The Position of Burberry in the Market - Essay Example

Corporate Finance and Financial Accounting Contents Executive Summary 3 Review of UK and Global Economy 3 Company Information 7 Strength 7 Weakness 8Opportunities 8 Threats 8 Results and Discussions 9 Capital expenditure 11 Capital structure 11 Sensitivity Analysis 12 Appendix 13 References 17 Executive Summary The topic mainly emphasizes the position of Burberry in the market and its functioning in the market. Burberry is a retail company that deals in fashion wear and it is a United Kingdom based company but it carries out its operation throughout the world. The company is considered as the market leader in United Kingdom and its main competitors from the same industry mainly includes Ralph Lauren, Michael Kors and Coach Inc. the company was also affected during the financial debt crisis in the economy. Burberry provides employment to huge number of people and thus contributes towards the growth and development of the economy of United Kingdom. United Kingdom is considered as the eighth largest economy of the world and Burberry experiences a growth rate of more than 8% and therefore the projected and the forecasted figure signifies that the profit of the company is subjected to increase in the subsequent years. The net borrowings of the company have also decreased. The weighted average cost of capital of the company is more than 6% and the company experiences a cost of equity of more than 9%. Review of UK and Global Economy United Kingdom is considered as the fifth largest economy and eight largest economy of the world and it is measured and evaluated in terms of the Gross development product and also in terms of its purchasing power parity. The Gross domestic product in the United Kingdom is around 2522.26 billion US dollar in the year 2013. The Gross development product of the United Kingdom includes 4.07% of the economy of the world. The Gross domestic product is used to measure the output and the national economy of the country as a whole. The average GDP of United Kingdom represents 966.41 billion USD till the period of 2013. Figure 1: GDP of United Kingdom The GDP of the United Kingdom is mainly prepared by the World Bank group. The Gross domestic product of United Kingdom when represented in terms of its purchasing power parity in 2013 it was 35013.27 in terms of US dollars. The purchasing power parity of UK is equivalent to the average GDP of the world. The average of the purchasing power parity in United Kingdom is around 3112.78 US dollar. Figure 2: Purchasing power parity United Kingdom is regarded as the most globalized economies of the world. This economy is known as the fourth largest economy of the world in terms of its export as well; as in terms of its import. The recession in the recent years have affected the economy as a whole and the economic downturn is due to the sovereign debt crisis in the economy (Burberry Plc, 2014). Review of Target Company Sector The fashion market of United Kingdom is leading and it is famous for its key players which includes the Burberry, Mark and Spencer’s, Mulberry and the French connection. Figure 3: Consumption expenditure of UK The total household consumption of the fashion industry of United Kingdom mainly includes the footwear and the clothing that is mainly 59 billion euro. The number of employees that are working for the fashion retail industry of United Kingdom can be explained in reference to the graph given below Figure 4: Number of persons employed The fashion and the textile industry of United Kingdom employs around 600 thousand people with the help of which United Kingdom is considered as the third largest employer in the fashion industry. But within a decade the production and the manufacture of textile, footwear, leather and apparel products have reduced from 285 thousand to around 99 thousand people according to the statistics conducted in the year 2009. United Kingdom is considered as the leader in the manufacture and the production of the high quality fabrics in the textile and the clothing industry of United Kingdom. The direct contribution of the fashion industry of United Kingdom in the economy of the United Kingdom is around 26 billion pound. The overall sales in the =textile and the apparel industry worth to around 7.3 billion pound at the price of its manufacturers which is being exported to the countries of USA, Russia, France, Japan, china, Hong Kong, Italy and the middle east countries (Brigham and Ehrhardt, 2011). Company Information Strength The strength of Burberry can be evaluated ascertained as the company utilizes its resources for gaining the competitive advantages in the ever changing environment. It targets all its customers by maintaining a common and particular theme of its functional luxury. Burberry have increased its turnover by more than 263% and the profit of the company have been increased by more than 630% and it have generated all its resources from London in order to increase and develop its brand identity. The luxury fashion industry of British company has lead to the increase and the development in the accessories industries. The annual profit of the company has increased in the recent years. The net asset value of the company and the return on the share price of the company has outperformed the company. The company has investment trust and it is listed in the London Stock exchange. The liquidity position of the company is 1.92 therefore the company has strong liquidity position. The profitability condition of the company is sound which can be evaluated by calculating the return on asset that is 1.2 Weakness Due to the problem with its positioning it is restricted to the high street and it has too much appeal of the culture of UK in the fashion of Burberry which is not readily acceptable in another countries. Opportunities The unique resources of Burberry are concerned with the increase in the brand equity of the company. The company in order to increase its brand identity and brand value has formulated unique brand positioning and unique lifestyle association. The company is focusing on the economic growth in the global economy. The strong and the improvement