Critical Analysis in the Real World - Myer Holdings, David Jones, Billabong - Case Study Example

Critical analysis in the Real World Name: Lecturer: Course: Date: Table of Contents Table of Contents 2 Introduction 3 Financial performance and prospects 4 Billabong financial results 5 David Jones financial analysis 6 Myer Holdings financial analysis 7 Concluding remarks 8 Environmental protection credentials 11 Contextual factors: legal/political issues 15 Conclusion 17 References 19 Appendix 21 Introduction Phenomenal growth of interest on corporate investment has pervaded the industry over the last decade. Indeed, more investors are advocating for and sharing a common thought that companies need to stay profitable as well as sustainable (Yucel and Dagdalen 61-63). This implies that aspects of financial performance, corporate governance performance, environmental protection credentials, and contextual factors such as legal and political are critical for review in determining whether a business is worth investing in. The key contribution of this report is to present analysis of three Australian-based companies, listed on the Top 100 companies on the Australian Stock Exchange. To this end, three consumer discretionary companies including Billabong International (BBG), David Jones Ltd (DJS), and Myer Holdings Ltd (MYR) are selected (ASX Market Watch 1) Virtually, the report hopes to shed light on the financial performance of the three companies with the view of providing data for investors to make investment decision in selecting which of these three to invest in. The objective is to recommend a single company in which to invest $15,000,000. To help in the analysis, data was obtained from primary sources such as annual financial and performance reports from the companies. The primary data was complimented by data from secondary sources such as media reports and journals. Background: Business description In the Australian marketplace, the average profitability of the companies is susceptible to the kind of rivalry existing in the industry. The major players in the customary discretionary segment include Billabong, David Jones and Myer Holdings. Billabong International is a clothing and textile company based in Australia. Founded in 1973, Billabong is a full-fledged multinational company with operations in four continents. It gained listing on Australian Securities Exchange (ASX) in 2000 (Billabong 1-2d). The company’s strategies for operational management have enabled it to satisfy customer demands and to expand globally. Its core business covers manufacturers, marketing, distribution, and sale of boardsports items, clothing, wetsuits, accessories, and eyewear. The ranges of products are licensed for distribution in over 100 countries. Billabong estimates indicate it has over 4,000 employees across the globe (Billabong 1b). David Jones is a leading Australian upmarket retail brand that currently operates some 36 departmental stores, in addition to two warehouse outlets across Australian states and territories. Myer Holdings is a leading player in the Australian retail industry. At present, it operates 66 stores across the Australian states and territories. Myer Holdings gained first listing on ASZ in 2009 (David Jones 1-2s). Like Billabong and David Jones, the core products for Myer include youth fashion, men and women’s wear, kid’s apparel, fragrance, cosmetics toys, fashion accessories and general merchandise. However, Myer and David Jones also offer furniture, home décor, food items, and electrical appliances. The company has over 1,200 suppliers from across the globe, an employee base of over 12,500 and over 51,000 shareholders (Myers 1-4). Financial performance and prospects Billabong, Myers and David Jones have reported varied financial results over the past 3 years. Billabong financial results Billabong saw poor financial performance over the recent years. It experienced a net-loss of about $536 million for the half-year, ending December 31, 2012. Analysis of the 2012 financial report shows that the loss was caused by the partial sale of core Billabong brands, such as Nixon in 2012 (See Figure 1). In the half-year, ending 31st December 2013, it also witnessed a net-loss of about 126 million, indicating a net-loss of 74.5 percent (Billabong, 1b). As indicated in the balance sheet (See Appendix 1), Billabong is presently in an unstable financial ground. For instance, its total current assets have decreased. Additionally, the total liabilities have declined. As indicated in Figure 2, the company had total assets worth of 1.29 million in 2012. In 2013, however, the amount shrunk to about 958,000. The total liabilities later decreased from 618,000 in 2012 to reach just about 94,000 in 2013 (Billabong International 1-2). As indicated by the current ratio, measuring the company’s capability to pay its liabilities using current assets, investing in Billabong would be risky. As inferred from