A report on financial analysis of Next Plc.

Introduction:
Financial decision are crucial part of business activities because it has direct
impact on the liquidity and solvency of its operations. In order to make viable
financial decisions, management of firm is required to conduct appropriate
analysis on the available information. For this aspect, they make use of various
financial tools and techniques based on the decision of entity. Present study
focuses on the financial performance of Next Plc. over last 5 years.
Next is a British multinational clothing, footwear and home products retailer. It
has around 700 stores, of which circa 500 are in the United Kingdom, and 200
across Europe, Asia and the Middle East.
Brief history of last 5 years:

 2021***  2020 2019* 2018** 2017

           

SALES        

RETAIL (£m)  955  1,852 1,955 2,123 2,305

ONLINE (£m)  2,368  2,147 1,919 1,672 1,728

FINANCE (£m)  250  269 250 223  -

TOTAL GROUP SALES (£m)  3,626  4,362 4,221 4,118 4,137

  2021***  2020 2019* 2018** 2017

PROFIT / (LOSS)          

RETAIL (£m)  (206)  164 212 269 353

ONLINE (£m)  472  400 353 310 430

FINANCE (£m)  112  147 127  112 -

UNDERLYING GROUP PROFIT BEFORE

 342  729 723 726 790
TAX (£m)

TAXATION (£m)  (51)  (135) (133) (134) (155)

UNDERLYING GROUP PROFIT AFTER

 291  594 590 592 635
TAX (£m)

RETAIL STORE NUMBERS  491  498 516 528 538

RETAIL SQ FOOTAGE (000's)  8,059  8,031 7,989 8,029 7,978

UNDERLYING EPS (p)  226.3  459.8 435.3 416.7 441.3

ORDINARY DIVIDENDS PER SHARE (p)  -  57.5 165.0 158.0 158.0

SHARES IN ISSUE AT YEAR END (m)  133  133 139 145 147

SHARE BUY BACKS (shares m)  0.3  5.4 6.3 2.2 3.6

SHARE BUY BACKS (£m)  19  300 324 106 188

SHARE PRICE AT YEAR END (p)  7,730  7,194 4,777 5,218 3,850

PROFITABILITYL:
Profitability ratios are a measure of the profit earning capacity of a business.
Higher profitability ratio shows that organization is operating effectively and vise
versa in decreasing trend. By making intra comparison of these ratios,
stakeholders can determine which organization is providing better performance
and making optimum utilization of available resources.
Gross margin ratio shows trading efficiency of business by considering profitability
of goods and services. Operating and net margin considers expenses and incomes
which are not directly related to the product and services sold. Return on capital
employed shows capacity of business in earning return on the investment made
in business.
Profitability; (dow jones,a news corp company, 2021)

Net income= (635+592+599+610+287)/5 =544.6

Average sales= (4097+4091+4167+4266+3534)/5 =4031

Average gross income=(1295+1422+1605+1682+1239)/5=1448.6

Gross profit margin= 1448.6/4031 =0.359

Net profit ratio = net income/sales=544.6/4031 =0.135

LIQUIDITY RATIOS:
Businesses are measured by their efficiency in paying current obligations through their liquid and quick
assets. Current ratios shows proportion of assets and liabilities that will be disposed in one year.
Computation of liquidiy ratio is done to determine efficiency of business in paying  obligations.

Ideol quick ratio is 2:1. Further quick ratio computes proportion of liquid assets with the current
liabilities. Liquid assets are those assets which are instantly convertible into cash. Liquid asset does not
include stock and other non-cash items such as prepaid expenses.

Standard quick ratio is 1:1. Liquidity ratios must be near to the standard because higher ratio shows
excessive consumption of funds while lower ratio shows inefficiency of business in payment of depth.

Liquidity; (dow jones,a news corp company, 2021)

Average current assets =(1661+1798+1978+1955+2289)/5 =1936.2

Average current liabilities =(725+915+1244+950+1197)/5= 1006.2

Average current asset inventory= (451+467+503+528+537)/5= 497.2

Current ratio =toatal current asset/tota current libailities = 1936.2/1006.2= 1.9242

Quick ratio = total current assets inventory/total current liability= 497.2/1006.2= 0.4941

Efficiency ratio: (dow jones,a news corp company, 2021)

A lower e fficiency ratio indicates that a bank is earning more than it is spending, and 50% is the
maximum optimal level for a bank to operate at.

