Analysis of Ted Baker Company - Case Study Example

Analysis Annual Reports of Ted Baker Company Introduction Ted Baker is a renowned in the fashion industry. The Group has three reportable segments; retail, wholesale and licence income with over 275 stores and concessions worldwide dealing in fashionable clothing and accessories. The company’s products include menswear, womenswear, childrenwear, lingeries, accessories, childrenwear, footwear, eyeware and watches. Their competitors in the market are companies like Calvin Klein, Paul Smith, Kurt Geiger, United Colours of Bennetton and Levi’s in the fashion industry, though no competitor information is available for Ted in Bloomberg, since the market is highly segmented and each competitor has a different and unique business model. Overview of the group In the case of all the subsidiaries, 100 percent of the shares are held by the company/group. The Group has invested in a joint venture with Flair Industries Pty Ltd with its operations in New Zealand, one store and Australia, three stores valued at valued at £ 494,000 in the year 2012 and at £ 345,000 in the year 2011. The business is interconnected with several subsidiaries. At the 28 January 2012, the main trading company owed the parent company £30,053,000 (2011: £24,710,000). The main trading company was owed £38,987,000 (2011: £23,313,000) from the other subsidiaries within the Group. All these transactions are reflected in the group’s financial statements. (Annual report, 2012, p. 77) Performance of the group over the last 5 years Considering the slowdown in the economy due to European financial crises during the recent periods, the revenue growth and overall performance for the period under review can be considered reasonably as good. Gross profit remains more or less at the same level around 61.5% during the past three years. (£’000) 2012 2011 2010 2009 2008 Revenue 215625 187700 163586 152661 142231 Revenue Growth per year (%) 14.88 14.74 7.16 7.33 Gross profit 132206 115777 99927 89366 82671 Annual gross margin 61.31 61.68 61.09 58.54 58.12 Operating profit 24269 24132 19782 17161 22142 Annual operating margin 11.26 12.86 12.09 11.24 15.57 (after exceptional items) Exceptional Items -2814 0 -750 -1786 0 Annual operating margin 12.56 12.86 12.55 12.41 15.57 (before exceptional items) Profit t before tax 24255 24228 19504 17766 22057 Finance expenses -208 -120 -374 -307 -387 Interest Cover Earnings before interest and tax (EBIT)/Interest 117.61 202.90 53.15 58.87 57.99 Earnings Per Share (EPS) Basic 42.2p 41.5p 32.6p 29.6p 36.1p The impact of exceptional items on profitability can be ascertained from the workings given where workings have been given separately. Financing expenses are very limited, and the company has availed overdraft facilities only during the year 2012. The EPS has grown steadily from the year 2009. The Group has a net impairment credit of £0.4m (2011: nil). Performance for the 52 weeks ended 28 January 2012 Reduction in margin at 61.3% compared to 61.7% during the previous period has been attributed to sales promotion programs in retail, change in mix of retail & wholesale and full price & outlet sales. Operating expenses has increased by 14% and the distribution cost though increased, but in terms of percentage of sales decreased to 38.2%. Increase in administrative overheads has been attributed to growth in central functions and technology infrastructure whose benefit will reflect in future results. The exceptional costs The costs incurred during 2012, £2.8m are related to rent paid for stores which is expected to commence its operations in 2012, the expansion activities in China and provision for bad and doubtful debts in its operations in Greece. The benefits of new stores and expansion in China will accrue in future. The impact of the exceptional costs has been considered in the financial ratio analysis. Cash flow in the operations Increase in working capital during the year by £12.3m at £47.2m (2011: £34.9m) has been due to trade and other receivables and the inventory increase which is attributed to estimated growth and expansion into Chinese market. The capital expenditure incurred towards refurbishment in outlets works out to £15.0m (2011: £10.0m) and is in tune with the development of infrastructure required on the expanded business. Financial Ratio Analysis The other financial ratios relating to the 52 weeks ended 29 Jan 2011 and 28 Jan 2012 are given below. 