A1) Marks & Spencer plc. (M&S) is an international retailer with main business lines in food, clothing, and home products and general merchandise stores in more than 59 countries. It was started in 1884 and is headquartered at London, UK (Annual Report, p.1).
The company has own stores, fully owned subsidiaries and JVs, combining together to form more than 1300 stores worldwide in food, clothing and general merchandise areas. Bulk of the business comes from UK market, and more than 400 stores are operational in other countries. The company has more than 80,000 employees (Annual Report, p.22).
The company initially started with general merchandise and clothing stores and had mainly concentrated in UK area. In the mid 20th century, the company expanded into other geographies as well and opened stores throughout Europe.
Later, the company started its own food and clothing lines. These own merchandise lines have been highly profitable for the retailer in the last few years, especially in UK. The company has plans to extend these channels into other geographies too in the next few years and detailed plans are given in management section of the annual report of 2015 (Annual Report, p.24).
A2) The company’s statutory auditor is Deloitte, which recently replaced PwC in 2014. Previous year’s auditor report had highlighted two major issues concerning the visibility of the audit committee’s chairman in the overall process and the content of the audit committee’s survey. The audit committee report for the year 2015 has highlighted that the committee and management has taken steps to improve on the two issues highlighted in the previous year (Annual Report, p.83).
This year’s auditor report highlights that the company’s financial statement has been properly prepared in accordance with IFRS principles and requirements of Companies Act 2006. The auditor has identified some key risk areas of material misstatement including presentation of non-GAAP measures, impairment of store assets, inventory valuation, revenue recognition for few segments, supplier rebates and retirement benefits (Annual Report, p.83).
The report also stated that two additional areas regarding impairment of goodwill and management override controls were pointed out as risk areas of misstatement in previous year’s report, which have not been included for 2015 report.
The auditor’s report indicated a materiality of £32 million, which was approximately 5% of the £600 million profit before tax that the company had reported for 2015 (Annual Report, p.87).
Other matter on which the auditor is required to report by exception include inadequacy of information received from the company, directors’ remuneration, corporate governance and any other misleading statement. The auditor mentions that it has nothing to report on these matters. And that the company has followed the guiding principles for these matters.
The auditor’s report is very important both from a regulatory requirement perspective as well as to identify risks that the company faces due to its accounting and business principles. This report can help in identification of any malpractices and ensures that the company is following requisite accounting principles and conventions.
Also, the auditor’s report gives the shareholders an idea as well as an assurance that the company has been diligent in its reporting and that their money is safe. The regulators feel assured that an independent check has been imposed on the company and they would only have to ensure that material risk misstatement areas are taken care of.
A3) The profitability ratios including return on equity, net profit margin and gross profit margin, liquidity ratios including current ratio, asset management ratios including inventory turnover and payables turnover and also other ratios including gearing ratio and price to earnings ratio for the years 2014 and 2015 have been calculated and presented in the table below (Annual Report, p.90-91).
A4) The yearly percentage change in sales, operating profit and share price has been calculated for 2014 over 2013 and 2015 over 2014 and is tabulated below.
A5) As can be seen from the table above, the company’s profitability came down in 2015 as compared to the previous year after it had risen marginally as compared to 2013. The main reason for this decline was the decline in net profit for the company from £525 million in 2014 to £487 million in 2015. This decline in net profit meant that all the ratios with net profit in the numerator, such as net profit margin and ROE declined for the year.
In comparison, gross profit for the company had increased marginally from £695 million in 2014 to £701 million in 2015. This slight increase meant that the gross profit margin increased marginally, as the growth in sales was even lesser. Overall, the profitability of the company declined marginally, mainly due to higher provisions for income taxes.
The liquidity ratio, as measured through current ratio, improved significantly in 2015 as compared to 2014 from 58.3% to 68.9%. This shows that the company had much higher current assets in 2015 as compared to previous year.
But the ratio was less than 1, implying that the company does not have enough liquid assets to take care of short term liabilities. This could pose a problem to the company in times of distress.
Asset Management ratios are very important to determine a company’s policies regarding working capital management and how fast it is able to convert raw materials into cash. Inventory turnover ratio for the company deteriorated slightly from 11.38 in 2014 to 11.05 in 2015.
This meant that the number of days of inventory had gone up from 31.6 days to 32.6 days. This could have an adverse effect on the cash conversion cycle for the company thereby reducing the efficiency of the company in realising profits from the products it sells.
On the other hand, the payables turnover ratio improved from 11.10 in 2014 to 10.65 in 2015, implying that the number of days payable increased from 32.4 days to 33.8 days.
This means that the company is paying its creditors slowly. This could either mean a better negotiation with suppliers regarding the terms of payment or a worsening financial condition hampering the company’s ability to pay its creditors.
Other ratios measured in terms of gearing ratio using debt to equity ratio shows that the company’s leverage levels have come down significantly in the last two years from 90.04% in 2013 to 77.72% in 2014 and then further to 63.28% in 2015. This means that the company is reducing its debt levels, which could be beneficial in the long run.
The price to earnings ratio for company improved significantly from 13.44 in 2014 to 16.33 in 2015. This was on account of much higher average share price level in 2015 as compared to 2014 despite the earnings declining year on year (Financial Times).
The percentage change in sales was very minimal of 0.01% showing stagnation of business while operating profit increased by 0.86%, showing that the expenses for the year had been lesser as compared to the previous year.
As illustrated above as well, the average share price had increased significantly at 13.95% in 2015 over 2014, after it had declined by 4.44% in 2014 over 2013. This shows that the market has had more confidence in the company going forward (Financial Times).
A6) The DuPont analysis for the company for years 2014 and 2015 is tabulated below.
As discussed above as well, ROE for the company had come down drastically from 19.4% in 2014 to 15.2% in 2015. This was mainly on account of decline in Net Profit Margin from 5.1% to 4.7%. But the other two indicators had declined as well. Asset turnover declined marginally while equity multiplier witnessed a significant deterioration.
This means that all three measures signified by these components of DuPont analysis, profitability, efficiency and financial leverage had deteriorated in the current year. This is a bad sign for the company as it shows that it is doing badly on all fronts and needs to improve its performance significantly while also improving efficiency and leverage. The management needs to consider these ratios together and change both the short term and the long term strategies to turn around the company’s performance in future periods.
References
Marks & Spencer. 2015. Annual Report. [online] Available at <http://corporate.marksandspencer.com/investors/153855a7b7b24038920758283d6986fa>.
Financial Times. Marks and Spencer Group PLC. [online] Available at <http://markets.ft.com/research/Markets/Tearsheets/Summary?s=MKS:LSE>.
