Financial Analysis of JJB Sports Plc - Assignment Example

Financial Analysis of JJB Sports Plc Introduction JJB Sports Plc’s main business is retailing in sportswear and sports equipment. Its predecessors JJ Broughton had been running it from 1900 to 1971. It was in 1971 that JJB Sports acquired it. JJB Braddock first acquired and later JJ Bradburn acquired it. Lastly it was bought by David Whelan but he retained the name of JJB. From 4 stores in 1976 it grew to 120 stores by 1994. At this juncture the company was listed in the London Stock exchange. (Corporate Information) And now it has 409 stores out of which 65 stores have been since closed down in April 2008, 49 health clubs and 6 indoor soccer centres through out the U.K. Total employees’ strength is 12,040. Their reported sales for the year 2008 are £ 811,754,000. Previous years sales were £ 810,287,000. (Annual Report, 2008) Following is the Common Size Statement prepared from the Balance Sheet of the company for the year 2008. (Figures are expressed as percentages of total figures) JJB Sports Plc £'000 £'000 Fiscal year 2008 2007 Assets Total Assets 789,548 772,806 Cash 1.80% 3.05% Short term investments 24.85% 21.76% Receivables (net) 5.75% 4.94% Inventories-Total 14.56% 16.57% other current assets 0.19% 0% Current Assets -Total 47.15% 46.32% Loan to associate undertaking 0.51% 0 Investments in associated companies 0.21% 0 Property Plant and Equipment -Net 25.12% 25.74% Intangible Other Assets 3.22% 3.55% Goodwill 23.79% 24.39% Total Assets 100% 100% Liability & Shareholders’ equity Total Liabilities & Shareholders Equity 789,548 772,806 Accounts Payable 14.04% 14.69% Loan Notes 21.29% 21.75% Income Taxes payable 0 0.78% Provisions 2.87% 1.60% Current Liabilities Total 38.20% 38.82% Long Term Debt -Bank Loans 7.14% 4.25% Deferred Lease Incentives 5.06% 5.00% Deferred Taxes 3.07% 3.03% Other Liabilities 0.29% 0.11% Total Liabilities 53.76% 51.21% Share capital 1.51% 1.54% Share premium account 21.69% 21.91% Retained Earnings 23.36% 25.53% Capital redemption reserve 0.14% 0.14% Investment in own shares -0.39% -0.40% Share based payment reserve 0.09% 0.04% Foreign currency translation reserve -0.16% 0.03% Total Liabilities & Shareholders Equity 100% 100% LIQUIDITY Trends noticed over 2007-08, and JJB’s s liquidity position. Current ratio of the company for the last two years is worked out as below: Current Ratio for JJB Sports Plc £’000 27 January2008 Current Assets: Current Liabilities 372,348:301,647 1.23: 1 28 January 2007 Current Assets: Current Liabilities 357,970 :300,028 1.19: 1 The above position indicates that the company’s liquidity position is stronger than in the previous year. Acid test (quick) ratio for JJB Sports Plc £’000 27 January2008 Stocks : Current Liabilities 114,984: 301,647 0.38:1 28 January 2007 Stocks : Current Liabilities 128,082 : 300,028 0.43: 1 The slight decrease in the quick ratio may indicate slow moving stock in the inventory for the year 2008 which the management needs to look into. Accounts receivables turnover and inventory turnover of JJB Sports Plc and patterns of the firm’s conversion of accounts receivable and inventories to cash. Receivables for the years 2008 and 2007 are £ 45,412 and £ 38,205 respectively as against the turnover of £ 811,754 (including fitness club revenue of £ 66,280 and £ 810,287 (including fitness club revenue of £ 55,799) respectively. They represent 20 days and 17 days of sales respectively. Inventories for the years 2008 and 2007 are £ 114,984 and £ 128,082 against the respective turnover of £ 745,474 and £ 754,488.both exclusive of fitness club revenues. They represent 56 days and 62 days of sales. As regards receivables, the conversion appears abnormal for a retail industry where there can be only cash and carry operations. In case the receivables include credit card sales and respective dues from credit card companies are included as receivable from debtors, the amount locked up in receivables is not abnormal and not unsecured. The inventory stocking period of 56 days and 62 days are also abnormal unless the lead time is as much. If latter is not the case, there must be non-moving and slow moving items. The non moving items must be identified and removed from the stocks and value of inventory and to that extent profit will stand reduced. Overall assessment of JJB Sport’s’s liquidity position. Altogether 76 days of sales are blocked in the receivables and inventories. This is more than offset by trade and others payables of £.283, 692 for the year 2008 which represent 138 days sales. Actual trade payable is £ 21,523 representing 10 days sales. Strictly speaking, the receivables’ conversion period of 56 days for the year 2008 can only be offset by this 10 days sales equivalent of trade payables. Company has reported availing of credit period of 27 days for 2008 and 26 days for 2007. If cost of sales £ 405,642 is considered, trade payable of £ 21,523 equals 19 days. But the company has actually availed 27 days of credit period as per the report. ASSET MANAGEMENT The manner in which JJB sports Plc is managing its assets. Gross working capital represented by current assets is only £ 352,654, where as amount held up in payables £469,666 and bank loans £ 56355 is more. Generally Bank loans are availed to meet the gap between current assets and current liabilities i.e in cases of excess of current assts over current liabilities. In this case there is no excess of current assets but excess of current liabilities of £ 117,012. Despite this there are bank loans of £ 56355 This indicates problems in the working capital management of the company. FINANCING OF ASSETS The company had been engaged in restructuring