Decision to hold or divest from Next Plc
Introduction
Next Plc is a multinational which deals in clothing, footwear and home products. The company is domiciled in the United Kingdom and its headquarters are located at Enderby in Leicestershire. The company has over 500 stores in the United Kingdom and Ireland and over 180 stores spread out in various countries in Europe, Middle East and Asia. Next is currently the largest clothing retailer in Britain and is listed on the London Stock Exchange (http://www.nextplc.co.uk). Next Plc is a constituent of the FTSE 100 Index. The company’s history can be traced to J Hepworth & Son, Gentleman’s Tailors which was a company established in 1864 in Leeds, England. The company changed its name to Next Plc in 1982 with the opening of the first store offering an exclusive coordinated collection of stylish clothes, shoes and accessories for women. Next Plc clothes are designed and styled by in-house design team to ensure the company offers great style, quality and value for money to its customers which also creates an edge in contemporary fashion (http://www.nextplc.co.uk). Next Plc expanded its product range in the succeeding years by adding menswear in 1984, home interiors in 1985 and children wear in 1987 which transformed it to a full-line lifestyle brand company (http://www.nextplc.co.uk). In 1988, Next Plc introduced a new mail order operation line called Next Directory, with a hardback book containing 350 pages, which heralded a new standard in home shopping by incorporating catalogues which embraced glamorous photography and production values that are features of glossy magazines of fashion. The directory can be accessed through www.next.co.uk. Next Plc hence presented its customers with new ways of shopping via in-store, mobile and online shopping options. Next also undertakes other business lines namely Next Sourcing and Lipsy designs. Next Sourcing has operations in the UK, India, Sri Lanka, Hong Kong and Mainland China. Next Sourcing is engaged in design, sourcing, buying, merchandising and quality control of Next Plc products. Lipsy designs line on the other hand is a line of Next Plc.’s business that designs and sells younger women fashion products branded in its own brand name (http://www.nextplc.co.uk).
| Year ended January | 2013 | 2012 |
| Group revenue | £3.5 billion | £3.4 billion |
| Group profit before tax (before exceptional gains) | £622 million | £570 million |
| Total employees | 54,507 | 52,569 |
| Total full time equivalents | 28,301 | 28,685 |
| UK & Eire NEXT stores – number | 540 | 536 |
| UK & Eire NEXT stores – sq. footage | 6.7 million | 6.5 million |
| Average active Directory customers | 3.3 million | 3.0 million |
| Annual total of Directory pages | 4,204 | 4,180 |
| Share buybacks – number of shares | 7.5 million | 12.5 million |
| Share buybacks – value | £241 million | £290 million |
According to the information contained in the table above, the company’s revenue increased from £3.4 billion to £3.5 billion which shows that the company is experiencing growth in its various lines of business (http://www.nextplc.co.uk). The company is also a major employer with employees topping 54,507 as at 2013 up from 52,569 in 2012 out of which 28,685 in 2012 were permanent and28,301 were permanent in 2013. The number of directory pages increased from the initial 350 in 1988 to about 4,204 as at 2013(http://www.nextplc.co.uk).
Next Plc Key statistics and ratios
| Q3 (Jul ’13) | 2013 | |
| Net profit margin | 12.96% | 14.28% |
| Operating margin | 16.99% | 19.51% |
| EBITD margin | – | 21.55% |
| Return on average assets | 22.95% | 27.14% |
| Return on average equity | 179.28% | 200.12% |
The table above shows that the company is profitable and makes a positive return on shareholder’s funds (http://www.nextplc.co.uk).
| Current year -2013 | Previous year – 2012 | % Movement | |
| Revenue | £3.5 billion | £3.4 billion | 2.9% |
| Operating profit/loss | £695 million | £602 million | 15.5% |
| Capital employed | £286million | £223million | 28.3% |
| Total assets | £1,894million | £1,854million | 2.2% |
| Net cash generated/ used in operating activities | £659million | £526million | 25.3% |
| Number of employees | 54,507 | 52,569 | 3.7% |
| Earnings per share | 320.1pence | 282.0pence | 13.5% |
| Financial proposed dividend per share | 105.0pence | 90.0pence | 16.7% |
| Year end share price | 4059 pence | 2639pence | 53.8% |
| Year end market capitalization | £6,544million | £4,453million | 47% |
Financial ratios
Sales Growth Ratio
The sales growth ratio of a company measures the rate at which the sales of a company grew within a given period in time (LEE, 2010; ALLEN, HOUSE and ROSENBERG, 2009). The sales growth ratio of a company is derived through the following formula;
Sales growth ratio= Current period sales less previous year’s sales divided by previous year’s sales (Lumby & Jones 2003, p. 201).
