Revenue Growth of the JD Sports Company - Coursework Example

HNC Business & Management Introduction to Finance & Accounts With work Assignment Word Count: 2,435) IDFive Year Report for JD Sports Fashion Plc January 2013 Executive Summary This paper aims at analyzing and commenting on the financial statements of JD sports over a 5 years period from 2008-2012. For comparison, Marks & Spencer’s financial statements are used at various places within the report. In summary, JD Sports generates and increases its basic revenues through acquisition of new stores, investing in joint ventures, acquisition of brands, making business combination arrangements and other licensing arrangements. An example of such arrangements is the increase of 31% issued share capital of Focus Brands Ltd during 2012. The company is successful in maintaining its revenue growth over the five periods under consideration with an average growth rate of 4.16%. The company has kept its operations under tighter controls resulting in a rather stable operating margin before exceptional items. The company’s business model involves significant reliance on acquisition and organic growth. Cash flow from investing and financing activities properly reflect the strategies adopted. The company has recently broadened its services to Spain, France and Ireland by acquiring fully and partially owned subsidiaries. The business model may be practically supported by 2012 results which show that 67% of cash used in investing activities relate to acquisition of brands. The regular losses in re-measurements, revaluation and impairment of assets raise certain questions on the viability of the company’s depreciation and asset management policies. The exceptional items are seen at almost steady amounts throughout the 5 years period under review. The possible reason for such losses seem to be acquired assets which need to be revalued and losses recognized. Summary of Group Income Statement In £000’s 2008 2009 2010 2011 2012 Revenue 592,240 670,855 769,785 883,669 1,059,523 Cost of Sales (300,813) (340,309) (390,248) (446,657) (538,676) Gross Profit 291,427 330,546 379,537 437,012 520,847 Selling & Distribution Expense-Normal (225,994) (256,315) (288,462) (326,296) (403,923) Selling & Distribution Expense-Exceptional (8,404) (8,201) (6,458) (3,277) (10,532) Administrative Expenses-Normal (22,500) (20,867) (26,051) (32,966) (43,193) Administrative Expenses-Exceptional - (8,122) 1,472 (1,007) 847 Other Operating Income 1,086 1,109 2,270 2,177 2,730 Operating Profit 35,615 38,150 62,308 75,643 66,776 Before Exceptional items 44,019 54,473 67,294 79,927 76,461 Exceptional items (8,404) (16,323) (4,986) (4,284) (9,685) Operating Profit 35,615 38,150 62,308 75,643 66,776 Share of results of Joint venture (145) 748 (473) 2,823 1,068 Financial Income 297 529 385 618 646 Financial Expenses (764) (1,210) (827) (455) (1,048) Profit Before Tax 35,003 38,217 61,393 78,629 67,442 Income Tax Expense (11,416) (13,707) (18,647) (22,762) (18,093) Profit for the period 23,587 24,510 42,746 55,867 49,349 Revenue Growth In £000’s 2007 2008 2009 2010 2011 2012 Revenue 530,581 592,240 670,855 769,785 883,669 1,059,523 Hence, the revenue growth may be calculated as follows: 2008 2009 2010 2011 2012 Growth Rate 12% 13% 15% 15% 20% JD Sports shows a continuous growth in revenue over the five year period from 2008 to 2012. The growth of 79% has been achieved in revenue compared to the results of 2008. Cost of Sales Growth In £000’s 2007 2008 2009 2010 2011 2012 Cost of Sales (278331) (300,813) (340,309) (390,248) (446,657) (538,676) 2008 2009 2010 2011 2012 Growth Rate 8% 13.1% 14.7% 14.5% 20.6% The cost controls at JD Sports seem managed and properly monitored. The 2008 growth of cost of sales at 8% was lower than the growth in sales of 12%. This shows, apparently, a strong cost controlling mechanism working at JD Sports. The cost growth of 2009-2023 seems to be in line with the growth in revenue showing a direct relationship between cost and revenue. This further illuminates the tight direct cost control system of JD sports which maintains the levels of earnings and expenses as much as