Marks and Spencer Group PLC Performance Review - Case Study Example

Marks and Spencer Group PLC Performance Review By + Key words: Financial Risk Management, Working Capital Table of Contents Introduction 3 Weight of Debt Financing 3 Proportion of Capital-Revenue Comparison 7 The Volatility of the Firm in Contrast to the Market Security Index 9 Potential Risks the Firm may be Exposed to 11 References 12 Appendices 14 Performance Review of Marks & Spencer PLC Introduction Marks & Spencer PLC is a United Kingdom based retailer with over 700 branches in the UK and over 360 in more than 42 nations. The product range of Marks & Spencer PLC is grouped into food and general merchandise. It is the one of the largest clothing company in the United Kingdom with leading retailers in menswear, women’s swear, and lingerie. It is a leading producer of quality and standard food products. Marks & Spencer PLC is selling their products through telephone, online, and stores. The stock of the company is listed on the London Stock Exchange and is one of the FTSE 100 Index. Over the last thirty years, Marks & Spencer Group PLC has been the leading clothing company in the United Kingdom. The company operates more than 300 stores. The range and quality of its fashionable and functional clothes combined with better customer service has been attributed to the company’s success. In the past, the position of the company was strong in the United Kingdom market that it refused to make payments using credit cards from their clients (Markets.investorschronicle.co.uk, 2014). The company also felt no reason of conducting advertisements. Weight of Debt Financing The funding Strategy of Mark and Spencer Group is to make sure that the mix of financing sources offers a cost effectiveness and flexibility to match the company’s requirements. Operating subsidiaries of the company are financed through bank borrowing, finance leases, medium term notes, and facilities of committed bank. The objective is to make sure that the company has appropriate income in managing the financial obligations and to achieve the objective of the business. Additionally, its objective is to ensure that the company has a reasonable amount of source based on the maturity and the investors. The company has a committed syndicated revolving debt of 1.325 billion pounds that is meant to mature in 2017. The company has a single financial covenant which is the ration of the depreciation, earnings before interest and tax, rent payable, and the amortization plus the payable rent. The company has also various undrawn and uncommitted facilities that are available to it. Some of the outstanding debt for the company for 2012 and 2013 is as shown below Maturity Date Issued Amount  Coupon Interest Paid  Date Minimum Denominations  20172  US$500m  6.250% Semi-annually 1st June / 1st December $100,000 and increments of $1,000  20191  £400m  6.125% Annually 2nd December £50,000 and increments of £1,000  20211  £300m  6.125% Annually 6th December £100,000 and increments of £1,000  20372  US$300m  7.125% Semi-annually 1st June / 1st December $100,000 and increments of $1,000  20251  £400m  4.750% Annually 12th June £100,000 and increments of £1,000 See: Corporate.marksandspencer.com, (2014). Debt Investors. [online] Available at: http://corporate.marksandspencer.com/investors/debt-investors [Accessed 9 Dec. 2014]. The fortunes of the company have been on the reducing trend (Horcher, 2005). This began with a poor performance in Southeast Asian Market, which was thought to be less damaging. However, over the last few years, the company has experienced a lot of competition in the United Kingdom clothing market considered to be aggressive and high retailers such as Gap, together with discount outlets such as Debenhams. The performance outcomes have been on the sharp decline in the yearly profitability for Marks & Spencer Group PLC since 2012 with a subsequent share price of the company. Particulars 3-Apr-2012 02-Aprl-2013 Revenue 9540.6 9790.3 PAT 532 602.6 Debt-equity ratio 2.29 1.77 ROE 22.93% 21.36% Basic EPS 36.5p 39.8p Dividend per share 17p 19 p Dividend Yield 4% 5.00% P/E Ratio 12.3 10.7 Table 1: The tables (Markets.investorschronicle.co.uk, 2014) shows the financial indicators of Marks & Spencer PLC between 2012 and 203 As of last trade performance, the company traded at 492.63. This is 3.79% below the 52 week high of 512, which was set on February 2013. Open 0.00 Day High -- Day Low -- Bid 499.40 Offer 460.40 Previous close 489.70 Average volume 6.55m Shares outstanding 1.64bn Free float 1.57bn P/E (TTM) 15.86 Market cap 7.99bn GBP EPS (TTM) 0.308 GBP Annual div (TTM) 17.20 GBX Annual div yield (TTM) 3.52% Div ex-date Nov 13 2014 Div pay-date Jan 09 2015 Table 2: The table above (Markets.investorschronicle.co.uk, 2014) the summary performance of Marks and Spencer Group PLC as at February 2014. Proportion of Capital-Revenue Comparison From the first table, the company’s revenue and income has been growing over the last three years with a marginal mean growth rate of 2.61% based on the competitive environment. However, the company has focused on the