Financial Analysis

Financial Analysis of Marks & Spencer Group plc.

Table of Contents

1 INTRODUCTION

Marks & Spencer is a British retailer founded in 1884, in Leeds. It is currently part of the FTSE 250 in the London Stock Exchange and operates in 62 countries. This report aims to assess and evaluate Marks & Spencer financial and equity scenario. The report starts with a background about the company, followed by an analysis of the financial ratios, with information from Marks & Spencer’s annual statements of 2018, 2019 and 2020.

2 Background about the company

Marks & Spencer is a UK retailer that sells from food to clothing items and homeware, and it also has services such as M&S Bank and M&S Energy (M&S, no date). When it comes to the impacts that different sectors are having in the UK, it is undoubtedly due to Covid-19 and also Brexit, one of these sectors is the retail. The uncertainties around Brexit caused the retail market the slowest rate of consumer spending growth in 2019. Since the lockdown, retail sale volume dropped by over 5%, with sales in clothing stores dropping 34.8% (Livingstone, 2020).

According to Deloitte (2020), at this particular moment, it is the time for retailers to invest in a sustainability paradigm shift, which is an action M&S has already taken in launching their Plan A that visions sustainability. Furthermore, it is the time for a re-invention in retail with new digital experiences, as the digital era is in constant growth. As a proof of this statement, online sales in the UK reached a high of 22.3% of all sales during the lockdown period, demonstrating that online shopping will be an essential part of the future and companies should invest in great platforms for this service (Livingstone, 2020).

Below there is a graph that displays Marks & Spencer’s main competitors in the retail market, classified by their revenue.

Graph created for this assessment. (Source: Craft.co, 2020)

3 FINANCIAL STATEMENT ANALYSIS

This section will analyse the financial ratios calculated and expose the company’s results over the last three years. All the calculations are available in Appendix A.

3.1 Profitability ratios

Analysing the profitability ratios of a company is essential, as they demonstrate how well a company utilises its assets to produce profit and value to its shareholders (CFI, no date). The ratios of Marks & Spencer (M&S) analysed from 2018 to 2020, shows how the retail industry is currently being negatively affected, due to circumstances such as Brexit and the Covid-19 pandemic.

The gross profit margin has shown a small decline over the three years, with its ratio resulting 35.3% in 2020, meaning that M&S is not having such a cost-efficient production when compared to 2018. This also reflected in the operating profit margin which although had an increase from 2018 to 2020, reaching 2.8% in 2020, it started decreasing again in 2020, this can be due to competition in a market that required a reduction in selling prices.

Graph created for this assessment. (Source: M&S 2019, 2020)

As seen on the graph below, the company’s net profit was similar for the three years analysed, being in between 0.3% and 0.4%. According to Jahshan (2019), the profit margin for UK retailers have halved in the last eight years due to a combination of operating costs, legacy lease structures and changing of customers shopping habits, making this number, a ‘normal’ number within the retail industry.

The ratios show a decrease of Return on Equity in 2020, reaching the number of 0.7%. Analysing the numbers commented above, it shows that M&S has not been very efficient in generating profit over the last three years, which raises doubts such as management efficiency and future growth of the company.

The firm reached 5.9% on Return on Assets in 2019, which is considered a good number. However, the number decreased in 2020 to 2.49%, which is also alarming for the company’s shareholders. The numbers for Return on Capital Employed and Asset Turnover similarly decreased in 2020, reflecting on how the industries are currently suffering and reflecting on how M&S is failing to utilise its assets to generate sales efficiently. Since Brexit was announced in 2016, statistics show that households are preferring to save money other than spend, due to the uncertainties of this scenario (Edwards 2018). Presently, with Covid-19 pandemic, consumers are spending even less worried about the number of redundancies happening in this period, preferring to save money for essentials.

Graph created for this assessment. (Source: M&S 2019, 2020)

3.2 Liquidity ratios

The current ratio is used to evaluate the company’s ability to pay its short-term obligations, such as account payable and wages (Carlson, 2020), while the quick ratio is similar to it, with the exclusion of inventories. As seen on the graph below, the two numbers were constant. A quick ratio less than one means that the company does not have enough quick assets to pay for its current liabilities; however, Marks & Spencer’s results can represent an agreement with creditors when paying their obligations. When compared to its competitor John Lewis & Partnership, the numbers are acceptable as John Lewis is approximately reaching the same results (See Appendix B) and the industry has a higher level of trade payables and is scarce of trade receivables (Kaplan Financial Knowledge Bank, no date).

