Retail-Clothing Industry Analysis
2012 Financial Annual Reports:
Hennes & Mauritz
Marks & Spencer
Abercrombie & Fitch
Pacific Sunwear of California
Submitted by:
Cristina Reveles
Robin Palaganas
David Iskander
Leo Green
Accounting 465 Section 01 4360
Professor Valenzuela, J.
November 26, 2013
Table of Contents
Industry Introduction…………………………………………………………………………2
Part One………………………………………………………………………………………3
H&M…………………………………………………………………………….……………..3
M&S…………………………………………………………………………………..…….…8
A&F…………………………………………………………………………………..……...21
PacSun……………………………………………………………………………..……….27
Part Two………………………………...……………………………………………..……40
Presentation of Balance Sheet…………………………………….………………..……43
Presentation of Income Statement………………………………………..………..….…51
Presentation of Cash Flows………………………………………………..………..……58
Presentation of Stockholders Equity………………………………………………..……64
Part Three……………………………………………………………………………..……68
Overview of Accounting Policies
Accounting Principles
Liberalism v. Conservatism
Part Four……………………………………...…………………………………….………82
Part Five……………………………………………………………………………….……94
Conclusion…………………………………………………………………………………100
References………………………………………………………...………………………101
1
Industry Introduction
The retail sector is among the most dominant industries worldwide and highly
competitive. The retail industry encompasses companies that design and sell
clothing, footwear and accessories for men, women, and children. Influential factors
to the growth of apparel retailers revolve around fashion trends and consumer
income. As consumer spending is the key to the viability of any economy, the health
of the retail industry becomes an important economic indicator. (Zachs Equity
Research, 2013). A number of major players have saturated the market, but there
are also countless niche stores that cater to specific demographics. Consequently,
companies rely heavily on effective marketing and merchandising techniques for
profitability.
Moreover, the retail industry’s success is dependent on market forces that
make it experience more fluctuations than perhaps any marketplace. This report
attempts no only to answer the areas mentioned below, but also to explore the
economic factors and their implications to the retail industry such as: an increase of
cautious consumer spending, increased competition, varying consumer fashion taste,
and the global financial crisis. Although clothing is a basic need, people have wide
discretion as to when they update their wardrobes and how much they spend. When
times are good, apparel sales are usually brisk, but during periods of economic
uncertainty and contraction, clothing is an area where people can easily trim outlays.
(Spencer, 2013)
In order to analyze the retail apparel industry four comparable-stores were
chosen; some with foreign operations and others with only domestic operations.
Hennes & Mauritz (H&M) based in Sweden was selected as the foreign company
with U.S. operations. Marks & Spencers (M&S) based in the United Kingdom was
selected as the foreign company without U.S. operations. Abercrombie & Fitch (A&F)
and Pacific Sunwear of California (PacSun) are U.S. companies, but only PacSun
doesn’t have foreign operations. The analysis is divided into five parts. Foremost, an
overview of each company is provided, along with their operations, and economic
environment. Secondly, a comparison of all four financial presentations are made
including reasons for their similarities and differences. Third, a comparison of the
companies’ financial footnotes disclosures are analyzed. Fourth, a review of overall
disclosures and presentations. Finally, the companies’ financial statement impacts
are analyzed.
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Part One
Company Overview
Hennes & Mauritz (H&M) is engaged in the sale of clothing and cosmetics in
Sweden and internationally. H&M is a Sweden-based company operating under such
brand names, as H&M, H&M Home, COS, Monki, Weekday, Cheap Monday and &
Other Stories. It is engaged in the design, manufacture and marketing of clothing
items and related accessories. The Company’s product range comprises clothing,
including underwear and sportswear, for men, women, children and teenagers, as
well as cosmetic products, accessories, footwear and home textiles. The Company
offers its products in a number of branded stores spread across over 40 markets.
Additionally, the Company offers online and catalogue sales in Sweden, Norway,
Denmark, Finland, the Netherlands, Germany, Austria and the United Kingdom. In
August 2013, it launched an online store in the United States.
The company fist opened a women’s clothing store; Hennes (Swedish for
“hers”) and later acquired a men’s clothing store Mauritz Widforss. The company
offers fashionable apparel tailored for women, men, teenagers and children. The
clothes range from updated classics and basics to clothes that reflect the latest
international trends. H&M’s main concept is fashionable clothes at a functional price.
It currently holds 3000 stores in 52 countries including the United States. Germany is
its #1 market accounting for more than 20% of sales. The company doesn’t own any
factories but its goods are acquired from Europe and Asia. H&M is the number one
user of certified organic cotton in the world. "Being one of the biggest fashion
companies puts high demand on our sustainability work and we take this
responsibility seriously. There are a number of things that stand out such as being
the biggest user of organic cotton in the world, being the first fashion retailer to
launch a garment recycling initiative globally and promoting transparency by
disclosing our supplier factory list," says Helena Helmersson, Head of Sustainability
at H&M.
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The company is focused on fashion, quality and best practices, most recently
following a high sustainability development practice. By embracing the environment,
and promoting ethical behavior, H&M has been able to change the way it engages
with the community and business partners around the globe. H&M’s focus on
sustainability applies to everything from using sustainable materials, responsible
water management, use of renewable energy and most notabily the ability for
customers to trade in old clothes for reuse or recycling purposes. H&M sustainable
efforts have not gone unnoticed. In 2012, H&M once again qualified for the Dow
Jones Sustainable Index World, which lists the companies leading the drive towards
more sustainability. H&M’s supply chain also contribute the economic growth of
developing countries by providing over 1 million jobs worldwide. H&M is able to
provide quality apparel by conducting business transactions with only the most
qualified and experience suppliers, primarily in Asia and Europe.
Furthermore, H&M works closely with suppliers to train and educate both
suppliers and employees on important areas such as workers’ rights, health and
safety. H&M prides itself in taking a global initiative to increase working conditions
and it has been a very successful agent. For example, in 2010 CEO Karl-Johan
Persson urged Bangladeshi Prime Minister Sheikh Hasina to increase minimum
wage levels in the textile industry and were implemented the same year. The
initiative exemplifies the transfer of the company’s Swedish labor market model to
foreign suppliers. There are multiple activities H&M practices in order to provide
sustainable and ethical commodities to its market base such as: fashion for
conscious customers, selecting and rewarding responsible business partners,
practicing ethical principles, being climate smart, reducing waste, and committing to
natural resources. Above all, H&M is able to offer high fashion at low prices with
efficient methods such as in-house design, large purchasing volumes and no
middlemen.
H&M’s affordable chic fashion apparel have awarded them as one of the
most profitable retail companies in 2013. Nevertheless, the retailer has suffered from
the faltering global economy just as many others in the industry. The Euro.
Performance earlier in the year was hit by a chilly spring in Europe. The company
reported an increase in sales. Maybe because of its expansion into China and Japan
and the Asian consumers rising income and heightened demand for style. Although
the Euro crisis and a global economic downturn has affected retail consumption in
several European countries, Sweden’s H&M’s expansion is not deterred. In fact, they
are projected to launch 350 new stores by the end of 2013. “H&M is expanding
globally and will have more than 3,000 stores before the end of 2013,” said Karl4
Johan Persson, CEO.
In 2012 the Group stepped
up the rate of expansion and
opened 304 new stores net
compared to the originally
planned 275 stores. By the
end of the financial year 2012,
H&M had a total of 2,776
stores in 48 countries. New
stores opened in markets
around the world. Most new
stores were opened in China
and the US but Russia, Italy,
Poland, France, Spain and
the UK were also large
expansion
markets.
According to their Annual
Report 2012 Five new
markets are planned also for
2013:
Chile,
Estonia,
Lithuania, and Serbia and
(via franchise) Indonesia.
With the opening in Santiago
de Chile H&M takes the first
step into the southern
hemisphere. The two-floor
store is situated in the very best business location, in the Costanera Center shopping
mall, and is the first H&M store in South America. Just as in other parts of the world,
there is great potential for continued expansion in this fashion-conscious region.
The strong pace of expansion continues into 2013 with a planned 350 new
stores net. The highest rate of expansion will be in China and the US. There is also
great potential for expansion in other markets such as Russia, Germany, the UK,
Italy, Poland and France. Before we move into a new country or city an assessment
is made of the market’s potential. Factors such as demographic structure,
purchasing power, economic growth, infrastructure, political risk, human rights and
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environmental sustainability are analysed. (H&M Expansion Strategy).
H&M does not only interact with customers on a brick and mortar basis but it
also has expanded its online presence in 2012. The company invested heavily on
information technology sector in order to provide customer with trendsetting and
appealing website. Fashion enthusiasts flock to hm.com for the latest fashion
forward apparel and actively interact with H&M’s social media accounts. H&M is one
of the leading fashion companies on Facebook, Twitter, Instagram, Google+ and
YouTube with hundreds of active followers. Since January 2013, H&M shop online is
completely mobile-adapted and tech-user friendly. Investments in online sale and IT
are projected to bring higher profits by expanding on the company’s product range.
H&M quickly adapted to the increasingly growing online market via smartphones and
tablets. And although profits for 2012 were hindered by strong technology
investments the company still reported a profit growth of 7 percent after tax and
currency translation.
Figure 1
The company trades on the NASDAQ OMX Nordic Exchange Stockholm,
Sweden under the name H&M B. H&M gained as much as 5.4 percent to 262.70
Swedish kronor in Stockholm trading. (Gustaffson, 2013). The company is also
present in online market in order to meet the rapid expansion. The company has
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invested heavily on online marketing and computerization for online shopping like
smart phone and tablet compatibility. H&M’s shop online is available in 9 European
markets and the US. The easily navigated digital store is fully mobile-adapted since
January 2013 and already very popular with our customers. Roll-out of shop online
to other markets of the H&M Group will follow. COS, Monki, Weekday and Cheap
Monday offer sales online in 18 European markets while & Other Stories is available
online in 10 European markets.
H&M's business concept is to provide its customers with high value by
offering fashion and quality at a low price. The clothes are created with the intention
of satisfying a broad spectrum of customers, with different tastes and needs. The
company does not manufacture the products by itself, but rather buys the clothes
from independent suppliers who are located primarily in Asia and Europe. Also, H&M
rents the stores where the products are sold. (OMX NASDAQ, 2013).
While there has been great success abroad, H&M has faced struggles in the
U.S. market. While the company’s scattered presence diminishes the importance of
the U.S., the region still is H&M’s second-largest in terms of sales and locations. The
problem with that is twofold: One, there has been lots of chatter about weak
consumer sentiment here in the states, especially in the wake of weak secondquarter numbers from Walmart, Macy’s and others. Secondly, H&M was late in
establishing an e-commerce presence in the U.S. The move was delayed several
times and just launched last month. While it’s indeed a case of better-late-than-never
and could be a boon to its business now, some have suggested the delay had
already sent many fashionistas to e-commerce rivals. (Oursler, 2013).
Nevertheless, H&M has become one of Europe’s fastest growing retailers by
following unusual sales approach. The company specializes in offering fashionable
and hip clothing, but with pricing intended to attract discounted shoppers. As a result,
of its strategy, it has been dubbed a purveyor of “fast-food fashion.” (By, 1999).
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Company Overview
For more than 125 years, Marks and Spencer Group plc. (M&S) has
been an iconic retailor in the United Kingdom. Started by a polish refugee residing
in the UK, the company has flourished through many declining seasons of unstable
political movements, wars, corporate management shifts, and industry
transitions. Since the beginning, the essential need for M&S vital products has kept
the UK retailer alive despite many difficult seasons. Birthed from a retailoring
success, M&S now has a clothing, food, and home product line.
With the beginning of a bargain retailer, Michael Marks slogan was “Don’t
ask the price, it’s a penny” (Marks in time). Marks opened his first bazaar in Leeds
in 1884 called Marks Penny Bazzar. As the partnership with Tom Spencer started in
1894, the company focused on five key principles: quality, value, service, innovation,
and trust (Marks in Time). These principles are in the heart of M&S business until
this day. The partnership offered complimentary abilities. Spencer had amazing
skills in administration and had accounts when the partnership began. Marks was
a superb seller. He knew how to deal with people quite well and it was shown
through his talent for the merchandise. To note, the retail industry was just
beginning its positioning in the UK market in locations like High Street and Market
Place. Interested enough, M&S was able to build an environment like no other
retailer during the era. Their new stores were called Penny Bazzars. The same
slogan continued to bring customers to the stores. They also added the words
admission free to encourage customers no obligation to their browsing. That style
of marketing was unheard of at the time. With 39 Penny Bazaars and 12 High
Street stores by 1900, M&S seemed to be a well-built organization. Only 6 years
into the partnership and M&S had acquired a business model and market that had
success written all over it.
In a very competitive industry, M&S had a hand up on the competition by
being able to purchase out their competition. The first 20 years of the 20th century
illustrate a still growing and innovative company model. Buying a number of their
competitors M&S built their first property at Derby Street, Manchester in 1901. As
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the company’s first registered address and headquarters, it was building a retail giant
with roughly 145 stores by 1915. M&S success was tied to the booming growth of
the economy. But as any good thing, the times changed and M&S had to deal with
an inflationary economy during the First World War and the company had to change
its penny-marketing scheme.
The first period that could of potentially eliminated M&S and had to conquer
was the Great Depression. However, what could have been the downfall of a
short-lived company helped the company sharpen up and focus on strengthening
their foundations. An affordable product was a main priority for the company.
This, which is still quantifiably viable in the companies image, was the time when
M&S emphasized on two departments, food and clothing. Many other significant
outbreaks caused M&S to potentially see hard times. The second world war
damaged over 100 stores; yet, by 1942, as rationing did not apply to restaurants,
M&S created 82 Café Bars in stores. Also, during this time, M&S created the first
retail laboratory to pre-test quality and deliver higher quality for lower prices. More
so, M&S was one of the first to offer ready-to-wear clothes (instead of tailor-made
items) for its customers by offering sizes and variations of the same piece.