first plan for long term sustainability of the business. Additionally, the company’s net profit since 2012 is rising with a growth rate of above 10%. Irrespective , the marginal growth rate of 2.10% in revenue during the financial year 2012-2013, the firm is in a position to register a growth rate of 14.45% in profit after imposing tax due to a reduction in the interest cost. It signifies that the firms are able to control the cost so that the profit margin can be improved. The debt-equity ratio of the firm is reducing over the years due to strengthening and liability of the company’s net worth which is a good sign for the company. This has decreased the interest burden on the firm leading into to an improvement in the net profit margin. The company’s return on equity for the last three years is greater than 20 % which is a better return (Hull, 2007). A healthy return is termed as the company’s strength. The firm is distributing half of its earning to the shareholders based on their dividend yield and dividend during the 2010-2011 financial years. When the company invests in stock, the shareholders expect a return of 5% on investment based in the dividend together with the capital appreciations. The profit and earnings ratio of the firm for the three year, shows that the shareholders have trust with the company. Consequently, the closing share price of the firm at LSE in 2012 is 3.81 pounds per share and the market capitalization is 6million pounds. The highlights of half annual outcomes for the 2011 and 2012 financial year, is the that the group revenue of Value added tax is up by 2.5% to 4.7 Billion pounds and the profit before tax is 320.5 million pounds. The fundamental Earning per share is 16% and the interim dividend is 6.20 % per share. Meaning that there is little effect of poor performance in 2012 on the company’s performance. There will be little variation in the company’s performance during the 2012 and 2013 financial year compared to 2011 and 2012 financial year. The result of the three remaining tables shows that the outcomes are neither terrible nor stunning. Based on the results there is an extent which signify that the company is finding it increasingly hard in generating strong growth from the business of United Kingdom. Behind the outcomes of the company’s performance, the food product of the company is registering a perfect performance in like for like and total performance. Meanwhile the sales of the general merchandise are weaker and the range performance of the company is actually weaker (Retail-week, 2012). The management of the company is striking a less effort on future years. The 3 year growth objective is on the uplifting trend, this is because the company has registered a 1.7 billion pounds from 1.1 billion pounds, compared to the 2.5 billion pounds from 1.5 Billion pounds that was set out in November 2012. The profit before tax of 705.9Million pounds is 2.4 per cent better the forecast that the company has in November 2012. While the guidance of 2013 financial year increased by 3%, the company’s performance in 2013 was reduced to 2.5%. Subsequently, the company delivers profit before tax in the financial year of 2012 according to the company’s expectation. The management of the company and its strategic revenue looked optimistic and trimmed the expectation of the company (Snider, 1964). Management of working capital The Volatility of the Firm in Contrast to the Market Security Index The section compared the retail market share e of the company compared to top stores company based on their market capitalization. Tesco 30% Asda 18% Sainsbury’s 17% Morrisons 12% Waitrose 4% Iceland 2% Aldi 3% Lidl 3% M & S 11% Table 5: The table (Yahoo! Finance, 2014) shows the top stores company based on their market capitalization. Meanwhile, the internal growth of M&S has gained competitive advantage over their competitors, that include the Morrisons which are the materialized mechanism of reaching a wider consumer range through an organized and successful channel to their clients. The core framework for market capitalization shows that the analysis of the company is compared to the competitors who understand the position of M&S. In the analysis, Morrison’s PLC is a perfect example for the purpose of comparative analysis. Morrison is taken as one of the companies that is engage in the business of food just like M&S. Additionally, Morrison is listed in London Stock Exchange. The other listed companies within the same industry include Tesco, Sainsbury, who have annual revenue of 72.4 billion and 26 billion pounds respectively. Morrison is also listed as one of the closest firm based on their market capitalizations which are highly dominated by Sainsbury, Asda, Tesco and Morrison. The income and balance sheet for the company within the discussed years is a shown below at the Appendices. The profits per earning for Marks and Spencer Group PLC is ranked as the highest compared to other top department stores based on their market capitalization, Debenhams Plc. is ranked the second in terms of profit per earnings top department store firm based on their market capitalization