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HOUSE OF FRASER & MATALAN

[ return to top ] Financial Analysis of Matalan and House of Fraser Investment Analysis Matalan & House of Fraser Introduction In this essay I would like to elaborate on the investment analysis of two companies, open a space of possibilities in discourse and practices in order to determine which of the two companies to invest in. The essay will commence with a brief overview of the two companies that are being considered. The latter part of the essay will explain and critique the financial position of the two companies and also the strategy and structure of the organization. For this purpose different financial tools will be used. The conclusion will be description and reasons for the company chosen to invest. Company overview Matalan Plc is quoted to the FTSE 250 with a current market capitalization of 695.83M. The Group is an out of town retailer, which it distributes its products straight from the manufacturer. The company operates a chain of 143 retail stores, covering the United Kingdom and its main product range consists of clothing and footwear for ladies, men and children, as well as furnishings for home. Some famous brands that the Group is trading include Wrangler, Wonderbra, Falmer, Wolsey. In 2003 the Group's UK clothing market share was 3.1% increased by 0.3% compared to 2002 and Matalan is now the UK'S fifth largest clothing retailer by value and third largest by volume. Matalan plc now has over 9.1 million active members (an increase of 11%), while its store estate in 2003 has increased from 143 to 163. Its total trading space is up 22% to 4.5 million sq ft, while its average store size is up 8% from 25,578sq ft to 27,695 sq ft. The Group's strategy focuses on six key areas, in order to improve the operational effectiveness of its business. By already having the advantage of prices up to 50% below the equivalent high street prices due to products directly brought by the manufacturer and low overhead costs, as a result of its out of town location, the Group targets to a sustainable profit growth in the future by investing on: a) People development, b) systems capability, c) supply chain, d) retail execution e) brand development and f) buying and sourcing system. The second company to be considered today is House of Fraser. House of Fraser is Britain's leading

retailer of designer brands. It operates a chain of 50 stores in the United Kingdom. Its product range consists of clothing, footwear, furnishing and food. Some famous brands that the Group is trading include Gucci, Dolce & Gabbana, Armani. House of Fraser is quoted to the FTSE with a current market capitalization of 234.80 million. The groups strategy focuses on a) people development b) new store opening program c) develop brand d) reposition the home office e) information technology development f) supply chain g) cost saving. Financial overview To ascertain which of the two companies to invest in it is very important to know the present financial position of the two companies. In this part of the essay I will be analyzing the financial statements of the two companies, which will help me ascertain their present position and also to a certain extent help me predict their future. For this I will be using certain financial tool like the ratio analysi s, cash flow analysis etc. To get a brief history of their financial performance I have looked into the 4-year financial records of the two companies. Looking into the financial statements on the two companies for the past four years it is seen that Matalan has shown an increase in turnover since 2001 although the rate of increase has dropped between 2003 and 2004. House of Fraser showed a minor rise and fall over the years. This is because of sales of store refurbishment projects etc. Looking at the profits it is seen that Matalan, despite a constant increase in turnover, has shown an increase in operating profit and PBT until 2003 and a steep fall in Operating profit and PBT in 2004. On the other hand House of Fraser has shown a constant increase in operating profit & PBT. This has had a similar knock-on effect on EPS for both the firms. Coming to the dividends it is seen that Matalan has shown an increase in Dividend per share in 2002, 2003 and an increase of 12.5% in 2004 DPS for House of Fraser shares has remained constant at 5.5p per share since 2001. Moving to the financial analysis of the two companies. To make this process simple I have divided the financial analysis of the companies under 4 segments

y Earning stability and working capital y Short-term finances y Profitability y Gearing

Earning stability and working capital EARNING STABILITY

YEAR MATALAN (%) HOUSE OF FRASER (%)

2003. 2. 6

-2004

-1.4

2002. 20. 5

-2003

-0.73 The first and most important aspect to be looked into while assessing an organization is to see how stable the organization is. For this I have compared the sale and profits of Matalan and House of Fraser to compare and contrast which company has more earning stability. This is also a method by which we can predict the future of the organizations. It here that I would like to emphasize that inspite of the increase in the sales of Matalan it shows a steep fall in its operating profit from 2003 to 2004. The reason for this is the fall of the like to like sales by 6.5%. It is seen that house of Fraser faced a fall is the sales due to store disposal and disruptions from the refurbishment work. But it is appreciable to note that inspite of all this they were still able to maintain their profit. This is because house of Fraser changed their strategy from being a discount led store promotion to targeting their loyal and higher spending customers with reward scheme promotions. From a broader point of view, one of the main drivers of this diminution of sales and profit before tax in the year up to March 2003 was the world's economic circumstances. Indeed, the period November 2002-March 2003 was a very weak trading period for retailers due to the general economic recession of the world markets and actually the growth of the retail sales during that period reached the lowest point of the last ten years at -1.3%. Looking into their working capital it is seen that Matalan's policy is to finance its operations through combination of retained profits, short-term bank borrowing and trade finance. Moreover its fixed interest debt should have duration of not less than eighteen months and not more than four years. In general, its targeted short-term flexibility is achieved by overdraft facilities and short-term paper hence causing a

