Primark Stores ltd history of Primark stores ltd.

Primark stores ltd is famous for the trading of high street quality clothes with simple designs and fabrics for all genders, ages and in various sizes to fashion conscious individuals for cheap prices. It was incorporated on 30 April 1948 and has its head quarters in Dublin, Ireland. The first store was opened in June 1969 and within a year 4 more stores were opened. Primark’s story has been one of continuous success as they now have 215 stores across United Kingdom and six other countries. Primark has about 21,827 employees, and operate from over 6.0 million square feet of selling. It is also a subsidiary of Associated British Foods Plc (ABF). As retailers they have various competitors such as Next Plc, Newlook, TK maxx and many others.

critical evaluation of the techniques applied in the analysis

Analysis

In assessing the financial situation of Primark it is required to look at its balance sheet, income statement and cash flow statement. Ratio analysis was carried out for Primark over a five year period in order to identify the trend and also two of its competitors (Next Plc and Newlook) to be able to know how primark is doing in the industry.

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Revenue and Profitability

Primark’s revenue has been increasing considerably over the five year’s period. There was an increase in sales by 13.64% to £1743.01million in 2009, 18.13% to £1533.79million in 2008, 41.86% to £1298.4million in 2007 and 21.29% to £915.3million in 2006. Profit however increased by 78.77% in 2009 and 7.54% in 2006 and declined significantly in 2007 by 33.99 and 2008 by 55.07%. In 2009, Primark opened 5 new stores in different countries and thereby increasing profit and sales. The growth in Cost of sales and expenses exceeded that of sales hence a decline in profit.

Interpretation of financial statements

Ratios are essential in ascertaining the worth of a company. Ratios help in checking the performance of a company. This performance could be against past periods (Trend analysis), similar businesses and planned performance.

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Profitability and return ratios

Gross Profit Margin

Primark’s gross profit margin in decreased in 2009 by 0.20%, increased by 0.4% in 2008, decreased by 3.2% in 2007 and increased by 0.3% in 2006. ‘It is a measure of profitability in buying (or producing) and selling goods before any other expenses are taken into account’ (Mclaney, Atrill, 2005, pp215). A decline in these ratio shows that gross profit was lower when compared to the sales revenue. This also shows that the cost of sales was higher relative to the sales revenue in 2009 and 2007, than in 2008 and 2006. Next and Newlook had higher margins when compared to primark and continuous growth from 2005 to 2009 except the slight decline in 2008 for next and 2007 for newlook.

2005

2006

2007

2008

2009

Primark

20.5%

20.80%

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17.60%

18%

17.80%

Next Plc

26.10%

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26%

26.50%

26%

27.40%

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New look

53.30%

56%

55.10%

58%

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59%

Net Profit Margin

Net profit margin increased by 1.07% in 2009 but decreased by 3.05% in 2008, 5.68% in 2007 and 1.30% in 2006. In 2005 for every £1 of sales revenue an average of 11.90p was left as profit, after paying for other expenses of operating the business. This dropped significantly as the years progressed. In 2008 it became 1.87p, but and increase to 2.94p occurred in 2009. Newlook and Next did better than Primark.

2005

2006

2007

2008

2009

Primark

11.90%

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10.60%

4.92%

1.87%

2.94%

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Next Plc

6.38%

6.90%

8.47%

8.06%

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13.60%

New look

13.60 %

13.3%

11.60%

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14.40%

10.70%

Return on capital employed (ROCE)

ROCE is essential in analyzing the performance of a business. ‘It compares the inputs (capital invested) with outputs (Profit)’ (Mclaney, Atrill, 2005 pp214). Primark’s ratio declined continuously from 2005 to 2009. Next had the best ROCE but primark’s did better than newlook and also had a high ratio which indicates that the profit generated in the utilization of the company’s resources.

