THE BUSINESS AND FINANCIAL PERFORMANCE OF MARKS & SPENCER PLC OVER A THREE YEAR PERIOD

By XYZ ACCA No. 0000000

A Research and Analysis Project Submitted in Partial Fulfillment of the Requirements for the Degree of Bachelors of Science (Hons) in Applied Accounting at Oxford Brookes University May 20X0
Word count: 6,496

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TABLE OF CONTENTS
Introduction Project objectives and research questions Research approach Information gathering Sources used and reasons Methods used to collect information Limitations of information gathering Ethical issues and their resolution Accounting and Business Techniques used Ratio analysis and its limitations SWOT analysis and its limitations Analysis Company overview and strategy SWOT analysis of the company Strengths Weaknesses Opportunities Threats SWOT in a nutshell Ratio analysis Sales Profitability ratios Liquidity ratios Efficiency ratios Gearing ratios Investor ratios Conclusion Appendix 1: References list Appendix 2: Ratios definitions Appendix 3: Ratios calculations and spreadsheet 11 12 13 14 15 17 1 2 3

4 5 6 7

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18 19 23 23 25 27 29 30 33 38

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INTRODUCTION
The topic that I have chosen for this Research and Analysis Project (RAP) is topic number 8: The business and financial performance of an organisation over a three year period. Having to choose this topic among others was a challenge as each of the 20 topics provided by the Oxford Brookes University is not only very interesting but also presents a massive scope for research and analysis. In my opinion the analysis of business and financial performance of a company is one of the most important aspects of the modern day accounting profession and therefore, I decided to opt for this topic (which is the topic number 8). Also, by analysing the performance of a real company, I had the opportunity to apply my theoretical knowledge, which I learned through ACCA exams, into a practical scenario. Moreover, I feel that by applying the acquired skills to a real world scenario will broaden my knowledge of various financial analysis techniques. After settling for topic 8, I had to make an equally important decision about my choice of company on which to base my RAP. After a day of research I was convinced that Marks & Spencer Plc (M&S) would indeed be a much better company for me to analyse by taking account of the ease in accessibility of various information available for the company. Though taking everything into perspective, i.e. the availability of information, the scale of operations of the company, its impact on the socioeconomic dynamics of a country, choosing M&S indeed came as a natural choice. I have worked for M&S, although in a limited scope, and have admired the company both as an employee and as a customer. But in order to effectively analyse the business and financial information of any company one needs to have access to its financial as well as non-financial data. Since M&S is a large company, which is listed in various stock markets with operations in many countries, there would not be any dearth of information available. M&S annual reports are readily available over the websites and various other press releases and news items are easily available too. Another reason for choosing to write on this company was due to magnitude of its operations and it is highly regarded in the retail industry.

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PROJECT OBJECTIVES AND RESEARCH QUESTIONS

The primary objective of this research report is to present a thorough analysis of the business of M&S Plc and its performance over a three year period from the point of view of an investor. The period under consideration is the three financial years from 2nd April 2007 to 28th March 2009. This will mainly be accomplished by employing a detailed ratio analysis on the financial data available for a three year period. Only focusing on the financial aspects will not provide a comprehensive analysis of its performance. Therefore, this report will also focus on the non-financial aspects using a strategic planning tool called SWOT analysis which will focus on strength, weaknesses, opportunities and threats inherent in the company of faced by it. The main aims and objectives of the report on which my research questions were based can be summarised as follows: To gather, present and analyse the financial information of M&S Plc for the three year period ended 28th March 2009 in a form which can assist an investor to assess the overall financial performance and prospects of the group. To analyse the strengths, weakness, opportunities and threats which have resulted from the adopted strategy and their impact on the company and the group as a whole. To evaluate the effectiveness of the strategy of M&S Plc. To assess whether the company has sufficient resources to wither the economic downturn. To present conclusions on the analysis carried out to aid a potential investor to make a well informed decision regarding investment in the company. In addition to the above, I had to base my research on answering the following questions: Which sources and methods should be used to collect information? Which competitor should be selected to provide a basis for comparison with M&S? What are the reasons for M&S being one of the leading retailers and how is it coping with what has been described as the worst recession in 50 years?

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EXPLANATION OF THE OVERALL RESEARCH APPROACH

A large part of this research analysis has been originated by analysing the financial statements of M&S and Next and various other reports in its annual report. Secondly, to gain enough information about M&S and the retail industry I read wide variety of news articles, analysis, companies press briefs, various reports and commentaries from various different sources. Although this reports looks at the whole M&S group but my main focus has been the UK market as its international operations comprises less than 10% of its revenues. Careful consideration was given to lay out the objectives and outcomes from this report. Having articulated the list of objectives and research questions, any further reading was done to assist me in finding answers to the questions. In order to carry out research I went through various academic models and techniques for business analysis which will provide a structured approach to analysis of financial performance, its strategies and position within the industry. Few attempts were made to gather primary data but to no avail. Therefore, this research is carried out using all secondary data. Various sources were used to find reliable, accurate and unbiased information. I then collected information on the methods and sources that I could use for effective secondary research. The next phase was the most important one as it required me to carry out actual, target oriented research on the topic. Here I gave a special thought to any ethical issues relating to the research and made an effort to avoid any chance of plagiarism or collusion. Having sufficient information at my disposal I carried out the actual analysis using the models identified earlier and set out conclusions at the end. Finally, I made a check list and ticked off each of my project objectives and research questions that I felt had been answered upon the completion of the project.