Average cost of goods sold= (2802+2669+2562+2584+2295)/5= 2582.4

Asset turnover= sales revenue/(total asset/2) =4031/(1936.2/2)=4031/968.1= 4.163

Inventory turnover =cost of goods sold/(inventory/2) = 2582.4/(497.2/2)= 2582.4/248.6 =10.3877

Long term financial stability ratios; (dow jones,a news corp company, 2021)
Financial ratios are created with the use of numerical values taken from financial statements to gain
meaningful information about a company. The numbers found on a company's financial statements –
balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis
and assess a firm's liquidity, leverage, growth, margins, profitability and more.

Average liabilities= (1894+2079+3376+3232+3097)/5= 2735.6

Average shareholder’s equity= (511+483+366+442+661)/5=492.6

stability ratios= total liabilities/total shareholder’s equity= 2735.6/492.6= 5.553

gearing ratio= total liabilities/(total liabilities+ total shareholder’s equity) = 2735.6/(2735.6+492.6)=

2735.6/766.2= 3.5703

appendix A
Profitability; (dow jones,a news corp company, 2021)
Net inome= (635+592+599+610+287)/5 =544.6

Average sales= (4097+4091+4167+4266+3534)/5 =4031

Average gross income=(1295+1422+1605+1682+1239)/5=1448.6

Gross profit margin= 1448.6/4031 =0.359

Net profit ratio = net income/sales=544.6/4031 =0.135

Liquidity; (dow jones,a news corp company, 2021)

Average current assets =(1661+1798+1978+1955+2289)/5 =1936.2

Average current liabilities =(725+915+1244+950+1197)/5= 1006.2

Average current asset inventory= (451+467+503+528+537)/5= 497.2

Current ratio =toatal current asset/tota current libailities = 1936.2/1006.2= 1.9242

Quick ratio = total current assets inventory/total current liability= 497.2/1006.2= 0.4941

Efficiency ratio: (dow jones,a news corp company, 2021)

Average cost of goods sold= (2802+2669+2562+2584+2295)/5= 2582.4

Asset turnover= sales revenue/(total asset/2) =4031/(1936.2/2)=4031/968.1= 4.163

Inventory turnover =cost of goods sold/(inventory/2) = 2582.4/(497.2/2)= 2582.4/248.6 =10.3877

Long term financial stability ratios; (dow jones,a news corp company, 2021)
Average liabilities= (1894+2079+3376+3232+3097)/5= 2735.6

Average shareholder’s equity= (511+483+366+442+661)/5=492.6

stability ratios= total liabilities/total shareholder’s equity= 2735.6/492.6= 5.553

gearing ratio= total liabilities/(total liabilities+ total shareholder’s equity) = 2735.6/(2735.6+492.6)=

2735.6/766.2= 3.5703

ESG ANALYSIS OF PROFITIBILITY RATIO:

Economical Analysis: Profitbility of Next Plc over the average 5years is 13.5 % which is quite good
compared to the industry it means that next plc has enough cashflow to cover its:

1.) Fixed Cost

2.) Operations Cost

3.) Dividends

4.) Other direct & indirect Expenses

Social Analysis of Profitability Ratio:Social Factors such as Labor Interest their surroundings and good
working conditions effects the profitability ratio if labor interest in the surrounding is very promising
then the profitability ratio would be higher.13.5% shows adequate low rate of labor and expenses.

Governance Analysis of Profitability Ratio: Governance is the body which controls and directs the
entity. For governance of profitability ratio it is very important to get the highest ratio of profibility so
that next plc is able to cover all the fixed expenses and generate revenue.13.5% shows that the Next plc
is utilizing its cost of good sold in very good way.

PROFITIBILITY ANALYSIS AVERAGE 5 YEARS

4031

1448.6

Gross Profit Sales Gross Profit

0.359Margin

ESG ANALYSIS OF LIQUIDITY RATIO:

Economic Factor: Liquidity Ratio of Next Plc is very good which on average is 1.924 which depicts the
following points:

1.) Enough Cashflow to handle day to day operations

2.) Enough money to pay dividend

3.) Enough cash to make further investment and expand

Next Plc liquidity ratio states that Next Plc have enough fund to cover all its expenses and is financially
attractive to the investors.

