Financial Analysis Of Primark Stores Ltd

Imagine that you have recently been appointed as a junior investment analyst at Bord, Dulle and Witless, a firm of stockbrokers in London.

The firm has recently been appointed by a new client to advise them on a potential stock exchange floatation (IPO). The new client is a company called Primark Stores Ltd and you have been tasked with preparing a Financial Analysis of the company which will be used to form the IPO pricing.

From the financial data sheet provided on Primark Stores Ltd (September 2016, year-end), and from your own research on the company and industry sector background, you will prepare an

analytical report in which you will critically evaluate, analyse, discuss and comment upon the key issues in the financial appraisal of Primark Stores Ltd (‘Primark’). The report and presentation,
referencing literature, will explicitly address the following matters:

An analysis of the current business and financial situation of Primark.  
 

Business and Financial Situation

The present report will be placing emphasis on the financial analysis of the Primark. To commence with the analysis, the trend analysis of ratios with the help of ratios is used to measure the financial situation of Primark for the year 016. The ratio analysis techniques are put into use to gain an in depth understanding of the financial performance of the Primark by facilitating comparison with the Next Ltd, H & M Hennes & Mauritz UK ltd, Marks, and Spencer Plc. Apart from this financial strength and weakness of the company will be analysed. Additionally, by making use of the industry sector index Primark would be ranked in terms of financially on the London Stock Exchange. Furthermore, a forecast of the profit for 2017 will be explained. The study will further provide the evaluation of the techniques and recommendations on the corporate governance structure will be provided at the end of the report.

Business Situation:

The business of Primark is organized in a manner that they remain close to the market and customers that is served by the business. Primark is the part of the Associate British Foods and they are managed as the five business segments, which collectively combines the industry expertise, operational ability and the market intelligence (Powers et al., 2014). Considering the business situation, the operational decisions of the company is made locally with people that have better understanding of the markets. The corporate centre targets to provide the framework in which the business leaders possess the freedoms and decision making authority to pursue the opportunities having entrepreneurial ability. The business situations of Primark reflect that the corporate centre agrees strategy and budgets with the business by closely monitoring the performance.

Financial Position:

The financial position of the firm in 2016 reflects that the influence of the Primark in the UK market is experiencing growth and the company is gaining strength increasingly in the strong global market with its business operations in UK, Sweden, and USA and in the regions of Middle East (Oulasvirta, 2016). Similarly adjusted earnings per share increased by 5 % to 106.2p and the basic earnings per share increased by 55% to 103.4p.
Over the years Primark reported a strong year of financial growth and cash generation as the revenue for the company stood 13.3bn pound with a rise of 9% and the adjusted operating profit of Primark stood 1.185m pound which is up by 10% from the previous year. The net capital investment of the company increased to 600 million pound with a fall in the net debt to 804m pound (Zeff, 2016). Considering the financial performance in the year 2014, Primark had reported an exceptional year with revenue increasing by 18% and the like for like sales grew by 6%. The profit of Primark was ahead by 35%.
By improving the net profit margin, the company has been successful in strengthening the order book that has ultimately increased with lower amount of loans. From the year 2014 to 2016 the current liabilities of the company have increased subsequently from 2684 million to 2960 million. In addition to this the number of employees employed in the company has gradually increased during this period from 124,000 in 2015.
However, in the year 2016 the revenue of the company increased by 5% to 13.3 bn pound and the adjusted before tax stood 1071 which is again up by 5%. On the other hand, in 2016 the company gained grounds by reporting a higher operating profit of 1103 with an increase of 18%.

Profitability and Return

Profitability and Return:

To understand the financial position of the Primark the profitability and return ratios is computed to gauge into the five-year trend of the company. The gross profit margin reported by Primark over the five years stood somewhat stable with 23.6% in 2015 and 23.4% in 2016 respectively. On the other hand, the net profit ratio stood 6.1 for the financial year ended 2016 (Williams, 2014). The operating profit margin though represented a stable trend with operating profit ratio in 2016 stood 8.23 respectively. The return on asset and return on equity represented a strong trend. Return on assets for 2016 stood 7.56. The return on equity of the firm stood 8.33 in 2015 and gain strength in 2016 as the same was reported to be 12.22.

Solvency, Stability and Efficiency Ratios:

Under the solvency ratio the current ratio is computed to understand the liquidity position of the firm in order to pay its short term obligations and long term obligations. As evident the current ratio reported by Primark has been medium with the company reporting the current ratio of 1.40 in 2016. The company has reflected that it has not been very successful in meeting its short term and long-term debt obligations (Beatty & Liao, 2014). The quick ratio of the firm determines how quickly the company uses it to meet its short term credit. Similarly, the quick ratio of Primark stood very low over the trend of five years with the lowest quick ratio of 0.57 in the year 2016 and highest quick ratio of 0.65 in the year 2015. 

The efficiency ratio is computed to determine the performance of the firm in respect of the assets and liabilities used internally. An effective efficiency ratio helps in gauging into the general use of the inventory and machinery (Warren & Jones, 2018). The accounts receivable ratio of Primark for the financial year of 2016 stood 13.88 and represented a strong trend of growth during the financial year of 2016. The fixed asset turnover ratio represented a somewhat stable trend with the ratio standing 2.78 for the financial year 2016 as Primark has been utilizing the fixed asset to mobilize the resources and earnings of the firm.