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INFORMATION GATHERING

It was important that the sources of information chosen and the data gathered should be accurate and provide objective, unbiased view of the company and the market. As a result a wide variety of sources were used to collect, compute and analyse information. The sources are mentioned as follows, along with the reason for the choice, which facilitated to perform the analyses of business and financial performance of M&S.

Sources used and reasons:

Annual accounts of Marks & Spencer Plc: They are the most important source of financial data on which the key ratios are based and are vital in analysing the financial situation of the company and can also be used for Trend-Analysis. Annual accounts of Next Plc: These are used to calculate the key ratios of Next Plc. They are essential to this report as they act as a yardstick to draw comparative analysis of M&S with Next. The official M&S website: The website provides access to Annual General Meeting reports, annual accounts and strategy of M&S Plc. Furthermore, they provide press briefings by the company which informs about its current and future activities. The information from this website has been used contentiously in the project as it could be favourably biased towards the company. Financial Analysts reports: These reports provide an impartial analysis of the current situation, future prospects and the feasibility of the decisions made by the company. Moreover, websites such as that of The Economist and Financial Times and databases such as FAME and Datamonitor provide useful data, financial ratios and commentary on the senior managements policies/strategies over the concerned period. Newspapers/Media: Articles and commentaries published in Bloomberg or newspapers such as Financial Times provide expert analysis on the strategic decisions made by the directors and often have a significant impact on the share price of a company. Other broadsheets such as The Times and The Guardian provide up to date financial news.

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Text Books and Student Accountant Magazine: The study texts published by Kaplan Publishing UK for ACCA syllabuses and Student/Trainee Accountant magazine of ACCA were a part of my background reading and have aided me greatly in generating useful ideas as to the formation and analysis of this report.

METHODS USED TO COLLECT THE INFORMATION

LIBRARY RESEARCH: This basically involved the following two activities. General reading: This mainly involved reading different articles, newspapers, magazines, books and journals to understand the company and the environment in which it operates. Specific reading: This involved going through different databases and reports to get specific information about M&S Plc and Next Plc. Some of the specific reading material included the following: FAME Database (Financial Analysis Made Easy): This provides detailed financial data on companies registered within the UK such as annual accounts, ownership information and key ratios of the two companies. DATAMONITOR (Electronic Database): It provided me with detailed non-financial information that I needed on Marks & Spencer from a source that avoided bias and was also reliable. Libraries used for general and specific reading include: Local boroughs Central Library and City Business Library.

WEBSITES USED: As mentioned earlier, the official websites of M&S and Next were used for the purpose of information gathering. Other main websites used include www.economist.com; www.ft.com; www.guardian.co.uk and www.telegraph.co.uk.

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MEDIA: Bloomberg, BBC and other news channels provided information on current business affairs and the general prevailing economic conditions. Although they were not used specifically for M&S or the retail industry but they have provided a general understanding of the economic environment and an increased knowledge of the business world.

LIMITATIONS OF INFORMATION GATHERING

Some information was collected from M&S website which may be favourably biased towards the company. Some sources of information may contain research carried out with different objectives than this Research Report (RR). It is difficult to judge whether such information should be used for the purposes of this RR or not. The financial statements of the company may be a bit favourably biased towards the company as through these the company aims to present itself in the best possible manner. Some of the reports, such as carried out by Mintel, were not available free and were not also available at the libraries.

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ETHICAL ISSUES THAT AROSE DURING INFORMATION GATHERING AND HOW THEY WERE RESOLVED

One issue that arose was of plagiarism. As most of my research is from secondary data, there was a risk of plagiarism if any information that was used was not properly referenced. For this I took special care. I clearly identified and attributed any thoughts or quotations which were not my own at the points where they occur in my RR and used the Harvard Referencing System to eliminate beyond any possible doubt any chance of plagiarism. Another ethical issue that arose was of potential collusion. One of my colleagues requested me to carry out research together with him as he had to do a similar research project for his university. By carrying out the research together it would have taken less time, but it would have resulted in collusion. This issue was easily resolved as I did not consent to carrying out the research together with him or to sharing my research with him.

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ACCOUNTING AND BUSINESS ANALYSIS TECHNIQUES USED AND THEIR LIMITATIONS

RATIO ANALYSIS
Ratio analysis is one of the main accounting techniques of financial analysis to evaluate the financial position and performance of a company. It involves comparison and calculation of a number of profitability, liquidity, efficiency, gearing and investor ratios which in turn paint a thorough picture of the companys performance over a period of time. Ratio analysis helps in the following ways: It simplifies the comprehension of financial statements. It provides a fairly complete picture of the various changes in the financial condition of a business. It facilitates in making inter-company comparison and highlights the factors which are commonly associated with successful and unsuccessful firms. It helps in making investment decisions by looking at various ratios, as mentioned above.

