Introduction
This report presents an in-depth analysis of financial performance of two leading UK clothing companies: Debenhams and Marks & Spencer’s. The report will provide prospective investors with an analysis of the performance of the two organizations in the last one year, with an aim of creating knowledge that will help them make proper decisions before putting their money in any of the two corporations. The report will show how the two companies performed in the last five fiscal years (2008-2012).
It seeks to help investors determine which of the two companies would be good for investment. In addition, the report will provide an industrial analysis in reference to the two organizations in order to show their current financial situations. This will help the reader predict the performance of the two companies in future, and thus create the required knowledge before deciding to invest in any of the two companies and the industry in general.
Background information
Debenhams Plc
Debenhams Plc is a UK-based multinational corporation that has a number of departmental stores in the UK, Denmark and Ireland in addition to franchise stores in various countries. The origins of the company can be traced back to 1778 when Clark and Flint started a small business called ‘Flint & Clark’ stores at 44 Wigmore Street, London.
In fact, it was initially a draper’s store before it advanced to including other products. Around 1813, another investor, William Debenhams, joined the company as a partner, thereby it changed the name from Flint & Clark to ‘Clark & Debenhams’. Between 1815 and 1850s, the company advanced by opening several other stores in various parts of Britain.
In 1850s, the company changed its name to ‘Debenhams & Freebody’ after Clement Freebody joined as a partner. In 1905, however, the company was incorporated under the name ‘Debenhams Limited’. Throughput the 1900s, the company grew by acquiring small stores throughout the UK, especially under the leadership of William Debenhams’ son Ernest. However, Burton Group acquired the company in 1985, but in 1998, it demerged and listed again as a separate corporation.
Today, the company operates more than 150 stores in the UK, more than 10 in Ireland and 6 in Denmark. In addition, it has more than 70 franchise stores in about 26 countries located in various parts of the world, with heavy presence in some countries like Philippines, Cyprus, the United Arab Emirates, Saudi Arabia, Indonesia, India, Romania and Kuwait.
Marks & Spencer
Marks & Spencer plc is a multinational retailer based in Westminster, London. The company operates over 700 stores in the UK and more than 360 in about 40 countries throughout the world. The company specializes in retailing clothing and luxury foods in its stores. Throughout its existence, the company has been strongly associated with Zionist Jews because of its Jewish founders.
The company was started in 1884 as a partnership between Thomas Spencer, a British cashier based in Yorkshire and Michael Marks, a Belarusian Jew. The first store was set up in Leeds, but within few years, the two partners opened several stores in various parts of Britain, especially in North West England, Leeds and Manchester.
Throughout the 20th century, Marks & Spencer’s policy was to deal with British goods, but the policy was abolished in 2002. The “St. Michael” label was its main product line, a line of products made by different British manufacturers specifically for the stores. In addition, the company adopted the marketing slogan “the customer is always and completely right” in 1953 and used it for the remaining part of the 20th century. Since 1960s, the company has been investing in foreign nations.
However, the company has been closing some of its foreign stores due to harsh economic situations as well as competition. For instance, it closed its entire business and left Canada altogether in 1999. Business operations in France have not been doing well, but the company has maintained its presence in Paris and Lyon since 1970s. Similarly, the company had acquired American companies Kings Supermarket and Brooks Brothers in late 1980s, but sold them off between 2001 and 2006 before leaving the US market.
Although the company had sold all of its 38 stores in Europe in 2001, it reopened several stores in the period between 2002 and 2011. Currently, the company is present in more than 40 countries, with heavy presence in South East Asia, Middle East, North Africa, Ukraine, the Philippines and Hong Kong.
The industry
Retail industry in the UK and the world in general is one of the most competitive and risky yet profitable investments. The industry differs from industrial sector in that corporations in this sector do not involve in producing tangible goods, but they deal with a wide range of products, from tangible goods to services. The specialization here is to deal with a wide range of products from a wide range of producers in manufacturing industry.
In the UK, retailing industry is a major and crucial contributor to the national economy. It provides a link between the manufacturers and consumers. In addition, it is one of the major sources of employment in the UK and other parts of the world. The sector is composed of multinational corporations. For instance, Tesco, Carrefour, Wal-Mart, Marks & Spencer and Debenhams are some of the largest income earners in the sector. For instance, Tesco’s annual income is over £20 billion, with companies like Wal-Mart and Carrefour achieving almost similar values every year.
However, competition is stiff, with large corporations, small business and multinationals seeking to venture into the market. The sector is prone to entry of new competitors due to the free-economy nature of the Britain and Europe in general. For instance, major competitors to Marks & Spencer and Debenhams are Tesco, Carrefour, Wal-Mart and other small business, yet Wal-Mart and Carrefour are foreign corporations from the USA and France respectively.