Considering the food industry, M&S was a unique in creating the first refrigerator
counters for their meat products to offer fresh meat to their customers. M&S
redefined the supply chain for their meat products to be chilled through the entire
process instead of frozen. Even by 1973, M&S was the first to offer ‘sell-by’ dates for
a guarantee to its customers. With its own Food Technology department, M&S
was able to work with producers and farmers to establish strong, sellable products.
Likewise, M&S adopted a revolutionary policy of purchasing directly from suppliers.
M&S was overcoming every obstacle so well, that in 1975 M&S opened its first
International stores in France and Belgium. Overall, M&S was able to keep ahead
of the curve by not letting catastrophe, depressions, or wars hinder their business
but build it up even higher.
The Company Today
Grounded on a solidified foundation, M&S has been a top UK retailor. M&S
prides themselves in being open and transparent in their business practices.
Today, more than ever, it has been important for M&S to have what they call, “good
business practices” (M&S). Both domestic and international business is done
above the minimum requirement of the law. M&S knows that accountability in
today’s market steered by transparency and openness creates a trusted
brand. This allows business today for M&S to be done with a readiness to embrace
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the change in the current market from controllable to uncontrollable factors. M&S
has in store, online and phone order channels for customers to make shopping
convenient. As always, M&S focuses on each part of the experience from in-store
design to purchases and delivery. Currently, ‘Your M&S’ creates products that are
differentiated and suited for the customer needs. M&S ensures value for its
customers – and also to its shareholders – by making sure customers are
recognized in all business decisions. This is possible with an open communication
with its customers each month. Roughly 17,000 customers every month help M&S
anticipate what customers are looking for. More so, through M&S online retailor,
M&S generates over 3.4 million visits weekly to the site. Delivery is global and
reaches countries as far as Cambodia. Plus, M&S has international sites for 8
major European nations like Germany, Belgium, and Ireland.
Today, M&S believes in not only reaching customers but also investing into
their team. With over 81,000 employees worldwide, M&S strives to continually
engage with its people through different channels to develop leadership, talent and
to secure a strong succession for future growth. Knowledgeable employees ensure
that the right people are able to deliver the growth ambitions set out by M&S each
year. In the top 100 employees, M&S turnover rate is rare to none. In 2012,
three defections took place. This is understood to be no more than just the natural
flow of life. Clearly, with 15 new hires and 15 internal promotions in the same year,
the turnover is not a threat. With ever-changing innovation and trustable business
practices, M&S has been able to create a strong vision for the future including an
archive collection dating back to the beginning of M&S, Plan A (a 100-point eco-plan),
and a continuous improvement culture.
Methods of operation both internationally and domestically are comprised of
a variety of options. Ownership of an M&S location is segmented in full ownership,
joint venture, or franchise. The extent of the company’s operations tends to keep a
close eye to final outlay of products to the consumer. Thus, a more centralized
management style is used and therefore franchising is an optimal choice for M&S.
This also allows for strong retailers in the franchise segment to lead new avenues of
growth for the company. Franchising has also allowed the company to grow faster
internationally. This is done by coordinating the entire line of products to
franchisees while in a different nation can tailor it to the specific needs of the culture
and local market conditions. These methods of operation have allowed the
company to grow expansively internationally by adding over 100 new stores in the
last five years internationally.
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International Operations
Internationally, M&S focuses on being a global retailor. The company only
ships to the United States but does not have any locations currently located in the
United States. In detail, the long-term orientation for M&S International highlights
things that could be done today for the business in the future. Such as, launching
new European websites in France and Ireland, new stores globally, investment
opportunities, and reviewing the current operations of the company is M&S
International initiative. Also, the company has divided the structure of international
business into three regions: Europe, Asia, and the Middle East. This allows
integration for international marketing to build different market expertise. Moreover,
future growth is found in territories like China, India, Russia, and the Middle East.
As these locations have already top-level performance, new growth opportunities are
available in the future. Out of the total International scope of the company, 157
stores are in Europe, 122 in the Middle East and North Africa, and 108 stores in Asia.
The international growth and focus allows M&S the ability to not be dependent on the
UK market as they disperse their operations worldwide.
Financial Status
Currently, in regard to the 2012 annual report, M&S has grown close to £1
billion pounds in the last five years from £9 billion in 2008 to £10 billion in 2012,
respectively. This implies a strong notion that despite international environmental
issues like the deep recession, M&S has had the ability to increase its market share
both in the UK and internationally.
However, this information is not fully inclusive
of the current operations of M&S. With a stead increase in revenue, operating
profit and subsequently profit after taxation has declined dramatically. In 2008,
M&S earned roughly £1.2 billion in operating profit compared to £0.75 billion in 2012.
This information has quantifiable issues. On the large scale, M&S cost of sales,
selling and administrative expenses, other operating income, and non-GAAP
adjustments to underlying profit all have increased in the last five years. This
pushes operating profit to less than 7 percent of revenue in 2012, down from almost
13 percent in 2008. This almost 6 percent drop indicates the company is
generating more revenues yet spending even greater amounts to establish this
income. Without further analysis, it would be assumed that either costs are rising
because of future investment projects or the company is struggling to keep revenues
growing and thus it is causing them to spend more than before to increase revenues.
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Today, M&S Group plc is traded on the London Stock Exchange. M&S has
affiliations with many social and environmental organizations. M&S recognizes
revenue from its UK retail market in 2012 as majority at £8.9 billion, respectively.
Internationally, revenue was recognized in the same year for £1.1 billion,
respectively. Therefore, it is clear to see that M&S has a large dependency on the
UK market. Expanding internationally will help the company achieve its goals of
reducing its dependency on the UK market.
Dividends have been consistently paid out to shareholders every January
and July. In 2012, interim dividend paid in January was £6.2 per share and in July
£10.8 per share for a total of £17.0 per share. As of 2012, there are 204,186
holders of ordinary shares with over 50 percent of total shareholders owning less
than 500 shares. With that said, a majority of the shares owned are by private, non
major financial investors. Thus, the typical investor looks sees M&S with a current
£34.9 earnings per share as a meaningful investment. Even as a dividend per
share declared has fluctuated up and down over the past five years, M&S has
retained most of its shareholders. Basic earnings per share has decreased over
the last five years underlining the decrease in operating profit in the corresponding
years.
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Further, M&S has had a negative cash flow from 2011 into 2012. This
could be a dangerous with closing net debt in 2012 at respectively £1,857.1 million
and closing net cash at respectively £195.8. M&S must then be careful of how they
conduct future cash movements to make sure enough cash is available to meet all
their daily expenses. The company’s total equity (subtracting all non-controlling
interests in equity) is £2,778.8 million. In comparison, net assets is equivalent,
respectively. With that said, M&S has more assets than net debt. This does tell
of the company’s going concern is apparent. More so, it tells that the company is
investing and spending wisely. If anything, M&S should be concerned with
generating more cash available for any debt due within the next year of business.
Furthermore, the current assets ratio of .7:1 (CA:CL) indicates that M&S must be
careful on how their money is being used because major accounts in operations are
less than current liabilities. This, with a negative cash flow is enough to say that
M&S must be cautious about their spending.
Inventory is measured at the lower of cost and net realizable value using the
retail method. The retail method is computed on the basis of selling price less than
appropriate trading margin. More so, inventories are all counted as finished goods.
This implies that M&S production is done outside the company’s four walls.
Inventory accounts for 46 percent of current assets of the company in 2012,
respectively. Also, Plan A has generated new revenues for the company topping
roughly £135 million while having a positive effect on the market and environment.
With a 29 percent increase from 2011 to 2012, net benefit generated by Plan A
increases financial benefits to be invested back into the company.
World Economy Influence on M&S
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After the 2008 recession that started in the United States rippled into
neighboring nations, the UK was hit by the challenges of a declining economy.
Since than, a narrow, almost unseen recovery is beginning to take place in the UK
market. Specifically, the retail section rose 1.1 percent in 2010 yet remained an
issue through the first half of 2011. Not only from an economic standpoint, but also
a personal financial position, consumer confidence has been relatively week since
the extreme decline in June of 2008 (GfK). The personal financial position of the
average person in the UK seems to be of little hope for the next 12 months.
Overall the climate and general economic situation is still very skeptical of major
purchases. The measurements have increased by a small percentage, however.
Internationally, the world economy has posed many threats to the operations
of M&S. Perhaps, not a major threat because of the distribution of M&S
international covers 43 territories, M&S saw profits rise by 5.8 percent. Major
pressure arose concerning Ireland, the Czech Republic, and Greece’s markets and
trading conditions. Specifically, in 2012, four stores were closed in these nations
while taking full control of the business operations in the Czech Republic after
identifying issues in operations. On the other hand, double-digit growth was seen
in markets of India, China, and the Middle East. So, as International pressures
arose, specifically in the Eurozone, M&S has been recognizing ways to overcome
these obstacles.
Additionally, the Bank of England’s chief economist Spencer Dale is not
optimistic about the current economy state. He told BBC recently that the
momentum is increasing; yet, it will take time before things are back to normal.
This recession that sparked in 2008 was deep and has been difficult to swim out of.
He believes it will take years of sustained growth to bring the economy to a rise and
consumer confidence back up. Regenerating the UK market is Dale’s agenda as
well as Alan Steward, Chief Finance Officer of M&S. Unemployment rose sharply
after the recession hit rising to an unemployment rate of over 8 percent. This was
the highest level of unemployment in the nation for over 17 years. Overall, the
unemployment rate is still too high, the housing market is still too weak, and the
consumer’s confidence has a far way before it is restored for the UK market to see a
full turn around after the 2008 collapse.
On a more optimistic approach, the top ranking leaders for immigration and
investment appeal by Gfk concludes in 2013 that behind the United States, Canada
and Germany, the UK ranks fourth in the world (Gfk). This international perspective
14
gives the UK large appeal considering the poor status of the current economy.
Worldwide, the UK economy is suffering but not enough to reduce its investment
appeal. With all this said, M&S has kept its head a float even with a .9 percent
decrease in revenues in clothing and home merchandise while food revenues rose
up by 3.9 percent.
Competition for M&S
Major competitors in the European retail market heads against four rivals:
Tesco, Sainsbury, Asda (Walmart), and Wm Morrison. These companies operate
with the same markets as M&S concerning clothing, food, and home. However,
between M&S three segments, they tend to do quite well against competitors. For
instance, in 2010, M&S was head in operations of overall department stores in the
UK. Considering, in the competition of major clothing, textiles and footwear
retailors, M&S also was classified as number one in sales (Sparks). Against all
other major competitors listed, M&S was under all other companies listed above
concerning food retailers operations. With that said, M&S focus, compared to
competitors that rank high on the major food retailors operations in the UK have a
top priority or singular focus on this industry. Inclusive in all the major UK retailers
with foreign operations, M&S operates only third under Tesco and Kingfisher in the
UK (Spark). Accordingly, M&S since 1985 has been in top competition with its
charge card against financial services. Major competitors include Sainsbury’s Bank
plc., Tesco Personal Finance Limited, and Virgin Money Personal Financial Serve
Ltd (Hoovers). In mid-2012, M&S Money will launch 50 branches in M&S stores to
offer accounts and eventually loans. This, however, is notable yet outside the
scope of this project. It is important to consider as a portion of M&S total revenue
is recognized under M&S Money.
Plan A
With just about one-third of the United Kingdom’s 63 million people visiting a
M&S store weekly, it is clear that M&S’s operations has an effect on the eco-system.
M&S has not only put together a plan to counterbalance this but also to be ahead of
the curve of future corporate responsibility endowed to any large multi-national
corporation. Taking initiative before it is necessary is something M&S values in the
core principles. They are also willing to make this a priority as a company standard.
Started in 2007, Plan A is an eco-plan with 180 goals to achieve by 2015 to create a
sustainable company (Financial Statements 2012).
Plan A to-date has accomplished 139 of their 180 goals. CEO Marc Bolland is a top
15
believer in the benefits of Plan A. Bolland underlines that “good is not always easy
or the cheapest but it is well worth it and necessary” (M&S). Not only to save the
environment but Bolland sees it as the only way forward. M&S has understood the
difficulty that comes with some of the tasks. For instance, working with over 100
farmers on sustainability products becomes a very cumbersome task. However,
since the vision is so dynamic, it has had lots of attention and focus. Plan A has not
only been an eco-friendly push but also has generated financial benefit for the
company. In 2012, over £135 million were generated by Plan A initiatives.
Plan A was founded on 7 pillars:
•
•
•
•
•
•
•
Involved customers in Plan A
Make Plan A how we do business
Climate Change
Waste
Natural Resources
Fair Partner
Health and Wellbeing
Each pillar has had major achievements. To highlight, pillar one has made Plan A
a full circle market. Shwopping was launched in April 2012 for customers to donate
an item of clothing Oxfam to be resold. In return, customers receive a voucher to
use in the store. Since the launch, M&S has helped the environment by putting to
use 3.8 million shwopped items back into use while raising £2.3 million for Oxfam in
one year. This achievement achieved the successes that pillar one aims to
achieve by creating customer participation with corporate initiatives. Another
highlight and difficult achievement for M&S was under the fourth pillar. That is,
M&S sends zero waste to landfills from stores, offices, warehouses, and construction
activities. This fourth pillar is valuable for the environment. Waste – if not reused
or recycled – ends up in a landfill. Any value for the resource is forever lost.
From changes in packaging to carrier bags, M&S wants to ensure any waste that is
generated rejoins the circular economy of recycling. This achievement has
decreased total waste by 28 percent to 83,000 tones in 2012/13. Also, from 69,000
tones of waste sent to landfills in 2008/09, M&S now is proud to say zero waste was
sent to landfills. This does not stop with M&S operations solely. Another
commitment in this pillar to help suppliers reduce waste to zero waste sent to
landfills. Currently, 84 suppliers of M&S Food will not be sending any waste to
landfills. Obviously, M&S not only values a good public image for sustainability for
the next year but for the rest of future of the eco-system. With that said, Plan A is
16
designed not only to be trendy but because it is the only way forward.
