Financial Analysis Report Burberry PLC
Added on 2021-06-11
23 Pages3246 Words1017 Views
Student Id - 20672062SECTION AFINANCIAL ANALYSIS REPORTBURBERRY PLC 2019-20201.0 EXECUTIVE SUMMARY:During the financial year 2019-2020, Burberry Group Plc was on track to move to the secondphase of its strategic transformation with new collections delivering double digit growth andtaking a leadership position in digital sales that contributed to sales growth in the first ninemonths of the year. However, Q4 was badly affected by Covid-19 pandemic. As a result, FY2019/2020 results were significantly below the expectations. Revenue was £2.6 billion, down3.2%. Reported operating profit was £189 million, down 57%, after charging £244m ofadjusting items, predominantly related to asset impairments resulting from the expectedimpact of the pandemic.digital strength, made it more resilient as to navigate through this challenging times. Burberrygroup has sustained the Covid-19 crisis in a fair manner and the decrease in revenues andoperating margin are similar to industry standards. Introduction of the new IFRS16 regulationshas impacted significantly on the financial analysis of the Burberry Group Plc.2.0 CONTEXT:2.1 External Profile:Burberry Plc is a British Luxury design house and clothing brand with headquarters in London,England. Established in 1856, the company has now grown to become one of the mostvaluable luxury brands worldwide. As per the data from 2019 (Figure-1), Burberry group stoodat 3rdposition by revenues in leading luxury brands position in UK. Covid-19 crisis has sloweda decade of growth across luxury categories that was buoyed by a bullish global economy.Business outlooks remains uncertain because of the potential for the virus to remerge. At theconsumers become more environmentally, and socially aware and digital channels becomemore important as sources of inspiration and sales. Companies that respond by streamliningoperations, redefining luxury to be less conspicuous and more inclusive, and investing in newways of doing business are more likely to not just power through these uncertain, changingtimes but emerge stronger for the future.
Student Id - 20672063Figure1 Leading luxury brand revenues originating from the UK (2019)2.2 Internal Profile:Burberry Group Plc is listed on the London Stock Exchange and is a member of the FTSE100Index. Burberry produces and distributes a wide range of luxury outwear for both men andwomen around the globe. Famous for its coats and signature tartan lining pattern, Burberrygenerated over 3 billion GBP in annual revenue worldwide amidst covid-19 in year ending2020. The three main areas of strategic importance to Burberry are Revenue and grossmargin growth, adjusted operating profit margin accretion and capital efficiency. Thecontinuing spread of covid-19 and the associated restrictions on public life has significantlyimpacted the FY2019/2020 performance with 64.1% decrease in net profit. The companyrecognizes changing consumer preferences, pandemic, technological disruption, changingregulatory compliances, emerging disrupter brands and changing regulatory environment asthe emerging risks.3.0 OVERVIEW:Figure-2Figure-3
Student Id - 20672064Impact of Covid-19 and the adoption of new accounting standard IFRS 16 that recognizesleases as rights of use assets and lease liabilities on the balance sheet has to be consideredwhile evaluating the financial performance for Burberry FY 2019/2020. The company has beensteadily growing in terms of revenue and operating profit till 2019. Revenue was down 3.2%in 2020 in comparison to 2019 as quarter 4 was affected by covid-19. Operating profit £189m,-57% reported, was principally due to £244m of adjusting operating items relating to storeimpairments, inventory provisions and other charges resulting from the expected impact of thepandemic. Finance costs were significantly high in 2020, £27.8m (425% up) as compared to2019. Earnings per share was 29.8p (64% down) and Dividend per share was 11.3p (73%down) for the year 2020. Free cash flow of £66m (78%down) as compared to £301m in 2019.£300m was drawdown from the Revolving Credit Facility in March 2020. During the year,Burberry returned £325m to shareholders through a combination of dividends of £175m anda share buyback of £150m. Inventories increased 11% in gross terms, generating an outflowof £41m due to drop off in Q4 sales. Cash conversion was 52% as compared to 93% in 2019.Net debt for Burberry increased to £538m from £409m in 2019.application of new guidelines as per IFRS 16, liabilities increased to £1045m and assetsincreased to £878.1m with net of impairment adjusted. No ongoing concern was recorded bythe auditor.4.0 FINANCIAL ANALYSIS RATIOS AND EVALUATION:Detail ratios calculation has been done and shown in the appendix exhibit-3 for Burberry groupplc and exhibit-4 for Mulberry plc. For ratios calculation, proforma income statement forBurberry 2020 has been adjusted as per previous accounting standard for leases, IAS 17 inorder for the comparability for 2019 and 2020 report. The three main areas of strategic
Student Id - 20672065importance for Burberry group plc were identified in internal profile analysis. Consequently, Iwill discuss and evaluate ratios that relate directly to these three areas.4.1 Revenue and Gross Margin Growth:Revenue growth is the increase (or decrease) in a company's sales from one period to thenext. Shown as a percentage, revenue growth illustrates the increases and decreases overtime identifying trends in the business. It is vital for any company to achieve sustainable growthin the industry and consequently to leverage more profit out of the revenue.increased around 10% from 2015 to 2016. But since then,has been more or less static and then decreased around 4% in 2020. Thisis attributable mainly due to retail sector. Decrease in revenue has affected the profit of thecompanytrajectory.Gross Margin is a metric analysis use to assess a company's financial health by calculatingthe amount of money left over from product sales after subtracting the cost of goods sold. It isfrequently expressed as a percentage of sales. It depends upon the gross profit and salesrevenue of the company.The gross margin of Burberry Plc appears to be deteriorated slightly during the year. It isevidenced by the gross margin ratio 68.4% in 2019 to 67.4% in 2020. The gross margin forBurberry is more than61% in 2020.The reduction in gross margin indicates that there has been decrease in gross profits andsubsequently increase in cost of sales. Gross margin is also affected by the sales price,discount factors, product mix of the Burberry group and inventory valuation.4.2 Adjusted Operating Profit Margin Accretion:Adjusted Operating Profit Margin measures how much profit a company makes on a pound ofsales after paying for variable costs of production, such as wages and raw materials, butadjusted operatingincome by its net sales. Higher ratios are generally better, illustrating the company is efficientin its operations and is good at turning sales into profits. It is expressed on a per-sale basisafter accounting for variable costs but before paying any interest or taxes (EBIT).