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2005

2006

2007

2008

2009

Primark

0.62

0.61

0.60

0.58

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0.55

Next Plc

1.70

7.20

1.73

0.81

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0.64

New look

0.36

0.25

0.18

0.16

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0.15

Return on asset (ROA)

It measures productivity of the assets by indicating how effective the management of the company utilizes the earnings generated from the assets. Primark’s ROA increased in 2009 by 1.54% but subsequently declined in the remaining years, in 2008 by 2.98%, in 2007 by 3.35% and 8.44% in 2006. For each pound invested in the asset Primark made 3.77p in 2009, 2.23p in 2008, 5.21p in 2007 and 8.56p in 2006. Next and Newlook utilizes the earnings generated from their assets when compared to primark.

2005

2006

2007

2008

2009

Primark

17%

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8.56%

5.21%

2.23%

3.77%

Next Plc

5.09%

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5.88%

7.02%

6.56%

10%

New look

18.2%

14%

10.90%

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12.80%

10%

Return on Equity (ROE)

ROE measures the profitability of the returns of shareholders funds invested. ‘…If an investment in a particular company presents a greater risk, the higher degree of uncertainty should be rewarded with a greater potential return’ (Kramer, Johnson, 2009). The ROE increased in 2009 by 9% but declined in 2008 by 17%, in 2007 by 11% and in 2006 by 1%. Next and Newlook generated returns fairly better than Primark.

2005

2006

2007

2008

2009

Primark

40%

39%

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28%

11%

20%

Next Plc

55.3%

26.19%

67.9%

35.6%

37.8%

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New look

37.7%

25.7%

21.2%

22.6%

21.4%

Gross profit margin on inventory investment

The GPMOI declined all through except in 2008 where it remained stagnant. This figures show that Newlook and Next are more productive than primark as they generate more returns on gross profit from the inventory invested when compared to primark.

2005

2006

2007

2008

2009

Primark

1.63

1.62

1.47

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1.47

1.30

Next Plc

2.40

2.70

2.91

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2.69

2.87

New look

8.43

7.02

6.49

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7.33

6.21

Graph showing the profitability and return ratios

Liquidity Ratios

Current Ratio

The current ratio indicates how well a company would be able to pay its short term obligations as they fall due. ‘This relationship of current assets to current liabilities is an attempt to show the safety of current debt holders’ claims in case of default’ (Helfert,2001). ‘The higher the ratio the more liquid the company is considered to be’ (Mclaney, Atrill, 2005, pp225). After the decline in current ratio to 0.2 in 2006 from 0.30 in 2005, there has been a continuous increase from then till 2009. Usually the accepted ratio is usually between 1 and 1.5. Primark and Next have low current ratios and this could be seen as an issue because it means they would not be able to easily pay their short term obligation. On the other hand, Newlook has sufficient funds to pay their debt as they fall due. If the ratio is high it could also mean that the company is tying most of its funds in cash and other liquid assets.

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2005

2006

2007

2008

2009

Primark

0.3 times

0.2 times

0.21 times

0.26 times

0.27 times

Next Plc

0.24 times

0.23 times

0.26 times

0.28 times

0.28 times

New look

1.61 times

1.15 times

1.3 times

1.6 times

2 times

Cash generated from operations to maturing obligations

Primark’s ratios increased in 2009 to 0.019 times from 0.017 in 2008. A major decline occurred in 2006 by 66.92% and then it improved from then on. Primark and Newlook have poor ratios. This means that it would be hard for them to meet their maturing obligations as they fall due. Higher ratios signify better liquidity. Next has a better chance of meeting their obligations.

2005

2006

2007

2008

2009

Primark

0.013 times

0.0043 times

0.0026 times

0.017 times

0.019 times

Next Plc

0.036 times

0.074 times

0.14 times

0.25 times

0.31 times

New look

0.015 times

0.018 times

0.036 times

0.006 times

0.008 times

Efficiency ratios

Average inventory turnover period

It measures the number of day in a year that it takes a company to sell its inventories. It took primark 61 days in 2009 to sell or turn over the inventories held and when compared to prior years the difference is not much although there was an increase in 2009. Next has a better turnover period but Primark ‘s turnover is better than that of newlook. ‘A business will normally prefer a short stock turnover period to a long one, as funds tied up in stocks cannot be used for other purposes’ (Mclaney, Atrill, 2005, pp218).