but it is lower at a rate of 17.2%. The table shows that the earning per share for Marks and Spencer PLC has been increasing over the years. This shows that the company has the ability of performing better compared to other companies found in the industry. Therefore, considering a rising Earning per Share and high profit to earnings ratio is the market, hence the stocks of the company can easily be advocated best for investment. According to the company’s income statement, its annual net income grew by 15.7% which, is equivalent to the growth from 453.5 Million to 524.80 Million pounds despite the flat revenue growth of the company. Based on the company’s growth rate, the growth in dividend per share remained stagnant while the EPS without the extraordinary items rose by 14.39%. Consequently, when analyzed on annualized basis, the DPS of the company is in line with the markets average compared to the industries within the same markets. In its industry, the company has a higher growth of earning per share. First quarter of this year, the company raised its cash reserve by 15 million pounds (Hampton, 2011). The company received earnings of 1.1296 Billion from their cash flow margin operations of 11%. Additionally, the firm used 615Million pounds on investment tasks and also incurred payment of 498 Million pounds to finance some of its cash flow. Based on the company’s balance sheet, the company recorded a Debt to Total Capital figure of 45%. This is a lower figure compared to 2013 which was 68.20%. Potential Risks the Firm may be Exposed to Marks and Spencer PLC believes that the efficient and reliable risk management is crucial for the company to achieve their strategic objective and sustainable growth of the business. Mark and Spencer PLC board has a general accountability to make that the risk is managed effectively across the company. The company has an audit committee that reviews the risk process effectiveness (Bank.marksandspencer.com, 2014). Each business region is responsible to identify, assess, and manage the risk in their respective regions. Mark and Spencer PLC identify the risks and assess them by all business regions half-annually and are measured against the defined collection of criteria, considering potential effect and occurrence to the group. As with any company and firm, Mark and Spencer PLC face uncertainties and risk daily. It is the effective management of the risk that places the company in a proper place to achieve their strategic objectives and embrace the opportunities as they come up. The company emphasizes risk that is external to the business, core to their daily operation, related to the change of business activity, and those that could easily emerge in future. Some of the principal risk that the company experiences are categorized as core external risk, the emerging risk, core operations, and the business change. The risk in emerging areas includes the competition and information security (Bank.marksandspencer.com, 2014). The core operations risks include the food integrity and safety, their people, GM customer engagement, GM margin, and international. The business change risks include the IT change, the company’s business resilience, GM supply and logistics chain network, and the work stream management. The company has continued driving improvement in their risk management process and their risk information quality, while at the same time it has continued to maintain and practical and simple approach. The company’s risk profile has continued to evolve over the last years. Mark and Spencer’s PLC has responded to the evolving environment within which the company operates and their strategy of becoming a multi-channel and international retailer. Therefore, the company introduced three risks such as information security, GM margin, and M&S.com business resilience. Subsequently, the company has a risk appetite which is an expression of the amount and types of risks that the company is willing to accept or take to attained their objectives and aim in supporting risk informed and consistent decision making across the company’s profile (Bank.marksandspencer.com, 2014). Our vision for the company’s risk management is that every principal risk to achieve their strategic objectives are identified and assessed before they are managed within their acceptable levels. Risk appetite has continued to be the main consideration in strategic decision by the company’s board and has continued to recognize the significance of including the risk concept across the organization level. It is specifically, pertinent to determine the extent and nature of mitigating activities and their responsibility to address the likelihood or impact of the risk (Christoffersen, 2003). References Bank.marksandspencer.com,. 2014. Retrieved 4 December 2014, from http://bank.marksandspencer.com/explore/about-us/board/ Christoffersen, P. 2003. Elements of financial risk management. Amsterdam: Academic Press. Hampton, J. 2011. The AMA handbook of financial risk management. New York: American Management Association. Horcher, K. 2005. Essentials of financial risk management. Hoboken, N.J.: Wiley. Hull, J. 2007. Risk management and financial institutions. Upper Saddle River, NJ: Pearson Prentice Hall. Markets.ft.com,. 