History and analysis of primark stores
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.
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.
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.
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%
17.60%
18%
17.80%
Next Plc
26.10%
26%
26.50%
26%
27.40%
New look
53.30%
56%
55.10%
58%
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%
10.60%
4.92%
1.87%
2.94%
Next Plc
6.38%
6.90%
8.47%
8.06%
13.60%
New look
13.60 %
13.3%
11.60%
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.
2005
2006
2007
2008
2009
Primark
0.62
0.61
0.60
0.58
0.55
Next Plc
1.70
7.20
1.73
0.81
0.64
New look
0.36
0.25
0.18
0.16
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%
8.56%
5.21%
2.23%
3.77%
Next Plc
5.09%
5.88%
7.02%
6.56%
10%
New look
18.2%
14%
10.90%
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%
28%
11%
20%
Next Plc
55.3%
26.19%
67.9%
35.6%
37.8%
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
1.47
1.30
Next Plc
2.40
2.70
2.91
2.69
2.87
New look
8.43
7.02
6.49
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.
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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