2005

2006

2007

2008

2009

Primark

58 days

59 days

53 days

56 days

61 days

Next Plc

54 days

47 days

45 days

47 days

48 days

New look

49 days

66 days

69 days

70 days

85 days

Average settlement period for creditors

This ratio measures the number of days on average it takes the company to pay its creditors. Most companies try to increase their trade payable periods because it could be regarded as a short term free finance. It takes Primark and Next 24 days to pay their creditors in 2009 and there was not much difference in prior years. However, it took newlook 90days to pay its creditors. The reputation of the company is at stake when the number of days is high.

2005

2006

2007

2008

2009

Primark

27 days

27 days

20 days

25 days

24 days

Next Plc

24 days

22 days

23 days

27.4 days

24 days

New look

49 days

80 days

64 days

68 days

90 days

Sales revenue to capital employed

‘The sales revenue to capital employed ratio (or asset turnover ratio) examines how effectively the assets of the business are being used to generate sales revenue’ (Mclaney, Atrill, 2005, pp220). The higher the ratio the better. There was an increase in 2009 by 1.90%, in 2008 by 37.98%, in 2007 by 51.29% and 2006 by 2.86%. This signifies that there has been an improvement, since revenue increased in 2009 for each £1 of capital employed (£10.7) when compared to that of 2008 (£10.5) and that of the Next (£4.71) and Newlook (£1.43).

2005

2006

2007

2008

2009

Primark

4.89 times

5.03 times

7.61 times

10.5 times

10.7 times

Next Plc

12.9 times

58 times

12.02 times

6.31 times

4.71 times

New look

2.67 times

2.05 times

1.86 times

1.58 times

1.43 times

Gearing ratios

Capital gearing

‘The gearing ratio measures the contribution of long-term lenders to the long-term capital structure of a business’ (Mclaney, Atrill, 2005, pp230). The capital gearing in primark, Newlook and Next are relatively low and this means that most of funds used in acquiring assets and ongoing operations are the funds invested by shareholders.

2005

2006

2007

2008

2009

Primark

1.10%

7.70%

8%

10%

9%

Next Plc

0%

0%

0%

0%

1.5%

New look

1.9%

4.4%

5.6%

6.1%

0%

Debt to worth ratio

This ratio measures the financial strength of a company by comparing the amount owed to creditors to the funds invested by the shareholders. It is exposes the debt of a company.

2005

2006

2007

2008

2009

Primark

2.42

5.58

6.59

8.58

7.98

Next Plc

15.2

67.2

13.5

6.69

4.51

New look

1.02

1.01

1.07

0.85

0.61

Interest cover

This is signifies the number of times the profits of the company covers the interest owed to creditors. The ratio declined dramatically from a position where profit could cover interest 6.4 times in 2006 to 1.39 times in 2007, 0.52 times in 2008 and 1.36 times in 2009. Newlook has the highest ratio and this indicates the availability of funds to cover interest payable and this reduces the risk for lenders. A small decline in the profit of primark in 2009 would have left the business with insufficient funds to cover the interest payment. Next profits cover its interest by 5.67 times.

2005

2006

2007

2008

2009

Primark

0 times

6.4 times

1.39 times

0.52 times

1.36 times

Next Plc

1.94 times

2.24 times

2.43 times

2.68 times

5.67 times

New look

96.4 times

24.6 times

7.47 times

13.4 times

106 times

Productivity ratio

Sale/employee

Every company would like to have a high ratio because it shows the effectiveness of the employees in that company. Primark’s ratio increased in 2009 by 8.55%, in 2008 by 7.52% and declined in 2007 by 1.75% and 2006 by 8.26%. New branches where opened in 2009 and 2008 hence increasing the number of employees. This ratio indicates that the employees have been working effectively. Next is fairly better than primark in terms of productivity of the employees in relation to sales revenue but primark did better than newlook.