possible. Annual Gross Margin In £000’s 2008 2009 2010 2011 2012 Gross Profit 291,427 330,546 379,537 437,012 520,847 Hence, Gross margin i.e. Gross profit as a percentage of total revenue will be as follows: 2008 2009 2010 2011 2012 Gross margin% 49.2% 49.3% 49.3% 49.5% 49.2% The gross margin growth is relatively steady due to a linear increase in sales and cost of sales. The company’s performance, however, can be appreciated in keeping the costs stable and hence the gross profit. Profit from Operations before exceptional items In £000’s 2008 2009 2010 2011 2012 Before Exceptional items 44,019 54,473 67,294 79,927 76,461 Annual Operating Margin before Exceptional Items 2008 2009 2010 2011 2012 Operating Margin 7.4% 8.1% 8.7% 9% 7.2% The operating margin in 2011 is 9% as compared to the competitor, Marks & Spencer, at 8.6%. Moreover, the operating margin in 2012 is 7.2% as compared to the Marks & Spencer’s operating margin at 7.5%1. This shows that comparing to the competitor; no significant fluctuations have been observed in the trend. In aggregate, the operating margin before exceptional items seems quite stable and satisfactory compared to the competitor and the company’s own previous records. Profit from Operations after exceptional items In £000’s 2008 2009 2010 2011 2012 Operating Profit 35,615 38,150 62,308 75,643 66,776 Annual Operating Margin after Exceptional Items 2008 2009 2010 2011 2012 Operating Margin 6% 5.7% 8% 8.6% 6.3% Comparing the operating profit trends after accounting for exceptional items to the competitor, however, show a different reality of the picture. The profit of 2011 still seems to equate, if not outweigh the competitor’s operating margins. However, the year 2012 show a disappointing result of 6.3% operating margin when Marks & Spencer achieved an operating margin of 7.2%2. The operating margin after exceptional items in 2012 is also 2.3% lower than JD Sport’s own previous year results. When analyzed closely, it has been observed that the main cause of exceptional expenses, during 2012, is asset revaluation, amortization and impairment losses. Other items of exceptional costs included, closure, redundancies and reorganization issues. The closure of Canterbury North America LLC operations also occurred in the year 2012. The operating margins do not show much fluctuation before and after accounting for exceptional items. However, the results before and after exceptional items of 2008 and 2009 may be questioned. Looking closely to the financial statements of 2009 provide a break down information about the exceptional item as cost due to failed assignments like impairment of investment in JJB Sports of 6.1 million and Impairment of goodwill in Hargreaves airport portfolio, impairment of assets and loss on sale of assets accounted for an accumulated amount of 7.2 million of the exceptional item amount. The 2008 exceptional items included Lease variation costs, impairment of fixed assets and loss on disposal of fixed assets at an approximate value of 2.9, 2.5 and 3.0 million respectively. We may conclude, as a result, that the basic exceptional costs relate to fixed assets, their impairment and sale on loss. The company’s depreciation and revaluation policies regarding fixed assets may be questioned. In addition, the losses on acquired businesses and unprofitable assignments also form a major part of these exceptional costs since 2008. There is a need to further investigate or analyze the bases of plans that lead to higher costs in future. Interest Cover (after exceptional items) In £000’s 2008 2009 2010 2011 2012 Financial Expenses (764) (1,210) (827) (455) (1,048) Hence, the interest cover will be: operating profit / finance costs for each year: 2008 2009 2010 2011 2012 Interest Cover 46.6 31.5 75.3 166.2 63.7 Interest Cover is the least at 31.5 times in 2009. The company, throughout the 5 years time, is able to meet the interest expenses. The fluctuations, however, are significant in the interest charges that are split as follows in the 5 years period under review: Summary of financial Expenses Split In £000’s 2008 2009 2010 2011 2012 On Bank Loans & Overdrafts 758 1209 511 380 905 Interest on Obligations under finance leases 6 1 - 129 Other Interest - - 156 75 14 Amortisation of Facility cost - - 160 - - Total Financial Expense 764 1210 827 455 1048 It can be noticed that a shift from 2008 to 2009 brought the company to an enormous increase of 59% in bank loans and overdrafts related finance costs. This was a major shift and caused the fluctuation in total financial expense of the year. The year 2010 reduced the bank & overdraft interest costs; however an amortization of facility cost and other interest costs formed 38% of the year’s financial expenses to balance. 