Financial Analysis of Next plc's Acquisition of Mackay Stores Limited

This report provides a comprehensive financial analysis of Next plc's potential acquisition of Mackay Stores Limited. It begins with an executive summary highlighting the importance of financial analysis in evaluating past performance and creating future strategies. The report compares and contrasts the financial performance of Next and Mackay Stores from 2015 and 2016, focusing on profitability, asset management, and liquidity ratios. It includes a detailed examination of profitability ratios, asset management ratios, and liquidity ratios for both companies. The report also covers the cost of capital, the calculation of price per share payable by Next for the purchase of Mackay, and the impact of the acquisition on Next's financial statements. The report also considers share price movements and concludes with key findings and recommendations for Next plc's management.

Financial management
Analysis of the acquisition of Mackay by
Next plc.

Executive summary
Financial analysis can be useful in evaluating the past performance of the company. It helps in creating
long term strategies and growth plans for the management. The objective of the report is to compare
and contrast the performance of Next and Mackay Stores Limited. Both the firms are related to clothing
industry and their financial statements of 2015 and 2016 have been included for the study. Next has
been successful in the past 2 years as their revenues have increased by 4,24%, EBIT by -6,35% and Net
profits have changed to 4,78%. Apart from this, some assumptions have been done for the calculation
of WACC and valuation of the company. 13% is the value of WACC in the given section. Furthermore,
this rate can be used for computing the acquisition valuation for Mackay Limited. It can be seen from
the report that Next Company has sufficient count of money as well as plausibility. The price per share
from sales ratio method is GBP 61364, from asset based method is GBP 64 and discounted cash flow is
1572 GBP. The differences between the two organizations as well as their peers have been used for
finding out the problems in the firm. The techniques like financial ratios, cost of capital, calculation of
price per share, share price movements etc will be helpful for the management of Next Plc.

Table of Contents
INTRODUCTION.....................................................................................................................................3
1. a. Introduction and financial analysis of Next Plc.................................................................................3
Analysis of Next Plc .....................................................................................................................4
1. b. Introduction and financial analysis of Mackay Stores Limited.........................................................5
Analysis of Mackay Stores Limited..............................................................................................6
2. Cost of Capital ......................................................................................................................................8
3. Calculation of price per share payable by Next for purchase of Mackey..............................................9
4. Impact of financial statements of Next the purchase of Mackey...........................................................9
5. Share price movements........................................................................................................................10
CONCLUSION........................................................................................................................................10
REFERENCES.........................................................................................................................................11

INTRODUCTION
Financial analysis helps in the evaluation of the performance of the company with the help of its
financial statements. It allows the management to make changes in their plans to ensure that the
business grows consistently. The entire process is carried out by a financial analyst who uses different
methods to assess the viability, profitability, solvency, liquidity and future potential. These methods
include ratio analysis, cost of capital, comparative statements and share price movements (Brigham and
Ehrhardt, 2013). It provides information about the past performance of the company to the
stakeholders. They can use financial ratios and mathematical techniques to predict the future of the
business. The management has to make sure that they increase the profitability of the business to make
their shareholders satisfied. This objective can only be accomplished if they review the performance at
regular intervals and make changes in it as per requirement (Grinblatt and Titman, 2016). The main
stakeholders who are associated with the company are employees, investors, shareholders, creditors,
government, suppliers and customers.
The aim of this paper is to compare and contrast the performance and operations of Next and
Mackay Stores Limited. Both the firms are related to clothing industry and they have been providing
tough competition to each other. The annual reports of 2015 and 2016 have been taken into
consideration for better evaluation and assessment. Furthermore, the report has been divided in
different sections: introduction, financial analysis, cost of capital, calculation of price per share, impact
of financial statements, share price movements and conclusion. It will help the management of Next to
take decisions form strategies for the future of the company.
1. a. Introduction and financial analysis of Next Plc
Next is a multinational retailer which is based in England, UK. It has more than 700 stores
which include Europe, Ireland, Asia and Middle East. The company was established in 1864 by Joseph
Hepworth & Son. But in 2014, Next became the largest retailer in clothing in UK due to its high sales
and revenues. The company has been growing at a good pace but the level of competition has been
rising in the industry which has affected its business to some extent (Next (2017a)). It is essential for
the management to increase the productivity and efficiency of their operations to make it more
competitive in the market. It will increase the brand imaged as well as profitability of the organization
(Brooks, 2015). The Financial ratio classification for Next has been given below:
Financial ratio classifications
(Next) 2016 2015

