Marks and Spencer Group (M&S) is the premier retailer in clothing, foods and home ware within the United Kingdom. The companys commitment to quality, value, service, innovation and trust is a key contributor to their success as a high street retailer in the UK. Their current core UK operations centre around three divisions, food, general merchandise (including clothing and home ware), and the financial services industry. Therefore Tesco plc is the prime UK retailer to analyse and compare growth, financial performance and the financial status of M&S Plc in line with other competitors within the same industry.
1.2 Analysis of Financial Statements
M&S's financial statements represent stability within the company. Revenue increase was a highlight within the key performances, which included a substantial rise in its food business. However the segment information also shows that were less efficient in controlling their product costs (cost of sales).
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Similarly Tesco Plc has also seen an increase in their revenue, and their cost of sales. One possible reason could be to the 'Soaring food prices', which 'Pushed up output prices 1.4 per cent between March and April', 2008. (http://www.dailymail.co.uk/news/article-565787/Family-budgets-set-rise-production-costs-climb-fastest-pace-20-years.html accessed 3/4/09 9.49 AM)
Another important aspect of the income statement is the expenses incurred by the business. This reveals that while both companies had increased revenue, the value of expenses has also risen; therefore applying that 'Economies of Scales' was not achieved.
In relation to the Balance Sheet, the Operating director of M&S referred to it as' A strong Balance Sheet that underpins our future plans to invest' and the figures seem to reiterate this message (M&S annual Report 2008, pg 9). During the last year M&S has seen increases in its current and non-current Assets, particularly in areas such as intangible assets, Property, Plant and Equipment.
Likewise, Tesco's strategy to 'Become a successful international retailer' and 'Be as strong in non-food as in food' has seen a spike in borrowings over the past year (Tesco plc annual report 2008, pg 5). Both companies desire to expand and develop its retail services amid uncertainty show the strength and depth they have.
1.3 Analysis of Accounting Ratios
According to M&S's annual report they have currently completed the first phase of 'a three point plan' that was first implemented back in 2004 (M&S annual Report, pp 5). Since the start of the year Marks and Spencer's has enjoyed significant sale growth amounting to 5.1%, despite the economic downturn during the last quarter of the year. However compared to the 10.1% increase achieved in 2007, it has since seen a considerable drop, due to the economic uncertainty encountered during the last quarter of the year. Similarly Tesco Plc has also posted an ever increasing sales growth, but yet again shows little improvement on the year on year growth. This threat of the economy addressed by both chief executives who both firmly believe both companies are in a position to ride out the economic climate due to the infrastructure in place.
. Unexpectedly the profit margins of both companies revealed a fall in gross margin. The same figures were also posted by similar retailers in their industry, such as Burberry (Burberry annual report, 2008, pg 5). Therefore most retailers in this sector are making less 'profit on what it sells' to that of the previous year (Gene Siciliano, 2003, pg 106).
But the net profit margin is where they differ. M&S with their increase of 1.2%, and gradual increase year on year, prove that they have a grip on cost control. On the other hand Tesco profit margin seems to fluctuate year on year. This evidently proves that M&S have a tighter control on their costs compared with Tesco. But this could be expected as the size and power of Tesco makes it more difficult to manage costs efficiently.
Taking in account that Tesco are traditionally viewed as a grocery store, and M&S as a clothing retailer they are expected to have a high rates of Asset Turnover, and indeed they do. Once again both companies have seen a reduction in this ratio over the past two years, meaning that the company were less effective in 'generating sales from [it's] assets'. (Leopold, A et al, 1999, 249).
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However implementation of liquidity ratios illustrates that the 'short-term debt-paying ability' of the companies has improved with and without the inclusion of inventories (Jerry J et al, 2008, pg214). This is of particular interest to M&S who may require financial aid to finance the renovation of its stores. In terms of the current recession many investors may be worried to what effect the current recession will have on Tesco and M&S respectively.
Another indication of 'how efficient the companies are in purchasing and selling goods' is the stock turnover Ratio (J. R. Dyson, 2004, 258). As a group M&S have seen this liquidity ratio shrink over the past couple of years. Similarly Tesco Plc has also experienced the same fate but the ratio calculated still remains high.
From the perspective of an investor, M&S have showed a consistent growth of earnings per share. Figures stated in the key performance measures highlight the significant growth of the EPS over the past five years. Similarly the five year record of Tesco Plc also shows an increase in EPS from 15.05p to 26.95p. Both M&S and Tesco's, like many other competitors in the same sector have benefited from the boom in the UK economy until the beginning of the year.