high interest cover ratio. House of Fraser has a mixture of short and long term borrowings, retained profits. It is ideal for a company to have a mixture of both short and long term borrowings. Thus it is clear from the table above that House of Fraser is more stable as compared to Matalan. It is true that the sales of House of Fraser have declined but like mentioned earlier it was due to the store closure and the refurbishment program. In the future it is clearly seen that with the new stores and store improvements that have been undertaken the sales are more likely to rise. Short-term finances Company Year Current ratio Quick ratio Matalan 2004 0.98 0.29 House of Fraser 2004 0.88 0.22 Matalan 2003 1.08 0.24 House of Fraser 2003 0.81 0.18 The current ratio is not high, for both the companies however it does not imply any difficulties from the firm to meet its maturing obligations, since general retailers produce a lot of cash from their daily trading activities. It must also be noted here than the quick ratio is very low this means that both the companies have always had high level of inventory. Thus it is seen that coming to the short term financing both the companies are more or less the same. They would need to sell their stock. Finally the limited liquidity of the firm as a result of its remaining stocks is highly offset by the long period that needs to pay its creditors and the short period that takes to be paid from its debtors. Thus, it gets a kind of free finance from its trading activities. Profitability Another aspect to be looked into while assessing the firm's financial position is the profitability. Every firm operated with an aim to earn profit. For an investor it is very important that the organization earn profit as the more the profit the more the return that the shareholder gets in the form of dividend. The firm also increases its value by earning profit and increasing its customer base. After looking at the profitability ratios of Matalan it is seen that in all the profitability ratios of Matalan there is a decline in the year 2004 as that of 2003. The main reason for the diminution of profitability is the great fall of the sales growth for the year up to March 2003 that has generated relatively lower levels of profit. On the other hand, the capital base of the firm grows steadily due to the growth of the total reserves, but it remains unaffected by the ordinary share capital (the firm does not issue any new stocks) and the long - term debt that was 0 in 2003.

It must also be noted here that Matalan focuses on using the returns i.e. retained profits for the day to day running of the organization. In this case it is a threat to the investor as if the company does not earn enough profit then they wouldn't not have enough working capital, which will in turn lead them into borrowing and thus the interest cover will increase. All of this will increase the company's liability. The company also needs to build a momentum on the market and add consistency and sustenance on its performance. On the other hand it is seen that House of Fraser were able to maintain their profit over the years. House of Fraser did have a fall in sales too as a result of store closure and the refurbishment program, but profits increased as they changed their strategy during this period. Their focus was on targeting the loyal high spending customers with rewards scheme promotions. It must also be noted here that with the new stores program, the cost reduction program, store uplift, etc. the sales are likely to go up in the future which will add to the profit increase. All of these initiatives are expected to start making returns in due course. It is positive future that is forecasted for House of Fraser. Gearing While making a decision on investing in a firm another aspect to be considered is the company-gearing ratio. It is a measure of financial leverage, demonstrating the degree to which firm's activities are funded by owner's funds versus creditors funds. The higher the company's degree of leverage, the more the company is considered risky. A company with high gearing is more vulnerable to downturn in the business cycle because the company must continue to serve its debts regardless of how bad sales are. From the table above it is clearly seen that the gearing or leverage of Matalan is higher as compared to House of Fraser. Therefore it is seen that Matalan is at a higher risk than House of Fraser. It is at this point I would like to mention that Matalan is at a higher risk as compared to House of Fraser as Matalan has a trend of fall in profit and also higher gearing as compared to that of House of Fraser. Therefore Matalan is more vulnerable to downturn in the business cycle. From the investors point of view this is not a good indication for Matalan. House of Fraser with the focus on debt management program have improved considerably in the management of their debt despite of all the capital expenditure they incurred which related to the cost of the new store opening and the refurbishment program. Conclusion In conclusion I would like to mention that Matalan's financial position up to year 2003 was still safe; however the reduced profitability of the company in the years after and its weakness to `turn over' its stock may result to a great reduction of the company's current asset base. Lack of cash inflow from operating activities due to low profit, will make Matalan seek for external funds like short term and longterm debt, in order to support its operations and therefore it will increase the current and total liabilities of its balance sheet. Hence causing significant problems for the firm to meet its maturing obligations in the near future. In the case of House of Fraser the sales have been more or less consistent over the last 5 years thus increasing the cash inflow they were also able to maintain their profit over the years.