To date, only one commitment has been cancelled (due to a product no
longer being available), four not achieved, and five behind plan. 139 plans have
been achieved – some that posed major obstacles – and 31 plants are on track for
full achievement in the estimated period. Overall, M&S has been able to create a
leap in the industry by recognizing and initiating an innovative plan to call all aspects
of sustainability in every level of the business and every corresponding component
that is attached to the business. This high level of performance and sustainability
has been recognized with over 100 awards since its launch in 2007.
Comments from the CEO
Today, M&S has not shifted from their initial principles. A top leader in
quality, M&S is the number one retailer, ahead of the competition in womenswear,
lingerie, and menswear in the UK (Financial Statement 2012). Current CEO Marc
Bolland has guides the company for roughly three years after climbing the corporate
ladder to CEO of Heineken NV. Bolland was appointed CEO after a rough season
for M&S. Nevertheless, Bolland has a strong plan for success. Consumer
confidence is still week in the major part of M&S market – the UK.
Emphasis on the UK market is important for M&S as 731 of their roughly
1100 stores are in the UK. In 2010, in the retail industry M&S operations accounted
for 668 stores and the highest sales revenue of its kind in the UK (Sparks). The
M&S operations in the UK nearly doubled the next leading competitor in the sector.
Bolland has a clear understanding of the business world.
As the material world is expanding at an unprecedented
pace, M&S wants to be part of this growth. Bolland
highlights that the customer and technology are moving
faster than the industry or retail. Initiatives like Plan A
is just one part of it.
Its expansion to 180 goals from
an original 100 is what Bolland sees as the importance
of the future.
Moreover, knowing what the supply chain is
doing on a vertical level while understanding consumers
on different horizontal classes and the future of the
material world connect the pieces for M&S to continue to
be a leader in the industry.
In the next era, 330 million Chinese people will join the
17
middle class. Consumers have a role model inspiration, similar to the American
dream. That is, status, desire, aspiration, and success are all pieces M&S has to
continue to provide to be a first class retailor and industry leader. Bolland
emphasizes the importance of knowing the business you conduct and the future it
holds. That is why, for Bolland, understanding supply chain management, initiating
strong corporate responsibility, following consumer needs, and informing any
individuals involved with M&S are all part of the way of doing business in todays
economy. “The fight is harder than before,” Bolland states but clarifies that, “the
game just started”.
Detailed Market Operations
M&S since its inception has kept ahead of the curve as a trendsetter
business and core influencer on the UK market and abroad. Analyzing up to the
2012 publication of their financial statements, M&S, specifically in the UK sector, is
an iconic and lifestyle brand. M&S reaches their clients with different channels and
specifically with retail locations. Currently, approximately 93 percent of the UK
population is within a 30-minute drive from a full line M&S store. Strategically
placed in the most convenient locations, M&S three markets – clothing, food, and
home – create the modern M&S name. Each market has a significant impact in the
UK and that ripples into the international community. Overall, M&S has built a
brand that clothes, feeds, and decorates people’s lives from a pair of socks to a large
dining room table for its customers.
Clothing
It is undeniable that the M&S endurance through very difficult seasons has
been lead by their ability to provide essential items. M&S clothing line was birthed
in one of the hardest times for the company – the Great Depression and has kept the
business alive during hard times until today. Currently, staple items are of major
value for M&S and the consumer concerns. M&S indicates that consumers are
looking for products with longevity, wearability and versatility. Especially with a
value conscious consumer, M&S understands that a top priority is for stylish pieces
that last beyond a season. As M&S is built on the principle of quality, their clothing
market has many reasons to be discussed. Since the first focus on clothing during
the Great Depression, M&S has always aimed to offer well-made products that are
affordable.
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M&S womenswear and lingerie is one of the most sought after products in
the UK market. Womenswear carries over 10 unique brands all fashions support
the markets segmentations and differentiations. For any style or budget, M&S
wants to offer quality clothing at affordable values. M&S clothing has kept quite
stable from last year’s sales; yet, M&S has maintained to be the UK market leaders
in these womenswear and lingerie. This is quite an achievement given the more
price conscious and value oriented consumer in the UK market. Personal financial
situations over the past 12 months in the UK have relatively stayed the same
(GFK). Further, in 2012, the general economic situation led many UK consumers to
be low in expectation for the future (GFK). With this in mind, M&S has had the
ability to face challenging conditions. M&S Womenswear in the UK has a 10.4
percent market share in 2012 while the lingerie market share for M&S products was
over 27 percent. Menswear has also been a major hit for the company. With
collaborations with top British tailors and designers, M&S has kept in fashion with upto-date wardrobes for the young adult to the professional manager. In the UK, M&S
in 2012 increased their market share to 12.1 percent in menswear. M&S menswear
offers a full range of products that suits almost every customer needs. Tailored to
different market segments, M&S has 7 sub-brands that include M&S Man.
Food
Food revenue alone accounts for over £4.7 billion of M&S total £9.9 Billion of
revenue in 2012. Definitively a major portion of the company’s sales and image,
M&S food offers high-quality, great value food that people enjoy. With major
competitors in the UK market like Tesco, M&S strategy for food sales is to gain a
larger market share over the years. Considering the value conscious consumer in
the UK, promotional strategies corrected increasing inflation and other macroeconomic factors. Trust, one of M&S core principles, becomes especially important
for value conscious buyers who want to assure themselves that they will get a great
product worth the price. Of course, major successes for the food market in the UK
was tea and biscuits. Also, customers had a large focus on healthy food that was
met with fresh, convenient, top-quality products. Overall, food business sales
increased and were impressive despite inflation pressure and value conscious
consumers.
Home
One important feature of M&S entire line is their home market. While this
market has been sluggish through 2012 with major furniture replacements being
postponed until needed, a major portion of the revenues came from smaller and
19
more up-to-date style accessories. Also, bedding, bath, dining, and kitchen items
performed strongly. M&S has taken a new approach to categorize and tailor new
segments for different markets within their home market. These segments include
classic, contemporary, and design. Focusing on easier updates and emphasizing the
time people spend at home, M&S home has seen a nasty slowdown due to value
conscious buyer. Restaurant-quality food with an attractive price, similar to M&S
clothing strategy, helped M&S. However, overall, a 10 percent drop in home in
2012’s annual report indicates it was still in decline. M&S also exited the technology
sector of the home market, which seems to have had a negative effect of the current
company’s market.
20
Company Overview
Incorporated in 1996 in Delaware, U.S ; Abercrombie & Ficth is an American
specialty retailer with three distinctive segments : U.S stores, international stores,
and direct-to-consumers (internet sales, websites). All segments sell a variety of
products that fall in these categories : casual sportswear apparel, including knit and
woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, and
outerwear; personal care products; and accessories for men, women and kids under
the Abercrombie & Fitch, Abercrombie kids, and Hollister brands. Additionally, the
company specializes in girls only products under the Gilly Hicks brand. Under this
brand, they offer both in stores and through websites the following items: bras,
underwear, personal care products, and sleepwear and at-home products.
The company has four different brands, each one of them embodying a
distinct heritage and expression. The four brands are: Abercrombie & Fitch –
Drawing from the East Coast traditions and from Ivy league heritage, the brand
accurately expresses privilege and casual luxury. Abercrombie Kids – Following in
the footsteps of Abercrombie & Fitch, this brand specifically concentrates on kids.
The distinc features are a combination of energetic design suitable for casual, classic,
as well as athletic styles. Hollister – Rooted in the Southern California lifestyle, the
brand is a direct reflection of the region’s beautiful beaches and hot lifeguards. The
laidback attitude that is typical of SoCal is directly reflected in the design of clothes.
Gilly Hicks – Inspired by the free spirit of Sydney, Australia, the brand specializes in
young, naturally beautiful, confident girls. Offering items such as bras, undies, and
other kinds of sexy lingerie.
The brands possess unique features appealing to different customers;
however, they all also share some common characteristics such as: classic, casual,
confident, intelligent, privileged while possessing a sense of humor. One key
business operation of Abercrombie & Fitch is their emphasis on in-store customer
21
experience. Aside from the regular channels of advertising such as the internet and
social media, the company considers in-store experience to be its primary means of
advertising. Capitalizing on the humans’ senses, the company diligently uses sight,
smell, touch, and hearing to convey the spirit of each brand. For example, when it
comes to Abercrombie Kids, the company will use fragrances specifically design to
appeal to kids, they may play current well-known kids music, use special fabrics, and
arrange the store and display the products in such a way as to convey the brand’s
juvenile spirit.
It is interesting to note the vibrant colors that are in display in the picture.
Although a variety of colors can be found throughout the store, we can clearly see
that both the colors pink and blue are the most noticeable. The two colors being
characteristics of boys (blue) and pink (girls). This is just one simple example of their
creative store and products display design. The company has standardized their
operations design and display, making it easy to expand and open new stores both
domestically and internationally.
22
Regarding the growth strategy of the company, they claim that it is entirely
based on international expansion. As such, the company as of 2013 has a total of
1051 stores both in the U.S and abroad. The following tables breaks down store
distribution by segment and brand for the past two years: Their focus on international
expansion maybe an explanation of why they decided to close stores in the U.S
market. We see a reduction of 34 U.S stores from 2011 to 2012, as the U.S is still
marked by slow recovery perhaps progressive disinvestment from the market makes
sense. They may have simply closed stores that were not meeting profit criteria in
comparaison to its costs and strategic potential, thus closure of such stores would be
a wise move since a major concern of all companies during this global recession is
to keep costs down. As stores closed, new ones were open internationally, a total of
40 international stores were opened. However, It appears that the company has not
chosen the best continent to be in at the moment as the majority of its sales happen
in Europe.
Although total sales have increased, the comparable stores segment
reporting has actually been negative for international stores. Demand for specialty
retailers apparel such as A&F does not seem to be strong, this low demand is just
one reflection of the European debt crisis as consumers sacrifice such goods during
hard times. Of great concern is the fact that the company has decided to expand in
the continent, up until now it has not been a good move and with the long term
recovery that is now characteristic of Europe, long term operations do not seem very
profitable. Only the upcoming annual report will reveal if perhaps management has
decided another strategic route. Perhaps the Asian continent should be considered
as many economies are now emerging and where per capita income is growing
considerably. However, one problem that may be of major concern for Asian
expansion, is the establishment of a successful distribution structure. As many
countries in the continent operate under a traditional distribution structure or import
oriented structure such as Japan. In such countries, laws protect the small retailer
and setting up shop is not easily done. Such countries are hard to expand on,
23
specially in the fragmented industry that seems to be characteristic of apparel
retailers. Perhaps maintaining a moderate presence in Europe while slowly planning
further long-term expansion both in Europe and Asian countries. Complemented with
the strategic reinforcing of the home market segment where A&F is actually doing
good and where brand awareness is at its highest, may well be the strategy that the
company needs.
Operations
Sales have gone up throughout the years. But in order to compare retailers
we have to look at same store sales (you can increase sales by opening more stores,
but can you increase sales without increasing expenses ?). Overall same store sales
went up 7% and 5% in 2010 and 2011 but they went down in 2012 by 1%. However
the company was recently efficient since their sales per square footage went up
since 2010, making more money for the available space that they have. As stores
went down total space increased up until 2012 resulting in more sales per square
feet, more efficient with available space. Their decrease was actually in Int’l sales in
2012 while U.S. stores’ sales actually increased by 1%. Int’l sales are about 27% of
total sales. Thus, in 2012 int’l sales are not doing as good as the previous two years,
they slowed down. Their online sales has almost increased by 75% (possibly
because of higher gaz prices, global and U.S. recession makes consumers be price
conscious) in the past three years while total sales has increase by 30% in the last
two years.
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Another evidence of price concious consumers (gross profit/net sales =
gross margin) is that gross margin has gone down by 2% . Gross margin has gone
down significantly from 2010 to 2011 probably due to pricing pressures in a weak
economy, however company improved gross margin slightly by reducing costs. In a
weak economy everybody does worse. Prices go up but COGS don’t go down as
much resulting in less profit. Due to the weak economy, the company has been
managing expenses well by : reducing stores and distribution expenses from a
total of 45.80 to 44.10 of the total sales. As a result on cost control, company has
increased operating margin from 6.8 to 8.3, also profit margin has increased.
Although in 2012 they are doing well, in the last two quarters they are barely
profitable. In 2013 some of the competitors are doing well, companies such as Gap
are doing well even in the last two quarters.
Company has managed its cash flow very well in the last three years by increasing
cash flow from operations from avg. of 10% of sales in 2010 and 2011 to 15% of
sales in 2012. However, due to increase in CAPEX, free cash flow did not increase
significantly. In 2012 there were alot of expenses in home office, distribution
centers and IT.
25
Of importance, CAPEX will not be as high during Fiscal 2013 (if
management is correct), thus free cash flow will have considerable boost, facilitating
business operations overall. Unfortunately, despite all the good measures that the
company seems to be taking, it is not performing well when compared to the S&P
Apparel Retail Index and and the S&P 500 Index. Business performance is critically
lower than the general apparel index, performing well below average. However, the
company is exhibiting slow continued growth since its lowest point back in 2009,
while this is positive, it also shows that catching up will be long and challenging.
Unless the company hits bull’s eye in a series of succesful market expansion on
stable and growing economies, it appears that the road will be a long one before the
company can perform above the market.
