Investments and Share Prices of Harvey Norman - Case Study Example

«Investments and Share Prices of Harvey Norman» Table of Contents Table of Contents 0 Objective of the Report 0 Company Information 1 Analysis of Financial Performance 4 Liquidity: 6 9 Capital Structure: 9 Future Prospects 10 Conclusions 12 Bibliography 13 Objective of the Report The objective of this report is to examine the investment decision – making usefulness of accounting financial statements. The company chosen for this report is David Jones. The three competitors chosen for the analysis are Harvey Norman, Oroton Group and Country Road. After discussing about the company in general, the competitors and the industrial scenarios for this segment, a comprehensive financial analysis is performed on David Jones and is compared with that of the competitors and the industry in general. Based on the analysis, future prospects of the company are estimated and the growth potential is forecast. Recommendations are made on investment decisions on the company’s stocks. Company Information The Company: David Jones is Australia’s oldest and largest departmental store. It was started way back in 1838, under the name David Jones & Co. The company was started by Mr David Jones, on the corner of George and Barrack Street. The company was born with the mission “to sell “the best and most exclusive goods" and to carry "a stock that embraces the everyday wants of mankind at large" (David Jones, 2009). The company majorly deals with imported British and foreign goods and mainly deal in wholesale and retail. The company deals from over 35 stores which offer a variety of both Australian as well as international brands of apparel, footwear, home furnishing, food and also cosmetics. The company provides customers with a variety of options like David Jones Credit cards, purchase gift cards, gourmet food baskets and also fresh floral arrangements. Also the company provides different services at their hair salon which also include gifts for bridal and other special occasions. Also they provide for in store interior designers and also have an option for the customers to join the David Jones Wine Club. The company has spread itself across Australia and have over 40 stores across the continent. David Jones to a great extent holds a strong market share when compared to its competitors and is known to operate in a niche market. The company has positioned itself at the top end of the market and has a mature and affluent customer base (Invest Smart, 2009). The company is currently head by M. Mclnnes (CEO) and the current Chief Financial Officer of the company is S Goddard. The industry as a whole is very competitive and the company holds as much as 0.1800% of the market, and almost 2.1001% of the Consumer Discretionary Sector. David Jones is one of the oldest to be incorporated in the industry and one of the first few to be listed in the Australian Securities Exchange Limited. David Jones has a Market Capital of almost $1594M. Major Competitors: David Jones faces a lot of competition from companies like Harvey Norman, Oroton Group and Country Road. While in the share prices, the company faces competition from Woolworths, Premier Inv., and Woolworths Notes. The consumer incomes and demographics are two very essential elements of demand. A company as big as David Jones has an upper hand over its competitors since it can use a number of different and more innovative ideas for the improvement of the business. This is majorly due to the easy access to cheaper to funds. However, in smaller companies, there is a lack of enough monies which makes the companies more dependent on their personal contacts and also on the extra mile that the companies go for customer satisfaction. The table below provides a clear picture of the comparison of the companies.   P/E (x) EPS Change (%) Dividend Yield (%) Company Last Price Mkt Cap 07A 08F 07A 08F 07A 08F Woolworths $24.77 $31,250M 18.7225 17.2298 25.9372 8.6632 3.7142 4.0775 David Jones $2.98 $1,594M 10.525 10.9685 22.7072 -4.0438 9.0604 8.7248 Premier Inv $4.27 $605M n/a n/a n/a n/a n/a n/a Woolworths Notes $86.25 $519M n/a n/a n/a n/a n/a n/a Table 1: Comparision of Peers (Invest Smart, 2009) David Jones also faces a lot of competition from companies like Harvey Norman, Oroton Group and also Country Road. All these companies have been in the industry for a long time. Oroton group was started in 1938. It is one of the largest importers and retailers of luxurious and high quality fabrics for the Australian fashion industry. The company is known for leather goods, bags and mesh. It serves a high range of audience and this is majorly the women. Also the products profile includes products for men and the travel range as well. Oroton has over 33 stores across Australia and 2 in New Zealand. The company is at a non stop aim at trying to ensure that the most luxurious choices are available for the customers and the company is under the current plan of expanding its business internationally (Oroton Group, 2009). Harvey Norman is another one of the big retailers in Australia. This is a public limited company and was started in 1961. It has shown outstanding performance and the company has been successful in integration of retail, franchise and property system (Harvey Norman, 2008). Country Road was started in 1974, and was mainly aimed at serving the niche women shirting markets. It grew to become the first Australian lifestyle brand. It was known for its style, and high quality apparel. The company