Performance And Response To Economic Climate Accounting Essay

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Debenhams plc is a British company that was formed in London in 1778 by Messrs Flint and Clark. It used to sell expensive fabrics, gloves, parasols and bonnets. William Debenham became a partner in 1813 and the company's name changed to Clark and Debenham. In 1905, the company was incorporated as Debenhams Limited. In 1928, the business became a public company. Debenhams was the largest department store in the UK by 1950; it owned 84 companies and 110 stores. In 1976, Brown's of Chester was acquired and it is the only store which kept its original name. In May 2006, Debenhams returned to the LSE after being bought by Baroness Retail Ltd in 2003. In 1997, the first international franchise opened in Bahrain.

Business model

Debenhams is a leading international, multi-channel brand. The company is consumer-driven as they put their customers at the heart of everything they do and are truly passionate about the products that they sell.

Segmental reporting

The group has identified the executive committee as its Chief Operating Decision Maker based on the requirement of IFRS 8 "Operating Segments" to present information based on what is reported to the CODM. Two operating segments have been identified, UK and international. The UK segment will reflect the performance of "Focusing on UK retail", while the international segment will reflect "Expanding the brand internationally".

The segments are reported to the CODM, employing the same accounting policies as used on the Group accounts.

Performance + response to economic climate

Debenhams believe that they performed well in 2012 in a market that was challenging on many levels. Like-for-like sales growth (the annual sales performance of stores that have been open for one year or more) of 1.6% for the year clearly outperformed both the UK high street and clothing sector. They achieved this through meeting their customers' needs, especially when the number of people who visited their stores was at its highest around key events as well as month ends. They began to see the benefit of lower commodity prices in the final months of the year although inflation in other will require careful management.

Their buying, merchandising and supply chain teams who have many years of experience of direct sourcing and have developed long-standing relationships with many of the company's suppliers will help manage input costs. The development of choice, availability, and service for customers will help optimise all sales channels.

Future Prospects

They are working on "single view of the customer" which will give a clearer perspective on shopping patterns and customer behaviour. One of the benefits of this will be more tailored marketing to individual customers because the company will have a better understanding of how they shop. They are strengthening the overall customer strategy and insight capability.

The company does not expect a significant shift in the economic environment in 2013 but they anticipate making extra progress during the year as their strategy delivers further benefits. They will always manage cash, costs, and stocks closely but they are determined to continue investing in important areas of the organization to deliver long-term feasible growth and further returns on capital.

Financial position

In July 2011, the Group refinanced its £650 million senior credit facility which has a maturity date of October 2015, with an option to stretch further to October 2016. The facility comprises a £250 million term loan and a £400 million revolving credit facility. The senior credit facility contains fixed charge cover and leverage covenants, which were both met in full during the year. The directors believe that the Group has sufficient headroom to ensure compliance for the foreseeable future.

Financing

The Company's objectives when managing capital are to secure its capability to carry on as a going concern, provide returns for shareholders and benefits to other stakeholders and to maintain a structure to optimise the cost of capital.

The Group may consider the amount of dividend paid to shareholders, the return of capital to shareholders, the issue or sale of shares; or the sale of assets to reduce debt, in order to maintain or rectify the capital structure.

Corporate Social Responsibility

As a retail business, Debenhams's operations have an effect on the lives of millions of people: customers, people, the communities in which they operate, and those who work in the supply chain and their own communities. They have started to choose products that minimise ecological impact. A few of the initiatives they're putting into action are:

Reviewing timings for lights, air conditioning and escalators. As a result of all these efforts, they received the Energy Efficiency Accreditation awarded by the Energy Institute.

Training their truck drivers to increase fuel efficiency by almost 15%.

Developing more environmental friendly packaging for bra collars on Lingerie. They were able to maintain the print quality, while introducing 20% recycled content.

Investments in non-current assets

The Group holds 10% (2011: 10%) of the issued shares of Ermes Department Stores Limited, a company listed on the Cyprus Stock Exchange. The market value of the shares at 1 September 2012 was £1.9 million (2011: £2.6 million). Ermes is a company that is registered and trades in Cyprus and its shares are quoted in Euros.

