Strategic Financial Management: Analysis of Marks & Spencer PLC

This report provides a financial analysis of Marks & Spencer PLC for the last three years, including profitability ratios, liquidity ratios, efficiency ratios, and gearing ratio. It also discusses significant developments within the company and the retail sector, as well as challenges and opportunities for the foreseeable future.

STRATEGIC FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY ..................................................................................................................................1
Financial analysis and performance of MARKS & SPENCER PLC for last 3 years. ...............1
Significant developments within the company and the retail sector ...........................................7
Challenges and opportunities for foreseeable future...................................................................7
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Strategic financial management refers to study of finance with the long term views
considering strategic goals of organisation. It not only deals with managing the finances of
company but are also concerned with managing these with intention of succeeding. Objective of
strategic financial management is to achieve goals and objectives of company with maximising
the wealth of shareholder over the time. It is essential for the company to identify and define its
key objectives strategically. Finance managers are required to utilise the available potential
resources of company and devising a strategic plans for achieving the goals and objective of
company. It deals in creating profits for the enterprise ensuring acceptable return over its
investments (Cornwall, Vang and Hartman, 2019). Financial objectives are accomplished using
the financial plans of business, by setting financial controls and more accurate and effective
financial decision making. The present report is based over Marks and Spencer Plc. Report will
provide the financial analysis of company and the performance of company in last three years.
Report will also cover the developments with challenges and opportunities in the foreseeable
future including both financial & non financial elements.
MAIN BODY
Marks and Spencer is amongst the largest multinational retailer in Britain with the head
quarters in Westminster, London. Company specialise in sale of clothing, home goods and the
food products. It is a publicly listed company on London stock exchange. Company is having
around 959 stores in UK. Company is selling its products worldwide. Company is performing
efficiently in the market with the annual revenues of 10377.3 million British pounds, operating
income of 601.0 million and net income of 37.3 million pounds. Company is having currently
80787 number of employees. The further financial performance of company could be assesses
using the financial figures of company.
Financial analysis and performance of MARKS & SPENCER PLC for last 3 years.
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RATIO ANALYSIS
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Particulars Formula 2019 2018 2017
Profitability Ratios
Return on capital
employed
Net
operating
profit/Em
ployed
Capital 12.09% 11.72% 11.66%
Employed Capital
Total
assets –
Current
liabilities
(7200-
2228.4) 4971.6
(7550-
1826) 5724
(8292.5-
2368) 5924.5
Net operating
profit 601 670.6 690.6
Return on Equity
Net
Income /
Sharehold
er's
Equity 1.39% 0.99% 3.67%
Net Income 37.3 29.1 115.7
Shareholder's
Equity 2680.9 2954.2 3150.4
Gross profit
margin
Total
Sales –
COGS/To
tal Sales 36.91% 37.84% 38.49%
COS 6547 6650 6534
Sales 10377 10698.2 10622
Operating profit
margin
Operating
Income/
Net Sales 5.79% 6.27% 6.50%
Operating income 601 670.6 690.6
Revenues 10377 10698.2 10622
Assets Turnover
Sales /
Net assets 387.07% 362.14% 337.21%
Sales 10377 10698.2 10622
Net assets 2680.9 2954.2 3150
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Liquidity Ratios
Current assets 1490 1317.9 1723.3
Current liabilities 2228.4 1826 2368
Inventory 700.4 781 758.5
Quick assets 789.6 536.9 964.8
Current ratio
Current
assets /
current
liabilities 0.67 0.72 0.73
Quick ratio
Current
assets -
(stock +
prepaid
expenses) 0.35 0.29 0.41
Efficiency Ratios
Inventory 700.4 781 758.5
Trade Receivables 322.5 308.4 318.6
Trade Payables 1461.3 1405.9 1553.8
Days 365 365 365
COS 6547 6650 6534
Sales 10377 10698.2 10622
Inventory days
Inventory
/
COS*365 39.048 42.867 42.371
Debtor days
Debtor/
Sales*365 11.34 10.52 10.95
Creditor days
Creditor /
Sales*365 51.40 47.97 53.39
Investor Return
EPS
Total
Earnings/
Outstandi
ng shares
Total Earnings 413 452 492.8
Outstanding
Shares (in
millions) 1627 1629.4 1631.1
EPS 0.254 0.277 0.302
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Gearing Ratio
Long-term debt 1279.5 1670.6 1711.7
Shareholder's
equity 2680.9 2954.2 3150.4
Debt-equity ratio 0.48 0.57 0.54
Financial performance and position of company can be assessed using the financial
ratios. The true position cannot be judged b seeing the figures given in the financial statements,
ratio analysis helps in assessing the internal position of company. Marks and Spencer is a large
retailer serving the market but its actual performance can only be judged assessing its financial
statements. Profitability ratios of company are used for assessing the effectiveness of company in
running its operations.
