British Retailer Mothercare - Assignment Example

 Table of Contents International Group 3 UK retailing 3 Wholesale 3 Charity giving: 5 Employee care: 5 Suppliers: 5 Segmentation 7 Provisions: 8 From the audit report 8 Respective responsibilities of directors and auditor 9 Opinion of audit committee on financial statements 9 Opinion on other matters prescribed by the Companies Act 2006 10 Current Performance: 10 Future Prospects 11 From chairman’s perspective: 11 Liquidity Ratios 13 Efficiency Ratios 13 Leverage Ratio 14 Profitability Ratio 15 PERFORMANCE ANALYSIS 16 Works Cited 18 Introduction Mothercare is a British retailer which specializes in products for expectant mothers and in general for children up to 8 years old. Mothercare specializes in retailing of the products for mothers-to-be, babies and children up to the age of eight. Mothercare operates in the UK and also operates internationally in Europe, the Middle East, Africa and Far East. A wide range of products including children’s clothing, furniture and bedding, travel equipment and toys are offered by Mothercare. The Company was founded by the entrepreneur Selim Zilkha and Sir James Goldsmith in 1961. In 1982 it merged with Habitat  to form Habitat Mothercare plc and in 1986 Habitat Mothercare plc merged with British Home Stores to form Storehouse plc. It bought Children's World from Boots in 1996. In 2007 Mothercare launched Gurgle, a pregnancy and parenting social networking website and in July 2010. Principal Activities The basic principal activity of Mothercare is to meet the needs and aspirations of parents for their children, worldwide. A wide range of products including children’s clothing, furniture and bedding, travel equipment and toys are offered by Mothercare through its Retail and internet operations in the United Kingdom, and internationally. They have different groups nationally and internationally. International Group Their International business continues to grow worldwide, with total sales increasing by 16.3 per cent and retail space by 20 per cent. International sales now represents around 50 per cent of total network sales and, for the first time this year, was the major profit generator for the group. UK retailing During the year the UK retail environment remained challenging with lower consumer spending and poor economic growth leading to a weaker trading performance in the UK. Wholesale Mothercare has also dealed in wholesale market which is a relatively new but exciting Channel for the Mothercare group and they see strong growth on a global basis. Wholesale provides them the opportunity to maximize the revenue and profit. CORPORATE SOCIAL RESPONSIBILITY Corporate Social responsibility is the managerial obligation to take action that protects and improves both the welfare of society and the interest of the organization. Mothercare pays a lot of attention to corporate social responsibility and protects and improves its communities. By acting responsibly, mothercare secures its long-term success and fulfill its mission to meet the needs and aspirations of parents for their children, worldwide. Mother care’s corporate social responsibility is focused on the following key areas: Communities- parents and children: Mothercare believes that parenting and raising children is an essential foundation for the society, and that healthy baby, parents and families benefit all therefore in 2010, Mothercare joined a select group of parenting brands. Since launch, representatives of the college have been actively participating in their staff training and parenting events. Charity giving: Mothercare’s total direct giving to charity last year was £548,161. The largest donation made was to the Mothercare Group Foundation, and further substantial gifts to the Foundation were given for the Study of Infant Death and Cancer Research UK. Employee care: Mothercare promotes a work culture that cares – something that resonates with people who work for them who often talk about being part of Mothercare family. One of the ways they measure this sense of community is by their annual participation in The Sunday Times 25 Best Big Companies to Work for scheme, based on employee votes. Suppliers: Being responsible is a key part in the ethics of Mothercare. It is a challenging area with complex issues in which they continue to work to identify and overcome with their suppliers. The Mothercare group Responsible Sourcing (RS) Code, based on international labor law and reflecting the requirements of the Ethical Trading Initiative Base Code. Board of Directors INFORMATION BY CHAIRMAN AND BOARD FOR FINANCIAL STATEMENTS: Segmentation According to the board, IFRS 8 necessitates operating segments to be recognized on the basis of reports produced internally about components of the company that are frequently reported to the company’s board. This is done in order to allocate resources to the various segments of the group and assess their subsequent performance. The group’s reporting segments under IFRS 8 are UK and International. Depreciation Property, plant and equipment are carried at cost less accumulated depreciation and any recognized impairment losses. Depreciation of property, plant and equipment is recorded so as to write off the cost or valuation of assets, other than land and assets in course of construction, over their estimated useful lives, using the straight-line method, on the following basis: Freehold buildings – 50 years Fixed equipment in freehold buildings – 20 years Leasehold improvements – the lease term