Hence for Next Plc the sales growth ratio for 2013 =£3.5 billion-£3.4 billion/£3.4 billion=2.9%
From the ratio one can see that the sales of Next Plc grew by 2.9% in 2013.
The sales growth ratio for 2012 is as follows.
Revenues in 2011 were= £3.3 billion,
Revenues in 2012 were =£3.4 billion
Sales growth ratio=£3.4 billion-£3.3 billion/£3.3 billion=3%
According to the tabulation above, the sales growth ratio of the company was 2.9% in 2013 and 3% in 2012. The sales growth was therefore relatively constant with the two years.
Gross profit margin
Gross profit margin is a ratio that measures a company’s ability to cover its cost of sales. The ratio measures profitability ratio of a company without consideration of the company’s indirect costs (Monks & Lajoux, 2011; NISSIM and PENMAN, 2003)). The formula for calculating gross profit ratio is by dividing sales by gross profit. According to Mautz & Angell (2006) gross profit should be adequate because it is used to pay operating expenses and other associated company expenses. Next Plc gross profit margin is as follows
| Current 2013 | Previous 2012 | |
| Sales | £3.5 billion | £3.4 billion |
| Gross profit | £1.13billion | £1.05billion |
| Gross profit margin | 32.3% | 30.6% |
Formula for gross profit margin=gross profit/sales
The table above shows that the gross profit margin increased from 30.6% in 2012 to 32.3% in 2013. This means that the company’s performance improved in 2013 as compared to 2012.
Net profit/loss margin
The net profit/loss margin on the other hand measures a company’s ability to meet its operating expenses, depreciation/amortization expenses and finance costs and still report returns that can be paid to shareholders as dividends at the end of the trading period (HARRIS and ARNOLD, 2013). In effect it is a measure of capital appreciation or depreciation of a company. A company that reports losses erodes its capital base during the year (Palmer, 1983).
The net profit/loss margin is obtained by dividing the net profit/loss by the sales at the end of the financial year.
Next Plc Net profit/loss ratio is as follows.
| Current 2013 | Previous 2012 | |
| Sales | £3.5 billion | £3.4 billion |
| Net profit/loss | £508.6million | £474.8million |
| Net profit margin | 14.5% | 14% |
The table above shows that the net profit margin increased from 14% in 2012 to 14.5% in 2013. This means that the company’s performance improved in 2013 by 0.5% over the performance of the previous year.
Liquidity ratios
Liquidity ratios of a company measure the company’s ability to meet its short term liabilities mainly within a year. Liquidity ratios therefore provide a good tool for analyzing the position of a company with respect to meeting short-term obligations when they fall due. Liquidity ratios, otherwise known as solvency ratios, provide comfort to a company’s creditors that the company will be able to meet its obligations as they fall due.
The commonly used liquidity ratios are as follows;
Current Ratio– This ratio tests the working capital adequacy of a company. Current ratio is obtained by dividing the total current assets by the total current liabilities of a company (NAJJAR, 2013). The current ratio for Next Plc for 2013 and 2012 is shown below;
| 2013 | 2012 | |
| Total current Assets | £1.21 billion | £1.14 billion |
| Total Current Liabilities | £816 million | £742.4million |
| Current Ratio | 1.5:1 | 1.5:1 |
According to the table above, the current ratio of the company was 1.5:1. Even though financial recommend as a rule of the thumb a current ratio of 2:1, the current ratio at Next Plc in 2013 and 2012 was not too way of. It meant that for every pound the company was owed it had one and half pounds of assets that it could use to pay off the outstanding liabilities.
Quick ratio/ Acid test ratio
This liquidity ratio tests a company’s ability to meet its short term liabilities without relying on its stock or inventories. This is because stock may not be easy to sell and the company may have to rely on its more liquid assets less stock/inventories to meet its short term obligations (BROOKS, 1991; GARDINER, 1995). This ratio therefore tests the liquidity of a company without relying on its stock. The quick ratio or acid test ratio of a company is arrived at by dividing the current assets of a company less the inventories by the current liabilities (Schroeder, Clark, & Cathey 2011). A company that has a quick ratio of 1 and above is regarded as being liquid whereas one with an acid test ratio of less than 1 is regarded as being illiquid (Gupta 2008, p. 71). A ratio of 1 and above implies that the company is able to meet its short term financial obligations without a hitch (Wetherly & Otter 2008, p. 117). The Quick ratio/Acid test ratio of Next Plc for the years 2013 and 2012 is as shown below;
| 2013 | 2012 | |
| Total Current assets less inventories | £876 million | £768 million |
| Total Current liabilities | £816 million | £742.4million |
| Quick Ratio | 1.1:1 | 1:1 |
The table above shows that Next Plc quick ratio for the financial years 2013 and 2012 was at least 1 which showed that the company is able to meet its short term financial obligations without relying on inventories (LIAO, 2008).