It is at this point that I would like to mention about the share price and broker sentiments it is to be noted at this point that the share price of house of fraser have been more or less consistent and that of Matalan have been a rise and fall. it is also to be noted that 9 of the brokers out of 13 for house of Fraser suggest the shareholders to buy more shares and only 2 suggest to sell. In the case of Matalan out of 16 brokers only 3 say buy while 6 suggest sell (www.hemscott.com) Looking into all the details above it is thus seen that House of Fraser is a better investing choice as compared to Matalan. The main reason why House of Fraser is better is because it has been consistent. Matalan has been having rise and falls over a period of time. Despite Matalan being a out-of town retailer which sells goods at cheap prices and House of |Fraser being he city store which sells designer wear it is noted that financially House of Fraser is performing better than Matalan. Matalan in comparison to House of Fraser takes the advantage of low rent (out of town location), cheap products (bought straight from the manufacturer), but still had a fall in the profit, is more vulnerable to changing economic trend (high gearing) high fluctuating sales figures. Not to forget the broker sentiments attached to the firms. It is clearly seen after all the initiatives taken by both Matalan and House of Fraser and looking at their performance the brokers have suggested to buy House of Fraser shares keeping in mind the improving performance. Thus I would like to conclude by stating that it is better to invest in a stable firm like House of Fraser than a firm that has a fluctuating trend like Matalan. Reference 1) Management accounting Ray H. Garrison, Eric W. Noreen, Willie Seal European edition London McGraw Hill 2002

2. Managing Financial Resources- Michael Broadbent and John Cullen 3. rd edition Oxford: Butterworth- Heineman 2003 3. Financial reporting Practical element R. J. Kirk 3. rd edition CIMA 1996 4. Financial statement analysis: theory, application and interpretation / Leopold A Bernstein and John J. Wild 6th edition Mc Graw Hill 1998 5. Annual Report of Matalan 6. Annual Report of House of Fraser

7. www.hemscott.com 8. www.fame.bvdep.com 9. www.matalan.com 10. www.houseoffraser.com

Nike Financial Analysis

[ return to top ] Nike Financial Analysis Nike Financial Analysis

Investing in a company has certainly changed over the years. Financial information is literally at one?s fingertips via the internet. In today?s fast paced corporate environment companies are under tremendous scrutiny to maintain their edge. The company I am evaluating is NIKE. This Financial analysis will consist of th e following: Ratios from the Income Statement, Statement of Owner?s Equity, and Balance Sheet. This information is designed to assist a potential investor. Nike?s mission is complex. Listed below is a copy of Nike?s company philosophy. Company Philosophy: WE ARE ABOUT DREAMS. Nike was, is, and will always be a company driven by certain key philosophies. What are they? First and foremost, we are a company dedicated to innovation and the passion to create great product. From Bowerman's Waffle Trainer to the Tour Accuracy golf ball, we make every effort to take consumers where they want to go before they realize they want to go there. WE ARE ABOUT THE CONSUMER. The consumer rules the roost. They make the important decisions. I answer to them, as we all do. The opinions of Wall Street analysts and media pundits are really just derivatives of our relationship with our consumers. When the young at heart seek out our products, when they respond to our messages and believe in what we stand for, when our relationship with consumers is healthy, that's when we grow. Even so, gaining true understanding of our consumers, and thereby being able to deliver meaningful innovation to them, is a huge challenge. It's not the demographics that change; it's the deliverables. Ours is a constantly moving target. Technology continues to increase the pace and volume of options in all of our lives. WE ARE ABOUT IRREVERENCE. We are about irreverence. The great thing about Nike is that we have the ability to laugh at ourselves, to ind the humor in what we are doing, to compete aggressively but also to have fun. It shows in our best advertising, from Mars Blackmon to Andre Agassi. Irreverence has always been a core part of our culture. It is, for us, the balance between our attempt at greatness and the risk of arrogance. We mix confidence and strength with the humility to look at ourselves in the mirror and say, we can do better. WE ARE ABOUT WINNING AND COMPETING HARD. We invent markets and new ways to compete. We have withstood every challenge that has come our way. Winning starts with taking care of business at home and then looking for new challenges. We are doing both. WE ARE ABOUT CHANGE. Over the past twenty -five years we have had to reinvent ourselves many times. The first surge was with the Waffle Trainer and the running craze. When that

