The Research and Analysis Project Primark

1. INTRODUCTION

TOPIC CHOSEN

The Research and Analysis Project report is written based on the Topic: The business and financial performance of Primark stores limited over the three year period 2007 to 2009. This report highlights more on the operations, strategy, business and financial performance of Primark stores limited. This is written in comparison to one of its competitors, BHS Limited.

REASON FOR CHOOSING THIS TOPIC

The reason why I have chosen this topic is that, as a student accountant, business and financial analysis is very important as it will widen my understanding of financial analysis of companies. I will be coming across them on the practise field and that I should be able to analyse them without any difficulty.

More so companies want to have a deep understanding of where their business is leading to and so tend to rely on their business and financial performance analysis. This will help them to recognise their strengths and weaknesses and not only that but also the opportunities and threats which lie ahead of them. It will also help companies forecast ahead of time based on the historical financial analysis made. In this way companies will be able to propose healthy strategies in the sustenance of their company warranting an uninterrupted growth in both sales and profitability.

Being a guideline in analysing the financial situation of a company, this analysis is also relevant and critical in modern day business worldwide as it outlines the complete image of the company in question.

REASON FOR CHOOSING THIS ORGANISATION

Being one of the most popular clothing retail stores Primark stores limited has gotten into the media in both good and bad name.

As a low cost-focus giant in the clothing industry, Primark stores limited has been attracting a very large market in the United Kingdom. Despite its low cost, it is also criticized on its low quality standard as compared to its competitors like Marks and Spenser, BHS and Debenhams.

With these high valued competitors having ‘store wars’ with Primark Limited, I have become keen to know how good Primark is doing in terms of its business and financial performance.

I am also very curious about the impact to the profitability of Primark on the ethical issues concerning Primark using child labours in third world countries to make its products. http://news.bbc.co.uk/1/hi/business/7467846.stm

I will also like to know how the recent economic downturn affected the financial performance of the business of Primark between the 2007 to 2009 periods.

With a recent change in turnover of 13.64% in 2009-2008, I am keen to know what contributed to this change. www.fame.bvdep.com.

Throughout this project, I have made a clear assessment between Primark stores plc and BHS limited.

AIMS AND OBJECTIVES OF THE REPORT

The main objective of this report is to analyse the business and financial operations of Primark stores limited.

This will be looking at whether it is worthwhile to invest in the low-cost clothing retailer, Primark. Since both potential and existing shareholders are keen on knowing the profitability and going concern of Primark stores limited, this will serve as a guide to them on whether it is worthwhile to sell their shares, invest in buying more shares from Primark or to hold on to what they already have in the company. I have therefore analysed the financial performance of Primark stores in both in comparison to its previous years and one of its main rivals in the United Kingdom.

This project goes further in assessing the internal and external environment of Primark using the SWOT analysis in analysing Primark’s strength, weakness, Opportunities and Threats.

RESEARCH QUESTIONS

In this project I have looked into answering the following research questions so i can come out with a vivid conclusion as to whether it is financially viable for shareholders and potential shareholders to continue to invest their interest in Primark.

How successful is Primark in terms of its profitability and turnover as compared to its rivals in the same market?

What are some of the strengths and weaknesses, opportunities and threats affecting the going concern of Primark?

Has the Return on Capital Employed of Primark Improved with time?

Has the recent criticisms by the public on its ethical stance in using suppliers who use child labour affected its turnover adversely?

2. INFORMATION GATHERING

2.1 SOURCES OF INFORMATION

Annual reports for the financial years 2007 to 2009:

I was able to get access to the financial reports of Primark and BHS limited for the periods between 2007 and 2009. I then read through the three year results. This was a very important part of my work as these were compare specific information. Here it showed the financial statements and the financial ratios of both companies

Chairman of the Associated British Foods plc’s report: this gave me access to the most recent report update on the revenue upsurge in the year 2010. This was helpful in updating my project because as at the time I had started this project, the 2010 financial report of Primark had not been released to the public domain and so the chairman’s report from the parent company’s annual statement provided me with some recent updates in relation to its subsidiary, Primark.