Another key ratio for shareholders is the dividends per share. Since investors invest in companies to see a return on the investment, both M&S and Tesco provide an attractive proposition. All investors in M&S have enjoyed a year in year increase in dividends per share since 2004.
Furthermore the Dividend cover is another important aspect of shareholder ratios. Potential investors can asses the risk of investing in shares through he use of this ratio. Once again both M&S and Tesco show an increase between the last two years. Therefore it is 'Less likely that the company will reduce or pass the dividends payout in the future if profits fall' (A. Stoltz, M et al, 2007, pg 52)
1.4 Limitations to Accounting Ratios
Although M&S and Tesco trade in similar products, expanding into sectors such as financial services, home ware, and technology makes it is difficult to identify them with one sector. For example M&S are mostly noted for the clothing products they provide whereas Tesco Plc is traditionally viewed as grocery providers.
Furthermore due to the use of using IRFS standards rather than FRS many figures in the accounts could be misleading. This change due to the requirement by the UK law, and the possibility of Window Dressing all limit the use of ratios. Other reasons such as the use of historical data, different methods of use, and the lack of non financial data all contribute to the limitations of financial Account.
2.0 Accounting policies
Marks and Spencer's are obliged to disclose the Accounting Policies implemented during the year in accordance with IFRS and the companies act 1985. They require M&S to include a summary of all accounting policies used in order to 'Assist users in interpreting the Financial Statements (Hermanson et al, 2005, 195).Therefore the disclosure of any accounting policies must provide enough transparency to enable users of the report to understand all data provided.
For this reason the FRS 18 was established in June 2001 was primarily established to deal with accounting policies. It governs how companies select, apply and disclose the policies used.
The FRS requires accounting policies to be consistent with accounting standards. Therefore the relevance of an accounting policy should be assessed when it is selected. This requires M&S to judge how 'appropriate an accounting policy is to the particular circumstance for the purpose of providing a true and fair view'.
Furthermore FRS 18 ensures the reliability of a policy is evaluated, and reviewed on a regular basis. If a change in methods takes place, reasons for this will need to be disclosed to the public. These changes should only take place 'If a new policy becomes more appropriate'.
Finally 'sufficient information needs to be disclosed' to enable users better understand ability. Moreover, this will aid in the comparability of accounts whether to a competitor or year on year performance.
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For Example, one key stakeholder of M&S is investors. They use accounting policies to make 'intelligent comparisons of the financial position and results of operations of different firms in the same industry' (David H, et al, 2003, pg 356). A two of the key Accounting policies disclosed by M&S are '
Depreciation Method- Used to reveal how the values of non-current assets of M&S were calculated. Due to M&S's commitment to investing in property, non-current asset remains one of the highest values on the company's Balance Sheet. Therefore any changes in methods are required by stakeholders to accurately value its performance.
Basis of consolidation- M&S is company whose power of governing the financial and accounting polices of other enteritis. Therefore providing a brief statement confirming that the 'consolidated financial statements include the financial data of all subsidiaries' is required to reassure users of the report (David H, et al, 2003, pg 356).
3.0Analysis of property, plant and Equipment
Since the start of the financial year, M&S has been working towards their task of improving their UK property portfolio. To date M&S has amounted a total of 622 stores in the UK, and a further 278 abroad in this portfolio. Included in this is a 70% modernisation of stores, with a further 10% planned in the coming year. All this has had a substantial effect on the company's property, plant and Equipment, of which is analysed below.
To allow readers to understand the annual report all property, plant and equipment have been devised into three categories. These are:-
Land and buildings- This involves any land owned by M&S during the year. As mentioned above for easy understanding Buildings relate to all property that the company owns which is complete.
Things such as office space, stores and warehouse's all fall under category. Due to the need to strengthen their portfolio this category represents the highest value of tangible assets that the business owns. Moreover with further additions to come Land and buildings could become a valuable asset in the companies Balance Sheet.
Fixtures fittings and equipment- Fixtures and fittings owned by the company have largely increased due to its expanding property portfolio. Together with new equipment and the commitment to modernise its stores, this category is identified as a key factor in fighting the recession the UK Economy finds itself in.
Assets in Construction- Due to the increase of M&S's UK portfolio, and the modernisation of its stores many assets remain uncompleted. Therefore the cost of these assets is listed as its value until it is complete.