Figure 4 and Figure 5 (See Appendix), the company has a current ratio of 2.6 of 26 percent, showing that the Billabong is highly risky to invest in. Critically, it combined assets can only pay 25 percent of its current liabilities (Investing.businessweek.com 1). Additionally, in using the gross margin to determine Billabong’s profitability ratio and to measure how the company can profitably sell its inventory, higher gross margin ratio is found. This indicates that the company has sufficient money to pay for the operating costs. Analysis based on Figure 6 (See Appendix), shows that the company has a ratio of 70.74 percent. This indicates a high ratio in apparel industry. It also implies that Billabong can pay off inventory costs and still manage to remain with 70.74 percent of its sales revenues to cover for the operating expenses. David Jones financial analysis The sales revenues for David Jones for the financial year 2013 was AUS$1.845 billion, showing a decline of 1.2% on the preceding year (2012 sales revenues was $1.868 billion). This reflected the challenging trading environment during the year 2013. David Jones profits have declined in four successive years, from 2010 to 2014. As indicated in Table 1, the company witnessed decreased profits in FY2012 by 39.9 percent, to reach $699.8 million. In 2013, however, the gross profit rose by $6.3 million to reach $706.1 million, in spite of the declines in sales by $22.8 million. The increased gross profit indicates ongoing strategies to reduce the extent and intensity of discounting, in addition to advancements in inventory management. The company’s consolidated financial position is indicated below. Table 1: David Jones Financial position The value of David Jones inventory is $251.5 million, indicating $27.6 million (9.9%) lower than the previous year’s $279.1 million). Myer Holdings financial analysis Myer Holdings experienced growth in sales and operating profit margin. This could be attributed to superior mark-down management, margin expansion, and growth in sales. Myer’s business continued to be highly cash-generative, witnessing a growth of 11.4 percent in the operating cash flow to reach $300 million. This could be attributed to the regimented focus on inventory management, which Myer (14) pointed out to be the key driver of improved working capital and which was supported by high investment in technology to create fast fashion environment with effective inventory management. The company’ net debt decreased by $43 million, to reach $340 million, resulting to a lower net debt to Earnings before interest, tax, depreciation, amortisation (EBITDA) of 1.11 times. Figure 1: Myer's financial summary (Myer 14). Concluding remarks From the financial analysis of Myers, David Jones and Billabong, it is concluded that Myers is the most profitable and provides less risk for investment. Corporate governance performance The main objective of corporate governance is to make sure that stakeholder interests are protected. Responsible decision-making at the board levels in the three companies ensures that decisions made are communicated effectively, as well as in a transparent manner, hence providing greater confidence to the investors (Zulfiqar and Butt 140-142). Corporate governance practices are measured basing on their need to attract external investments' problems in monitoring the firm, and to protect stakeholder interests (Zietoun 3). Myers, David Jones and Billabong have great corporate governance needed for better financing at minimal costs. Effective governance refers to a situation where a group of owners (shareholders) maintain the right to approve, as well as monitor strategic decisions, while at the same time the management maintains the right to make and implement such decisions (Pavel 46). Zulfiqar and Butt (143) suggested four criteria for measuring corporate governance. These include (a) engaged of the insiders in fraudulent practices (b) existence of proper functioning control mechanisms, (c) engagement of insiders in interrelated party transactions and (d) conformity of the board of directors to independent requisites. Using these criteria, the level of corporate governance by the three companies is surveyed. At David Jones, Billabong and Myers, the board maintains the responsibility of making sure that the companies are appropriately managed to protect and promote shareholder interests. At David Jones, the Board perceives corporate governance as concerned with creating a set of values and norms that support the company’s activities to promote effective risk management, transparency, fair dealing, value creation, stakeholder interests’ protection, and accountability (David Jones 1-2b). However, Billabong and Myers appear as only keen to protect stakeholder interests’ protection, transparency, and accountability. David Jones, Billabong and Myers have showed compliance with the ASX recommendations, requiring listed firms to include