Analysis of Next PLC

Next plc is a UK based retailer offering products in clothing, footwear, accessories and home

products” distributing its products through three main channels: Next Retail, a chain of more

than 500 stores; Next Directory, a home shopping catalogue and online Website with more

than 2 million active customers, and international arm, Next International with more than 180

stores (“Thomson Banker”, 2010).

2010 2009

Liquidity Ratio

Acid Test/Quick Ratio

Current Assets – Inventories

Current Liabilities

1,041.2 – 309

758.1

1,073.6– 318.7

713.5

Current Ratio

Total Current Assets

Total Current Liabilities

1,041.2

758.1

1,073.6

713.5

Cash Ratio

Cash and Cash Equivalents

Current Liabilities

107 +8.6

758.1

84.4+47.8

713.5

Gearing Ratios

Long Term Debt to Equity Ratio

Long term Loans

Total Equity

520.9

133.6

567.8

140.6

Interest Cover

Operating Profit + Finance Income

Finance Cost

529.8 + 0.8

25.3

478.3+1.3

50.8

Profitability Ratios

0.97 1.06

1.37 1.50

0.15 0.19

3.90 4.04

20.97 9.44

Gross Profit Margin

Gross Profit X 100%

Revenue

996.9

3406.5

908.5

3271.5

Operating Profit Margin

Operating Profit X 100%

Revenue

529.8

3406.5

478.3

3271.5

29 % 27.8%

15.6 % 14.6%

01/30/10 01/24/09

Trade receivables collection period 56.80 58.61 Inventory turnover 7.30 7.04 Current ratio 1.37 1.54 Acid test ratio 0.97 1.09 Cash Ratio 0.15 0.19 Non-current asset turnover 5.22 4.76 Trade payable payment period 27.88 33.28 Long-term debt to equity 390.34 362.99 Interest Coverage 18.76 9.71 Gross Profit Margin 29.13 27.77 Operating Profit Margin 16.04 15.64 ROCE 79.03 54.65 ROE 184.78 123.05

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("Morning Star stock Report", 2010)

The above table shows selected ratios for Next Plc. Starting from liquidity ratios we find that

that Next plc is sufficiently poised to meet its financial obligations. Liquidity ratios are

indicators of whether a company’s current assets will be sufficient to meet the company’s

obligations when they become due. Current ratio is more than 1 showing that current assets

are more than current liabilities – while acid test ratio has decreased for 2010 it is still quite

close to 1 while for cash ratio although it is a very conservative way to look at the balance

sheet it simply shows if Next can repay its short term debt from its cash and cash equivalents

only.

We will look at profitability of the company to determine its investment worthiness. Gross

Profit and Operating profit margins have both improved from 2009 and considering that 2010

was not a particularly healthy year economically so Next’s performance is to be credited.

These measures show that Next has grown despite recession and economic slump and so

Next should continue to do well when economy recovers fully in 2011 and beyond. Further

looking at ROCE and ROE we see that these two indicators are particularly good for 2010.

ROCE reflects company’s ability to earn a return on its capital while ROE relates net income

to the amount invested by the shareholders. ROE indicates efficiency shareholders investment

has been utilized.

Efficiency ratios including Non-current asset turnover, Inventory turnover, Trade receivables

collection period and Trade payables payment period all show improvement over 2009. Trade

payable payment period has decreased showing reveals Next has improved its ability to pay

its bills and has reduced time period to pay its outstanding bills from 33 days to 27 days, also

there has been a small improvement in Next’s ability to receive payment basically signifying

Next’s effectiveness in extending credit as well as collecting debts. Improvement in non

current asset turnover also is a healthy sign showing improved ability in using the investment

in fixed assets to generate revenues. Inventory turnover’s small improvement shows faster

turnaround of inventory so better ability to generate revenues. Determining number of times

inventory is sold during the year provides some measure of its liquidity and ability of

company to convert inventories into cash quickly. If we were to distribute inventory turnover

into 365 days of the year we find that inventory turnaround has reduced to 50 days in 2010

from around 52 in 2009.

Gearing ratios Long-term debt to equity and Interest cover are both favorable. Long term debt

to equity ratio has increased showing decrease in long term debt and further Interest cover’s

increase shows improved ability of Next to meet its obligations.

(“London Stock Exchange”, 2010)

("Morning Star stock Report", 2010)

Finally looking at investment ratios P/E ratio, Dividend payout, Dividend cover, and

Dividend yield shows increasing EPS and dividends over 2009. P/E ratio has improved from

7 to 10.4 and revenue per share has also climbed up. Slight improvement in dividend cover

shows improved profits to be ploughed back into business. Also looking at EPS estimates for

the future Next shows a healthy outlook with an analyst green signal and go ahead and buy

rating. EPS estimates show EPS to grow from 177, currently to 248 by 2013, a more than

40% growth.

(“Thomson Banker”, 2010)

Having analyzed Next plc we need to cross check the company’s performance with Ted

Baker to see if Next is really viable for investment. “Ted Baker PLC (Ted Baker) is a United

Kingdom-based designer brand company with wholesale and retail sales of menswear,

women's wear, children wear and related accessories (“Thomson Banker”, 2010).