Disclosures:

Debenhams' consolidated financial statements have been prepared on the going concern basis and in accordance with IFRS.

The company uses the Accrual basis method when recognizing their revenues. For example, online sales revenues are recognized when the goods are despatched to the customers.

Property, Plant, and Equipment are held at historic cost. Depreciation is calculated on the straight line method.

Inventories are stated using the retail method which takes into account any stock loss or mark down to goods sold below cost.

According to the independent auditors' report to Debenhams' members, the company's financial statements provide a true and fair view of the company's affairs at September 1st 2012. They also stated that they have been prepared corresponding to the specifications of the Companies Act 2006.

Risk Analysis:

The principal uncertainties and risks that may affect the Group's ability to achieve its operational and strategic goals are either external (such as inflation, competitive pressures in the market), or internal risks (such as fraud, ineffective brand awareness and marketing programmes, or failure to deliver a business critical project).

The system of internal control and risk management is designed to manage rather than terminate the risk of failure to achieve organizational goals and can only give acceptable and not 100% assurance against material misstatement.

NextLogo_07.bmp

History

The NEXT brand was established in the year 1982. NEXT became a full-line lifestyle brand by adding up the menswear, home interiors, and children's wear in the years 1984, 1985, 1987 respectively.

In the year 1999, NEXT launched its online version - creating the concept of allowing the customers to be able to shop in three different ways (in-store, online, or by phone). At present there are approximately 3million active online customers and 80% of the Next's home shopping is transacted online. At present NEXT trades online in more than 50 countries worldwide. The brand has more than 300 stores all over the world. NEXT has celebrated its 30year jubilee this year.

BUSINESS MODEL

In Next's case its internal assets like an experienced managerial team, an efficient operating model, and a strong financial position make it possible for them to run their organization profitably. Customers, being its biggest assets, have to be happy with what they see as the company's future. Their strategy remains to focus on quality, design, and value of their product, with excellent service and delivery to customers.

SEGMENTAL ANALYSIS

The Group's operating segments under IFRS 8 have been determined based on the company's accounts reviewed by the Board. They mark the performance of the operating segments based on PBIT, excluding equity settled share option charges recognized under IFRS 2 Share Based Payment and unrealized foreign exchange gains or losses on derivatives not designated as a hedge.

FUTURE PROSPECTS & RESPONSE TO ECONOMIC CLIMATE

The world is going through a financial crisis; this hasn't only affected companies but also widely affected stock exchanges. During this time Banks do not approve loans easily, this affects the purchasing power of customers and the financial capability of organizations. NEXT has managed to pull away from the down falling trends of the LSE and keep growing even through tough times. During recession, companies should hold on to its assets. The firm renewed their medium term bank facilities, leaving the Group financed for the future.

Corporate Social Responsibilities

Next aims to act responsibly through their CR program support while they continue to grow. There are certain methods they use to do this:

Being ethical.

Maintaining positive relations with their suppliers.

Employee welfare.

Taking responsibility of their impact on the environment.

Supporting through charity.

Value to their customers.

They have been able to reduce 5% of Energy usage when compared to last year, 10% more waste recycling compared to 2011, etc.

DISCONTINUATION OF OPERATIONS

The Capita Group bought Ventura, the Group's customer services management business, on a cash and debt free basis on July 1st 2011 for £65m. Net cash proceeds of £63m were received on completion and the balance was received on 31 January 2012.

COMPANIES DISCLOSURES

Inventories are valued at the lower of standard cost or net realizable value. Depreciation is based on current prices at the balance sheet date. Useful lives are also reviewed annually.

The director is aware, there is no relative audit information of which the firm's auditors are oblivious, and the director's have taken steps that they should have taken to make themselves acquainted with any relevant audit data and to make sure that the organization's auditors know about the information. Although, there are certain disclosures of director's remuneration specified by law which are not made. These are matters which the auditors are supposed to report by exception.

