Investors are interested in companies that are performing well for them to know if they will be able to recover their investment. To be able to do this, investors have to analyze the financial information of a company. There are numerous ratios that the investors can measure to determine the performance and the potential of a given corporation. This report aims at evaluating the financial performance of Burberry PLC, which is a London headquartered Luxury fashion house. The report provide a brief history of the company and evaluate its current strategies, products, customers, as well as its key competitors in the industry. Four key financial ratios of the company that include gross profit margin, return of capital employed, gearing ratio and earning per share are analysed and recommendation for investors provided.
Background of the Company
Burberry PLC is a British Luxury fashion house that has it headquarters in London, England. The company traces its origin to 1856 when Thomas Burberry at only 21 years of age opened a store in Basingstoke, Hampshire, England. He had earlier worked as a draper’s apprentice. The company grew at a considerable pace and by 1870, it was fully established and focused on the development of outdoors attire. The initial name of the company was Burberry but soon after the formation, it starter using Burberrys due to many customer around the globe started referring to it as “Burberrys of London” (Burberry, 2017). The company however, in 1999, reverted to its old name which it uses even today. Burberry managed to open a shop in Haymarket London in 1891. Prior to Burberry brand being referred to as trench, it was referred as Tielocken and was common with British officers, featuring a belt without buttons, double breasted, and protecting the body from neck to knees (Burberry, 2017). The term “trench coat” came as a result of the officer wearing them at the trenches. The company rise to prominence was influenced by stars of the modern world who started wearing their brand. Between 1970s and 1980s, the company was able to sign agreements with global manufacturers to produce complementary products to the British collection including suits, trousers, shirts, and sportswear.
The Burberry PLC strategy is underpinned by four key themes, that shape and connect its global operations. The four themes are Brand First, Customer- centric, famous for product and productive and responsible. Brand first alludes to the fact that the business is led by the brand whereby, decisions are taken for its long term interest. The company places more emphasis on the customer who is placed central to its operations. It is the aim of the company to be sector leading in understanding, engaging as well as serving its customers both online and offline. In the theme of famous for product, the company demonstrates commitment to the creation of authentic and distinctive products as well continuous innovation both in design and manufacturing. Lastly, in productive and responsible theme, the company pledges more prioritizing productive and efficient ways of working in the entire organization as well as ensuring the responsibility culture.
Product and customers
Burberry company have its operation focused in 3 sub-brands. Burberry Prorsum is the most fashion forward collection and is centered around runway shows and provide the design inspiration for the brand. Burberry London on the other hand is a tailored collection and is typically, what a customer wears during the weekday when going to work. Lastly, the company has Burberry Brit, the most casual collection that is worn on weekends. Burberry fashion house focuses on and distributed ready-to-wear outwear, fashion accessories, fragrances, sunglasses as well as cosmetics. The fashions are distributed to customers from all over the world and especially in Europe. They are available in major stores and customers also are able to order online.
The apparel industry is faced by stiff competition with many competitors trying to win customers. To survive in the market, the companies have to find ways of positioning themselves. Burberry has adopted a position characterized by functional luxury to the minds of the consumers. The company maintain a product line that has great width and depth consisting of numerous products with their product falling into fashion and continuity categories. Some of its major competitors are Polo Ralph Lauren and Girgio Armani in the apparel sector and Coach and Gucci in the accessories Domain.
Financial statement Analysis
Gross profit margin
The gross profit margin is a profitability ration that seeks to measure how much of every dollar of revenues remains after payment of costs of the goods sold (COGS). The gross profit margin as shown in the appendix is calculated by subtraction of costs of goods sold from the total revenue in a given financial year and dividing the resulting figure by the total revenue figure. A percentage can be obtained by multiplying the figure obtained by 100 (Delen, Kuzey & Uyar, 2013). The gross profit percentage inform us the percentage of revenues left after payment of direct costs associated with making of the products. For the Burberry PLC, the Gross margin ration in 2016 was 0.70 or 70.1%. This was above the sector’s average of 41.41% indicating the company performed well. Moreover, this was an improvement from its own gross profit margin ratio of 2015. As calculated in the appendix, the company’s gross profit margin in 2015 was 69.96 percent. This means that after paying the cost of sales in 2015 the company retained 69.96 of the revenues while in 2016, the situation improved slightly because the company retained 70.1 percent of earned revenues.