Profitability Ratios
Gross Profit Margin 34.78% 33.59%
Net Profit Margin 15.96% 15.87%
EBITDA Margin 23.59% 23.17%
EBIT Margin 20.76% 20.30%
Assets Management Ratios
Assets Turnover 3.60 2.87
Return on Capital Employed
(ROCE) 74.79% 58.19%
Days of Sales Outstanding
(DSO) 92 77
Days on Hand (DHO) 65 57
Creditors in Days 29 31
Liquidity Ratios
Gearing 73% 76.9%
Interest Cover Ratio 27.44 26.45
Current Ratio 1.40 1.82
Quick Ratio 0.99 1.35
Investors’ Relation Ratios
Return on Equity (ROE) 2.781 2.523
Earnings per Share (EPS) 4.53 4.15
Dividend per Share (DPS) 1.51 1.38
Dividend Cover Ratio 1.17 1.46
P/E Ratio 8.568
Analysis of Next Plc
Profitability Ratios: It can be seen from the Profitability Ratios that the profits of Next plc
have increased from 2015. Their Gross profit, net profits, EBITDA and EBIT has increased to some
extent which is a positive sign (Grinblatt and Titman, 2016). It shows that the company has reduced
their cost and the demand of the products has increased. But they have to make sure that the rate of
growth is high because as compared to last year the growth has been slow. It has been due to increased
competition and changing market conditions. The trend shows that the profitability of the company will

increase but slowly which has to be taken into consideration by the management.
Assets Management Ratios: The Assets Management Ratios of Next has improved in 2016 as
compared to 2015. It shows that their efficiency has increased and their overall cost has reduced. Their
ROCE has increased from 58.1% to 74.7% in 2015 and 2016 respectively (Jordan, 2014). It means that
the business has been using their capital efficiently. Their productivity has increased. Similarly, their
asset turnover has improved to 3.6% from 2.8% in 2015. Apart from this, their activity ratio is only 29
days as compared to their days of outstanding sales and days on hand. It means that the company has
been paying to their creditors in fewer days while they have been receiving money from their debtors in
more days. It can affect their liquidity which can result in shortage of cash in near future. It can be seen
in Appendix 1 and 2 that their liquidity ratios have declined from 2015. The profitability and investors
relation ratio can be evaluated by Assets Management Ratios (Greenbaum, Thakor and Boot, 2015).
Liquidity Ratios: The liquidity ratio of Next has declined in 2016 which is a concern for the
management. Both current and quick ratio has reduced which means that the business may find
difficulties in paying off their short term debts. But their interest coverage has improved from 26.45%
in 2015 to 27.44% in 2016. Next Plc will have no problems in paying their interest on long term
borrowings as they have ample of funds for it. But they have to focus on their short term payment
obligations (Buchman, Harris and Liu, 2016).
Investors’ Relation Ratios: The Investors’ Relation Ratios have also shown positive trend and
slow growth which is beneficial for the investors and shareholders. The return on equity has improved
from 2.5% in 2015 to 2.78% in 2016. The wealth of the shareholders has increased. The EPS as well as
dividend per share has risen (Brooks, 2015). It has made the company more attractive for future
investments. The PE ratio of the organization is 8.5 in 2016. The management should focus on
increasing the PE ratio of the company.
1. b. Introduction and financial analysis of Mackay Stores Limited
Mackay Stores Limited was formed by McGeoch brothers in 1834. The company was initially
started as a pawnshop but in 1953 it was changed to clothing stores. The headquarters of the company
is in Inchinnan, Scotland. The management has been focusing on long term value creation and they
have made changes in the organization accordingly (Bodie, 2013). The culture of the company is
positive and they have been benefitted by the long staff residency and employee engagements. In 2005,
it was also named as one of the best companies to work in due to its pay grades and healthy working
environment. Mackay Stores Limited has more than 300 which include online stores as well. They have
employed more than 3000 employees which consist of part timers. They are nearly up to 75% of the