2005

2006

2007

2008

2009

Primark

£75,906

£69,636

£68,420

£73,567

£79,856

Next Plc

£73,189

£70,375

£72,348

£73,698

£81,564

New look

£63,175

£62,269

£63,200

£120,732

£63,617

SWOT ANALYSIS

This is an effective business analysis model used in executing any company’s internal and external analysis. Internal analysis considers the strengths and weaknesses of the company while external analysis considers the opportunities and threats faced by an organization.

STRENGTH

The organization structure of primark is simple and orderly. Primark provides high street quality clothes for all ages, gender and sizes for cheap prices and this is beneficial because their competitors (Next and Newlook) prices are not as cheap therefore greater number of customers in primark. They have been around for awhile (over 41 years) and have been a key player in the retail business and this gives the competitive advantage. They implemented the ethical trading policy which focuses on respect for workers, that is, improving the working lives of people across the globe that is within the supply chain. Next and Newlook are also implement the ethical trade policy. Primark has won several awards. Some of which are the prestigious retail week award 2010 for outstanding contribution to retail, ‘Multi Market Retailer of the Year’ – Oracle World Retail Awards , Best Outfit for under £50 Award – Fabulous High Street Awards 2010 and many others. During the recession Primark sales still increased by 41.86% while Newlook where majorly affected. ‘Primark continued to thrive in the recession, with sales at the discount clothing chain up by 21% since last September’. (Wearden, guardian). New look planned to get listed on the London stock exchange. ‘The chain aims to expand to compete with other budget rivals such as Primark. It will also use the proceeds to pay down debt’ (Dailymail). Next’s turnover increased by 0.97% during the recession and this was because a major supplier was also affected by the recession.

WEAKNESS

Primark relies on customers to talk about their product since they have no form of advertisement. Competitors such as newlook and next rely on advertisement which is an advantage for them. Primark stores are usually crowded because the prices are cheap. The return process and payment for sales tend to be slow due to large number of customers. Unlike Next and newlook the customer service is faster as the queue is usually not as long as that of primark’s. Primark does not fully comply with rules governing working conditions, living wages, working hours, legal requirements. Figure 1.1 shows the extent of their non-compliance.

OPPORTUNITIES

Opportunity to provide cheap quality clothes to fashion conscious individuals regardless of variation in age, gender and size in various countries in the world.

THREATS

They have big and established competitors who have also been in the retail business for awhile. Relying on people to do your advertising might not be a good idea because there is no guaranty that they are spreading good words about the company.

PESTLE Analysis

This is a model of business analysis that is used to understand the environment in which the company is operating in. It considers how various factors such as political, economical, social, technological, legal and environmental affects Primark.

POLITICAL

Primarks operations are subject to government policies and regulations such as tax policies, employment laws, environmental regulations, trade restriction, tariffs and political stability which affect the business costs. Most businesses tend to pass this cost to final consumers but primark keeps their overhead cost very low in order for them to sell to customers at a cheap price. Primark is a member of the Ethical Trading Initiative and they are determined to succeed on their own merit and not at the expense of others.

Economic factors

The economic factor considers economic growth, interest rate, recession, exchange rate and inflation rate. Primark is located in different countries and has global presence. If the exchange rate of a supplying country increases this could affect primark’s business or the interest rate of creditors increasing. Primark has grown significantly in the past years. In 2009, Primark opened 5 stores in various countries.

Social Factor

Primark has a corporate social responsibility which aims at giving all employees equal opportunities, treating suppliers fairly, supporting and respecting local communities and taking environmental responsibilities seriously.

Technological Factor

There is rapid change in technology and every organization should try to be at par with the change. Growth and development would be impeded if an organization does not meet the trend. In 2009, Primark invested in an auditing software (Entropy Software) that is designed to help in the effective management of suppliers with compliance to ethical standards. Primark has also set some targets to achieve in the coming year such as developing buyer reporting function on Entropy database, Launch ethical trading extranet (Online information resource) for suppliers and factories.

Legal Factors

The government regularly change laws in line with political polices thus causing businesses to respond to changes in legal framework.

Environmental analysis

Asides from Primark providing jobs for people in the environment they also support many local charitable organizations, community projects and they also replaced plastic carrier bags with paper bags thus reducing their impact on the environment.

Conclusion

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