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Accounts Analysis of Next plc
It must be determined whether to invest in Next plc or not. This report examines the performance of Next plc from an investment perspective and assesses the likelihood of future above average performance.
To make a recommendation on investing in Next, this report reviewed their past performance as a basis for judging their ability to deliver future profitability and growth. The report discusses the economic environment as a context for understanding the challenges that Next must manage. The report reviews the Next plc annual report for the year to January 2011 to evaluate the company's performance and also analyses investor and financial ratios. The annual report provided a summary of Next's performance during the previous fiscal year, including a discussion of their achievements as well as shortfalls. The report also provided insights into management strategies to counter the threats of global inflation, erosion to consumer confidence and buying power, stocking and supply issues, and limited opportunities for growth and expansion. This assessment also includes a SWOT analysis to help identify factors to consider in making an investment decision.
In addition to analysing Next financial statements, it would have been helpful to read in-depth investment reports produced by investment services to see an even broader evaluation of Next performance. In particular, comparing Next ratios with a wide range of industry ratios, as well as their competitors' ratios, would have provided additional insight into Next's performance.
Conclusion
Based on Next's track record of meeting challenges posed by the recent and current economic landscape, this analysis recommends buying Next stock.
Introduction
A leading UK-based retailer, Next plc markets home products and fashions and accessories for men, women and children. Next faced a challenging economic environment in 2011 as the economic downturn that began in 2007 continued. The effects of the downturn continue to be reflected in their annual reports and accounts.
While fashion and homeware sales began the year with a positive start, retailers had to adjust to economic factors that affected consumer confidence and spending power throughout the year. Industry analysts anticipated that the retail sector would continue to feel negative pressures in 2011 from financial, political, environmental and psychological sources. Since the downturn began in 2007, UK retail has been subject to economic challenges, but evidence during this time showed that consumers continued shopping, providing an indication of the resilience of the retail sector. Most experts view the retail industry with guarded optimism.
Consumers felt the pinch of rising unemployment, higher taxes and minimal increases in wages, all of which put pressure on disposable income. Likewise, higher petrol prices and mortgage rates affected shoppers as well. Many retailers in turn struggled with the dual impact of the VAT rise along with higher input costs. Inflation and the potential impact on interest rates also caused concern for much of 2011.
Likewise, anything that affected consumer confidence posed potential problems for retailers. Problems in the housing market, public sector cuts, the European debt crisis, political instability in the Far East all combined to create challenges for consumer confidence that affect spending habits. Even though experts predicted that spending would remain unchanged or even increase slightly due to rising prices, the volume of retail purchases would be affected.
Industry analysts also predicted that retail spending would be concentrated in fewer trips wherein fewer stores were visited. This change in consumer spending habits required that retailers like Next adapt by devising strategies to provide service and pricing that exceeded customer expectations, thereby making the most of consumers' curtained shopping. Retailers also needed to make the most of changing demographics, characterised by different age spectrums, shopping habits, retail channels and personal interests. Also, given the economic pressures in the UK, retailers needed to look for growth opportunities outside the UK. Industry analysts predicted expansion opportunities in large East Asian countries. The most attractive opportunities for retailers seeking expansion were offered by Thailand, India, Indonesia, Vietnam and China, among others.
Findings
Analysis of Next Performance and Market Position
The Next 2011 annual report showed overall above average performance. To begin with, Next anticipated challenges posed by the economy, to which they responded by adopting strategies to control costs and still achieve growth. The company managed a reduction in central over head of 0.6% while at the same time holding store payroll costs flat. As a result, even though occupancy costs increased as a percentage of sales, the company's net operating margin improved by 0.6%. Next decreased distribution and warehousing costs, resulting in margin improvement by 1%. Their cash...
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