The deprecation polices adapted to account for the Land and buildings depend on a number of factors. Freehold Land is deemed not depreciable under the M&S accounting policies, whereas freehold and leasehold buildings are. Depending upon the remaining time the lease term has left, they will either be depreciated by their residual value over their estimated remaining economic lives if over 50 years, otherwise over the remaining period of the lease
In relation to Fixtures, fittings and equipment the principle remains the same. But the assets are depreciated between 3-25 years according to the estimated life of the asset, using the straight line method. This shows a change in their accounting policy compared to the previous year, which stated 3-15 years. Therefore it can be implied that M&S can pay less depreciation on any additions as there is an option to depreciate an asset over a longer period of time.
Finally the Assets in Construction, as the name suggests refers to the assets that are not yet complete. Therefore any asset of this type is not subject to depreciation until after it has been completed and reclassified to either one of the other categories.
The annual report further shows no impairment took place during the year. Nevertheless, if impairment was to take place, than according to the accounting policies of M&S it would be reviewed annually, and any impairment found would be charged to the income statement as the NBV value is more than its recoverable amount.
Upon analysing note 14 of M&S's accounting notes it shows that there was an increase in additions for all types of assets compared to the previous year. Likewise the disposals of assets during the year also show a sharp increase despite the increase in additions. What is more unusual is that among the disposals, M&S disposed of assets still in construction. Although it seems to be an isolated incident as the 2007 annual report shows nothing similar.
4.0Analysis of director's remuneration
In accordance with the Listing Rules of the Financial Services Authority, the relevant schedules of the Companies Act and the Directors' Remuneration Report Regulations 2002 marks and Spencer's are required to provide a detailed disclosure of the pay and benefits received by its directors. (M&S Annual Report 2008, pg 48) Hence the inclusion of the remuneration report.
4.1 Director Structure
The disclosure of the director's structure is mainly due to familiarise the stakeholders with the board. Listing the roles of the directors is a non- priority and therefore it is placed in the unaudited part of the remuneration report. Extensive mention is made of the restructuring of the director's board at the top. From the start of the new financial year the Chief executive, Sir Stuart Rose will take up his new post as executive chairman due to the retirement of Lord Burns (thereby combining the two roles into one). Therefore the new role of deputy chairman will also be established to monitor and oversee this newly found role.
However this restructuring has caused controversy as it is 'a breach of corporate best practice guidelines.' (http://www.independent.co.uk/news/business/analysis-and-features/marks--spencer-agm-royal-festival-hall-london-866282.html). In particular the Hampel Report 1998, which clearly stated that 'No one individual should have unfettered powers of decisions' (Hicks. A et al, 2008, pg 241). M&S responded by stating it felt it was in the best interest of the company. This is backed up by Sir Stuart Rose track record since this appointment.
4.2 Decision on Remuneration
The remuneration committee are given the responsibility to devise a true and fair remuneration framework that rewards the executive director's for the performance over the year. Comprising of only Non-executive director's (NEDS) who are hired on initial three year contracts meet five times a year to evaluate and review the remuneration framework, with input from both Chief executive and chairman, where appropriate. The attendance at the meetings is also disclosed in the report to provide transparency between the committee and stakeholders.
Similarly both the chairman and executive director's intern devise the amount of basic annual fee, committee member and chairman fee that the NEDS receive for their contribution to M&S. In contrast the 'chief executive and the other members of the board decide upon the chairman's salary which reflects on his role rather than his performance.
M&S have disclosed this information to assure stakeholders that the interest of the company is their main priority. This transparency ensures efficient governance as requested by the Combined Code 1998.
4.3 Pay Structure
As with all types of high profiled jobs, roles such as director's requires numerous methods of rewards to keep each personnel motivated. Since M&S are a plc this reward is primarily funded through financing of shareholders. Therefore disclosure of how this financing is being used remains a priority to all investors. As a result the following methods of reward selected by M&S are annually disclosed for the benefit of all stakeholders.
Salary and Benefits - Each member of the board is set a basic salary/fee that they will earn. Depending upon their role, the level of salary will vary. In relation to benefits each director has the option to use a number of these 'benefits in kind' if they wish to do so. Things such as company car's, personal drivers and hand held devices provided by M&S, to aid directors in doing their job should be disclosed in the Remuneration report. Since the beginning of the year, salaries and benefits have not changed in relation to the chairman as stated in the previous years report. Therefore chief executive will not receive a an increase in his salary for taking up the role of Executive Chairman, but he and two other executive directors did received an increase in their fee as the remuneration committee deemed it valid due to the changes in factors used to determine their pay.
