Financial analysis Marks & Spencer NEXT

TABLE OF CONTENTS

EXECUTIVE SUMMARY. 3

1. INTRODUCTION TO UK RETAIL SECTOR.. 4

2. ANALYSIS.. 6

2.1 Tools of analysis. 6

2.2 Marks & Spencer PLC.. 8

2.2.1 Comparison with industry: 9

2.3 NEXT PLC.. 10

2.3.1 Comparison with industry. 12

2.4 Recommendation: 12

3. CONCLUSION.. 14

4. REFERENCE.. 16

5. ANNEXURE.. 17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Executive summary

 

Investment in stock market is considered as one of attractive option on account of higher return. However, investment in stock market also entails high risk which may erode even principal investment. Therefore, investment decision in stock market should be done after thorough analysis of risk and returns from investment. Diversification of portfolio is one of the basic tools to reduce from the investment.

Dave has a large portfolio of shares and is interested in broadening his portfolio by investing in the UK retail sector. He has identified two companies that he is interested in investing in – Marks & Spencer Plc and Next Plc. In order to facilitate his decision making, analysis of Marks & Spencer Plc and Next Plc in comparison to the industry is being done.

UK retail sector has reached the level of saturations and it is highly competitive. 2011 is not considered good for retail sector as there was no much strength in retail spending. Christmas 2011 can be remembered only for constant promotions and sales. Performance of retail sector in 2012 and 2013 is expected to improve in view of increase in retail investing.

Financial analysis of the company is one of the key parameter used by the investors for the selection of the stocks. Revenue, PAT, debt/equity ratio, ROE, EPS, dividend payout, EPS etc are some of the key parameters which is being considered for the purpose of analysis. P/E ratio of the company shall be compare with industry average in order to draw conclusion.

Marks & Spencer Plc is able to sustain its performance even in tough time. Healthy ROE, increasing EPS, highest P/E ratio among top department stores companies and low debt-equity ratio are some of the key strength of it. NEXT Plc is having Healthy ROE, increasing EPS, highest P/E ratio among top apparel stores companies and medium risk. Marks & Spencer Plc is larger in size and having lower debt-equity ratio than NEXT Plc and therefore Marks & Spencer Plc should be preferred over NEXT Plc. However, NEXT Plc can be also considered for the purpose of investment.

 

Introduction to uk retail sector

 

The retail industry includes business of distribution of finished goods to consumers. There is wide range of products which is targeted by retail sector. Product range may include food products, soft goods, and hard goods used by common public (Bhatia, 2008). Walmart, Carrefour, Tesco etc are some of the well known retailer in the world. Tesco, Marks & Spencer, Next etc are some of the UK based retailer. Retail industry works on thin profit margin and volume of sales depends on the consumer spending which in turn general economic conditions of the country.

The UK retail market is characterized by presence of cut-throat competitions on account of large number of players. Retail market can be considered as fully saturated which limits the growth of company.  Top line of the many companies is either constant or decreasing. In order to achieve long term sustainable business many companies like Tesco, Marks & Spencer, etc has ventured into international markets. Market segment for retail industry can be classified into four groups: neighbourhood, town centre, out-of-town, and non-store. Share of these four market segment in total revenue of the company over the years are as under:

               Graph:  UK Retail Futures 2011 by Verdict: Sector Summary

 

From the above graph, it can inferred that share of town-centre in the total revenue is decreasing over the years and so the neighbourhood. Share of out-of-town and non-store channel is increasing over the years. Online channel for sales is becoming popular over the years.

2011 is not considered good for retail sector as there was no much strength in retail spending. Christmas 2011 can be remembered only for constant promotions and sales. The 1st half of 2011 has shown the sign of recovery but 2nd half of 2011 was poor. One of the reasons for this can be Euro zone crisis. GDP growth for 2011 is estimated to be around 0.9% which is less than one–half of original forecast for the 2011 (retailresearch.org).  January, 2012 has witnessed exit of Blacks Leisure from London Stock Exchanges. It was 26th retailer exit from London Stock Exchanges in the past five years and more are likely to follow in 2012 (Barrett, 2012). The main reason was pressure on the profit margin due to competition.

Retail spending for 2012 in money terms is expected to around 3.2% and most of sales improvement is expected in latter part of the years. 2013 is expected to be better than 2013 as retail spending is expected to be around 3.9% (retailresearch.org). The main beneficiaries are expected to be clothing, DIY, H&B, pharmacy, and departmental stores. On account of high level competitions in electrical and grocery segments, benefits can be garnered by the company selling products at lower price.