Return on Equity ratio
Return on equity ratio is a ratio that measures return from operations on equity of the firm. It measures the return the company is generating for its shareholders. If it is positive it shows that the shareholders are making a return on their investments (ATTMORE, 2013). If it is negative it shows operations are depleting the shareholders stake in the company. The return on equity is derived by dividing net profit by total equity funds of a given year (DONICI, MAHA, IGNAT and MAHA, 2012). Next Plc return on equity is shown below.
| 2013 | 2012 | |
| Net Profit | £508.6million | £474.8million |
| Total Equity | £286 million | £223 million |
| Return on equity | 177.8% | 213% |
The table above shows that the company made an impressive return on equity during the two years under review. This shows the company grew its asset base in the two years.
An Analysis of the performance of your company over the last trading period using all relevant percentage movements, financial ratios and information
The ten year financial summary shown in the table below
| 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | |
| Revenue * (£m) | 3,548 | 3,441 | 3,298 | 3,406 | 3,271 | 3,329 | 3,284 | 3,106 | 2,858 | 2,516 |
| Profit before tax * (£m) | 622 | 570 | 543 | 505 | 429 | 498 | 478 | 449 | 424 | 358 |
| Taxation * (£m) | (149) | (143) | (150) | (141) | (127) | (144) | (147) | (136) | (119) | (108) |
| Profit after tax * (£m) | 473 | 427 | 393 | 364 | 302 | 354 | 331 | 313 | 305 | 250 |
| Shareholders’ funds (£m) | 286 | 223 | 232 | 133 | 156 | (79) | 189 | 256 | 276 | 155 |
| Underlying EPS (p) | 297.7 | 255.4 | 221.9 | 188.5 | 156.0 | 168.7 | 146.1 | 127.4 | 120.2 | 93.9 |
| Dividends per share (p) | 105.0 | 90.0 | 78.0 | 66.0 | 55.0 | 55.0 | 49.0 | 44.0 | 41.0 | 35.0 |
| Shares in issue at year end (m) | 161 | 169 | 181 | 191 | 197 | 201 | 227 | 246 | 261 | 265 |
| Shares buybacks (shares, m) | 7.5 | 12.5 | 10.0 | 5.9 | 3.9 | 26.1 | 19.0 | 15.0 | 4.0 | 21.7 |
| Share buybacks (£m) | 241 | 290 | 205 | 120 | 54 | 514 | 316 | 218 | 57 | 209 |
| Share price at year end (p) | 4059 | 2639 | 1994 | 1966 | 1097 | 1375 | 1946 | 1698 | 1592 | 1292 |
| Market cap at year end (£m) | 6,544 | 4,453 | 3,614 | 3,758 | 2,162 | 2,764 | 4,418 | 4,179 | 4,157 | 3,425 |
As shown in the table above, the company’s revenue has grown from£ 2.5 billion in 2004 to £3.5billion in 2013 which is a growth rate of about 40%. Profit after tax grew from £250million in 2004 to £622million in 2013 which is a growth rate of 149 %( Kuching, 2012). All other parameters analyzed above show a phenomenal growth of the company. From the foregoing it is clear that Next Plc has been trading profitably over the last ten years. The company made a profit each year since 2004 up to the current period. The company’s sales revenue also grew each year since 2004 to 2013.
During the financial year 2012 and 2013, the company’s revenues grew by 2.9 % which was the same growth witnessed in the period 2011 and 2012. The company’s revenues have therefore been growing each year which is a sign of good trading conditions and effective management within the company. The company’s return on equity has also been quite impressive. It has surpassed 100% mark to 213% in 2012 and 177%in 2013. This shows that the company is effectively utilizing its assets to generate revenue for the shareholders (ACHIM, ACHIM and BORLEA, 2009). A company which is returning a high return on equity normally sees its stock price at the stock exchange rise quite fast. Next Plc stock price rose by 53.8% between the periods 2012 to 2013 (Anonymous, 2010). This is a reflection of the impressive trading performance that the company has been reporting each financial year. The company’s gross profit margin and net profit margin have also been impressive showing that the company has been generating adequate funds from its lines of business to cover the operating expenses, cost of sales and other operating costs (PAKDEL, SADEGHI, MOHAMMADI and HAMEDI, 2012).
Conclusion
According to the financial performance of the company I would advise that the small public sector pension scheme to not only continue holding its investment in the company but to increase it since the investment will get capital gains going forward.
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