Report on Analysis of Next PLC Essay
Subject: Next pc is a uk based retailer that sells moderately price clothing for men, women and children. It also specialize in housewives and furnitures through 500 stores primarily in uk and irelandl. It also franchise more than 200 stores in asia nad Europe counties. Profitability The primary financial indicator is the roce which has shown an increases to 53. 4 % in 2012 from 52. 09 %. But, if the capital employed included the new ?300m committed bank facility that yet drawn down at the financial reporting, then the roce show a fall to 42. 07 %.
The group might understate their long term liabilities. Roce could further be analyzed through two main ratios which are operating margin and asset turnover. It is seen that there is slightly decrease in roce could mainly attributable to the fall in asset turnover by 0. 62 times. But the group had improved their operating margin of 0. 22 % from 17. 13% to 17. 35 % . It can be said that the group has done a good job to increase its margin in the reporting period, as there were many external challenge which could affect the operationg profit margin.
The weakness of sterling pounce was a great challenge to the company, as it is decline by 10cents to the US dollar. Besides that, the revenue has increase 4. 35 % because of the soaring cotton prices have push the clothing prices up since the beginning of the year. This cause the average selling price rise 7 %. Base on the trading statement issued by next plc, Next brand sales for the first half year were up 4. 5% against last year. It indicated next plc may generate a higher profit coming this year. Linking this with asset turnover, it has increase of 0. times from 3. 04 in 2011 t0 3. 07 in 2012 if exclude the 300m committed bank facility. This is largely due to the excellent performance of the next directory sales especially through the internet. Unlike stores, this channel of distribution requires the fewer amounts of assets and hence revenue per asset is very high.
But, the revenue is consider to be insufficient generated if the committed bank facility is counted into the capital employed which shown a decrease. However in the future, company has indicated that as per their trategy they plan to open more home standalone format stores which will depress revenue densities, hence it will affect the asset turnover. To mitigate the effect of this, company plans to increase its directory sales and sale to international customers through online channel. The gross profit margin is a critical indicator for a retailer and it is slightly increase to 30. 38 % in 2012 from 29. 27 % in 2011. The reason of increase is due to selling price and increase by 7%. This indicated Next plc is able to control its discounting strategy very well.
The total mark down cost of next directory and retail is only 0. 6 % of overall sales. Based on the trading statement has been issued by next plc, Next brand sales for the first half year were up to 4. 5 % against last year. It indicated next plc may generate a higher profit coming this year. Competitor: H & M will be used to compare to next plc as their group have a similar marketing way in the same industry. H & M’s roce had decreased to 44. 86 % in 2012 from 54. 39 % in 2011. So this indicated H & M have same situation with the next pc, but their roce is higher than next plc.
Besides that, the fall of H & M’s roce is mainly attributable to the drop in their operating profit margin which different to the next plc ( as next plc ‘s operating profit margin is increase ). H & M group not using the long term debt such as bank overdraft and bank loan for their source of finance as well as the size of company are should be take into consideration. Liquidity The company’s current ratio have improved to 1. 54:1 in 2012 from 1. 28 : 1 in 2011 as well as quick ratio have increased to 1. 30 :1 in 2012 from 0. 84 in 2011 ; despite the global recession.
However, behind the ratio is the increase in current assets ( 3. 45 %) while decrease in current liabilities (10. 87 %). Both ratios are affected by the drop drastically of their bank loan and overdraft from 125m to 7. 6m. Of course, as refer to last part, the committed bank facility should be ensure since the 300m should be consider as material toward the company. Another specific factor of concern is inventory turnover . This ratio was decreased to 57 days from 58 days in 2011. It indicated that they have improved their management on inventories despite it just only a small decreases.
The trade receivable turnover had increase to 63 days in 2012 from 59 days in 2011. However, this ratio may not prove to be strong point of consideration as most of its sales are on cash basis. In addition, the credit sales figure is not available in the company’s financial report hence we just using the total sales for calculating this ratio that may not accurately represented. The derivation of meaningful payables turnover period is quite difficult as not all the operating expenses are incurred on normal credit terms. (i. e. wages and salaries – cash based ; depreciation and amortization charges – non cash items).
So, trade payables cannot be directly linked to cost of sales and operating expenses but the calculation permit some comparison. There is an decrease of 2 days from 31 days in 2011 to 29 days in 2012. This may be the probably for suppliers are requesting earlier settlement of debt ( possibly by offering discount. ) Financial The gearing ratio is seemed has a little improvement from 53. 89 % in 2011 to 50. 44 % in 2012. It noted that the group net debt has decreased and equity has decrease by 3 %. The total borrowing from bank loan and overdraft has decrease from 125. 2 to 7. 6.
It indicates that debt has reduced 94 % which show that next does not rely much on borrowing commitment. Besides that they also have secure a bank facilities which amount to 300m. It is conclude that the lenders are happy with the information they have been provided with regarding the future prospect of the business. Interest cover has fallen from 24. 74 times in 2011 to 20. 68 times in 2012. It shows that the interest charges under bank borrowings had increase, however next plc’s profit still able to cover the finance cost. Shareholder value and dividends The Next plc’s eps grew from 121. 9 to 225. 4 pence.
The group has clearly stated that a constant and sustainable increase in this figure is a financial goal of the co. The objectives and strategies of the company are designed to deliver the long term growth in eps. The improved eps has casued the share price of next plc in the London stock exchange, after share buyback to continue to increase due to demand for its shares. However, it is not useful to look at this ratio alone as the no. of shares in trading could be increase of decrease. ( through share buyback). By the company and therefore does not reflect the true eos if the company with a fairly consistent profit figure.
P/e ratio has increase from 9 in 2011 to 10. 3 in 2012. It shows a good result to investors. However the P/e ratio is below the industry average of 16. 20. The dividend per share is increase from 78 pence to 90 pence, which is an improvement of 15 %. This is in line with an increase in eps from last year. It also noted that the dividend cover is at 2. 8. This is a profit of the good performance of the company over the year. However, the company has also bought back 12. 5m worth of its own shares. This may clearly reflect the shareholder behavior of the company.
The majority of the shares of the company are held by investment management firms and large mutual funds which may expect short term return from the company. The dividend yield has fallen but this is largely due to a large increase in share price of the company. Cash flow management As noted above, Next pc should be a cash generative business capable of generating sufficient cash from its operations to cover all of its routine commitments – including increases in working capital, interest, taxation, replacement capital expenditure and dividends- as distinct from expansion and growth.
Reduced payments of corporation tax mean there is an increase in the cash earnings per share to 3. 01 pence in 2012 from 2. 39 pence in 2011. The common size cash flow statements endorse the effect of the reduced corporate tax paid, coupled with a slight decrease in purchase of property, plant, and equipment, purchase of share by ESOT, interest paid, a reduction in dividend payments as well as the the payment of finance lease liabilities. As a result, the increase in cash flows to positive cash flows of 9. 6 % in 2012 from negative cash flows of 10. 7 % in 2011.