Next Plc Profitability Report Essay
Introduction                                            
Based in the UK, Next is a giant retailer with numerous exciting products such as quality clothing, accessories, home products and footwear. There are three main channels through which Next Plc. distributes its products namely NEXT Retail whose chain has more than 500 stores located in the UK and Eire, NEXT Directory which provides a catalogue for home shopping with more than 3 million active customers and Websites whereby customers from over 60 countries are served. The third man in channel is NEXT International which comprises of approximately 200 franchises located in diverse regions around the globe. NEXT Sourcing plays the role of designing, sourcing and buying branded products for the group. Additionally, Lipsy is exclusively mandated with the role of designing and selling younger women’s fashion products developed by the group.
The Group’s performance over the past financial years has indicated a continuous level of profitability. Indeed, NEXT Plc operates under a primary financial objective of delivering sustainable growth of earnings per share over the long term. This is an important component of increased shareholder value. There has been a consistent increase in earnings per share for the Group over the years. This has been associated with continuous increase in the share price. In this report, the profitability of NEXT Plc is analyzed (NEXT Plc Group, 2013). The report looks at the profitability ratios relating to the Group and other important ratios affecting profitability. The report also addresses the competitors’ performance to ascertain any possibility of the Group’s profits dwindling. The report will also analyze the prospects of the Group in the industries it operates to establish the possibility of continued profitability.
 
Ratio Analysis                                                                                     
Ratio analysis is defined as a tool applied in conducting a quantitative analysis of a   company using the available financial statements of the company often released periodically say one year period. The current year numbers are used in the calculation of ratios. The outcome is compared with the previous years’ ratios to ascertain the progress of the company. In particular, profitability ratios are important in the calculated based on the various items of the operating entries of the company for a given financial year (MorningStar, 2013). In particular, profitability ratios are important in helping determine the effectiveness with which a company utilizes the available resources in generating profits. There are numerous ratios included in the calculation of the profitability of a company such as gross profit margin, net profit margin, return on capital employed and operating profit margin. The different profitability ratios are calculated using distinct formulas as shown below.
Profitability is an absolute measure. The ratios used to measure profitability try to indicate the extent to which an organization is profitable based on its business operations. Profitability ascertains the whole performance of the company. In the case of NEXT Plc, profitability indicates the extent to which the Group’s performance has been affected the various business activities during the year (MorningStar, 2013). The profits made during the year are compared with the performance of the Group during the past years. Through the profitability ratios of NEXT Plc, it is possible to determine how effective the company has been in its business operations. Comparison is also made with the previous year on the performance of the company. Based on the information obtained from ratios on profitability analysis, it is possible to establish whether the firm is headed to a positive performance in the future or not. Additionally, profitability ratios are important in ascertaining the level of operational effectiveness of the company.
The table below represents various financial ratios and information for NEXT Plc for the years 2010 to 2013:

Item/year 2010 2011 2012 2013
Gross margin (As % sales) 29.3 29.3 30.4 31.6
Net Margin (%) 10.69 12.16 13.80 14.28
Asset turnover (average) 1.97 1.89 1.89 1.90
Return on assets (%) 21.08 23.01 26.05 27.15
Return on equity (%) 265.86 219.30 208.70 200.17
Return on Invested Capital (%) 50.48 56.65 57.78 56.74
Interest Coverage 19.37 25.15 24.00 28.32
Earnings per share 1.86 2.17 2.75 3.12

Source: (MorningStar, 2013)
Gross Profit Margin