Incentives - Another method of reward is the annual bonus scheme. This involves rewarding executive directors in the short and long term. The principle of the scheme remains unchanged and therefore on this basis none of the directors with the exception of Steven Esom, received any bonus as they failed to meet the targets set by the remuneration committee. Moreover the PSP involves awarding directors up to 200% and in special cases up to 400% of salary, for exceptional performances. Due to the outperforming of targets set, the committee made are likely to make a small number of wards in 2008 to retain key individuals. In addition after a review of the method used to calculate the PSP it was deemed the use of EPS as the performance measure is still the 'most effective measure of management performance'.
4.4 Interest in other Companies
Other components disclosed include the director's involvement in other companies. In most cases the Executive Directors act in the role of NEDS as it is believed it 'can broaden their knowledge and experience'. Changes within this segment include an increase in fees paid to the chief executive, by land securities group plc, and the inclusion of two other executive directors in this role. The need to bring out the additional activities of directors into the open, reassure stakeholders that the directors are committed to M&S and therefore the underlying reason behind this disclosure.
4.5 Directors Emoluments
Finally the director's emoluments available in the appendices states a breakdown of emolument paid to each director. The Publishing of this table gives the opportunity for the stakeholders of M&S to view a brief summary of who received what and when.
The table reveals that the now retired Lord Burns received an increase in his total emolument from 2007. This was largely due to his increase in salary which was announced in last years report. In contrast the chief executive obtained an increase in his annual salary and cash allowance, but ended the year '927,000 worse off largely due to the failure of receiving any bonuses due to not meeting the targets set. Similarly other executive directors suffered the same fate due to not meeting the targets set.
Furthermore included in this was the emoluments incurred by former directors, including the ex chairman Paul Mayners. This is because of contractual obligations, such as the early retirement plan which has since been withdrawn. Analysis of the all emoluments paid for the year reveals an increase in total salary and cash allowance compared to the previous year, but a significant drop in total paid to all directors. Further examination reveals that this was solely due to reduction in bonuses paid out. Thus applying that some executive directors were given an increase in salary yet they failed to meet the targets set by the committee this is expected as individual performance is not one of the factors used to determine the director's salary.
Gross Profit ration (gross margin)
Gross Profit / Revenue 38.6% 38.9%
Profit Margin 13.4% 12.2% Sales Growth Increase = 5.1% Increase =10.1%
Return on equity
Profit attributable to shareholders
Average equity shareholders' funds 2 45.6% 46.3%
Revenue 9022 1.74 Times 8588.1 2.28 Times
Capital employed 5172.1 3774.8
Current Assets 1181.7 0.59 Times 846.4 0.53 Times
Current Liabilities 1988.9 1606.2
Acid Test Ratio
Current Assets ' Stock 1181.7 ' 488.9 0.35 Times 846.4 ' 416.3 0.27 Times
Current Liabilities 1988.9 1606.2
Cost of Sales 5535.2 11.3 Times 5246.9 12.6 Times
Inventory 488.9 416.3
Earning Per Share 43.6% 40.4%
Dividend per Share 22.5p 18.3p
Profit attributable to shareholders
Dividend payable 2.3x 2.1x
Price Earning Ratio
*Share Price *302.0p
Earnings per Share 43.6p 6.93 Times
TESCO PLC 2008 2007
Gross Profit ratio (gross margin)
Gross Profit 3630 *100 3463 *100
Revenue 47298 7.7% 4641 8.1%
Profit Margin 5.9% 6.9%
Sales Growth Increase 11.1% Increase 10.9%
Return on equity
Profit attributable to shareholders
Average equity shareholders' funds 12.6% 12.9%
Revenue 47298 2.38 Times 42641 2.56 Times
Capital employed 19901 16655
Current Assets 5992 0.58 Times 4168 0.51 Times
Current Liabilities 10263 8152
Acid Test Ratio
Current Assets ' inventory 5992' 2430 0.35 Times 4168 ' 1931 0.27 Times
Current Liabilities 10263 8152
Cost of Sales 43668 18.0 Times 39401 20.6Times
Inventory 2420 1911
Earning Per Share 26.95% 23.61%
Dividend per Share 22.5p 18.3p
Profit for year
Dividend payable 3.52x 3.50x
Price Earning Ratio
**Share Price *331.10.00 p
Earnings per Share 26.95 12.9 Times