From the above data analysis, it is evident that UK retail sector has reached the level of saturations and it is highly competitive. Online selling is becoming popular due to increase in popularity of e-commerce. Small player is finding hard to survive in the competitions. However, big player is able to sustain by aggressive marketing and focussing on international markets. In such a scenario, investment in the stocks of companies playing in UK retail sector should be evaluated properly for the purpose of investment.

 

ANALYSIS

2.1 Tools of analysis

Selection of stocks for the purpose of investment is one of crucial task as return on investment depends on it. Fundamental and technical analysis is important methods used for the selection of stocks. Fundamental analysis can be used for valuation of stock based on performance of economy, industry and the company (Graham & Dodd, 2004). Underpriced stocks are recommended for investment (“buy”) whereas overprices stocks are recommend for exit (“sell”). Technical analysis is entirely based on the chart pattern of stock price coupled with volume of trading (Kirkpatrick and Dahlquist, 2006).

Financial analysis of the company is one of the key parameter used by the investors for the selection of the stocks (Ritholtz, 2005). Financial analysis helps in understanding the financial strength of the company and same can be also used to compare with other companies (Houston & Brigham, 2009). It includes analysis of balance sheet, income statements, cash flow statements, and performance at stock exchange (Pandey, 2005). Revenue and profit after tax from income statement is used to know the magnitude of performance of the company and used as important indicator for the measurement of performance of the company. There are many financial ratios which are used to find out the financial strength of the company and comparison of company with its competitors and industry. Some of the key ratios which can be used by investors for the purpose of stock selections are as under

  • Debt-equity ratios (D/E ratio): It is ratio of total debt of the company to the networth of the company (Stoltz, 2007). It is one of the leverage ratios and used to know the financial leverage of the company (Weston, 1990). Higher debt-equity ratio entails higher risk for the business as it means compulsory cash outflow in form of interest. It may erode the networth of the company especially when business is not able to generate enough cash flow to meet debt obligation.
  • Return on equity (ROE ratio): It is ratio of profit after tax of the company to its networth (Pandey, 2005). It shows firm’s ability to use the resource of owners to generate profit. This is used to find out the return on investment of shareholders of the company and a good ROE should be the objective of every business.
  • EPS ratio: It is ratio of profit after tax to numbers of shares of the company (Khan  & Jain, 2007). It is used to find out the profit available to shareholder. It is one of the important ratios considered for evaluation of shares for the purpose of investment as dividend is directly related with EPS. Higher is the EPS, better is the company for the investment. Increasing EPS should be also one of the objectives of every business.
  • Dividend per share (DPS): Earnings from business can be either distributed as dividend or can be retained in business (Pandey, 2005). Therefore, dividend per share is important as it the portion of total earnings available to shareholders. Dividend is the actual return on investment for investors and quantum of dividend depends on the dividend policy of the company. As stock price is derivative of dividend policy of the company, it is one of the important parameter considered by the investors.
  • Dividend yield: It is ratio of DPS to market price of shares. It is one of the important ratios as it denoted cash return to equity investors on per unit of investment. Dividend yield in actually return on per unit of investment and therefore it is one of the important parameter.
  • P/E Ratio: It is ratio of market price of shares to its EPS. It denotes the investors’ expectations about the firm’s performance (Chandra, 2008). High P/E ratio means investors belief that the company will perform better. P/E ratio of the company should be analyzed coupled with EPS.

Above ratios can be used for the analysis of the company for the purpose of investment. The above ratios should be calculated for the period of 3 years or 5 years and same can be compared with other companies or industry average in order to evaluate the performance of the company. Input data for the above purpose is collected from the annual report of the company, stock exchanges, and database like FAME, FT.com, Mintel, etc.

2.2 Marks & Spencer PLC

Marks & Spencer plc is UK based retailer having 703 stores in the United Kingdom and over 361 stores in more than 42 countries. Its product range can be grouped into two groups: general merchandise (clothing & home) and food. It is largest clothing retailer in UK with leaders in womenswear, lingerie, and menswear. It is leading provider of quality food products in UK. The company is selling products through stores, online, and telephone. Stock of the company is listed on the London Stock Exchange and is a part of the FTSE 100 Index.

