Strategic Financial Management

Introduction

The objective of the report is to present analysis of the performance of NEXT PLC. The report consists of the financial as well as non-financial analysis of the company’s position in the market and how it is changing due to the multiple changes in the economy. The report focuses on the analysis of both the aspects so that it can get detailed information about the process of the company and this is attained through the help of PEST and SWOT analysis. These measures are useful in comprehending the position of the company in the market and what are internal and external factors that have direct and indirect impact on the performance of the organization.

NEXT PLC is a British Multinational Retailer of Clothing, Footwear and home products. The company is headquartered in Enderby, England. The company is one of the promising retailers of UK and it is a big brand in UK. The company has around 700 stores, out of which 500 stores are in the United Kingdom, whereas 200 stores are located across Europe. The company earned revenue of GBP 328 Crores in 2021. The company is also listed in the London Stock Exchange. The report will also analyze the financial performance of the company on the basis of Ratio Analysis.

Financial ratio analysis

The financial ratio analysis is divided into four different segments – profitability, liquidity, efficiency and investor’s ratios. These different segments have the different functions and objectives in actions. The ratios are being measured to evaluate the financial condition and performance of NEXT Plc for the last four years.

Profitability ratios

The profitability ratios are the measure of profit made from a business and profit can be delivered to the investors on basis of the equity of the business. The operational or short-term profit margins are measured on basis of the income statement of a period whereas profit against the equity requires to measure with respect to the balance sheet data of total equity. The last one is effective is delivering the investors an idea of investment return for long-term whereas the operational margin might be understood from the other profitability (Zorn et al. 2018). In this context, gross, operating, net profit margins and return on equity (ROE) are measured for NEXT Plc.

Profitability 2021 2020 2019 2018
Gross margin = Gross profit / sales 1247.9/ 3284.1 = 38.00% 1640/ 3997.5 = 41.04% 1474.2/ 3917.1 = 37.63% 1397.8 / 3867.5 = 36.14%
Operating margin = Operating profit / sales 444.5 / 3284.1 = 13.53% 853.9 / 3997.5 = 21.36% 762 / 3917.1 = 19.45% 759.9 / 3867.5 = 19.65%
Net margin = Net profit / sales 286.7 / 3284.1 = 8.73% 610.2 / 3997.5 = 15.26% 590.4 / 3917.1 = 15.07% 591.8 / 3867.5 = 15.30%
ROE = Net profit / total equity 286.7 / 660.9 = 43.38% 610.2 / 441.5 = 138.21% 590.4 / 553.8 = 106.61% 591.8 / 482.6 = 122.63%

Table 1: Profitability ratios of NEXT Plc

(Created by author)

The above table has computed the profitability ratios of NEXT Plc for the last four years. It has shown that gross margin of the business was the highest in 2020 and trend of the margin is not entirely negative as it has been improved to 38% from 36% in 2021. Therefore, the improvement in gross margin has indicated that NEXT Plc has controlled its cost of sales to retain and enhance its profitability of the business. The operating margin of the company has shown a drastic fall in 2021. The impact of COVID-19 and lockdown of the economy has been reflected in the operating margin of the business. NEXT Plc is a large brand in fashion sector and it could not afford to furlough many people in its operation. Hence, the higher operating cost due to wages and infrastructure expenses has dragged operating profit below the hope line of NEXT. Therefore, the trend of operating profit is negative. Similarly, the net profit margin has fallen for the company at the end of the period, which cannot be controlled by interest income of the business during the period. The ROE of the business has shown drastic fall due to low profit margin of the business and higher retained earnings of the last year’s profit. The company has shown a negative trend in ROE, which is a negative aspect for the investors.

Data Analysis and Findings

Liquidity ratios

The liquidity ratios are the measure of availability of liquidity in a business, which are necessity for running the operation. In this context, four liquidity ratios are computed – current, quick, cash ratios and net working capital. The current and quick ratios show the capability of the company to meet the current liabilities by selling the current or quick assets such as inventories, receivables and cash (inventory is not a quick asset). On the other hand, the cash ratio measures the capability of cash in hand and in bank to meet the total liabilities (Linares-Mustarós, Coenders and Vives-Mestres, 2018). All these ratios higher valueis considered as good for the company’s turbulent viewpoint. However, very high liquidity might indicate the block of cash or current assets in business of unacceptable level, which in turn is reducing the opportunity of expansion or making it idle position of the business (Linares-Mustarós, Coenders and Vives-Mestres, 2018). The net working capital of the business is considered good if it is positive for a company during a period.