RISK ANALYSIS

The management has identified key risks for the business in their report; such as:

Because the group has taken a big amount of medium and long-term finance in place to support its business activities in the future, it falls under the category of Credit risk & Liquidity. The Board is assessing its exposure to counterparty keeping in mind the economic conditions in the UK and the Rest of the World.

As we can grasp from the financial statements and the annual report on the whole, the sales of NEXT are at high and will increase with time passing by. It has to make sure it is able to meet the increasing demand. In order to achieve this, there are chances that NEXT can face surplus of stocks in the business which cannot be sold at the actual selling price and might be disposed of at loss.

The above point highly relies on the supplier's base of delivering products on time. The management has to continuously keep an eye on its suppliers and be up-to-date about the input cost for production of goods, to avoid increase in the overall cost.

The fluctuations of interest and foreign exchange rate could be one of the main concerns for the financial risk.

INVESTMENT IN NON-CURRENT ASSETES

(Extracted from report)

REGIONS

2012

2011

United Kingdom

579.6

281.1

Rest of Europe

15.0

21.3

Middle East

4.6

4.6

Asia

28.2

31.4

Rest of World

0.1

0.5

627.5

638.9

FINANCING

The Company secured long term financing through the issue of new £325m 10yr bond and also £300m 5yr bank facility. NEXT bought back 12.5m shares at a cost of £290m to manage their capital base efficiently.

Ratios:

Note: For Debenhams, the 2012 financial year comprised 52 weeks to 1 September 2012 whereas the 2011 financial year comprised 53 weeks to 3 September 2011. The board thought comparing 52 weeks of this year with 52 weeks of 2011 would be more appropriate so they used values extracted on August 27th. The financial statements given in the report are for 53 weeks for 2011 therefore I used them to calculate the ratios.

Growth of sales:

The revenues of NEXT in 2012 have been above par which we can collect from the growth of sales of 4.34% when compared to 2011. This may be because NEXT is now able to trade online in more than 50 countries worldwide. Debenhams' sales grew only by 0.9% because the promotional calendar was highly unchanged compared to last year and therefore sales only increased by £20m. Marks & Spencer on the other side had a growth of 2.0% due to enhancement of stores and products, strengthening of brand.

Operating Profit Margin:

The operating profit margin for Debenhams has declined this year due to increase in Distribution Cost & administration expenses which include pension payments to directors by 0.47%. However, for NEXT the operating profit margin grew only by 0.3% in comparison to last year. Marks & Spencer's operating profit margin decreased by 1.8% because of an increase in Selling and Administrative expenses and costs of Non-GAAP adjustments to underlying profit.

Return on Shareholders' funds:

Due to a low rise in profit for Debenhams, the return on shareholders' funds was 18.95% this year which led to an increase in 1.25% based on last year's figure. On the other hand, a massive increase in profits for Next led to 40.7% of increase for return on shareholders' funds.

Return on Capital Employed:

There has been a decline in the Return on Capital Employed for both the companies. Debenhams current Return on Capital Employed is 12.8% while it was 14.1% for last year. This happened due to a fall in Operating profit margin. NEXT also declined this year by 4.97% which brings it down to 54.1% from 59.07%.The reason behind this is Secure long term financing through the issue of a new £325m 10year bond and new £300m 5 year bank facility.

Profit after tax margin:

The PAT margin for Debenhams has increased by 0.31% because of reductions in the headline rate of corporation tax and lower interest. It was the same case with Next but their PAT margin increased by a higher percentage because of higher growth in profits i.e. 12.1% increased to 13.7%.

Inventory holding period:

Due to a high volume of sales for NEXT, the inventories keep moving which is clearly indicated through inventory holding period of 39.25 days. On the other hand, Debenhams is bound to have a longer holding period of 61.8 days due to lower sales in comparison with NEXT.

Receivables Collection Period:

For the receivable collection period, Debenhams is able to collect 6 times, whereas NEXT collects only once during the period of 72 days, because the collection period of Debenhams is only 12.07 days.

