Financial Analysis Report: Fashion Retail Industry of Australia

This report provides a comprehensive financial analysis of the fashion retail industry, focusing on Michael Hills and Lovisa Holdings. It begins with a business and strategic analysis, including an examination of macroeconomic factors using PEST analysis and an industry analysis using Porter's Five Forces. The report delves into the competitive landscape, assessing key competitors and the companies' competitive strategies. It then proceeds to accounting and financial analysis, including cross-sectional and time series analysis to evaluate the financial performance. Finally, the report offers recommendations based on the analysis and concludes with a summary of the findings. The analysis covers the Australian fashion industry, considering economic, social, and technological factors influencing the sector. The report also evaluates the growth potential of the industry and the strategic decisions of Michael Hills and Lovisa Holdings.

Running head: FINANCIAL ANALYSIS
Financial analysis
Name of the student
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Authors note

FINANCIAL ANALYSIS
Table of Contents
Introduction:....................................................................................................................................3
1. Business and strategic analysis:...............................................................................................3
Analysis of economy:..................................................................................................................3
Industry analysis:.........................................................................................................................5
Competitor of the selected company:..........................................................................................6
Porter’s Five Forces analysis of the industry:..............................................................................6
Competitive and corporate strategy of selected organisation:.....................................................8
2. Accounting Analysis..................................................................................................................10
3. Financial Analysis.....................................................................................................................13
Cross-Sectional analysis............................................................................................................13
Times Series Analysis................................................................................................................17
5. Recommendation.......................................................................................................................20
Conclusion.....................................................................................................................................21
References list:...............................................................................................................................22

FINANCIAL ANALYSIS
Introduction:
The report is prepared to demonstrate the understanding of the macro economic factors
affecting the operations of company and industry as a whole using PEST analysis. Company that
has been selected for the explanation is Michael Hills and Lovisa Holdings limited that operates
in fashion retail sectors. Michael Hills is a retail jeweler chain operating in many countries such
as Australia, New Zealand, United States and Canada (Michaelhill.com.au 2018). It provides its
customers with exquisite range of diamond jewellery, diamond engagement rings, bracelets,
earrings, watches and charms. Lovisa was established in year 2010 and exploded in fashion
accessories, operates through 300 stores worldwide and have established themselves in fourteen
countries (Lovisa.com 2018). Analysis of industry to which these two companies belongs is done
by using Porters five forces. Moreover, later part of report explains competitive strategy of
company, its growth potential and key success factors.
1. Business and strategic analysis:
In this section, analysis of fashion industry of Australia is done by explaining several
macro-economic factors using PEST analysis.
Analysis of economy:
Political factors- Legal issues of any particular country have considerable impacts on
fashion industry and such issues involve permission grants and rewards available to new fashion
designer. Fashion retailers in Australia such as Michael Hills and Lovisa Holdings are currently
facing with issues pertaining to no protection for unregistered designs. However, the reciprocal
rights governing copyrights in fashion industry will enable retailers to enjoy same level of

FINANCIAL ANALYSIS
copyright protection. Changes in copyright will assist the mass produced artistic works will
enable them to enjoy considerable longer period of protection for their copyright (Fenna 2015).
Economic factors- Companies operating in fashion industry is influenced by wide range
of economic factors. Strategy of retailers is impacted to considerable extent by the amount of
disposable income of consumers. Product quality of fashion retailers might be enhanced since
price factor simply scoops in higher profits. The development of fashion clusters across major
cities has resulted due to shift in manufacturing practices and geographical displacement of
fashion industry. Development of fashion industry in Australia has been supported by lower
interest rate and lower inflation rate of country. Domestic economic of country is driven by
slump in oil price and trend of cutting interest rates (Gardetti and Torres, 2017). Therefore, the
stable position of Australian economy will help in supporting the growth of fashion industry and
thereby affecting the performance of both the companies. One of the ongoing real estate trends
for retail floor space for fashion retailers is influencing fashion industry. This has resulted in
increasing number of retailers for selecting nontraditional locations for their premises.
Social factors- Social factors driving change in fashion industry in Australia involves
lifestyle trends, consumer trends, media options, branding, demographics, ethical issues and
advertising image. The attitude of people towards fashion in Australia is changing and people are
becoming more fashion conscious and this has a direct impact of fashion retailer’s corporate
strategy. People are brainwashed by the advertising campaign of companies and they inclination
of embracing fast fashion has considerable influence on retail fashion business (Hatfield et al.
2015).

