Marks and Spencer’s plc. Financial Analysis:
Marks and Spencer is a unique retailer offering high quality fashion, award winning food and stylish homeware (Global.marksandspencer.com, 2018). M;S was founded in Leeds more than a century ago in 1884 where it started as a Penny Bazaar. Since then, the company has grown rapidly with 1463 stores across 57 countries, 20 websites around the world and is one of the UK’s leading retailers (Global.marksandspencer.com, 2018). M&S employ 81,00 employees serving about 35 million customers worldwide (annual report). M&S are dedicated to ensuring that the company can fulfil the potential of the brand and deliver long-term sustainable, profitable growth to investors, colleagues and the communities they operate in (annual report).
Marks and Spencer recognise the importance of inspiration, integrity and innovation and live by these values in everything they do. They are always innovative and make their products and tailor the shopping experience to impress their customers around the world.
M&S is a unique retailer with over 1,463 stores and 20 websites worldwide who operate Food, Clothing & Home and other retail businesses using the M&S own-brand model. M&S once again hope to satisfy the potential of its brand and deliver long-term sustainable, profitable growth to investors and colleagues. M&S are committed to a programme of transformation, they are thinking Digital first. Competing in a rapidly evolving market means change is their only option. M&S have become more relevant to existing customers and are becoming more appealing to potential new ones, like larger households and busy families.
The following are the main observations made and conclusions retained from this report:
· M&S primarily operates in the UK, however it sells their products to an additional 57 countries with about 32 million customers around the world.
· As of 31st March 2018, M&S have 80,787 employees with 28% being male and 72% being female.
· Despite the significant cash outflows associated with strategic programmes, net debt was down £107.2m on last year.
· Profits more than doubled this year and there in now a more defined platform for growth due to reshaping of the International business. M&S closed lossmaking outlets abroad and changed their business model which was a great success.
· Basic EPS before adjusting items decreased primarily due to the lower adjusted profit generated in the year. The weighted average number of shares in issue during the period was 1,624.0m (last year 1,623.1m)
· The share price for this year was calculated at £3.433, this was the average share price between 16th June and 22nd June 2017.
· The reduction in food gross margin and an increase in operating costs associated with volume growth, new space and channel shift resulted in Group PBT down on last year. This was down 5.4% from last year before adjusting these items.
· At year end, the UK schemes indirectly held 41,046 (last year 193,506) ordinary shares in the Company through its investment in UK Equity Index Funds.
· M&S gender gap is considerably lower than the industry average of 16.4%. At a 12.3% mean it is low compared to its competitors.
M&S’s receivable days in 2018 was 3.89 days, remaining fairly constant to its prior years. This reflects the number of days it takes for customer’s credit payment to be processed and transferred from their bank to M&S. This is only slightly above the industrial average such as Tesco’s, receivable days of 2.96 in 2018. This would indicate that M;S is not giving excessive credit to their customers.
Furthermore, the amount of days M;S holds their inventory in storage in 2018 is 42.86, also remaining consistent with their prior years. Their stock days is much greater than retail competitors such as Tesco’s (15.26 days), however it is also necessary to consider that this may in part be a reflection of the composition of both companies’ stock. Although both inventories are comprised of food, clothes and household items, M;S’s stock includes a greater proportion of clothes stock with a slower turnover than Tesco’s primarily food based stock. Therefore a greater number of days may be required for M;S.
A steady decrease is evident in M;S’s payable days, decreasing 4 days from 2016 to 2017 and decreasing further to 47.90 days in 2018. It is often beneficial to delay paying creditors as long as possible, using the additional cash on hand as a form of interest free finance. However, it is evident when comparing to competitors (Tesco 36.51 days) that M&S may have been taking an excessive number credit days. This may be a direct result of the liquidity issues M&S have been experiencing over the recent years and should be monitored carefully to avoid developing a poor creditor reputation amongst suppliers. Their creditor days of 47.90 is still above competitors however is decreasing, becoming more in line with competitors.
Marks and Spencer’s cash cycle of -1.16 days in 2018 is low which can be an indicator for good credit control. Their cash cycle places them in a position where they are receiving cash from debtors before they are paying suppliers. (Look at Tutorial notes). This has increased from 2017’s cash cycle of -7.92 days. Although this increase would suggest a disimprovement, M&S’s cash cycle increase is a direct proportional to the improvements made in reducing their payable days to a more appropriate length of time. In order to begin to improve their cash cycle they should focus on improving their stock turnover and their receivable days. This will aid in improving their liquidity problem by receiving cash faster and reducing warehouse costs.