Books and journals:

I was able to get some background information relating to financial analysis of businesses by relying on books and journals. It helped me understood better the financial ratios and trends in the financial statement. It was a boost to my analysis as it enabled me to get deeper knowledge of results showing on the financial statements.

Websites (electronic sources):

It was much easier and quicker to use the internet to research information. I used mainly the Primark website and the BHS website alongside the financial times and FAME.

Financial Analysis Made Easy(FAME):

This is an electronic source which provides financial analysis of the UK’s leading companies. Results of the top 1.7 million UK and Irish companies for the last 10 years. This shows the statement of financial position, income statements and other information useful and relating to the financial analysis.

Emerald [electronic resource]. 

This gave me access to management research journals from MCB University Press. It therefore provides service access to more than 20,000 management articles, with a full text archive going back to 1994. I was able to read through some of the articles relating to financial analysis to gain more understanding on the topic chosen.

2.2 METHOD USED IN INFORMATION GATHERING

A major part of this research is done through researching secondary data. Being information already accessible by the public as reliance on publicly available information is relevant to this analysis. I first of all read through the annual report of Primark stores limited and BHS limited to get the understanding of how they have operated throughout the three years. I also read through their company profile from their websites and other competitor sites like BHS and Marks and Spenser to gain some more knowledge of their operation in the clothing retail market.

I was able to gather some more information through the use of the library and BBC documentary. Researching through the library was a bit difficult as compared to using the electronic library to research on the two companies.

The financial information between years 2007 and 2009 were considered and used in the analysis because as at the time of this project, the 2010 financial report had not been released to the public domain.

I was able to get customer’s view on Primark by reading from complaints and complements made in a forum online at addresses like the www.ciao.co.uk.

I did most of my research using information from online source. i was a get the detailed financial information of both Primark and BHS from online as well. Apart from the online source, I was able to rely on books as well like the ACCA’s Kaplan text books and that from BPP’s text book. Further, i used the journals from ACCA student’s accountant magazines to help me write and understand my research well.

The articles from the financial times Newspaper was also very helpful in my research as it gave me up to date information and occurrences in the retail industry.

ACCOUNTING TECHNIQUES USED

Some of the financial ratios used in answering and understanding of the research questions posed in 1.5 above were;

Revenue Growth ratio: this showed the trend of growth in revenue for the three year period 2007 to 2009 and also compared to BHS.

Profitability and return ratios: This showed how well Primark has improved in terms of Profitability for the three year period and also as compared to BHS.

Working capital ratios: this is an indicator of short-term financial credibility of Primark. This is the liquid capital available with the company to carry on with its day to day activities. This considered key ratios like the creditors payment period and stock turnover.

Efficiency ratios like the profit per employee and turnover per employee were all considered. This was able to show how efficient Primark has been managed in relation to its workers.

3. ANALYSIS AND PRESENTATION

3.1 PRIMARK COMPANY PROFILE

Primark Stores Ltd., a subsidiary of Associated British Foods plc (ABF), is a leading and expanding international clothing retailer.

As at December 2010, it operated a total of 215 stores in and around the UK with 150 stores in the UK, 38 in Ireland, 19 in Spain, 2 in the Netherlands and Portugal as well 3 in Germany and 1 in Belgium. Spain (Plenilunio) and Ireland, where it trades under the Penneys brand. It was first established in 1969 as Penneys in Mary Street, Dublin.

Primark carries a full range of departments: Women’s wear, Lingerie, Children’s wear, Menswear, Footwear, Accessories, Hosiery and Home. The company has several brands, which include Atmosphere, Secret Possessions, Primark Essentials (for Women, Men and Children’s quality basics), Early Days, Rebel and Young Dimension.

Primark targets young, fashion-conscious under 35’s, offering them high quality, fashion basics at value for money prices. Almost half of sales are in Women’s wear. A quarter of sales is dedicated to Menswear and Children’s wear, with other items constituting the remaining sales.

The company has developed computerised customs clearance, dedicated warehousing and distribution services to support the individual stores and facilitate stock control, thereby ensuring immediate sales analysis.