their annual reports disclosing that they have complied with the requirements for reporting periods. This is to ensure transparency (David Jones 1-2b). David Jones, however, has greater level of corporate governance than Myers and Billabong, the Board reviews and approves capital allocation, ensures effective risk management systems and reporting systems, and ensures compliance with proper standards of corporate governance and ethical behaviour (David Jones 1-4a). To ensure proper corporate conduct, the company has continues the traditions of excellence by upholding the honesty and transparency in business practices expected by the customers, suppliers, shareholders and the general community. To ensure this, of the three companies, David Jones has the most comprehensive Code of Ethics and Conduct that expect compliance from the contractors, employees, senior managers and contractors by being fair, honest and respectful. It also has whistleblower protection policies and a Code of Ethics Hotline, as well as the tradition of prompt, fair and confidential investigation (David Jones 1-2b). Myers has greater level of corporate governance than Billabong. Myer is dedicated to the high level of integrity and ethics in its business operations and the manner in which it interacts with its stakeholders. Corporate governance is supported by the company’s code of conduct, whistleblower program, and training of the team members (Myers 14-25). The company requires that the employees acknowledge acceptance of the Code of Conduct before starting the work, as well as refreshing their code of conduct training each year. Estimates by Myer show that over the past two years, some 75.5 percept of the employees have undergone its Code of Conduct training. At the same time, efforts are ongoing to increase compliance using email contacts for the employees. To cover for the losses, Myer has started Shrinkage cultural and process-based program to cover for the loss of product and related profits because of pilferage and poor handling. In Financial year 2013, the company reduced such losses by 11 percent (Myers 15-25). Billabong has low level of corporate governance. Indeed, it is more concerned about functional and divisional governance. Billabong uses the matrix organisational structure in response to the swift shifts in its divisions and subsidiaries. The matrix organisation design combines the company’s functional and divisional areas to ensure dual-command situations (Burkus 54-55). Its core functional areas comprise customer-driven innovation capabilities, handling, performance information and retail-skills gaps, as well as IT reporting systems. The divisional areas include subsidiaries and departments (Billabong 1a). Environmental protection credentials Studies on business and environmental protection have focused on identifying the link between profitability and corporate environmental protection (Rivera and Megali 230-231). The underlying argument is that it pays to protect the environment. According to some studies, green strategies enable companies to gain competitive advantage by attracting more eco-conscious customers. Indeed, a recent study by Deloitte in 2008 concluded that more and more customers are becoming environmentally aware (Blondell et al. 1). Similarly, consumers are increasingly appreciating the benefits to the long-term corporate profitability and the community. Towards this end, it is within the interest of investors to monitor the progress companies make in the areas of sustainability (IMA 1-2). The sustainability framework standards should cover the breadth and the existing environmental issues for measurable and reportable actions, retaining flexibility of measures in order to put up with the near-term needs, be flexible to various industries and offer cross-enterprise measurements, as well as be capable of ranking comparative measures in industries. Of the three companies, it is only Myers and David Jones that meets these criteria (Yucel and Dagdalen 61-63). The aspects shared by David Jones, Myers and Billabong include recognition of global environmental trends and altering company's plans accordingly, increased stakeholder satisfaction, minimising environmental impact by improving design of products, processes and packages (Myers 15-25). Myer is dedicated in reducing the impact of its operation and in integrating environmental accountability and management across its activities. The company’s key focus areas include energy use and interrelated carbon emission, recycling packaging materials and waste management (Myers 15-25). Concerning energy use, Myers has initiated strategies to reduce energy use among its 67 stores and 4 distribution centres. In 2013, the company initiated an Energy Management Strategy targeting 10 percent reduction in the intensity of energy used by 2018. David Jones and Billing International are yet to establish such a program in place (Figure 5). Figure 2: Myers