Social Factor: Social Factor includes the people attractiveness towards Next Plc it shows that the next plc
is attractive to new investors people will get attractive to the current ratio of 1.924 and more funds will
eventually flow because this high liquidity ratio.

Governance Factor: Governance factors of next plc are :

1.) Attractive dividends to shareholders.

2.) High turnover because of more funds available

3.) Entity is the right direction and will not go bankrupt.

4.) Able to Expand because of High Fund Flow.

Liquidity Ratio(Average 5 Years)

1936.2

1006.2

Current Asset Current Liability 1.92426952892

Current Ratio
069

ECONOMIC FACTORS

During economic boom periods, people may buy more clothing, increasing sales for
manufacturers, wholesalers and retailers. Economic factors can have both positive and negative
impacts on the clothing industry.
The fashion industry has a huge impact on the economy. It is responsible for both the recent and future
growth of the apparel industry. As of 2017, the market is expected to grow by 5.91 percent. The market
is predicted to reach 1,652.73 billion dollars by 2020.

Governance

The number of stores in our portfolio has increased by 330,000 square feet this year, taking our portfolio
to 8.0m square feet, with the increase in new space being offset by the closure of smaller, less profitable
stores. The profitability of the portfolio of stores opened or extended in the last 12 months is forecast to
be 23% of VAT inclusive sales and payback on net capital invested is expected to be 24 months.

The vast majority of our stores make a healthy profit, with 97% of our space delivering a net branch
profit6 of more than 10%. The left hand table below sets out the percentage of our turnover within
stores of different levels of profitability at January 2017. The right hand table shows the same
information projected forward into next year based on the assumption that like-for-like retail sales are
down -7%, which is in line with central guidance.

In the unlikely event that like-for-like retail sales continue to decline at high rates for the next ten years,
we believe that our lease structure is such that the portfolio could be managed down profitably. Even in
our worst case scenario, the portfolio would still make around 10% netbranch profit before central
overheads. In such extreme circumstances it is likely that we would be able to renegotiate rents and
open some profitable new stores, both of which would increase profitability.

Net trading space increased by 51,000 square feet this year, taking our portfolio to 8.0m square feet.
Total Online sales grew by +9.2%, with full price sales growth of +11.2%. Of the 17 store closures, three
were as a result of consolidating two stores into one location. The remaining 14 stores made an average
12% profit(before centraloverheads) for the first half of 2017.

Real Earnings in the UK have remained positive since January 2018 and look like they are still gaining
strength as we move into 2019.

In the wake of the coronavirus pandemic it would be easy to talk or think of nothing else, but that would
be a mistake. Our sector continues to experience profound and lasting structural changes and these
changes are not on hold. At some point the pandemic will pass and when the dust settles it will be the
work we have put into securing the cash resources that will make the difference to the long term future
of the Company. The internet has dramatically lowered the barriers to entering the retail market,
allowing small, niche and new businesses to reach millions of consumers without the need to invest in
expensive retail shops. For an established retailer, with a relatively large UK market share, heavily
invested in physical retail assets, this change poses a significant and ongoing challenge. Our response
has been to actively enable our competitors to reach more customers by selling their product on our
Online Platform through LABEL.

In the last six months, the average value ofreturned stock in transit between our stores and warehouse
was down -30% compared with the previous year. On average, this meant £15m of additional stock (at
full selling price) was available to our Online customers at any one time. The most successful initiative
has been fast tracking high demand items. High demand stock is now processed and available for resale
within four days, compared with 12 days a year earlier.
The release from Retail constraints has given our product teams the freedom to develop additional
designs, product categories and size ranges. Items can be made available online with minimal stock
investment, whereas making an item available across500 stores, in several sizes, requires thousands of
units. Third-party branded items, soldthrough LABEL (including Branded Beauty), have seen enormous
growth and now make up more than 70% of all the items that are for sale on our website. Over the last
two years we have grown our customer base by +40% to 8.4m (see page 30). The fact that the fastest
growingcustomer segments are the youngest and the oldest cohorts is, we believe, testament to the
appeal of our website and product ranges.