Financial analysis for Debenhams and Marks & Spencer
Financial analysis is the art and science of assessing the viability, profitability and stability of a business or a business project (Ehrhardt and Brigham 76). Specifically, it involves analysis of organizational performance using ratios obtained from its financial statements as well as other reports in a given fiscal period. In economics and finance, financial analysis seeks to determine four major aspects of business performance: Profitability, liquidity, solvency and stability.
Financial analysts seek to compare the financial ratios of a company to determine its growth and predict its future using three primary methods- past performance, future performance and comparative performance. Comparative performance involves a comparison between the performance of one company that of one or more companies of the same kind or in the same industry (Kieso, Weygandt and Warfield 83).
Ratio analysis is the primary method used in financial analysis. It is a process that economists and financial experts use to measure and interpret the performance of an organization based on each item appearing on the company’s chief books of accounts- the balance sheet and profit & loss account. The results provide an indication of the financial position of the company, its current performance and a prediction of its future position and performance.
Comparative Ratio analysis for Debenhams and Marks & Spencer
Return of capital employed (ROCE)
The performance of the two companies can be assessed by examining the gross profit (GP) and the Asset turnover for the period 2008-2012. ROCE is the ratio of Net Operating Profit after Tax (NOPAT) and capital employed in the following formula:
For Debenhams, the company’s ROCE did not show a big change between 2008 and 2010. However, it provided an indication that it dropped significantly in 2009 as shown below:
From the calculations in the table above, it is evident that the company has achieved a relatively stable ROCHE, which it has maintained since 2010. However, it is clear that the company’s ROCHE has improved significantly when looking at the past five fiscal years. For instance, the company’s ROCHE fell by 4.65% between 2008 and 2009. However, it improved by 31.7% in 2010, 8.3% in 2011 but again fell by only 1.5% in 2012. This trend is an indication that the company is recovering from the 2008-2010 financial crisis (Debenhams plc 23).
Return on equity (ROE)
Return on equity (ROE) is determined by the ration between the company’s net income after tax, NI (AT), and shareholders total equity as shown below:
An examination of Debenhams’ financial records for the five years 2008-2012 give the following results:
Return on Sales
Return on equity (ROE) is determined by the ration between the company’s net income after tax, NI (AT), and shareholders total equity as shown below:
Return on sales (%) = Net profit / Sales revenue
An examination of Debenhams’ financial records for the five years 2008-2012 give the following results:
Gross profit margin
Gross profit margin is determined by the percentage ratio of gross profit and sales as shown in the formulae below
An examination of Debenhams’ financial records for the five years between 2008-2012 gives the following results:
Asset Turnover
Asset turnover, AT, is the ratio of net sales revenue and the average total assets. It is used to determine the efficiency of a company in using its assets to generate revenue in a given fiscal year. The revenue may be taken as sales generated by the company using its assets. A company that has a low profit margin is likely to have a high rate of asset turnover. Since the two companies analysed here are in retail industry, it is expected that they will have a high rate of turnover, but a lower profit margin due to competitive pricing. This is one of the major characteristics of the retail industry, and is common in the United Kingdom.
An examination of Debenhams’ financial records for the five years 2008-2012 gives the following results:
Current ratio
This ratio provides an indication of the company’s current capacity to meet its current or immediate obligations. It is the ratio of the company’s current assets and its current liabilities as shown by the following formulae:
The financial documents provided by both Debenhams and M&S provide an indication that the companies had some current rations that were less than one. This is actually not an adequate level of a corporation’s financial strength, and may indicate that the companies have some problems meeting their current obligations. In this case, it is observed that both companies have a current ratio that is below the ideal level of satisfaction in economy and finance.
On analysing Debenhams’ books of accounts, it is clear that the current ratio decreased significantly in 2008 because the financial liabilities were increasing. For instance, it was observed that the revolving credit applied in the UK banks, as well as borrowing by the public sector increased significantly in 2008 (Debenhams plc 36).
The books of accounts further indicate that the company’s current liabilities decreased significantly between 2008 and 2009, which in turn provides an indication of a drastic improvement in the company’s ability to meet its current obligations. Moreover, it is clear that there was a decrease in liabilities due to a loan facility. The directors explain that the loan facility in question included an immortalized issue cost increase from £9.7 million to £8.6 million.
On the other hand, M&S had a current ration with a proportionate change in its current liabilities and current assets up to 2008. It is clear, from the balance carried forward, that the current ratio increased significantly in 2008 but was maintained throughout 2009 to 2012 (Marks & Spencer plc 32).
A comparison between the two companies in terms of the current ratio indicates that Debenhams has a stronger ability to meet its current obligations than M&S retail chain. Arguably, it would be better for a person to invest in Debenhams as per the current ratio. This difference shows that the company may be managing its liabilities in a better way than M&S.