26
Company Overview
Pacific Sunwear of California, Inc., also known as PacSun, is a fashion retail
company based in Anaheim, California. The company was incorporated over 30
years ago in August 24, 1982. It was founded by Tom Moore, a great surf fanatic,
who opened his own small surf shop in 1980 at Newport Beach, California. Along
with a surfing buddy, Moore opened its first store at a mall nearby. Only six years
later, the company was already operating over 20 stores in the state of California
alone. By 1989, the company decided to expand further and operate outside of
California. Michael Rayden, the former head of the infamous clothing brand Eddie
Bauer based in Torrance, California, was named by PacSun as its first Chief
Executive Officer. After serving for six years as the CEO, he left the company for
another known retail brand and was replaced by Greg Weaver in 1996. This critical
event changed the company’s market objectives. Only a about 20 years since it was
incorporated, PacSun went on public in 1993 with almost 60 stores in and out of its
home state. And in year 1995, the higher management decided to add juniors’
clothing, jeans, and footwear (Biesada, 2013). In the rest of 1990s, the company has
grown even larger, with additional 50 stores almost every year.
During the late 1990s, the company decided to shift its target market to the
urban youth. Because of this, the company reinvented some of their new stores—
which they named d.e.m.o.—all inspired by hip-hop and urban fashion. Along with
the rising of these d.e.m.o. concept stores, PacSun opened their business for online
users. Eager to gain a great market share in the fashion retail industry, the company
was inspired to launch its own store credit card like its competitors. More than 20
years after it was founded, the California-inspired company has grown largely with
more than 800 stores in all 50 U.S. states including the U.S. territory Puerto Rico.
PacSun is considered to be a specialty retailer influenced by action sports, fashion,
and music inspired by the California lifestyle. The retailer sells a combination of
luxury brands ranging from proprietary apparel, accessories, and footwear. Their
products are catered to men and women, with teenagers as their target market.
Some of the premium brands that PacSun sell includes the following: Billabong,
Crooks and Castles, DC Shoes, Diamond Supply Co, Hurley, Neff, nike, Roxy,
RVCA, Vans, Volcom, and a lot more others. Aside from their main online shop
27
PacSun.com, the company also handles another website committed to the retailer’s
latest marketing campaign Golden State of Mind (Business Wire, 2012).
In response to its competitors and other fashion retailers’ entry to the shoe
industry, PacSun came up with the One Thousand Steps concept. This concept was
reflected in their new mall-based stores that featured nothing but shoes and
accessories for teens. The first three One Thousand Steps concept-based stores
were at the Galleria at Tyler in Riverside, California; Los Cerritos Center in Cerritos,
California; and at Mall of America in Minneapolis. According to the store design
director Ted Jacobs, “The goal was to achieve a balance between creating
something aspirational and completely new, yet comfortable and inclusive for the
wide swath of mall shopper…” (Kaufman, 2006). They didn’t want to design a store
that will bring about an environment totally estranged for they customers. Instead,
they upgraded their customer touch points through movable wall ladders to retrieve
merchandise in order for them not to lose contact and connection to their
customers—thus, maintaining their sales.
Many believed that these new concept stores—d.e.m.o. and One Thousand
Steps—were going to be growth vehicles for the company. However, soon after Seth
Johnson from Abercrombie & Fitch took over the position from then CEO Greg
Weaver in Novermber 2004, the company’s growth started to decline. Many were
shocked when only months after being recognized as PacSun’s new CEO, Seth
Johnson left the company. He was replaced by Sally Frame Kasaks in 2007. And in
the same year, the management decided to shut down its One Thousand Steps
stores—which only reached nine stores after its launch despite of people’s
speculation of having the potential to reach more than 800 store locations. PacSun’s
d.e.m.o. shops were also shut down, along with the company’s relocation of its
distribution center from California to Kansas (Biesada, 2013). With all of the changes
going on within the company, yet another critical phase was about to happen. In
June 2009, there was yet another transition in the CEO position—from Sally Kasaks
to Gary Schoenfeld. Schoenfeld was the former CEO of the well-known shoe and
apparel company Vans. Kasaks handed over the title to Schoenfeld with the belief
that his strong background in teen retailing will bring back the stability in the
company’s business operations.
Today, Schoenfeld still remains as PacSun’s President, CEO, and Director. His
Senior Vice President of Operations is Jonathan Brewer, while Michael Kaplan
serves as the Chief Financial Officer. The company’s biggest markets in the country
are California, Texas, and Florida with 93, 57, and 53 stores in each state
28
respectively. According to Hoover’s, Inc., these three states builds up more than a
quarter of the company’s total stores combined. PacSun has a total of 733 stores as
of 2012; and below is a table that shows the number of stores PacSun handles in
each U.S. state.
State
Number of Stores
Alabama
3
Alaska
3
Arizona
16
New Hampshire
6
New Jersey
21
New Mexico
6
New York
31
Arkansas
3
California
93
Colorado
15
North Carolina
18
Connecticut
5
North Dakota
3
Delaware
4
Ohio
25
Florida
53
Oklahoma
6
Georgia
13
Oregon
11
Hawaii
7
Idaho
3
Pennsylvania
38
Illinois
25
Rhode Island
1
Indiana
15
Iowa
6
South Carolina
9
Kansas
7
Kentucky
5
South Dakota
2
Louisiana
7
Tennessee
13
Maine
5
Maryland
17
Texas
57
Utah
10
Massachusetts
20
Vermont
2
Michigan
22
Virginia
23
Minnesota
15
Washington
22
Mississippi
4
West Virginia
5
Missouri
13
Wisconsin
15
Montana
2
Nebraska
4
Wyoming
1
Nevada
9
Puerto Rico
14
PacSun’s sales and profit has plummeted immensely in the past five years.
This precipitous drop in sales and profits can be attributed to the massive financial
29
crisis in the U.S. and around the globe in 2008. Ever since, the sales and profits of
the company has continued to decline up until the fiscal year of 2012. Being in the
negative side for five years in a row, this has a big implication to the future of the
Southern California company. The company sales decreased by 10% in fiscal 2012
compared to fiscal 2011; while the sales in the four years overall has declined by 42%
(Biesada, 2013). Some people believe that aside from the instability of the U.S.
economy in the past years, the ever-changing shopping behavior of PacSun’s
clientele is also to be blamed in the company’s plummeting sales. For instance, the
sales from the company’s women's department has continually been declining while
sales from the men’s merchandise remained flat (Biesada, 2013). According to
Hoover’s, Inc., PacSun reacted to the big decline in sales by chopping off a great
portion of their capital expenditures—from more than $100 million to $13 million in
the past four years alone. This counts up to almost a 90% cut in budget, yet the
company still demonstrates negative losses from sales.
Many are surprised and wonder how a company who demonstrated a really
fast-growing history can lead to a quick decline in sales and profits for years in a row.
One of the actions that company has taken in the past few years is closing down
more than 100 of their store locations—and still continues to downsize their lowestgenerating stores until today, while plans for any new locations are still far from
happening. Aside from shutting down most of their underperforming store locations
all over the country, the company is also looking forward to renegotiating many of
their lease agreements (Hoover’s, Inc.). However, the most crucial step that PacSun
is taking to overcome the continuation of sales and profits decline is the
strengthening of their brand overall by repositioning itself in the market. One of the
ways the company plans to achieve this is by catering to the needs to their current
shoppers.
PacSun is in the stage of expanding the footwear and accessories carried to
many PacSun stores across the country. This can be very valuable for PacSun since
it accounts for 14% of the company, down from 33% about 7 years ago (Biesada,
2013). Apart from this, the company is also looking forward to restrengthening their
market share by providing their women shoppers with quality customer service. For
example, the company is renovating their store fitting rooms, lighting, and displays
(Biesada, 2013). This is to coincide with the company’s main objective, which is to
reclaim their strong position in the apparel retail industry. Just recently, the retailer
hired the infamous Kardashian sisters Kendal and Kylie—17 and 15 years old
respectively—to introduce a new clothing line that is believed to attract the retailer’s
old teenage customers back to its stores. CEO Gary Schoenfeld says that he sees
33
the young designers as “entering the sweet spot of [their] target customer, and [they]
look at building a brand with them, not just creating a moment” (WWD, 2013).
These significant events signify how the company is counteracting the business
drawbacks they are facing in the market today, and how likely it is to survive the
competition. Led by Gary Schoenfeld, PacSun has recently acquired a $160 millionworth financing deal. According to Hoover’s, Inc., this financing deal provided the
company with $100 million in revolving credit and $60 million loan. This deal has a
great implication in terms of the company’s financial status—which will be discussed
later in the paper. Financially speaking, the California based retail company is
majorly owned by the family-run investment firm, GI2 Ltd. with 30% of the shares
(Biesada, 2013). In addition, the other two major stockholders of the company are
PS Holdings of Delaware and Adage Capital Management, who owns 20% and 15%
of the company stakes respectively. The top three competitors of PacSun are
considered to be: Abercrombie & Fitch Co., American Eagle Outfitters, Inc., and
Aeropostale, Inc. However, numerous other retail brands are strongly competing
against PacSun today such as the action-sports themed company Zumiez. With their
own strengths and weaknesses, these competitors nonetheless present a big threat
for PacSun.
SWOT Analysis
PacSun has been a great asset to the apparel industry—making a name for
itself in the competitive environment of fashion retailing over the past years. The
company demonstrated some business strategies that helped it rise above the rest.
However, due to the nature of the company’s business, there are also weaknesses
that PacSun needs to address in order to remain stable and efficient. It is important
that the company search for opportunities in the market in order to overcome any
threats that their competitors pose as well as that of the volatile economy and the
ever-changing buying behavior of the consumers. Below is a table of the strengths,
weaknesses, opportunities, and threats that affect the company overall according to
the DataMonitor Report in 2011:
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Strengths
• Company-owned brands complement
Weakeness
• Declining sales productivity
heritage brands and expand its product
portfolio
• Refined merchandise assortment
• Litigations tarnish company’s image
Opportunities
• New marketing initiatives
Threats
• Weak consumer spending in the US
• Growth in online markets to drive significant • Product sourcing costs may increase
market share gains
• Intense competition may erode the market
share
Strengths:
As mentioned earlier, PacSun is one of the few current fashion retailers in the
country to sell a massive collection of premier brands that cater the tastes of young
teenage Americans. Unknown to the majority, although PacSun sells products from
various brands, it has a great control over the production and distribution of all the
brands they carry in stores. According to the Datamonitor report about PacSun, the
company not only designs the products from each brand’s merchandise, but the
company also allocates budget in order to oversee the manufacture and the delivery
of these branded products. This strategic process allows the company to efficiently
maneuver the flow of its merchandise—making sure each product offered is of best
quality. The company is always seeking for true talents that will enable them to
showcase the latest fashion trends and maintain the quality of the proprietary brands
in line with that of the branded merchandise. One of the best business strategies of
PacSun is ensuring that the proprietary brands that it sells complement the heritage
brands currently being offered by the retailers. About 54% of the net sales in fiscal
year 2010 of the company is generated from the sales of its heritage brands, while
the other 46% is generated from its proprietary brands (Datamonitor, 2011).
Together, this combination of quality brands enables PacSun to offer a wide range of
products to its valued target market. And because of the wide range of selection
available to the consumers, PacSun is able able to broaden its customer base.
Another strength the company has over its competitors is its offering of
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refined merchandise assortment. In choosing the store locations of PacSun, the
management team carefully analyzes how it can group these stores so that each
cluster can function and operate relatively the same in terms of customer
segmentation and brand performance. The implications of the environment they are
in are also analyzed such as the weather and demographics. Through this, the
company is able to cater to the specific needs of each varying customers. For
example, if it were to be proven that the cold winter weather hits the East coast
before the West coast, so the company might want to sell more outerwear products
to the East coast first before making it available to the majority of stores in the West.
Through the right process of product adaptation over standardization, the company
is able to distribute the right products to the right stores, and to the right customers—
allowing the company to attract more customers and increase sales through higher
merchandise margins.
Weaknesses:
In the past few years, PacSun has shown a negatives sales productivity, and
there are a few factors that can attributed to this decline. Datamonitor (2011) states
that the retailer’s sales per square foot has declined by $92 from $350 in FY2008 to
$258 in FY2011—a decrease of about 26% in sales per square foot. Some of the
key factors that caused the decline is the “de-emphasis on the non-apparel category”
that started in 2008 (Datamonitor, 2011). Aside form the decline in sales per square
foot, the report also states that in FY2008 the sales of non-apparel category
accounted for more the 30% of net sales, while in FY2010 it has decreased to about
12% of the net sales. This huge sales decrease in a span of 2 years, in one category
alone, is very significant to the future state of the company. Even until today, the
company is still having a hardship of recouping from the financial crisis that hit the
United States in 2008, which changed the consumer attitude and behavior of
Americans. From 2008 to 2010, PacSun has lost a lot of sales opportunities due to
the massive decrease in sales of their accessories and footwear product categories.
One of the many ways the company could have solved this is by providing enough
marketing efforts to sell their proprietary and branded merchandise from their
accessories and footwear collections and preventing further decrease in any of the
product categories they sell.
Not only did PacSun not try to at least maintain its sales in the past years,
but further decline in other product categories they carry was eminent. For example,
the decrease in sales of the retailer’s denim category started to be evident in the
company’s reported FY2011. The denim category of the company is one of its
36
higher-priced products in the stores. Surely enough, the decrease in these premium
items can significantly account for a big share in the company’s overall sales. Even
though the denim sales of PacSun grew by about 10% of net sales from 2008 to
2010, the price-competitive business and “limited uniqueness in terms of fit or trend”
caused the growth of the company’s denim segment to destabilize, and eventually
lead to sales decline in denim by over 20% (Datamonitor, 2011). Had the company
played well in the competition amongst other denim retailers, a great sales decline
could have been prevented, or at least helped maintain the sales of the company.
These factors resulting to negative productivity lead to unfavorable business
decisions that will pressurize the company’s overall margins.