Liquidity ratio 2021 2020 2019 2018
Current ratio = current assets / current liabilities 2288.6 / 1196.8 = 1.91 1955.4 / 949.8 = 2.06 2032.2 / 1112.5 = 1.83 1797.5 / 914.8 = 1.96
Quick ratio = current assets – inventories / current liabilities 2288.6 – 536.9 / 1196.8 = 1.46 1955.4 – 527.6 / 949.8 = 1.50 2032.2 – 502.8 / 1112.5 = 1.37 1797.5 –466.7 / 914.8 = 1.45
Cash ratio = cash / total liabilities 608.2 / 3097.1 = 0.20 86.6 / 3231.8 = 0.03 156.3 / 2257.5 = 0.07 53.5 / 2078.9 = 0.03
Working capital = current assets – current liabilities 2288.6- 1196.8 = 1091.80 1955.4 – 949.8 =1005.60 2032.2 – 1112.5 = 919.70 1797.5 – 914.8 = 882.70

Table 2: Liquidity ratios of NEXT Plc

(Created by author)

The above measurement has shown that current capability of the company is deteriorated compared to previous years (current ratio). However, the reduction of inventories has not affected the cash liquidity of the balance sheet and NEXT has the similar capability to meet its current obligations in 2021 as seen in 2018 (interpreted from quick ratio). Further, the cash ratio of the company has shown that the reduction in receivables has improved the cash position of the business due to online business growth in 2021 (it is in the best position during the period). Similarly, the net working capital of NEXT is the highest in 2021 as the cash growth of the business is the highest in the last year.

Efficiency ratios:

The efficiency ratios measure the management’s decision-making capability as well as managing working capital efficiently. In this context, days inventory, days sales outstanding, payables days and cash conversion cycle are measured for NEXT Plc. These ratios may show the efficiency level of the managerial decision in working capital management of the organization both separately and in combined. The inventory days shows the time being taken to convert the inventories into sales after finishing products (in this case, inventory sold). The days sales outstanding shows the time taken for receiving money after sales whereas payables days refer to payment done to the suppliers (Marsha and Murtaqi, 2017). The cash conversion cycle is the measure of foresaid efficiency ratios where total time taken of an operation is measured to convert the cash from order supplied.

Efficiency ratios 2021 2020 2019 2018
a. Inventory days = (inventories / cogs) x 365 (536.9/2231.7) *365 = 87.81 (527.6 /2584.2) * 365 = 74.52 (502.8 /2640) * 365 = 69.50 (466.7/ 2668.6) * 365 = 63.83
b. Sales days outstanding = (receivables / cogs) x 365 (1108.1/2231.7) *365 = 123.16 (1315.3 /2584.2) * 365 = 120.10 (1339.8 /2640) * 365 = 124.84 (1248 / 2668.6) * 365 = 117.80
c. Payables days = (payables / cogs) x 365 /2231.7) *365 = 90.82 /2584.2) * 365 = 83.62 /2640) * 365 = 88.56 / 2668.6) * 365 = 79.36
Cash conversion cycle (a+b -c) 120.15 111.00 105.78 102.28

Table 3: Efficiency ratios of NEXT Plc

(Created by author)

The efficiency ratios have shown that the company’s inventory turnover period has been increased due to pressure in sales. On the other hand, sales outstanding of the business was remained almost at the same level during the period. Farther, the management has increased the payment days to the creditors slightly. Overall, efficiency has been decreased as the cash conversion cycle has been increased to 120 from 102 days for NEXT.

Investor’s ratio

The investor’s ratio of the company actually shows the market comparison or the return to the investor in real basis during the period. The dividend payment, earnings, book value of a firm and price to book value are the valid investor’s ratio that can be compared with the market peers (Ligocká and Stavárek, 2019).

Investor’s ratio 2021 2020 2019 2018
Dividend per share = dividend paid / number of shares 0.00 1.57 1.52 3.24
Earnings per share = net profit / number of shares 2.13 4.49 4.15 4.00
Book value per share = total assets / number of shares 4.90 3.25 3.89 3.26
Price/Book value = closing price / book value per share 1577.81 2135.62 1249.04 1600.22

Table 4: Investor’s ratio of NEXT Plc

(Created by author)

The investor’s ratio has shown that Next has not paid any dividend in 2021 and the trend of dividend payment has been fallen during the period. Similarly, the EPS of the company has been halved at the end of the period of analysis. However, the book value of the company has been increased during the period due to accumulating more assets, which has translated a reduction in the P/BV of the company at the end.