has grown significantly over the years and has expanded its business across Australia and also moving into the US and Asian markets. However the business in the US has not been very successful, and has been less competitive and also unprofitable (Country Road, 2009). These companies have proved to be the biggest competitors of David Jones. Analysis of Financial Performance In order to analyse the current financial health of the company and its future prospects, it is essential to carry out a comprehensive financial analysis based on its financial statements. Share Price: The share prices of David Jones have shown a steady growth till December 2007, after which they have varied with a few peaks and valleys. The share prices are comparatively lower this year due to the global economic slowdown. The trend of the share prices is illustrated in the graph below. (Source of Values: Yahoo – Finance: AU, 2009) The share prices when compared to that of the leading rivals, namely, Harvey, Oroton and Country Road, indicate that David Jones has shown steady rise and at some points, had the highest share price comparatively. It can be seen that all the four companies have shown a common trend and have stayed within a specific range in the last year. In the last one year, David Jones share prices have risen to be at par with its rivals. Investors have shown keen interest in David Jones’ stocks over the last few months, in spite of the recession, as the company has shown tremendous growth potential and has been managed very effectively by its board. (Source of Values: Yahoo – Finance: AU, 2009) Liquidity: The liquid position of the company is very crucial, as it relates to the short term solvency and the ability to meet the liabilities. The liquidity is analysed using the quick ratio and the current ratio. 1. Quick Ratio: The quick ratio is a measure of the company’s ability to meet its short term liabilities using the liquid short term assets. David Jones has a quick ratio of 81.19% which is a significant percentage. This indicates a tremendous rise from 74.33% in 2005 by David Jones. The company is very well positioned to cover more than 80% of its liabilities in case it goes solvent. The rivals, Oroton and Country Road have a comparatively lower quick ratio of 33.78% and 77.05%. The competitor Harvey has a higher quick ratio of over 103% indicating that the leading rival has a better liquidity position in terms of short term assets (Infinancials, 2009). The high level of liquidity is mainly due to the reserves it has maintained over the last 5 years. 2. Current Ratio: David Jones has a high current ratio of over 123%, indicating that the company will be able to cover its liabilities effectively with both liquid and other assets. All the rivals have higher current ratios comparatively. An optimum current ratio is anything around 100% whereas higher current ratio indicates that the company is not effectively utilising the cash in hand. However the companies have sufficient liquidity to cover the liabilities. The reasons behind this high current ratio is that the company has introduced the New David Jones credit card which has had an impact on the receivables and also the increased cash flow brought about by this card. Profitability: It is essential for a company to have substantial earnings from its investments. The dividends paid to the shareholders depend on the earning capacity of the firm and hence profitability of a company plays an important role in investment decisions. There are a number of measures that provide insight into the profitability of a firm. In order to analyse David Jones and its effectiveness in generating profits, the return on assets, the net margin and the return on capital employed are assessed. 1. Net Profit Margin: The net profit margin is the ratio of net income to net sales. This ratio is of utmost importance as it indicates the efficiency of the company in turning sales into profit and how good the company is in controlling the operating costs. The net profit margin for David Jones is 7.02% as of July 2008, which is well over the median of 4.14% for the industry (Infinancials, 2009). However, it is interesting to note that the prime rival Harvey and Norman Holding registered a net margin of 25.09%, indicating that almost one fourth of the sales revenue is being converted to income. Hence it is evident that David Jones has to focus on improving the operational efficiency. The main reason behind this operational inefficiency is due to the inability to attain economy of sales, due to the comparatively smaller scale of operations. However, the other competitors are almost on the same level as that of David Jones, as illustrated in the graph below. (Source of Values: Infinancials, 2009) 2. Return on Capital Employed: The return on capital employed (ROCE) indicates the net returns from the total capital employed by the company. David Jones has a ROCE of 18.09% (Infinancials, 2009) which is comparatively very lesser than its rival, Harvey Norman, which recorded an ROCE of 44.37%. However, this is well over the industry median of 8%. This indicates that the company has to focus more on effectively utilising the capital funds on generating sales. As discussed earlier, the reason for this inefficiency is mainly due to lower market share and hence the inability to attain economies of scale. The trend of the ROCE over the last five years is depicted as below: It is evident from the graph that the ROCE has been declining over the last five years. It is an