Analysis of the Thornton Plc - Companys Performance - Essay Example

Executive summary The operation of the Thornton Plc is reviewed on an investor’s perspective. The objective of analysis is to find out if Thornton Plc is a secure company to hold investments. Investors are particularly interested on how well is the company being managed by the company. Investors want to know the positioning and comparison of the company in the market. The study has shown details of these questions and has answered the issues using the benchmark information provided by analysts in the trade. Benchmark information guides investors in looking at the key financial highlights that gives easier understanding of the position, as they are presented in ratios of “best to worst” On the management side, benchmark information gives the company a target basis for planning of future marketing strategies. Analysis of the Thornton Plc Introduction. The study will dwell on situational analysis of Thornton Plc, to get an insight on the overall aspect of the company on the point of view of an investor. As an investor, information provided will lead to decisions for investing particularly in choosing companies in the same category. The situation analysis should take into account the market, competitors, staff, structure, technology, control systems, production and supply, performance and financial state. (Policy Coordination and Planning Section, pp 7-8) A situational analysis will be done to analyze performance to Thornton, Plc. It will present a detailed picture of the present state of the company. It will consist with a review of the past data and its translation into future trends with regard to marketing, production and financial system of the company.. Financial state will make use of scoreboard and benchmark information analysis. What is a balanced scorecard? The balanced scorecard of the company is defined as “a performance measure which will present whether the operational activates of the company are aligned with its company’s objectives in terms of vision and strategy”. .(Wikipedia) What is a benchmark. This is defined as a “security or index against which the performance of other securities is judged.” It is explained as a “goal to meet or beat”. For example, investors use the S&P 500 Index as a benchmark, and if their returns is more than the benchmark, the investor have beaten the benchmark, meaning the company is a good investment. The theory behind this is the expected return of investment must at least be equal or more than the benchmark or otherwise, investor may well at least invest in the benchmark (Investors Glossary) Market. Thornton Plc has been in the market of confectionary since 1911 manufacturing and selling quality chocolates to high end market in UK. Established by Joseph William Thornton, Thornton today is a £200m+ turnover company with 379 shops and cafés and around 250 franchises together with internet, mail order and commercial services. The company had tried to establish retail stores in Belgium and France but this market did not work well and had to be closed. Due to difficulties set by overexpansion, the company has slowed down on new stores and franchises pegged its number to 400 retail stores and franchises to 300. (Thornton Annual report) The company is listed in the London Stock Exchange, and latest share price is 57.58 pence This share price is definitely much lower from a high of 300 pence in 1998 as compared to the present share price. (Corporate information snapshots, 2009) Marketing Strategies. As shown in the company’s annual report, present strategies are figured out on a 3 year development plan which started in 2000s and has since then been continued to attain the repositioning of profitability and growth. Strengthening of management. Replacement of the CEO to me, is a correct management move, as the new one introduced innovations and new directions which helped the company recover over time. The management had also put emphasis on training of employees to attract and retain the best people in order to provide the best customer service. Slowing down on retail stores and franchise. Company has closed down outlets in Belgium and France due to culture differences and has slowed down on opening stores. Targets were reduced, such that target for retail stores is set to 400 contrary to previous 500; present number of store outlets is 379. Franchise stores long term goal is to reach 300. Overexpansion is one of the problems encountered by the company before, such that they were not able to maintain their supply to stores and this situation has encouraged customers to buy from competitors. * Rebuilding of product lines. Chocolate market is not a monopoly of Thornston. Big name companies are coming in as threat to their market positioning. The Chairman of the company announced of their plan to increase their share of the market which now stands to 50%. ( Thornton Annual Report Sept. 2008) Strategies developed towards this plan are