Primark Stores Limited Financial Analysis - Example

Primark Stores Limited Financial Analysis Students Name: Institutional Affiliation: Department Course: Date: Executive summary The objective of this report is to describe the Primark stores limited financial performance for the three financial year ending 2013. The financial analysis is aided by the use of the ratio analysis in technique which is sensibly used to provide the Primark stores limited financial performance in comparison to the three competitors such as BHS Ltd, Matalan retail Ltd and New look retailers. The report aims at describing the Primark stores limited efficiency ratio, growth ratio, profitability ratio gearing ratio and market analysis ratio to assess the Initial public offer (IPO) in comparison with its competitors. The in-depth ratio analysis technique will accentuate further Primark internal and external environment through the use of SWOT analysis to determine its internal strengths and weaknesses and external opportunities and threats. The financial appraisal technique to be used will also provide guidance on the ideal price of a share the company will use in its IPO. A reasoned conclusion will also be drawn from the analysis on matters pertaining to where Primark would be ranked in financial standing within its industry on the London Stock Exchange. The report will also be expected to analyze the forecasted profits after tax for the year ended 2014 with arguments in support the valuation of IPO. Table of content Executive summary 2 Table of content 3 Introduction 4 Primark Stores Limited 4 NEXT PLC 4 Matalan Retail Limited 5 New Look 5 SWOT analysis 6 Strengths 6 Weaknesses 7 Competitor analysis 7 Profitability ratios 8 Net profit margin 8 Return on assets 10 Return on capital employed 11 Liquidity ratios 13 Current ratio 13 Stock turn over 14 Revenue per employee 16 Profit per employee 18 Debt ratio 19 Recommendation of the price of IPO 21 Basic Corporate Governance structure for Primark Stores Limited 21 Conclusion 22 References 23 Introduction Primark Stores Limited Primark Stores Limited, a subsidiary of Associated British Foods Investments PLC is a retail company that was founded by Arthur Ryan in Dublin Ireland in June, 1969. The company serves Western Europe with an estimate of 278 stores. Primark has an estimated 51,250 employees working in its shops. The company deals with fashionable clothes for the low cost market end, home ware and cosmetics. The retail shop company like most of other retailers do not manufacture its products, it works with selected suppliers for supply of its product. The company has also opened up concession models to boost its operation Primark works in tandem with the Ethical Trading Initiative (ETI), an organization that bring together other like-minded companies to promote working condition of its employees. Primark recorded revenues in excess of £4.2 billion in its last financial statements. NEXT PLC NEXT, a company founded in 1864 by Joseph Hepworth a tailor in Leeds, United Kingdom under the name Joseph Hepworth & Son. The company opened its first shop on 12 February 1982 by acquiring Kendall & Sons Ltd a rainwear and ladies Fashion Company based in Leicester. Next is a public limited company that trades in London Stock Exchange (LSE) as NEXT and also a constituent of FTSE 100 index. The company registered office is found in Enderby, Leicestershire, England with an estimated 700 retail stores of which 597 stores are in U.K and Ireland and 200 stores spread across Europe, Asia and Middle East. From sales, NEXT is the largest clothing retailer in the UK. It has 54,507 employees working in its retail shops. The company has gone through some changes since it was founded by selling 433 jewelry stores in the UK to Ratners Group in 1988 and acquisition of the youth brand Lipsy in 2008. The company latest revenues was an estimated £3.55 billion. NEXT operations is made of three channels that is, Next Retail which is made of over 500 retail chains in the UK and Ireland, Next Directory an online shop made of a home shopping catalogue and website with 3 million active customers and Next International with over 180 international stores. Matalan Retail Limited Matalan Retail Limited is a privately owned company founded by John Hargreaves in 1985 where it set up its first shop in Preston. The company is a clothing and home ware retailer where it offers quality fashion and home ware merchandise. Matalan Retail Limited has an estimated 217 stores spread across the UK and its registered office is in Skelmersdate. Matalan sell its own brand as well as other brands with a diverse customer base divided into four departments of men, women, children clothing and home ware. The company stores occupy an average of 30,000 square feet with majority of the stores based in locations out of town. The company reported revenue was in excess of a billion pounds in the most recent financial statements New Look New Look founded by Tom Singh in 1969, is owned by two private groups Apax Partners and Permira. The fashion retailer chain of high street shops has its registered office in Weymouth, Dorset, United Kingdom with an approximately 1160 shops serving 22 nations in Europe, Middle East, Asia, North Africa and China. The company deals with clothing fashion products with an estimated 30000 employees worldwide with the United Kingdom accounting for 17000 employees. The fashion retailer through its online shop now whips 120 countries worldwide which generate 10% of its revenue. New Look had an estimated £1.4 billion in terms of revenue. The fashion retail chain takes into consideration the different customer individual style which is made of women, men and children fashion clothing. SWOT analysis Strengths The Primark stores limited is operating in pragmatic managerial measures which conceptualize on profitability enhancement