Report to the Management of Wilson, Tan & Associates
This report provides an evaluation of the performance of the performance of two U.K companies that operate in the fashion industry with the objective of identifying a suitable takeover target for Wilson & Tan Associates. The report covers the financial performance of the two companies based interpreted in the context of the business environment in which they operate.
The two companies included in the report include Supergroup Plc and Mulberry Plc. The analysis is based on the group statement of financial position as at 2011 and 2010 and the group income statement for the years ending 2010 and 2011. The rest of the report is organised as follows: section 2 focuses on analysing the financial performance of both companies in relation to their industry and economic environment; and section 3 provides conclusions and recommendations on which company to take over.
Analysis of the Performance of Supergroup Plc and Mulberry Plc
Appendix 1 contains the ratios of both companies over the period 2010 and 2011. The ratios cover a variety of areas including profitability, liquidity, management efficiency and long-term solvency.
The ability of a company to generate a return on invested capital is a critical factor in determining the value of the company. Profitability serves as a measure of the competitive position of a company as well as the quality of the management (Penman, 2007; Robinson et al., 2009). It can be observed from appendix 1 that overall profitability of Mulberry Plc is better than that of Supergroup Plc. Supergroup Plc realised a gross profit margin of 55.82% in 2011 up by 6% from its 2010 figure of 52.58%. Despite this high ratio, that of Mulberry Plc was high. The company realised a gross profit margin of 65.4% in 2011 up 11% from its 2010 figure of 59.0%. The operating profit margin of Supergroup Plc was higher than that of Mulberry Plc for both 2011 and 201. However, Mulberry Plc realised a greater improvement in the operating profit margin from 2010 to 2011. If the company continues with this spirit it will soon outperform Supergroup Plc. In terms of the net profit margin, return on assets, and return on equity, Mulberry Plc outperformed Supergroup Plc. In addition, Mulberry Plc witnessed a significant improvement in these ratios from 2010 to 2011 while Supergroup Plc witnessed a significant decline in these ratios over the same period. With respect to profitability, both companies appear to be profitable. However, the performance of Mulberry Plc surpasses that of Supergroup Plc.
The high profitability observed for these two companies can be attributed to positive developments in the fashion industry. Despite the poor economic climate, the U.K fashion industry is experiencing a growth in revenue. The U.K remains a major manufacturer of clothing and high quality fabrics. The combined textile and clothing industry in the U.K is valued at ?8.5billion worth of goods. Retail sales in the fashion industry in 2009 were approximately ?285billion. Export sales amounted to approximately ?7.3billion at manufacturer’s prices with the U.S.A, Japan, Russia, France, Italy the Middle East, Hong Kong and China being major export destinations (Fashion United, 2011). Rising trends in both export and domestic sales explain why companies in the industry are experiencing increasing profit margins and return on investment as indicated by the ratios of Supergroup Plc and Mulberry Group Plc.
Liquidity measures a firm’s ability to meet its current financial obligations. It is a measure of how well the firm can pay its short-term creditors with its current assets without having to liquidate its non-current assets. In order words, liquidity measures how quickly the company converts assets into cash (Myers and Brealey, 2002; Penman, 2007). Appendix 1 also presents liquidity ratios for Supergroup Plc and Mulberry Plc. It can be observed that Supergroup Plc has a better liquidity position than Mulberry Plc. Supergroup Plc had a current ratio of 2.81 in 2011 up 1% from 2.79 in 2010. On the contrary, Mulberry Plc had a current ratio of 1.62 in 2011 down 24% from 2010. The quick ratio of Supergroup Plc was 1.59 in 2011 down 17% from 1.91 in 2010 compared to a quick ratio of 0.97 for Mulberry plc in 2011 down 34% from 1.48 in 2010. Considering only the current and quick ratios, it can be observed that Supergroup plc can meet its current liabilities with its current assets better than Mulberry plc can do. The cash ratio for both companies in 2011 was less than 1.0 suggesting that cash and cash equivalents are not enough to meet current liabilities. This means that if both companies suffer a write-down in the value of inventory or an increase in bad debts, they would be unable to meet their current liabilities with their current base of cash and cash equivalents. Overall, the liquidity position for both companies is declining although Supergroup Plc appears to be doing better than Mulberry Plc.