In the next few months a further 41 stores will be added, mainly those acquired from Littlewoods, with a total investment of some £700 million. New stores recently opened include Dundrum Town Centre and Dundalk (Ireland); Leicester, Lakeside Shopping Centre, Hull, Cardiff, Oxford, Metro-Centre, Sutton, Ayr and Leeds, Harlow, Preston, Luton and Maidstone. (www.primark.co.uk and www.fame.bvdep.com)

3.2 BHS COMPANY PROFILE

British Home Stores Limited otherwise known popularly as BHS is a private British retail department stores chain with its branches mainly in the high street locations, they primarily sell clothing and household items such as bed-linen, cutlery, crockery and lighting. The BHS operates a total store of about one hundred and eighty six (186) stores throughout the United Kingdom. The Company has been a constituent of the FTSE 100 Index, but is now part of the Arcadia Group since 2009.

Company Strategy

In a highly competitive marketplace in which all UK retailers are fighting to sustain their sales against a slowdown in consumer spending, Primark is doing remarkably well.

The UK high streets and malls are packed with no-frills fashion retailers. That means that Primark has plenty of competitors all aiming at the same type of customers. It is not easy to sell cheap fashion. Well-established rivals such as BHS and Matalan are struggling, while results at Primark are booming.

The market segment targeted by Primark is the fashion conscious under-35s with the slogan “Look good pay less”. It offers fashionable clothes at very competitive prices (for example, jeans for £4) and reasonable quality: in other words, a value for money strategy. In competitive strategy terms, Primark is a pursuing a classic ‘focus cost leadership’ strategy.

The American management professor Michael Porter of Harvard University developed a well-known approach to the competitive strategy of firms. He argued that companies could achieve a higher rate of profit (or at least potential profit) in one of two ways: they could either provide a product or service that is identical to that provided by rival companies, but at a lower cost than rival firms, or they could provide a product or service that is differentiated from that of rival firms such that customers would be prepared to pay more for their product than for a rival firm’s product. (R. M Grant (2005)).

The first approach would mean that the firm has a cost advantage over rival firms, allowing it to pursue a ‘Cost Leadership’ strategy; the second approach would mean that they had a differentiation advantage, allowing it to pursue a ‘Differentiation’ strategy. Firms selling a ‘no-frills’ product are usually attempting a cost leadership strategy, such as Easyjet (UK) or SouthWest (USA) airlines. The ‘focus’ part of Primark’s strategy is the specific customer segment it focuses on i.e. that of the under-35s. It is not attempting to sell to everybody. It has selected a particular customer segment, just as the ’18-30′ holiday company has selected a clear market segment based on age group within the leisure industry.

In the last three years Primark has got a lot of things right. Some of its strongest successful competitors are BHS, TK Maxx and George at ASDA. However, although all three are in the ‘value’ segment and therefore have similar market positioning, the other three have different strategies to that of Primark. TK Maxx sells heavily-discounted prestige brands and George at Asda has created its own private-label brand mostly at out-of town stores. Primark is a high street retailer which has a family of brands and focuses much more on buying, logistics and supply chain management rather than branding.

In its pursuit of ever-lower costs, teams of buyers in UK and Ireland travel internationally both to identify fashion trends and to seek out the most competitive suppliers. The company uses computerised customs clearance (speed to market) and dedicated warehousing and distribution facilities, such as the giant warehouse owned and run by the logistics company TNT but dedicated solely to Primark stock distribution. This one warehouse is centrally located for the whole UK market, near a junction of the M1 motorway and it houses 50% of Primark’s UK stock, receiving 30 lorry loads each day. (This warehouse was destroyed by fire in November 2005). Computerised warehousing and distribution systems are linked to computerised daily sales and stock information (rapid restocking of fast-selling items) by size and colour for each item in every store to optimise turnover. (www.open2.net)

FINANCIAL ANALYSIS

3.4.1 Revenue Growth

2009

2008

2007

PRIMARK

1,743,006

1,533,794

1,298,396

BHS

1,121,045

850,241

864,453

Source: www.fame.bvdep.com

Figure 1

From the above graph of Primark stores limited, the revenue has improved significantly since 2007. This has risen from 1,298,396 in year 2007 by 18% to 1,533,794 in 2008 and then further to 1,743,006 by 13.6% in 2009. This has been very amazing as these upsurges in revenue are coincidentally at the same period as when the global economic downturn took effect. The increase in revenue could be as a result of the recent new Primark stores opened across the United Kingdom and other European countries.