Fixtures, fittings and equipment – 3 to 20 years The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in income. Provisions: Provisions are recorded when the company has a present obligation arising as a result of a past event, and it is reasonable probable that the group will have to settle that obligation. Provisions are estimated by the directors of the company and are the best estimate of the expenditure that will have to be settle the obligation at the balance sheet date. If the provisions are material in value, they are discounted back to present value. From the audit report From the audit report we find out that the audited parent company’s financial statements are of 52 weeks ended 26 March 2011 which comprise of the parent company’s balance sheet. The financial reporting framework that has been applied in the preparation of the annual reports is applicable to law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). [Mot11] Respective responsibilities of directors and auditor Preparation of the parent company’s financial statements is the responsibility of the directors. They also ensure that the financial statements give a true and a fair view of the company’s finances. Auditing involves gathering evidence about the amounts and disclosures that are included in the financial statements. Sufficient evidence is obtained to give reasonable assurance that the financial statements are free from material misstatements that can be caused due to fraud or error. The responsibility of audit committee is to audit and express an opinion on the parent company financial statements in accordance with pertinent law and International Standards on Auditing (UK and Ireland). Opinion of audit committee on financial statements In their opinion the parent company financial statements: • Give an accurate and fair view of the state of the Company’s affairs as at 26 March 2011; • Have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • Have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In their opinion: • The part of the directors’ remuneration report that was audited has been properly prepared in accordance with the Companies Act 2006; and • The information that is provided in the directors’ report for the current financial year is consistent with the parent company’s financial statements. CHAIRMAN’S STATEMENT Current Performance: This year marks the fiftieth anniversary of the founding of Mothercare by Selim Zilkha in September 1961. The board and management have made considerable progress in transforming Mothercare from a UK business into a globally recognized parenting company. Mothercare has taken steps to adapt the UK business to the changing needs and preferences of their customers, and have transformed their supply chain capability. Their online offer, which is so successful in the UK, is now being rolled out internationally. All of these changes are consistent with the founder’s vision of ‘Everything for mother and her baby under one roof’ The International business continues to grow apace – franchisee sales rose by over 15% last year and, for the first time in its history, The Company had a first half in which retail sales in its international business exceeded retail sales in its UK business. According to their Chairman: “We will continue to expand our International business with our excellent existing franchise partners and with new franchisees joining the system” Future Prospects For the next year, Mothercare anticipate that cost pressures will demand attention and they do not foresee any significant decrease in input cost trends, particularly with the impressive growth in demand from countries such as China and India impacting raw material prices. From chairman’s perspective: I do not expect 2011/12 to be easy, but we have laid the foundation for success, and, as a result of our strategy, are far stronger than we were to deal with the current business challenges in the UK and to capitalize on the enormous growth opportunities to come. The process is not complete but our mission ‘to meet the needs and aspirations of parents for their children, worldwide’ remains at the heart of what we do. Ratio Analysis of Mothercare Plc RATIO ANALYSIS Liquidity Ratios Liquidity ratios illustrate the company’s ability to pay off obligations in the short term[Jae083]. Current asset ratio and quick ratio are observed closely when liquidity is in question. The company is in a good position in both of these parameters. In 2010, their Current ratio was 1.54 which decreased steadily to 1.39 in 2011. This dip is due to decrease in current assets from £201.6m to £193.8m and increase in current liability from £131.0m to £139.4m. However, the ratio is still significant enough for day to day operations of the company. The Quick Ratio of the company has increased drastically from 0.84 to 0.56 which is a cause of concern for the company. Along with the decrease in current assets, it also suggests that a lot of stock is accumulated in inventory. In 2011, the company only has £15.8m cash in hand and £116.0 is piled up in inventory. Efficiency Ratios Efficiency ratios judge the ability of a company to earn from its resources in an effective and efficient manner[Eug102]. These include receivable turnover ratio, inventory turnover ratio, Asset Turnover, Net worth Turnover, Net Working Capital Turnover. Inventory Turnover ratio is just average for mothercare. It is approximately 8.39 in 2010. This means that in a matter of 8.4 days, inventory is converted into sale. This ratio decreases to about 6.84 