and stock clearance exercise during the year under review. It has allocated £ 25 million for restructuring which will result in closure of underperforming retail outlets. Besides there is a provision of £ 3.3 million towards anticipated payouts due to action by the Fair Trading authority for closure of some of the loss making stores. Because of these provisions, the company’s net profit before taxation has fallen by 71.9% from £ 38.5 million to £ 10.8 million. This however indicates timely action of the company in managing their assets by allocation of a major portion of profit towards restructuring instead of declaring more dividends with future growth of the company in mind. This is evident of sound policies of the company in financing and managing of their assets. Debt Ratio Total Liabilities /Total Assets £424,493 / 789,548= 0.54 This debt ratio of 0.53:1 compares total debts of the company with its total assets. The lesser percentage of ratios indicates that the company does not leverage on its debts. In otherwise, it indicates strong equity position. The company is not at a high risk. This however is not a pure measure of the debts of the company since it involves operational liabilities such as payment due to creditors and tax outstanding. Debt Equity Ratio Total Liabilties/Shreholders Equity=£ 424,493/365,055=1.16. Though it shows leveraging on debts, the total liabilities includes operational liabilities and hence not a pure measure of debt-equity of the company. Capitalisation ratio. This is a more meaningful ratio to measure the company’s debt-equity position. It measures debt part of the company’s capital structure made up of long term liabilities and shareholder’s capital. The ratio is calculated as below. Long term liabilities/ Long term liabilities + Shareholder’s capital Accordingly, JJB’s position in this regard is as shown below: £ 424,493/424,493+365,055 £ 424,493/789548= 0.54: 1 This shows that company is not highly leveraged which may curtail its freedom by creditors besides having interest rates draining its profits. Interest coverage ratio= Earnings before interest and Taxes (EBIT)/Interest Expense 23242/12442= 1.87 The amount of 23,242 is made up of profit before taxation 10,800 and finance cost of 12,442 as shown in the income statement. This is not a good sign as the ratio is more than 1. Only if it is less than 1, can it be said to have high leverage and have capacity to borrow on a large scale. In sum, it can be concluded that the JJB’s financing its assets seems to be on equity but behind the scene is the bank’s reluctance to lend on a large scale .The absence of heavy bank liability explains this trend. The company is heavily dependant on trade creditors to finance its current assets. This trend may continue if the company’s restructuring efforts starts giving results .i.e more profit due to elimination of wasteful expenditure on underperforming stores and non moving stocks PROFITABILITY year 2008 2007 2006 2005 2004 Profit before tax 10,800 38,493 33,747 50,374 67,838 % of sales 1.33% 4.75% 4.53% 6.51% 7.30% Sales 2004 929,812 2005 773,339 2006 745,238 2007 810,287 2008 811,754 Year 2008 2007 2006 2005 2004 Operating profit margin 11,295 39,021 34,349 50,339 71,322 Pre tax net margin 10,800 38,493 33,747 50,374 67,838 The above profit figures show a steady decline from 2004 to 2008. But for the earmarking of earnings for restructuring expenses during 2008, the profit would have stood at 2007 levels. As more stores have been since closed down in 2008 and there had been stock clearance operations, profitability for future years is bound to increase. As there is not much difference between the operating profit margin and pre-tax margin in the last five years, it is indicative of the company’s consistent policy of planning all expenditures during the years of operations themselves. Return on Assets 2008 2007 2006 2005 2004 Total Assets 789,548 772,806 747,478 660,640 733,439 Return on Assets(pre-tax) 1.37% 4.98% 4.51% 7.63% 9.25% The total assets position of the company has halved by 2008 since 2004 assuming that for 2008, there would have not been much difference from 2007 position but for the reserve made restructuring expenses. It has been reported that the company is further considering sale of its non-core assets. (Business week) Return on equity 2008 2007 2006 2005 2004 Total equity 365,055 377,026 364,593 342,415 353,003 Return on equity (pre-tax) 2.96% 10.21% 9.26% 14.71% 19.21% Similar to ROA, ROE also has declined steadily from 2004 to 2008 by half. Conclusion The foregoing analysis reveals that the company has been able to maintain its presence in the market due to its strong equity position without having to borrow in difficult situations. It has taken timely steps of prudent restructuring by closing down under- performing outlets and cutting down of non moving and slow moving inventories. Despite the negative trends prevailing in the retail industry, it has shown stable earnings. Unlike in the food supermarkets in the retail sector, this industry though in retails belongs to the luxury segment. Stock analysts have neither recommended to buy its buy its stocks nor sell its stocks but to hold. This would show that the company will bounce back in the years to come. References Annual Report 2008, JJB Sports Plc, Available from http://www.jjbcorporate.co.uk/financialannouncements.php accessed 14 November 2008 Business Week, Consumer Discretionary Sector/Specialty Retail Industry, Available fromhttp://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capid=881824accessed 15 November 2008-11-16 Corporate Information, JJB Sports Plc, Available from accessed 14 November, 2008 Read More