PEST analysis of NEXT Plc

The PEST analysis stands for political, economic, social and technological analysis, which is normally conducted for evaluating the external environment of a business (Shtal et al. 2018). In this context, the external environment analysis of NEXT Plc is conducted to understand the external pressures or advantages for the business in current scenario as well as future stages. The following sections have explained the PEST analysis on basis of UK’s retail and fashion sector:

Political: The current tax rate of the UK is low as it is now 19% for the corporates, which is quite low compared to other developed countries (Rates and allowances for Corporation Tax, 2021). However, this tax rate could have been 17% as proposed in the 2016 budget, which was not reduced due to COVID-19 economic downturn. The political issues like BREXIT and government supports in the fashion retail sector are enormous. The BREXIT has reduced the propensity of the business expansion throughout the Europe for sourcing materials and designs at cheaper cost. The cost of transaction and transport cost could affect the input cost of the business of NEXT Plc. On the other hand, there is no guarantee that tax rate may remain at the same position in the next year. Moreover, the government’s scheme of job retention provided enough cushion to the private companies for GBP2500 per person per month since March 2020 to 30th September 2021 subject to the condition that the firms would pay 80% staff of the wage (Find coronavirus financial support for your business, 2021). The government policies to tackle the financial situation has helped NEXT to deter the management for reducing employees. The political instability of various tax rate is observed in the UK due to COVID-19 pandemic and it might hurt the sentiment of the company’s policy to grow its online business in future. Further, the government’s announcement of hiking tax rate from 2023 to 25% from the current level does not show lucrative picture of the environment for future (United Kingdom, 2021). Apart from job retention through subsidy to the firms, the government’s policy to improve the new employment condition through increasing the subsidies for various schemes of traineeship, internships, apprentice, statutory sick pay returns to small companies and self-employment scheme (United Kingdom, 2021).

Economic: The economy of a country or a region has immense importance in assessing the external environment of a business as it has direct and indirect impact on the operation as well as influence the overall demand and supply of the businesses (Next warns sales will slow down over Christmas, 2021). The UK’s current economic state has shown lower spending by the customers of fashion due to reduced purchasing power. Although, NEXT is a fashion retailer based on differentiation and premium market of clothing’s, which should be influenced less due to economic swing. However, the situation is so subtle currently due to poor demand of the fashion. The problem of demand side in the fashion sector has reduced the possibility of economic revival strongly, which is slightly managed by the stimulus provided by the government. The government’s policy for the large businesses has enabled NEXT to borrow up to GBP 50 million with government’s 80% guarantee (Policy Tracker, 2021). Moreover, the bank of England has purchased GBP1.9 billion under corporate finance facility, which are actually short-term debt of the large companies. There are several other schemes were launched by the UK government for boosting the demand side in the economy.

Analysis On External Judicial Practice And Internal Governance Mechanism

Social: the social issue has strong impact on the retail market of a business, especially for a fashion sector. The UK’s ageing population requires special attention for the fashion sector as these people are less mobile than that of the young generations. Hence, the NEXT’s online sector might see a boom in its market. Further, the lockdown due to amid pandemic of COVID19 has increased the online retailing of NEXT Plc, which is considered as a profitable option for the business. NEXT procures its fashion products from various developing countries such as Bangladesh at cheaper price. Due to surge of COVID 19 in those countries, NEXT must reduce its payable towards the contracted producers to retain their labors. Hence, the higher operating margin from online retailing might help the company to repay its working capital debt faster. Moreover, the supply chain issue might come up due to different logistics of online retailing such as availability short-run vehicles for reaching the customers in time as well as large warehouses for maintaining the supply-chain(Reports and presentations, 2021). The social issues such as reverse trend among the UK’s ageing population might be possible due to reduced purchasing power of the consumers.