2011 shows the most relaxing cost figure and this is derived by a reduction in both, bank related and other interest costs. However, the 2012 results are 130% higher than 2011. The group companies have relied on bank loans and overdrafts in addition to the finance lease arrangement. The finance lease arrangement is 12% of the costs identified, however, overdraft and bank loans related finance costs are calculated at 86% of the derived total financial expenses. It can be assumed that the Group of Companies, hence, has taken a significant overdraft or loan facility from the bank in 2012, as established by the consolidated financial accounts. Revenue Growth Drivers The 2012 results of 20% growth in revenues is mainly generated through acquired businesses during the period including revenues from Sprinter, Champion, Focus and Kukri at £51.7 million, £36.9 million, £17.2 million and £16.1 million respectively. The revenue growth of 2011 by 15% is derived from the improved like for like sales performance of 3.1%, an increase in number of stores (i.e. 15 new stores) resulting in higher sales and the £41.5 million pre acquisition revenues generated by Chausport, Canterbury and Kooga. The revenue growth of 2010 is also derived through improved like for like sales performance 2.5%, new stores and approximately 48 million of revenues are from recently acquired operations. The 2009 and 2008 revenue growth of 13% and 12% respectively are also generated from improved like for like sales, revenues from newly acquired businesses and stores. The revenue growth seems significantly higher than Marks & Spencer’s revenue growth rate of 2% in 2012, 2.1% in 2011 and so on. The company is outperforming with its current business Model and strategies compared to the competitor Marks and Spencer. Business Model of JD Sports JD Sports is one of the leading retailer and distributer of sportswear including fashionable footwear, sports apparel and accessories. The business follows a path that directs towards achieving competitive advantage through differentiation of products. It follows an organic growth model as well as an acquisition of brand names, licenses, wholly owned subsidiaries, other companies etc. It further generates its major income through developing its retail portfolio base by opening new stores in different areas. In 2012, the group consisted of 4 divisions named Sports Fascias, Fashion Fascias, Outdoor and Distribution3. The group is expanding to international countries including the expansion recently noticed in Ireland, Spain and France during 2012. JD Sports is observed to highly rely on joint ventures and the results of each joint venture business fluctuates significantly causing an increment or reduction in the overall profitability from the joint venture results. This forms a major part of company’s business model as the year on year changes in joint venture arrangements is identified. For financing activities, JD Sports Group seems to rely on bank overdrafts and loan facilities at varying degrees in the different years. The bank loans and charges are basically fluctuating due to acquired businesses and brands. JD Sports does not use any overdraft facility under its own name. For instance, the group companies used overdraft facilities as follows during 2012: Chausport SA €5,000,000 Sprinter Megacentros Del Deporte SLU €8,800,000 Champion Sports Holdings €3,000,000 Kukri Sports Limited and Kukri GB Limited £170,000 Canterbury International (Australia) Pty Limited AUD $3,000,0004. The major business aim is to become a