Next Plc - Business Description - Case Study Example

Next Plc - Business Next plc manufactures, designs and distributes apparels, accessory items and home furnishing items through its nearly 500 retail stores and mail order sales catalog. Nearly all of the Next retail stores are located in Ireland and England. Nearly 200 stores of the company are located in 40 countries overseas. The retail chain of the company was first launched in 1982. The first store that opened launched stylish clothes, accessories, and shoes for women. Quickly followed was the collection for men, children and home furnishing items. The apparel for the company are designed by its in-house design team which offers quality, great style, and value for money with a modern fashion edge. In 1999, the online shopping system was introduced by the company and the catalogue was made available to access through internet in order to shop. The company continues to improve its customer service and launches new initiatives. In addition to its catalog sales operation and retail stores service, the company offers financial services under the name of Next brand credit financing. Another emerging division of the company is its customer service subsidiary, Club 24 which operates call centers. Economic Factors influencing Next plc include interest rates, taxation charges, inflation, economic growth and exchange rate. The rate of Pound is close to Euro. In the market of UK, sales of Next are nearly 96%. Limited affect is observed currently but in future it could be more substantial for thinking globally. The falling rate of unemployment is yet another issue. It means increasing expenditure for the company for recruitment of competent employees. Marks & Spencer Business Description Marks and Spencer also known as M&S is one the leading retailers of UK having 20 million visitors each week in its stores. The company was established in 1884 and the head quarter is located in City of Westminster. The company owns nearly 766 outlets across the UK in major shopping centers, retail parts, in high streets, railway station as well as airport. Marks and Spencer has nearly 418 stores overseas in 51 different territories of Europe, Asia, and the Middle East. Apart from its retail stores, the channel through which the company sells include mobile sites, online, telephone, home catalogues as well as in store ordering. The company sells home products and clothes primarily. Furthermore, the company deals in selling food that is sourced from 2000 suppliers worldwide. The group is considered as number one supplier of lingerie and women wear in the UK however the market share is rapidly growing in kidswear, menswear and home. Similar to Next Plc, M&S also focused on providing financial services and launched its bank in 2012 developed in the foundation of M&S Money. A range of financial services offered by the company include loans, cards, travel, save & invest, and insurance. Economic factors are influenced by government and political policy as a major influence. The retail sector of UK has remained quite prone to economic slump and is also very sensitive to changes in interest rates. The recession 2009 set the country to struggle for economic survival and managed to stand back on its feet again. Nowadays, consumers are fairly optimistic about the economy and the retail industry is booming. The benefits are reaped by the companies such as Marks and Spencer and Next Plc that belong to the same industry. However, UK is the central point of ecommerce in Europe that means consumers are not confined to local retailers but external tourists also create a diverse base trends and retail business. 2) Financial Ratio Analysis Financial ratio analysis is conducted in order to grasp the financial performance and position in a comparable manner with the similar industry participant or company’s own performance of the prior periods. The following ratio analysis is conducted for Next plc with respect to its major competitor i.e. Marks & Spencer plc such that the financial performance and position of both companies for the year 2014 are analyzed. The working of computation of ratios and the related financial statements of both the companies are attached in appendices section. Financial ratios of both these companies are split into four basic categories i.e. 1) Liquidity 2) Solvency 3) Efficiency, and 4) Profitability. All these four categories are described as under: Liquidity Ratios Liquidity Ratios are mainly computed in order to check the liquidity aspects of the company such that how liquid the assets of the company be given its other underlying assets. This means whether the assets of the company are convertible into cash or the cash of the company is stuck