2012 2011 Return on equity Net income/Share holders funds 11.04% 12.28% LIQUIDITY RATIOS Current ratio Current assets/Current liabilities 1.98 2.14 Acid test ratio Quick assets/Current liabilities 0.86 1.05 ACTIVITY RATIOS Receivables collection period Total debtors/Sales x 365 51.78 53.25 Payables payment period Creditors/Cost of sales x 365 154.37 177.47 Asset turnover Total sales/Total assets 1.62 1.61 Gearing Total debt/Total equity 0.30 0.29 Dividend cover Net Earnings/Dividends 1.80 2.01 Price earnings ratio Share price at the close of the year (in GBp) 747.50 665 Share price / EPS 17.71 16.02 Return on equity is expected to improve in future based on the ongoing expansion plans whose results will reflect in subsequent years. We can observe the stress in working capital through current and acid test ratios, which is caused due to aggressive expansion plans. In spite of the aggressive expansion, gearing level is maintained by efficiency in working capital management and plough back of profits into the business. The reduction in payable’s payment period could enhance the bargaining power of the group with its suppliers. Segmental Reporting Revenues in Retail and Wholesale segments in £’000 are at 174,185 (152,724) and 41440 (34976) respectively with profit before tax at 32,311 (27,460) and 16,688 (15,668) respectively. Licence income for the year is at 6733 (6227). There is growth in all the segments during 2012. . Future of the business Increase in wholesale business in the US segment in its first full year of operations by 45.5% at $9.6 m is encouraging. The expansion activities of the group internationally have been successful. The company (Annual Report 2012, p. 9) states “During the year we opened a further store in Hong Kong and, with our licence partner in the territory, a concession in Singapore…In August, we (opened our first store in Auckland, New Zealand through a joint venture with our licence partner in that territory, Flair Industries Pty Ltd, and we are pleased with its performance. As at 28 January 2012 we operated 4 stores in Australasia (2011: 3 stores). In a study by Al-Twaijry (2007) it was found that “The results suggest that current dividends are affected by their pasts and their future prospects.” The increase in dividend payment reflects the confidence of the management in its future. Comparison with the competitors Due to variations in the business models, performance of the company with its competitors is not strictly comparable. But the industry comparison is very important to understand the relative position of the company within the industry. Comparison with reference to revenue will reflect on the companies’ size and its reach in the market in relation to its competitors. The comparison based on profitability indicates the efficiency in performance in general. The comparison on these lines is made in respect of the following companies. Levi Straus & Co: The product portfolio includes dresses, jackets, footwear, and related accessories for men, women and children. PVH Corp: The Company’s brands include Calvin Klein, Van Heusen and Arrow sold through leading retail stores and own outlets and the portfolio include apparels, accessories, leather goods, home furnishings and life style products. Benetton Group: The product range includes womenswear, menswear, childrenswear, perfumes, stationeries, eyewear and travel bags. (In millions) Ted Baker Levi Straus Benetton PVH £ $ Euro $ 2012 2011 2011 2011 Revenue 215.63 5674.40 2032.00 5890.60 Operating profit 24.27 336.40 149.00 758.00 Net Profit for the period 17.56 138.80 77.00 392.20 Operating profit margin % 11.26 5.93 7.33 12.87 Net profit margin % 8.14 2.45 3.79 6.66 Though all the companies are leading players of the fashion industry in the international markets, the product portfolio differs. For example in the case of Levi Strauss, Jeans in their product portfolio is a major contributor to the revenue, though they are dealing in several other products also. It could be observed that the companies vary in size. However, both at operating profit and net profit level, the performance of Ted Baker is better on comparative basis, and it tops in net profit margin in comparison. Sustainability and environmental responsibility Torres et al (2012) state “Multinationals and their operations slowly began to be scrutinised by different segments of society from the beginning of 2000. CSR has evolved into a complex concept that is now a key component of the corporate