The details of each of these ratios are mentioned in the Analysis segment of the Research Report and their definitions provided in the Appendix 2 & 3.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has a number of limitations which are as follows: Companies may adopt differing accounting policies from each other. Different methods of depreciation will lead to different accounting profit figures and hence it may not be appropriate to draw conclusions of the two ratios without making suitable adjustments. Although ratio analysis aid in providing clues to the companys performance or its financial position but on their own they cannot show whether performance is good or bad and therefore, they need to be carefully interpreted to draw meaningful conclusions on

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which informed decisions could be made. Furthermore, comparisons need to be made with the best in the business or with industry standards. The figures in a companys latest annual accounts is likely to be several months out of date and may not provide most current and best indication of its performance. Different businesses may have different sizes and hence may enjoy different levels of economies of scale. Comparisons of such businesses using ratio analysis may not be appropriate as smaller business may not enjoy facilities which are available to large ones (e.g. bulk discounts, extended credit periods, etc). Inflation could render the comparison of financial results misleading if compared over longer time period as financial figures will not be within the same level of purchasing power. Improving trend of various ratios could indicate that the company is performing well but if accounted for inflationary changes it may paint a different picture.

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SWOT ANALYSIS
A SWOT analysis is carried out in this Research Report as the main business technique used to analyse internal and external factors which have an impact on the company. It carries out an assessment of a companys strengths and weaknesses which relate to internal factors such as resource and capabilities. It also assesses the opportunities and threats that may arise in the future. This involves an analysis of external factors such as the economic environment and the industry structure. SWOT analysis provide a simple four box framework which facilitates in understanding the strength and weaknesses of the organisation and enables the development of strategic thinking (Kaplan Financial, 2008).

LIMITATIONS OF SWOT ANALYSIS

One major shortcoming with the SWOT analysis is that although it emphasises the importance of the four elements associated with the organisational and environmental analysis, it does not address how the company can identify the elements for their own company. Many organisational executives may not be able to determine what these elements are, and the SWOT framework provides no guidance. For example, what if a strength identified by the company is not truly a strength? While a company might believe its customer service is strong, they may be unaware of problems with employees or the capabilities of other companies to provide a higher level of customer service.

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ANALYSIS
Company overview
Marks and Spencer started as a small stall in 1884 in Leeds, UK where all products were sold for a penny (Britannica, 2009). Since then the company has established itself as a leading UK retailer. During the late 90s and the early years of 2000, M&S experienced deteriorating financial performance due to fierce competition, poor supply chain management, inferior products and ineffective cost management. However, when Sir Stuart Rose took charge as the CEO in 2004 M&S has regained its lost spark. M&S is traditionally called a bell-weather of the UK retailing industry, which means that if M&S is struggling then hard times are ahead for the whole sector. Analysis of the financial position of M&S Plc requires a glance at M&Ss long term strategy in addition to a detailed look at the financial accounts of the group. Moreover, a three year trend analysis and intercompany comparison with Next Plc coupled with a SWOT analysis provides a reasonably realistic view of the performance of M&S over the three year period ended 28th March 2009. The analysis of M&Ss performance is as follows:

Key strategies
Increasing the pace of change and operational execution in the business Accelerating towards becoming a multi-channel retailer, focusing all our actions on the customer, whichever channel they wish to use Driving the international business, particularly China, India and Southern and Eastern Europe, balancing investment and returns; and Reinvigorating the brand communication with customers, highlighting our ethical and sustainability objectives (M&S, 2009)

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SWOT ANALYSIS

An analysis of the strengths, weaknesses, opportunities and threats relating to M&S has been carried out as follows to show the impact of retail industry and the general economic environment on the company.

STRENGTHS

Market Share
M&S is the UKs largest clothing retailer, where more than 1 in 10 clothing items is bought from M&S (M&S, 2009). Although value market share declined but M&S is still the UKs leading clothing retailer holding a healthy market share of 10.7% by value and 11.2% by volume in general merchandise.

Strong brand image

The M&S brand commands a strong loyalty especially from the UK consumers, which has enabled it to wither the economic downturn. The strong brand image has also helped the company to diversify into new markets like Personal Finance and electrical goods. M&S brand has been at the heart of its success throughout its existence. Overall, the strong brand image has further facilitated the companys growth strategy by allowing the company to operate in international markets, while maintaining a strong control of its existing ones. According to Kate Bostock, the executive director of clothing, M&S brand is the number one in womenswear on the High Street (M&S, 2009).