M;S’s cash flow adequacy of 0.47 in 2018 has remained consistent with the previous year and with the industry average, indicating that there are no significant underlying issues.
M&S is continuing to steadily improve their cash generation ratio. In 2018 their cash generation was 5.43, improving from 4.22 in 2017 and above the industry average and their competitor Tesco who saw cash generation of 2.91 in 2018.
M&S has a liquidity problem, they are not liquid. The current ratio of 72.17% in 2018 is consistent with their ratio of 72.77% in 2017. This indicates that M&S is not well placed to pay their debts with only €0.72 available in current assets for every €1 due in short term liabilities.
The company’s acid test ratio in 2018 is 29.40%, a dramatic decrease from 40.74% in 2017. Although it is still a healthy result for the industry (Tesco 17.50%), this large fluctuation would be a major concern for shareholders.
The current ratio may be more relevant for investors to analyse then the quick ratio for M;S and their competitors. This is due to the fact that M;S and its competitors’ stock become liquid very quickly due to their fast stock turnover.
The lack of improvement in both ratios suggests that their liquidity is not getting the well needed improvement. This is a cause for concern as it reflects that the short term safety of the company is insecure. A question of going concern would be notable based on their inability to pay their short term liabilities.
M&S is a highly geared company. The debt equity ratio in 2017 was 88.06% and has increased to 93.76%. This deteriorating result means they are susceptible to more risk. It indicates the company is largely dependent on outside borrowing, heavily financing their growth through debt and therefore at risk from outside investors. Shareholders would not be happy with M&S’s gearing percentage as the high interest may put dividends future in jeopardy.
Interest cover was 2.24 times in 2017 however has disimproved to 1.38 times in 2018. M;S have adequate profit to cover their interest 1.38 times. This is a continued worsening trend from 2016’s high interest cover of 5.02. 2018’s interest cover is below the industrial average (eg: Tesco’s interest cover of 2.91 in 2018). This alarming deterioration would be a major concern for shareholders as it could increase the risk of outside investors and may make payments of both interest and dividends more difficult.
Similar to M&S’s liquidity ratios, their finance ratios would raise the same question of going concern and the firm’s ability to continue into the future.
M&S is a profitable company. The ROCE is 14% in 2018, a slight improvement from 13.7% in 2017. Both returns are above the return from a risk free investment, therefore shareholders would be satisfied with this figure. Their ROCE is also above their cost of borrowing reflecting the businesses efficient use of resources.
Their gross profit margin has remained fairly consistent over the past 5 years with a gross profit margin of 37.83% in 2018. This is very high and above the industrial average (eg: Tesco 6%). This demonstrates how profitable M&S is at the most fundamental level, using company resources, materials and labour efficiently.
The operating profit margin has disimproved from 2% to 1% this year, a result slightly below the industrial average (Tesco 3%). However the decrease in operating profit margin could be a direct result of the large additional costs in 2017 and 2018 involved in the drastic changes and capital restructure undergone by the company in these years. If the ratio were to accommodate the operating profit before adjusted items it would see a profit margin of 6.27%. This is on par with 2016’s result and may more closely resemble the future expected operating profit margin.
Both profit margins have steadily decreased over the past couple of years and should be monitored carefully.
The businesses adjusted earnings per share as referenced under their key performance indicators in their annual report is showing a negative downward trend the past 3 years, decreasing from 34.8 to 30.4c in 2017 and further decreasing to 27.8c in 2018. Shareholders will not be happy with the 8.6% decrease this year. This illustrates that the earning power of the company has deteriorated and are becoming less profitable on a shareholder basis.
However despite this downward trend, their dividend per share has remained static at 18.7c. Although some shareholders may prefer the higher dividend pay-out, it may not be in the best interest of the firm and its cash flow situation. This high dividend pay-out means that M;S are only reinvesting 32.73% of earnings back into the business. The business should consider the long term stability of the company and look to ploughing back more profits in attempt to reduce gearing and improve liquidity.
Similarly the dividend cover ratio is dramatically decreasing from 1.34 times in 2016 to 0.31 in 2017 and a further decrease to 0.10 in 2018. This further demonstrates that not enough earnings are being retained and would be a major cause for concern for investors. A very low dividend cover can often suggest that the firm will not be able to keep up this high dividend pay-out in future years.
The company’s dividend yield has improved from 5.55% in 2017 to 6.92% in 2018. Shareholders would be happy with this as it is higher than the return from a risk free investment.
However, this increase is partly contributed to by the steady decrease of the shares market value. This is a worrying trend for shareholders as it indicates a lack of market confidence in the company. Shareholders may start to sell their shares in the company which will worsen the situation.