Financial Analysis of Debenhams Plc - Case Study Example

CONTENTS INTRODUCTION OF THE COMPANY RECENT ANALYSIS OF UK RETAIL INDUSTRY 2 CASH GENERATING ABILITY OF THE COMPANY 3 ADDITIONAL INFORMATION IN THEANNUAL REPORT 4 Director’s report 4 Sustainability Report 4 Risk Review Report 5 ASSETS IN THE STATEMENT OF FINANCIAL POSITION 5 Intangible Assets 5 Inventory 6 REFERENCES 8 INTRODUCTION OF THE COMPANY Debenhams plc. is a British retailer operating under a department store format in the United Kingdom, Ireland, and Denmark, and franchise stores in other countries. Debenhams is one of the leading and the most recognized name in the fashion industry. The company was established in the eighteen century and since then it has grown by leaps and bounds. For the past many years the company has been considered a synonym for unmatched quality and unmatchable service. The company is considered to be one of the UK’s leading retailers with the customer base of mass family market, which comprises of more than 11.5 million customers visiting the Debenhams stores on a weekly basis. The Debenhams brand trades through 239 stores in 28 countries and is available online in 67 countries. Customers can also shop through smartphones, tablet computers and other mobile devices as well as more traditional sales channels such as catalogues and by telephone. Debenhams flexible approach means that they can tailor their product range to meet the demands of a particular local market or channel. The company’s main business consists in selling fabric items and clothing for men, women and kids’. The company, by applying prudent marketing techniques, has been able to grab the market share in UK as shown in the figure above. Delivering a compelling customer proposition is a key part of our strategy. Debenhams’ offer is unique as they combined of their own brands, international and concession brands. It is exclusive through core and designer own brands which account for almost half of everything that they sell. It is differentiated through Designers at Debenhams, a portfolio of diffusion brands from some of the UK’s top fashion designers. Debenhams also give their customers the wide choice of product categories that they expect from a department store. Debenhams has also been actively involved in the business of marketing and selling jewelry and other ornaments items which have earned the company immense revenue in the past few years. Through its unmatchable product quality, Debenhams is now regarded as one of the finest when it comes to high end fashion merchandise. The financial outlook of the company also looks quite stable. During the financial year of 2012, the company has been able to increase its revenue 1.% to a striking £2.229 billion also the operating profit of the company grew steady with 6.9%. In addition, the financial ratio analysis of the company and the comparison of the company with its competitor also show that a positive financial outlook can be forecasted. RECENT ANALYSIS OF UK RETAIL INDUSTRY Market conditions remained challenging throughout 2012. Macroeconomic factors were compounded by unseasonal weather throughout the year with a warm, dry autumn followed by a cold, wet spring and summer. The summer of 2012 saw an unprecedented number of special events including the Queen’s Diamond Jubilee and the Olympic and Paralympic Games. Managing Director of GfK Social Research Nick Moon (2012) stated that, “confidence has never been so low for so long, even during the dark days of the 2008-2009 recession.” Consumer confidence in the UK remained in negative territory throughout 2012, causing The widely reported “feel good factor” from the various events that took place during the summer did not translate into discernible improvements in consumer confidence data. The total market for clothing, footwear and accessories grew in 2012. In the 24 weeks to 2 September 2012, it increased by 0.3%. This was largely a result of increases in average prices which of set a decline in volume. Amongst the major product categories, the size of the women’s wear market declined whilst menswear and children’s wear both grew. Several financial analyst and economist questioned that the set back in the market was whether due to general economy slow down, or could it be considered as a one off effect. In general it was observed in the UK retail market that the customer demand remained fragile. Significant investment is now expected to be seen in the form of new stores and shops being opened in untapped market. Investment in providing better customer service is also on the agenda of the UK’s retail market giants. CASH GENERATING ABILITY OF THE COMPANY Cash Flow Statement (CFS) divulges the firm ability to generate funds and raise cash. Cash flow statements are use as analytical tools to evaluate the firm’s ability to cover it cost and fund its capital. CFS is the third essential pillar in financial reporting and according to International Accounting Standards (IAS 7) it is mandatory for the firm to represent its statement of cash flow in financial statement. Divided into cash flows from operations, investing and financing activity, a cash flow statement