MODULE

MODULE : CORPORATE FINANCE
MODULE CODE : COAF 2202
LECTURER : MR W MAWANZA
FACULTY : COMMERCE
DEPARTMENT : ACCOUNTING AND FINANCE
PROGRAMME : BCOM ACCOUNTING AND FINANCE
FORMAT : CONVECTIONAL
PART : 2.2
GROUP MEMBERS NAMES
SUPREME MOYO L0171068L
WILLIAM SIBANDA L0171372C
QUESTIONS
Choose two companies of your choice and perform a four year financial statement analysis with respect to the following
Pestel analysis
Revenue generation
Profitability
Liquidity
Working Capital Management
Inventory Management
Capital Structure
Suggest and give recommendations on how these companies can improve the highlighted areas
Solution
Background
Edgars Stores Limited (the Group) is a limited company incorporated and domiciled in Zimbabwe and whose shares are publicly traded. The Group manufactures clothing, which it distributes and sells together with footwear, textiles and accessories through a network of stores in Zimbabwe. The Group also offers micro finance loans.CITATION Edg18 l 1033 (EDGARS, 2018)Truworths Limited is listed on the Zimbabwe Stock Exchange, comprises of Truworths stores and Topics. It also operates under Number 1 stores. Truworths closed over 11700 accounts during the half year to January 6, 2013.

Pestel analysis
Political environment
These determine the extent to which the government and the government policy may impact on an industry. These would include political policies and stability as well as trade, fiscal and taxation policies. The political environment can affect the operations of a business positively and negatively. Unfavorable conditions load to the inefficiency operations of the business whereas favorable conditions ensures growth, efficiency, and productivity. When a country is politically unstable, investors may withdraw their investment with the country thereby affecting the operations of the business. Low economic growth, political instability and the sovereign credit rating downgrades in South Africa, and Brexit in the United Kingdom, collectively contribute to declining consumer disposable income and negative consumer sentiment, which in turn have a direct impact on the Group’s ability to grow sales revenue.

For companies, that import raw materials from other countries, their operations may be hindered by an increase in import duties thereby making it expensive to import goods. For example Truworths is a company which imports raw materials such as polyester however because of implement policies it has caused inefficiencies in its operations. Also the exchange rate volatility is a factor that has been affecting companies importing raw materials from other companies thus its very expensive.
Economic factors or environmental factors
These are factors that affect the economy and its performance, then in turn directly impacts the organization and its operations. The factors may include the unemployment level, interest rates and foreign exchange rates. CITATION www15 l 1033 (www.articlelibrary.com, 2015)Exchange rate volatility has a direct impact on the cost of imported goods, specifically in Truworths where approximately 65% of all merchandise is imported and US dollar denominated, which in turn constrains sales growth in an economy dominated by uncertainty and growing pressure on consumers’ disposable income. The weaker pound has increased the cost of euro-denominated imports and other inputs incurred by Office, and reduced the Group’s foreign revenues and profits when translated into Rand.

Shareholder Value creation
Integration of Office
Good progress has been made with the ongoing integration of Office into the Group,with the business reporting lower stock levels and an improved inventory turn followingalignment with Truworths retail processes and systems.Office has generated cash from operating activities of approximately ?50 million (approximately R850 million) since acquisition and it is estimated that the Group’s share of the equity value of R3.4 billion will be paid back over a period of five to six years.

Acquisitions
The Group will continue to pursue its strategy of complementing organic growth with the acquisition of fashion businesses that meet the board’s investment criteria, with the primary focus on the United Kingdom and Europe. The acquisition of the Loads of Living chain of 14 stores in South Africa will accelerate the Group s entry into the fashion homeware market. Management plans to upgrade the store design, review the product range and expand the store base to ensure that the Group becomes a meaningful player in this market within the next five years.

Launch of Office London
Based on the success of Office in the United Kingdom the Group has introduced Office London into the South African market, with 10 stores being opened during August 2017.The in-store offering of branded and in-house designed footwear will be complemented by an online offering.

Expand kids wear presence
The Kids Emporium concept is unique in South African retail and houses the LTD Kids, Earthchild and Naartjie brands. A further 18 Kids Emporiums were opened in the 2017 financial period, increasing the footprint to 32. Customer response to the kidswear offering creates the opportunity for sustained store expansion for several years.