The inventory turnover of the firm stood 5.65 in the year 2015 and marginally declined to 5.32 in 2016. The inventory turnover representing the effectiveness of the firm by comparing the cost of the goods that is sold with the average period of inventory for the year ended 2016. The asset turnover ratio of the firm stood 1.24 during the financial year of 2016. It can be said that Primark has somewhat been stable in generating the sales revenue generated from the asset. From the asset turnover ratio, it can be stated efficiency of the company has been better in generating sales revenue or the sales income to the company.

Solvency, Stability and Efficiency Ratios

Investment and Shareholders Ratio:

The investment ratio for Primark is computed to determine the performance of the Primark shares its earnings per share and its yield (Cohen & Lys, 2015). The ratio serves the greatest interest to the ordinary shareholders in understanding the return on their investment. The earnings per share of the company has been gradually increasing over the five-year span as the EPS stood relatively lower. Though Primark reported a falling EPS in the year 2015 to 0.67 but gained grounds in 2016 to 1.03. The company reported the EPS that stood highest in the year 2016 of 1.03. The return on invested capital for the firm stood 10.96% in the year 2014 and subsequently increased in the following years to 11.29 in the year 2016.
The return on invested capital has been stable reflecting that the company has been successful in generating profitability and return from its capital employed. The debt to equity ratio of the firm stood relatively in the year 2016 with the company reporting debt to equity ratio of 0.09. On the overall it can be said that the appropriate return from the investment has been drawn by the firm with appropriate return to the shareholders. The debt ratio too represented a fall since the debt ratio for the year 2016 stood 5.51 with the company reported that amount of debt has gone down to 315 m pound.

Industry Sector and Competitor Analysis:

Industry Sector

The section of this report places emphasis on the industry sector and the financial situation of the Primark by comparing the company with its three competitors namely, Mark and Spencer, H & M Hennes & Mauritz UK Ltd and Next Plc. The financial ratio tools will be put into the use to asses and evaluate these three firms. Industry can be defined as the manufacturing of economic goods and service within the economy. Essentially, industry sector generally refers to the organization functioning within the same organizations. In the present research, Primark is listed under the retail industry (Bushman, 2014).

The morning star of the company intelligence clearly illustrates the four main areas of the retail industry sector index that comprises of the market, capitalisation, turnover, and total number of employees and PER prospective (Grant, 2016). With increased operations the garment industry has experienced a growth. Primark became the first UK brand to sign the accord that is designed to make sure that the sustainable improvements is made in the working conditions in the retail industry.

Investment and Shareholders Ratio

According to Henderson et al. (2015), it is believed that collaborations with the other stakeholders is key to locate the sustainable and effective solutions concerning the challenges that is faced by the garment industry. With approximately around 95% of the factories shared by the other high street brands. Several companies have collaborated with the other retailers and non-governmental organizations in order to address the industry challenges both with the help of Ethical Trading Initiative and externally with the help of non-ETI members.

Competitor Analysis:

In the present context companies such as Next Ltd, H & M and Mark and Spencer Ltd as these companies are based in UK with relatively being the retail companies. Next Ltd, H & M and Mark and Spencer is listed on the London Exchange Market. The financial ratios offer the quick and relative method of evaluating the financial situations of the organization. Ratios can be helpful at the time of comparing the financial health of the organization with respect to different firms and it helps in describing the associations amid the different items in the financial statement (Pratt, 2016). By computing the ratios, it would help in creating a better vision of the firm’s financial position along with the financial performance of the organization. Ratio analysis includes the areas of profitability, efficiency, liquidity and investment.
 

Profitability and Return:

The financial position of the Primark is not as good as the Next Ltd, Mark and Spencer and H & M particularly during the period of 2016 as the profit margin, return on assets and equity is relatively lower and the company is could still be facing the problems of liquidity in the recent years (Marshall, 2016). The analysis represents that there could be a shortage of cash and weak paying off capability even though the net profits, volume of sales and return on equity is increasing sharply in the year 2015 the company reported a fall in the sales revenue and posted a lower amount profit after tax in respect of its competitors. Primark though reported a higher net profit ratio in 2015 but it is still weaker than its other competitors.

Solvency, Stability and Efficiency:

Considering the solvency ratios, the current ratio and quick ratio of Primark is greater than its competitor Mark and Spencer however its other competitor namely the H & M has reported a better solvency ratio. Lower solvency ratio can be attributed to the lower amount of cash generated from the business in meeting its short-term debt obligations while its competitors have been successful in meeting the short-term business needs (Macve, 2015). Companies such as Mark and Spencer, H & M and Next Ltd have reported a better efficiency ratio than Primark particularly during the year 2016.