strengthening of product lines and coming out with new concepts. * Reduce dependency on the seasonality of products. The company has incurred a big loss on their Easter eggs chocolates in 2000 due to insufficiency of stocks and in another year, for over supply. The demand and supply of seasonal products were not carefully considered in the planning for marketing and production. Company chairman proposes to do away with this strategy and concentrate on year round products, such as ice cream and others. * Refurbishing its stores. The company has been established in 1911 and most of its store design structures need to be changed. Company report showed that the looks of the stores have been improved and equipments have been changed to conform to the modern designs that will attract customers. * Implemented new advertising campaigns. Advertising is a means to create awareness, interest desire and action. (McNamara, Carter n.d.)) The long used logo of the company had to be changed to attract customers, although the annual report contends that it has customers loyal to their brands. (Thornton annual Report) For the long term goal of profitability, company plans of giving the products broad appeal, according to the Chairman had made progress, and was noticed and awarded a Television Advertising Award in 2008. * Product development and strategies. Thontorn Chairman reports plans to introduce new concepts of their chocolate due to the long term decline of their continental lines. They have introduced new recipes and designs to attract sales. This strategy, according to the report has worked beyond their projections and will be continued in a sustained 3 year period. (Thornton Annual Report) * Adapting to new trends and developments. The company followed the trend started by Starbucks and opened their own coffee shops, serving their own coffee brands, deserts and carry out orders. (Thornton Annual Report) * Continue with the direct mail approach of selling. The customized orders and deliveries accepted thru internet is one of the profit centers of the company. It has enhanced sales growth and has contributed 26.6% to sales growth (Thornton annual Report) * Putting in more financial investments to carry out plans. Heavy investment that will require capital costs will be used for execution of plans and will have a short term effect on net profit margin. Competitors. The confectionary market is not a monopoly of Thornton, as company report stated that they hold only about 50 percent of the market. Principal competitors of the company are known large manufacturers of chocolates lines which are Cadbury Schweppes PLC; Nestlé Holdings (UK) PLC; Mars UK Ltd; Kraft Foods UK Ltd; The Wrigley Company Ltd; Ferrero UK Ltd; Swizzels Matlow Ltd; Leaf (UK) Ltd; Bendicks (Mayfair) Ltd. (Funding Universe) Staff. The company has 4,566 employees at present staffed in the different stores and outlets. The present CEO assumed the position in 2000s and has redirected the strategies of the company. Structure. Established and holds office in UK 30% owned by Thornton family Day to day operation managed by CEO Peter Burdon Channel of distribution is thru network of retail shops which are mostly owned by the company, others are in franchises. Company products are also available in large scale department stores and supermarket channel. Coffee shops have been introduced and carry out orders began. Control system . To ensure that ethical, moral and social standards are followed by the supply chain, regular audit is done by the company regularly. 95 percent of suppliers are visited to see if they conform to the manufacturing standards of company. Audit concerns are food safety, a review of ethics, health and safety, employment conditions, use of child labor, environmental policies and practices. (Thornton Annual report) Production/suppliers The company sourced its materials from all around the world and uses over 300 raw materials in production. Majority of the products are made with natural food flavors and coloring, and children’s products do not contain artificial flavors, and added preservatives (Thornton Annual report) Performance This is an overall assessment in terms of market share, growth and profitability. It is also measured using benchmark information within the industry. This is measured in terms of production performance, marketing performance, financial systems performance and human systems performance. (PCPS, pp 7-8) 1. Marketing performance. Marketing efforts made through different sales channels produced sales growth and compared with its 2 years operations. Source: Thornton Annual Report There are four profit centers wherein the company draws its revenue sales. An 11.9% growth is seen from 2007 to 2008; with company own stores having highest profit contribution. This information helps the management where to direct marketing efforts to push sales from among the four profit centers. Growth rates. Growth rates are defined as “the changes in retained earnings