The key financial indicators of Marks & Spencer PLC for last three years are as under:

                                                                                          (Figure in £m)

 Particulars 28-Mar-09 03-Apr-10 02-Aprl-11
Revenue

9062.1

9536.6

9740.3

PAT

506.8

523.00

598.6

Debt-equity ratio

2.46

2.27

1.74

ROE

24.13%

23.93%

22.36%

Basic EPS

32.3p

33.5p

38.8p

Dividend per share

17.8p

15p

17 p

Dividend Yield

6.70%

4%

5.00%

P/E Ratio

9.5

11.3

9.7

Table 1: Showing key financial indicators of Marks & Spencer PLC

From the above table and analysis of annual reports of the company, following conclusion can be drawn.

  • Revenue of the company has grown over the past three years at marginal average growth rate of 2.61% on account of competitive environment. However, the company is focussing on Plan A for long term sustainable business.
  • Net profit of the company from 2010 onwards is increasing at growth rate of more than 10%. Despite, the marginal growth of 2.14% in revenue during FY 2010-11, the company is able to register growth of 14.46% in profit after tax primarily due to decline in interest cost. It shows that the company is able to control its cost in order to improve profit margin.
  •  Debt-equity ratios of the company is decreasing over the year on account of decrease in the liability and strengthening of networth which is good signal. This has reduced interest burden on the company resulting into improvement in net profit margin.
  • Return on equity of the company for last three years is more than 20% which is a healthy return. Healthy ROE can be considered as strength of the company.
  • The company is distributing approx 50% of its earnings (i.e. EPS) to shareholders in form of dividend and dividend yield during FY 2010-11 is 5%. By investing in stocks of Marks & Spencer, investors can expect 5% return on investment in form of dividend in addition to capital appreciations.
  • P/E ratio of the company over the year is near about 10. There are no much variations in P/E ratio of the company for last three years which shows investor trust in the company.
  • Closing share price of the company at LSE on March 16, 2012 is £3.81 per share and market capitalization is £6,044.48 million.
  • Highlights of half yearly results 2011/12: Group revenue ex VAT is up by 2.4% to £4.7bn and profit before tax is £320.5m (last year £348 m). Basic EPS is 16.0p and interims dividend is 6.2 p per share. It means that there is no much impact of poor 2011 on the performance of the company. There will not be much variation in the performance of the company during FY 2011/12 in compare to FY 2010/11.

1.2.1     Comparison with industry: Performance of Marks & Spencer plc in compare with top Department Stores Companies by Market Capitalization is as under:

(Currency in GBp)

Company

Market Price

Mkt. Cap

P/E

Marks & Spencer Group plc

381.00

6.00b

1005.28

Grupo Elektra SA de CV

1115.00

269.46 b

12.74

El Puerto de Liverpool, SAB de CV

105.00

140.93b

23.79

Debenhams plc

75.75

974.21m

832.42

Organizacion Soriana SAB de CV

34.75

62.55b

20.44

Table 2: Top Department Stores Companies by Market Capitalization

(Source: Yahoo finance)

P/E for Marks & Spence Group Plc is highest among top department stores companies by market capitalization. Debenhams plc is having 2nd highest P/E among top department stores companies by market capitalization but lower by 17.2%. It shows that investor has high expectation about the growth in the earning of Marks & Spencer Plc. Table 1 show that EPS of Marks & Spencer Plc is continuously increasing over the years which shows the ability of the company perform better. Hence, considering increasing EPS and high P/E ratio is the industry, stocks of Marks & Spencer Plc can be considered for investment.

2.3 NEXT PLC

NEXT Plc is UK based retailer which is offering clothing, footwear, accessories and home products. The company is having more than 500 stores in UK and Eire and more than 180 stores around the world. It is selling products through three main channels: Next Retail, Next Directory, and website. Stock of the company is listed on the London Stock Exchange and is a part of the FTSE 100 Index.

The key financial indicators of Marks & Spencer PLC for last three years are as under:

                                                                          (Figure in £m)

 Particulars

24-Jan-2009

30-Jan-2010

30-Jan-2011

Revenue

3271.5

3406.5

3453.7

PAT

302.30

364.00

400.90

Debt-equity ratio

11.53

11.69

6.71

ROE

215.16%

272.86%

172.50%

Basic EPS

156.00p

188.50p

221.90p

Dividend Yield

5.00%

3.40%

3.90%

Dividend per share

55.00p

66.00p

78.00p

P/E Ratio

7.00

10.40

9.00

 

Table 3: Showing key financial indicators of NEXT PLC

 

From the above table and analysis of annual reports of the company, following conclusion can be drawn.