into those assets. For this reason, two important ratios are computed i.e. current ratio and cash ratio. Current ratio of Next plc is 1.76 and of Marks & Spencer plc is 0.58. This shows Next plc has around £1.76 worth current assets in its belt to pay off the current liabilities of £1. On the other hand, Marks & Spencer plc has barely £0.58 worth assets to pay off £1 of current liabilities. In this way, the current ratio of Next plc is far better as compared to that of Marks & Spencer plc. Likewise, cash ratio of Next plc is 0.33 and that of Marks & Spencer plc is 0.08 which also denotes that the cash position of Next plc is considerably improved than that of Marks & Spencer plc. Overall, it can be concluded that Next plc is cash-rich company in comparison with Marks & Spencer plc which is facing cash shortages. Solvency Ratios Solvency ratios are indicative of the riskiness situation underlying in the companies as they depict how risky is the company under a given capital structure. Three major ratios are computed in respect of solvency ratios i.e. debt ratio, debt-to-equity ratio and times interest earned. Debt ratio of Next plc is 0.87 and of Marks & Spencer plc is 0.66. it means that Next plc is highly indebted as its 87% assets are financed through debt and only 13% equity is used in its total assets. Comparatively, Marks & Spencer plc has around 66% debt and 34% equity in its capital structure which shows less risky prospects in the company. Debt-to-equity ratio of Next plc 3.58:1 which shows that for every £1 invested as part of equity £3.58 is invested through debt which is highly geared. However, for Marks & Spencer plc, this ratio is 1.05:1 which is quite satisfactory and stable under the existing scenario. Times interest earned show the interest coverage as how many pounds company have to pay off £1 of interest expense. For Next plc, this ratio is 25:1 which shows that company has profits of 25 times to cover its interest expense whereas for Marks & Spencer plc this ratio is around 5:1 which is relatively lower. Overall, Next plc is highly geared as compared to Marks & Spencer plc. Efficiency Ratios For efficiency ratios, two major ratios are computed to check how efficiently the companies are performing their operations i.e. Receivable turnover and total assets turnover. The receivable turnover of Next plc is around 4 times in comparison with Marks & Spencer plc which is around 16 times. This shows Next plc only managed 4 times in a year to complete its receivable cycle. On the other hand, Marks & Spencer plc completed around 16 receivable cycles in the same year. Total assets turnover for Next plc is 1.74 whereas it is 1.3 for Marks & Spencer plc. This means that Next plc has utilized £1 of total assets to generate around £1.74 amount of sales. However, Marks & Spencer plc only managed to generate sales of £1.3 with the same amount of total assets. Overall, there is a mixed performance of both companies in regards to efficiency. Profitability Ratios As far as the profitability situation of Next plc and Marks & Spencer plc is concerned, three major ratios are computed i.e. Profit margin, Return on Equity and Return on Assets. Profit margin for Next plc is 15% in comparison with that of Marks & Spencer plc which is 5%. This means that Next plc only converted 15% of its sales into profits. Conversely, Marks & Spencer plc only managed to get 5% profits from its current sales. ROA for Next plc is 26% as compared to 6% of Marks & Spencer plc which is highly significant. ROE of Next plc 193% which is extremely high mainly due to low level of equity involved in the capital structure of the company. 19% ROE was reported by Marks & Spencer plc which is generally acceptable. Overall, Next plc outperformed Marks & Spencer plc in regards to profitability prospects. 3) Usefulness of Financial Information The overall presentation and disclosure of accounting heads in the financial statements of both the companies are quite improved such that most of areas are disclosed which require attention of users of financial statements. However, the working of deferred taxation under IAS 12 requires further considerations as the companies have provided only necessary details. Both companies can provide higher level of disclosures including the reconciliation required under IAS 12 especially for a comparison between current tax and deferred tax liability. Works Cited Berk, Jonathan B, and Peter M DeMarzo. Corporate Finance. Boston: Pearson Addison Wesley, 2007. Print. Brealey, Richard A, and Stewart C Myers. Principles Of Corporate Finance. New York: McGraw-Hill, 1988. Print. Hargreaves, Rupert. 