Just like other retailers, PacSun has faced multiple litigations that has
tarnished the company’s image to the public. Another example of this was a case
filed by its own store employees back in 2011, claiming that the company has
violated the California wage and hour overtime, meal break and rest break rules and
regulations (Datamonitor, 2011). This was not the first time that the company was
forced to face such a lawsuit. In the year prior, the company was also summoned to
court for similar violations, bur it was settled in early 2011. And like many other
litigations, it can impair the business operations of companies like PacSun due to its
lengthy arbitrations and the large amount of money needed in order to resolve such
cases. These litigations adversely affect not only the financial results of PacSun, but
more so its brand image overall. As a premium retailer that serves the younger
consumers, they are expected to by the public to maintain a good image in order for
the latter to gain confidence when shopping in their stores.
Opportunities:
For a company relatively new to the market, there are a lot opportunities that
PacSun can take advantage of in order to obtain higher sales profits. One of these
opportunities are new marketing initiatives. The company limits its marketing efforts
in-store, through creative content and promotional events. As mentioned earlier, its
most recent marketing campaign was the “Great State of Mind,” which was launched
in 2012 as a solution to its declining sales. This marketing campaign was expected
to run in almost all mass media like television, print, and mobile. The objective of this
particular marketing initiative was to emulate the newly enhanced merchandise
assortments in terms of potential, quality, and style (Datamonitor, 2011). A powerful
marketing campaign is key to connecting to its target market and is a great tool to
promote brand awareness. As perviously noted, the company recently collaborated
with the young Kardashian siblings who designed their own collection that will be
37
featured in almost all PacSun locations. This approach is meant to create an
excitement for the retailer and the many brands it carries that personifies the
California lifestyle. Being active in the market and continuously seeking ways to
connect to the consumers and survive the competition is key to the success of
PacSun in the coming years.
Aside from great potential in new marketing initiatives, the increasing online
market today is also important for a retailer like PacSun. Along wight he
advancement of technology are the changing preferences of methods of shopping by
consumers. For some, online shopping can be considered convenient, and in some
cases cheaper. This is why having an online shop for retailers—to some extent—is
mandatory. Through its own online shop, PacSun is able to reach a massive amount
of potential customers and serve them through the Web at a fairly relative costs.
Threats:
One of the threats that the company has been facing in the past couple of
years is the weak consumer spending of Americans in the U.S. The financial crisis
that occurred in 2008 not only affected the company’s financial for one, two, or three
years but more importantly, it affected the consumer spending behavior of most
Americans for a very long time. The employment rate and tight financial market
played an important role in this scenario. According to Datamonitor (2011), the
unemployment rate in the country has reached 9.4% in 2010. However, this rate has
quickly changed every month, causing it to go down, and back up again in 2011. The
report claims that in 2011, personal consumption expenditure grew at a very small
percentage from 2009 to 2010, while personal savings increased by almost 2% in
2010 (Datamonitor, 2011). At times like this, it is important that companies like
PacSun is able to forecast not only its future sales, but as well as the future of the
financial environment to which they are heavily reliant on.
Another factor that poses a threat in the company’s current and future
financial status is the probable increase in product sourcing costs. The recent trend
in increasing cotton prices greatly affects the costs that the company grants in the
production of most of its merchandise. Its lack thereof of manufacturing facilities only
makes it worse for the company, because this requires them to rely on independent
their party vendors. In addition, the company’s private label apparel products and its
branded products are mainly manufactured in China (Datamonitor, 2011). The short
supply of cotton is not helping the situation, and only makes things worse for both
manufacturers and retailers. This short supply of cotton was indirectly caused by the
38
financial crisis in 2008. Many consumers were tightening their budget for basic
commodity, so many cotton producers decided to chop of a great portion of their
cotton plantations—causing China’s cotton output to decline by about 15% to 6.4
million tons (Datamonitor, 2011). However, it cannot all be attributed to the financial
crisis in 2008, much of the problem can also be pointed to the major floods that
occurred in strong cotton producing countries such as Pakistan and Australia, as well
as the volatile weather conditions in China’s major cotton planting cities. If cotton
prices were to increase in the coming years in China, it can hit the company
adversely due to the possible high product sourcing costs it will create. And if the
problem persists in the future, PacSun will be left with no choice but to increase their
product prices; hence, it may lose all its loyal customers, especially those that are
price-sensitive.
Lastly, intense competition in the apparel industry makes it hard for PacSun
to gain a strong market share. Not only is PacSun competing with other clothing
retailers, it is also competing against small shops that specialize in accessories and
footwear. Their major competitors, however, still remains to be specialty retailers and
department stores that offer the same merchandise that PacSun sells. They compete
with these retailers and specialty stores in many aspects; for example, price, quality,
location, and customer service. These are some of the most important components
to give importance to when a business is competing with other major businesses.
The increasing number of competitors in the market today only makes it even more
complex and harder for PacSun to react and perform effective counteractions to the
competition.
Based on the SWOT analysis discussed above, the retailer PacSun has a great
potential to maintain its market share. With the proper business strategies and
effective planning, by utilizing its strengths and taking advantage of unique
opportunities, the company still has a chance to gain a greater market share than it
has now. Another key to their future success is their attitude and approach in
addressing their weaknesses and threats they may face as a business entity. Their
acknowledgment of their own weaknesses is a critical stage for them to minimize any
further mishaps. Making enough efforts in eliminating—if not preventing—any future
threats to the business can be very valuable to the success of the company in the
next coming years
39
Part 2
There are numerous similarities and differences in the way the financial
statements are presented by A&F, PacSun, H&M, and M&S that affect the image of
their financial report and financial status as a company overall. However, one
financial report stands out among the rest is M&S. Out of all the four companies,
M&S is the only retailer that serves the food and home market aside from clothing.
Also, it serves relatively larger territories compared to A&F, PacSun, and H&M. The
retailer is also very much involved in fulfilling massive social corporate responsibility.
40
Furthermore, M&S follow some non-GAAP measures not followed by the other three
retailers, making their financial statements a lot different from the others.
The two U.S. based companies A&F and PacSun are most commonly similar
since they both report under the US GAAP. However, major differences exists
between their financial statements, which affects their viewed financial position
overall. Both companies present their financial statements using the U.S. dollars,
while the foreign companies H&M and M&S use the Swedish krona (kr) denoted as
SEK and British pound (£), respectively.
For organizational purposes, the four companies are divided into two
subgroups: one group that follows the US GAAP, and another that follows the IFRS.
These two groups will then be compared and contrasted with one another since they
report under different reporting standards. Also, it is important to note that all
comparisons made are based from the group financial statements of all group
retailers. These group financial statements expresses the companies’ assets,
liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries
as a single economic entity.
Differences in units of measurement is present between these two groups.
A&F and PacSun present their financial statements in thousands of U.S. dollars,
while H&M and M&S present their financial statements in millions—in accordance to
their used reporting currency.
US GAAP: A&F and PacSun
Between the American retailers A&F and PacSun, a major distinction that
needs to made is the fact that PacSun sells hundreds of premium brands, as
opposed to A&F that only sells its own fashion brands. Although they are both
reporting under the US GAAP, there are still differences that exist within their
financial statements. For example, the buying and distribution costs of PacSun’s
premium brands are reported differently compared to A&F. Another major difference
between the two US GAAP reporting companies is the adjustment that A&F makes
related to foreign currency translation—which is irrelevant for a domestic company
like PacSun.
Presentation: Although both A&F and PacSun follow the same accounting
standards, the emphasis of their annual financial reports are different. One way of
determining particular items that the companies want to emphasize is by analyzing
41
their financial statements. The U.S. GAAP does not require companies to present
their financial statement in a specific order. One of the noticeable differences
between A&F and PacSun is the order of their financial statements. The income
statement is presented first by A&F, while PacSun presents the income statement
following the balance sheet. The focus of A&F might be to attract investors by
demonstrating the financial performance of the company through the income
statement. On the other hand, PacSun prioritizes in demonstrating the financial
status of the company by presenting the balance sheet first amongst the other
financial statements.
The three other statements outside the balance sheet shows three
comparative periods for A&F and PacSun, while H&M and M&S only shows two. For
A&F and PacSun, this allows them to demonstrate the trend in their financial position
in a larger picture, without overwhelming the readers of their respective financial
statements. One issue that these two retailers may face compare to the foreign
companies H&M and M&S is that the comparative information provided may be
considered outdated and does not represent the company’s actual financial position.
IFRS: H&M and M&S
Both foreign companies H&M and M&S follow the same accounting
standards in accordance to the IFRS. More importantly, these two retailers both use
the same version of IFRS. Considering the statements, the terminology is different
for each statement. This is not an issue as the words are used interchangeably with
the same definition. For instance, long-term assets are interchangeable with fixed
assets and non-current assets. Or, Consolidated statement of financial position is
used interchangeably with group or consolidated balance sheet. These differences
are not a major difference in the format of the financial statement. That is, both
companies use IFRS as adopted by the EU (IFRS adoption by country, 2012). This
indicates that from the outset, it is clear that both companies will have many
similarities in principle. The importance of this knowledge is notable.
Presentation: Considering the basis of accounting under both US GAAP and IFRS,
comparability between these companies is not jeopardized. Yes there will be
differences in practices; yet, this basis creates a synergy in the EU between nations
and businesses across borders. Again, differences will start to appear in practices
and valuation of clear financial position of the company to the public. Namely, under
IFRS, presentation requirements will give a fair presentation of the company (IFRS
compared to US GAAP, 2012). Thus, differences in valuation or categorization will
42
be dependent on the clearest presentation of the company’s financial position. With
this in mind, M&S and H&M both use different methodologies allowed under IFRS to
give a fair value representation of the company. These differences will be discussed
in detail following.
Further, in regard to overall information given in the financial statements, certain
components are identified and comparative information is given. Initially, with regard
to the structure of the financial statements, generally, these key points are identified
under IFRS requirement IAS 1.50 (IAS Plus, 2013):
•
•
•
•
•
•
The financial statements
The reporting enterprise
Whether the statements are for the parent or for the group
The date or period covered
The presentation currency
The level of precision (thousands, millions, etc.)
While already noting the first three points, the next three also presented under
H&M and M&S financial statements. The period covered is fiscal year 2012 for both
set of statements with comparative information from fiscal year 2011. The reported
period considered annually. Next, the presentation currency for H&M is the Swedish
Krona (SEK) and for M&S is the British Pound (£). The difference in the functional
currency coincides with the companies decision of what currency will be their
currency of presentation.
With H&M and M&S, both companies happen to use their home currency. That is,
both companies have used the headquarters national currency as the functional
currency. Reasons for choosing home currencies may well be that accounting is
heavily influenced by currencies as well as payments, taxes, collections, and
hedging. Therefore, the difference exists to best suit the company (H&M and M&S)
current operations. Following, both companies use a level of precision of million.
These requirements under IAS 1.50 are consistent throughout all the statements and
a major similarity that keeps accounting principles fulfilled. With regard to the
comparative information, under IFRS, only the preceding period is required (IFRS
compared to US GAAP, 2012). The major similarity with H&M and M&S is the
statements from the previous fiscal year are presented on the financial statements
and discussed in the notes. As IFRS mandates, this information, with regard to any
amounts reported, must be disclosed.
43
1. Presentation of Balance Sheet/Financial Position
Current Assets
A&F
PacSun
H&M
M&S
Cash and equivalents
Cash and cash
equivalents
Inventories
Stock-in-trade
Marketable securities
Restricted cash
Other financial assets
Accounts receivable
Receivables
Inventories
Trade and other
receivables
Tax receivables
Inventories
Prepaid expenses
Derivative financial
instruments
Other receivables
Deferred Income
Taxes
Other Current assets
Current tax receivable
Prepaid Expenses
Cash and cash
equivalents
Short-term investments
Other Current Assets
Liquid funds
The balance sheet demonstrates the financial position of a company. Out of
all the four companies, PacSun is the only one to present its balance sheet before all
other statements, followed by the income statement, shareholders’ equity, then cash
flows. On the other hand, A&F, H&M, and M&S all prioritizes their income statement
over the balance sheet, share holders’ equity, and their respective cash flows. This
might be significant for an investor who’s priority might be the financial position of the
company, or its financial performance.
The table above shows the accounted current assets by all four companies.
At a glance, it is noticeable that not all four companies have the same listed items
and each common item they present are not listed in the same order. More
specifically, the U.S. based companies A&F and PacSun show a greater
resemblance than the other two foreign companies H&M and M&S. Both A&F and
PacSun start their current assets with Cash and cash and cash equivalents, while
H&M starts with Inventories and M&S with Stock-in-trade. These already present a
major difference in terms of their overall presentation of the current assets alone.
Through this, we can infer the similarities and differences between US GAAP and
IFRS, and how it can affect the perceived orientation of the company when it comes
44
to assets and liabilities.
If IFRS requires companies like H&M and M&S to present a classified
statement of financial position, the US GAAP does not necessarily have such a
requirement in presenting unclassified statement of financial statement. The order to
which all four companies present their current assets in particular also varies. The
US GAAP requires that all companies list their assets in a specific order. This order
starts with the current assets, followed by non-current assets. On the other hand,
companies that file under IFRS have no specified requirements regarding their
assets’ order of liquidity. As required, American companies A&F and PacSun present
their current assets before non-current assets, while H&M and M&S prioritizes the
presentation of their fixed or non-current assets over their current assets. There are
some advantages and disadvantages of presenting current assets before noncurrent assets; some investors might be more apt to invest in A&F or PacSun if the
first thing they see is the amount of cash or cash equivalents, receivables, or
inventories that the company currently possess, as opposed to other investors who
might invest in H&M or M&S because it shows that they prioritize the value of their
long-term assets over current assets.
Since H&M and M&S both follow the same standards under the IFRS, they
are allowed to report their assets and liabilities more broadly than A&F and PacSun,
so as long as it provides reliable and more relevant information (KPMG 3.1).
