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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
Oxford Brookes University
May 20X0

Word count: 6,496

Research Report


Introduction 1
Project objectives and research questions 2
Research approach 3

Information gathering
Sources used and reasons 4
Methods used to collect information 5
Limitations of information gathering 6
Ethical issues and their resolution 7

Accounting and Business Techniques used

Ratio analysis and its limitations 8
SWOT analysis and its limitations 10


Company overview and strategy 11

SWOT analysis of the company
Strengths 12
Weaknesses 13
Opportunities 14
Threats 15
SWOT in a nutshell 17

Ratio analysis
Sales 18
Profitability ratios 19
Liquidity ratios 23
Efficiency ratios 23
Gearing ratios 25
Investor ratios 27

Conclusion 29

Appendix 1: References list 30

Appendix 2: Ratios definitions 33
Appendix 3: Ratios calculations and spreadsheet 38
Research Report


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 socio-
economic 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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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
• 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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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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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 management’s
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.


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 borough’s
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.


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.

Research Report



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.

Research Report




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 company’s 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.


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 company’s 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 company’s 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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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 company’s 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).


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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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&S’s 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&S’s 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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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.


Market Share

M&S is the UK’s 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 UK’s 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 company’s 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 take-
over bid from Philip Green (Davidson, Andrew, 15 January 2006).


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)


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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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
today’s 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 people’s 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 UK’s 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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• Market share
Strenghts • Strong brand name
• Aggressive marketing

• Deteriorated financial
Weaknesses • Declining brand value
• Poor corporate

• Developing new
• Catering younger
• Online food

• Competition from other

premium food retailers
• Succession problems
• Cash tied consumers

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Sales growth
4000 M&S
3000 Next
2007 2008 2009

Sales proportion Sales proportion

UK International General Merchandise Food


49.9% 50.1%


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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.


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 there’s 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, Next’s 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 Next’s 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

30.00% M&S GPM
% of turn- 25.00% Next GPM
over 20.00% M&S OPM
15.00% Next OPM
10.00% M&S NPM
Next NPM
2007 2008 2009

Asset turnover

Asset turnover measures management’s efficiency in generating revenue from net assets utilised
by the business (Kaplan Financial, 2007). Next’s 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




3.00 M&S


2007 2008 2009

Return on capital employed (ROCE) and Return on shareholder’s 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.


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.


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, Next’s stock turnover had been significantly higher throughout the years in
consideration. Next’s 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



M&S Inventory days
Days 60 Next Inventory days
M&S Creditor days
Next Creditor days

2007 2008 2009

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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 company’s
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. Next’s 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




Times M&S

2007 2008 2009

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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,
Next’s 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 Next’s 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&S’s 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&S’s shares.

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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 UK’s 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

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 consumer’s 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.

Research Report


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
Rose’s chairman role at Marks & Spencer [Online]. Retrieved from:
[Accessed 15 October 2009]

Attwood, Karen, The Independent (11 March 2008). Investors attack M&S plan to make Rose
chairman [Online]. Retrieved from:
chairman-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

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

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--Spencer-
looks-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/article-
1181381/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:
&versionid=c6167e6e5dc44b918eb9a277b921fa23 [Accessed 19 September 2009]

M&S (2008) M&S Annual Report and Financial Statements 2008 [Online]. Retrieved from:
[Accessed 19 September 2009]

M&S (2007) M&S Annual Report and Financial Statements 2007 [Online]. Retrieved from:
[Accessed 19 September 2009]

M&S (6 October 2009). M&S expands online international delivery to 73 new countries
[Online]. Retrieved from:
[Accessed 2 November 2009]

M&S (7 January 2009) Proposal to close M&S stores [Online].

Retrieved from:
[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

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Wachman, Richard, Guardian, The Observer (4 October 2009). How change of leadership can
cripple companies [Online]. Retrieved from:
[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:
one-day-sale-as-high-street-becomes-hooked-to-discounts.html [Accessed 14 October 2009]

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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
× 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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