Company Next PLCTED Baker PLC

QuoteSymbol NXT-LN TBK-LN

Last Price Close 32.497 10.121

Price 52 Wk High 36.96 10.62

Price 52 Wk Low 28.43 6.87

Price Volatility 23.98 25.45

Current P/E Ratio 11.69 19.17

Last Yr. P/E Ratio 8.14 13.3

P/E High 5Yr Avg 13.24 18.33

P/E Low 5Yr Avg 8.53 12.57

P/E Frcst FYR1 9.73 15.5

Current Price/Book 15.11 3.87

Last Yr. Price/Book -34.87 3.62

Current Price/Cash 7.27 10.62

Last Yr Price/Cash 5.75 8.56

Price/Cash 5YR Avg 7.49 10.26

Div Yld 3.646 2.837

(“Thomson Banker”, 2010)

Next is performing well in almost all fronts with higher price, EPS and dividend yield. P/E

for Ted is higher but that ratio is overshadowed but better performance on almost all other

fronts by Next PLC. Comparison of ratios shows higher profitability margins on Next versus

Ted while Ted shows a major problem in turning its inventory. Next is also showing a higher

operating profit margin while gross profit margin is higher for Ted.

Company Next PLCTED Baker PLC

QuoteSymbol NXT-LN TBK-LN

Sales Per Share 24.34 5.17

Earnings Per Share 2.25 0.43

Dividends Per Share 0.79 0.24

Book Value Per Share 1.15 2.16

Cash Flow Per Share 3.17 0.72

COGS Per Share 16.71 1.94

Gross Income Per Share 7.63 3.23

Oper Exps Per Share 3.82 2.77

Oper Inc Per Share 3.81 0.46

EBIT Per Share 3.55 0.61

Int Exp Per Share 0.37 0.01

EBT Per Share 3.18 0.6

Taxes Per Share 0.93 0.17

Company Next PLCTED Baker PLC

QuoteSymbol NXT-LN TBK-LN

Last Fiscal Yr End Date 1/24/2009 1/31/2009Profitability Ratios

Return on Per Share 261.65 21.11

Return on Assets 19.78 14.46

Gross Profit Margin 27.77 58.54

Operating Profit Margin 15.64 8.86

Asset Utilization Ratios

Asset Turnover 1.84 1.6

Inventory Turnover 7.04 1.72

Leverage Ratios

Total Debt to Common Equity 440.65 0

Dividend Payout 35.22 55.45

Cash Dividend Coverage Ratio 4 3.05

Liquidity Ratios

Quick Ratio 0.93 0.7

Current Ratio 1.54 1.93

Accounts Receivable Days 56.77 32.22

Inventories Days Held 51.82 212.2

Gross Profit Margin 27.77 58.54

Operating Profit Margin 15.64 8.86

(“Thomson Banker”, 2010)

(“Thomson Banker”, 2010)

Similarly looking at analyst estimates standing alone Ted also has a positive outlook with

EPS forecasted to grow from 32.6 currently to 51.14 by 2013 (an extraordinary 57% growth).

Standing alone Ted would be a good buy, however in comparison with Next Ted would be a

secondary choice as Next promises better return because of its higher magnitude share price.

Next PLC Sales and Profitability

2,950

3,000

3,050

3,100

3,150

3,200

3,250

3,300

3,350

3,400

3,450

2006 2007 2008 2009 2010

0

50

100

150

200

250

300

350

400

Revenue £m Profit after tax £m

(“Next Plc corporate website”, 2010)

Next revenues have been consistently growing except for 2009 and similar growth can be

seen in the profitability.

Latest trading statement from Next PLC reiterates that profit forecasts for years ending

January 2011 would be met and further profit would range between £540m to £555m

representing a healthy more than 7% growth over last year and EPS is expected to increase by

around 15% over last year. This forecast further increases suitability of Next PLC as

investment option (“Next PLC Trading Statement”, 2011).

Looking at the financial ratios and company outlooks, Next Plc promises to be a better buy,

though possibly in coming years Ted Baker might also be growing significantly. The decision

in favour of Next is because of the base magnitude of share price so the growth would

increase the base line improving Next share price and EPS and thus a smaller percentage

increase than Ted would reflect in a larger magnitude result – hence Reiner should go for

Next PLC’s shares.

Which part(s) of questions did you find difficult to answer and which did you find easier? Why did you think that was?

Some ratios were straight forward while other like ROCE and ROE were trickier.

Analysis of ratio results was however the difficult part, as both of the companies

standing alone were good buys but it required more thorough analysis to separate one

more promising company for investment.

What are your strengths and/or weaknesses that you have identified? What have you learned from this work?

Strengths were ability to find sources for getting required information, however

finding the correct number for analysis through ratios was the tricky part. My learning

was that numbers alone do not mean anything in isolation. Number have to be

considered in accordance with base facts for good or bad number have to be

considered in relation with the respective environment for high percentage might not

be necessarily a healthy sign if the base magnitude is small compared to otherwise

smaller percentage increase if the base magnitude is higher.

How effectively did your group work together on this work? Would you prefer group or individual work? Why?

Group work has its definite advantage. Groups allow division of work and if the work

division can be made in accordance with the respective member’s strengths than the group

function can be synergized, however if the group member’s strengths are not fully exploited

than group work can actually lead to disjointed slowed down work with much duplication of

efforts.

Group work can be useful for some work if group member’s strengths can be appropriately

mapped on the work. It will also be useful if the work is divisible into appropriate pieces

matching group member’s forte and expertise.

References

Next Group plc 2011 [WWW] http://banker.thomsonib.com/ta/ (8th January, 2011)

(2011) Next Group PLC Website [www]

http://www.nextplc.co.uk/nextplc/financialinfo/reportsresults/2010/2011-01-05/2011-01-

05a.pdf (8th January, 2011)

(2011). Next Group PLC Website [www]

http://www.nextplc.co.uk/nextplc/financialinfo/financialsummary/ (8th January, 2011)

(2011) Next PLC Morning Star Stock Report [www]

http://tools.morningstar.co.uk/uk/stockreport/ (8th January, 2011)

(2011) Next PLC NEXT PLC ORD 10P - Fundamentals - London Stock Exchange [www]

http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?

fourWayKey=GB0032089863GBGBXSET1 (8th January, 2011)