decision-making of a number of multinationals that are considered to be the frontrunners in integrating CSR.” In Ted Baker an executive committee has been formed with specific responsibility in relation to Brand Communication, Product Design, Production and Special Projects (Interior Design) for sustainable management of social, environmental and ethical matters (“SEE”). The responsibilities include sustainable sourcing, use of resources with minimum environmental impact, regulatory compliance, community welfare, health, safety and welfare of the personnel, diversity in workplace and employee engagement. (Annual Report, 2012, p. 21) Compliance with the accounting and reporting standards According to the independent Auditors’ Report to the members, the reporting has been made within the framework of International Financial Reporting Standards (IFRS) by adopting International Accounting Standards in accordance with the provisions of the Companies Act 2006 (Annual Report, 2012, p. 38) Reserves The Statement of changes in equity of the company reflects the variations in the reserve accounts. Translation and other Reserves: The differences arising out of translation of revenue and expenses in foreign currencies in the international operations into sterling is transferred to translation reserve. Cash flow hedging reserve: At 28 January 2012, the value of financial instruments that are designated as hedging instruments recorded in equity was £312,000 (2011: £148,000) and complete details with regard to the cash flow hedging reserve is furnished and gains and losses have been appropriately adjusted in the financial statements. Risks and uncertainties in the business The company has identified the strategic risks inherent in the business due to the environmental economic, regulatory/legal and social factors and changing tastes and fashions of the consumers. The operational risks related to the industry may arise in supply chain, infrastructure, information security, HRD and CSR. The financial risks are relating to interest, credit and counter party risks as well as fluctuations in foreign exchange in view of its international operations. The Executive Committee consisting of the people at the Directors’ level identifies, assesses and manages the risks involved in the business. (Annual Report, 2012, p.12 & 13) There is a proper system for risk management in place in the company, since risks such as market risk, liquidity risk, credit risk, risks due to fluctuations in exchange rate and interest differentials are inherent in the operations of a multinational company and warrant continuous monitoring of the environment. Conclusion In the Annexure – I, ‘Financial Statements of Ted Baker and Financial Ratio Analysis of Ted Baker Group for the past five years’ the comprehensive details of the annual reports have been given. These details have been used for the purpose of analysis. In the Annexure – II, ‘Revenue and Profitability of Ted Baker Group for the past five years’, workings with reference to profitability have been given. These statements with the figures grouped uniformly under different headings for the whole period show growth over the period of time on a comparative basis. These statements indicate that there is all-round improvement in performance of the company over the past five years in spite of the difficult economic and financial situation in the world. References Al-Twaijry, A.A., 2007. Dividend policy and payout ratio: evidence from the Kuala Lumpur stock exchange. The Journal of Risk Finance, Vol. 8 Iss: 4, pp.349 - 363 Benetton Group, 2012, Annual Report 2011, [online] Available at: [Accessed 14 December 2012]. Levi Strauss & Co., 2012. Annual Report 2011. [online] Available at: [Accessed 14 December 2012]. PVH, 2012, Annual Report 2011. [online] Available at: [Accessed 14 December 2012]. Ted Baker, 2012, Annual Report 2011/12. Ted Baker, 2010, Annual Report 2009/10. Ted Baker, 2001, Annual Report 2007/08. Torres, C.A., Garcia-French, M., Hordijk, R., Nguyen, K. and Olup, L., 2012. Four Case Studies on Corporate Social Responsibility: Do Conflicts Affect a Company’s Corporate Social Responsibility Policy? Journal: Utrecht Law Review. Year: 2012 Vol: 8 Issue: 3 Pages/record No.: 51-73.  Appendices Annexure – I Financial Statements of Ted Baker and Financial Ratio Analysis of Ted Baker Group for the past five years Annexure - II Revenue and Profitability of Ted Baker Group for the past five years Read More