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Next Financial Review and Stakeholder Value
Consumer spending is estimated to fall by around 3. 25% in real terms by the end of 2009, with a further fall of 0. 25% in 2010, oppressing an already highly competitive and sensitive sector. Retail clothing was one of the worst hit sectors in the aftermath f the credit crisis, but it has rebounded well from mid-2009 with Year on year sales up 5. 8% to September 2009, compared to 2. 5% overall for retailing for the same period. This has been rewarded by the near 40% rise of I-J FETES clothing retail shares from May 2009.
The outlook for the retail sector is still subdued and will remain so in the medium term with value growth depressed by intense competition and discounting among high street clothing retailers. Next Pal has not been immune from the current climate with pre-tax profits down to IEEE. 8 million in PAYOFF, a decrease of 13. 91% over 2008. This report recognizes the strong management of the Next Pal board which has allowed it to maintain its dividend payment at 2008 levels. This has generated confidence in the market leading to an above sector average performance in share price.
The proactive approach to cost control has ensured the enviable operating margin of the Next group has not suffered as badly as many retail competitors. However the underlying decline in like for like sales in the core revenue generating Next Pal retail business is of concern for the group and represented a risk to investors before the credit crisis. This was countered prior to the credit crisis by ongoing expansion of retail space, which is no longer possible leading to questions about the sustainability and growth of Next Pal in the coming 2 years.
However, this report encourages Next Ply’s management to look for alternative revenue streams during the current operating environment, but notes the lack of investment in this retail sector would generate greater shareholder value, particularly in light of the current valuation of the group’s shares, its dividend forecast and lack of capital investment in higher growth overseas markets. Page | 3 . Introduction Next Pal (Next) is predominately a UK based retailer, generating 94. 3% of its revenue in the I-J through its 500+ stores, the remaining 5. % revenue comes from other European countries, the Middle East and Asia. Next also distributes its products through the Next Directory, a direct mail catalogue and transactional Website. This report will review the economic outlook for the I-J and its impact on the I-J retail sector. An in-depth analysis of Nest’s financial performance in the last financial year will be undertaken followed by insight and analysis of the current management tragedy, likely performance in the next 2 years and implications for shareholder value. 3.
UK Economic Outlook UK GAP is estimated to fall by around 4. 75% by the end of 2009, with modest average GAP growth of around 0. 75% in 2010. Consumer spending is estimated to fall by around 3. 25% in real terms by the end of 2009. It is expected real consumer spending will fall by a further 0. 25% in 2010. (see Figure 1). (PricewaterhouseCoopers I-J Economic Outlook Report 2009) A further projected rise in unemployment to a peak of around 3 million in the second half of 2010. Business investment is also likely o remain weak in 2010 (See Figure 1).
A gradual recovery is expected from 2010-2012, and although the potential for a stronger or weaker recovery is possible. This analysis is supported by a review of global trends and prospects, Appendix A. Historic trends in selected UK economic indicators are included for reference in Appendix B. Figure 1 . I-J Consumer Spending, Business Investment and GAP 1999-2009 Page | 4 The UK economic outlook outlined is likely to maintain the squeeze on UK retail performance, in particular I-J consumer spending rates and rising unemployment.
Also of importance will be governmental fiscal tightening in 2010, initially with the reintroduction of VAT back to 17. 5% on 1 January 2010 which could lead to a short- term renewed slowdown on the high street. Figure 2 shows the retail sales volume growth 1992-2010 which is showing signs of fragile recovery. Figure 2. Retail Sales Volume Growth 1992-2010 4. 1. I-J Clothing Retail Clothing and footwear retail, while the most severely effected in the early part of the recession has shown signs of a stronger than expected recovery.
Year on year it is up 5. 8% to September 2009, compared to 2. % overall for retailing for the same period. The clothing retailer report 2009, forecasts the market is will have increased by 16. 9% between 2006 and 2011 to EYE. Ban. However, the massive surge in sales seen between 2001 and 2006 will not be repeated, and this report predicts that five-year growth will more than halve from 50. 1% to 21 . 7%. The wider participation of lower price clothing specialists will drive prices down in this sector and dampen growth. Page | 5 5.
