1. MB428 Corporate Strategy Financial and strategic evaluation of Marks and Spencer Plc and NEXT Plc

2. Agenda n Overview of the general retail sector n Overview of NEXT Plc & Marks & Spencer Plc n Ratio discussion n Valuation methods n Analysis of respective strategies n Conclusions n Questions

3. General retail environment n Political Changes to Financial Services Legislation Sunday trading laws n Economic Intense competition Falling sales (fear of recession) Retail downturn from mid-1998 n 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 n Technological Increase in on-line shopping (leading to an increased availability of discounted products)

4. Overview of NEXT Plc n Focus on top end of mass market n Stylish, good quality products n Substantial competitor in market for clothing, homeware and financial services

5. Overview of Marks and Spencer Plc n Major player in UK retail market for clothing, food, homeware and financial services n Reputation for quality, value & durability

6. General retail sector

7. Traditional valuation techniques n Return n Risk What does this tell us?

8. Equity V Dividend 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

9. n The ability to meet debts with liquid assets at times of downturn n A rule of thumb should be 2 n NEXT have dropped to 1.6 in last year but no major concern n M&S have gone from 1.45 minimum to 1.77, again no major concern with such a large organisation Liquidity (current)

10. Efficiency n Ratios are creditor ratio, debtor and stock turnover – NEXT - Currently Trade debtors take 60 days to settle, Creditors 118 days – Stock turnover an average of 54 days – M&S - Currently Trade debtors 118.4, Creditors 99.2 – Stock turnover 32.9 days – Food turnover will have impact upon figures

11. Beaver ratio n Operating cash flow\STL + LTL – Monitor of cash flow\debt – rule of thumb 1 – monitor very closely - sudden fall represents danger of collapse n Both ratios for NEXT and M&S are positive

12. Ratio limitations n Single snapshot in time n Do not illustrate performance through the year n Soft valuation techniques n The value of the share does not necessarily represent the value of the organisation.

13. Valuation models Value can be defined in a number of ways, each being appropriate in different circumstances n liquidation n going concern n book n market n intrinsic

14. Valuation models cont. n Financial instruments are valued by their differing cash flow patterns, to which discount rates are applied n Shares are generally valued by reference to the expected growth of future dividends n 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

15. CAPM Valuation Model Expected return = Risk free rate + beta x average risk

16. Price-Earnings Model (PER) Historic PER = current market price of share/ last years earnings per share

18. Economic Value Added Model n 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

19. Market Value EVA is seen as the driving force behind market value MV = (ROCE/WACC) x IC NEXT = 1985.1 M&S = 4873.0 3041.8 8552.0

20. Soft Valuation Techniques n CAPM, DVM, EVA and Market Valuation are based on hard financial data but do not give a full picture n Soft valuation techniques add intangibles and other “soft” factors i.e. employee satisfaction n Inclusion of soft techniques do not provide certainty but can increase business performance

21. 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

22. 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

23. 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

24. 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

25. Questions?