represents the inflow and out flow caused during the course of the business. In comparison with the income statement, the cash flow represents the change in the working capital of the company the management of which is very crucial for the effective operation of any organization. As per the consolidated cash flow statement of Debenhams, the cash flow from operations has shown a minor increase by 1.05% during the current financial year. Although the revenue from sales decreased around 3% during the current year, but decrease in finance cost paid counterbalance the decrease. Net Cash at the year-end has increased by 51.75% indicating that it can increase its dividend payments, repurchase its stocks (share buyback), reduce its debt or invest in new capital. Debenhams major increase in net cash was due to zero payment in Term Long Loan. Another area where the company utilized most of its cash funds is the buyback of shares and issuing of dividend. Decent investment was made in Property, Plant and equipment. The company incurred major capital expenditure on the purchase of vehicles, furniture and fixture. These capital expenditures are in line with the opening of new stores during the year. As company incurred fewer financing cost, cash from the year operations increased resulting in higher net cash in the end ADDITIONAL INFORMATION IN THE ANNUAL REPORT Director’s report Debenhams’ Directors report provides the investors, shareholders and user with insight information of the company actions and information. In the report the information regarding the callback/repurchase of shares, major events occur around the financial year, appointment of external auditors, annual general meeting and the date on which the report was signed. In addition, the report also presents the composition of entities having major shareholding in Debenhams, the nature and type of contracts entered into during the current financial year in which any of the directors have material interest and donations made during the year. Also in the report the payment of supplies the company showed improvements and faster transaction then previous year, this is lucrative information for the suppliers as if they want to continue doing business with Debenhams. Apart from current and prospective investors, users of financial statements also include the regulatory authorities. Sustainability Report The company has divided its corporate social responsibility into three main activities Environmental, Ethical Trading and Workplace and community. Debenhams recognizes the adverse change in the climatic condition due to the carbon emission and increase in production of waste material. As per the sources, the temperature of the earth has increased by from 1905 to 2005 and it is still increasing. In order to curtail these harmful impacts on the environment, Debenhams have started ‘carbon foot printing’ through which the company is able to understand which is of its operations is generating what amount of carbon dioxide in the environment. Debenhams also ensures that the working environment for its labor force is safe and humane. The company has implemented safety rule and monitors that the workers are following the code of conduct. As per the corporate responsibility report, Debenhams also put great emphasis on the manufacturing of products from organic and harmless material so that the consumers are satisfied and safe. The company is also an active philanthropist and actively takes part in charity both at national and local level. Risk Review Report The risk review report has identified the risks that the management is willing to take in order to achieve its strategic goals and objectives. The management at Debenhams identified various risk during the financial year which can cause several uncertainties to the operations of the company. Broadly, financial risk can be defined as the risk that a company will not have adequate cash flow to meet financial obligations in future. Unplanned cost management and delayed receivables turn over period can cause shortage of cash flow for the company resulting in serious effects on operations. Since the company’s operations is spread across several countries, one of the major financial risk is the effect of change in exchange rate. Debenhams has implemented vigilant treasury controls, including hedging, in order to divert any foreseeable financial risks and these controls are regularly monitored. Another risk mentioned in the report is the reputational risk. Debenhams’ reputation can suffer some serious damage if it is unable to deliver its social responsibilities. The social responsibilities of Debenhams include implementing health and safety rules for its working force, making donations to philanthropist organization and curtailing the environmental damage caused by its operations. The company strives in providing better working conditions to its workers and makes regular donations. The most significant risk for Debenhams is the strategic risk which may include decline in revenue due to the volatile economic conditions, ineffective marketing and the company’s inability to grow. Company has adopted strategic marketing techniques