Gross profit is the difference between cost of sales and the amount of sales revenue. Therefore, gross profit refers to the profit before the deduction of indirect expenses. Gross profit margin refers to gross profit expressed as a percentage of the revenue obtained from sales. Thus Gross Profit Margin = Gross profit * 100/ Sales revenue. From the ratios above, it is evident that NEXT Plc has continuously recorded increasing gross profit margin over the past four years (MorningStar, 2013). Indeed, the ratios indicate that the year 2010 and 2011 recorded a gross profit margin as a percentage of sales of 29.3% on the other hand; the years 2012 and 2013 recorded gross profit margin as a percentage of sales of 30.4% and 31.6% respectively. Higher gross profit margins are preferred over smaller ones. In the case of NEXT Plc, the gross profit margin has been rising over the four years. The ratio is also high meaning that it is highly preferred by investors. The increase in gross profit margin can be attributed to the increase in sales throughout the period. For instance, the financial year ended 2013 saw a sales growth of 9.5%. The growth was recorded from various channels used by the Group in selling its products. The various channels that recorded impressive sales growth included UK full price sales which grew by 5.2%, Clearance Tab which grew by 2.2%, Markdown sales grew by 0.1% and International online grew by 2.0%. There was an increase in operating profits during the financial year ended 2013 to 25.3% indicating an increase of 1.2%. The actual Gross profit margin for the years 2012 and 2013 were as follows:
Gross profit margin = [Gross Profit * 100]/ sales revenue
2012 Gross Profit margin = [1045.3 * 100]/3441.1 = 30.37%
2013 Gross Profit margin = [1125.58 * 100]/3562.8 =31.58%
Net profit Margin
This ratio indicates the profitability after including all the costs. Net profit margin is the net profits expressed as a percentage of the revenue acquired from sales. Thus
Net Profit Margin = Net profit (EBIT)* 100/ Sales Revenue. This ratio shows the percentage of turnover represented by net profit. From the ratio analysis above, it is evident that the net profit margin of NEXT Plc recorded a continuous increase throughout the period under consideration. There was an increase in net profit margin of more than 10% since the year 2010. Such an impressive increase in net profit margin by more than 10% means that there was a profit of more than 10% for every 1 pound of sales. Based on the fact that the net profit margin for the company has been on the increase over the past four years, it is therefore evident that NEXT Plc is a profitable firm. The reasons for the increase in net profit margin are similar to the reasons leading to increase in gross profit margin. Nevertheless, the increase in net profit margin is an indication that there were no unnecessary expenses incurred during the period under consideration. Therefore, the overhead expenses remained low throughout the period under consideration.
Return on Capital Employed (ROCE)
This ratio represents the profit for the given year as a percentage of the total capital employed during the period under analysis. The ROCE of a company is considered favorable if it is high. Therefore, investors prefer an increasing ROCE as it indicates continuous profitability for the company during the year under analysis. ROCE seeks to ascertain the percentage return from the total capital employed in the business. Based on ROCE, the profits of the firm are measured as a percentage of the total capital employed. This ratio also attempts to establish how effective the firm is in using its assets in generating profits. As a prime ratio, ROCE provides a measure of main task management indicating a maximization of the capital employed.
ROCE = [Net profit (Operating profit) * 100]/Capital employed. The return on capital employed for NEXT Plc shows that there was an increasing return of more than 20% since 2010. This is an indication that the company has been generating over 20 pounds for every 100 pounds of capital invested throughout the period under examination (MorningStar, 2013).
Earnings per share (EPS)
This is a ratio measuring the amount of money generated by the firm from every share of stock outstanding. The method of calculating EPS is as follows: EPS = Net Profit *100 [#of common shares outstanding]. A profitable company has an EPS which increases annually. This is exemplified by NEXT Plc which has an increasing value of EPS throughout the four years under analysis (MorningStar, 2013). This is an indication that the company has continuously improved shareholders’ value through the numerous activities undertaken. It is also evident that the company has a highly valued share in the stock market.
Return on Assets (ROA)
This financial ratio is important in expressing the profits earned by a company as a percentage of the total assets available. This ratio is very essential in ascertaining the profitability of the company per very pound or dollar in assets invested. Therefore, the ratio indicates how is able to generate profits without including the amount of financing obtained through leverage. A well performing company should demonstrate an increasing ability to generate more profits from the assets available. According to profitability analysis of NEXT Plc, it is evident that the company’s ROA has been growing tremendously over the past years (MorningStar, 2013). Therefore, there has been a tremendous increase in the amount of pounds generated from every pound of assets invested.