in generating revenue attributable to the company’s shareholders within the financial period[Agu12]. The company depicts a predetermine principles which enhance the employee efficiency in generating earnings which substantiates the company’s higher stock prices. Primark stores limited contains over 278 stores which is located in different geographical locations with up-to date fashioned offering the consumers a well establish based of acquiring products. Consequently, the company’s modern logistical departmental stores allows Primark’s purchasing power which increases the company competitive advantage. Primark’s substantially offers the higher quality fashioned cloths with average prices which enhance higher customer’s satisfaction towards the company’s products. Moreover, employ the cost saving strategy by effectively provide the customers with quality product efficiently with attractive prices evaluated within the company’s controllers analysis. Primark’s operate with efficient managerial team which articulates efficiency in the company’s financial operations which enhances better and reliable cash flows within the financial years[Alt08]. The better operational management in delivering quality and fair price products describe the company’s continual winning of awards which also triggers consumers towards their products. Weaknesses The critics attached to the Primark Stores Ltd is linked with unethical working environment reported within the media reports which offer the employees unethical working conditions. The company was ranked according ethical index in 2005 at 2.5 on the total of 25. Subsequently, Primark’s online stores reported to operate in a poor working environment which depress the ethical code of conduct[And14]. However, the management conversance in the state of unethical behavior the company takes bureaucratic steps to solve the problem. Primark’s also invest less in advertising and other marketing initiatives which offers the company lower competitive advantage as compared to the competitors. Poor adverting reduces the poor online sales as well as poor perception of Primark’s products. Competitor analysis Competitor analysis refers to the pragmatic evaluation of the inter-company financial performances to assess the credibility and pricing of stock in the given companies. Financial ratios analysis are sophisticated financial techniques which is used to assess inter-company analysis within the historical years. The ratios assesses the company’s profitability growth, market price of IPO’s stock, financial strength as well as company’s gearing margin. Primark Stores Limited and its competitors are analysis as bellow; Profitability ratios Profitability ratios are financial ratios which are used to assess the company’s ability to generate earnings relative to the company investments. Profitability ratios evaluates the company’s ability to generate earnings which are attributable to the company’s shareholders[Bal061]. The profitability ratios evaluate different fundamental insights of the company’s state of financial affairs and performance. The higher profitability value accentuates the company’s better performances in generating revenues, cash flows as well as earnings attributable to shareholders. Company’s profitability ratios provides the significant financial performances information within the company and competitors based on the industry ratios[Ali13]. The profitability ratios are describes below: Net profit margin Net profit margin ratio is profitability utilized in determining the relativeness of the company’s sales revenue to the earnings before taxes and interest. Net profit margin accentuates the company’s average amount of dollars in the sales which contribute to the company's earnings profit at end of the financial year[Alf12]. The net profit ratio sensibility in assessing the company’s profitability is considered a benchmark for decisive base for investors in evaluating the comprehensive viability to invest in relative to the competitors operating in the same industry. The ratio behooves the shareholders on the pragmatic measures which are embraced to enhance the company’s financial performance. It is arrived at using the formula earnings before interest and tax / sales revenue x 100. 2013 Financial year Primark Next PLC New Look Matalan EBIT 237.15 666.5 3.1 17.8 Sales revenue 2583.52 3,562.80 1,484.00 1,125.40 Net profit margin 9.18% 18.71% 0.21% 1.58% The net profit margin accentuates that Primark Stores Ltd financial has an average ability in turning the sales into income during 2013 financial year. According company’s competitor trend Next Plc describes higher efficiency in generating profit through sales[Agu12]. The trend analysis encompasses that the management should aid in ensuring better efficiency in making more profits through sales to enhance better profitability if Primark as compared to the market competitors. Return on assets This ratio is used in evaluating the corporations profits in relation to the average total assets used to generating profits[Alf12]. Return on assets ratio gives comparison between the company’s earnings generated to the total company assets. Higher ratios the company accentuates that the company operates efficiently while lower return on ratio’s discloses that the company’s competitors has found strategic ways that they operates efficiently hence overwhelming the company’s profitability on the assets. It is arrived at using the formula company’s earnings before interest and tax / average total assets x 100. 