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Effective marketing
M&S had been marketing itself aggressively over the past several years. It has introduced slogans such as Quality Worth Every Penny and Your M&S, the advertising had been customer focused (M&S, 2009). This had the effect of the customer loyalty even in the times of recession. The TV advertisements have been particularly potent and have involved celebrities such as Twiggy, Myleene Klass, Laura Bailey and Take That (M&S, 2007). Furthermore, the executive team of M&S is very experienced with CEO Sir Stuart Rose at the helm of affairs. He had been widely praised of having turn around the once dwindling business of M&S since his arrival in the May 2004. In the same year he had ward off several hostile takeover bid from Philip Green (Davidson, Andrew, 15 January 2006).

WEAKNESSES

Declining financial performance

M&S performance slipped over 2007 Christmas period. While all retailers did badly, M&S was particularly exposed. By the financial year end of 2008 the share price was 396.25p which means that M&S has lost more than 40% of its value during the year. Similarly, the price/earnings ratio of 8.4 in 2009 has dropped almost by half since 2007. P/E ratio is the major indicator of investor confidence in a company.

Possible loss in brand value

In order to attract price conscious shoppers M&S started cutting prices and trying to be all things to all people. This may devalue the brand and the company has been allotting more floor space to its outstanding value line (The Economist, 2008).

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Poor corporate governance

The company was harshly criticised for promoting CEO Stuart Rose to chairmanship as well, fuelling accusations of poor corporate governance, lack of transparency and segregation of duties. The move infuriated many large investors. (Attwood, Karen, 11 March 2008)

OPPORTUNITIES

Developing new markets

Developing markets such as India and China presents great opportunities for M&S and its brand to grow even further. Whereas in the UK market M&S have been facing stiff competition, it could thrive in new markets and capitalise on its brand power.

Targeting younger generation

M&S had traditionally been targeting a middle aged customer. This had the effect of alienating the younger customer base. An opportunity arises for M&S that it design and promote trendier clothes to cater to younger customers.

Online food distribution

Online food sales are a great opportunity as well, since online margins are higher though it would require large initial investments into setting up distribution channels (Mailonline, 2009).

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THREATS

Risk of loosing younger customer base

Currently, M&S target group are older customers many over the age of 45. This may be risky as todays 20-30 year olds will still remain trendy after 10-20 years and might be reluctant to shop in M&S, especially taking into account peoples obsession to look younger these days. Although the company is trying to appeal to younger customers but it needs to do more as trendier rivals such as Next will eat into this market segment.

Cash tied customers

As the economic downturn continues, there are increasing number of customers who are now turning to cheaper retailers such as Primark. M&S faces threat of losing its current market dominant market share as a leading clothes retailer.

Succession problems
The current CEO of Marks & Spencer Sir Stuart Rose is to step down from his position of the chief executive and his term expires in 2011 as a chairman. Failing to find a suitable CEO could turn the company into disarray and financial difficulties which Stuart Rose several years to turn around the company to its once dominant position in the clothes retailing market. Even if a suitable candidate is found but the transition from the old leadership to the new leadership is not smooth then it could have severe consequences for the company. The key stakeholders of the company are in the dilemma whether to seek candidate internally or externally (Wachman, Richard, 4 October 2009).

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Threat from other premium food retailers

M&S touts itself as a premium food retailer but it is coming under increasing threat from other competitors who are offering premium quality food such as Waitrose or Tesco Finest.

Possible investor revolt

Accusation of poor corporate governance have damaged the reputation of the retailer and dent investors confidence in it as Sir Stuart Rose took the position of chairman while being CEO of the company at the same time. Under the UKs Corporate Governance Codes it is advised that the role of chairman and that of the chief executive order be kept separate (Ashton & Davey, 30 March 2008).

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SWOT ANALYSIS IN A NUTSHELL

Strenghts

Market share Strong brand name Aggressive marketing

Weaknesses

Deteriorated financial performance Declining brand value Poor corporate governance

M&S
Opportunities

Developing new markets Catering younger generation Online food distribution

Threats

Competition from other premium food retailers Succession problems Cash tied consumers

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RATIO ANALYSIS

Sales growth
10000 9000 8000 7000 6000 Revnue 'm 5000 4000 3000 2000 1000 0 2007 2008 Year 2009 M&S Next

Sales proportion M&S

UK International

Sales proportion M&S

General Merchandise Food

9.9%

49.9%

50.1%

90.1%

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SALES REVENUE GROWTH

The sales revenue increased by a small 5.5% from the year 2007 to 2009 and a negligible 0.4% from the year 2008. This shows the grim market conditions faced by an up-market retailer. However, M&S has been able to maintain a steady sales figure by its continued focus on outstanding quality, innovation, backed up by potent advertising. Moreover, the growth has largely been due to the significant expansion by the company in the overseas market. Although the international market only comprises 9.9% of the total revenue, there has been an increment of 47.0% from 2007 to 2009. This significant growth has proven that the company is pursuing its key strategy of expansion of its international business. Revenue from food comprises nearly half of the total, rising household bills have put consumer confidence at its lowest in many years which has the effect of customers going to discounted retailers. M&S has tried to invest in its margin, slashed prices and promoted its outstanding products more. Consumer spending has seen an increased trend where people are preparing meals from scratch in order to save money. As opposed to M&S, Next has struggled to grow over the three years from 2007 and in 2009 its revenue shrunk back to even below that of 2007. Next kept its high pricing strategy in place and did not sacrificed its margins.