Cash ratio
Cash ratio (CR) shows how quickly an organization can mobilize its resources to meet its short-term liabilities. In other words, it is the ability of a company to repay its current liabilities. In establishing company value, it is important to determine cash ratio in comparison to other liquid ratios. In fact, most analysts consider this ratio as part of comparison between the other liquid ratios. The ratio is also used to determine the cash ability of a company to claim its current liabilities.
In case of Debenhams, the company’s report provides an indication that the management initiated a number of investments through loans. For instance, the company says that it took loans in 2006 that could have passed 50% of its current loans and debts. In addition, the company says that it strengthened its financial status with additional loans and cash in 2007. Thus, looking at the financial reports provide in 2008, it is clear that the company’s cash ratio was affected by its activities with loans and cash.
For instance, the company’s short-term bank deposits in 2008 fell from 58.2 to around 3.4 million GBP. This activity affected the company’s liquidity position. However, it is noted that the company repaid its short-term liabilities in 2008 and 2009, which caused a decrease of more than 20% of its current liabilities. In 2009, Debenhams further increased its bank deposits from 3.4 million to about 157.7 million GBP. Again, this activity increased the company’s financial ability by a significant margin.
On the other hand, M&S retained its level of current ratio between 2008 and 2010. Although it appears that the company could have experienced a major fall of its cash in 2007, it increased significantly in 2008 and 2009 and retained its cash to about 489 in 2010 and 2011 before again falling to 356 in 2012. In fact, there has been a small change in the company’s current cash ration since 2009.
A comparison of the two sets of cash ratio provides an indication that Debenhams has a stronger liquid position as compared to M&S. However, it is worth noting that the company’s major dips in 2008 and 2009 and a significant increase between 2010 and 2012 are an indication that its liquid stability is often affected, while that of M&S remains stable over a longer fiscal period.
Quick Ratio
Quick ratio QR provides an insight into a company’s liquid without looking at its inventory. Quick ratio, also known as the acid-test ratio or liquid ratio, is the ability of a given company to use its quick assets or available cash to meet its current liabilities in the shortest time possible (Pendlebury and Groves 53). It is determined by finding the ratio of current assets less inventory to its current liabilities as shown by the following formulae:
In case of Debenhams, the company’s quick ratio is tied up to 45% with its inventory, while that of M&S is retained at 34%. This means that Debenhams has most of its liquid assets tied up in the inventory. The company has maintained this position since 2009. Thus, it is clear that Debenhams is more dependent on its sales than M&S.
Payout on Dividends
Marks & Spencer’s dividends increased rapidly between 2008 and 2010, with the highest increase rates recorded in 2009 and 2010. This is an indication that the company was experiencing higher earnings payable to its shareholders at the end of every fiscal year. It is also an indication that the company has been experiencing a decrease in its growth. However, since 2008, the company has been reducing the dividend per share.
For instance, shareholders obtained a dividend per share decrease of 17% in 2009 and another decrease of 16.9% in 2010. In addition, it has maintained a reduction in dividends per share since 2010, but the amounts payable to its shareholders have been increasing significantly.
On the other hand, Debenhams has actually attempted to decrease its dividend payout, as observed in its 2008 report. For instance, there was a rapid decrease in dividends per share between 2008 and 2010, which allowed the company to grow. It is also worth noting that the company did not offer dividends in 2009, but resumed offering in 2010.
When the two companies are compared in terms of their dividends per share, it is worth noting that Marks & Spencer has been paying higher values of dividends to its shareholders than its rival. In fact, this implies that Marks & Spencer has been giving out more on shares and investing some percentage of its annual revenue back to its business operation. On the other hand, Debenhams has been reinventing more than 90% of its revenue.
From these differences, it is clear that an investor who is willing to invest in a company with better share price can consider Debenhams because it is investing more than 90% of its revenue back in business. This means that in future, the company can experience a rise in its profit, which means that the investor would receive better allocations as shareholders dividends.
However, an investor who is seeking to invest in a company where dividend per share at the time of investment is better would consider Marks & Spencer. For instance, the company has been investing more in dividends payable to shareholders at a rate of more than 70% of its annual revenue. Despite this, such an investor would be risking his or her future returns because the company’s ability to make huge profits in future is compromised by its inability to use its revenue in growth. It is probable that the company will maintain a slow growth, thus complicating its future profitability.
Yield on Dividend
For Marks & Spencer, the yield on dividend has actually been increasing significantly since 2008, but slowed in 2011 and 2012. On the other hand, Debenhams maintained a steep increase in its yield between 2008 and 2009, but fell drastically in 2010 and 2011. In fact, there has been a steep fall in dividend yield ever since, with the company marinating a similar fall in 2012.
It is clear that the reason for a company’s decrease in dividend yield is due to an increase in dividend per share and drop in share price. This is the situation at Marks & Spencer.
