Burberry Ltd., it is seen that average Current ratio is 9:1 and acid test ratio is 6 :1. This testifies that in the case of Burberry there are unutilized funds that need to be suitably invested since the liquid assets available are far in excess of current needs. Thus, the Company needs to utilize available liquid assets more effectively and bring down the match to acceptable standards. There are also possibilities that current liabilities need to be accounted for, while liquidity ratios are needed at par with industry standards, like 2:1 or 2.5:1, a large value could be harmful to company. "Investor look at liquidity ratios to determine the ability of a business to pay off its short term obligations from cash or near cash assets to evaluate the risk associated if were to invest in this company. Failure to pay off short term obligation may resulted in financial difficulty or bankruptcy in near future." (Liquidity Ratios). Capital Gearing: The term capital gearing refers to the proportion of owned funds as against loan, or debt funds in an organisation. A company could be said to be highly geared when the percentage of debt funds exceeds 65% of total funds, including capital. ---- It could be seen in two ways: 1. Debt /Equity ratio and 2. Debt/capital employed. It is proposed to take up the second method; Debt = Original capital + reserves +profits Capital employed= equity capital + long term loans. In the case of a similar company, it is seen that the Shareholders funds for the 5 years in operation between 2003- 2007 are as follows: Particulars 2003 2004 2005 2006 2007 Shareholders Funds 275.1 221.0 272.7 265.2 189.3 Long term liabilities 56.3 371.4 372.6 462.6 643.2 Ratio= long term liab / shareholders funds + long term liab. 16.98% 62.69% 57.74 63.56% 77.26% It is seen from the above that the model is highly capital geared, at 77% which is a risk. However, its average over the past 5 years has been 55%. The most important aspect regarding capital gearing is that interest payments have to be made ahead of profits and is mandatory, therefore in the event of non-payments of interests on debts and loans (outside funds) the company would run into serious problems. In the case of Burberry, it would be as follows: Particulars 2003 2004 2005 2006 2007 Shareholders Funds 390.0 437.1 454.6 386.6 393.9 Long term liabilities 39.8 40.7 19.8 29.7 22.4 Ratio= long term liabilities / shareholders funds + long term liabilities 9.26% 8.51% 4.17% 7.13% 5.38% In the case of Burberry Ltd, UK it is seen that the gearing has been low averaging just 7 %. A low capital gearing is as lethal as a high one, in that it suggests that the company is more inclined towards own funds rather than loan funds. Being in the luxury segment does present opportunities for Burberry in the form of business development plans, expansions and heavy investments and progression for which own funds may not be always ideal. It is necessary that certain amount of business risks are taken to augment growth strategies to effectively counter rival and competitors eroding into Burberry's market share, especially in global business. However, "the book value of equity may be an understatement of its true value in a period of rising prices. This happens because assets are carried at their historical values less depreciation, not at current values." (Chandra 2008, p.73). A right blend of capital gearing ( Own to debt) is important since high gearing would involve major interest burdens, while low gearing would mean overdependence on equity capitals and own funds, increasing tax burdens and obligations to shareholders. Moreover, the risk aspect is higher in cases of lowly geared than normal geared companies. But an important advantage of low gearing could be in terms of the fact that when business is low, dividends to equity shareholders could be stalled and savings incurred, which may not be available for highly geared companies who need to pay interest mandatorily. Interest Cover ratio: Taken as Profit before interest and taxes/ Interest. In the case of a similar company it is seen as below: Particulars 2003 2004 2005 2006 2007 Profit before interest and taxes (PBIT) 302.7 370.9 442.7 471.8 511.5 Interest paid 1.5 17.6 19.8 22.7 33.1 Interest cover ratio 202 times 21 times 22 times 21 times 15 times It is seen from the above that interest cover ratio averages 20 times during the 4 year period, Coming to the interest cover ratio of Burberry Ltd., it is seen as follows: Particulars 2003 2004 2005 2006 2007 Profit before interest and taxes (PBIT) 85.1 138.8 164.4 157 156.3 Interest paid 2.7 0.1 0.6 1.8 6.2 Interest cover ratio 32 times 1388 times 274 times 87 times 25 times Thus it could be seen that in the case of Burberry, there have been wide disparities in interest cover ration due to fluctuations in interest paid over the years. However, it is believed that "This ratio is not a very appropriate measure of interest coverage because the source of interest payment is cash flow before interest and taxes, not earnings before interest and taxes." (Chandra 2008, p.74). Conclusion: This paper has sought to highlight the differences between the marketing approaches between two major global garment players, Zara and Burberry, having totally different backgrounds, management styles and marketing cultures. Zara has been part of the Spanish conglomerate with large number of stores, catering to non luxury and utility segments. Burberry however, is a high premium brand which, despite several marketing constraints and difficulties has been able to retain their position as a premium global brand. It needs to be said that marketing is a dynamic process, pro-active and changing to suit market demands and customer preferences. It is therefore necessary for marketers to respond alacritically to market overtures, and with the right blend of marketing and positioning strategies retain leadership in a fast changing business environment. Bibliography Chandra, Prasanna. (2008). Financial Management Theory and Practice Chapter 4: Analysis of Financial Statements. Tata McGraw-Hill Publishing Company Limited. p.73. Chandra, Prasanna. (2008). Financial Management Theory and Practice Chapter 4: Analysis of Financial Statements. Tata McGraw-Hill Publishing Company Limited. p.74. Company History. [online]. DH gate.com: Fast Trading Marketplace. Last accessed 01 January 2009 at: http://www.fundinguniverse.com/company-histories/Burberry-Ltd-Company-History.html Liquidity Ratios. [online]. 1st Stock Investment.com. Last accessed 01 January 2009 at: http://www.1st-stock-investment.com/financial-ratio-analysis/liquidity-ratios.php Our Group. [online]. Inditex. Last accessed 01 January 2009 at: http://www.inditex.com/en/who_we_are/our_group Overview: The Past. (1856). [online]. Burberry. Last accessed 01 January 2009 at: http://www.burberryplc.com/bbry/corporateprofile/overview/ Profits Rise for Zara. (2004). [online]. Last accessed 01 January 2009 at: http://www.fashionunited.co.uk/news/inditex.htm Strategy and Mission. (1856). [online]. Burberry. Last accessed 01 January 2009 at: http://www.burberryplc.com/bbry/corporateprofile/strmis/ The Company. [online]. Zara. Last accessed 01 January 2009 at: http://www.zara.com/ Zara. [online]. Inditex. Last accessed 01 January 2009 at: http://www.inditex.com/en/who_we_are/concepts/zara Read More