2013 Financial year Primark Next PLC New Look Matalan EBIT 237.15 666.5 3.1 17.8 Assets 1654.45 1,893.60 1,339.60 487.7 Return on Assets 14.33% 35.20% 0.23% 3.65% Return on assets ratio describes a substantive assets efficiency analysis in generating revenue income[Alt08]. The ratio describes that the Primark Company shows an average efficiency in utilizing it asset to generate profits. Primark’s return on assets ratio of 14.33% is the second profitable firm in the competitor’s trend which is led by the Next Plc with 35.20%. However, this shows that the company need to conceptualize on managerial strategies to substantiate the efficiency in utilizing the assets to generate more earnings. Return on capital employed Return on capital refers to the profitability which articulates the company’s net operating income as a percentage of the company’s capital employed to assess company’s ability to earning out of the shareholders’ investment[And14]. Return on capital employed should be privileged over the firms shareholders capital invested since lesser cost accentuates that the company is not sufficiently effective in employing its capital for great return hence poor shareholder value.  2013 Financial year Primark Next PLC New Look Matalan EBIT 237.15 666.5 3.1 17.8 Total assets - Current Liabilities 1654.45-1329.84 1893.6-816.0 1339.6-323.7 487.7-59.7 Return on Capital 73.06% 61.85% 0.31% 4.16% Return on capital financial ratio describes that the comppany Primark Store Ltd reveals substantive capital performances as the company reveals 73.06% ability to utilize the capital invested to generate income. The company’s ability to strategically use capital invested effectively in generating revenue income accentuates that the management has structures substantive procedures which stimulate capital return over the competitors succeeding with 61.85%, 4.16% and the lowest 0.31% for Next Plc, Matalan and New Look respectively. Liquidity ratios Liquidity ratios are financial ratios which assesses the company’s financial ability to meeting its short term financial obligations on the time it is due for payment. Liquidity ratio describes shows the numbers of times that current financial obligations are gathered for by current assets as well as cash[Atr11]. Where the liquidity ratio is more than one, the company describes successive business with good financial health which describes less likelihood of falling to financial difficulties. The higher the liquidity ratios sensibly describes higher company’s margin of safety in paying the current financial liabilities. The liquidity ratio involves; Current ratio The current ratio assesses the company's ability in paying current debt utilizing the current assets. The current ratio assesses ability to utilize the resource such as current assets to meet the current financial obligations[Agu12]. The Potential creditors utilize the current ratio in determining whether they should offer current loan to the company. Current ratio does not put into consideration the timing of company’s cash flows hence higher probability of misleading the users. It is calculated as follows by dividing the current assets by current liabilities. 2013 Financial year Primark Next PLC New Look Matalan Current assets 419.57 1,207.80 343.1 30 Current liabilities 1329.84 816 323.7 59.7 Current ratio 0.32 1.48 1.06 0.50 The current ratio accentuates that Primark company has poor managerial initiaive in meeting the comppany’s curremt liabiliteas using the current assets[Atr11]. Primark current assets reveals low company’s capability in meeting the current obligation since Primark current ratio is 0.32, while other competitors such as Next Plc, New Look as well as Matalan accentuates 1.48, 1.06 and 0.50 respectively. However, the company should conceptualize on the pragmatic measure to increase its current assets. Stock turn over Stock turnover ratio is an essential ratio which evaluates the company’s period of time which it takes to sale its inventory over a financial period. The company’s ability to sales its inventory increases the company’s efficiently pay the outstanding current financial obligation utilizing the revenue income from sale of the inventories[Ali13]. The higher inventory turnover describes that the companies have a greater chance of meeting the current financial obligation. It is calculated by using the formula = average inventory / cost of goods sold x 365. 2013 Financial year Primark Next PLC New Look Matalan Stock 370.08 331.8 144.1 140.7 Cost of goods sold 2089.64 2,437.00 698.9 997.8 Stock turnover 64.64 49.70 75.26 51.47 According to the stock turnover ratio Primark store shows that the company takes longer time to in turning its inventory to sales as compared to the other competitors in the market[Alt08]. Primark take 64.63 days to turn it stock while Next Plc takes 49.7 which is more efficient while New Look shows a turnover of 75.26 and Matalan takes 52 days to turn it inventory. However, Primark should emphasis on strategic measures to increase its efficiency in turning its stock to increase the company’s financial ability to meet the obligations. Productivity ratio Productivity ratio is financial ratio which expresses the company’s inputs utilized on the production in relation to the company’s outputs[And14]. The productivity ratio assesses the company’s viability to compete in the competitive market as well as describing the company’s standardized effectives framework in ensuring that substantive procedures such as technological and management initiatives are installed to enhance productivity. Profitability ratio closer to one accentuates substantive financial productivity while ratios closer to 0 describes worse productivity. Revenue per employee Revenue per employee refers to the company’s efficiency ratio uses to assess the human resource contribution to the company’s sales revenue[Bar13]. The revenue per employee ratio indicate the personnel productivity efficiency in utilizing the human resource to generate the company’s revenue. The higher the revenue per employee accentuates that the company is efficient in utilizing the employees to generate more revenue hence viable for making investment as well as describing higher stock prices. 