  • Revenue of the company has grown over the past three years at marginal average growth rate of 1.26% on account of competitive environment.
  • Net profit margin of the company moves near about 10% on account of cost control measures. Despite, the marginal growth of 1.39% in revenue during FY 2010-11, the company is able to register growth of 10.14% in profit after tax.
  •  Debt-equity ratio of the company is on higher side and has decreased substantially during FY 2010-11 on account of strengthening of networth. The company need to control its debt-equity ratio as it may impact business.
  • Average return on equity of the company for last three years is more than 220% which is a robust return. The company is able to generate high return by strengthening its capital basis using long term and short term borrowing. It shows that although the company is having high financial leverage, it is able to utilize its assets efficiently in order to give good result.
    • The company is distributing approx 30% of its earnings (i.e. EPS) to shareholders in form of dividend and dividend yield during FY 2010-11 is 3.9%. Despite of high ROE and EPS, the dividend in hand of investment if 3.9% based on market price of the company. By investing in stocks of Next Plc, investors can expect 3.9% return on investment in form of dividend in addition to capital appreciations.
    • P/E ratio of 9.0 as on January 30, 2011 is neither a very high P/E ratio nor very low P/E ratio, it can be considered as acceptable. There is variation in the P/E ratio of the company which shows that investor expectations about the performance of the company vary from time to time.
    • Closing share price of the NEXT PLC at LSE on March 16, 2012 is £29.35 per share and market capitalization is £5,095.52 million.
    • Highlights of half yearly results 2011/12: Group revenue is up 3.6% to £1,565 m and profit before tax is up 8.5% to £228m. On account of cash generative business, the company has continued with buyback of shares resulting into increase in EPS. EPS is up by 18.6% to 98.3p and interim dividend is also up by 10% to 27.5 per share. The company is reducing its equity base instead of repaying its debt.  This is resulting in increase in EPS but high debt is continued to be source of risk for the company.

2.3.1 Comparison with industry: Performance of NEXT plc in compare with top Department Stores Companies by Market Capitalization is as under

 (Currency GBp)

Company

Market Price

Mkt. Cap

P/E

Next Plc

2935

4.91b

1211.81

Trent Ltd

950.05

19.05b

279.18

Limited Brands, Inc

46.93

13.91b

17.38

Ross Stores Inc

55.79

12.76b

20.65

Nordstrom Inc

54.88

11.39b

17.48

Table 4: Top Apparel Stores Companies by Market Cap

(Source: Yahoo finance)

P/E for NEXT Plc is highest among top apparel stores companies by market capitalization. Trent Ltd is having 2nd highest P/E among top apparel stores companies but it is much lower in compare to NEXT Plc. It shows that investor has high expectation about the growth in the earning of NEXT Plc. Table 3 show that EPS of NEXT Plc is continuously increasing over the years which shows the ability of the company perform better. Hence, considering increasing EPS and high P/E ratio is the industry, stocks of NEXT Plc can be considered for investment.

2.4 Recommendation:

UK retail sector is one of the highly competitive sectors due to presence of large number of small and large players. Small players is finding hard to survive in the competitions. 2011 is not considered good for retail sector as there was no much strength in retail spending. During 2011, 31 retailers went bust and 2,500 stores got closed. Performance of retail sector in 2012 and 2013 is expected to improve in view of increase in retail investing. Therefore, investment in retail sector should be done with utmost care.

Marks & Spencer Plc is largest clothing retailer in UK with leaders in womenswear, lingerie, and menswear and leading provider of quality food products in UK.  Healthy ROE, increasing EPS, highest P/E ratio among top department stores companies and low debt-equity ratio are some of the key strength of it. NEXT Plc is having Healthy ROE, increasing EPS, highest P/E ratio among top apparel stores companies. Marks & Spencer Plc is larger in size and having lower debt-equity ratio than NEXT Plc which means low risk. Although ROE and EPS ratio of NEXT Plc is much higher but due to high debt-equity ratio, it can be considered as ‘medium risk’ investment.

Overall, both the companies are recommended for the investment depending upon the risk taking aptitude of the investors. Marks & Spencer Plc is having lower risk and descent return whereas NEXT Plc is having higher risk and higher return. However, it is recommended that investment in these two companies should be monitored regularly as performance of retail companies entirely depends on consumer spending and general economic conditions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. 2.    CONCLUSION

 

This report has been started with the objective to facilitate decision making regarding investment in two companies of UK retail sector: Marks & Spencer Plc and Next Plc. Analysis of these two companies was to be done with the help of financial ratio and comparison of same with industry. Revenue, PAT, debt/equity ratio, ROE, EPS, dividend payout, EPS etc are some of the key parameters which is considered for the purpose of analysis. P/E ratio of the company is also compared with industry average in order to draw conclusion.