PROFITABILITY RATIOS
Gross profit margin (GPM)
It can be inferred that gross profit margin (GPM) for Next, has stayed fairly constant (27.8% in 2007 and 27.7% in 2009). Although in absolute terms the GPM has fallen. Likewise, GPM for M&S remained steady throughout the three years from 2007. It was 38.9% in 2007 to 37.2% in 2009. The economic downturn and prevailing recession inflicted a pressure upon profit margins for both companies during the last two years. Marks & Spencer celebrated its 125th birthday on the month of May 2009 by selling about 2 million items at the price of a single penny and they called this a Penny Bazaar (Mailonline, 14 May 2009). The company also had 20% discount day sale to allure recession hit shoppers to spend more in the M&S UK stores (Wallop 24 November 2008). Both of these are contributing factors to lower gross profit margins.

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Although M&S has showed improved performance relative to Next in this regard as it enjoyed superior supplier relationships. (M&S, 2008). Furthermore, M&S has taken a conscious approach in investing in its prices to offer better value without sacrificing its quality. Furthermore, a very weak sterling at the beginning of 2009 put an increased pressure on the purchasing power of M&S which sources many of the goods from Europe, far east and South America. To offset this M&S told suppliers to cut its prices (Leroux, Marcus ,October 23 2009) . But theres a limit to what the suppliers can cut their prices and therefore most of this extra cost M&S had to absorb, thereby increasing their costs and affecting their margins.

Operating profit margin (OPM)

The operating profit margin in 2007 was 12.2% which fell by 2.6 percentage points in 2009. Since the year 2007, the OPM margin dropped by a significant 2.6%. This was largely due to the increase in retail occupancy, which are the energy costs and higher distribution costs which in turn was due to higher fuel prices. M&S also closed down 26 of its under-performing stores (M&S, 7 January 2009). Although this should result in savings but contrary to it the company had to fulfil onerous lease contracts and incur decommissioning costs, thereby increasing its expenditure. The marketing costs were lower as the company sought to cut back on promotional and TV campaign with fewer ads running. In comparison, Nexts OPM had been higher throughout the years in consideration implying implying that core business operations were profitable. OPM increased from 15.5% to 16.1% in 2008 due to Nexts inflated product prices, though it dropped by 1.4% in the following year.

Net profit margin (NPM)

In the year 2007, the profit after tax was 659.9m representing 7.7% of the turnover. 2008 was a good year for M&S where its pre tax profit was over 1.1 billion and its NPM was 9.1%. The NPM margin from 2008 to 2009 faired a little better than the OPM through the same years. OPM dropped by 3.8% points whereas the NPM dropped by 3.5% points. This is possibly due to

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significantly lower corporation charge in 2009 than that in 2008. Once again M&S has performed poorly in comparison to Next. Next had an average NPM of about 10% while M&S average NPM was 7.5%.

Profit margins over 3 years

45.00% 40.00% 35.00% 30.00% % of turn- 25.00% over 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 Year 2009 M&S GPM Next GPM M&S OPM Next OPM M&S NPM Next NPM

Asset turnover
Asset turnover measures managements efficiency in generating revenue from net assets utilised by the business (Kaplan Financial, 2007). Nexts asset turnover was 5.58 in 2007 which dropped to 5.11 and subsequently dropped to 4.76 in 2009. This means that in the year 2009 Next generated 4.76 for every pound invested in non-current assets. Although this asset turnover trend had been declining during the three year under analysis but Next had been a better performer as compared to Next. Marks & Spencer asset turnover had been pretty abysmal, it declined slightly from the year 2007 (1.89) to 2009 (1.54). Though 2008 was a good year in terms of sales but due to heavy capital expenditure the asset turnover still declined to 1.51, M&S invested 1.1bn in 2008. As it can been seen from the financial statements, the sales revenue in 2009 dropped 0.44% but also at the

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same time the capital expenditure was reduced significantly to 652m which led to a slight increase in the asset turnover. Furthermore, non-trading stores worth 58.3m were sold off. Another reason for M&S having a poor asset turnover ratio is due to the fact that the company has a massive land portfolio and has investments in land and buildings worth over 2.4bn. Having freehold land and buildings always proves beneficial to the company as when the time of need arises where the company is finding hard to raise equity capital then it could always seek loan from bank or other financial institutions by keeping these lands as collateral.