Return on capital employed of company for 2019 was 12.09%. It shows gradual increase
in its return over the three years. Significant variation are not seen in the figure of last three years
(Annual Reports,2019). Return of company has remained despite of fall in operating profit of
company continuously during the three years with the decrease in capital employed. Current
liabilities of company have increased and company has also disposed off the unproductive assets
from its financials (Brandes and et.al., 2016). Disposing off the assets have helped company in
maintaining the return over capital employed. The return shows the utilisation of the resources is
adequately made by the company.
Return over equity of company for three years showed significant variations. In 2017
return was 3.67 where it fell to 0.99 % in 2018. However company due to effective management
and reducing the share capital of capital of company managed to increase its return over equity to
1.39%. Every investor invest in the company with the motive of earning adequate returns over
their investment. Companies with low return over its equity tend to lack behind in the market
even with good performance and position (Fazzini, 2018). Return over equity of the company
should be increased using the appropriate strategies that will help in increasing its returns.
Gross Profit margin of company have remained even during the last three years. In 2019
company had gross margin of 36.91%. The gross margin refers to the proportion of revenues that
is left with the company after carrying out its sales operations. Company using its effective cost
management strategies have maintained the cost of sales of company to low (Borroni and Rossi,
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2019). However along with reducing the cost of sales it is also essential for the company to pay
attention over increasing its sales and customer base. Cost of sales have increased due to the
increase in import and export tariffs by the governments.
Operating revenue margin of company was 5.79% in year 2019. There has been a
declining trend in the operating margin of company even after maintaining the sales level.
Increases are seen due to the expenses of company for the year are increasing. As against the
revenues expenses are raising faster. Company has to maintain its operational expenses by
adopting new policies that will help in reducing the expenses (Juárez, Pérez and Useche, 2017).
Unproductive expenses of company should be reduced.
The overall profitability of company is adequate as per the industry trend, however company is
required to improve its performance for regaining its market share.
Liquidity ratios are calculated for knowing the financial health of company and its ability to
meet its obligations from the available resources. Ratios used for checking the liquidity are
current ration and quick ratio that do not consider inventory.
Current ratio of company in 2019 was 0.67 and it has declined from last two years.
Current ratio shows the ability of company in meeting its short term obligations using the current
assets (Financial performance, 2019). The current assets of company have increased from last
year where the current liabilities have increased more as compared with last year. Company
should have strong ratio which shows the liquidity strength of company. Company has raised
short term borrowings for meeting its working capital requirements and disposed the derivative
instruments(Taurista and et.al., 2018). In asset company have made investments in derivative
instruments and other financial assets. The current ratio of company is very low. Weaker current
ratio shows that company is not having enough current resources for meeting its short term
obligations.
Quick ratio of company 0.35 and has improved from last year. The ratio measures the
liquidity of company excluding the inventories of company. The inventories are excluded by
some of the investors and experts for knowing the liquidity position. Inventories are not
considered in current assets as they cannot generate immediate cash when sold. Excluding the
inventories the liquidity position is even more weak. The current liabilities are around the double
of its current assets. The standard acid ratio is 1:5 where of industry is not even around 1.
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Company is going through tough phase and is required to improve its liquidity position. The
liquidity position affects its stakeholders and suppliers as if company is not having sufficient
cash it may not be able to meet the repayment obligations on time(Bunker, Cagle and Harris,
2019). Company would be acquiring more of the short term loans to meet its requirements which
will further affect the liquidity and cash operational cycle.