divided by the beginning stockholders equity”. A high ratio means the company is able to generate internal funds, and has no need for external sources to finance its business operations. Growth rates are used by analysts to compare one company to another with the industry. Growth rates are also used to analyze sales, dividends and market share. Analysts consider companies with a long term growth of more than 15% as good investments, and we will analyze the performance of Thornton along this premise. (Allbusiness, n.d.) Table 1. Growth rates (2008)   Company Industry Sector S&P 500 Sales (MRQ) vs Qtr. 1 Yr. Ago 8.90 3.67 -13.60 -0.32 Sales (TTM) vs TTM 1 Yr. Ago 11.90 -0.21 -3.93 9.74 Sales - 5 Yr. Growth Rate 4.49 10.27 9.66 14.36 EPS (MRQ) vs Qtr. 1 Yr. Ago -25.09 -692.00 -158.62 -90.08 EPS (TTM) vs TTM 1 Yr. Ago 14.73 -- -- -- EPS - 5 Yr. Growth Rate 6.34 11.38 16.85 16.67 Capital Spending - 5 Yr. Growth Rate 14.19 14.29 14.68 10.62 Source: Reuters. Growth rates Year end 08 June 2008 In Table 1, Thornton passed the benchmark index of SP 500 in terms of sales growth for one year, but something went wrong with a low sales growth on a 5 year average. Figures in table 1 also reveal relative market position of the company in terms of sales. Growth of sales over the previous year’s basis proved that the combined strategic marketing efforts pushed the sales of the company upwards. On the 5 year growth average, sales were low which could be due to wrong marketing strategies of the company. The earnings per share on a 5 yr.growth average falls below the S& P500 benchmark and this may not work well for the company’s market share. In analyzing investment decisions, investors look at their earnings on investment using S&P500 index which shows higher EPS (Table 2.). For the year being reviewed, the growth on capital spending follows the marketing strategies which focus on store refurbishing spending. Table 2. Growth Historical valuation   1 Year 3 Years 5 Years Sales % 11.90 3.50 4.49 EPS % 14.28 2.28 6.34 Dividend % 0.00 0.00 0.00 Earnings per Share Stockholders first question in analyzing an investment is the earnings per share, Or how much is his share is worth. This is arrived at from getting the total earnings divided by the number of shares outstanding. (Investor words. Com, n.d.) As seen in Tables 1 and 2 the fluctuations in sales growth has an impact on the growth of earnings per share 2. 2. Human systems performance. Information gathered here provides ratio of Efficiency of key people and productivity of the work force   Company Industry Sector S&P 500 Revenue/Employee (TTM) 45,911 26,639,341 32,540,826 329,511 Net Income/Employee (TTM) -13 352,040 626,917 34,050 FINANCIAL STATE Using business ratio report, Thornton can be compared on companies on a likely basis, thus profitability; growth and debt levels are assessed. Fluctuations in any area can be observed as reports compiled by analysts cover a 3 year period. Simple Benchmarking. Using business ratio, a benchmarking can be done by choosing the company as a benchmark against a major competitor, such as profitability, growth and sales. By this, a realistic target can be set by management using solid facts in the industry and help management during planning. (Reuters, n.d.) LEAGUE OF TABLES. This section gives as the financial ratios of the company as compared with the industry, sector and S&P 500. According to Reuter this has been ranked as “best to worst” to help analyst see which is the strongest company in any criteria from the table. (Reuters) Each table gives ratio result which could be used as a benchmark for comparison purposes. Table 3.   Company Industry Sector S&P 500 Return on Assets (TTM) 5.63 0.83 1.03 5.85 Return on Assets - 5 Yr. Avg. 4.68 5.43 4.54 6.27 Return on Investment (TTM) 9.77 1.57 1.53 8.12 Return on Investment - 5 Yr. Avg. 7.46 7.88 6.87 8.51 Return on Equity (TTM) 17.36 27.39 3.43 20.57 Return on Equity - 5 Yr. Avg. 14.33 9.61 10.59 16.14 Source: Reuters Ratios Table 4. Profitability Ratios   Company Industry Sector S&P 500 Gross Margin (TTM) 50.50 4.10 11.41 39.61 Gross Margin - 5 Yr. Avg. 51.96 37.23 26.26 41.21 EBITD Margin (TTM) 10.37 -- -- -- EBITD - 5 Yr. Avg 10.93 11.56 12.16 18.82 Operating Margin (TTM) 4.96 1.00 1.72 -- Operating Margin - 5 Yr. Avg. 4.90 8.57 7.84 17.87 Pre-Tax Margin (TTM) 4.07 1.02 1.81 14.44 Pre-Tax Margin - 5 Yr. Avg. 3.82 8.93 8.17 17.57 Net Profit Margin (TTM) 2.92 0.69 0.90 10.32 Net Profit Margin - 5 Yr. Avg. 2.72 5.01 4.96 12.35 Effective Tax Rate (TTM) 28.36 4.48 22.65 28.09 Effecitve Tax Rate - 5 Yr. Avg. 28.69 35.89 39.26 30.04 Source: Reuters ratios Table 5. Financial Strength ratios.   