3 Great Reasons Why NEXT plc Is Better Than Marks and Spencer Group Plc. 7 October 2013. Web. 7 December 2014. http://www.fool.co.uk/investing/2013/10/07/3-great-reasons-why-next-olc-is-better-than-marks-and-spencer-group-plc/ Marks and Spencer plc. Company Profile. 6 June 2013. Web. 7 December 2014. < http://www.propertyweek.com/Journals/2013/06/13/s/j/s/Marks-and-Spencer-plc.pdf> Ross, Stephen A, Randolph Westerfield, and Bradford D Jordan. Fundamentals Of Corporate Finance. Boston: Irwin/McGraw-Hill, 2000. Print. Ross, Stephen A, Randolph Westerfield, and Jeffrey F Jaffe. Corporate Finance. Boston: McGraw-Hill/Irwin, 2005. Print. The Next Brand. Business Overview. N.d. Web. 7 December 2014 < http://www.nextplc.co.uk/about-next/business-overview.aspx> Wallop, Harry. Marks & Spencer overtaken by Next. The Telegraph. 8 July 2012. Web. 7 December 2014. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9384962/Marks-and-Spencer-overtaken-by-Next.html Ratio   Formula   Next plc       M&S plc         Current Ratio = Current Assets 1,468 = 1.76 1,369 = 0.58   Current Liabilities 835 2,349   Cash Ratio = Cash 273 = 0.33 182 = 0.08   Current Liabilities 835 2,349   Total Debt Ratio = Total Debt 1,858 = 0.87 5,196 = 0.66   Total Assets 2,145 7,903   Debt-Equity Ratio = Long-term Debt 1,024 = 3.58 2,847 = 1.05   Total Equity 286 2,707   Equity Multiplier = Total Assets 2,145 = 7.49 7,903 = 2.92   Total Equity 286 2,707   Times Interest Earned EBIT 723 = 25.54 695 = 4.99   Interest 28 139   Receivable Turnover = Sales 3,740 = 4.63 10,310 = 16.54     Days Sales in Receivable = 365 365 = 78.86 365 = 22.07   Receivable Turnover 4.63 17   Total Asset Turnover = Sales 3,740 = 1.74 10,310 = 1.30   Total Assets 2,145 7,903   Profit Margin = Net Income 553 = 0.15 506 = 0.05   Sales 3,740 10,310   Return on Assets = Net Income 553 = 0.26 506 = 0.06   Total Assets 2,145 7,903   Return on Equity = Net Income 553 = 1.93 506 = 0.19     Total Equity   286       2,707     Income Statement - Next plc   Revenue 3,740.00 Cost of sales (2,499.90) Gross profit 1,240.10 Distribution costs (296.20) Administrative expenses (217.70) Other (losses)/gains (5.90) Trading profit 720.30 Share of results of associates 2.50 Operating profit 722.80 Finance income 0.70 Finance costs (28.30) Profit before taxation 695.20 Taxation (142.00) Profit for the year 553.20 Next plc - Statement of Financial Position   Non-current assets   Property, plant & equipment 509.20 Intangible assets 44.40 Interests in associates and other investments 7.90 Defined benefit pension surplus 70.30 Other financial assets 17.70 Deferred tax assets 27.00   676.50 Current assets   Inventories 385.60 Customer and other receivables 808.00 Other financial assets 1.20 Cash and short term deposits 273.30   1,468.10 Total assets 2,144.60 Current liabilities   Bank loans and overdrafts (2.60) Trade payables and other liabilities (594.00) Dividends payable (74.40) Other financial liabilities (83.80) Current tax liabilities (79.70)   (834.50) Non-current liabilities   Corporate bonds (800.80) Provisions (8.50) Other financial liabilities (0.90) Other liabilities (213.70)   (1,023.90) Total liabilities (1,858.40)     NET ASSETS 286.20 TOTAL EQUITY 286.20 Marks & Spencer plc – Income Statement   Revenue 10,309.7 Operating profit 694.5 Finance income 25.0 Finance costs (139.1) Profit before tax 580.4 Income tax expense (74.4) Profit for the year 506.0 Marks & Spencer - Statement of Financial Position   Non-current assets   Intangible assets 808.4 Property, plant and equipment 5,139.9 Investment property 15.7 Investment in joint ventures 12.7 Other financial assets 3.0 Retirement benefit asset 200.7 Trade and other receivables 313.5 Derivative financial instruments 40.6   6,534.5 Current assets   Inventories 845.5 Other financial assets 17.7 Trade and other receivables 309.5 Derivative financial instruments 13.7 Cash and cash equivalents 182.1   1,368.5 Total assets 7,903.0 Liabilities   Current liabilities   Trade and other payables 1,692.8 Partnership liability to the Marks & Spencer UK Pension Scheme 71.9 Borrowings and other financial liabilities 448.7 Derivative financial instruments 51.5 Provisions 44.8 Current tax liabilities 39.6 Non-current liabilities   Retirement benefit deficit 11.7 Trade and other payables 334.0 Partnership liability to the Marks & Spencer UK Pension Scheme 496.8 Borrowings and other financial liabilities 1,655.1 Derivative financial instruments 75.4 Provisions 31.4 Deferred tax liabilities 242.6   2,847.0 Total liabilities 5,196.3 Net assets 2,706.7 Equity   Issued share capital 408.1 Share premium account 355.5 Capital redemption reserve 2,202.6 Hedging reserve (41.8) Other reserve (6,542.2) Retained earnings 6,325.1 Total shareholders’ equity 2,707.3 Non-controlling interests in equity (0.6) Total equity 2,706.7 Read More