Graph created for this assessment. (Source: M&S, 2019, 2020)

3.3 Financial efficiency ratios

According to Nickolas (2019), the inventory turnover period of a company represents its ability to manage inventory efficiently. When comparing M&S’s turnover period ratio with its main competitor in the industry, John Lewis & Partnership – according to prices, services offered and customer target profile. It is perceptible that both companies present fairly the same results. M&S demonstrated an improvement on its inventory turnover period in 2020, resulting in 8 days less than 2019, this can represent an awareness that less inventory was bought, due to 2019’s number of 39 days.

The trade receivables period collection period was stable during the three years, and also similar to its competitors John Lewis. The 11 days of trade receivables for 2020, represents an effective collection of money owed by their clients. On the other hand, the trade payables results represent how long the company takes to meet its short-term debt to its suppliers and creditors (Murphy, 2020). In M&S’s case, the results were also stable over the three years analysed and ended in 79 days in 2020, which is considered average when compared to other competitors in the industry, such as John Lewis.

Graph created for this assessment. (Source: M&S 2019, 2020)

3.4 Financing ratios

The financing ratios, such as the gearing ratio is important “to compare some form of owners equity (or capital) to debt, or funds borrowed by the company” (Kenton, 2020). As seen on the graph below, the gearing ratio for M&S has decreased over the three years, which is indicates that their degree of leverage/amount of debt is becoming lower. Although 55.1% is still a high number, it does not indicate a poor financial condition, as regulated entities usually have a higher gearing ratio, as they can operate with higher levels of debt (Kenton, 2020).

Within the financial ratios, the interest cover (times) as seen on the graph above, exhibits that M&S decreased its probability of paying interest expenses on outstanding debt, which is alarming, as usually, the higher this ratio is, the better.

Graphs created for this assessment. (Source: M&S, 2019, 2020)

3.5 Investment ratios

M&S showed a modest improvement in their earnings per share (EPS) in 2019, and this can be due to their decrease in the cost of goods sold and an increase of revenue on that same year. However, in 2020 the number decreased even less of what it was in 2018. This number results in shareholders less confident in the future growth of the company. The P/E ratio, which provides a comparison of the price of a company’s stock to the earnings it generates (Berger, 2020), reached the lowest number in 2020, of all the three years analysed. The causes of this decrease are due to the lower levels of consumer spending in 2020 and also redundancies reaching the company, which decreases the demand for stocks and leads the PE ratios to reduce (Basu, no date).

The dividend per share was stable in 2018 and 2019, however, showed a massive drop in 2020, reaching 3.9p, as stated on their annual report. According to Eley (2020), this drop on dividend was due to M&S cutting its final dividend for the financial year, in order to add cash to its reserves due to the Covid-19 pandemic, that has been affecting many industries. The cut of dividends is also part of M&S’s strategy, as the company recently paid a high price for a joint venture with Ocado (Eley, 2019).

The stable results for dividend cover show a good position for M&S. However, their result less than one suggests that the company might be taking from profit of the previous year to pay their dividends (CBS, 2007). Dividend yield reached a standard number in 2019, in case it was lower than 3.9%, it was enough justification for investors to prefer investing in other companies.

Graphs created for this assessment. (Source: M&S, 2019, 2020)

3.6 Growth ratios

As seen on the graph below, the growth for all the analysed ratios from 2019-2020, demonstrated how the industry decreased in all aspects with the current ongoing problems in the world. While the growth rate for gross profit and operating profit increased from 2018-2019, it decreased in the following two years due to the decrease in sales. The decrease in the growth of net profit can be a result of low pricing strategies, which means that M&S was mainly forced to lower prices in order to reach a competitive advantage. Due to the pandemic, many workers were made redundant and is preferably choosing low-priced retailers due to their financial situation.

Graph created for this assessment. (Source: M&S, 2019, 2020)

4 CONCLUSION

In summary, Marks & Spencer results represent a decrease in many aspects of the company over three years. Although many companies in the retail sector are wrestling with the currently ongoing situations in the world, Marks & Spencer is still in a great position when compared to others in the market. The company has proven its ability to meet their short-term obligations and is also looking for opportunities to grow its market and adapt during the Covid-19 pandemic; investing in Ocado is an example.

The company will be an excellent option for those investors that do not like taking risks; however, any investor must keep track of the company’s performance. In addition to this, it is vital to highlight the limitations of this report, for example, the dependence on historical costs, inflation adjustments and the fact that data is based on a specific period. As well as this, future predictions of the company are not always a guarantee, as well as it is not guaranteed that they were no fraudulent practices to adjust numbers until the publication of the financial statements.

5 REFERENCES

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Carlson, R. (2020). What is the current ratio? The balance small business. Available from https://www.thebalancesmb.com/what-is-the-current-ratio-and-how-do-you-measure-it-393218. [Accessed 1 November 2020].

