The New Look Case. New Look is one of the most popular fashion retailers on the
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The New Look Case.New Look is one of the most popular fashion retailers on the British high street today, and expanding worldwide, specializing in current fashion trends available immediately at a low price. The aim is to take the trends from the catwalk, celebrities and the street, and put them into the shops as quickly as possible giving customers the most current look possible. The brand originated in Taunton, England, in 1969, and now has more than 1,000 stores in 14 countries. With its internet site, shoppers in 120 countries can buy from New Look. In 2010, 355 million customers visited New Look, either online or in the high street, giving a 6% market share in the UK. This can be broken down via further analysis: New Look has a 10.8% market value share for the under 35 women’s clothing and accessories market, and a 9.7% market value share for the 9–15 years children’s range. New Look’s income statement and balance sheet are given below.
1. Reformat the income statement and balance sheet of New Look dated March 2010 to reflect the contribution of operating activities and financing activities, respectively. List items which may be classified as part of both operating and financing activities.
2. Using the financial data for New Look dated March 2010, calculate the following performance indicators and state briefly what they represent for New Look. Please apply end of year balance sheet figures. Return on invested capital (after tax) Return on invested capital (before tax) Profit margin (after tax) Profit margin (before tax) Turnover rate of invested capital
3.Using the results of the performance indicators you have calculated, compare them to the performance indicators given below, which are the results of New Look’s competitors in the UK market, all based in UK. Compare them by breaking down NOIC into profit margin and turnaround (you could also suggest your guess about product quality, but this is not required).
Note: Company B is a new competitor in the market and has only around 50% of the shops that New Look has, but these have all been opened within the last three years. The company’s ethos is of an even quicker stock turnaround than New Look. Company C is an established competitor in the market, and has been trading as long as New Look. It doesn’t aim to achieve the quick stock turnaround that New Look has. It also appeals to a slightly older age group. Note: Company B is a new competitor in the market and has only around 50% of the shops that New Look has, but these have all been opened within the last three years. The company’s ethos is of an even quicker stock turnaround than New Look. Company C is an established competitor in the market, and has been trading as long as New Look. It doesn’t aim to achieve the quick stock turnaround that New Look has. It also appeals to a slightly older age group. New Look Company B Company C Performance indicator Return on invested capital (after tax) Return on invested capital (before tax) | Profit margin (after ta) Profit margin (before tax) Turnover rate of invested capital 11 2% 141% 73% 9 2% 5 2% 6 6% 1.4 9.5% 14 196 43% 54% 2.6 17 5% 50% 9 2% 1.9
Explanation / Answer
Part I
Income Statement for the year ended March, 2010
Administrative Costs can be classified as a part of both Operating as well as Financing Activities
Balance Sheet for the year ended March, 2010
Items that can be included in both Operating and Financing are:
(1) Cash and Short Term Deposits
(2) Income Tax Assets
(3) Income Tax Liabilites
(4) Deferred Income Tax Liabilites
(5) Other Reserves
(6) Retained Earnings
Part II
Return on Invested Capital (After Tax) = Profit After Tax / Equity x 100
= 19.70 / 269 x 100
= 7.32%
it shows the return earned by company on shareholder's funds after tax.
Return on Invested Capital (Before Tax) = Profit Before Tax / Equity x 100
= 36 / 269 x 100
= 13.38%
it shows the return earned by company on shareholder's funds before tax
Profit Margin (After Tax) = Profit After Tax / Revenue x 100
= 19.70 / 1,463.60 x 100
= 1.35%
it depicts that 1.35% of revenue is after tax income earned by company
Profit Margin (Before Tax) = Profit Before Tax / Revenue x 100
= 36.00 / 1,463.60 x 100
= 2.46%
the company has earned 2.46% before tax on it s revenue
Turnover Rate of Invested Capital = Revenue / Average Equity
= 1,463.60 / 269.00
= 5.44 Times
this ratio indicates how efficiently the company uses its capital to generate revenue. The invested capital can generate revenue of upto 5.44 times.
Part III
Even though the Company B is a new player and has even lesser stores as compared to New Look, it still earns a similar return on Invested capital after tax for its shareholders. It even has lower tax burden as compared to New Look. It is earning a Profit Margin of more than thrice of New Look. We can say all in all it is having a better earning potential as compared to New Look, even though its turnover to invested capital ratio is very less as compared to New look.
Company C which is an established competitor of New Look is earning better than New Look. It caters to need of a Slightly older age group, but is still having a high earning potential. Company C also has lower Turnover to invested capital ratio, but it is still in a better position as compared to New Look.
Both the companies are having a greater earning potential as compared to New Look.
Particulars Amount in Million Euro Income from Operating Activities Revenue 1463.60 Less: Cost of Sales 634.20 Less: Operating Expenses Distribution Costs 417.20 Administrative Costs 278.20 Operating Profit (A) 134.00 Income from Financing Activities Finance Income 3.40 Less: Finance Expenses 101.80 Income from Financing (B) (98.40) Net Income from Operation and Financing (A+B) 35.60 Share of Profit / Loss from Joint Venture 0.40 Net Income before Taxation 36.00 Less: Taxation 16.30 Net Income After Tax 19.70Related Questions
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