MB428 Corporate StrategyFinancial and strategic evaluation

of Marks and Spencer Plc and NEXT Plc

Agenda

Overview of the general retail sector Overview of NEXT Plc & Marks & Spencer

Plc Ratio discussion Valuation methods Analysis of respective strategies Conclusions Questions

General retail environment Political

Changes to Financial Services Legislation

Sunday trading laws Economic

Intense competition

Falling sales (fear of recession)

Retail downturn from mid-1998 Social

Shift in shopping patterns (move to out of town shopping centres with everything under one roof)

Public inclined to spend money on different things, I.e. new technology including mobile phones, PCs. Etc

Technological

Increase in on-line shopping (leading to an increased availability of discounted products)

Overview of NEXT Plc

Focus on top end of mass market

Stylish, good quality products

Substantial competitor in market for clothing, homeware and financial services

Overview of Marks and Spencer Plc

Major player in UK retail market for clothing, food, homeware and financial services

Reputation for quality, value & durability

General retail sectorComparative Share Price Marks & Spencer/Next/General Retailers FTSE Index

Appendix 1

0

500

1000

1500

2000

2500

3000

1 9 17 25 33 41 49 57 65 73 81 89 97 105

113

121

129

137

145

153

161

169

177

185

193

201

209

217

225

233

241

249

257

Last 5 years in weeks

Sh

are

Pri

ce Marks & Spencer

Next

Retail FSE

Poor Xmas sales1998

New product range introduced

End of 'Made in UK'

Closure of small shops / increased footage per shop

Continued failure to read the market

Traditional valuation techniques

Return

Risk

What does this tell us?

Equity V Dividendretun on equity

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

1 2 3 4 5

years

Next Return on equity = M+S Return on equity =

retun on equity

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

1 2 3 4 5

years

Next Return on equity = M+S Return on equity =

Dividend pay out

05

101520

2530

1 2 3 4 5

Years

Dividend next Dividend M+S

Dividend pay out

05

101520

2530

1 2 3 4 5

Years

Dividend next Dividend M+S

•Traditional indicator of profitability•Profit + Share dividend\OE

•Over a five year period it can be seen that NEXT have achieved a 12% average figure

•M&S on the other hand have gone from a healthy 9% to minus 5%

Despite ROE going negative M&S are still paying dividends

Beaver ratio

Operating cash flow\STL + LTL– Monitor of cash flow\debt– rule of thumb 1– monitor very closely - sudden fall represents danger of collapse

Both ratios for NEXT and M&S are positive

The Beaver Failure Ratio

0.000

0.500

1.000

1.500

1 2 3 4 5

Years

%

NEXT

M&S

Ratio limitations

Single snapshot in time Do not illustrate performance through the

year Soft valuation techniques The value of the share does not necessarily

represent the value of the organisation.

Valuation models

Value can be defined in a number of ways,

each being appropriate in different

circumstances liquidation going concern book market intrinsic

Valuation models cont.

Financial instruments are valued by their differing cash flow patterns, to which discount rates are applied

Shares are generally valued by reference to the expected growth of future dividends

The valuation of acquisitions is key in take-overs, when the bidding company must justify the added value of making the acquisition.Methods of calculation:– on incremental cash flows/earnings– on assets– on a combination with implied rates of return

CAPM Valuation Model

NEXT 4.7 + 0.23 (8.2 –4.7) = 5.51

M&S 4.7 + 0.48 (8.2 – 4.7) = 6.38

Expected return = Risk free rate + beta x average riskExpected return = Risk free rate + beta x average risk

Price-Earnings Model (PER)

NEXT = 914/38.4 = 24

M&S = 315/9 = 35

Historic PER = current market price of share/Historic PER = current market price of share/last years earnings per sharelast years earnings per share

Price/Earnings Ratio Marks & Spencer v Next last 5 years

0

5

10

15

20

25

30

35

40

1 9 17 25 33 41 49 57 65 73 81 89 97 105

113

121

129

137

145

153

161

169

177

185

193

201

209

217

225

Last 5 years in weeks

P/E

Rat

io

Mark & Spencer Next

Economic Value Added Model

Economic value is added when actual returns on invested capital exceed the required rate of return as measured by the weighted cost of capital

EVA = ROCE - (WACC x IC)

NEXT = £110.1m

M&S = £-93.0m

Market Value

EVA is seen as the driving force behind market value

MV = (ROCE/WACC) x IC

NEXT = 1985.1

M&S = 4873.0

3041.83041.8

8552.08552.0

Soft Valuation Techniques

CAPM, DVM, EVA and Market Valuation are based on hard financial data but do not give a full picture

Soft valuation techniques add intangibles and other “soft” factors i.e. employee satisfaction

Inclusion of soft techniques do not provide certainty but can increase business performance

Valuation Methods - Summary

“Valuing a business is part art part science”Warren Buffet

“Valuing a business is part art part science, and possibly part educated guesswork”

The group

Strategic Analysis - M&S

•“expansion plan of unprecedented magnitude”• Sq. footage increase essential part of the plan• “While our competitors strengthened we were busy developing new stores”• Internal issues more apparent to general public• Foreign suppliers / end to “Made in UK” labels• Verdict Report 1999 “Retail space is growing too fast in relation to consumer spending, particularly in relation to fashion

Strategic Analysis - NEXT

• Greater ability to react to market conditions• Understood customer needs• Seized opportunity to gain competitive advantage• March 1998 issued a profit warning • October 1998 New range = 36% rise in sales• Increase sq. footage by closing smaller shops in favour of larger premises• 1999 closed 16 stores and only reopened 10• main focus relocating and extending stores where they already had a trading presence

Looking forward• M&S recently enjoyed up turn• NEXT continued to perform well • Why have M&S turned the corner?• Radical changes including

- new look stores- new product range- JV with Desmond- “Per Una”

• “intangible” value the company holds - a strong brand - loyal customer base - culture

Questions?