Return on capital employed
Return on Capital employed or ROCE is another profitability ratio that is used in the measurement of the level of efficiency that the company is able to generate profits from the capital employed through comparison of operating profit with the capital employed. The implication of this to investors is that it helps them know the amount of dollars in profit generated by the capital employed. A higher ratio would be favorable to the investors because it implies that more dollars of profits are generated by every dollar of capital employed (Hoskin, Fizzell, & Cherry, 2014). For a given company, comparing two or more years can help in knowing whether the ratio is improving or declining.
The return on capital employed for Burberry PLC for two years (2015 and 2016) is calculated in the appendices. In 2015, the company’s return on capital employed was 0.277 or 27.7% while in 2016, the company recorded a ROCE of 0.227 or 22.7 percent. The company’s performance therefore declined in 2016 as the ROCE ratio declined. This means that in 2015, for every dollar invested, the investors earned 0.277 while in 2016 , an investor would be worse off because for every dollar invested, he or she would earn 0.227.
The gearing ratio of a company is used in the measurement of the company’s borrowed funds to its equity. The ratio provides an indicator of the financial risk to which the business is subjected to because having excessive debts can be unhealthy for the company and can lead to the company experiencing financial challenges. A high gearing ratio means a huge proportion of debt to equity while a low gearing ratio implies there is a low proportion of debt to equity. Generally, a business that has gearing ratio of more than 50% is considered as highly geared while a business with less than 25 % is considered as having a low gearing. For a normal company, 255 to 50% would be considered good and implies the company is comfortably financing its operations by means of debt (Delen, Kuzey & Uyar, 2013).
For Burberry PLC, as can be seen in the appendices, in 2015, the company had a gearing ratio of 49.7. This reduced to 42.8 in the year 2016. This shows the company moved from highly gearing to low gearing. This is an improvement which implies the company is now more able to obtain funding from financial institutions and therefore this is good for investors. The investors would be better off investing in the company in 2016 than it were in 2015 showing it is improving.
Earnings per share
Earning per share ratio for the company (EPS) refers to the company’s net income after tax which is available to the company’s common stockholders divided by the weighted average number of shares of common stock which are outstanding at the period pf then earnings. EPS can be calculated by first subtracting dividends from the net income and then dividing the weighted average common share outstanding. The earning per share is similar to other profitability or market prospects ratio where a higher earnings per share is better for a company and for current and potential investors. In other words, it means the company has more earnings available for distribution to the shareholders (Hoskin, Fizzell, & Cherry, 2014).
For Burberry PLC, the calculated EPS in the books of account for year 2015 is 4.16% while for 2016, it is worse at -7.59%. This is not a good situation for the investors as it means their earning are reducing per year. However, this may be due to the earnings being put back to the business. A further analysis over 10 years average shows an EPS of 12.96 in 2015 and 12.02 in 2016. The implication is that even considering 10 years average, the EPS is still on the reduction trend.
Conclusion and Recommendation
A review of the four ratios and the company’s strategies discussed can be used to evaluate whether it is advisable for the investors to put their money in this company or not. In terms of gross profit margin, the company is doing well with a ration higher than the industrial average. Moreover, the company’s average for 2016 is higher than that of 2015 which implies the company is on improvement trend. In terms of return of capital employed, the company is not doing very well with a declining trend noted. The decline is however not very significant. On the other hand the gearing ratio for the company as in the appropriate level for an average company. The leverage reduced between 2015 and 2016 which indicates improvement a good thing for the investors. Lastly, the Earning per share ratio is on the declining trend which is not good for investors as it means their earning will decline as per the shares invested in. If not well managed, the investors can continue to lose their investments. On consideration of these ratios and the company’s strategies, would recommend investors to invest in this company but do it cautiously. Despite of low EPS, and low Rate or return on investment the company has potential as profit margin is improving. Policy changes in the company can therefore improves the few unfavorable areas.