Burberry and Debenhams - the Companies in the Apparel Industry - Case Study Example

Burberry and Debenhams - the Companies in the Apparel Industry Introduction The Apparel industry is a very profitable business especially for companies that provide quality branded products which are not directly affected by industry trends such as cheaper products manufactured in China, India and Pakistan (Plunckett Research, 2007). In the United Kingdom there are companies thriving in this industry utilizing branding strategies to differentiate themselves from the competition. Two United Kingdom companies that have been very successful are Burberry and Debenhams. This paper analyzes these two companies by providing insight into their trading operation, overall levels of debts, five-year financial history and auditor reports. Burberry Trading Operations Burberry was founded in 1856 in the United Kingdom and since its inception they dedicated themselves to providing the clothing needs of the British citizens. The company is very success and during the 2006 fiscal year the company had revenues of 850.3 million pounds with a net profit margin of 12.96% (Burberry Annual Report, 2006). The enterprise has a solid business strategy with a trading operation with multiple strategic objectives and goals. The company core strengths are multiple product offerings, global reach, a solid management team and channel expertise in retail, wholesale and licensing (Burberry Annual Report, 2006). Their strategic plan for the near future is flexible and targets opportunities within the apparel and non-apparel industry. The company has five main strategic objectives for their trade operation. The five objectives are: Leverage the franchise Intensify non-apparel development Accelerate retail growth Investing in under penetrated markets Continues operational excellence (Burberry Annual Report, 2006). The leveraging the franchise means improving its products, marketing imagery and stores. The company has a competitive advantage in the United Kingdom luxury market which they will continue to exploit. Burberry plans to expand its overall product offerings of apparels while concentrating in its cash dog which is casual outerwear products. The company seeks to streamline its business processes and restructure its supply chain to better meet global requirements. The company seeks to strengthen its non-apparel business segment. The segment accounts for about a quarter of overall revenues and there is room to grow due to the fact that this segment is a growing market within the industry. The company is investing in R&D, marketing and its supply chain to increase sales of handbags, small leather goods and shoes (Burberry Annual Report, 2006). The company also expanded its non-apparel product line to include eyeglasses for the first time in the company’s history. Expanding the retail presence is a top priority for the company. The company wants to open new stores, but their main focus is to increase the overall sales volume of its currently open retail outlets by improving the stores. The company will change its design cycle, upgrade the infrastructure of the stores and create new in-store presentation capsules to attract more walk-by traffic into the stores. In the companies expansion plans the business plans to divert from the classical store structure. They are planning opening a Prague store in 2007 to test a new concept of a smaller store led by an assortment of accessories and outerwear (Burberry Annual Report, 2006). The company plans to expand its global operation in China, Eastern Europe, Russia, the Middle East and especially in North America. The company develops its international business through franchise structures which operate business structures – a retail/wholesale hybrid model (Burberry Annual Report, 2006). The company will make major investments to improve its processes and systems to operate in a more efficient manner. Debenhams Trading Operations The Debenhams brand was born in 1813 when Thomas Clark and William Debenhams open up a small retail operation in London, but it was not until 1905 that the first Debenhams department stores was opened for business (Annual Report Debenhams, 2006). During 2006 the company had global revenues of 1707.7 million pounds that accounted for an operating profit of 223.4 million pounds. The success of the company is based on its exclusive branded products which include womenswear, menswear, home and beauty, lingerie and childwear. The company’s strategies include organic, new space and other channel growth (Annual Report Debenhams, 2006). The organic growth strategy of the company entails increasing sales and growth margins by improving its designs to acquire a bigger customer base while at same time extending the company’s product line. The supply chain is transformed by lowering the total number of suppliers while at the same time minimize lead times to improve customer availability (Annual Report Debenhams, 2006). The company plans to improve its overall retail floor space by opening 240 new stores in the near future. Along with traditional Debenhams department stores the company plans to introduce a new store format called “Desire” which will be tailored for women customers. The new channel strategies include a massive international rollout along with an ecommerce sales growth strategy. Over 97% of the store’s business is currently being generated in the United Kingdom, thus the companies initiatives to launch its products globally will increase its revenues significantly in years to come. The company has a portfolio of 80 brands of products which were developed through their own R&D and designing efforts. The established customer base of the company amounts to 2 million card holders, a number with potential of increasing the total of cardholders to 7 million (Annual Report Debenhams, 2006). The company has been increasing its market share of United Kingdom apparel over the last decade. Burberry vs. Debenhams Debt Analysis Burberry and Debenhams have chosen different routes to expand their businesses and establish strategies for future growth. The utilization of liability can help companies increase in overall size by acquiring other companies or expand its internal production capacities. Debt is also a very dangerous element that can decrease the profit margins of a company due to annual interest expenses related to the debt. Burberry and Debenhams managed their debt levels completely differently. Burberry has very low levels of debt. In 2006 the company’s debt to equity ratio was 0.88. The long term debt of the company accounts for less than 3% of its overall debt levels. Burberry overall debt actually increased by 74.6 million pounds from the previous year, but the increase was due to short term debt utilization for the purchases of materials which the company capitalized on to increase its total revenues in 2006 by 107.4 million pounds. In reality the levels of long term debt of the company decreased by 28.77% from the previous fiscal year. Debenhams has very high levels of debt. In 2006 the company’s debt to equity ratio was 28.2. The company total debt amounts to 1503.2 million pounds of which 89.58% is long term debt. The company’s amount of long-term debt is high, but Debenhams actually reduced its long-term debt by 