FINANCIAL ANALYSIS
Technological factors- The shopping experience of customers and the corporate strategy
of fashion retailers are shaped by the advancement in technology such as video content, high-
resolution imagery, reviews and recommendations of products along with detailed descriptions.
Many fashion retailers in Australia have commenced their online journey by formulating new
strategies. Evolvement of technology is witnesses at rapid rate both from perspective of retailer
and consumers (Chan et al. 2017). It is required by Australian fashion retailers to make
investment and embrace online shopping by making planning and proper investment in
development of new operating model. Such model will help in accommodating rapid
technological development and meeting the increasing needs of sophisticated consumers.
Industry analysis:
Fashion and jewellery industry is one of the rising industries, which is posed with the
glittering future and sustainable growth owing to their magnitude of service. Since decades,
heritage luxury jewellery brands are the market leaders in their respective organisations. With
global sales figure of 148 billion euro, fashion and jewellery industry is growing at 5% to 6%
annual growth rate (Soni and Gulati 2016). According to the Panayiotou and Katimertzoglou
(2015) there has been certain lag in the jewellery industry to cope up with the present market
demand, however, depending upon the brand like Michael Hills, fashion industry is gaining
momentum. Among many players in the jewellery and fashion industry, Michael hills, is one of
the best organisations, which is popular for production of appealing and distinct jewelleries since
1979 (Michaelhill.com 2018). With their in-house master of craftsmanship and dedicate team of
designers, the brand has gained much amount of popularity. For this report Michael hills, is the
selected organisation, which is known for their explicit craftsmanship, wide range of jewelleries
and global vision. Owing to their outstanding features, the brand has topped the Australian

FINANCIAL ANALYSIS
market and presently it serves countries like New Zealand, Canada, United States and other with
their 296 retail chain around the world (Parsons and Wilkinson 2015). Thus, it can be considered
as the top performer in the middle range firms in the case of jewellery and fashion industry that
enjoys market share of 6.6% with market capitalisation of 492.05 million USD (Kennedy 2015).
Competitor of the selected company:
Michael Hills is one of the market leaders, when it comes to the explicit jewelleries along
with exclusive diamond collection that adds a lot to the fashion sense of the wearer. Being one of
the market leaders, Michael fashion has many competitors, however, among them; Lovisa
Holding Limited can be acknowledged as the main competitor of the selected organisation.
Lovisa was introduced back in 2010 and since then it has transformed itself to become where it is
now. For instance, it has 300 retail stores around countries like Australia, Singapore, South
Africa, Australia and other countries (Kieser 2018). With its wide range of products, and
exclusive services, Lovisa has become a market leader in the Australia and other countries that
possess great potential to prosper in future. According to the Live Stock Exchange Rate, price of
the products from this brand is rising, which showcase demand of Lovisa is rising at a steady rate
(Perez 2015).
Porter’s Five Forces analysis of the industry:
Porter’s Five Forces analysis is an approach to find out the competitiveness of a given
industry (Anton 2015). In this report fashion and jewellery industry has been considered for
discussion and the Porter’s Five Forces analysis for the given industry is as follows:
Buyer power – Fashion and jewellery industry has little amount of bargaining power due
to the fact that there is large amount of players in the market. Price is determined depending

FINANCIAL ANALYSIS
upon the supply and demand equilibrium and scope of direct bargaining power is low. However,
there is little incentive to keep attached with a particular brand that provides some amount of
bargaining power, which is indirect in nature (Rothaermel 2016).
Supplier power – Fashion industry provides little amount of supplier power to the
producer owing to the fact that they do not have control over the market. Price is decided
depending upon the demand and supply situation that reduce the supplier power.
Competitive rivalry – fashion and jewellery industry has large amount of supplier that
makes it an oligopolistic market. However, there is certain amount of brand preference that
makes the market an interesting one. With close substitute products, most of the brand provides
similar kind of goods and services that makes the market saturated and hard one to penetrate by
the new entrants (Anton 2015). However, with the help of new designs and ideas, brands can
have competitive edge compared to its rivals.
Threats from new entrants – There is high risk in the case of the fashion and jewellery
industry, however, there is great scope of high return too. With ever increasing demand of new
design and ideas, threats from new entrants is comparatively high (Rothaermel 2016).
Threat of substitution – threat from substitution is negligible in the case of fashion and
jewellery industry. With saturated market condition, firms are now producing similar products
that reduce the threat of substitution.
Growth potential of the industry:
Jewelleries and fashion industry is one of the rising sector that has been growing with an
annual growth rate of 5% to 6%. With huge amount of annual turnover, fashion and jewellery

FINANCIAL ANALYSIS
industry is expected to have higher growth potential by the 2020 (Dauriz, Remy and
Tochtermann 2014). According to the statistics, the industry will have 10% annual growth rate
within next three years. Moreover, Dauriz and Tochtermann (2017) also highlights that if the
industry can successfully capture the attention of people who are older than 18 to 34 years,
fashion and jewellery industry will face much higher growth rate compared to present forecast.
Brands like Michael Hills possess great amount of importance in this regards because with the
help of their exclusive services and wide array of product varieties, fashion and jewellery
industry can be highly benefited. According to the study of Esty, Gross and Pickle (2017),
among many verities of fashion and jewellery industry, firms that produce exclusive diamond
jewelleries are expected to have higher demand and they possess highest amount of earning
potential. Michael Hills and Lovisa Holding Limited, both is the exclusive diamond jewellery
producer, thus they too have high potential to grow in future, however, which firm tops the
market, will dependable upon the strategic decision of the firms.
Competitive and corporate strategy of selected organisation:
Strategic planning is one of the crucial factors that aid the firm to reduce its financial
problem and shift the focus of the managers from profitability of the firm to the sustainability of
the firm. With the help of competitive and corporate strategy organisations can not only avail the
organisational goal (Rugman and Verbeke 2017). Moreover, it will help the firm to avail
sustainability in long run. Competitive and corporate strategy of the Michael Hills, which is one
of the most famous brands in fashion and jewellery industry, is as follows:
Competitive strategy of the selected company:

FINANCIAL ANALYSIS
Among many organisations, Michael Hills is one of the famous multi-speciality fashion
and jewellery brands that have been operating in various countries since 1979. By the end of
1987, the brand opened more than 10 stores in various countries around the world (Longley
2017). The brand has been producing differentiated services and products, thus creating value for
the brand since decades. The brand is aimed to align itself with the latest trend of the market.
This will provide the firm a scope to enhance its market base compared to its rival firms. The
firm is aimed to provide best shopping facility to their customers, using which the firm devote it
to achieve exclusiveness that is beneficial for the growth of the firm (Wesener 2016). Besides
this, as the core competencies strategy, Michael Hills offers best price in the market, which
provides competitive advantage to the firm. All the branches located near the city centre, helps
the Michael Hills to become one of the best firm in the fashion and jewellery industry. Raw
materials that the firm chooses for their goods and services are sourced by the certified suppliers
that provide better longevity and durability of the products. In addition the firm employees only
the educated and experienced employees that help the firm to provide best in class service
compared to its rival companies. Online customer service and online retail stores help the firm to
gain great amount customer base.
Corporate strategy of the selected company:
Michael Hills is one of the top level fashion and jewellery firm that lies in the middle
range and the firm always aims to maintain god corporate governance, which not only help it to
have a strong market holding, moreover provide it ability to stand out from the crowd. As their
corporate strategy the firm uses low level of capital expenditure roll out policy, where cost is
minimised using the small store layout (Parsons and Wilkinson 2015). Moreover, depending

FINANCIAL ANALYSIS
upon the political, social and environmental condition of the place of operation, the firm alters
their mode of operation that gives them competitive advantage and let it align with the local
policies. In addition international store roll out policy of the firm always helped it to hold its
stand in the market. Culture of continuous development and well versed management team with
high international retail exposure Michael Hills always try to keep track record of profitable and
rapid growth (Coolier, Probert and Jeffries 2016). Customer base marketing strategy of Michael
Hills helped the firm to become one of the renowned firms in various countries.
2. Accounting Analysis
Michael Hill
Inherent Risk Accounts
Impacted
Control Measures
Market Risk- Foreign Exchange –
Foreign Exchange risk is considered to
be arising from the future commercial
transactions and the recognition of the
assets and liabilities which are
denominated in the currency which is
not the functional currency. The group
is designed to be having significant risk
-Cash and cash
equivalents
-Trade
receivables
-Forward
exchange
contracts
The company is designed to
use cash flow forecasting
sensitivity analysis to tackle
this problem.

FINANCIAL ANALYSIS
in buying foreign exchange contracts of
different foreign currencies in the future
at the pre-determined exchange rate
(Terlizzi, Meirelles and de Moraes
2016).
Liquidity risk- The significant
exposures pertaining to liquidity risk is
considered with borrowings and other
liabilities. There is a sufficient problem
associated to the risks with the
availability of cash and marketable
securities. In addition to this, there is
significant scope of uncertainty
pertaining to adequate amount of credit
facilities (Talonpoika et al. 2016).
-Current
Liabilities
-Borrowings
The management has
ensured that there is
sufficient availability for
borrowing facilities and
committed credit lines.
Credit risk- This particular risk is seen
to be based on availability of cash and
cash equivalents along with trade
receivables. There may be significant
problem with the credibility of the
company is associated to increased debt
which may not allow the company to
borrow finance from banks or other
-Impaired Trade
Receivables
-Short-term
deposits
The management of credit
risk is followed by settling
the sales to retail customers
via cash or major credit
cards.

FINANCIAL ANALYSIS
financial institutions. The group incurs
the credit risk from trade receivables
(Hayes 2014).
Lovisa Holdings
Inherent Risk Accounts
Impacted
Control Measures
Credit Risk- The credit risk of the
company is associated to financial loss to
the group in case a counterparty fails to
meet its contractual obligations. This
particular risk factor is seen to be
recorded with the consolidated statement
of financial position which has the
carrying amounts of receivables assets.
This particular risk is also recognized
with cash and cash equivalents along
with the derivatives with banks and other
-Short-term
deposits
The company recognizes the
credit risk in terms of
considering the carrying
amount of the receivable
assets along with net
provision for doubtful debts.