UK retail sector has reached the level of saturations and it is highly competitive. 2011 is not considered good for retail sector as there was no much strength in retail spending. Christmas 2011 can be remembered only for constant promotions and sales. During 2011, 31 retailers went bust and 2,500 stores got closed. Performance of retail sector in 2012 and 2013 is expected to improve in view of increase in retail investing.

The finding from the analysis of financial of Marks & Spencer Plc including comparison with industry is as under:

Trend of increase in revenue is continued during current FY as well and so the profit after tax.

  • Comfortable debt/equity ratio and healthy ROE.
  • Continuous increase in EPS over the years
  • ‘Low risk’ as debt/equity ratio is 1.74 as on April 2, 2011and big size of the company in term of revenue, profit, and net-worth.
  • Highest P/E ratio among top department stores companies.

The finding from the analysis of financial of NEXT Plc including comparison with industry is as under:

  • Trend of increase in revenue is continued during current FY as well and so the profit after tax.
  • Healthy ROE.
  • Continuous increase in EPS over the years and healthy EPS
  • Medium risk’ as debt/equity ratio is 6.71as on January 30, 2011 and medium size of the company in term of revenue, profit, and net-worth.
  • Highest P/E ratio among top apparel stores companies.

Based on above finding, both the companies are recommended for the investment depending upon the risk taking aptitude of the investors. Marks & Spencer Plc is recommended for investors looking for low risk and decent return whereas NEXT Plc is recommended for investors looking for medium risk and good return. It is strongly advised that investment in these companies should be monitored regularly.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. 3.    REFERENCE

 

  1. Barret, C. (2012), UK retail sector set to shrink further, available at http://www.ft.com, assessed on March 12, 2012.
  2. Chandra, P (2008), Financial management, 7th edn, Tata McGraw Hill,
  3. Graham, B. ,Dodd, D. (2004), Security analysis. McGraw-Hill. ISBN 978-0071448208.
  4. Houston, Joel F.; Brigham, Eugene F. (2009). Fundamentals of financial management, South-Western College Pub. p. 90. ISBN 0-324-59771-1.
  5. Khan & Jain (2007), Financial management, 5th edn, Tata McGraw Hill Publishing Company Ltd, ISBN 0-07-065614-2
  6. Kirkpatrick and Dahlquist (2006), Technical analysis: the complete resource for financial market technicians, Financial Times Press, ISBN 0-13-153113-1
  7. Pandey, I.M. (2005), Financial management, Vikas Publishing House Pvt. Ltd., 9th edn. , ISBN 81-259-1658-X
  8. Retail Forecast for 2012-2013, available at http://www.retailresearch.org, assessed on March 11, 2012.
  9. Ritholtz, B.,(2005), Six keys to stock selection, August 2005

10. Stoltz, A.(2007), Financial management, Pearson Sout Africa, ISBN 978-1868913428

11. Verdict (2007), UK Retail Futures 2011, available at www.verdict.co.uk , assessed on March 14, 2012.

12. Weston, J. (1990). Essentials of managerial finance. Hinsdale: Dryden Press. p. 295. ISBN 0030307333

 

 

 

 

 

 

  1. 4.    ANNEXURE

 

  1. 1.    Financial of Marks & Spencer Plc
 Particulars 28-Mar-09 03-Apr-10 02-Aprl-11
Revenue

9062.1

9536.6

9740.3

PAT

506.8

523

598.6

Basic EPS

32.3p

33.5p

38.8p

Dividend Yield

6.70%

4.00%

5.00%

Dividend per share

17.8p

15p

17 p

PE Ratio

9.5

11.3

9.7

Total liabilities

5157.5

4967.3

4666.7

Equity

2100.6

2185.9

2677.4

ROE

24.13%

23.93%

22.36%

Debt-equity ratio

2.46

2.27

1.74

Source: http://corporate.marksandspencer.co and londonstockexchange.com

 

  1. 2.    Financial of Next Plc
Particulars

24-Jan-09

30-Jan-10

30-Jan-11

Revenue

3271.5

3406.5

3453.7

PAT

302.30

364.00

400.90

Basic EPS

156.00

188.50

221.90

Dividend Yield

5.00%

3.40%

3.90%

Dividend per share

55.00

66.00

78.00

PE Ratio

7.00

10.40

9.00

Total liabilities

1619.9

1560.1

1559.9

Equity

140.5

133.4

232.4

ROE

215.16%

272.86%

172.50%

Debt-equity ratio

11.53

11.69

6.71

 

Source: http://www.nextplc.co.uk and londonstockexchange.com

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