CBS (2007). Calculating dividend cover. CBS News. Available from https://www.cbsnews.com/news/calculating-dividend-cover/#:~:text=Dividend%20cover%20measures%20a%20company’s,dividends%20to%20its%20common%20stockholders. [Accessed 30 October 2020].

CFI (No date). Profitability Ratios: Measures of a company’s earning power. Corporate Finance Institute. Available from https://corporatefinanceinstitute.com/resources/knowledge/finance/profitability-ratios/ [Accessed 30 October 2020].

Conway, I. (2020). M&S cuts outlook and dividend on virus impact. Shares. Available from https://www.sharesmagazine.co.uk/news/shares/ms-cuts-outlook-and-dividend-on-virus-impact. [Accessed 30 October 2020].

Craft.co (No date). Marks & Spencer competitors. Craft.co. Available from https://craft.co/marks-spencer/competitors. [Accessed 25 October 2020].

Deloitte (2020). Retail trends 2020: Retails finds it purpose. Deloitte. Available from https://www2.deloitte.com/uk/en/pages/consumer-business/articles/retail-trends.html. [Accessed 20 October 2020].

Edwards, J. (2018). Two trends propping up economic results in Britain have suddenly reversed as more consumers realise the damage from Brexit is permanent, not transient. Business Insider. Available from https://www.businessinsider.com/uk-consumer-saving-and-household-debt-post-brexit-2018-5?r=US&IR=T [Accessed 30 October 2020].

Eley, J. (2019). M&S paying ‘high price’ for Ocado, say analysts. Financial Times. Available from https://www.ft.com/content/8579a014-3aa9-11e9-b856-5404d3811663. [Accessed 3 November 2020].

Eley, J. (2020). M&S scraps dividend and warns of prolonged disruption. Financial Times. Available from https://www.ft.com/content/4f8f3be6-6a99-11ea-800d-da70cff6e4d3. [Accessed 30 October 2020].

Gopinath, G. (2020). The Great Lockdown: Worst Economic Downturn Since the Great Depression. International Monetary Fund Blog. Available from https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/#:~:text=The%20cumulative%20loss%20to%20global,as%20no%20country%20is%20spared. [Accessed 25 October 2020].

Hargrave, M. (2020). Return on Equity – ROE. Investopedia. Available from https://www.investopedia.com/terms/r/returnonequity.asp. [Accessed 30 October 2020].

https://finance.zacks.com/influences-pricetoearnings-ratio-3474.html .[Accessed 30 October 2020].

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Jahshan, E. (2019). UK retailers’ store profit margins have halved in the last 8 years. Retail Gazette. Available from https://www.retailgazette.co.uk/blog/2019/10/uk-retailers-store-profit-margins-halved-last-8-years/ [Accessed 30 October 2020]

John Lewis & Partnership (2020). John Lewis & Partnership plc. Annual report and accounts 2020. John Lewis partnership plc. Available from https://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/Juniper/ARA2020/JLP-2020-Annual-Report-and-Accounts.pdf. [Accessed 30 October 2020].

Kaplan Financial Knowledge Bank. (No date). Liquidity analysis. Kaplan Financial Knowledge Bank. Available from https://kfknowledgebank.kaplan.co.uk/financial-reporting/interpretation-of-financial-statements/liquidity-analysis. [Accessed 1 November 2020].

Kenton, W. (2020). Gearing ratio definition. Investopedia. Available from https://www.investopedia.com/terms/g/gearingratio.asp [Accessed 30 October 2020].

Livingstone, N. (2020) Retail’s disrupted dynamics and Covid-19. UK IN A CHANGING EUROPE. Available from https://ukandeu.ac.uk/retails-disrupted-dynamics-and-covid-19/. [Accessed 20 October 2020].

Marks & Spencer (No date). About us. Marks & Spencer Est. 1884. Available from https://corporate.marksandspencer.com/aboutus. [Accessed 25 October 2020].

Marks & Spencer Group plc (2019). Annual report & financial statements 2019. Marks & Spencer. Available from https://corporate.marksandspencer.com/documents/msar-2019/financial-statements.pdf [Accessed 30 October 2020].

Marks & Spencer Group plc. (2020) Annual report & financial statement + Notice of annual general meeting 2020. Marks & Spencer. Available from https://corporate.marksandspencer.com/documents/msar2020/m-and-s_ar20_full_200528.pdf [Accessed 20 October 2020].