Asset turnover trend

6.00 5.00 4.00 3.00 2.00 1.00 0.00 2007 2008 2009 M&S Next

Return on capital employed (ROCE) and Return on shareholders equity (ROE)

The decreasing profit trend in M&S has been translated to the ROCE for M&S. Since 2007 ROCE has deteriorated considerably, from 27.7% in 2007 to 17.6% in 2009. Lower ROCE is also due to growing recession which adversely impacted Christmas sales in 2008 and 2009 and turnover did not increase as substantially as expected (The Economist, 2008).

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ROE indicates how much profit is attributable to the shareholders after all interest and taxation obligations have been met. As the increase in profits attributable to shareholders was greater than the increase in the shareholders equity, in 2008 ROE increased by a slight 2% point from 40% in 2007. A substantial drop in the profits from 2008 (38.8%) lead to an equally significant drop in the ROE. Compared to Next, M&S has performed poorly in both ratios as Next had a ROCE & ROE of 44.7% and 193% respectively. But M&S has a much greater proportion of equity financing than Next and that explains a poor ROE ratio.

LIQUIDITY RATIOS
Current ratio & Quick ratio
According to Atrill and McLaney (2007), minimum liquidity ratio should be 1:1, however, the ratios for M&S and Next presents a different picture. Though both the current and quick ratios have been improving for M&S since the year 2007 (from 0.53 to 0.60 and 0.27 to 0.37) but they are still well below the recommended ratios for companies that represent improved liquidity position. However, for companies operating in cash-rich retail environment it is considered normal for them to have low current and quick ratios.

EFFICIENCY RATIOS
Creditor days
As evident from calculations, Next has been paying off liabilities rather slowly (at 96 days in 2007). During 2008, Next took 24 days less to pay off creditors primarily due to rising revenues. However, in 2009 the creditor days increased by 3 days. Compared to Next, M&S had been paying its creditors much quicker, 23 lesser days in 2007. The average credit period taken by M&S dropped by 9 days in 2008 but this rose to 69 days in the following year. This perhaps could be the reason of increased cash and cash equivalents.

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One possible explanation of this increasing creditor day ratio could be that the company in this time of recession is trying to keep hold of cash and investing it in the business. M&S has also revised its supplier terms and perhaps they have agreed to provide a longer credit period in order to secure their business with M&S.

Inventory turnover days

From the calculations it is evident that the inventory turnover days have deteriorated. It took 29 days to sell stock in the year 2007 which increased by two days on year on year basis. M&S has been facing stiff competition from cheaper retailers such as Primark which are offering greater value for money and from other trendier brands such as Top Shop. In comparison, Nexts stock turnover had been significantly higher throughout the years in consideration. Nexts increasing selling prices adversely affected consumer spending and stock turnover increased by 6 days to 49 from 2007 to 2009. While on the other hand M&S adopted a moderate pricing policy during recession hence customers have a greater preference for its products (Financial Times, 6 January 2009).

Inventory & Creditor Days

120 100 80 Days 60 40 20 0 2007 2008 2009 M&S Inventory days Next Inventory days M&S Creditor days Next Creditor days

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GEARING RATIOS
Capital gearing
Next appears highly geared, it depicted a significant rise in gearing from 359% in 2007 to negative 1452% in 2008. This is due to considerable reduction in retained earnings that reduced by 19% in 2008 together with persistent borrowings which exceeded shareholder funds. Gearing ratio augmented as Next borrowed excessively for financing store expansion which increased long term debts. As gearing is exceeding 100% it indicates substantial bankruptcy risk for Next. Gearing ratio for M&S also indicates that, investments are mostly financed by borrowing rather than shareholder funds. Gearing increased from 157% in 2007 to 209% in 2008 when borrowings exceeded shareholder funds. The rise of gearing in 2008 is explained by heavy borrowing of 235.3m in the year 2008. M&S gearing ratio has been significantly lower over the three years from 2007, though it shows a similar increasing trend as Next. M&S have relied on debt financing to fund its expansion strategies. From the companys consolidated statement of cash flows it is evident that in 2008, it issued medium-term notes worth 631.7m together with a drawdown bank loan of 317.6m. Even though M&S gearing also exceeded the 100% benchmark for high risk companies, it is better-off than Next as it has greater shareholder funds and retained earnings and utilising them effectively. M&S therefore, entails lower bankruptcy risk compared to Next as it has over 5.7bn of retained earnings to pay off its debts.

Interest cover
The interest cover for Next was 15.3x in 2007 which gradually decreased to 9.4x in the year 2009. But even then, this is pretty healthy rate as such companies with high interest cover are deemed to be less likely to default on interest payments. Nexts high pricing strategy has lead to greater profit margins and thereby providing enough operating profit before interest and tax to pay off the interest.

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In comparison, M&S interest cover rate was about half that of Next (7.3 times) and it has shown a continuous downward trend. M&S had been trying to increase its market share at the expense of lower margins. Also there has been a 33% rise in net interest payable in 2009 from the preceding year, which is translated to its decreasing interest cover. Though interest cover of 4 times in 2009 is still well above the threshold of 1.5 times but M&S should look to decrease its burden of debt expense.