in order to divert these risks. ASSETS IN THE STATEMENT OF FINANCIAL POSITION Intangible Assets Intangible assets form an important line item in the Balance Sheet of any company especially in the case of patent, trademarks, copyrights or internally design software. As per the International Accounting Standard (IAS) 38 Intangible Assets, an entity to recognize an intangible asset, whether purchased or self-created (at cost) if, and only if: it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and The cost of the asset can be measured reliably. The important thing to consider at the time of recognition of an intangible asset, that the probability that future outcome or future economic repayment from the asset is based on supportive and logical postulation and these conditions will meet over the useful life of the assets. The classification of some intangible assets i.e. internally generated brands, mastheads, titles, lists are not recognized as assets. The cost calculation for an intangible assets differ for each category as for each assets different model is applied, i.e. for assets generated from research, for these assets all cost is converted into expense and are capitalized only after the technical or commercial or both feasibility of the assets is established for the use in its useful lifetime. Intangible assets are amortized our useful life of the asset, in some cases intangible assets have indefinite life are not amortized, they however are reviewed each year to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. Amortizing of intangible assets is calculated on a systematic basis over that life. The cost less residual value of an intangible asset with a finite useful life should be amortized. Debenhams has followed the above requirement of IAS 38 entirely as presented in its annual report for the financial year 2012. The detailed breakup of the Intangible Assets are presented in the note 13 of the financial statement which provides the breakup of in freehold goodwill, Acquired trademarks and licenses, internally generated software and purchased software. Also in accounting policies note 2 the company have gave amortization rate of the assets with their intangibility classification explained. These notes to the financial statement will assist the users of the financial statement in identifying the additions and disposals made during the current financial year and also the depreciation charged in respect of each asset. Inventory For Debenhams inventory is an integral part of business chain. Focus on the accounting of inventory is emphasized as per international accounting standard 2 (IAS 2) inventory. IAS 2 states that the inventory should be recognized in the financial statement at the lower of cost or net realizable value (NRV). NRV of stock or inventory is the current market value if the stock is sold in its current state. Also the organization is required to apply a definite method of valuing inventory such as weighted average method, first in first out method (FIFO) or the last in first out method (LIFO). The balance of inventories is quite quantifiable to the statement of financial position of the company as it accounts for around 16% of the total value of the assets. The note 16 does not provide substantial information to its readers, though the company has mentioned in the paragraph titled ‘Accounting Policies Note 2; that the annual report is in full compliance with the requirements of IAS 2 according to inventory and the inventory has been stated at the lower of cost or net realizable value. Any other provisions for losses on account of slow moving or obsolete inventory have also been recognized in the current year income statement. REFERENCES Debenhams Plc., 2012. Annual Report. [Online]. Available at: http://www.debenhamsplc.com/phoenix.zhtml?c=196805&p=irol-reportsannual [Accessed 20 November 2012]. Deloitte Global Services Limited, 2012. Summary of IAS 38. [Online]. Available at: http://www.iasplus.com/en/standards/standard37 [Accessed 20 November 2012]. Deloitte Global Services, 2012. IAS 2. [Online]. Available at: http://www.iasplus.com/en/standards/standard6 [Accessed 23 November 2012]. GFK (2012). October sees a drop in the UK’s Consumer Confidence. Press release, issued 31 October 2012. [Online]. Available at: http://www.gfk.com/news-and-events/press-room/press-releases/pages/october-sees-a-drop-in-the-uk%E2%80%99s-consumer-confidence.aspx [Accessed 23 November 2012] Kollewe, J., 2012. Retailers point to sales slowdown. [Online]. Available at: http://www.guardian.co.uk/business/2012/sep/13/retailers-point-to-consumer-slowdown. [Accessed 20 November 2012]. Sky News, 2012. Retail Sales Fall Before Christmas Rush. [Online]. Available at: http://uk.news.yahoo.com/brc-retail-sales-fall-ahead-christmas-rush-002523315.html. [Accessed 20 November 2012]. Stephens, R. G. & Govindarajan, V., 1990. On assessing a firm’s cash generating ability. The Accounting Review, 65(1), pp. 242-257. The Guardian, 2012. UK retailers buoyed by October sales growth. [Online]. Available at: http://www.guardian.co.uk/business/2012/oct/30/uk-retailers-sales-growth-cbi [Accessed 20 November 2012]. Read More