Efficiency ratios are for assessing the effectiveness of company in using its resources
during the period. This also involves the ability of company in rotating its cash by having
effective cash operating cycle. These ratios involve inventory days, debtor days and creditor
days.
The inventory days of company are 39 days in 2019 and it is reduced . Inventory is being
more fast used in generation of cash. As against these company have increased the debtor and
creditor days in current year. These were reduced seeing the position of last year. The cash
operating cycle of company for current year was improved. The cash operating cycle of the
company should be shorter. This will enable the company to reduce its cash requirements. This
could be assessed that resources are being efficiently used by the organisations. Th is shows that
the internal management is performing their duties with proper care and diligence.
Debt to equity ratios are used by the investors to assess the financial risks of company.
Higher debt debt equity ratio shows that company shows that company used more of the debt for
raising funds instead of equity funds. In year 2019 debt to equity ratio of company was 0.48 and
has declined from last years. The long tern debt of the company has educed from previous years.
Company has repaid many of its financial liabilities and borrowings. Reducing the borrowings
will help the company to reduce the financial risks (Lewis and Tan, 2016). The finance cost will
be reduced that will help in increasing the return available to the investors. Company should
have an effective control over the debt structure as increasing high equity will decrease the EPS
and increasing debt will reduce the profits. Therefore an effective mix of debt and equity is
required for running he operation of company smoothly.
Significant developments within the company and the retail sector
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Company is deeply under the phase of transformational programmes and to continue in
making progress for restoring basics and to fix legacy issues. Company has built a new
leadership team for bringing the fresh energy, perspective and challenging the business model
which is held back because of entranced cultural issues. Company is striving to become first
digital retailer. Company has successfully developed the website and assessed the basics of
customers that has helped in delivering Clothing & home with increase in online sale by 9.8%.
The website has been transformed by the company (Adler and Capkun, 2019). Company has
made progress in restoration of basics of the technology. Partnership with TCS and migrating
the online platform to cloud & rolling new management software for warehouse.
UK home and clothing have reduced by 3.6% because of the store closure programs. The
company has established new supply chains will help the buyers in building confidence.
Company has also taken approaches for modernising the food. The food business has shown
good signs of growth. Company is approaching to rebuild the profitable growth in the
international market (Signs of Progress, 2019). Company is planning to create joint venture with
Ocado Group plc, a digital grocer serving in UK. Company will acquire 50% shares in joint
venture. Also the company has made considerable cost savings of around 350 million pounds.
Challenges and opportunities for foreseeable future
Marks and Spencer is showing slump in the clothing sales due to poor level of
availability in stores compounded by supply chain out of date. M& S is amongst the revered
names, but is going through tough phase since a decade, specifically in the clothing field, with
food. In the recent trend company is focused over building digital business and the rationalised
store estate as the part of revival programmes.
FTSE 250 is edged into territory of negative. Competition in clothing 7 home space are at
the fever pitch and company is not winning it. Online sales of company has shown growth
because of the discounting schemes. The challenges are raised within company as company
focused over the women wear and the menswear resulted in underperformance (Zokaei and et.al.,
2017). Biggest challenges that company is facing are;
Greater competition is faced because digital technology has made the shopping for
customers more easier than before. Customers are available with wider ranges and access over
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fashion worldwide. Footwear seeing the demand is also brought online as per the reports. The
smaller brands like Asos , Boden and may more have struggled in adapting ((M & S in Trouble,
2019)). The digital technology with ease has also made the competition more tough.
Company is having too many stores selling its full range of clothing where the world is
moving towards the online platforms for even food and home-wares. Company has not been able
to meet the demands of customers and quality cuts for reducing the prices has even more
affected the sales of company. The retail market are gong through the worst phase and
companies like M&S and Tesco are suffering. Competition is increasing over at very fast phase.
Company is not much develop over the digital platform for the sale of its products. Company
has not strong digital market base and also do not have and efficient website for the online sales.