Consequently, US GAAP has no restrictions as to when A&F and PacSun can
provide information regarding unclassified statement of financial position. This poses
a major difference between the two groups; one has more flexibility to report certain
information based on their own discretion, while the other has to follow certain
restrictions and can only justify the amount they provide through disclosures.
One major difference in the reporting of currency assets involves the
inventories in particular. Under no circumstances are inventories allowed to be
valued using LIFO inventory costing for companies following IFRS. IAS 2 strictly
states that LIFO is not perceived as an acceptable method of managing inventory.
Thus, the only methods acceptable for H&M and M&S are the FIFO and weighted
average inventory costing methods. Under the US GAAP, retailers like A&F and
PacSun are able to use the LIFO method in addition to the FIFO and weighted
average method that they are allowed. Hence, A&F and PacSun are given more
liberation in terms of their inventory management under the US GAAP. Another
distinction to be made between the American companies and foreign companies is
45
the reporting of their inventories. If the US GAAP requires that all inventories be
reported at the lower of cost or market (LCM), the FIRS require companies to report
their inventories at the lower of cost or net realizable value (IAS 2). This causes a
major difference in the reported value amounts for inventory by A&F and PacSun
versus H&M and M&S. Furthermore, a difference exists in the reversal of writedowns in inventories. The US GAAP requires that all write-downs to market cannot
be reversed should the replacement costs increase, while the IFRS mandates writedowns to be reversed if the selling price increases. Depending on the plausible
changes in replacement costs and selling price, the four companies are likely to
report varying amount of inventories. Overall, these major differences affect the
reporting of a specific amount of inventories under the current assets by A&F,
PacSun, H&M, and M&S.
Aside from inventories, there is also a notable difference in the reported
marketable securities by all four companies. Under US GAAP, marketable securities
are grouped into three categories: (1) trading, (2) available for sale, (3) and held to
maturity. The available for sale (AFS) securities are measure at fair value like IFRS.
However, loans held-for-sale are only measured at the lower of cost and fair value
under the US GAAP (KPMG 7.6). In addition, if the fair value of available-for-sale
changes, it needs to be recognized in other comprehensive income.
Non-current Assets
A&F
PacSun
Property and equipment, Property and equipment,
net
net
H&M
M&S
Brands, Note 11
Intangible assets
Non-current marketable
securities
Deferred income taxes
Customer relations,
Note 11
Property, plant and
equipment
Other assets
Other assets
Leasehold rights,
Note 11
Investment property
Capitalised expenditure,
Note 11
Investment in joint
ventures
Buildings and land,
Note 12
Other financial assets
Equipment, tools,
fixtures and fittings,
Note 12
Retirement benefit asset
46
Long-term receivables
Trade and other
receivables
Deferred tax
receivables, Note 10
Derivative financial
instruments
One notable difference between the companies that report under US GAAP
and those that report under IFRS is the amount of items they report as non-current
assets. The third item that the first two companies both report—Other assets—gives
them the flexibility to minimize their reported items under non-current assets. This
does not only help the aesthetic simplicity of their financial statements, but it also
allows them to disclose more information as to what other assets they account for in
this specific item. Although both US GAAP and IFRS requires that property, plant
and equipment be initially recognized at cost, it is noticeable that out of all the four
companies, H&M is the only one that separates its properties from plant and
equipment.
There are similarities and differences that exists between the US GAAP
reporting companies and those that report under IFRS when it comes to property,
plant and equipment. Both accounting standards require all four companies to
initially recognize property, plant and equipment at cost—including all direct
expenditures related to “bringing the asset to the location and working condition for
its intended use” (KPMG 3.2). Also, all of the four retailers are required to add or
deduct any changes in restoration obligation from the cost of the related asset. It is
also a requirement for the companies to depreciate any property, plant and
equipment over its expected useful life. Despite of all the similarities in reporting
plant, property and equipment by the four companies, differences in business
operations and accounting standards also exists, affecting their reported non-current
assets.
Because each companies conduct business under different environmental
circumstances, it affects the way each company reports their financial status. Both
US GAAP and IFRS require that cost of property, plant and equipment to include the
dismantling and removing of asset and certain costs of restoring it. The difference is
that the US GAAP forbid the capitalization of costs related to environmental
remediation (KPMG 3.2). Also, US GAAP states that the estimates of useful life and
residual value, and method of depreciation can only be “reviewed when events or
changes in circumstances indicate that the current estimates or depreciation method
are no longer appropriate” (KPMG 3.2). Due to the varying nature of their businesses,
47
certain events can affect the way plant, property and equipment are reported in their
financial statements. In addition, the revaluation of this particular item is revalued at
fair value under IFRS—if measured reliably. On the other hand, the US GAAP
forbids the revaluation of property, plant and equipment.
The table above demonstrates how simple the reported non-currents are
under US GAAP compared to those under IFRS. The foreign companies H&M and
M&S report other specific items as fixes assets including customer relations,
retirement benefit asset, deferred tax receivables, investment in joint ventures, and
derivative financial instruments. These items boosts the total amount of assets in the
financial statements of H&M and M&S. However, their flexibility in reporting other
assets are constrained, unlike A&F and PacSun.
Current and Non-current Liabilities
A&F
PacSun
H&M
M&S
Current Liabilities:
Current Liabilities:
Long-term Liabilities:
Current Liabilities:
Accounts payable
Accounts payable
Provisions for pensions,
Note 18
Trade and other
payables
Accrued expenses
Other current liabilities
Deferred tax liabilities,
Note 10
Borrowings and other
financial liabilities
Deferred lease credits
Long-term Liabilities:
Current Liabilities:
Partnership liability to
the Marks & Spencer UK
Pension Scheme
Income taxes payable
Deferred lease
incentives
Accounts payable
Derivative financial
instruments
Long-term Liabilities:
Deferred rent
Tax liabilities
Provisions
Deferred lease credits
Long-term debt
Other liabilities
Current tax liabilities
Leasehold financing
obligations
Other long-term liabilities
Other liabilities
Accrued expenses and Non-current Liabilities:
prepaid income, Note 20
Retirement benefit deficit
Trade and other
payables
Borrowings and other
financial liabilities
48
Derivative financial
instruments
Provisions
Deferred tax liabilities
Compare to the other three companies, H&M is the only one that begins their
liabilities with current liabilities. The Swedish based company starts off its liabilities
section with long-term liabilities followed by current liabilities. However, M&S also
stands out from the other three companies in terms of the number of items it reports
under current and non-current liabilities. The other three company also has a
separate item recognizing accounts payable, while M&S combines trade payables
with other payables. Doing so increases not only the monetary value of “payables” it
reports, but it also gives the company the discretion to report “other” payables.
There is also a difference to be pointed out when it comes to provisions,
which both the foreign companies report under their liabilities section. The table
above shows that H&M accounts for provisions for pensions under its long-term
liabilities, and plain provisions for M&S in the same category. If the U.S. companies
would have reported a provision and contingencies in their balance sheet, there
would have been a difference in the context of reporting such items. The IFRS
requires a provision—legal or constructive obligation—to be recognized if and only
“probable outflow of resources and the amount can be estimated reliably” (KPMG
3.12). Under IFRS, “probable” is used in the context meaning “more likely than not,”
compared to the US GAAP’s use of “probable” as “likely to occur.” This would have
given A&F and PacSun a higher recognition threshold compared to H&M or M&S.
Unlike H&M and M&S, A&F and PacSun do not present any item relating to
tax liabilities. The foreign companies report deferred and current tax liabilities both in
their current and non-current liabilities. This makes a huge difference in the
presentation of the companies’ financial position. For an American investor, tax
liabilities might be perceived as something negative. Whether A&F and PacSun have
tax liabilities or not, it can affect the way the readers of their financial reports
perceive the company overall.
Another item that differentiates the U.K. based company M&S from all the other
retailers is the “Partnership Liability to the Marks & Spencer UK Pension Scheme” it
49
reports under its current liabilities. As noted, M&S is a big English company that is
involved in many other types of businesses. This item roots from the limited partner
of M&S Scottish Limited Partnership, the Marks &Spencer UK Pension Scheme.
Their limited partnership gives the Pension Scheme an entitlement to millions of
pounds yearly from the profits of the partnership, which is earned mainly from rental
income. Evidently, accounts such as this greatly affects the total amount of liabilities
a company reports in their balance sheet.
Shareholders’ Equity
A&F
PacSun
Class A common stock
Preferred stock, $0.01
— $0.01 par value:
par value; 5,000,000
150,000 shares
shares authorized; 1,000
authorized and 103,300
shares issued and
shares issued at each of outstanding, respectively
February 2, 2013 and
January 28, 2012
H&M
M&S
Share capital, Note 17
Issued share capital
Paid-in capital
Common stock, $0.01
par value; 170,859,375
shares authorized;
68,092,639 and
67,511,468 shares
issued and outstanding,
respectively
Reserves
Share premium account
Retained earnings
Additional paid-in-capital
Retained earnings
Capital redemption
reserve
Accumulated other
comprehensive (loss)
income, net of tax
Retained earnings
Profit for the year
Hedging reserve
Treasury stock, at
average cost — 24,855
and 17,662 shares at
February 2, 2013 and
January 28, 2012,
respectively
Other reserve
Retained earnings
50
Non-controlling interests
in equity
Comparing the equity of the American companies A&F and PacSun, the
table above shows that while PacSun offers preferred and common stock, A&F is
involved in issuing Class A common stock and Treasury stock. It is also notable that
PacSun has a lot more authorized, issued and outstanding shares compared to
those of A&F’s. A great similarity between all four retailers is their reporting of
retained earnings. If A&F and PacSun both reports paid-in capital and/or additional
paid-in capital, it can be considered equivalent to the “Reserves” and/or “Capital
redemption reserve” items reported by H&M and M&S, respectively. Also, out of all
the four companies, only M&S reports a “hedging reserve” and “non-controlling
interests in equity.” There is no difference in classifying non-controlling interest within
equity. According to KPMG, just like in the IFRS, non-controlling interest are
classified within equity. However, these controlling interests needs to be separated
from equity that is “attributable” to the parent company’s shareholders (KPMG 7.3).
This signifies a major difference in shareholders’ equity in comparison to the other
three retailers that does not report any non-controlling interests under equity.
Regarding H&M’s Group balance sheet and M&S’s Consolidated statement
of financial position, under IFRS no prescribed format is required (IAS plus, 2013).
With that said, one major difference in calculation practice exists that dictates the
aesthetic and format of the statement. To note, the three main components are
included in both H&M and M&S’s statement (assets, liabilities, and equity).
Concerning the equation for these three, the actual calculation is exactly the same
but the use of these values to balance is different. To illustrate, H&M’s balance sheet
balances by adding total equity and total liability to equal total assets (total equity +
total liability = total assets). For M&S, total liabilities are subtracted from total assets
to equal net assets. Then, net assets balances with total equity (total assets-total
liabilities=net assets and net assets=total equity). This does not affect categorization
or more importantly, the actual numbers. This major difference shows that H&M and
M&S balance their statements differently. There are multiple reasons why M&S
would take a net assets equals total equity approach rather than total equity and
liability equals total assets.
One thing that M&S could be looking to accomplish is showing investors a
clear indication of the health of the company (McClure, 2013). By clearly indicating
51
net assets, M&S is showing the public there is plenty of cash available. Cash
available shows the company will be able to deal with tough times (McClure, 2013).
More so, M&S shows its investors the amount of total assets it possesses over
liabilities. This indicates a strong health for investors. The connotation around net
assets equaling total equity is a positive implication. Considering this information,
H&M includes all the same information but the format is different and main pieces of
information are emphasized differently. Plus, the M&S’s consolidated statement of
financial position aesthetically is one column with line items throughout. As for H&M,
the group balance sheet is divided into two columns with assets on one side and
liabilities and equity on the other side. The reasons for this difference may be many;
but overall, one conclusion drawn from this analysis would be that readability and
understandability. H&M’s group balance sheet shows an aesthetic balance between
the three main components of the balance sheet.
2. Presentation of Income Statement/ Comprehensive
Income/Earnings/Operations
A&F
Consolidated
Statements of
Operations and
Comprehensive Income
PacSun
Consolidated Statement
of Operations and
Comprehensive
Operations
H&M
Group Income
Statement & Group
Statement of
Comprehensive Income
M&S
Consolidated Income
Statement &
Consolidated Statement
of Comprehensive
Income
Net sales
Net sales
Sales including VAT
Sales excluding VAT
Revenue
Cost of goods sold
Cost of goods sold,
including buying,
distribution and
occupancy costs
Cost of goods sold
Operating profit
- Finance income
- Finance costs
Gross profit
Gross margin
Gross Profit
Profit before tax
Selling, general and
administrative expense
- Selling expenses
- Administrative
expenses
Income tax expense
-
-
Store and
distribution
expense
Marketing,
general and
administrative
expense
Other operating
exp. (income),
52
net
Operating income
Interest expense, net
Operating loss
- Loss on
derivative
liability
- Interest
expense, net
Operating Profit
Income from cont.
operations before taxes
Loss from continuing
operations before
income taxes
Interest income
Interest expense
Profit for the year
-
Equity
shareholders of
the Company
Non-controlling
interests
Basic earnings
per share
Diluted earnings
per share
Tax expense from
continuing operations
Income taxes
Profit after financial
items
Non-GAAP measures:
Underlying profit before
tax
Net income from
continued operations
Loss from continuing
operations
Tax
Adjusted for:
- Profit on
properly
disposals
- IAS 19 Ireland
one-off pension
credit
- IAS 36
Impairment on
assets
- IAS 39 Fair
value movement
of financial
instrument
- IAS 39 Fair
value movement
of embedded
derivative
- Strategic
53
programme
costs
Income from
Income (loss) from
Profit for the year
discontinued operations, discontinued operations,
net of tax
net of income taxes
Underlying profit before
tax
Net Income
Net loss
Earnings per share
Number of shares
Underlying basic
earnings per share
Net income per share
from cont. operations:
Comprehensive loss
COMPREHENSIVE
INCOME:
Underlying diluted
earnings per share
Basic
Diluted
Loss from continuing
operations per share:
Basic and diluted
Profit for the year
Profit for the year
Net income per share
from discontinued
operations:
Basic
Diluted
Loss from discontinued
operations per share:
Basic and diluted
Other comprehensive
income:
- Translation
differences
- Change in
hedging
services
- Tax attributable
to change in
hedging
services
Other comp. income:
- Foreign
currency
translation diff.