Interest Cover
18 16 14 12 10 Times 8 6 4 2 0 2007 2008 2009 M&S Next

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INVESTORS RATIOS
Share price

The above chart indicates that closing share prices for both companies deteriorated from 2007 to 2009 due to economic uncertainties. Worsening economic crisis resulted in M&S share price to drop from 676.50p in 2007 to 265.25p in 2009;causing a significant reduction in share price, of approximately 61%. Similar trend was observed for Next, where share price declined from 1946p in 2007 to 1097p in 2009; reporting a decline of approximately 44%. Compared to M&S, Nexts share price declined by a much lower percentage and shares were traded at relatively higher prices from 2007 to 2009. In the year 2009 the maximum share price for Next was 1522.0p, while for M&S the share price peaked to 417.0p.

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Earnings per share (EPS)

By the end of the year 2007, the EPS for the Nexts shares at the end of the financial year was 144.3p which increased by approximately 15.5% to 166.6p. This rise suggests that the growth in the earnings of the company has been at a higher level than the growth in shareholders equity. But as the margins deteriorated, the EPS dropped by 6.5% to 155.7p in the following year. A similar trend could be observed in the EPS of M&S, it rose by 25.8% from the year 2007 when it enjoyed healthy profit but as the company tried to maintain its market share in the economic downturn it had to invest in its margin. This resulted in the EPS of 32.3p representing a drop of 34.3% from the preceding year.

Price to earnings ratio (P/E)

P/E represents the number of years of earnings it will take to payback the purchase price of the share. It could also be interpreted as how much the investors are willing to pay per pound of earnings (Bized, 2009). M&Ss P/E ratio has remained higher than Next even though its share price remained significantly lower from 2007 to 2009. Though M&S shares a similar trend with Next, this shows that investors in the current economic downturn that hit in early 2008 are not willing to invest further in a company. The P/E ratio of 17.3 in 2007 declined by 53% to 8.1 in the following year. The share price chart above provides evidence that the price of share has been particularly volatile for M&S. As compared to Next, M&S is a much lower geared company and investors perceive lower risk of investing in M&Ss shares.

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CONCLUSION
It could be concluded from the above analysis that Marks and Spencer like Next is confronted with deteriorating financial performance. Its UK profits were down by 33% in the year to 28th March 2009. In view of the declining performance, the group finance and operations director Ian Dyson is leading a change program called 2020 Doing the Right Thing (M&S, 2009). Some of the poor performance could be attributed to the economic recession. As the UKs largest clothing retailer and with a premium food offer, M&S is bound to be affected by consumers who are looking to cut their spending. Clothing dropped by 4.1% and although M&S fared better in kidswear and lingerie, the major menswear and womenswear clothing lines continue to cause problems. Food sales comprises 49.9% of the turnover for M&S but it has been facing stiff competition as consumers turn to cheaper rivals such as Sainsbury who offer good quality food. In order to fend off competition M&S has been making substantial investment in margin and having a strong promotional stance. On the brighter side, M&S online channel, M&S Direct, has seen a substantial increase of 19% (M&S, 2009) with sales amounting 324m. It now delivers to over 73 countries worldwide and is targeting to reach M&S Direct sales to 500m by 2010/11 (M&S, 6 October 2009). Although part of Sir Stuart's original strategy was to change the culture of the company (a strategy which he states has been achieved), M&S still appears to be chasing retail trends rather than setting them, as was once the case. The speed of change must accelerate fast if the retailer is to fight off greater competitive threats to its customer base from the likes of Sainsbury and Next. If Ian Dyson can deliver on this aim then he will go a long way towards proving himself a worthy successor to Sir Stuart Rose. M&S must take account of consumers purchasing capacity and investing in margin by having aggressive pricing strategies could erode turnover. M&S must revise its investment decisions and utilise existing resources efficiently to maintain its competitive edge. Expansion plans can escalate financial costs and will lead to more borrowing, therefore M&S must wisely invest in projects which will lead to greater productivity.

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APPENDIX 1: REFERENCE LIST

Atrill, P and McLaney, E (2007). Financial Accounting for Decision Makers. FT Prentice Hall, 5th Edition Ashton, James. and Davey, Janney. Timesonline (30 March 2008). Storm grows over Stuart Roses chairman role at Marks & Spencer [Online]. Retrieved from: http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article3638573.ece [Accessed 15 October 2009] Attwood, Karen, The Independent (11 March 2008). Investors attack M&S plan to make Rose chairman [Online]. Retrieved from: http://www.independent.co.uk/news/business/news/investors-attack-ms-plan-to-make-rosechairman-794061.html [Accessed 24 October 2009] Bized (2009).Price earnings ratio [Online]. http://www.bized.co.uk/compfact/ratios/investor12.htm [Accessed 22 October 2009] Britannica (2009). History and Society: Marks & Spencer Plc [Online]. Retrieved from: http://www.britannica.com/EBchecked/topic/365822/Marks-Spencer-PLC [Accessed 10 October 2009] Davidson, Andrew. Timesonline (15 January 2006). Interview: Andrew Davidson: Full Marks for Stuart Rose [Online]. Retrieved from: http://business.timesonline.co.uk/tol/business/article788500.ece [Accessed 23 October 2009) Financial Times (6 January 2009). Consumer and Retail: Investors cheer as retailers reassure [Online]. Retrieved from: http://www.ft.com [Accessed 22 October 2009] Kaplan Financial (2008). Study Text Paper P3: Business Analysis. Berkshire: Kaplan Publishing UK Kaplan Financial (2007). Study Text Paper F7: Financial Reporting. Berkshire: Kaplan Publishing UK Mailonline (14 October 2009). Marks & Spencer looks to online food shopping to boost sales [Online]. Retrieved from: http://www.dailymail.co.uk/news/article-1220159/Marks--Spencerlooks-online-food-shopping-boost-sales.html [Accessed 14 October 2009]