Mattinson, A. (2020). M&S to cut 7,000 jobs in response to ‘shift in trade’ caused by Covid. The Grocer. Available from https://www.thegrocer.co.uk/hiring-and-firing/mands-to-cut-7000-jobs-in-response-to-shift-in-trade-caused-by-covid/647635.article. [Accessed 25 October 2020].

Murphy, C.B. (2020). Net Profit Margin. Investopedia. Available from https://www.investopedia.com/terms/n/net_margin.asp. [Accessed 30 October 2020].

Pfanner, E. and Hipwell, D. (2020). Marks & Spencer to cut 7,000 jobs in the new hit to UK workers. Bloomberg. Available from https://www.bloomberg.com/news/articles/2020-08-18/marks-spencer-to-cut-about-7-000-jobs-as-clothing-arm-suffers. [Accessed 26 October 2020].

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Walsh, H. (2020). Will your Ocado shopping be cheaper when M&S products replace Waitrose? Which? UK. Available from https://www.which.co.uk/news/2020/08/will-your-ocado-shopping-be-cheaper-or-more-expensive-when-marks-and-spencer-products-replace-waitrose/. [Accessed 25 October 2020].

6 APPENDICES

Appendix A – Calculation of financial ratios

PROFITABILITY RATIOS

FORMULA

2018

2019

2020

Gross Profit Margin = Gross Profit/Sales (Turnover) x 100

Operating Profit Margin = Operating Profit/Sales x 100

Net Profit Margin = Net profit/Sales x 100

Return on Equity (ROE) = Net profit after interest & tax/Total Equity x 100

Return on Assets (ROA) = Operating profit (profit before interest & tax)/Total assets x 100

Return on Capital Employed (ROCE) = Operating profit (profit before interest & tax)/Capital Employed x 100

Asset turnover (times) = Turnover/Assets

LIQUIDITY RATIOS

FORMULA

2018

2019

2020

Current Ratio = Current Assets/Current liabilities

Quick ratio (Acid test) = Current assets – Inventory/Current liabilities

FINANCIAL EFFICIENCY RATIOS

FORMULA

2018

2019

2020

Inventory Turnover Period = Inventory/Cost of Sales (or turnover) x 365 days

Trade receivables’ collection period (days) = Trade receivables/Credit turnover (SALES REVENUE) x 365 days

Trade payables’ payment period (days) = Trade payables/Cost of sales x 365 days

FINANCING RATIOS

FORMULA

2018

2019

2020

Gearing ratio (Debt/Equity) = Long term liabilities/Equity x 100

AND

Long term liabilities/Long term liabilities + Equity x 100

Interest Cover (times) = Operating profit (Profit before interest & tax)/Interest paid

INVESTMENT RATIOS

FORMULA

2018

2019

2020

Earnings per share (EPS) = Net profit/Number of ordinary shares

1.6p

2.5p

1.3p

Price/earnings ratio (PE) = Market price per ordinary share/EPS

*As at 29 March 2018

*As at 29 March 2019

*As at 30 March 2020

Dividend per share = Dividends/Number of shares

13.9p

*Number found on the annual report

13.3p

*Number found on the annual report

3.9p

*Number found on the annual report

Dividend cover = Net profit or Profit after interest & tax/Dividends

Dividend yield = Dividend per share/Market price per share x 100

GROWTH RATIOS

FORMULA

2018 – 2019

2019 – 2020

Growth rate for turnover = This year’s figure – Previous year’s figure/Previous year’s figure x 100

Growth rate for Gross Profit = This year’s figure – Previous year’s figure/Previous year’s figure x 100

Growth rate for Operating Profit =

This year’s figure – Previous year’s figure/Previous year’s figure x 100

Growth rate for Net Profit =

This year’s figure – Previous year’s figure/Previous year’s figure x 100

Appendix B – Calculations for competitors’ ratios

OTHER COMPANIES MENTIONED IN THE ANALYSIS

CALCULATIONS

Inventory turnover period for John Lewis partnership (2020)

Trade receivables’ collection period for John Lewis partnership (2020)

Trade payables’ payment period for John Lewis partnership (2020)

Current ratio for John Lewis partnership (2020)

Quick ratio for John Lewis partnership (2020)

Appendix C – Marks & Spencer financial statements 2018/2019

Earnings per share 2018/2019. (Source: M&S, 2019)

(Source: M&S, 2019)

(Source: M&S, 2019)

(Source: M&S, 2019)(Source: M&S, 2019)

(Source: M&S, 2019)

Appendix D – Marks & Spencer financial statements 2019/2020(Source: M&S, 2020) (Source: M&S, 2020) (Source: M&S, 2020) (Source: M&S, 2020) (Source: M&S, 2020) (Source: M&S, 2020)