leading provider of sports and fashion wear on a global basis. The company’s recent activities, including expansion in different geographical boundaries, also support this aim. The financial decisions, including the use of cash investment to acquire subsidiaries and new stores also aim at achieving a global business status for JD Sports. The company’s profitability and revenue growth suggests a positive future anticipation towards achieving its aims. Summary of Cash flow Statement5 In £000’s 2008 2009 2010 2011 2012 Net Cash from Operating Activities 56,431 54,248 75,616 75,695 68,907 Net Cash (used) in investing activities (33,232) (38,988) (29,284) (40,397) (65,151) Net cash used in financing activities (22,460) (3,691) (7,773) (9,850) (29,690) Net inc/(decrease) in Cash and Cash Equivalents 739 11,569 38,559 25,448 (25,934) Cash & Cash equivalents at the beginning of the period 11,230 11,969 23,538 62,097 87,545 Cash & Cash equivalents at the end of the period 11,969 23,538 62,097 87,545 61,611 The results of Cash flow statement provide an analysis of the company’s actual cash position. The group showed an increase in cash over the 4 years period from 2008-2011. However, a significant reduction in cash is found in 2012. The cash reduction seems to arise due to significant usage of cash in investing activities which is 61.3% higher in 2012 compared to 2011. Further analysis of investing activities reveals that the cash is used to acquire property, plant & equipment at 42% higher rate than 2011. In addition, the cash consideration of acquisitions form the highest cash investment in investing activities for 2012 at £26,106,000 (i.e. 67% of the total cash used in investing activities. The acquisitions also brought overdrafts which were acquired through cash amounting £3,326,0006. Brands Cash Consideration in 2012 (£’000s) Focus brands ltd 1,000 Premium Fashion Ltd. 1,598 JD Sprinter 3,508 Blacks Outdoor Retail Ltd. 20,000 Total Cash Invested during the period in Acquisitions 26,106 The Cash flows from financing activities is significantly higher in 2008 and 2012. Analyses reveal that the major contributor of these high cash use are repayment of loans, dividends and finance lease liabilities during 2012. In 2008, the major difference occurred due to the repayment of interest bearing loans and borrowings calculated at £18,917,000 (i.e. 84% of the total cost incurred. However, it must be noted that despite the significant cash usage on investing and financing activities and fluctuations the company holds a positive cash flow at the end of each period. In addition, the company is achieving its aim of generating sufficient cash flows from its operating activities which increases its chances of long-term success and helps the company in meeting its current liabilities for a longer time keeping its going concern assumption protected. References JD SPORTS FASHION PLC. (2008) Annual report and Accounts 2008 [online], JD Sports fashion plc. [Accessed 23 Jan 2013] JD SPORTS FASHION PLC. (2009) Annual report and Accounts 2009 [online], JD Sports fashion plc. [Accessed 23 Jan 2013] JD SPORTS FASHION PLC. (2010) Annual report and Accounts 2010 [online], JD Sports fashion plc. [Accessed 23 Jan 2013] JD SPORTS FASHION PLC. (2011) Annual report and Accounts 2011 [online], JD Sports fashion plc. [Accessed 23 Jan 2013] JD SPORTS FASHION PLC. (2012) Annual report and Accounts 2012 [online], JD Sports fashion plc. [Accessed 23 Jan 2013] MARKS & SPENCER GROUP PLC. (2008). Annual report and Financial Statements 2008 [online], Marks & Spencer Group plc. [Accessed 23 Jan 2013] MARKS & SPENCER GROUP PLC. (2009). Annual report and Financial Statements 2009 [online], Marks & Spencer Group plc. [Accessed 23 Jan 2013] MARKS & SPENCER GROUP PLC. (2010). Annual report and Financial Statements 2010 [online], Marks & Spencer Group plc. [Accessed 23 Jan 2013] MARKS & SPENCER GROUP PLC. (2011). Annual report and Financial Statements 2011 [online], Marks & Spencer Group plc. [Accessed 23 Jan 2013] MARKS & SPENCER GROUP PLC. (2012). Annual report and Financial Statements 2012 [online], Marks & Spencer Group plc. [Accessed 23 Jan 2013] Read More