Asset Turnover
This ratio measures the amount of sales generated from every dollar or pound worth of assets. Asset turnover is therefore obtained by expressing revenue as a ratio of assets as follows:
Asset turnover = Revenue/Assets. In particular, asset turnover is important for growth companies as they need to establish the extent to which their revenue is growing in relation to sales. The efficiency of a firm is measured by asset turnover. This determines how the firm is efficient in generating revenue from the assets invested. When a company has a higher asset turnover ratio are considered better as opposed to those with lower ratios. From the ratios analyzed above, it is evident that NEXT Plc has had an impressive asset turnover ratio over the past years. This ratio has been averaged 1.9 meaning that the company is efficient enough with an ability to generate revenue almost twice the assets invested (NEXT Plc Group, 2013).
Return on Equity      
This profitability ratio measures the net income amount obtained as a percentage of shareholders’ equity. This ratio reveals the amount of profit earned by the company in relation to the amount of equity contributed by shareholders as indicated in the balance sheet. Indeed,   shareholders are interested in seeing that their investment is able to bring about profits by generating income (MorningStar, 2013). From the analysis undertaken above, it is evident that there is a very positive return accrued by the equity contributed by shareholders. A Return on Equity of over 200% is an indication that NEXT Plc is a highly profitable company
Competitor Analysis
The clothing market in the UK has in the recent past indicated a downward trend. The market has been declining at an alarming rate meaning that there are limited opportunities for clothing companies to continue making massive profits. Indeed, there is a high level of co petition in the UK clothing market to the extent that   the major player in the market can no longer expect to make massive profits as it has been the case in the previous years (Giffels, 2012). Indeed, competition has particularly been enhanced by the high employment of technology in the production process meaning that such companies have become highly efficient in their production. Additionally, there are other textile companies that have shifted their production centers in regions with cheaper in terms of labor (NEXT Plc Group, 2013). The main players in the UK clothing market still make modest profits in spite of the many challenges facing them. Expanding the market horizons in the UK clothing market is not easy based on the fact that each company has to strive in order to sustain its current market share. Companies that manage to expand every by very minimal levels have to work very hard as this is not the easiest of things to do.
There are two broad categories of clothes retailers: own-brand clothes retailers and third-party retailers. Some of the major players in the UK clothing market such as Arcadia Group and Marks & Spenser often self own-brand clothes. Similarly, NEXT and Gap companies also sell own-brand clothes. There are other clothes companies which deal with third party clothes. The main players in the third-party clothing include the various department stores as well as individual retailers dealing with clothes from numerous clothing manufacturers. Indeed, there is a high level of diversity in the clothing retailing (Giffels, 2012). The sector ranges from retailers dealing with low cost clothes to those dealing with formal wear, sportswear, as well as boutiques dealing with exclusive designer clothes. The clothes retail sector is much more the same as the other retail sectors. Therefore, the UK clothing retail sector is at the middle level with major players and ample opportunities to make profits.
NEXT Plc’s history dates back to 1864 when J. Hepworth & Son founded the company. The company was first named Gentleman’s Tailors. The founders later decided to   buy Kendalls shops in 1981 leading to the establishment of group of shops dealing with women’s wear. The acquisition of Kendalls marked the birth of NEXT Plc (NEXT Plc Group, 2013). Currently; NEXT Plc sells clothes which are moderately priced and acts as a trendy street retailer. The main target consumers for NEXT Plc’s clothes are men and women within the 20-40 age brackets. The company also deals with household goods as well as financial services. The analysis of NEXT Plc’s political, economic, social and technological factors reveals a trend towards ever increasing challenges especially from competitors. Nevertheless, the company continued to register impressive performance.
Marks & Spencer Group
Marks & Spencer Group is one of the major competitors of NEXT Plc Group. Marks & Spencer is a major player in the British clothing market with over 345 department stores. The company also has over 385 food shops spread over UK. Marks & Spencer is also highly effective in regions outside the UK market. In fact, Marks & Spencer is operational in over 385 places outside the UK market (Giffels, 2012). The operations of Marks & Spencer are felt in more than 40 countries such as Indonesia, Russia, China, South Korea, America just to mention but a few. Marks & Spencer’s departmental stores often deal with household items, food and apparel with mid prices. All the products sold by Marks & Spencer have the company’s private brands such as per una, portfolio, classic or autograph. Although there are many locations globally dealing with the company’s products, approximately 90% of the sales are obtained from the domestic market in the UK. Indeed, Marks & Spencer is the leading provider of men’s and women’s clothing as well as lingerie in the UK. Marks & Spencer has been able to capture the UK clothing market owing to its long existence in the market over the past 125 years.