On comparing this to the BHS limited, BHS limited also performed well and better in year 2009 with a 31.8% rise above that of year 2008 despite the drop of 1.67% in 2008.

Primark stores outperformed BHS limited in the share of the clothing retail market as it continues to grow its revenue every year.

Profitability and Return Ratios

3.5.1 Operating Profit Growth

2009

2008

2007

PRIMARK

86,015

76,274

96,426

BHS

-53,535

15,203

35,500

Source: www.fame.bvdep.com

Figure 2

With a high profit of 96,426 in year 2007, the operating profit fell from 96,426thGBP in 2007 to 76,274thGBP in 2008 which represents 26%, In spite of this fall in 2007, Primark began to get better with a good operating profit of £86,015thGBP in year 2009. The fall in the profit between years 2007 and 2009 was because some expenses like Administration expenses was constantly increasing from 131,745thGBP in 2007 to 223,912thGBP in 2009. Apart from this, the cost of sales had also increased from 1,070,225thGBP in 2007 to 1,433,079thGBP in 2009. These contributed to the slight fall in profit as at 2009.

On comparing the results of the operating profit to that of BHS, in year 2007 BHS did well in ensuring it maintained a profit level of 35,500thGBP but could not do better than Primark Stores in the same year and even years 2008 and 2009. BHS profit began to fall in year 2008 and later drastically fell from 15203 in 2008 into a loss of 53,535thGBP in year 2009.

Overall I will say that despite the 2008 fall in the operating profit of Primark, it outperformed BHS significantly.

3.5.2 Profit after Interest and Tax

2009

2008

2007

PRIMARK

29,795

14,714

44,102

BHS

-62,022

17,554

27,638

Source: www.fame.bvdep.com

Figure 3

Similar to the operating profit growth discussed above, the profit after interest and tax have also experienced a downward slope from 44,102thGBP in year 2007 to 14,714thGBP in year 2008 but then rose to 29,795thGBP in year 2009. There was a net interest as follows, year 2007 had a 46,604thGBP with year 2008 having £55,737thGBP and year 2009 having a 38,422thGBP. Also, the annual taxation was 19,750thGBP for 2007, 2008 paying 41500thGBP whereas in 2009 they paid 29,795thGBP. These significant amounts of interests and taxations for the years also partook in the adverse effect on the profit after tax and interest.

The huge interest list was as a result of the interests being paid to the bank, hire purchase, leasing and other interests paid.

Comparatively, the BHS profit after tax also fell even more drastically than Primark, it had a profit after interest and tax at 27,638 in year 2007 but then later fell into a loss in 2009 at -62,022thGBP.

3.5.3 Profit Margin

2009

2008

2007

PRIMARK

2.94

1.87

4.92

BHS

-5.54

2.53

4.46

Source: www.fame.bvdep.com

Figure 8

Primark stores plc was able to achieve a favourable profit margin throughout the three years from 4.92% in 2007 to 2.94% in 2009. This was a slight fall from 4.92 to 2.94. This was partly due to the ineffective control of costs and sales in Primark.

But on comparing this to BHS ltd, BHS had a good profit margin of 4.46% but then reduced to 2.53% in 2008 and then further to -5.54 in 2009.

3.5.4 Net Assets Turnover

2009

2008

2007

PRIMARK

8.73

8.39

6.32

BHS

4.09

3.11

3.39

Source: www.fame.bvdep.com

Figure 12

This measures the ability of Primark to manage its net assets very well to generate revenue.

This is calculated by dividing the sales revenue of Primark against its capital employed. Primark was able to get a relatively reasonable figure of 6.32times as at 2007compared to BHS which had 3.39times. Primark’s net asset turnover continued to rise from 6.32times in 2007 to8.73times in 2009. This is an indication that Primark has efficiently been able to manage its net assets very well. Compared to that of BHS who’s net assets indicates that there could be inefficient management of its net assets.

