Coles Myer Limited for an Institutional Investor Considering - Case Study Example

Myer Holdings Report College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Executive Summary This report presents an analysis of Myer Holdings investment. The analysis is to determine the investment viability of the company. Myer Holdings is a big retail-chain store company with operations all over Australia. It has a total of 67 retail chain stores across the country. A peer analysis with David Jones indicates that Myer Holdings performed better, especially on profitability. Ratio analysis also indicates strong profitability for 2013; the company has an efficient and effective use of its assets. Liquidity of the company is quite low, but this could be due to more investments carried out by the company whereas the company has a balanced debt financing. Myer Holdings strength lies in its wide network of retail chain stores, increasing profit margin, and use of technology whereas its major weakness is the poor management of operating expenses. Currency fluctuations are a threat to the company’s operations. The operating as well as financing currency is the Australian dollar. Any adjustments will result in either a profit or a loss, or it could be offset through currency risk hedging. This information indicates that the company is viable for investment. Introduction Ahead of making any investment decision, it is important to have all the relevant information as regards the investment. This information is availed through an in-depth analysis of the investment opportunity or the investment entity where one intends to put their money into. In light of this, this report is aimed at analysing Myer Holdings Limited so as to have an understanding of its investment viability. The analysis is based on the company operations, a peer analysis, ratio analysis, strengths and weaknesses, impact of currency fluctuations on the company’s operations and the investment recommendation based on the analysis. Company Background Myer Holdings Limited was founded by Sidney Myer, a destitute Russian migrant. Sidney Myer was a creative thinker and a great philanthropist. These qualities won him great admiration from people and drove his business success in Australia, among them the Myer departmental stores. Today, Myer Holdings is the biggest retail-chain store in the Australian retail industry. The company operates a total of 67 key retail stores located all over Australia. The company’s headquarters is located along Collins Street, Docklands in Victoria, Australia (Myer, 2014b). Myer Holdings has a strong brand that is supported by the recently instituted online, mobile as well as digital presence. This presence has created a strong customer feeling and attractiveness to the company given the convenience that it creates. The company, through the customer loyalty (card membership) program has well over 12,500 members. In addition the company’s business is enhanced by over 1,200 suppliers from all over the world and around 54,000 shareholders in its stake along with great community support gained through a stretched record of humanitarian support as well as local community involvement (Myer, 2014a). Myer Holdings offers merchandise for children, women as well as men that span 11 main product groups that include beauty products, handbags and accessories, cosmetics and perfume, electrical goods, furniture, footwear, toys, home ware, plus other general merchandise (Myer, 2014a). Peer Analysis Myer Holdings faces stiff competition from other retail-chain store companies in Australia. It is therefore important to analyse the performance of Myer Limited alongside this other companies so as to have an understanding of the company’s position in the retail industry in Australia. The other retail-chain company that could be well compared with Myer Holdings is David Jones given that the two companies are almost of the same size. The analysis compares the performance of the companies on various performance measures that include market capitalisation, net profit after tax (NPAT) and a number of profitability ratios for the year 2013. The analysis is presented in the table below; Market Capitalisation NPAT Earnings Per Share Price Earnings Ratio Dividend Per Share Dividend Yield (%) Myer Holdings 1,559m 129.9 20.1 10.8 17.9 7.6 David Jones 1,766m 101.6 19.1 13.5 16.9 6.6 Source: Investsmart. Com (2014). The analysis indicates that Myer Holdings had a lower market capitalisation. However, the company posted a higher net profit after tax, earnings per share and dividend per share than David Jones. The company had a lower price earnings ratio than David Jones. Myer Limited is competing well in the retail-chain store compared to David Jones. Ratio Analysis Financial ratios form the toolbox used to perform the financial analysis of a company. Ratios are easy to understand and interpret considering that the final statements of accounts are not easy to interpret (Steven, 2006). Below are the key rations indicating Myer Limited’s performance in 2013. Profitability Ratios Profitability ratios review earnings performance relative to sales or investment. The ratios gauge the ability of the management and the operations of the company to generate profits and returns (Martin & Fernando, 2002). Ratio Formula Working Result Operating profit margin 41.71% Return on equity 4.04% Source: Myer Limited Annual Report, (2012, 2013) Myer Holdings posted a strong profitability in 2013 given that it generated 41.71 per cent operating profits from total sales. Also the return on shareholder’s investment was favourable at 4.04 per cent. Asset Utilisation Ratios Asset utilisation ratios are measures of how well assets (investments) are utilised by a company. The ratios can be used to assess the gains produced by specific assets such as inventory, assets or debtors or all a company’s assets together (Smith, 2007). Ratio Formula Working Result Inventory turnover 3.99 Total asset turnover 1.62 Source: Myer Limited Annual Report, (2012, 2013) Asset utilisation ratios indicate that the company is making good use of its assets to generate incomes. Inventory turnover was 3.99 times in 2013 and total asset turnover was 1.62 times. Liquidity Ratios Liquidity ratios evaluate the ability of the company to meet up its short-term obligations using its current assets (Edmonds et al 2006). Ratio Formula Working Result Current ratio 0.92 Quick ratio 0.22 Source: Myer Limited Annual Report, (2012, 2013) Myer Holdings’ current ratio was 0.92 in 2013 that was less than the required 2:1. This could point to a higher lender risk meaning that it may well not be able to meet short term obligations. The quick ratio was also 0.22, less than the required 1:1. However this could indicate that the company is investing more of its cash (Date-Shappard, 2013). Debt Utilisation Ratios Debt utilisation ratios evaluate whether the company is generating a sufficient amount cash to not only run current operations, but also to meet up future obligations such as loans, bond payments, guarantees and capital improvements (Edmonds et al 2006). Ratio Formula Working Result Financial Leverage 17.53% Debt/equity 65.36% Source: Myer Limited Annual Report, (2012, 2013) Debt utilisation ratios indicate that the amount of debt used to finance asset acquisition is low at 17.53 per cent. Debt/equity is 65.36 percent indicating that equity financing is more than debt financing. This indicates that the company can still source more funds easily to finance its operations (Steven, 2012). Strengths and Weaknesses Strengths Weaknesses Wide network of retail chain stores Online, mobile and digital presence (use of technology) Increasing gross profit margin Increasing cash generation hence boosting cash flows Customer loyalty program Poor management of the increasing operating expenses such as high occupancy costs Difficulty dealing with uncertain business environment. Impact of Currency Fluctuations Exchange rates keep changing every now and then. These changes reflect a change is value of items. The change could be positive or negative and could result in a gain or a loss. Therefore, the company ought to consider currency fluctuations since they will affect items reflected in the financial statements. Taking this into account, Myer Holdings, measures financial statement items using the currency of the prime economic location in which the company operates. This is also called the functional currency. Given that the company is based in Australia, the company’s financial statements are presented in Australian dollars. Transactions involving foreign currencies have to be translated into the functional currency using the exchange rates prevailing at the dates of the transactions. This could result in a gain or a loss that is reflected in the income statement as other income or other expenses, apart from the time they are deferred in equity as qualifying cash flow hedges (Myer, 2014c). Investment Recommendation Myer Holdings is a growing retail-chain store and is among the largest departmental stores in the Australian retail industry. Compared against another key player, David Jones, Myer Holdings posted a much better performance in 2013. Ratio analysis indicates good profitability as well as asset and debt utilisation. Liquidity is quite low but this could indicate that the company is aggressive, meaning that it prefers a low liquidity hence more funds are invested elsewhere (Date-Shappard, 2013). The company’s strengths exceed its weaknesses. Given the above analysis, I would recommend a potential investor to consider investing in Myer Holdings Limited. References Date-Shappard, D. (2013). Myer Comes in Flat, Looks Toward Developing More Online Sales. The Motley Fool, 12th September 2013. Viewed 19 March 14, . Edmonds, C. Edmonds, T. Olds, P. and Schneider, N. (2006). Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin Investsmart.com, 2014. Myer Holdings Limited. Viewed 19 March 2014, Myer, 2014a. About us: Company Profile. Viewed 19 March 2014, Myer, 2014b. About us: History. Viewed 19 March 2014, Myer, 2014c. Investor Centre: Reports. Viewed 19 March 2014. Martin, S.F. and Fernando, A. (2002). Financial Statement Analysis: A Practitioner's Guide, 3 edn, John Wiley & Sons. Smith, J. (2007). Handbook of Management Accounting, Amsterdam, Boston Cima Publishing. Steven, M.B. (2006). Financial Analysis: A Controller's Guide. 2nd edn. Wiley. Steven, M.B. (2012). Business Ratios and Formulas: A Comprehensive Guide. 3rd edn. Wiley. Read More