On the other hand, Debenhams has been decreasing its dividends per share since 2008. The reason is probably that the company experienced a fall in dividend per share and its failure to offer payments on shares in 2009.
Thus, it is clear that Marks & Spencer has been making better cash payments to its investors than Debenhams, which means that at this moment, as well as over the last five years, it has been a very attractive source of investment, while Debenhams has been rejecting investment but emphasizing on growth.
Cover on dividend
A low cover on dividend is an indication that the company is retaining a lower percentage of its earnings and using a major part of it in re-investments. This is the situation at Marks & Spencer. On the other hand, Debenhams has been maintaining a higher percentage of dividend cover due to using the amount of earnings to reinvest in the business. Marks & Spencer’s EPS had been rising since 2008, but it fell drastically in 2010 and 2011. On the other hand, Debenhams’ EPS has been fluctuating since 2008, with an increase in 2009 and a decrease in 2011. In fact, it is worth noting that there is a sudden increase in 2009 as compared to 2008 and 2010.
Based on these findings, it is worth noting that investing in Marks & Spencer would be better for investors who seek to obtain better pay per annum, while investing in Debenhams means that an investor has to ensure low pay for the first few years before the company starts getting profits from its current investments.
The price per earnings ratio (P/E Ratio)
At Marks & Spencer, there was a significant increase in PE ratio between 2008 and 2009. On the other hand, Debenhams experienced a rapid decrease in this ratio in 2008, but since then, it has been increasing significantly every year. Compared to Debenhams, it is clear that Marks & Spencer has been maintaining a higher PE ratio, which is a clear indication that there is a higher growth prospectus from earnings as well as reduced rate of risks. In addition, it indicates that the company is trading its shares at a lower premium compared to its rival.
Moreover, both organizations had lower PE ratios between 2008 and 2010, probably due to the European and world economic crisis. In fact, the two companies cite various problems experienced during the period as sales reduced and investments halted for some time. However, it is worth noting that the companies have cited 2011 and 2012 as better years due to increase in growth, as well as sales and investments. In addition, it is clear that Debenhams has maintained a higher market price compared to Marks & Spencer.
These differences inform an investor that it is better to invest in Marks & Spencer because its PE ration is relatively higher than that of Debenhams. Although Marks & Spencer’s market price was relatively low in 2009, the company continued to offer better premiums up to 2012, indicating that it is not willing to reduce its PE ration a time soon.
Industrial analysis
As mentioned above, retail industry in the United Kingdom has always been one of the major contributors to the national economy. In addition, it has always been a boon to the social and environment development for centuries. The industry is actually the link between consumer needs and manufacturing processes. In microeconomics, the industry is considered to be one of the most crucial aspects of an economy due to provision of goods and services at the consumer’s geographical position.
In the United Kingdom, the retail industry has been playing a crucial role in the distribution of financial expeditions in addition to contributing to the development and growth of private sector. Some of the major UK companies that have invested heavily in foreign markets are mostly the manufacturers and the retailers. For instance, Tesco, Marks & Spencer and Debenhams have been investing heavily in foreign markets for several decades, which earn a lot of income to the national economy.
However, the retail industry is one of the sectors that always suffer greatly in case of a minor or major economic problem. For instance, due to global recession as well as the recent European financial crisis, the retail industry in UK as well as in other regions has suffered greatly. Companies in this sector experienced heavy losses as households cut on their spending. Since 2007, retailers in the UK have made huge loses or limited profitability, which has also affected their ability to grow.
There is need for companies in this sector to consider investing in other countries to avoid making huge loses. In fact, globalization has been one of the major targets for corporations in this sector. For example, companies that relied on the local or regional market were heavily affected by the financial crisis, especially the recent European financial recession.
Conclusion
From an analysis of the two companies, it is clear that both have invested heavily in foreign markets to avoid undergoing serious loses if they invest in just one region or country. For example, the recent rush to invest in China, South Korea, Philippines, India, The Middle East and North Africa has come due to the realization that these regions have fast growing economies, huge populations but low competition.
Both companies have recently been diversifying their specializations from single product of single line of products to include a wide range of products. This is important because it allows them to gain profits from new and developing markets, which require large-scale retailers.
Works Cited
Debenhams plc 2012, Company annual report and accounts 2012. Web.
Ehrhardt, Michael and Erick Brigham. Corporate Finance: A Focused Approach. London, OUP, 2011. Print.
Kieso, Donald, Jerry Weygandt and Terry Warfield. Intermediate Accounting. London, UK: John Wiley & Sons, 2011. Print
Marks & Spencer plc 2012, Company annual report and accounts 2012. Web.
Pendlebury, Maurice and Roger Groves. Company Accounts: Analysis, Interpretation and Understanding. London: Routledge, 2012. Print.