Next PLC : Financial Analysis
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Research and prepare a critical analysis of financial information for a FTSE 100 company. Summarise the following aspects of the company's performance (no separate answers to each question are expected. These questions are to make apparent the core issues faced by companies):
1) Using financial reports data for a total of 5 years, 4 years pre-Covid-19 crisis (i.e.,2016-2019) AND the Covid-19 crisis years (i.e., 2020-21) focus on the general strengths and weaknesses that the company had before the crisis, and any possible changes in the company circumstances during the crisis, including information from 2021 whenever possible. Notice that as financial, annual and other reports for the year 2021 will not be complete, any partial reports and information could be used to inform your discussion. Constraints in access to information must be made apparent in the "methodology" and the "analysis" section of the essay.
2) As the company selected as a case study may be a multinational corporation, the company's performance may differ from other companies who only trade in the UK because their revenues may depend on different countries, which were less/more affected by the crisis. This factor should be an interesting point to develop by looking at the particular location of operations which have suffered more during the crisis, the type of activities/operations/products of the company which have been more/less harmed, and to find out any possible variations in the short-term strategy of the company during 2020-21.
3) Clearly identify the specific financial, risk and annual reports, the accounts and the ratios in the corresponding financial statements depicting information of positive and negative consequences of the crisis versus the pre-crisis performance. Has the company changed its capital structure by taking/issuing more debt/equity? Has the company changed its Working Capital policies/ratios? Has the company fulfilled any investment plans during the crisis period or delayed investments which were scheduled in advance to 2020-21? Have the profitability indicators been acutely/slightly affected by the crisis? How has the company progressed in the application of the ESG Criteria?
4) Clearly identify the reports, accounts, ratios, and intelligence provided by external analysts. Incorporate relevant information about assistance/support received from government or Bank of England policies during the crisis. If commentaries are not openly identified in the company's financial statements and accounts, note this fact and state possible reasons for the missing information/details.
5) Visibly ascertain the risk factors that the company should be surveying after the crisis (i.e., short-term and medium-term after the crisis), and relate each one of these risk factors to explicit financial reports, accounts and ratios that must be monitored by the corresponding financial manager, the executive and board of directors of the company, and any potential investors and stakeholders.
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1) The financial report's data for 5 years, 4 years pre-Covid crisis, and the Covid crisis years 2020-21 for Next PLC show that the brick and mortar sales of Next PLC declined from £ 2,406 m in 2016 to £ 1,955 m in 2019. During the same period, the online sales of Next PLC increased from £ 1,688 m in 2016 to £1,919 m in 2019. The sales from financial activities of Next PLC commenced from £ 223 in 2018 and increased to £250 in 2019. The profit from brick-and-mortar stores of Next PLC declined from £ 384 m in 2016 to £212 m in 2019. At the same time, the profit from online sales also declined from £ 418 million to £ 353 million.
In contrast during the pandemic years, that is between 2020 and 2021, the store sales of Next PLC declined from £ 1,852 m to £ 955 m. However, the online sales of Next PLC increased from £ 2,147 m to £2, 368 m. During the COVID years, the store profit declined from £234 m to a loss of £136 m. During the same period, the online profits of Next PLC increased from £ 410 m to £ 477 m. Between 2020 and 2021, Next PLC 's profit declined from £611 m to £286 m.
Before the pandemic, Next PLC 's strengths were a high level of customer satisfaction. Next PLC set up a strong CRM department and this led to customer satisfaction. The employees of Next PLC were well trained and had gone through excellent learning programs. The employees of Next PLC were strongly motivated. Next PLC also performed well in new markets and this helped build new revenue streams. Moreover, Next PLC had a strong distribution network, reliable suppliers, and a strong free cash flow. Also, Next PLC has a reputation for building a strong brand portfolio and has a successful track record of developing and launching new products.
Before the pandemic, the weaknesses of Next PLC were that its investment in research & development was inadequate. Next PLC has been unable to compete with the strongest competitors. Moreover, during mergers and acquisitions, Next PLC has not been able to assimilate the cultures of other companies. This led to weak integration with acquired companies. Further, the demand forecasting of Next PLC is weaker than that of its competitors. The result is lower sales because of stockouts at certain stores and excessive inventory carrying costs because of incorrect forecasts. Other weaknesses of Next PLC before the pandemic are that the company was a laggard in investing in technology. Because of this weakness, there was poor integration of processes before the pandemic. Also during this period the profitability and net contribution % are below the industry average. Moreover, Next PLC is weak in financial planning and the ratios are not satisfactory. As discussed above, the inventory of Nextis high, the profitability is low, and the net contribution is weak. The reasons attributed to COVID-19 are that the demand for Next PLC products is low because of the pandemic; there are several barriers to supply because of the pandemic, and the customers do not want to buy new apparel if they are required to stay at home. The COVID crisis at Next PLC has altered NExt's financial outlook for the year and also the long term-direction. Even though before the pandemic Next PLC was experiencing declining store sales, with the pandemic the need to change over to the online format has become very strong. However, Next PLC has experienced an increase in profit in stores increase from a £ 136 m loss in 2021 to a £ 107 m profit in 2022. Next PLC is encouraged by the improvement in store performance as well as an increase in online sales and profit.
2. Even though Next PLC is a multinational company, of its 700 stores more than 500 are in the UK. Besides, its 200 stores are spread across Asia, the Middle East, and Europe, areas which were also equally affected by the COVID-19 crisis. Before the crisis, the products of Next PLC were targeted at those who wanted to purchase fashionable products in the middle class in the 25-45 age group. What was observed was that during the pandemic the sales of functional and essential clothing experienced a surge in demand. In the middle class, several organizations introduced Flexi-work or work-from-home options. This means that after the COVID-19 crisis the decline in demand for mainstream fashion related to the middle class will continue. If people work at home, they do not require fashionable clothes but need functional garments. Similarly, before the pandemic, the pricing of Next PLC products was in the middle. Even though the prices of Next PLC were not premium, the prices were not discounted either. After the COVID-19 crisis, the large discount chains experienced a surge in demand. From this perspective, for ...
Education
- MBA, Indian Institute of Social Welfare and Business Management
- BSc, University of Calcutta
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