Technological: The current business environment has shown the boost of internet marketing as well as online retailing in fashion and other retail sectors. The emergence of online sales is witnessed throughout the UK where majority of the revenue of the business has come from online order booking (Next warns sales will slow down over Christmas, 2021). In this context, the fashion sector might find the hurdle of meeting such requirements within short-time as they have to employ different working capital management, supply chain for the demand side and packaging management. Moreover, the change management of current situation of retailing might hamper the traditional marketing concept as the digital marketing requires long time to improve the market footprint for a new organization (United Kingdom, 2021). However, it is observed that technological changes might enhance the attrition rate of traditional employment of marketing in fashion sector. Further, the change in technology might require higher investment as well as time of adoption for the employees.

SWOT Analysis

The framework of SWOT Analysis is applied on the organizations for identifying the internal strategic factors such as the strengths and weaknesses of the organization. It also sheds light over the external strategic factors such as the Opportunities and Threats that are related to the business. The SWOT Analysis is very helpful for the managers in making strategic decisions regarding the operations of the company and what actions can be taken by them to further enhance the operations of the firm. The SWOT Analysis is also useful for ensuring and protecting the operations of the company from the potential threats that might impact on the profitability of the organization.

Here, the SWOT Analysis of Next PLC is done to comprehend the key aspects of the company. The SWOT analysis would aid the management of NEXT PLC in utilizing its resources in a manner to exploit the external opportunities and counter the threats that is in the way of the company. It will also aid the management in picking the right areas of the company which would provide it higher strength and improve the performance of the company in the long run. Mentioned below is the SWOT Analysis of NEXT PLC.

Strengths

  • Strong Record of Developing New Products: One of the biggest strengths of NEXT PLC is Product Innovation. The company is leading its counter parts in developing new products as per the needs and requirements of the customers. This is the biggest strength of the company which makes it different from its competitors.
  • Strong Brand Portfolio: The Brand Portfolio of the company is quite Strong. The management of NEXT PLC has invested a lot of time and capital in building a brand portfolio on the basis of its existing customer base. This is extremely useful for the company in expanding into new projects (Flynn and Walker, 2020).
  • Strong Cash Flow: Another vital Strength of the company is that it has a strong Free Cash Flow that aids in providing the company resources as well as capital so that the company can invest and expand into new projects.
  • Reliable Suppliers: The Company has a very strong base of reliable supplier of raw materials for the production of goods. This is beneficial for the company as it enables the firm in overcoming any supply chain bottle necks(Reports and presentations, 2021).
  • Great Performance in New Markets: NEXT PLC’s strength involves expertise in entering into new markets and utilizing them for increasing their sales and generating higher revenue respectively (Rahman, 2019). This has led the company to expand to new horizons and areas and this has aided the firm in building a strong stream of revenue, which has led to diversification of the economic cycle risks in the different markets, the company operates in.

Weaknesses

It is the area where the company can make improvements so that it can build its competitive advantage and strategic Positioning. The weaknesses of the organization are:

  • Financial Planning: The Company is not that efficient in Financial Planning. It is one of the biggest weaknesses of the firm. The Financial ratios of the company suggest that the company needs to monitor the position of assets in the firm. It needs to bring more efficiency in its operations to gain the desired results.
  • Requires more Investment in Latest Technology:According to the scale of expansion of the company, and the areas the company is further planning to expand, it needs to invest more capital in the Latest Technology.  It would be beneficial for the company to invest in technology as it would aid in the integration of different activities of the firm and it would lead it to the envisioned vision of the company (Wsj.com. 2021).
  • Need to Improve Demand and Supply Forecasting:The Company needs to focus on the forecasting of demand, as this has led to many missed opportunities to the competitors. The lack of forecasting the demand has also led to higher inventory for the firm. This is also leading to higher costs and higher expenses for the firm(Reports and presentations, 2021).
  • Investment in Research and Development:The Company is not investing a large amount towards research and development. Although the form is ahead of its peers in terms of innovation, but the competitors are investing more account in the latest and advanced technologies.

Opportunities

  • Taxation Policy: The taxation policy on the country where the company is dealing and trading can be very beneficial and can create new opportunities for the company to do its business. The taxation policy can aid the company in generating higher profitability(Reports and presentations, 2021).
  • Lower Inflation Rate: The low rate of inflation is also an opportunity for the company as it brings in more stability in the economic market, which means that it would enable the company to take loans at lower interest rate. This can aid the firm in taking loan for investment purposes.
  • Change in Trends in Consumer Behavior: The changes in the trends of the consumer behavior can create new opportunities for the company in terms of launching new products and building revenue by diversification (Otp.tools.investis.com. 2021).
  • Increase in Online Customers: Another great opportunity for the company is the increase in the online sale of products in the market. More and more customers are now purchasing through online mode, which makes it easier for the company to increase its sales.