Company Industry Sector S&P 500 Quick Ratio (MRQ) 0.34 0.98 1.11 0.92 Current Ratio (MRQ) 0.86 1.54 1.46 1.11 LT Debt to Equity (MRQ) 15.11 34.84 36.72 79.37 Total Debt to Equity (MRQ) 83.78 62.62 76.75 101.75 Interest Coverage (TTM) -- 1.66 0.16 31.71 Source: Reuters ratios Table 6. Valuation Ratios   Company Industry Sector S&P 500 P/E Ratio (TTM) 5.90 1.41 7.92 13.18 P/E High - Last 5 Yrs. -- 1.41 0.29 29.37 P/E Low - Last 5 Yrs. -- 0.65 0.08 6.96 Beta 1.39 0.58 0.89 0.90 Price to Sales (TTM) 0.17 0.09 0.25 1.62 Price to Book (MRQ) 1.03 2.32 1.15 2.55 Price to Tangible Book (MRQ) 1.20 2.08 1.45 4.86 Price to Cash Flow (TTM) 2.09 1.00 1.38 6.46 Price to Free Cash Flow (TTM) 5.23 171.20 12.88 14.15 % Owned Institutions - Source: Reuters Ratios Environmental factors that shaped the company’s strategy. There internal and external factors that have helped the company in formulating their strategies. (Thorntorns Annual Report.) Internal issues are those related to sourcing of materials, employee welfare, community issues, health and safety measures,, occupational health, customer relations, packaging and transport. External focuses on environment issues and community affairs. Each of these issues was considered in the long term goal of the company. For instance, company hires their seasonal workers from the local community; employees are given flexible benefit package; health and safety improvement programs are always reviewed; offering customers choices of products, e.g. sweets for diabetics; and packaging should conform to the government standards. External environmental focus is done to waste management issues. (Thornton Annual Report) Discussions and comments a. Analysis of present strategy. The company has to change the old marketing strategies due to some failures which led to the sliding down of profits. The present marketing strategies, started in 2000s, bring back the company into profitability.. However, it has not regained its former market position wherein market share in 1990s was 300p as compared with present market price of 58p. Announcements made in the annual reports show strategic plans for improvements and future goals to include export market as a long term goal. How do analysts react to this? Recent news as of February 18, 2009 in Quick Facts show an interim profit decline for 28 weeks ending 10 January 2009 . (RTT News) In a similar report, of Alacra Pulse (09 Feb. 2009) said “Thornton down as HI profit melts.” This report said that the pre-tax profit fell to GBP 7.28 million from GBP 11.94 million a year, underlying earnings went down from 12.75 pence per share last year to 7.5 pence share”. b. Critically evaluate how the following strategic management accounting tools, individually and collectively, help Thornton plc achieve their current strategy. Benchmark information gathered from the financial ratios gave the company a clearer target which is based from real market figures. Data gathered from the ratios using competitors and S&P 500 show the company position, whether it is classified under the best, better, poor and worst category. In several areas, Thornton is described as best like in Return on Assets and Investments. In profitability, the company is set on best position. Just looking on the score card will give an insight on the company performance as compared to others. . For an investor, Benchmark information says that if the ratio of the company is more than the benchmark, go ahead and invest, but if it is less, invest in the benchmark itself. From the tables presented, following information can be derived: * Thornton has a higher gross margin on 5 yr. average as compared with the market, meaning it has enough funds to support all other expenses * On 5 yr. average, the company’s operating margin is behind competition. Investor words, com says that “A company having a higher operating margin on average than its industry competitor’s, tends to have better gross margins and lower fixed costs, thereby giving management more flexibility in influencing prices. * Net profit margin on a 5 yr. average becomes an offshoot of its operating margin as it is smaller than the rest in the market. It is possible that the company has higher fixed costs that have made an impact on the gross margin. On the year reviewed, report of the company showed heavy investment of remodeling of stores, improvement of equipments and other marketing moves to induce higher sales on a long term goal. Conclusions. Tools in analysis are the best measure in gauging company’s performance both in management and financial profitability. This has provided us benchmark information to guide management on future plans in order to avoid costly mistakes. Mistakes of the company in the past have pulled down their profit and market positioning, and because of this, company must push on new plans to strengthen their market hold. Any future plans should consider benchmark ratios and shape business goals from there. From an investor’s viewpoint, a lot of consideration and careful analysis should be done to avoid risky investments. Risky investments are those that provide higher returns and high expectations. End. Word count 3,184 References About,com Benchmarking plus Retrieved 18 Feb. 2009 from Business Glossary. All Business Growth rate definition. Retrieved 18 Feb. 2009 from Read More