slowed, we thought we ran out of market. We had another surge with basketball behind Michael Jordan, and cross-training with Bo Jackson. Then again, we Thought our growth was dead. Another surge came in 1995, when Nike became fashionable and athletic urban wear became king. But,that too ended in early 1998, as did the health of the Asian economy. There we were, with an over-extended brand. Each time we reinvented our company. In 1995, when we reached $3 billion in sales, we said $5 billion was the absolute limit. Three years later we were closing in on $10 billion. Each time we did succeed it was due, in part, to our fear of failure, which drove us harder and faster. Each time, however, it has gotten harder. We have covered more of the market, and now the targets seem smaller and more numerous. We have stretched our Nike brand quite far. Some say too far. Others say it still has more reach to go. What is clear to me now is that the market has changed. We have new competitors and, as before, we need to adjust. We need to expand our connection to new categories and toward new consumers. WE ARE ABOUT SOCIAL RESPONSIBILITY. You have all read the press and seen the media regarding Nike's labor practices. The reality is, we have set the highest standards of conduct and practices in the industry. We have the responsibility to let the rest of the world see this and know it as well. That's why we are releasing a full corporate responsibility report this fall. It's a strong beginning. Where we are going. My aspirations for Nike are simple: I want Nike to be "the best company it can be." I want it "built to last." It must sustain beyond any team or any individual, including. Especially me. I won't say achieving these aspirations will be easy. But, they are the right ones for a company with our position, our brand reputation, our industry, our influence, and our capabilities. I believe we have the potential to do it. We've done it before; we can do it again. It won't be easy. There are a million reasons why we won't succeed. There will be challenges and road bumps along the way. Some will lose confidence. The Street and the media will be licking their chops. And the stock will fall, and the stock will rise. We have to be prudent and manage a tight ship. But, if the time comes to choose between managing our short-term earnings and creating long-term success, I choose the latter. If that means taking another hit with the stock, then I'm willing to live with that. If we are t o succeed, one universal truth is clear: We need to go through a re-commitment process. It's one I've had to go through over the past year, and I can tell you, it's not easy. We are building the leadership team that will help Nike succeed in the long term. We will be honest with you and work through our challenges. We will have bad times. But then we will have better times and, soon, great times. We can do this. We will do this. One last constant thought: As we step into the future, there is an important piece of the past that we take with us. It is the memory of a singular man who passed away in his sleep on Christmas Eve. Strategically eccentric. A natural motivator. Complete in his understanding of sports and the athlete. Tireless in his pursuit of innovation. That man is Bill Bowerman. And while no reference can give justice to his contribution or adequately express his spirit, we will always try to be that which would make him proud. Philip H. Knight Chairman of the board And CEO Nike Financial Ratios 19 99 (In Millions) Current Ratio = current assets/current liabilities = 5,247.7 divided by 1,4469.9 = 3.626 In most industries, according to the textbook, 2.0 is considered a good ratio. Acid Test Ratio = cash + short term investments + current receivable/ total current Liabilities = 198.1 + 1,540.1 + 65.4 + 73.2 = 1.297 Nike?s ability to pay all of their current liabilities, if they all came due immediately, is strong. According to most financial publications, an acid test of .90 to 1.00 is acceptable in most industries. Debt Ratio = total liabilities/ total assets = 1913.1 divided by 5247.7 = .364 Most company?s debt ratios range around .57 - .67. Nike?s .36 debt ratio indicates a low risk debt position. Times-Interest-Earned Ratio = income from operations/ interest expense = 790.2 divided by 44.1 = 17.9 The norm of U.S. businesses in this ratio falls in the range of 2.0 to 3.0 for most companies. This ratio of 17.9 means that Nike as a company can cover their interest expense almost eighteen times with their operating income. This figure in a word ?Outstanding. Rate of Return on Sales = net income/ net sales = 451.4 divided by 8,776.9 = .0514 This ratio shows that Nike earns five cents for every dollar in sales. Rate of Return on Assets =

net income + interest expense/ average total assets = 451.4 + 44.1 divided by 5,247.7 = .094 (1997 total assets not listed) This ratio measures how profitably a company uses its assets. This is simply another tool to measure a company?s profitability. The rate of return on assets varies largely from industry to industry. Rate of Return on Common Stockholders Equity = net income preferred dividends/ avg common stockholders? equity 451.4 divided by 3298.1 = .136 This rate of return again is a measuring stick of profitability. Nike?s 13.6% rate of return on stockholder?s equity would be considered strong in most industries. Earnings per share of Common Stock = 1.59 This ratio must appear on the face of a company?s income statement. Nike (EPS) is up from 1.35 in 1998. This is another sign of a strong company, although it is not uncommon for a company to have a down year. These ratios show the following: Nike has a very good ability to pay current liabilities. This was evident in the current ratio and the acid test. Nike has an excellent ability to pay short term and long-term debt. This was proven in the debt ratio and times-interest-earned ratio. Nike is a solid company in 1999, from a profitability stand point. This was apparent in the Rates of return on sales, assets, and common stockholder equity. I would recommend Nike to a potential investor because of the reasons listed above, in this analysis. I would also recommend a thorough analysis of the Industry by researching at least tow of Nike?s closest competitors. [ return to top ]