Despite the tough phase the retail market can take the opportunities for reviving. The
festive seasons are providing more opportunities for the retail market. While the others criticised,
M&S showed rise in three years. The festive are providing with strong uplifts. The Christmas
provided the company with significant revenues.
All the retail groups are required to help themselves. The trading statements shows
company will receive new hikes. The Brexit hardly affected the purchasing pattern of customers.
Company has received outcomes through joint ventures. Online food channel will also help
company to raise its revenues(Sanders and et.al., 2019). Customers are wanting the products and
services at their doorsteps. The development of its digital platform will help it in reaching the
new markets of the world and reduce the stores operating cost by closing excessive stores.
CONCLUSION
The above study shows that M&S has reported progress signs despite of fall in its
clothing and food business. The results have shown profits returning normal in two years with
the reduced prices. Clothing sales have fell by 5.5 % for like by like. Company is facing weak
market wit increased disruptions. It is also seen that weak performance was due to the execution
inefficiencies. Profitability backdrop was also due to end of season sale decisions. October
promotional and full price sales have shown growth of 2.7% in clothing. Despite of the current
phase the shares of of company rose by 7%, as biggest mover on Europe's bellwether Stoxx 600.
Company's revival programmes are working and this could also be assessed through it
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performance in last three years. Company is proposing to continue with the transformational
plans with improvements to get back the stability and higher probability stage.
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REFERENCES
Books and Journals
Cornwall, J.R., Vang, D.O. and Hartman, J.M., 2019. Entrepreneurial financial management: an
applied approach. Routledge.
Juárez, F., Pérez, C.H. and Useche, A., 2017, October. Just in time strategy and profitability
analysis in financial statements. In Proceedings of the International Conference on
Industrial Engineering and Operations Management (IEOM), IEOM Society, ed., IEOM,
New Britain, USA (pp. 1363-1372).
Fazzini, M., 2018. Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave
Macmillan, Cham.
Brandes, E. and et.al., 2016. Subfield profitability analysis reveals an economic case for cropland
diversification. Environmental Research Letters. 11(1).p.014009.
Borroni, M. and Rossi, S., 2019. Bank Profitability: Measures and Determinants. In Banking in
Europe (pp. 23-53). Palgrave Pivot, Cham.
Taurista, D. and et.al., 2018, June. ANALYSIS OF DOMINANT FACTORS INFLUENCING
THE COMPANY’S LIQUIDITY DECLINE. In Journal of International Conference
Proceedings (Vol. 1, No. 1).
Bunker, R.B., Cagle, C. and Harris, D., 2019. A Liquidity Ratio Analysis of Lean vs. Not-Lean
Operations. Management Accounting Quarterly.20(2).p.10.
Lewis, C.M. and Tan, Y., 2016. Debt-equity choices, R&D investment and market
timing. Journal of financial economics.119(3). pp.599-610.
Adler, B.E. and Capkun, V., 2019. Debt-Equity Conflict and the Incidence of Secured
Credit. The Journal of Law and Economics.62(3). pp.551-578.
Zokaei, K. and et.al., 2017. Creating a lean and green business system: techniques for improving
profits and sustainability. Productivity Press.
Sanders, N.R. and et.al., 2019. Sustainable supply chains in the age of AI and digitization:
research challenges and opportunities. Journal of Business Logistics, 40(3), pp.229-240.
Online
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M & S in Trouble. 2019. [Online]. Available through :
<https://www.theguardian.com/business/2018/may/23/seven-reasons-why-marks-spencer-
is-in-trouble>.
Signs of Progress. 2019. [Online]. Available through : <https://www.ft.com/content/24604874-
ffe7-11e9-be59-e49b2a136b8d>.
Annual Reports. 2019.[Online]. Available through :
<https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx/?
type=sl.ra.full&id=5de7973f-2ca2-4ecc-a1f4-bc9c5e68341e&user=
%2fPLPD8ZyEGSQwp76zrA80TW1cSr3FaaYnV8XHE2DtJ99qmddfW0xAzuK5qr3tdpt
&r=1>.
Financial performance. 2019. [Online]. Available through :
<https://www.hl.co.uk/shares/shares-search-results/m/marks-and-spencer-group-plc-
ordinary-25p>.
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