energy efficiency performance 2013 Concerning packaging stewardship, the three companies (Myers, David Jones and Billabong) are signatories of the Australian Packaging Covenant with focus on minimising the consumer and transport packaging and promoting the use of recyclable packaging materials. Of the three companies, Myers has initiated a program called “Floor Ready” to ensure it attains in-store product handling efficiencies and that it manages to drive packaging design and minimisation. The company uses six criteria to report compliance. These include price marking, reduced and uniform product packaging, ensuring product packaging and folding, reduced use of plastic bags and use of security tags. In 2013, the Myers reported 73 percent compliance with its “Floor Ready” program (Myers 15-20). In respect to waste and recycling, Myer has initiated a resource recycling system for the materials it uses, such as film plastics, paper, cardboard, security tags, paper and clothes hangers. The company’s head office also reprocesses the organics, containers and paper towels. The company’s distribution centre also recycles pallets, metals and pallet sheets. Additionally, the excess stock, samples, returns and damaged stocks are reused using a third party (Myers 15-25). Since 2006, David Jones has managed to reduce its greenhouse emissions by about 24 percent, and expects to meet its targeted 30 percent reduction by 2016. The company started six initiatives covering natural gas, electricity, diesel consumption, and refrigerant gas leakage. Like Myers, David Jones company has installed localised switching and use of LED lighting and motion detectors, managing to replace some 50,000 halogen lighting (David Jones 1-4b). In terms of waste reduction, Myers has also developed a policy aimed at ensuring environmentally-friendly disposal of its waste components, such as wastes stream. Examples include using colour-coded bin systems in allowing for easier separation of recyclables. The company also has a recycling program for its corporate offices, as well as e-waste recycling programs in the offices (David Jones 1-4b). Figure 3: David Jones 2012 sustainability results (David Jones 5) Among the programs David Jones uses to achieve its sustainability objectives include weekly and quarterly energy audits and making annual submissions to the government through the National greenhouse and Energy Reporting (NGER) (David Jones 1). Billabong undertakes voluntary measuring and reporting of its global greenhouse inventory. Billabong, like Myers and David Jones, adopted the NGER Act in reporting greenhouse gas emissions in 2008. Billabong’s carbon footprint for the financial year 2010-2011 was 9864 tonnes of CO2-equivalent, showing an increase from the previous 5769 tonnes in the previous year. This indicated an increase by 71 percent. The company hopes to reduce its emission footprint by 15 percent by 2017 (Billabong 1). The company has also started environmental initiatives such as recycling, increasing the use of video conferencing to reduce travels and eliminating paper-based purchasing procedures. The company has recycling programs in place. In 2011 for instance, the company recycled 11.5 tonnes of paper, 26.5 tonnes of cardboard and 8.8 tonnes of packaging plastics. The company has also taken to manufacture eco-friendly products such as boardsports items and eco-friendly t-shirts (Billabong 1). Contextual factors: legal/political issues The legal/political aspects are critical in the Australian retail industry. According to FAO (1), the rules and regulation outlining procedures of doing businesses and the boundaries on competitive and cooperative policies ensure effective business coordination. Additionally, enforcement of standards may minimise transaction costs as it increases the potential of buyers and consumers to access information. Standards include contract forms, weights, quality grades and measures (FAO 1-2). The issues facing the legal and political environments that Myers, David Jones and Billabong operate are centred on the institutional environment, such as the social, political and legal ground rules, through which the business has to operate, the property rights such as trademarks and patents, and taxation. Additional examples include equity movement and recourse. The laws and regulations are also aimed at ensuring that the markets function with the proper levels of competitive pressures, in order to safeguard consumer rights and to ensure market efficiencies (McGrath 1). Australia’s Competition and Consumer Act 2010 (CCA) seeks to ensure fair trading, and consumer protection. Unlike Myers, analysis of David Jones and Billabong’s annual reports indicates that the two companies have failed in ensuring compliance with the CCA 2010. This has enabled them to avoid likely fines and negative public image (McGrath 1). In the case of Billabong, the company suffered reputational damage due to non-compliance with legal requirements. In March 2014, the company faced a shareholder class action after it was accused of engaging in deceptive and misleading conduct. Additionally, there were claims it had failed to comply with the continuous disclosure obligations. According to the accusations, the company delivered misrepresented earnings guidance for the financial year 2012. Consequently, the company witnessed collapse in share price by 50 percent. 