Threats

  • Liability Laws: The liability laws of different countries are different, which can make it hard for NEXT PLC to continue business with its same policies. It would have to change policies in order to do business this can lead to losses for the company.
  • Lack of Skilled Labors: Lack of skilled labors in the market is a major threat to the company as it can directly impact the productivity and growth of the company(Reports and presentations, 2021).
  • Change in Consumer Behavior: The inclination of the consumers towards online mode can become a threat to the company’s present infrastructure driven supply chain model of the company.
  • Currency Fluctuations: The business of NEXT PLC is in different countries, which makes it exposed to several currency fluctuations. This can impact on the cost structure of the company.

Conclusion

The report concludes with the detailed financial and non-financial analysis of Next PLC, a clothing, footwear and home products retailer in UK. The company is one of the biggest names in UK and the company is known for its swift services to the customers. The report sheds light on the key metrics of analyzing the external and internal factors of an organization, which are PEST and SWOT Analysis. It can be said from looking at the SWOT Analysis, that the company has strong points of strengths and there are certain weakness which the company needs to take care of and act upon so that they do not create a major issue for the firm in the long run. It can also be said that in the modern times and ways, the company has multiple opportunities to thrive and expand its business, and make new customers. The company also has to take care of the threats that keeps on lingering to devoid the growth and development of the company. The report has shown that profitability of the company is reduced in overall due to economic pressure as well as reduced spending power of the consumers in the UK. Moreover, the analysis has shown that liquidity position of the business is in strong position due to the improved online sales of NEXT Plc.

References

BBC News. 2021. Next warns sales will slow down over Christmas. [online] Available at: <https://www.bbc.co.uk/news/business-59146166> [Accessed 21 December 2021].

Flynn, A. and Walker, H., 2020. Corporate responses to modern slavery risks: an institutional theory perspective. European Business Review.

GOV.UK. 2021. Find coronavirus financial support for your business. [online] Available at: <https://www.gov.uk/business-coronavirus-support-finder> [Accessed 21 December 2021].

GOV.UK. 2021. Rates and allowances for Corporation Tax. [online] Available at: <https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax> [Accessed 21 December 2021].

imf.org. 2021. Policy Tracker. [online] Available at: <https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#U> [Accessed 21 December 2021].

KPMG. 2021. United Kingdom. [online] Available at: <https://home.kpmg/xx/en/home/insights/2020/04/united-kingdom-government-and-institution-measures-in-response-to-covid.html> [Accessed 21 December 2021].

Ligocká, M. and Stavárek, D., 2019. The relationship between financial ratios and the stock prices of selected European food companies listed on stock exchanges. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis67(1), pp.299-307.

Linares-Mustarós, S., Coenders, G. and Vives-Mestres, M., 2018. Financial performance and distress profiles. From classification according to financial ratios to compositional classification. Advances in Accounting40, pp.1-10.

Marsha, N. and Murtaqi, I., 2017. The effect of financial ratios on firm value in the food and beverage sector of the IDX. Journal of Business and Management6(2), pp.214-226.

Nextplc.co.uk. 2021. Reports and presentations. [online] Available at: <https://www.nextplc.co.uk/investors/reports-and-presentations/2020-21> [Accessed 21 December 2021].

Otp.tools.investis.com. 2021. NEXT PLC-Results for the Year Ending January 2021. [online] Available at: <https://otp.tools.investis.com/clients/uk/next_plc1/rns/regulatory-story.aspx?cid=115&newsid=1466071> [Accessed 20 December 2021].

Rahman, S., 2019. Discretionary tone, annual earnings and market returns: Evidence from UK Interim Management Statements. International Review of Financial Analysis65, p.101384.

Shtal, T., Buriak, M., Ukubassova, G., Amirbekuly, Y., Toiboldinova, Z. and Tlegen, T., 2018. Methods of analysis of the external environment of business activities.

Wsj.com. 2021. NXT.UK | Next PLC Financial Statements – WSJ. [online] Available at: <https://www.wsj.com/market-data/quotes/UK/NXT/financials> [Accessed 20 December 2021].

Zorn, A., Esteves, M., Baur, I. and Lips, M., 2018. Financial ratios as indicators of economic sustainability: A quantitative analysis for Swiss dairy farms. Sustainability10(8), p.2942.

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