Next Pal 5. 1 . Next Pal Financial Appraisal IFFY-IFFY The company recorded revenues of EH,271. 5 million during the financial year (FYI) need January 2009, a decrease of 1 . 7% over 2008. The pre-tax profit was IEEE. 8 million in PAYOFF, a decrease of 13. 91% over 2008. Like for like (ELF) sales in Next retail which make up approximately 70% of revenue were down 6. 5% from IFFY. However Next Directory, the online brand showed resilience in the current market increasing 2. 1% to EMMA, but with profits reduced to El MOM from EMMA in IFFY.
The managements statement on reduction of net debt from EMMA to EMMA (- El 1 1 M) can be seen in a positive light, although this reduction is primarily the result n the reduction of unsecured bank loans from EMMA to MEME. Earnings per share fell by 7. 5% to IPPP from 168. PUFFY, caused by the lower average number of shares in issue following the share buyback which also resulted in the -11% drop in operating profits from IEEE. MM to IEEE. MM. No further buybacks are planned in the foreseeable future. Next Pal benefits from a strong operating margin which has helped the group manage the reduction in revenue.
Its current level of 14. 52% MM is total assets and pre-tax profit 2005-2009, 2010 and 2011 forecast, which essentially monster that revenue and pre-tax profit will remain flat for the next two years and will not reach IFFY levels until after IFFY. Figure 3. Next Pal Sales, Total Assets and Pre-tax Profit Page | 6 5. 2. November 09 Trading statement and Management Outlook The half year results have been encouraging, reflecting a general improvement in the I-J and global economic position, but as noted previously consumer spending and unemployment will continue to restrict growth.
ELF retail sales were down -1. 6%, an improvement from the -6. 5% from IFFY, with total retail sales up 2. 2% in CHAFFY from CHAFFY. The gross margin erosion from the devaluation of Sterling has been less damaging than could have been expected due to renegotiation of Dollar and Euro input cost prices. The market consensus for full year Profit before Tax is currently around Emma, but with the potential to move to Emma which would represent an increase of 10% over last year’s profit. 5. 3.
Two Year Share Performance After the sharp decline in share price from 2000 pence to a low of 879 pence in July 2008, Next has bounced back to 250 pence below pre-credit crisis levels fluctuating around 2000 pence. See figure 4. Figure 4. Next Pal share performance DCE 2007- Novo-2009 Figure 5 shows that Nest’s share performance suffered more than the FETES average and the I-J retail sector as a whole during the beginning and middle of the financial crisis. It has however bounced back strongly, beating the FETES average and the UK retail sector as whole since the turn of the year. Age | 7 (Adapted from HASH Direct) 5. 4. Fundamentals and Key Ratio Analysis The table in figure 7 shows some market fundamentals and selected ratios. Ratios do not always paint a clear picture of the future efficiency of the company but they do roved a useful snapshot. Looking forward to 2010, the key ratios for shareholder value including dividend yield, dividend cover, earnings per share (PEPS) and PEPS growth are forecast to improve from 2009, but this is expected after such a challenging time. Figure 7.
Next Pal selected financial ratios and financial Page | 8 6. Next Pal Shareholder Value Analysis The shareholder value analysis (SVGA) (Alfred Rapport 1982) has been chosen as a framework to evaluate Nest’s current position and future direction. It can be used to estimate the value of the shareholders’ stake in a company or business unit, and can also be used as the basis for formulating and evaluating strategic decisions. Figure 6 illustrates the SVGA model for Next Pal from a strategic perspective with key points noted at each level. Figure 6.
Shareholder Value Analysis Overview, Next Pal 6. 1 . Business Strategy The business strategy of Next Pal has been to increase store space and maintain its enviable +14% operating margin. Although the company has seen a fall in its revenues and associated pre-tax profits, these have compared favorably within the I-J retail sector, showing resilience and an increase in revenues forecast in 2010 and 2011. The page 19 management team have resisted the temptation to move to lower price points and compete directly with low cost competitors like H and Primary.