400 shareholders brought the class action (HG 1). David Jones has also been affected by issues of the institutional environment. The David Jones situation became complicated when two directors at David Jones purchased shares in their department stores, within days after the company rejected an offer made by Myer. The Australian Securities and Investments Commission (ASIC) investigated the trades since they had also occurred shortly after the retailer had issues strong sales report (McGrath 1). Some analysts have credited the woes to the complexity of the Australian corporate law that influences the corporate regulator’s decisions. In January 2014, for instance, Myer witnessed a failed merger bid with David Jones. According to the Australian insider trading laws, individuals who have inside information must procure or trade in financial product of the company. This is since inside information is considered as information that is not publicly available. Otherwise, it would affect the value of security or price of the share (HG 1). These raised concerns over David Jones corporate governance. It also indicates that insider trading is intricate areas in corporate law (McGrath 1). However, David Jones has suffered reputation and has been heavily criticised for lack of compliance with its broad corporate governance policies. Conclusion This report recommends that Myers Holdings would be the best investment option for the client, compared to David Jones and Billabong. This is since Myer is the most profitable, while Billabong and David Jones are in unstable financial positions. The report found that Billabong has witnessed consistent poor financial performance and profitability. Billabong experienced a net-loss of about $536 million for the half-year ending December 31, 2012. Again, in the half-year ending 31 December 2013, it also witnessed a net-loss of about 126 million, indicating a net-loss by 74.5 percent. David Jones also company witnessed decreased profits in FY2012 by 39.9 percent, to reach $699.8 million. In 2013 however, the gross profit in rose by $6.3 million to reach $706.1 million in spite of the declines in sales by $22.8 million. Myer Holdings has been experiencing growth in sales and operating profit margin. Myer’s business continued to be highly cash-generative, witnessing a growth of 11.4 percent in the operating cash flow to reach $300 million. Additionally, while David Jones has the broadest scope of corporate governance, it has failed to uphold its principles, resulting to litigations. The same has happened in the case Billabong leading to shareholder class actions. Myers has therefore the most effective corporate governance needed for better financing at minimal costs. Corporate governance has enabled Myers to engage of the insiders in fraudulent practices, existence of proper functioning control mechanisms, engage insiders in interrelated party transactions, and ensure conformity of the board of directors to independent requisites. Using these criteria, the level of corporate governance by the three companies is surveyed. Myer also has an effective environmental protection credentials, which while comparable to that of David Jones, is greater in scope. The company has also made landmark improvements in its environmental protection measures, covering the breadth and the existing environmental issues for measurable and reportable actions, and retaining flexibility of measures in order to put up with the near-term needs. They are also flexible to various industries and to offer cross-enterprise measurements as well as be capable of ranking comparative measures in industries. References ASX Market Watch. "List Of ASX Shares: Top 100 ASX Companies, Codes And Sectors," 2014. 30 Sept 2014, Billabong. 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"Globalization of markets, marketing ethics and social responsibility."Globalization of markets, marketing ethics and social responsibility." 2010, 29 Sept 2014, Zietoun, Hossam. "Corporate Governance And Corporate Social Performance: A Meta-Regression Analysis," 2010. 29 Sept 2014, Zulfiqar, Syed and Butt, Safdar. "The Impact of Corporate Governance on the Cost of Equity: Empirical Evidence from Pakistani Listed Companies." The Lahore Journal of Economics 14.1 (2009): 139-171 Appendix Figure 4: Billabong balance sheet 2012-2013 (Billabong 2013). Figure 5: Billabong financial ratios 2013 (Investing.businessweek.com, 2013) Figure 6: Billabong Income statement 2012-2013 (Billabong 2013). Read More