35.36% in comparison with the 2005 fiscal year. The company has long term goals of expanding its facilities beyond the United Kingdom and increasing its overall physical space a lot. In 2004 was when the company acquired most of the long term debt they are currently paying off. In order to finance its long term expansion plans the company got into debt. Debenhams utilization of debt defers from Burberry in that Debenhams utilizes long term debt to grow in the future while Burberry utilizes short term debt to grown in the present. Five year financial analyses Burberry During the last five years Burberry’s total revenues have been steadily increasing. Appendix A illustrates the company’s income from 2002 to 2006. The company’s income has been growing at an average growth rate of 8.65%. In 2002 Burberry’s primary source of income came from its wholesale operations which accounted for 51.7% of its revenues. By 2006 wholesale was not the dominant revenue generating activity, retail sales are now the primary source of income with 48.23% of total sales which represents 410.1 million pounds. The overall growth in retail sales during the last five years was 79.55%, while wholesale only grew 15.37% during the same period of time. The success of the company has increase the value of the company for the stockholders of the enterprise. Earnings per share have gone up 2.4x in the five year span. The company’s long term debt has remained relatively stable. In comparison with 2002 the long term debt of the company has only grown by 15.68%, which is a 3.14% average annual LT debt increase. This is a very good sign since Burberry’ yearly revenue growth rate was 8.65%, thus the growth has been financed with internal capital instead of external capital from lenders. The company’s intangible goodwill asset has appreciated by 34.49% since 2002. Debenhams During the last five years Debenhams revenue has remained relatively stable. Appendix B illustrates the company’s revenues from 2002 to 2006. In 2004 the company’s administrative expenses rose 61.3% from the previous year total. Debenhams attended the problem and by 2006 the administrative expenses were below the 2003 level. Debenhams’ net margin in 2002 was 6.43%, by 2006 the net margin had gone down to 2.56% largely due to the interest expenses of the debt the company acquired in 2004. Despite a lower net margin in 2006 in comparison with 2002 the company has actually become more efficient. Debenhams revenue in 2006 was basically at the same level as in 2002, but its gross profit increased by 91 million pounds due to a significant reduction in cost of goods sold. In 2004 which is the year the company’s debt skyrocketed Debenhams utilized the capital to invest in R&D and its intellectual property to create new branded products. The results were an increase of the value of its intangible assets from 2.2 million pounds to 799.7 million pounds. The company’s total equity has fluctuated a lot during the last five years. Appendix C illustrates Debenhams equity from 2002 to 2006. The company’s 736.9 million pound long term debt deduction in 2006 allowed its total equity balance to get back to a positive balance. Independent Auditors Reports An independent auditors report is a statement signed by an independent auditor outlining his or her opinion regarding the quality of information contained in a company’s financial reports and records (Answers, 2007). All publicly traded companies listed in the London Stock Exchange are required to have and independent auditor who is a CPA perform an audit of its financial statements every year. During 2006 both Burberry and Debenhams had their financial statements go through the independent auditors’ process. The independent auditors’ reports are prepared in accordance with section 235 of the Companies Act of 1985. The corporate governance must comply with the nine provisions of the 2003 FRC Combined code and the audit must be performed following the International Standards on Auditing. The purpose of the audit is to determine if the financial statements are free of material misstatements which may be cased by fraud, irregularities or error. Both the audits of Burberry and Debenhams came to the same conclusion. The auditor’s opinions were that the financial statements of the companies gave a true and fair view of the financial conditions of the company. The independent auditor report of Debenhams was prepared by PricewaterhouseCoopers LLP (Debenhams Annual Report, 2006). The independent auditor report of Burberry was prepared by PricewaterhouseCoopers LPP as well (Burberry Annual Report, 2006). A person analyzing these financial statements can feel confident that the financial results are what actually occurred during the year since a professional accounting firm certified the validity of the results. Conclusion Burberry and Debenhams are two companies in the apparel industry based in the United Kingdom. They both have over 100 years of experience in the industry and their products are targeted at medium and high class citizens. Despite the similarities of the two companies their strategic and financial strategies are completely different. Burberry has been able to achieve tremendous levels of growth over the last five years by reinvesting its earnings in the company without the need of any excessive long term liability measures. Strategies such as accelerated retail growth, expansion into non apparel products, operational excellence and taking advantage of under penetrated markets have paid off a lot of dividends for this company. Debenhams has always prided itself in having a unique variety of self-developed products which has differentiate them from its competitors. The company’s has focus on acquiring as much of the UK market as possible and has enjoyed very good market share within the local market. The company plans on expanding internationally and in order to do so they decided to take on over 1.7 billion pounds of long debt in 2004. A lot of the money was invested following the companies philosophy of having the top branded products in the industry. The company solidified its brand offering and significantly increased the value of its intangible assets. Debenhams has long term plans with a lot of potential which they are developing while sacrificing the short term returns of its investors. Both companies despite utilizing different approaches have been successful at implementing their objectives and goals. These two UK apparel giants are great investments for any person looking to acquire common shares of in the stock market. References Answers.com (2007). Accountant’s Opinion. Retrieved August 12, 2007 from http://www.answers.com/topic/opinion?cat=biz-fin Burberry Annual Report (2006). Burberry corporate website. Retrieved August 11, 2007 from http://www.burberryplc.com/brby/rp/reports/ Debenhams Annual Report (2006). Debenhams corporate website. Retrieved August 11, 2007 from http://www.debenhamsplc.com/deb/res-pres/ Plunkett Research (2007). Apparel Statistics. Retrived August 11, 2007 from Plunkett Research Online database. Appendix A: Five year Burberry revenue stream (Burberry Annual Report, 2006). Appendix B: Five year Debenhams revenue stream (Debenhams Annual Report, 2006). Appendix C: Debenhams Equity (2002-2006) ( Debenhams Annual Report, 2006). Read More