alarming indication, that the company’s capital is not being utilised effectively to generate sales revenue. Hence investors have to carefully asses the efficiency of the company’s operations and the promotional activities to generate sales. Capital Structure: David Jones is primarily funded by shareholder’s equity and long term financial debts. The non-current liabilities amount to $ 306 million in 2008, as opposed to $ 390.5 million in 2007. The shareholder’s equity in the company amounts to $ 455 million in 2008 (Annual Report, 2008). The capital structure of the company is illustrated in the pie chart below: (Source of Values: Annual Report, 2008) Gearing: As it can be seen, David Jones has utilised the long term funding options effectively to raise capital. The gearing ratio for David Jones is computed to be 0.72 which is comparatively higher and riskier than its rival Harvey Norman with a gearing ratio of 0.25. The other two rivals, Oroton and Country Road have not made use of the financing options available to them and hence their gearing ratios are negligible. The high value indicates that David Jones is geared up for long term growth. However, it is essential to note that its stocks are risky. In case the company goes solvent, the long term debts will be cleared before the share holders are paid. Future Prospects David Jones as discussed has been in the industry for a very long time and has made a mark for itself. The share prices as has been discussed have shown a constant growth until December 2007. However the share prices have seen to have a few peaks and valleys. Based on the current moves in the share prices and the press releases it has been seen that David Jones being the second largest departmental store chain has seen an increase in the share prices and has risen up to almost a good 8.4% as of March 2009 (Fenner, 2009). This shows a promising growth of the company and also throws light on the affirming profits of the company. The company’s earning has also seen a rise of almost 5% in the second half of the year. Based on all these facts, it is clear that the company forms to be a very good investment option. The steady growth despite the failure in the US makes the company more likely to receive higher investors. The future for the company seems to be very successful, as the CEO of the company, has taken a number of steps to ensure that the profit margins are high and the impact of the global financial crisis is not too big an impact on the company and its sales. Also strong and confident statements by the CEO like, “We are confident that our company will emerge with a strong brand, a loyal customer base, the best brand portfolio and a strong financial base”, show a promising image of the company and its future (Fenner, 2009). The overall performance of the company shows a great potential for growth and also indicates a possibility of high investor options in the company. This is very promising and indicates a bright future on the whole for the company both in terms of future prospects as well as the investor potentials. The financial analysis indicated that the company is not performing as well as its rival, Harvey Norman and in some cases, Oroton group. The main reason being, the scale of operations and Harvey has the benefit of economies of scale. However, David Jones is rightly positioned to provide significant returns to the investors. Hence it is advisable to invest in David Jones.The most optimum choice for the investors is to maintain a portfolio with both the David Jones and Harvey Norman stocks. Conclusions The Financial position of the selected company, David Jones has been analysed and it is evident from the ratio analysis, that it is a worthwhile investment. However certain measures, such as gearing and ROCE indicate that the investment carries a risk premium and hence in order to offset the risk, it is best to invest in a portfolio consisting of both Harvey Norman and David Jones’ stocks. The analysis has also shed light on the future prospects of the company, in terms of return on investments and share prices. Bibliography Annual Report (2008), Annual Report – David Jones, Accessed on 01 April 2009, Available at http://www.davidjones.com.au/ Country Road, (2009), Our History, Accessed on 1st April 2009, Retrieved from http://www.countryroad.com.au/#/about_us/our_history David Jones, (2009), Story of David Jones, Accessed on 26th March 2009, Retrieved from http://www.davidjones.com.au/about/story_of_djs.jsp?SID=HomeDJStory Fenner, R., 2009, ‘David Jones Climbs after Affirming profit forecast’, 18th March 2009, Bloomberg, Accessed on 2nd April 2009, retrieved from http://www.bloomberg.com/apps/news?pid=20601081&sid=aohaVg_KUj2M&refer=australia Infinancials (2009), David Jones Limited – Infinancials, Accessed on 01 April 2009, Available at http://www.infinancials.com/Eurofin/control/company?view=peergroup&type=0&company_id=00053AA&nbrdm=93807&year=0 Invest Smart, (2009), David Jones Limited, Accessed on 26th March 2009, Retrieved from http://www.investsmart.com.au/shares/asx/David-Jones-DJS.asp Oroton Group, (2009), Oroton, Accessed on 30th March 2009, Retrieved from http://www.orotongroup.com.au/index.php?option=com_content&task=view&id=2&Itemid=8 Norman Harvey, (2008), Company Profile, Accessed on 31st March 2009, Retrieved from http://www.harveynormanholdings.com.au/companyprofile.htm Yahoo – Finance: AU (2009), David Jones: DJS.AX – Historical Prices, Accessed on 01 April 2009, Available at http://au.finance.yahoo.com/ Read More