Payables Settlement Period:

NEXT pays back its creditors in the span of 75.3 days, while Debenhams takes 96.05 days. This could be possible because Next's revenue this year has been £3441.1m compared to Debenhams revenue which was £2229.8m.

Current Ratio:

Even though Debenhams had a current ratio of 0.34 in 2011, it has managed to double that this year by reaching the C.R of 0.63. But the liabilities remain higher than assets by 0.37 times because of high trade payables. Although, NEXT has a higher C.R value of 1.53 times, its trade payables stands higher than Debenhams.

Quick Ratio:

NEXT carries high tendency of meeting its obligations during the adverse conditions because of the Quick Ratios being at 1.03. On the other hand, Debenhams will tend to mostly fall because of lack of liquid assets in the organization. Its Q.R is only 0.017.

Interest Cover:

The bank would prefer giving loan to NEXT over Debenhams because NEXT will be able to cover its interest by 21.19 times, while Debenhams will be able to cover only 10.4 times.

Earnings per Share:

Growth in EPS is important to measure management's performance because it shows how much money the firm is making for its shareholders; changes in profit, and the effects of issuance of new shares. Debenhams outstanding shares decreased which led to an increase in the EPS in comparison to last year whereas, NEXT outstanding shares increase which led to fall in the EPS from 2011. Marks & Spencer increased in 0.3% in comparison to last year.

Share price movement:

Debenhams

Debenhams's Share price.png

Date Accessed: December 3rd 2012

Share price = 116.90 Volume = 3,815,687

Change = 1.00 Variance = 0.85%

EPS = 9.8 p Price/Earnings = 11.92

For December 3rd 2012, the share price was £116.9

As we can see from the graph there has been a steady growth of the share price in the market. The peak in the past three months was recorded on November 1st at a price of £123.7

From August 31st, the share price has grown by 21.14%

Next

NEXT.png

Date Accessed: 7th December 2012

Share Price: £3704.00 Volume: 383,019

Change: 8.0 Variance: 0.22%

EPS: 1.68(Basic) Price/Earnings: 2204.7 (Basic)

1.72(Diluted) 2153.4 (Diluted)

The share price for NEXT dated 07/12/12 stands at £3704.00, which fell by 0.22% than last recorded closing. If we see the chart of the last 3months, NEXT has made a nice growth in the market by +3.46%. But there was a time when NEXT had fallen drastically during this period (14/09/12) which was recorded as -7.79% of fall.

Conclusion

Next has been doing better when compared to Debenhams and Marks & Spencer in all perspective. All three companies are of the same league but Next's risk is way higher because of its borrowings which makes the gearing ratio of 79%. Debenhams and Marks & Spencer look promising for 2013 as generated in their reports. They have to come up with new strategies & promotions to be able to match up with Next.

References

http://media.corporate-ir.net/media_files/IROL/19/196805/agm2012/ar2012.pdf

[Accessed: 29th November 2012]

http://www.nextplc.co.uk/~/media/Files/N/Next-PLC/pdfs/latest-news/2012/ar2012.pdf

[Accessed: 29th November 2012]

http://annualreport.marksandspencer.com/_assets/downloads/Marks-and-Spencer-Annual-report-and-financial-statements-2012.pdf

[Accessed: 7th December 2012]

http://www.debenhamsplc.com/phoenix.zhtml?c=196805&p=history

[Accessed: 30th November 2012]

http://www.nextplc.co.uk/~/media/Files/N/Next-PLC/pdfs/corporate-responsibility-report/cr-report2012.pdf

[Accessed: 2nd December 2012]

http://www.debenhams-jobs.com/our-people-and-culture/corporate-responsibility.aspx

[Accessed: 2nd December 2012]

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0032089863GBGBXSET1 [Accessed:7th December 2012]

http://www.nextplc.co.uk/about-next/our-history.aspx [Accessed:30th November 2012]

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B126KH97GBGBXSTMM [Accessed:3rd December 2012]

Peter Atrill and Eddie McLaney (2011), Financial Accounting for Decision Makers, Harlow: Financial Times Prentice Hall.

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