2013 Financial year Primark Next PLC New Look Matalan Sales 2583.52 3562.80 1,484.00 1125.6 Number of Employees 29753 54,507 21,148 16373 Sales per employee 0.09 0.07 0.07 0.07 86,832.25 65,364.08 70,172.12 68,747.33 Sales per employee ratio describes that Primark leads it competitive firms with 86,832.25 employee ability to generate sales at 2013 financial year[Bal061]. The key initiative embraces within the successive higher contribution of employee to the company’s revenue accentuates that the company is strategically installs with good internal controls. Which oversees the company success. The Next Plc, New Look as well as Matalan accentuated that the company configures average of 68,000 contribution of employee to sales. Profit per employee Profit per employee is efficiency ratio which assesses the management efficiency in utilizing the employee to generate the earning attributable to the shareholders. This ratio accentuates the company’s relativeness in efficiency using the employee to generate profits within a financial year. The profit per employee is evaluated by using the formula profits divided by the number of employee. 2013 Financial year Primark Next PLC New Look Matalan EBIT 237.15 666.5 3.1 17.8 Number of Employees 29753 54507 21148 16373 Profit per Employee 79,706.25 122,277.87 1,465.86 10,871.56 The profit per employee ratio describes that Primark Company practically heightens on the employee dedication in competently contribution to the company’s profits. Profit per employee accentuates that Primark employee contributes to company’s earnings of 79,706.25 which is seconding more effective and productive Next Look Competitor with 122,277.87. Matalan retailers also shows a better employee contribution to profits by 10,871.56 whiles New Look describes the worst employee contribution of 1,465.86. However, Primark should conceptualize on the employee motivation to enhance dedication in contributing towards the company’s profitability[Alt08]. Debt ratio Equity ratio reveals the amount of dollars of equity in every dollar of assets. According to the accounting equation total equity is equal to total assets plus liabilities thus if equity ratio is less than 50%, then it reveal that the company was more dependent on debt funding than equity funding[Alf12]. This reveals that the company had more liabilities over its assets. It is accounted for as follows = total equity / total assets x 100.  2013 Financial year Primark Next PLC New Look Matalan Total equity 287.34 285.6 391.3 428 Total assets 1654.45 1893.6 1339.6 487.7 Equity Ratio 17% 15% 29% 88% According to the equity ratio graph above, Primark Store reveals to be more dependent on the internal sources of finance equity in financing its investment in assets. While Next Plc describe it financial strength in utilizing the equity as compared to debt of 15% when Primark equity ratio is 17%. The other competitors has 29% and 88% which describes that the company uses debt more that equity. Recommendation of the price of IPO Valuation of Shares for the IPO for Primark Stores Limited Primark Stores Limited is a will value its shares for the purpose of an IPO by using the Net Asset Approach basis[Bar13]. The Net Asset Approach basis entails the difference between the total assets and total long term liabilities and total current liabilities. The net asset value that is derived will be expressed as a fraction of the total number of shares that Primark currently holds. Total Net Assets £ 657.42 million Number of shares Outstanding 50000000 £13.1484 Primark Stores Limited ideal value of share to be issued through the IPO will be £13.1484. Basic Corporate Governance structure for Primark Stores Limited Corporate governance outline the process and relationships by which Primark Stores Limited will be controlled and directed. The structure of the company will identify how rights and responsibilities will be distributed among the participants of the company. The participants include the board of directors, managers, shareholders, creditors among others. The UK Corporate Governance Code outlines that the structure of the board and its committee should be made up of directors with appropriate balanced skills, experience, be independent and have requisite knowledge about the company which would enable them discharge their duties and responsibilities effectively. The provision further directs that there should be a strong presence of executive and non-executive directors. This is to ensure that one group does not dominate the other in decision making. At least half of the board members, excluding the chairman should be non-executive directors. Primark Stores Limited should thus apply this rule in its operations after the IPO to ensure compliance with the corporate governance code. Additionally, the board should be elected by the shareholders of Primark Stores Limited Conclusion The Primark Stores Limited financial analysis describes that the company’s financial performances is subject to constrain that redresses the company’s efficiency in utilizing the assets to generate revenue income attributable to company’s shareholders. The return on assets ratio shows that the company need to conceptualize on managerial strategies to substantiate the efficiency in utilizing the assets to generate more earnings. Primark productivity ratios accentuates moderate ability to enhance effectiveness in employee to generate profits and increase sales. However, Primark Stores Limited should emphasis on strategic measures to increase its efficiency in turning its stock to increase the company’s financial ability to meet the obligations. References Agu12: , (Aguilera, 2012), Alt08: , (Altman, 2008), And14: , (Anderson, 2014), Bal061: , (Ball, 2006), Ali13: , (Alisdair McGregor, 2013), Alf12: , (Alfredson, 2012), Atr11: , (Atrill, 2011), Bar13: , (Barth, 2013), Read More