Recent financial information reveals that M&S is struggling hard in the UK market just like the other companies in the same market. The company has not been able to register serious growth rates over the past years based on the intense competition level as well as the declining economies in the UK and the global economy as a whole (MorningStar, 2013). There is definitely a very tough future for M&S in terms of growth. The recent financial releases by M&S indicate a slight growth in profit. However, there is an expected continuous decline in the coming financial years. M&S has continued to record very disappointing profits from overseas operations.
 
Arcadia Group Limited
This is another serious competitor to NEXT Plc. Arcadia Group is a high street company based in UK. Indeed, it is very easy to find Arcadia store in any high street in UK. Arcadia Group is a major retailer of apparel in the UK with over 2500 stores in different parts of the UK alone. Most of these stores are in urban areas. Arcadia Group also operates over 500 franchises located in more than 35 countries globally. Some of these franchises include a Topshop store located in New York. There are various fashion chains owned by Arcadia Group such as Miss Selfridge, Dorothy Perkins, Evans, Burton and Topman as well as Topshop. Most of the retail shops owned by Arcadia sell housewares and clothing. Normally, the shops offer all the seven brands locales within various suburbs. With such an impressive record, Arcadia Group provides an intensive level of competition to NEXT Plc in the highly competitive clothing market.
H&M Hennes & Mauritz AB
This is yet another serious competitor to NEXT Plc. This company’s target is Hip and Modish through its cheap but chic clothing designs. The main target consumers for the company’s clothes are men and women aged 18 to 45 years. The company also deals with children’s clothes as well as cosmetics brands developed internally. H&M has recorded fast growth and now has over 2470 stores located in more than 35 countries. The company also provides online shopping in more than 8 countries (Giffels, 2012). Sales from Germany alone account for over 20% sales making it the largest market for the company. Although the company does not own its own factories, it is able to purchase goods from various locations mainly Europe and Asia. The first store selling women’s clothes owned by the company was opened in 1947 and was named Hennes. Later on, the company bought a Men’s store called Mauritz Wildforss.
The competitive analysis of NEXT Plc is part of the environmental threats facing the company. The company currently faces serious threats in terms of the low rate of growth in the UK clothing market as well as the strong competition from numerous players as discussed   above. NEXT Plc is trying to undertake various methods in order to ensure that it reaches its current objectives (NEXT Plc Group, 2013). Some of the decisions made by the company include offering products considered to be of high street value which are being manufactured in countries with low labor costs. In such developing countries, the company’s products are also offered at dumping prices making the markets in such countries extremely weak to cause any substantial competition. Competitive force also arise in relation to influence suppliers have on NEXT Plc. However, such influence is minimal owing to the many suppliers available. The customers have substantial influence on the company the sense that if the customers boycott the company’s products, there would be serious implications.
Due to the absence of item specific in clothing, customers can buy from any cloth dealer; therefore, NEXT Plc has to distinguish its products from its competitors through ways such as labeling, pricing, quality, and style. NEXT Plc faces an intensification of the already stiff competition from new market entrants. However, small players cannot pose any serious threat due to capital requirement. There are various strong players outside UK which can easily pose a major challenge to NEXT Plc. Some good examples of serious threats include Donna Karan and Calvin Klein whose massive resources, power and knowledge can allow them to establish serious stores in UK (Giffels, 2012). The current players in the UK clothing industry are serious rivals. There are several huge clothes retailers in UK totaling to more than 25,000. When combined with other small outlets, the number is more than 45,000. The many players in the UK market try to outdo each other by being sensitive about the quality, price and service of the products sold.
Critical Analysis of NEXT Plc Group
In the midst of the various challenges facing NEXT Plc, profitability is a major goal for the company. Indeed, the company’s main objective each year is the maximization of shareholder value. The main financial objective of NEXT Plc is on the delivery of sustained growth of EPS over the long term (NEXT Plc Group, 2013). Various strategies form the basis for the attainment of the main objective for the company. For instance, the company aims at improving the range of products provided to the customers. The company also aims at improving the retail outlets in a profitable manner. This dramatically improves the volume of sales as many customers are reached. The company also seeks to improve the number of directory customers alongside their level of expenditure throughout the regions it has stores. Additionally, NEXT Plc has been on a continuous trend towards increasing its online sales from the international consumers. This means more customers can be easily reached.