Social

Social factors affecting fashion include cultures, norms, lifestyle, demographics and population changes.
A small clothing manufacturer needs to create styles that appeal to those of different cultures, especially
if those cultural groups represent large segments of its market. An aging population may increase the
demand for larger jeans and pants sizes, such as relaxed or looser-fitting styles. Consumers' waistlines
expand so they need larger sizes and more room for comfort.

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• Improving and expanding our product lines, with sales performance as a metric of success.
• Increasing retail selling space profitably. Before an investment is made, new shop assessments must
fulfil stringent financial standards, and success is determined by the amount of profit contribution and
return on capital obtained in comparison to the estimated amount.

• Growing the number of lucrative NEXT Directory cash and credit clients, as well as their spending, both
in the UK and internationally.

Our LABEL publishing of branded items, as well as our finance facility (nextpay), are available abroad.

to our NEXT Directory clients in the United Kingdom.

• Managing gross and net margins by purchasing products efficiently and keeping track of inventory.

Improving product ranging

In the last year we have made a number of improvements to our buying and design processes, which we
will not detail here. The improvement we saw in our quarterly performance last year (see page 24) gives
us confidence that we are moving in the right direction. There is much more that can be done to make
our stores and their stock an active part of our online business - these ideas are developed in the
following sections. Find-in-store and same day click-and-collect are part of a wider project to make
better use of our store network. Of the items that are sold out online, 10% are likely to be available in a
store within 10 miles of customers' homes. In June we will also enable store-to-store transfers to fulfil
customer orders and introduce element of stock rebalancing between stores.

Defend retail sales and profitability

50% of our orders are delivered through stores. Average value of store orders is lower than home
deliveries but they still account for 43% of all online sales. Ten per cent of the stock our customers
attempt to order online is sold out. A further 20% is not available for immediate delivery either because
we are waiting for returns or a supplier shipment. In September we aim to launch a full click-and-collect
service that will allow customers to purchase scarce items online and collect them in a store within one
hour.

In June we will enable store-to-store transfers to fulfil customer orders and introduce an element of
stock rebalancing between stores. The long term aim is to further integrate our shops ever more closely
into our Online trading platform. The combined appraisal for the two Gino's restaurants in Hull and
Andale is set out below. We estimate that the concessions in Manchester will deliver c.£800k of income
to the store, accounting for around 40% of our rent, and 22% of total occupancy cost (rent, rates and
service charge). The key for us will be the positive effect they have on the sales of the stores in which
they operate. We plan to invest in four more Gino restaurants in the year ahead.
Many of our Online customers use their nextpay homeshopping account instore. We are adapting
nextpay to allow us to market it directly to Retail customers. Customers who are able to spread the cost
of their retailpurchases are likely to increase their retail spend. 240 of our leases, representing 32% of
our rental liabilities, will be up for renewal within the next three years. The table below shows what we
expect to achieve in the 29 stores we plan to renew in the year ahead.

The portfolio profitability before central overheads isnow 21%. This level of profitability is such that the
store should remain profitable for the life of the lease, even in adverse like-for-liketrading conditions.

Store portfolio stress test

In the last report we projected what would happen to the economics of our store portfolio in the event
of ten years of -6% negative like-for-like sales. It is important to emphasise that the scenario we set out
below is only a scenario, and not what we actually think will happen. The purpose of this scenario is not
to plan the future, but rather to test whether our current store portfolio is an asset or liability in
extreme circumstances.

In this scenario the cumulative cash generated by our stores over fifteen years is £86m and in year 15
there is a £19m cash loss from the remaining portfolio. We shut unprofitable stores at their lease expiry
and are able to continue trading, paying the same rent on a short term lease. Fixed costs that are shared
between the Retail and Online businesses are absorbed as the Online business grows. In the scenario of
-10% like-for-like sales it is very likely that retail rent reductions would fall at lease renewal. This profit is
a genuine Retail profit but is not accounted for in the Retail profit and loss account. In this, more
complete scenario, the store portfolio generates £431m of cash and only loses -£8m in year 15.

Bibliography
dow jones,a news corp company, 2021. WSJ. [Online]
Available at: https://www.wsj.com/market-data/quotes/UK/NXT/financials/annual/balance-sheet

Stephen M. Wigley , 2011. A conceptual model of diversification in apparel retailing: the case of Next
plc.