3.5.5 Return on Capital Employed (%)

2009

2008

2007

PRIMARK

25.68

15.69

31.06

BHS

-22.63

7.85

15.11

Source: www.fame.bvdep.com

Figure 14

One of the major reasons why people make investment is to get a satisfying return on capital invested. Therefore the return on capital employed is used to measure the success of a business in achieving its objectives

Primark’s return on capital employed shows the relationship between its profit and its capital employed.

From the above, we can see that Primark had a reasonable return on capital employed for 2007 of 31.06% but decreased to 15.69% and 25.68% in 2008 and 2009 respectively. This indicates that the percentage of return on capital employed by Primark into its business is becoming low and that it is a sign of inefficiencies in its business this can therefore be attributed to the decrease in the margin of profit in 2007 and 2009.

The BHS had a very low return on capital employed in year 2009 at -22.63% after falling from 15.11% in 2007. This is not very good for BHS as it implies inefficiencies in business operation for BHS.

3.5.6 Return on Shareholders’ Funds (%)

2009

2008

2007

PRIMARK

34.73

22.02

40.69

BHS

-143.74

9.50

20.83

Source: www.fame.bvdep.com

Figure 15

This is the relationship between the profit after interest and tax and shareholder’s funds. And it is measured as net profit divided by shareholder’s investments.

As the main goal of every company is to maximise profit, this ratio will help to measure the extent to which this profit is attained. Both the incumbent and the prospective shareholders of Primark will find this ratio particularly important. This is because it will be able to show to them how efficient the resources of Primark have been put to use.

From the above we can see that Primark stores had a high return on shareholder’s funds at 40.69% in 2007 but then decreased to 22.02% in 2008 and 34.73% in 2009. This shows that as at 2007, the shareholders of Primark was able to get good return from their investment into the clothing retail business. But then they found their return in the subsequent years reducing. This is also because of the reduction in the profit margin between 2007 and 2009.

Comparing this to BHS, it had a good return on shareholder’s funds in 2007 at 20.83% but then drastically decreased to -143.71% in 2009. This is as a result of its 2009 profit margin or -5.54%.

Here i will say despite the fall in Primark’s return on shareholder’s funds, it is seen to be performing better than BHS in the same industry.

3.5.7 Return on Total Assets (%)

2009

2008

2007

PRIMARK

3.76

2.23

5.21

BHS

-10.65

4.97

8.51

Source: www.fame.bvdep.com

Figure 16

This measures Primark’s earnings before interest and taxes against its total net assets. This will show how effective Primark is using its assets to generate earnings before contractual obligations must be paid. In year 2007, Primark had a high return on total assets of 5.21% which indicates that Primark is investing wisely and that it is highly probable that it will be making profit through this. It later fell to 2.23% and 3.76% in 2008 and 2009 respectively but as compared to BHS which fell to -10.65%, Primark was able to maintain its strength in maximising Profit by investing wisely despite the fall in 2008 and 2009.

Risk Ratio

3.6.1 Current Ratio

2009

2008

2007

PRIMARK

0.27

0.26

0.21

BHS

0.59

0.75

0.81

Source: www.fame.bvdep.com

Figure 4

The current ratio of Primark shows at what ratio Primark stores’ current assets can settle its current liabilities for a particular period. In other words, it will show the ability for Primark to settle its short-term debts obligation as they fall due.

There is a recommended general threshold of 2:1, it is generally accepted that any ratio below the level of 2:1 shows that the company is facing liquidity problems. In other words if a company’s current ratio is below the 2;1 then it means the company’s current assets is not able to cover its current liability.

From the above, we can see that Primark’s current ratio is far below the recommended general threshold of 2:1 and that this indicates that Primark has been experiencing liquidity problems throughout the three years from 2007 to 2009. From the balance sheet of Primark stores, we can see that it had total current assets of 311,444thGBP in 2009, 285,747thGBP in 2008 and 219,237thGBP in 2007 but had an excessive current liability of 1,162,552thGBP in 2009, 1,101,359thGBP in 2008 and 1,019,899thGBP in 2007. This could be the reason for the adverse state of Primark’s current ratio. The excessive upsurge in the current liability was due to increase in short term loans and overdraft throughout the three year period

Meanwhile, BHS seem to have performed a bit better than Primark even though it could not reach the recommended threshold as well and a fell from 0.81times in 2007 to 0.75 in 2008 and then later to 0.59 in 2009.