Industry Sector and Competitor Analysis

Shareholder and Investment Ratios

The shareholder and the investment ratio of Primark is better in the areas of EPS since its competitor Marks and Spencer have reported a relatively lower EPS. Other areas such as Return on Invested Capital, Debt Equity Ratio and Debt Ratio of the firm has been relatively lower than Marks and Spencer. Primark does not report any pay-out ratio since the companies does not reported any dividend being the subsidiary of Associate British Food Plc, however its competitors namely, Next Ltd, H & M and Marks and Spencer have better dividend pay-ratio.

Financial Strength and Weakness of Primark

The financial ratios help in highlighting the financial strengths and weakness of the business (Hoskin et al., 2014). By taking into the considerations financial ratios it is apparent that Primark has numerous financial strength and weakness.
 

Strengths:

Strong ability of paying off interest: As evident the company has reported lower amount of interest expenses and the results have suggested that the ability of the firm in paying off its interest is better (Jordan, 2014).

Stable increase in profitability: As evident from the analysis the gross profit margin, net profit margin and the operating profit margin of the firm has been increasing over the years. However, the inventory turnover ratio has been declining and the asset turnover has been robust representing that the efficiency of the organizations is getting better (Mullinova, 2016). Considering the Return on Invested Capital it has been increasing sharply over the years along with the robust return on assets.

Weakness:

Poor liquidity: The current ratio of the Primark is relatively lower reflecting that the Primark does not have sufficient amount of cash to meet their short term commitments to pay off their current liabilities (Schipper et al., 2017). On the other hand, the lower amount of quick ratio has reflected that Primark could be facing a recent cash trouble.

Insufficient long term borrowings: The lower amount of investment ratios reflects that the company lacks the long-term investment. Given the business has higher amount of investment ratios, which implies that the company is having large sum of money invested in the business coming from the long-term loans (Dutta & Patatoukas, 2016). Hence, the long term borrowings represents that the investors are confident with the development of the organizations.

Suitable Price ranges:

Primark has not passed on the high cotton price to its customers hence the profit of the company has been somewhat unsatisfactory. The decision of not passing the price of the cotton to the customers might lower the profit of the firm but may provide Primark with the improved price advantage. Commencing from the month of April to September the price of cotton has fell back to the basic level (Warren, 2016). On the other hand, the other problems that contributes to the unsatisfactory is the weakness in the consumer demand in UK. Since the product of the Primark has lower price in comparison to the other competitor companies, the consumer purchasing power may have the minimum impact on Primark. With lower purchasing power Primark may face the price advantage and consumers would initially choose the lower price products.

Conclusion 

The report has provided the analysis of the Primark financial conditions by comparing the results with the competitors. The company has reported a significant increase in the sales, profit and number of employees from the year 2016 with sales increasing to 13.4 bn revenue and employee’s strength of 124,000 in 2015. Especially following the international financial crisis, the profits of the company has increased and this is primarily attributable to the product price advantage. Two chief advantages of the Primark’s finance is the strong interest paying off ability of the firm and steady increase in the profit however there prevails the disadvantages in the areas of insufficient liquidity and deficiency in long-term borrowing. This problem might arise because of the company being not listed presently.

On analysing the sector competitors, it can be stated that Primark is better placed as a retail company and possess the potential to IPO. It is recommended that the company must make use of the broad performance assessment to enhance the efficiency, increase the transparency of operations to avoid misuse of the authority power and should cut down the unnecessary remuneration.
2017 Forecast:

The owner of the Primark’s British Foods Plc have posted a stronger increase in the revenue by 5% in the year 2016 and along with this the profit before tax of Primark increased by 47% to 1042 million Pound. However, the net profit of the firm could be further improved and to provide a forecast it can be stated that the standard rate of the VAT rose from 17.5 percent to 20 percent. Because of this, the sale price of the product should be increased and Primark must undertake heavy amount of discounting to maintain the price.
 

Financial Techniques Evaluation:

The objective of the financial ratio is to assess the operating and the financial difficulties surrounding the company (Callen, 2015). A large number of companies uses financial ratios due to the below stated advantages; m
a.Financial ratio can simplify and summarize the data for better analysis of the data.
b.Financial ratios are helpful for understanding the past data and current financial findings
c.Financial ratios can assist the creditors, investors and shareholders to gauge into the profitability of the firm and its ability to pay them (Hoggett et al., 2014).

Valuation affecting factors:

Some factors create an impact on the valuation of financial ratios. These factors are listed below;
a.The computations is based on the appropriate accounting data but incorrect accounting data might provide inaccurate results, which can influence the ratios (Cascino et al., 2016).
b.It is difficult to perform a comparative analysis of ratios between three firms since the amount of data required is not certain.
Corporate Governance Structure:
The objective of corporate governance structure is to assist the companies in delivering the long-term success through effective entrepreneurial and forecast management (Reeve et al., 2014). The OECD principles of corporate governance is accountable for these areas;
a.Efficient corporate governance framework
b.Rights of shareholders and vital ownership functions
c.Shareholders equitable treatment
d.Responsibilities of the board
e.Transparency

According to the belief of Primark, right governance structure could present effective protection for the stakeholders of the firm and would promote the long-term development of the company (Bodie et al., 2014). Therefore, better corporate governance possess the features of operative, consistency, accountability and transparency. 

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