total workforce (Mackey (2017b)). Apart from this, most of their sales assistants are females. The
company ensured that they clearly define their job gratification which has increased the satisfaction
level of the workers. 655 have given a positive score as they have not been spending too much of their
personal time at work. The policies of the company have been successful which has helped them to
increase their overall productivity and efficiency. They also have more than 2 million customers who
possess loyalty cards of the company (Debenhams (2017a)).
Both the firms Next and Mackay Stores Limited have been compared using similar ratio to find
the difference between the operations and performance of both the companies.
Financial ratio classifications
(Mackey S. L.) 2016 2015
Profitability Ratios
Gross Profit Margin 15.45% 13.91%
Net Profit Margin -0.42% -2.11%
EBITDA Margin 3.02% 1.60%
EBIT Margin 0.44% -1.29%
Assets Management Ratios
Assets Turnover 3.21 2.99
Return on Capital Employed
(ROCE) 1.42% -3.85%
Days of Sales Outstanding
(DSO) 2 3
Days on Hand (DHO) 60 62
Creditors in Days 15 14
Liquidity Ratios
Gearing 37.6% 47.8%
Interest Cover Ratio 0.67 -1.46
Current Ratio 3.01 2.95
Quick Ratio 1.44 1.43
Investors’ Relation Ratios
Return on Equity (ROE) 0.023 -0.074
Earnings per Share (EPS) -1.39 -6.84

Dividend per Share (DPS)
Dividend Cover Ratio
P/E Ratio
Analysis of Mackay Stores Limited
Profitability Ratios: The gross profit ratio of Mackay Stores Limited has increased from
13.91% in 2015 to 15.4% in 2016. Similarly, their EBITDA and EBIT margin has also improved. It is a
good sign that the revenues as well as profits of the firm has been improving. But their net profits are
still negative which has been a major problem for the management (Bodie, 2013). Even though they
have reduced their expenditures but still it requires more attention. They have been spending more on
administration, selling, distribution, promotion and advertisements. It has to be controlled and changes
have to be made in it for better performance of the firm in the future.
Assets Management Ratios: The Assets Management Ratios of Mackay Stores Limited has
shown slight growth. Their efficiency has increased which can be seen from the rise of Return on
Capital Employed and Assets Turnover. It has helped them to become more profitable in 2016 as
compared to 2015. But they have increased their debtor’s collection days while their creditor’s payment
days have been reduced. It can have negative impacts on their liquidity and cash. The management
should reduce their debtor collection period and the payment term period should be extended. It will
provide better results to the organization in the long term (Gunawardena, 2015). In 2016, their
Creditors in Days are 15 days and their Days of Sales Outstanding is 2 days.
Liquidity Ratios: The Liquidity Ratios of Mackay Stores Limited was increasing, but their
gearing ratio has decreased from 4.8% in 2015 to 37.6% in 2016. Apart from this, in 2016 their interest
cover was negative but they have made significant improvements in it which has made it positive to
0.67%. It is still low as compared to other peers but they have been working on it. Both current and
quick ratio is high which a good sign (Hoskin, Fizzell and Cherry, 2014). Mackay Stores Limited will
not have any problems in paying off their short term liabilities and it will improve their solvency potion
also in the long term. Low liquidity can create hurdles for the business because it does not allow them
to take advantage of the opportunities in the market.
Investors’ Relation Ratios: Mackay Stores Limited has been facing difficulties with their
Investors’ Relation Ratio which has been very low. Their Return on Equity (ROE) was -0.074 in 2015
and it is 0.023 in 2016. Even though it is positive but it is very low which is a concern for the company.
Similarly, their Earnings per Share (EPS) are -1.39. The other ratios such as Dividend per Share (DPS),

Dividend Cover Ratio and P/E Ratio have not been calculated because of negative EPS in both the
years i.e. 2015 and 2016.
Financial ratio comparison with Competitors
Financial ratios are useful for assessing the performance of the company as well as intra
firm comparison. The ratios can be compared with other company’s ratios as well as the industry
average to find out where the firm stands (Grinblatt and Titman, 2016). It will allow Next Plc to
discover their strengths and weaknesses. They can make changes to adapt to the chaining
business environment and customers. The table below illustrates the comparison of Next with the
other competitors in the market. The data for 2016 has been taken for all the companies.
Companies ROE (In %) GP Margin
(In %)
NP Margin
(In %)
Quick
Ratio
Current
Ratio
ROCE (In
%)
M & C 2.3% 15.45% -0.42% 1.44 3.01 1.42%
Next 278.1% 34.78% 15.96% 0.99 1.40 74.79%
Debenhams 9.89% 12.53% 3.67% 0.26 0.73 8%
Marks &
Spencer
12.25% 39.11% 3.83% 0.28 0.69 9.04%
The companies with the highest ratios have been highlighted in the table above. But it can be seen that
Next is the most profitable business as compared to all other rivals. IT is because the ROE of Next Plc
is 278.1 % which is highest. Apart from this, the company has been performing satisfactory but the
management has to make changes in the liquidity of the firm as it is below average.
2. Cost of Capital
The Next Company has been using around 12 to 15% of discount which is given by the rule for
the purpose of their budgeting and investment appraisals. The rebate rate for WACC is used for the
calculation and valuation of future projects (Jordan, 2014). It includes both equity and debt funds. The
assumption of this method is that risk is associated with all the projects which is evaluated on the basis
of the activities performed by the organization. It is important to use higher discount rates for the
projects which are more risky than others. According to the Dividend Yield Model the rate is 11.79%
for the company. It has used due to the aggressive dividend policy followed by the Next. They have
been using high WACC as per their DYM. Apart from this, in future their rate for minimum
development and dividend payment is 10%. Therefore, the cost of equity is high for the firm because