3.6.2 Gearing%

2009

2008

2007

PRIMARK

683.57

745.16

579.48

BHS

757.34

33.77

74.14

Source: www.fame.bvdep.com

Figure 7

This shows that the percentage of capital employed financed by the debt and long-term finance is quite high. High gearing is also associated with a higher finance cost and that the higher the gearing the higher the risk to equity holders. This is because the dependence on borrowing and long-term funding is high. Though there are no recommended best levels in gearing, it is advisable that Primark sustain a reasonable balance between its debt and other long-term borrowings with equity.

The gearing level for Primark stores is very high in all three years with 579.48% in 2007, 745.16% in 2008 and then 683.57% in 2009. From the balance sheet of Primark, we can see that the total long-term borrowings including debt had increased from 48,646thGBP in 2007 to 52,009thGBP in 2009 but with equity capital remaining constant at 50,000thGBP throughout the three years.

In comparison to the BHS ltd, BHS was able to sustain a below 100% gearing level between years 2007 and 2008 at74.14% and33.77% respectively. It later rose significantly in 2009 at 757.34% above its previous years and Primark stores in that same year. This shows that both Primark and BHS are prone to the risk of not being able to settle their debt.

3.6.3 Interest Cover

2009

2008

2007

PRIMARK

2.33

1.51

2.37

BHS

-17.22

7.49

10.73

Source: www.fame.bvdep.com

Figure 9

Interest cover indicates the number of times a firm’s profit before interest and tax for a given accounting period can cover its related interest cost. This will show clearly the ability of Primark to pay its interest with its available profit. This ratio can also be used to access the firm’s borrowing capacity and also to assess its risk of increasing its debts in the future.

From the above, we can see that the interest cover for Primark stores was at 2.37 times in 2007 but then fell to 1.51times and 2.33times in 2008 and 2009 respectively. This level of interest cover is not very high and this indicates that the ability of Primark to cover its interest with its available level of profit is quite low. This can also indicate that the level of financial distress that can be suffered by Primark in the near future should the interest cover keep reducing can run high and this may affect its future borrowings.

In comparison to BHS ltd, BHS was able to sustain a high interest cover than Primark in year 2007 at 10.73time but then fell to 7.49times in 2008. It later fell significantly to -17.22times in 2009. This shows that even in BHS ltd, they are very likely to suffer a great financial distress in year 2009 and to make matters worse may also affect their future borrowing capacity.

Working capital ratios

3.7.1 Creditors Payment Period

2009

2008

2007

PRIMARK

19.82

20.64

16.5

BHS

39.44

29.19

30.07

Source: www.fame.bvdep.com

Figure 10

The creditors’ payment period ratio measuring how long on average it takes a Primark to pay its creditors. This is calculated by dividing the trade creditors total figure shown in its accounts by its cost of sales, or sales, and then multiplying by 365days (www.finance-glossary.com).

The company was able to pay cash to its suppliers and other creditors within 16.5day (approximately 17days) in 2007 but then rose to 20.64days (approximately 21days) and 19.82 days (approximately 20days) in 2008 and 2009 respectively.

Primark stores has been able to maintain a reasonably good period in paying off its debt and should it continue to increase its credit period, Primark stores will be able to rely on the available funds to maintain growth till the payment period is due.

The upsurge in creditor days is also an indication that Primark stores could be experiencing cash flow problems and so is relying on credit purchases.

It is a good business practices that Primark continue to maintain a reasonable period to pay off its debts but will be unethical should the period exceed their payment days.

Similarly, BHS also has been able to increase its payment days from 30.07days to 39.44 days in 2007 and 2009 respectively. But unlike Primark the number of days taken by BHS in all three periods is higher. This means that it takes BHS ltd much more days to pay its creditors than that of Primark and that there is a risk of it exceeding its payment period.

3.7.2 Stock Turnover

2009

2008

2007

PRIMARK

6.71

7.07

7.59

BHS

10.15

10.91

10.84

Source: www.fame.bvdep.com

Figure 11

The stock turnover ratio is a relationship between Primark’s cost of goods sold of a period in time and its cost of average stock during a particular period. This is expressed