- Acturial
(losses)/gains
on retirement
benefit schemes
- Tax on
retirement
benefit schemes
- Cash flow and
net investment
hedges
o fair value
movements
in equity
o reclassified
and
reported in
54
-
net profit
o amount
recognized
in
inventories
Tax on cash
flow hedges and
net investment
hedges
Net income per share:
Basic
Diluted
Net loss per share:
Basic and diluted
Other comprehensive
income
Other comprehensive
(loss)/income for the
year, net of tax
Weighted-average
shares outstanding:
Basic
Diluted
Weighted-average
shares outstanding:
Basic and diluted
Total Comprehensive
income for the year
Total comprehensive
income for the year
Dividends declared per
share
Equity shareholders of
the Company
Other comprehensive
income (loss):
- Foreign
currency
translation
adjustments
- Gains (Losses)
on marketable
securities
- Unrealized gain
(loss) on
derivative
financial
instruments
- Other
comprehensive
Non-controlling interests
55
(loss) income
One major difference between the four companies is that they all do not start
with Net Sales like A&F and PacSun. The Swedish based company H&M begins its
income statement with Sales including VAT while the U.K. based retailer M&S starts
its statement with Revenue. H&M is the only company to show sales with VAT or
value-added tax. This type of tax is added when the value is added to a product.
Every time value is added, it is taxed bit by bit. This type of tax are present in some
other countries like Sweden, but not in the United States nor in the U.K. However,
H&M also shows its sales excluding VAT, allowing some room for comparison in
actual number with the other three retailers.
Out of all the four companies, PacSun is the only one without a subcategory
for comprehensive income. All of the other three retailers report a foreign currency
translation adjustments, an integral part of their business. Since PacSun is a
domestic company and does not operate abroad, these foreign currency translations
do not apply to the company. Furthermore, because A&F conducts business
internationally, its financial statements include items that are not provided in the
financial statements of PacSun. Some of these related items include: foreign
currency translation adjustments, gains on marketable securities, and unrealized
gain on derivative financial instruments.
Another thing that differentiates PacSun among the other retailers is that it is the
only one that shows a negative income or net loss for the year. A non-GAAP
measure is defined by the SEC as a “numerical measure of a registrant’s historical or
future financial performance, financial position or cashflows that (U.S. Securities and
Exchange Commission Website):
• Excludes amounts, or is subject to adjustments that have the effect of
56
excluding amounts, that are included in the most directly comparable
measure calculated and presented in accordance with GAAP in the statement
of income, balance sheet or statement of cash flows (or equivalent
statements) of the issuer; or
• Includes amounts, or is subject to adjustments that have the effect of
including amounts, that are excluded from the most directly comparable
measure so calculated and presented.
Amongst all the companies listed in the table above, M&S is the only company to
show and report non-GAAP financial measures. One possible reason why M&S
reported such an item is to provide more useful insight for investors. If an investor is
interested in investing a lot of money in a company, he or she will be willing to be
provided with more useful information, most especially when it comes to the future
financial performance or financial position of the company. This gives M&S the
advantage over the other reporting companies.
Among the four companies, only one does not recognize cost of goods sold in
their income statement—M&S. The item cost of goods sold in the income statement
is listed down differently by PacSun. This difference stems from the structure of their
company’s operations. Although A&F sells different brands, all of these brands are
produced and manufactured by the company itself. On the other hand, PacSun
carries inventory from hundreds of top outsider brands like Billabong, Volcom, and
Hurley amongst others. Acquiring these branded merchandise requires PacSun to
include numerous expenses into the value of the products they sold. Due to the
nature of their business, PacSun includes buying, distribution, and occupancy costs
in computing their “cost of goods sold” while A&F separates their expenses from
stores and distribution from the COGS item.
Other Operating Expense: Operating expenses generally include selling, general,
and administrative costs. In comparing the income statements of A&F and PacSun,
the California lifestyle clothing company PacSun combines all three components of
operating expenses in one line, whereas A&F separates all operating costs into three
different items. These items are (1) stores and distribution expense, (2) marketing,
general, and administrative expense, and (3) other operating expense. There are
pros and cons in using both methods used by the two companies. For example,
PacSun’s potential or current investors might want to gain insight as to what expense
item costed the company more--whether it is from selling, a general expense, or an
administrative cost. In the case of A&F, the inexperienced readers of financial
57
statements might ask what other expenses are accounted for as “other operating
expense” aside from the selling, general, and administrative expenses that the
company has already subtracted from the gross profit to calculate the operating
income. Looking at A&F’s income statement, its “other operating expense” actually
turns out to be negative, thus, it adds to A&F’s operating income. This might be a
strategy used by A&F to show its investors small ways that the company is still
making money.
Net Income/Loss: One of the key differences between the overall presentation of
the income statement of A&F and PacSun is typography--particularly their use of ‘all
caps’, and repetition. For investors, the word “income” alone is very significant and
can mean everything, as well as the word “loss.” Looking at PacSun’s financial
statement, the word “loss” is very much visible, which can potentially catch the
readers’ attention instantly--in a negative way. However, PacSun redirects the
readers’ attention to the simplicity of the financial statement and avoiding the use of
capital letters to overemphasize such losses. On the other hand, A&F uses all capital
letters to emphasize that the company is gaining income from all of its continuing
and discontinued operations. For most investors, some of the key words in a
financial statement are “income” and “losses,” and the ways of presenting them in a
financial statement can be critical.
Basic and Diluted Shares: In an income statement, the earnings per share from
continued and discontinued operations, and weighted-average shares outstanding
are categorized into two components: basic and diluted. PacSun presents these
earnings (losses) per share by adding both basic and diluted earnings per share in
one line, while A&F separates the each basic earnings per share from the diluted
earnings per share. Although combining the two might look simpler and pleasing to
the eye, A&F might have an advantage for separating them as some investors might
be interested in their respective amounts. However, combining the two might also be
advantageous for PacSun as these earning per share all result to losses. The
company might not want to emphasize their losses from both basic and diluted
shares.
3. Presentation of Statement of Cash Flows
Cash Flows from Operating Activities
A&F
Net Income
PacSun
Net loss
H&M
Current operations
- Profit after
58
M&S
Cash generated from
operations
-
financial items
Provisions for
pensions
Depreciation
Tax paid
Impact of other
operating activities on
cash flows:
- Depreciation
and
Amortization
- Non-cash
charge for asset
impairment
- Less on
disposal/writeoff of assets
- Lessor
construction
allowances
- Amortization of
deferred lease
credits
- Deferred taxes
- Share-based
compensation
- Tax benefit
(deficiency) from
share-based
compensation
- Excess tax
benefit from
share-based
compensation
- Auction rate
securities (gain)
loss
Adjustments to reconcile Cash flow from changes Income tax paid
net loss to net cash
in working capital:
provided by operating
- Current
activities:
receivables
- Depreciation
- Stock-in-trade
and amortization
- Current liabilities
- Asset
impairment
- Non-cash stockbased
compensation
- Amortization of
debt discount
- Loss on
disposal of
property and
equipment
- Loss on
derivative
liability
- (Gain) loss on
lease
terminations
Changes in assets and
liabilities:
- Inventories
- Accounts
payable and
accrued
expenses
Change in assets and
liabilities:
- Inventories
- Other current
assets
- Other assets
- Accounts
59
-
Income taxes
Other assets
and liabilities
-
payable
Other current
liabilities
Deferred lease
incentives
Deferred rent
Other long-term
liabilities
Based on the table shown above, M&S surprisingly only has two items
reported under its operating activities—cash generated from operations and income
taxes paid. If an investor was to compare all four financial statements, more
specifically the cash flows from operating activities, he or she will be more inclined
with the company that provides more detailed items and numbers along with them. It
is even more surprising that companies as big as H&M and M&S has much less
reported items than a relatively smaller-size company like PacSun. If A&F and
PacSun both starts their cash flows from operating activities with net sales and/or net
loss, H&M begins with current operations, while M&S starts with cash generated
from operations. In this case, M&S is considered to have the most disadvantage
among all of the four retailers in terms of presenting useful information through
financial statement of cash flows to potential investors. The retailer does not specify
any operations at all that generated cash for the company. For investors, numbers is
only half of what needs to be presented in financial statements, especially for large
companies as big as M&S.
A&F and PacSun’s operating activities and changes in assets and liabilities
categories are nearly identical, A&F reports more operating activities that impact the
cash flows such as Deferred taxes, Share-based compensation, Tax benefit
(deficiency) from share-based compensation, Excess tax benefit from share-based
compensation, and Auction rate securities (gain) loss. The more operating activities
a company has, the more it affects the cash flows of the whole company. Also, A&F
simplifies all its changes in assets and liabilities by combining current and noncurrent assets and liabilities in one item, unlike PacSun. Simplifying certain related
items is one way of organizing the financial statement in order to avoid any
miscellaneous and random listing of items. However, specifying these assets and
liabilities as non-current or long-term is beneficial for PacSun, because they are able
to prevent any confusions or misinformation in presenting information or numbers
worth of millions to potential investors.
60
Cash Flows from Investing Activities
A&F
PacSun
H&M
M&S
Capital Expenditures
Purchases of property
and equipment
Investment in leasehold
rights
Purchase of property,
plant and equipment
Purchase of trust-owned
life insurance policies
Restricted cash
Investments in other
intangible assets
Proceeds from sale of
property, plant and
equipment
Proceeds from sales of
marketable securities
Proceeds from
insurance settlement
Investment in buildings
and land
Purchase of intangible
assets
Investment in equipment
Purchase of current
financial assets
Change in short-term
investments, 4-12
months
Interest received
Other investing
Other investments
Due to their unique business operations, all four companies have different
investing activities that affect their cash flows. Both PacSun and M&S report their
purchase of property, plant and equipment. For an investor or a reader of their
financial statements, this item could mean a lot. It could mean that the company is
doing a long-term investment related to an expansion or development of the
company’s business operations overall. However, H&M also demonstrates its longterm orientation in terms of investing by investing in buildings and land and
equipment.
Out of all the four companies, A&F and H&M are the only companies to
report its investing activities more broadly than the other three by including an item
for “other investing.” A&F emphasizes its proceeds from sales of marketable
securities and purchase of trust-owned life insurance policies, while PacSun focuses
on reporting its proceeds from insurance settlements.
Cash Flows from Financing Activities
A&F
PacSun
H&M
M&S
Proceeds from sharebased compensation
Proceeds from credit
facility borrowings
Dividend
Interest paid
61
Excess tax benefit from
share based
compensation
Payments under credit
facility borrowings
Case (outflow)/inflow
from borrowings
Proceeds from
borrowings under credit
agreement
Proceeds from senior
secured term loan
Repayment of
syndicated bank facility
Repayment of
borrowings under credit
agreements
Payments for debt
issuance costs
Issue of medium-term
notes
Purchase of common
stock
Proceeds from mortgage
borrowings
Redemption of mediumterm notes
Dividends paid
Principal payments
under mortgage
borrowings
Monetisation of
derivative assets
Change in outstanding
checks and other
Principal payments
under capital lease
obligations
Decrease in obligation
under finance leases
Proceeds from exercise
of stock options
Payment of liability to
the Marks & Spencer UK
Pension Scheme
Equity dividends paid
Shares issued on
exercise of employee
share options
Purchase of own shares
by employee trust
Out of all the three sections of the statement of cash flows, the financing
activities category is the most surprising. H&M is the only company to report not
three or two, but one financing activity in its cash flows—Dividend. This may or may
not mean a lot for an investor. For an investor who is more interested in a business’s
financing activities than operating or investing activities, H&M might not be a great
choice to invest in. He or she might be more apt to invest in a company like M&S,
who reports ten more financing activities than H&M. Speaking of dividends, PacSun
also makes a statement in comparison with the other three companies. Not only
does PacSun show a net loss in its income statement, but it is also the only company
among the four to not report any dividends paid. Dividends are very significant for
investors. It serves as an incentive for them to invest more if they get back more
62
from it. PacSun’s lack of reporting in dividends paid to its stockholders can partially
be attributed to the constant massive losses that the company has been facing in the
past years.
As mentioned earlier, M&S takes into account its liability to the Marks &
Spencer UK Pension Scheme. The company considers it to be a financing activity
that affects their overall cash flows. With millions of pounds involved, this greatly
affects the total financing cash flows of the company M&S relative to the other three
companies. This, however, can be an advantage for M&S, because it shows that it is
able and willing to pay millions of pounds to its partner, as a commitment to their
partnership, for the development of the overall company.