The deteriorating liquidity for both companies can be attributed to the current economic climate. Bank lending has declined significantly as a result of the global financial crisis. Arranging an overdraft facility has become more difficult compared to what use to be the case before the global financial crisis. Declining liquidity too can be as a result of the constant change in the fashion industry. Clothing inventory becomes obsolete too quickly. This suggests slow moving inventory can result to liquidity constraints for companies that operate in the fashion industry.
Efficiency ratios are aimed at understanding how well a company manages its activities especially how it efficiently manages its assets. Appendix 1 illustrates a number of efficiency ratios for Supergoup Plc and Mulberry Plc. The inventory turnover of Supergroup plc declined from by 36% from 3.13times in 2010 to 2.01times in 2011. Supergroup is able to turnover more inventory than Mulberry plc who saw a decline in inventory turnover by 42% from 3.25times in 2010 to 1.88 times in 2011. The decline in the number of times that inventory is turned over led to an increase in the number of days that inventory is outstanding by 56% from 117 days in 2010 to 182days in 2011 for Supergroup Plc and by 73 % from 112 days in 2010 to 194 days in 2011 for Mulberry Plc. This decline in inventory turnover for both companies helps to explain why the liquidity ratios declined. Both companies have increased the number of days that inventory is held thus increasing the probability that inventory may become obsolete and thus result to a deterioration in its value. As far as inventory turnover is concerned, the management of Supergroup Plc is more efficient. The receivables turnover of Mulberry Plc however, is better than that of Supergroup Plc. Mulberry Plc is able to collect its outstanding receivables faster than Supergroup Plc can do. This is reflected in the lower number of days that its receivables remain outstanding compared to Mulberry Plc. The purchases turnover of Supergroup Plc is higher than that of Mulberry Plc. In addition, the number of days of payables of Supergroup Plc is higher than that of Mulberry Plc. This suggests that Mulberry Plc is either defaulting on its payments or has a higher bargaining power over its suppliers. The results for Supergroup Plc suggest that it either has a lower bargaining power or does not default on its short term debts. In terms of Payables turnover and receivables turnover, Mulberry Plc outperformed Supergroup plc indicating that the management of Mulberry plc is more efficient in managing its assets than Supergroup plc. Looking at the working capital, fixed asset, and total asset turnover, it can be observed that the performance of Mulberry Plc was better than that of Supergroup plc.
The solvency ratios indicate that Mulberry Plc is in a better solvency position than Supergroup Plc. The company has no long-term debt which makes its debt-to-equity and debt-to-capital ratios equal to zero.
Conclusions and Recommendations
One can conclude from the above analysis that Mulberry Plc performed better than Supergroup plc over the 2 year period under investigation. While Supergroup plc appears to have a better liquidity position than Mulberry plc, Mulberry plc is more profitable, has a better management and is in a better solvency position than Supergroup Plc. Given its more efficient management, it can work on its liquidity position and improve in subsequent years. In the light of these findings, this report considers Mulberry Plc a better takeover target and thus recommends that the management of Wilson, Tan & Associates should consider placing a takeover bid for it.
Fashion United (2011) Facts and Figures in the UK fashion industry, available online at: http://www.fashionunited.co.uk/facts-and-figures-in-the-uk-fashion-industry, [accessed: 1st February 2012].
Myers, S. C. Brealey, R. A. (2002). Principles of Corporate Finance. 7th Edition McGraw-Hill.
Penman, S. (2007) Financial Statements Analysis and Securities Valuation.3rd Edition. McGraw-Hill.
Robinson, T. R., Greuning, J. H., Henry, E., Broihahn, M. A. (2009), “Financial Analysis Techniques” in Financial Reporting and Analysis, CFA Program Curriculum, vol. 3, Pearson Custom Publishing.