in 2011. This means that a lot of stock is accumulated in inventory; it also suggests that the sale of the company is not increasing significantly[Pra09]. Efforts need to be made to increase its turnover rate as investment in inventory yields zero return and a company would always refrain from having its capital tied up in such an investment. They are ranked above average in comparison to the industry. Another indicator of efficiency is Receivable turnover which is calculated by dividing credit sales from average receivables. This ratio measures the efficiency of a company to collect its receivables. In 2010, the receivables turnover was 27.1 days which increased to 28.3 days in 2011. This is because the company is having difficulty in collecting sales made on credit. The asset turnover ratio for the company is fairly good of around 1.87 times sales/assets in 2010 and 1.94 times sales/assets in 2011. This is because of a slight increase in sales in 2011 compared to 2010. Net worth Turnover is increasing slightly from 4.07 to 4.12 in 2011 from 2010. This is due to the increase in sales. Net working capital turnover is increasing drastically from 10.85 to 15.62 due to increase in sales and also a decrease in working capital. Leverage Ratio Leverage ratio judge a company’s proportion of short and long term debt in relation to equity and asset[Jam22]. It includes Debt ratio and Funded Debt to Net working capital. This ratio is fairly good and under control for mothercare. Debt Ratio is the Total debt of the company to Total assets of the company. This ratio is very high for the company which suggests that the borrowings of the company are very high compared to the assets of the company. In 2010, the debt ratio is 54% which decreases only slightly to 53% in 2011. This suggests that the equity position of the company is quite weak. It is a concern for the company if this ratio increases more as it might get difficult to pay off the debts in case of difficult periods Funded debt to net working capital is also a leverage ratio showing the long term debts of the company compared to its net working capital. There is a slight increase in it from 1.283 to 1.518. This is due to decrease in net working capital of the company. Profitability Ratio Profitability ratios are an indicator of a company’s performance over the year. Profitability ratios include gross profit margin, return on total asset, return on net worth and return on net working capital. Gross Profit margin for the year 2010 was 11.35%. However, the ratio was at 7.04% in 2011. This shows that that cost of sales for mothercare has increased during the period. Gross profit margin is on the low side for mothercare compared to other companies and this is a cause of concern for the company. Return on asset has declined drastically in 2011 from 5.76% to 1.59%, this is due to drastic decrease in net profit from £23.6M to £6.5M in 2011. This suggests that the profit per assets has decreased significantly. Return on asset is very low for mothercare in 2011 and they must increase their net profit quite sharply. Return on Net worth for the company has also declined sharply from 12.53% in 2010 to 3.37% in 2011. Return on net working capital has also declined from 33.43% in 2010 to 12.80% in 2011. Both these drastic declines are due to decrease in net profit. PERFORMANCE ANALYSIS Mothercare has not had a significant impact on their performance during the past year. Their sales have increased, however their cost of sales has also increased significantly causing a dip for the profit made by the company in recent year. Mothercare reported a significant decrease in profits last year, from £32.5m to £8m. The overall group revenue increased by 3.6% to £793.6m, this increase was boosted by a rise 17% rise in international sales. The retailer has announced cost reduction plans to save £5m a year in an attempt to improve future profits. To overcome this problem, mothercare plans to expand its international business and is launching in Latin America later this year as well as developing their international ecommerce operations. Ben Gordon, Chief Executive of the Mothercare Group, said: "In the new financial year, we expect International to continue to grow retail sales at 15%-20% with 150 new store openings.” Mothercare plan to continue their partnership with Boots to sell their clothing range in selected stores. Mothercare plans to improve both its microeconomic and macroeconomic factors to increase sales in the upcoming years. Micro economic factors, closely integrated to the company performance and thus it have importance. Mothercare aims to have well awareness about the performance of a company and sustaining the same for long term. Micro economics tightly connect with the product, cost and demand in the market, that should affect the company and profit to a great extend, Company sales growth, cost of sales, capital allocation, debt increase or decrease, market monopoly. Although macroeconomic factors are not significant in short run performance of the company but mothercare intends to pay attention to it for its long term success. Macroeconomic factors such as economic output, unemployment, inflation, savings and investment are key indicators of economic performance of a company. Works Cited Mot11: , (MOTHERCARE PLC, 2011), Jae083: , (JAE K. SHIM, Joel G. Siegel, 2008), Eug102: , (BRIGHAM, Eugene F. and Ehrhardt, Michael C., 2010), Pra09: , (CHANDRA, Prasanna, 2009), Jam22: , (MCKINSEY, James Oscar and Frazer, George Enfield, 1922), Read More