the investors have high expectations of dividend from the organization. The Ke for Next is 13.07% and
WACC should consider the discount rates as well as future cash flows in the calculation (Grinblatt and
Titman, 2016). The lower yield of the company has put recourses on its share prices. It has significant
impact on the share market price of the stock. As per the CAPM, the rate is very high i.e. 13.14%
which indicates high risk in the firm. Furthermore, the policy of uncertain dividend has been adopted
by the management. It has increased the payment of dividend to the shareholders in the last few years.
This is the main reason why the DGM’s WACC is lower than Next Company’s CAPM. For both DGM
and CAPM, Next Plc has been following conservative gearing policy. It has helped them to make use
of low cost borrowings and in the management of cost of debts. They have been using bond markets to
gather the funds for the development. Therefore, Next plc is recommended to use 13% discount rate for
their investments. It has been deducted on the basis of their Cost of equity, Beta and WACC level
(Appendix 3).
3. Calculation of price per share payable by Next for purchase of Mackey
The fundamental ways to calculate the value of the organization has been given below:
 Market multiples method can be used as it takes into account the cost of the organization
(Brigham and Ehrhardt, 2013).
 Price sales ratio method can be used for the comparison of two different variables i.e. revenue
and stock price.
 Discounted cash flow method computes the value on the basis of cash inflows and outflows in

the future (Grinblatt and Titman, 2016).
 Asset based method compares the assets with the long term obligations of the organization for
the purpose of computing the value of the firm.
1. Price sales ratio method states that the price per share = Net assets/ Total no. of shares
= 303754 / 495 = 61364 GBP
2. Discounted cash flow method for the price per share will use discount rate of 2 and 7%.
For 2% = 7783 / 495 = 1572 GBP
For 7% = 15451 / 495 = 3121 GBP
3. Asset based method for the price per share will be = Net assets/ Total no. of shares
= 31682 / 495 = 64 GBP (Appendix 4)
4. Impact of financial statements of Next the purchase of Mackey
The purchase of Mackay Stores Limited will have minimal impact on the financial statements
of Next Company (Appendix5). It can be seen that the size and market share of Next Company is much
higher as compared to Mackay Stores Limited. It is highly depend on the size of the business obtained.
But there will be few impacts on financial statement of the company which has been given below:
 ROCE and Assets Turnover will reduce due to the increase in long-term debts and leverage.
It will be caused because of the by loan for which will be taken by them for obtaining it.
 The Gearing will also have impact due to the rise of long term borrowings and debts.
 Interest cover ratio will tend to decrease (Gamble and Thompson Jr, 2014). It is because the
finance cost will get expended due to new borrowings.
 The goodwill of the company will increase significantly which will help the firm to improve
their brand image in the market.
5. Share price movements
The share price of the firm can get affected due to many events which can be seen from the
movement of the graph. Usually, more than 5 years are taken into account to understand the pattern of
growth and for predicting future changes. But there are certain events which has caused some problems
such as the incident of January where the share market dropped. Similarly, news can also have impacts
of the share prices movements (Delen, Kuzey and Uyar, 2013). It can create problems in the entire
stock market. But these crashes may not affect the long term value of the organization. The share of the
Next Plc has dropped in 2016 due to problems in the economy of many countries. The expectations of

the inventors have also increased. But Next has performed well in the recent few years which has
helped the company to grow. Apart from this, the ratios of the company are far better than other rivals
operating in the industry.
Figure 1: Next plc share price movement
CONCLUSION
It can be concluded from the above report that Next Plc has been performing well in their
business and they have been showing positive trend in the future also. But they have to make sure that
the rate of growth is high because as compared to last year the growth has been slow. It has been due to
increased competition and changing market conditions. The trend shows that the profitability of the
company will increase but slowly which has to be taken into consideration by the management