Student Id - 20672066The board strategies to increase the adjusted profit margin gradually. However, it hasdeteriorated since last year from 16.1% to 15.3% (5-year summaryExhibit 8). In order toanalyse better we will look at the net operating margin ratio.Net operating margin for Burberry has reduced from 16.1% in 2019 to 6.1% in 2020. Itindicates that operating expenses has increased significantly which drive down the operatingprofit and hence net operating margin. In comparison to its competitor Mulberry who reportednet operating margin of -28.8% in 2020, Burberry did well in this crisis time.The reason for increased operating expenses can be due to impairment of retail cashgenerating units, inventory, intangible assets, receivables and other effects of covid-19 asdescribed in the note 6 to the financial statements. Restructuring costs of £10.6 million werealso added to the operating expensescost- efficiency programme announced in May 2016.4.3 Capital Efficiency:evaluate here ROCE ratio and Operating Cycle.Return on capital employed (ROCE) is a financial ratio that can be used in assessing acompany's profitability and capital efficiency. This ratio can help to understand how well acompany is generating profits from its capital as it has put to use.ROCE has significantly reduced during the current year from 25.8% in 2019 to 6.2% in 2020.It indicates that either operating profit has decreased or employed capital has been increased-46.3%.discussed above and itslease liabilities has also increased due to IFRS16 regulatory changes. Burberry has alsoborrowed £300m in 2020. These effects in increase liabilities, consequently in the capitalduring the current year.Operating cycle is the average period of time required for a business to make an initialoutlay of cash to produce goods, sell the goods, and receive cash from customers inexchange for the goods. This is useful for estimating the amount of working capital that acompany will need in order to maintain or grow its business.
Student Id - 20672067the current year from 9 days in 2019 to 36days in 2020 which is a contrast to its competitor mulberry who has reduced its operatingcycle by 18 days in current year.This indicates that Burberry will require more working capital to manage short term cash.The reason for increase in operating cycle can be due to increase in inventories anddelays in receivables due to covid -19 pandemic. Trade payable days has been decreasedfrom 223 in 2019 to 190 in 2020 which indicates lose command on suppliers.5.0 CONCLUSION:Introduction of IFRS16 regulations and Covid-19 has impacted a lot on the financial analysisof Burberry Group Plc. Revenue growth, gross profit margin and operating profit margin hasdecreased, and short term and long-term liabilities has increased. However, Burberry grouphas sustained the Covid-19 crisis in a fair manner and the decrease in ratios are similar toindustry standards. The most significant impact to the financial statement has been in respectof retail assets impairment and inventory provisioning. In order to focus on the strategic pillarsof the company, Burberry has decided to invest in digital platform, omnichannel services andsustainable and responsible products that aligns with the strategy of the group. Auditors havereported a true and fair view of the financial statement given by the Burberry Group Plc. In myview, Burberry has a strong financial position and decent financial performance over last yearconsidering covid-19 situation when compared with other luxury brands in the same sectore.g.: Mulberry. Burberry will require to renegotiate contracts with its suppliers in order toincrease payable days and improve efficiency in operating cycle.
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents
Fiscal Policy: Economic Impact of the Covid-19 Pandemiclg...
|8
|1660
|75
Impact of COVID-19 on Luxury Good Prices in UAElg...
|13
|3158
|424
Financial Performance Analysis of Greencore Group Plc, Hilton Food Group Plc, and Premier Foods Plclg...
|17
|3438
|74
Royal Mail Plc and How It Responded to the Impact of the Pandemic in 2020-2021 Compared to 2016-2019lg...
|13
|2914
|79
BUILDING A GLOBAL MARKETING PLAN ON IKEAlg...
|19
|6420
|28