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Mailonline (14 May 2009). Penny Bazaar 2009: M&S turns back the clock by offering two million items at 1p each [Online]. Retrieved from: http://www.dailymail.co.uk/femail/article1181381/Penny-Bazaar-2009-M-S-turns-clock-offering-million-items-1p-each.html [Accessed 15 October 2009] M&S (2009) M&S Annual Report and Financial Statements 2009 [Online]. Retrieved from: http://corporate.marksandspencer.com/file.axd?pointerid=c25b7670e6e4420abd2403cb7a6149f4 &versionid=c6167e6e5dc44b918eb9a277b921fa23 [Accessed 19 September 2009] M&S (2008) M&S Annual Report and Financial Statements 2008 [Online]. Retrieved from: http://corporate.marksandspencer.com/documents/publications/2008/annual_report_2008.pdf [Accessed 19 September 2009] M&S (2007) M&S Annual Report and Financial Statements 2007 [Online]. Retrieved from: http://corporate.marksandspencer.com/documents/publications/2007/2007_annual_report.pdf [Accessed 19 September 2009] M&S (6 October 2009). M&S expands online international delivery to 73 new countries [Online]. Retrieved from: http://corporate.marksandspencer.com/media/press_releases/International/InternationalDelivery [Accessed 2 November 2009] M&S (7 January 2009) Proposal to close M&S stores [Online]. Retrieved from: http://corporate.marksandspencer.com/documents/press_releases/2009/Q3_store_closure [Accessed 3 May 2010] Next (2007). Next Annual report and accounts January 2007 [Online]. Retrieved from: http://www.nextplc.co.uk/nextplc/financialinfo/reportsresults/2007/jan08/jan08.pdf [Retrieved 20 September 2009] Next (2008). Next Annual report and accounts January 2008 [Online]. Retrieved from: http://www.investis.com/nextplc/financialinfo/reportsresults/2008/Next_RA.pdf [Retrieved 20 September 2009] Next (2009). Next Annual report and accounts January 2009 [Online]. Retrieved from: http://www.orderannualreports.com [Retrieved 20 September 2009] The Economist (2008). A Rose by any other name. A retailing star ticks off investors at an awkward time [Online]. Retrieved from: http://www.economist.com [Accessed 13 March 2008] Leroux, Marcus, The Times (October 23 2009). Suppliers feels the pain as Marks & Spencer cuts back

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Wachman, Richard, Guardian, The Observer (4 October 2009). How change of leadership can cripple companies [Online]. Retrieved from: http://www.guardian.co.uk/business/2009/oct/04/succession-planning-itv-marks-spencer [Accessed 16 October 2009] Wallop, Harry., Telegraph (24 November 2008). M&S planning second one day sale as high street becomes 'hooked' to discounts[Online]. Retrieved from: http://www.telegraph.co.uk/finance/financetopics/recession/3512248/MandS-planning-secondone-day-sale-as-high-street-becomes-hooked-to-discounts.html [Accessed 14 October 2009]

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APPENDIX 2: RATIO DEFINITIONS

Profitability Ratios
Gross Profit Margin
Gross Proit 100 Sales Revenue Operating Profit Margin Operating Proit 100 Sales Revenue Net Profit Margin Proit after Tax 100 Sales Revenue Return on Capital Employed Operating Proit 100 Total Assets Current Liabilities Return on Equity Equity Shareholders Proit 100 Shareholders Equity

Asset Turnover Sales Revenue Non Current Assets

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Efficiency Ratios
Inventory Turnover Inventory 365 Cost of Sales Creditor Days Trade Payables 365 Cost of Sales

Liquidity Ratios
Current Ratio Current Assets Current Liabilities Quick Ratio Current Assets Inventory Current Liabilities

Investor Ratios
Price to Earnings Market Value of Shares Earnings per Share

Dividend per Share Total Dividends 100 Total Number of Shares Earnings per Share Proit Attributable to Group 100 Total Number of Shares

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Gearing Ratios
Capital Gearing Long Term Liabilities + Short term borrowings Shareholder sEquity Interest Cover Operating Proit Finance Cost

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