in the performance as compared to the other listed companies in the London stock exchange has facilitated in the increase in the demand of the shares. Burberry hassled to the expansion of its business it have started its export in Russia. It has decided to start its franchise business in china with 70 million pound and develop its presence in the Chinese market. The inventory turnover ratio indicates that the company is favourable in utilizing its asset. Threats The company mainly faces problem in adopting changes according to the strategic development in the ever changing environment. The brand of Burberry faces the challenges in terms of its availability and price the customers generally have lowers switching cost and also high b bargaining power. Preliminary Valuation: Assumptions, Results, and Discussion Assumption Burberry group plc is engaged in the manufacture and the production of the apparel and the foot wear and it provides its fashionable product in different continents such as Asia, America, Europe and various countries located in this continents and it sells its product under its own trade mark hat is under the trademark of Burberry therefore the company have to maintain a sound financial structure for functioning of the company and gaining competitive advantage in the market since it has to face strong and severe competition in the competitive and ever changing environment. According to the law of one price the company can be valued on the basis of comparing it with its competitors. The assumption of the price of Burberry is the mean target of the company 1846.08, the median or the normal target that it maintains is 1825, the high or the maximum target price of the company is 2513, and the low or the poor target that is the minimum target it sets is 1470. The main competitors under the same industry mainly are the Ralph Lauren, coach Inc., and Michael Kors. Ralph Lauren and coach Inc. are the company of United States, Michael Kors is the company of Hong Kong and our target company Burberry is the company of United Kingdom and therefore it can be assumed that our target company is the market leader in United Kingdom and its main competitors are the companies from United States and Hong Kong (Brown, 2003).  Results and Discussions Burberry group have been compared with its competitors on the basis of the financial and therefore he earnings, net income and he enterprise value of our target company have been compared with the competitors of our target company and it has been observed that the market capital of our target company is more than that of its competitors which indicates that our target company therefore this indicates that our target company has strong capital base which will benefit our target company in expansion and widening of the business in other countries and other parts of the world and remain competitive advantage over others without much borrowings and debt obligations. But when he enterprise value of the company is taken into consideration by including various aspects such as the debt obligations and the necessary cash that is available with the company and its competitors it has been evaluated and derived that the enterprise value of its competitor Coach Inc. is more than that of our target company Burberry which implies that the cash position in order to meet its debt obligations is less and therefore our target company is required to strengthen it cash and cash equivalents base in order to meet its debt obligations and long term as well as the short term liabilities of the company (Cox and Fardon, 2008).  The enterprise value in consideration with the earnings before interest and the tax and he sales ratio have revealed that he enterprise value in consideration with the sales ratio nod he earnings before interest and tax of our target company is more as compared to its competitors which implies that he earning of the company is better or sound as compared to its competitors but when the earning is compared to the sales ratio it has been observed that it is more for its competitor Michael Kors in comparison to our target company Burberry and on the basis of price earnings ratio which is considered as one of the most important indicator it has been observed that the price earnings ratio of its competitor coach Inc. is more than our target company Burberry and therefore the company is required to increase the earning per share in order to increase the price earnings ratio of our target company (Helferty, 2001). Valuation: Assumptions, Results, and Discussion Starting from the sales and revenue of the company it has been observed that it has increased from the year 2015 to the period of 2019 and therefore it indicates he company has a sound financial structure and it can be predicted and forecasted that the company is on the verge of growth and development despite of the decrease in the profit after tax and it has been observed that the EBIT of the company has been increased (Martin and Baker, 2011).The company was also affected during the economic crisis and in spite of the severe economic downturn the company has managed to decrease its extent or percentage of net borrowing and he free cash flow of the company has increased for the subsequent years and it is subjected to the increase in the years to come and he projected figure of the free cash flow has been calculated and it has been observed that the company is experiencing a growth rate of more than 8% which is favourable and preferable for the operation and functioning of the company and he forecasted income statement that has been prepared reveals that the profit for the period will increase subsequently for the years to come and the operating income is also expected to increase at the same rate in the future period of time (Bull, 2007). Capital expenditure The investment of the company has not increased it has remained same for the period of 2012 to the period of 2014 and we have projected that it will increase in the future years to come since he noncurrent assets is increasing and showing a progressive growth therefore the increase in the non-capital expenditure and the depreciation of the company is favourable and suitable and it is expected (Higgins, 2008). Capital structure Considering the debt ratio of the company it has been observed that he debt ratio of the target company is found to be around 1.91% and the weighted cost of the debt is found or evaluated as 0.01% and the present value of the cash flow is estimated to be around 11277.29 (Parker, 2007).  