E-commerce and online shopping
Truworths will be launching its new e-commerce site in the first half of the 2018 financial year. Through the online store customers will ultimately have access to the full range of Truworths, Identity, kidswear and Office London merchandise, with several payment options and delivery choices to ensure a convenient customer experience. The recently launched TruRoyalty and iDream customer loyalty programmes will be aligned with the new online offering.

Expanding retail presence and e-commerce
Office plans to expand its store footprint in the UK by opening 10 to 15 stores in the next two years, and about 5 stores in Europe over the next three years. The current e-commerce offering will be enhanced to offer customers an omni-channel shopping experience while a loyalty-based marketing programme is being developed to drive new and repeat purchases.

Profitability and efficiency
Mukanda (2013) pointed out that Zimbabwe customers are highly indebted and this situation was caused by low disposable incomes and the depressed economy. This saw clothing retailers incurring extra costs of employing debt collectors and upping their provision for bad debts. 2014 statistics showed that Truworths had a high gearing ratio of 147% and Edgars of 181%. With Edgars US$62,58 million revenue, 73% was on credit and Truworths credit sales accounted for 75% of its overall interim sales. Now, with high composition of credit sales to total turnover and high non-payment rate, profitability is affected adversely. The clothing industries were in turmoil as they faced competition and harsh operating environment. European Journal of Business and Management of Edgars, one of the largest clothing retailers in Zimbabwe from the year 2009 to 2015.

Year Trading Profit as % of sales Profit / Loss for the year Current Ratio Mukanda (2013) pointed out that Zimbabwe customers are highly indebted and this situation was caused by low disposable incomes and the depressed economy. This saw clothing retailers incurring extra costs of employing debt collectors and upping their provision for bad debts. 2014 statistics showed that Truworths had a high gearing ratio of 147% and Edgars of 181%. With Edgars US$62,58 million revenue, 73% was on credit and Truworths credit sales accounted for 75% of its overall interim sales. Now, with high composition of credit sales to total turnover and high non-payment rate, profitability is affected adversely. The clothing industries were in turmoil as they faced competition and harsh operating environment. Table 1 below shows the financial trends European Journal of Business and Management www.iiste.org of Edgars, one of the largest clothing retailers in Zimbabwe from the year 2009 to 2015.

The researchers of this study believe that relying on net earnings alone to gauge profitability might be deceiving. Profitability and other ratios might give a deeper insight into performance. Edgar’s downward trend in trading profit % of sales or gross profit margin is a sign of future problems facing the bottom line. This trend was common across the clothing retail outlets in Zimbabwe and thus the bi indicator of the problem to the clothing retail outlets in Zimbabwe.

Truworths Limited is listed on the Zimbabwe Stock Exchange, comprises of Truworths stores and Topics. It also operates under Number 1 stores. Truworths closed over 11700 accounts during the half year to January 6, 2013. Table 1.1 below shows the financial trends of Truworths Limited store in Zimbabwe from 2009 to 2015. The results show that downward trend of sales revenue since 2013, which is another evidence of the challenges being experienced by Clothing retail outlets in Zimbabwe.
The important issues include whether formulated strategies are effectively implemented. Flood et al., (2000) pointed out there is a growing recognition that the most important problems in the field of strategic management are in strategy implementation. Strategy implementation research remains limited despite its apparent importance and in that line of thought Noble (1999) argue that strategy implementation receives relatively limited research attention. Therefore, more research is needed to improve our understanding of strategy implementation in clothing retail outlets in Zimbabwe.

Liquidity
Liquidity is the property of being easily converted into cash. An asset is considered liquid if it can be converted to cash quickly and at little cost. An illiquid asset, by contrast, can be converted to cash only after a delay, or at considerable cost.

EDGARS LIQUIDITY TEST YEAR 2013 2014 2015 2016
CURRENT RATIO 2.8 2.7 2.67 2.55
Acid test ratio 0.88 0.91 2.5 1.84
N.B Margin of error ±0.3Current ratio
This is the liquidity ration that measures a company’s ability to pay its short-term debt and long term obligations. To measure this ability the current ratio is used to consider the total assets of a company in the relation to that company’s liabilities. Therefore the table above shows that Edgars was able cover its short term debts though its current ratio was reducing year by year hence this may be caused by different various factors.

Truworths Liquidity Test Year 2013 2014 2015 2016
CURRENT RATIO 6.30 4.99 4.98 3.26
Acid test ratio 5.47 4.35 4.25 2.45