2014. Marks and Spencer Group PLC, MKS:LSE financials - FT.com. Retrieved 4 December 2014, from http://markets.ft.com/research//Markets/Tearsheets/Financials?s=MKS:LSE&subview=IncomeStatement&period=a Markets.investorschronicle.co.uk,. 2014. Marks and Spencer Group PLC MKS:LSE Share price, analysis, charts, news, dividends, EPS forecasts, annual reports and RNS - Investors Chronicle. Retrieved 3 December 2014, from http://markets.investorschronicle.co.uk/research/Markets/Companies/Summary?s=MKS:LSE Retail-week.com,. 2012. Marks & Spencer full-year results: What the analysts say. Retrieved 3 December 2014, from http://www.retail-week.com/city-and-finance/financial-results/-marks-and-spencer-full-year-results-what-the-analysts-say/5036914.article Snider, H. 1964. Risk management. Homewood, Ill.: Published for the S.S. Huebner Foundation for Insurance Education, University of Pennsylvania, by R.D. Irwin. Yahoo! Finance,. 2014. Marks & Spencer Group PLC. Retrieved 3 December 2014, from https://uk.finance.yahoo.com/q?s=MKS.L Appendices fiscal data as of Mar 29 2014 2013 2012 Total revenue 10,027 9,934 Cost of revenue total 6,230 6,179 Selling, general and admin. expenses, total 2,647 2,542 Depreciation/amortization 463 480 Unusual expense(income) 75 -- Other operating expenses, total (67) (13) Total operating expense 9,349 9,188 Operating income 678 747 Other, net (11) 24 Net income before taxes 547 658 Provision for income taxes 102 168 Net income after taxes 445 490 Minority interest 8.70 24 Net income before extra. Items 454 513 Total extraordinary items -- -- Net income 454 513 Inc. avail. to common excl. extra. Items 454 513 Inc. avail. to common incl. extra. Items 454 513 Basic/primary weighted average shares 1,600 1,579 Basic/primary esp. excl. extra items 0.28 0.32 Basic/primary eps incl. extra items 0.28 0.32 Dilution adjustment -- -- Diluted weighted average shares 1,610 1,592 Diluted eps excl. extra items 0.28 0.32 Diluted eps incl. extra items 0.28 0.32 DPS - common stock primary issue 0.17 0.17 Gross dividend - common stock 273 268 Pro forma net income -- -- Interest expense, supplemental 125 137 Depreciation, supplemental 374 405 Total special items 101 63 Normalized income before taxes 648 721 Effect of special items on income taxes 19 16 Income tax excluding impact of special items 121 185 Normalized income after tax 527 537 Normalized income avail. to common 536 560 Basic normalized EPS 0.33 0.35 Diluted normalized EPS 0.33 0.35 Fiscal data as of Mar 29 2014 2013 2012 Cash And Short Term Investments 210 457 Total Receivables, Net 141 140 Total Inventory 767 682 Prepaid expenses 108 115 Other current assets, total 43 67 Total current assets 1,268 1,460 Property, plant & equipment, net 5,034 4,790 Goodwill, net 93 93 Intangibles, net 602 492 Long term investments 34 33 Note receivable - long term 30 34 Other long term assets 65 44 Total assets 7,611 7,273 Accounts payable 973 960 Accrued expenses 531 490 Notes payable/short-term debt 0 0 Current portion long-term debt/capital leases 559 328 Other current liabilities, total 176 229 Total current liabilities 2,238 2,005 Total long term debt 1,727 1,948 Total debt 2,286 2,276 Deferred income tax 241 196 Minority interest (19) (11) Other liabilities, total 885 345 Total liabilities 5,072 4,483 Common stock 404 401 Additional paid-in capital 315 294 Retained earnings (accumulated deficit) 8,353 8,194 Treasury stock – common -- -- Unrealized gain (loss) -- -- Other equity, total (6,533) (6,100) Total equity 2,539 2,790 Total liabilities & shareholders equity 7,611 7,273 Total common shares outstanding 1,614 1,606 Treasury shares - common primary issue 0 0 Date Open High Low Close Volume Adj Close 12/2/2013 486.5 487.6 429.71 432.6 3390100 416.51 11/1/2013 505 515 483.5 487 3517400 468.89 10/1/2013 498.4 509.62 460.3 503.5 3867400 478.74 9/2/2013 473.6 520.5 473.6 496.6 3416000 472.18 8/1/2013 483.1 491.7 450.3 471.7 3299000 448.51 7/1/2013 434.9 487 433 481.5 4120800 457.83 6/3/2013 470.4 471.5 414.7 430.7 5658600 409.52 5/1/2013 410.6 491.14 405.4 470.9 5149100 447.75 4/1/2013 390 418.5 368 408.6 4430500 379.86 3/1/2013 370.9 407.7 355 390 6339300 362.57 2/1/2013 380.1 392 360.9 371.3 5398200 345.18 1/1/2013 382.3 389.7 351.6 379.7 6123100 352.99 12/3/2012 392.6 399.6 378.5 382.3 2979100 355.41 11/1/2012 394.4 399.69 340 390.6 5860100 363.12 10/1/2012 357.3 397.6 355.2 393.8 4924400 360.21 9/3/2012 357 378.8 351.7 356.8 4849900 326.36 8/1/2012 335.1 385.9 334 357.8 4899100 327.28 7/2/2012 325.4 340.3 310.6 333.7 5792900 305.23 6/1/2012 333.5 342.3 317.5 325 5967000 297.28 5/1/2012 357.5 361.2 329.7 331.4 5440300 303.13 4/2/2012 379.5 384.8 351.2 357 5270300 316.32 3/1/2012 362.4 389.8 348.3 379 5972700 335.82 2/1/2012 327.7 364.2 327.4 363 4843300 321.64 1/2/2012 311 336.4 303.8 326.8 6103000 289.57 Table 4: The table above (Uk.finance.yahoo.com, 2014) shows the monthly performance Marks and Spencer Groups PLC between 2013 and 2012. 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