and he cost of equity of the target company is 9.92% and considering the market premium which is around 4.94% and the net borrowings of the company which has reduced or decreased for the subsequent years or the period of time and the net interest of the company has decreased and it has been forecasted that t will further decrease in the subsequent years (Jackson, 2007). Cost of equity = risk free rate+ Beta (expected market return – risk free rate) = 0.42% + 1.32( 5% - 0.42%) =9.92% Cost of debt of the target company = 1.91% Market value of equity = outstanding share * current price per share =0.82% * 12 = 4.94% The weighted average cost of capital is found to be 6.8% Sensitivity Analysis The earnings per share of the company are required to be increased since the earning per share affects the price earnings ratio of the company. The terminal growth rate of our target company is 2% and the present value of the future cash flow is estimated and it is around 11277.29 and the forecasted figure signifies that the net borrowings of the company has decreased or reduced in the subsequent years. Recommendations and Conclusion The company is an important and the market leader in the fashion industry and the company is focusing on the manufacture of the apparel , footwear and the designable accessories and it faces strong competition in the market and therefore it can be analysed and evaluated that the market value and the enterprise value of the company is more but when compared to its major competitors which mainly includes the Burberry, coach, Ralph Lauren and Michael Kors it is found that the price earnings ratio of our target company is less as compared to its competitor company Coach Inc. and therefore our target company is required to improve the price earnings ratio in which our target company is required to consider and focus on the earning per share of the company and the earnings before interest tax and depreciation of the company. Since our target company is engaged in the fashion industry and therefore the company is required to change and modify its design according to the change in the preference of the customers. The company is required to focus more on its expansion program which is followed and adopted more by its competitors and from our analysis it signifies that the company has a sound financial structure. Appendix Current assets 1210 Current liabilities 631 Liquidity ratio 1.92 Net income 2329 Total asset 1965 Profitability ratio 1.2 EBIT 444 Interest payable 10 Gearing ratio 44.4 Cost of goods sold 671 average inventory 419 Efficiency ratio 0.6   Burberry Ralph Lauren Coach Michael Kors           Market capital 29757 7433 23877 10902           Enterprise value 967.3 416.10 1815 682           Enterprise value to EBITDA 2.9 0.37 1.62 0.68           Enterprise value to Sales ratio 1.4 0.13 0.83 0.74           EBITDA to Sales ratio 0.7 0.36 0.52 1.09           P/E ratio 18.96 16.12 20.13 16.1 Burberrys Free Cash Flow (FCF) Forecast (in M₤)   Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5     2012 2013 2014 2015 2016 2017 2018 2019 CAGR EBIT 376.9 345.8 445.4 457.9 528.4 560.3 617.9 658.3 8.3% Less: Tax (20%) 75.4 69.2 89.1 91.6 105.7 112.1 123.6 131.7   Unlevered Net Income 301.5 276.6 356.3 366.3 422.7 448.2 494.3 526.7   Plus: Depreciation 0 0 14.9 16.1 17.5 18.9 20.5 22.1   Less: Capital Expenditure 32.6 91.7 -6.4 59.0 15.4 44.5 25.1 -520.8   Plus: Net borrowings 208.6 129.8 143 94.9 87.6 53.1 36.8 0.0   Free Cash Flow (FCF) 477.5 314.7 520.6 418.3 512.4 475.8 526.5 1069.6   Forecasted Income Statement for Burberry; Year 0 (2014) to Year 5 (2019) (in millions)   Year 0 Year 1 Year 2 Year 3 Year 4 Year 5   2014 2015 2016 2017 2018 2019 Continuing Operations             Revenue 2329.8 2534.5 2823.47 3056.26 3326.496296 3571.77 Operating Profit/(Loss) 445.4 457.867 528.422 560.252 617.8987654 658.334 Net Interest 3 2.7 2.4 2.1 1.8 1.5 Profit Before Tax 444.4 465.433 534.911 572.093 630.8049383 675.163 Profit After Tax 332.3           Discontinued Operations             Profit After Tax 0           PROFIT FOR THE PERIOD 332.3 352.733 408.278 440.415 488.1567901 525.495   BRBY (Stock) FTSE 100 (Market) Average monthly return 0.82% 0.41% Average annual return 9.89% 4.94% Standard deviation 9.0% 3.6% Beta 1.32 1.00 Risk free rate of return in UK 0.42%   Market premium (Calculated) 4.94% Market premium (Assumed) 5% (As mentioned in instruction) Cost of equity 9.92%   Cost of Capital using CAPM model Particulars Value (M£) Proportion / weight (A) Cost (B) Weighted Cost (A*B) Weighted Average Cost of Capital (WACC) Total Equity 1208 0.61 9.92% 0.06 Total Debt 757.5 0.39 1.91% 0.01 6.8% Total 1965.5       Terminal growth rate (g) 2% WACC 6.8% Terminal Value 1069.6 PV of FCF (M₤) 12349.81 Intrinsic value 12349.81     Present value of free cash flow with a terminal (continuation) 11277.29 References Burberry Plc., 2014. Annual report. Available at: http://www.burberryplc.com/investor_relations/annual_reports/annual-report-2013-14 [Accessed on 30 th march 2014]. Brigham, E. and Ehrhardt, M. 2011. Financial Management: Theory and Practice. Boston: Cengage Learning. Bull, R., 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business. Amsterdam: Elsevier. Brown, K. 2003. Investment Analysis and Portfolio Management. Boston: Thompson Learning. Cox, D. & Fardon, M. 2008. Management of finance. Worchester: Osborne Books. Helferty, A. 2001. Financial Analysis: tools and techniques. New York: McGraw Hill. Higgins, R. 2008. Analysis for financial management. New Jersey: McGraw Hill. Jackson, J. 2007. Financial Management. New York: Cengage learning. Martin, G. S. & Baker, H. K. 2011. Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. New York: John Wiley & sons. Parker, R., 2007. Understanding Company Financial Statements. 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