One very essential undertaking practiced by NEXT Plc is the management of net and gross margins. This is normally undertaken through appropriate product sourcing based on efficient methods as well as through cost management and control of cost. NEXT Plc also strives to maintain its financial strength by maintaining balance sheet efficiency and secure structure of financing (NEXT Plc Group, 2013). The group is also very much serious on matters related to generation of cash for issuing increased dividends as well as share repurchases. On account of the various profitability undertakings practiced by NEXT Plc, there has been a continuous improvement in sales. For instance, the recent statement of trading activities during the past 26 weeks up to 27th July, 2013, NEXT Plc registered grew by 2.3%. The period also registered impressive full price sales in comparison to the anticipated sales. This can be attributed to the reduced sales figure at the end of the season. The month of July saw an upsurge of sales by about 3.7% in comparison to the year 2012 over a similar month.
Sales volatility is a major factor affecting the future profitability of NEXT Plc. Indeed, the sales of the company have continuously exhibited sales volatility. The spontaneous nature with which customers are buying products has led to the increased weekly sales volatility. Indeed, there are various short-term events which highly affect weekly variance in sales. Some of the events affecting weekly changes in sales include school holidays, bank holidays, weather changes, and many other more. The recent analysis of the trends in the company’s sales and profitability indicate that consumer environment will change but on very minimal extents. The company’s sales value is anticipated to grow by a range of 1.5% to 3.5%. There is also a reduction in residual stock leading to reduced costs of markdown.
Conclusion
Profitability is an essential component of a firm’s existence. Therefore, a firm which does not make profits does not create any value to the shareholders who are the actual owners and/or directors. Profitability ratios are very essential in ascertaining the prospects of the company in fulfilling the objectives of the shareholders. Furthermore, profitability enables a firm to pursue numerous goals such as expansion. NEXT Plc is a company interested in recording a continuous growth of the EPS. This is not possible without appropriate strategies to increase the profits acquired by the company. In particular, NEXT Plc has been on the forefront towards increasing shareholder value through various strategies aimed at increasing the sales volume. Some of these strategies include expansion into numerous parts of the world, production of high quality products as well as provision of products at the lowest possible price. A detailed analysis of NEXT Plc’s profitability ratios indicates that the company is highly profitable. In terms of the nature of competition facing NEXT Plc, there is no doubt that the company operates in a highly competitive market. Therefore, it is highly recommended that the company undertakes various measures that increase its level of competitiveness. The most important aspect of competition is very challenging for any company. This means that firms have to take serious measures aimed at ensuring that they remain competitive at all times. The strategies adopted by NEXT Plc in its attempts to remain afloat in the midst of extensive competitive pressure have been very effective as the company still continues to register impressive profitability. Therefore, profitability of NEXT Plc has been at the core of its goals. Consequently, the company has continuously recorded improved profitability.
 
References
NEXT Plc Group. (2013). Trading Statement: Sales for the 26 Weeks to 27 July 2013. NEXT Plc.
NEXT Plc Group. (2013). Annual Report and Accounts January 2013. NEXT Plc.
MorningStar. (2013). NXT: NEXT Plc Top Competitors and Peers. Retrieved on Wednesday, August 14, 2013 from http://financials.morningstar.com/competitors/industry-peer.action?t=nxt&region=gbr&culture=en-US.
MorningStar. (2013). NEXT Plc: Growth, Profitability and Financial Ratios. Retrieved on Wednesday, August 14, 2013 from http://financials.morningstar.com/ratios/r.html?t=NXT&region=GBR&culture=en-US.
Giffels, M. (2012). Analysis of NEXT Plc and its Environment Contents. Retrieved on Wednesday, August 14, 2013 from http://www.grin.com/en/e-book/99429/analysis-of-next-plc-and-its-environment.
NEXT Plc. (2013). NEXT Plc Corporate: Business Overview. Retrieved on Wednesday, August 14, 2013 from http://www.nextplc.co.uk/about-next/business-overview.aspx.
 
 
 
 

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