Other Cash Flows
A&F
PacSun
H&M
Effect of exchange rates Net decrease in cash
on cash
and cash equivalents
- Cash and cash
equivalents,
beginning of
year
M&S
Liquid funds at
Net cash (outflow)/inflow
beginning of the financial from activities:
year
- Effects of
- Cash flow for
exchange rate
the year
changes
- Exchange rate
- Opening net
effect
cash
Net increase (decrease) Cash and cash
Liquid funds at the end
in cash equivalents:
equivalents, end of fiscal of fiscal year
- Cash and
years
equivalents,
beginning of
period
Closing net cash
Cash & equivalents, end Supplemental
of period
disclosures of cash flow
information:
- Cash paid for
interest
- Cash paid
(refunded) for
income taxes
Opening net debt:
63
Significant non-cash
investing activities:
- Change in
accrual for
construction in
progress
Supplemental
disclosures of non-cash
transaction:
- Property and
equipment
purchases
accrued at end
of period
- Shares issued in
connection with
lease
modification
- Capital lease
transactions for
property and
equipment
Movement in net debt:
- Net cash
(outflow)/inflow
from activities
- Increase in
current financial
assets
- Decrease in
debt financing
- Partnership
liability to the
Mark & Spencer
UK Pension
Scheme (noncash)
- Exchange and
other non-cash
movements
Closing net debt
Under IFRS, both H&M and M&S present the cash flows during the present
period. This information is similarly categorized and ordered in three sections:
operating, investing, and financing activities (IFRS compared to US GAAP, 2012).
This information is similarly followed by a detailed outline of opening and closing
cash flow movements. Hence, there are no major differences exist between H&M
and M&S cash flow statements overall. Based on the table shown above, H&M again
stands out from the rest of the companies. It provides the least items and smallest
amount of information relating to cash flows. This is vital for some investors who are
more focused in the movements of cash money within the company. However, it is
also the only company that provides information about liquid funds that the company
currently possesses at the end of the financial year.
A major difference between all four companies is evident in their prioritization
of specific items. All four companies starts with a different item—A&F with effect of
exchange rates on cash, PacSun with net decrease in cash and cash equivalents,
H&M with liquid funds at the beginning of the fiscal year, and M&S with net cash
in/outflow from activities. As mentioned, A&F starts of with an item related to the
exchange rates and how it affects cash. Since A&F is an international company that
conducts business globally, the varying exchange rates can greatly influence the
amount of cash movements within the company. Unlike A&F, PacSun does not have
64
to worry about this type of account since it only conducts business domestically in
the United States.
One very noticeable difference in this portion of the companies’ statements
of cash flows is PacSun’s inclusion of “supplemental disclosures of cash flow
information” and “supplemental disclosures of non-cash transactions.” These
supplemental disclosures include specific accounts such as cash paid for interest,
cash refunded for income taxes, property and equipment purchases that are accrued
at the end of the period, shares issued in connection with lease modifications, and
lastly, capital lease transactions for property and equipment. None of the other
companies include any supplemental disclosures related to these types of accounts
that has a major role in the inflow and outflow of cash throughout the company.
4. Presentation of Statement of Shareholders’ Equity
A&F
PacSun
Balance, January 20, 2010
Balance at January 20, 2010
Cumulative
Employee stock
restatement for
plans
change in inventory
Stock-based
accounting
compensation
Restated net
Net loss
income
Purchase of
common stock
Dividends
Share-based
compensation
issuances and
exercises
Tax deficiency from
share-based
compensation
issuances and
exercises
Share-based
compensation
expense
Unrealized gains on
marketable
securities
Net change in
unrealized gains or
losses on derivative
financial
instruments
Foreign currency translation
H&M
M&S
Shareholder’s equity, 1
December 2011
Profit for the year
Other
comprehensive
Income:
Translation
differences
Change in hedging
services:
reported in other
comp. income
transfer to income
statement
tax attributable to
hedging reserves
Dividend
Shareholders’ Equity, 30
November 2012
At 4 April 2010
Profit/(loss) for the year
Other comprehensive
income:
Foreign currency
translation
Actuarial gains on
retirement benefit
schemes
Tax on retirement
benefit schemes
Cash flow and net
investment hedges:
fair value
movements
reclassified
and reported
in net profit
amount
recognized in
inventories
Tax on cash
flow hedges
and net
investment
hedges
Transactions with owners:
Dividends
Recognition of
financial liability
Share issued on
65
adjustments
Balance, January 29, 2011
Balance at January 29, 2011
Restated net
Employee stock
income
plans
Purchase of
Stock-based
common stock
compensation
Dividends
Common stock
Share-based
issuance
compensation
Preferred stock
issuances and
issuance
exercises
Net loss
Tax deficiency from
share-based
compensation
issuances and
exercises
Share-based
compensation
expense
Losses on
marketable
securities released
to the income
statement
Net change in
unrealized gains or
losses on derivative
financial
instruments
Foreign currency
translation
adjustments
exercise of
employee share
options
Purchase of owns
shares held by
employee trusts
Credit for sharebased payments
Deferred tax on
share schemes
At 2 April 2011
Shareholders’ equity, 1
December 2010
Profit for the year
Other
comprehensive
Income:
Translation
differences
Change in hedging
services:
Reported in other
comp. income
Transfer to income
statement
Tax attributable to
hedging reserves
Dividend
Shareholders’
Equity, 30
November 2011
66
At 3 April 2011
Profit/(loss) for the year
Other comprehensive
income:
Foreign currency
translation
Actuarial gains on
retirement benefit
schemes
Tax on retirement
benefit schemes
Cash flow and net
investment hedges:
o fair value
movements
o reclassified
and reported
in net profit
o amount
recognized in
inventories
Tax on cash flow hedges
and net investment
hedges
Transactions with
owners:
o Dividends
o Transaction
with noncontrolling
shareholders
o Recognition of
financial
liability
o Share issued
on exercise of
employee
share options
o Purchase of
owns shares
held by
employee
trusts
Credit for
share-based
payments
o Deferred tax
on share
schemes
At 31 March 2012
o
Balance, January 28, 2012
Net income
Purchase of common
stock
Dividends
Share-based
compensation issuances
and exercises
Tax benefit from sharebased compensation
issuances and exercises
Share-based
compensation expense
Net change in unrealized
gains or losses on
derivative financial
instruments
Foreign currency
translation adjustments
Balance at January 28, 2012
Employee stock plans
Stock-based
compensation
Net loss
Balance, February 2, 2013
Balances at February 2, 2013
It is important to note that not all four companies starts with the same starting
point in terms of the date used as basis of their financial period. Nonetheless, all four
companies still state specific dates to which they are basing their ending and
beginning periods. A&F, PacSun, and M&S all presents the arrangement of their
respective shareholders’ equity from oldest to its most recent year report of
shareholders’ equity. On the other hand, H&M is the only company that makes a
distinction by starting its shareholders’ equity with its most recent reporting year to
the year prior. More importantly, a great distinction that can be made form the table
above is the fact that both of the American companies reporting under US GAAP
include three comparative years, as opposed to only two years—used by H&M and
M&S. Under the IFRS, the only require comparative information is for the preceding
period only. However, additional period and information may be presented (KPMG
2.1). Although this rule gives H&M and M&S the flexibility to provide more
information useful for potential investors, they decide not to include additional period
for comparative purposes. One of the many reasons why these two companies might
have decided to exclude a third comparative period in addition to the two periods
required is that they may consider that particular information outdated and non67
useful to be compared with the two most recent reported periods.
Adversely, the US GAAP does not require a presentation of comparative
information. However, it requires all its registrants under the SEC to present all other
statements for the three most recent reporting periods of the company (KPMG 2.1).
This can be advantage or a disadvantage for A&F and PacSun. As discussed earlier,
the oldest reporting period may be perceived by the readers or potential investors as
outdated and therefore non-insightful. Also, it can affect the overall perceived
financial status of the company; depending on the ending balances of each company
in the previous years. For PacSun, this can be a great disadvantage, considering
that it has been acquiring net losses in the all three previous periods. As a matter of
fact, it is the only company out of all four to demonstrate net losses from changes in
equity in the past three years.
Compared to the other three companies, M&S is the one to report the most
items—therefore providing potential investors with more information—in a given
period, while PacSun has the least reported items when it comes to changes in
equity. All other three companies report foreign currency translation adjustments and
dividends, while PacSun only includes employee stock plans and stock-based
compensation, and common and preferred stocks. Nonetheless, PacSun’s
Statement of Changes in Equity is the simplest amongst all four companies. Its
nature and function of its business operations affect the number of reported items
under this statement; after all, it is the smallest company amongst all four retailers.
Part 3
Review of Accounting Policies
[Focus: H&M and M&S]
The following comparison distinguishes accounting principles within the two
European companies versus two American companies. European companies follow
international standards under IFRS, whereas American companies follow U.S. GAAP
standards. Therefore, more difference is found between European companies and
American companies than within same region companies. Hennes & Mauritz (H&M)
is listed on the Stockholm stock exchange under NASDAQ OMX Stockholm AB. The
company’s annual financial reports have a calendar year from December 1 2011 to
November 30 2012. The basis for its financial preparation is in accordance to the
International Financial Reporting Standards (IFRS). Since the parent company of
H&M is a company within the European Union, only IFRS approved by the EU are
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applied. It does however; also disclose accounts in accordance to the Swedish
Financial Reporting Standards. In addition, the financials are based on historical
acquisition costs. H&M’s applies the Swedish kronor as the reporting currency for all
indicated reports.
Similar to H&M, Marks & Spencer (M&S) prepares its financials based on
IFRS due to the company’s affiliation to the EU. Furthermore, alike H&M, M&S’s
financial statements are reported on the historical cost basis of accounting. The
companies do however differ on the types of currencies used for their reports. M&S’s
functional currency is the British pound.
Consolidated Accounts
Both H&M and M&S included their subsidiaries in the consolidated accounts
from the date of acquisition. However, only H&M defines the methods used in
preparation of the consolidated accounts. According to H&M’s disclosure, the net
assets of acquired subsidiaries are determined based on an assessment of the fair
value of the assets, liabilities, and contingent liabilities at the time of acquisition.
However, if the acquisition of the subsidiary’s share surpasses the calculated value
of the net identifiable assets of the acquired company at the time of the acquisition,
then the differences will be reported as company’s goodwill upon consolidation.
Foreign Currency
There are more similarities than differences between H&M and M&S when it
comes to the translation of foreign currency. H&M and M&S both convert exchange
rate on the closing date for receivables and liabilities in their foreign currencies. In
addition, they both report the difference of exchange rate through reserves in the
consolidated statement of comprehensive income.
Intangible Assets
The disclosure format under intangible fixed assets is presented differently
between H&M and M&S. Marks & Spencer’s gives considerable recognition to the
reporting of intangible assets. Under the report they present three subcategories:
Goodwill, Brands and Software intangibles. M&S recognition of brands allow it to
define brand value and recognize its worth on their financial statements. Furthermore,
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the company’s brand value is amortized on a straight-line basis over their estimated
useful lives. Another important disclosure made by M&S is its recognition of software
intangibles as an intangible asset. This category allows it to report software costs
including external direct costs of goods, services and payroll related costs for
employees directly associated to computer software related projects. The recognition
of software development costs allows H&M to amortize the costs on a straight-line
basis and the costs are held less any recognized impairment loss. In turn this
method affects the value calculated on its income statement.
Under H&M accounting principles little is revealed about their consideration
is for intangible assets. H&M fails to provide depth on its intangible assets in
comparison to M&S. However, both companies recognize goodwill as an intangible
asset and define it as an excess of the consideration transferred and the amount of
any non-controlling interest over the fair value of identifiable assets and liabilities. In
addition, both companies assess goodwill in an annual basis and record its profits or
loss in the income statement.
Leasing
Leasing agreements are similarly treated relating to operation leases, where
they are charged on a straight-line basis over the lease term. H&M on the other hand,
differentiates between operational leases and financial leases. It categorizes
financial leases when the financial risk and benefits of ownership are transferred
from the lessor to the lessee. Under H&M assets held under financial leases are
reported as fixed assets and future payment commitments are reported as liabilities
in the balance sheet. (H&M Annual Report, 2012).For M&S where assets are
financed by leasing agreements the assets are treated as if they have been
purchased.
Pensions
There are some similarities and differences on how both companies report
pension benefit costs on the financial statements. According to H&M’s accounting
principles disclosure its benefit plans consists of either defined befit or defined
contribution plans. M&S follows the same categorical definition. In fact, under both
companies the defined benefit plan is calculated at fair value of managed assets less
the present value of defined benefit obligation. Pension costs are found under the
subheading “Provisions for pensions” in H&M’s balance sheet statement. Defined
benefit plans are primarily found and Sweden. Unlike M&S, H&M pension plans are
assessed by a “Projected Unit Credit Method.” This method includes actuarial
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assumption such as the discount rate, anticipated salary and pension increases, in
addition to the expected return on managed assets. The projected unit credit is also
used to calculate M&S’s defined benefit obligation. For H&M, changes in gains or
losses are recognized in profits in the year they arise. (H&M Annual Report, 2012)
Taxation
Both H&M and M&S calculate tax expense as current and deferred tax in the
income statement. H&M reports deferred tax is according to the balance sheet
method based on temporary differences arising between reported and fiscal values
of assets and liabilities. It is then calculated using the tax rates that are expected to
apply in the peiord when the receivables are deducted or the liabilities are settled,
which are based on tax rates on the closing date. (H&M Annual Report, 2012) The
method is also shared among M&S, where it reports that its deferred tax is
calculated based on the expected manner of realization or settlement of the carrying
amount of its assets and liabilities, after applying applicable tax rates. (M&S Annual
Report, 2012) H&M does take certain differences into consideration for the
calculation of taxes, such as goodwill or a liability in a transaction that is not a
company acquisition. However, H&M does not stipulate the manner in which
deferred tax liabilities are reported.
Financial Instruments
H&M and M&S differ on their disclosure under financial instruments. Under
H&M financial instruments recognize liquid funds, accounts receivable, short-term
investments, long-term receivables and derivatives. Both companies report the
financial instruments in the balance sheet when the Group becomes a party to the
contractual provisions of the instrument. For H&M financial instruments include trade
receivables, investment and other financial assets, classification of financial liabilities
and equity, bank borrowings, loan notes, and trade payables.
Derivatives and Hedge Accounting
Both European based companies, H&M and M&S primarily conduct hedging
for the purpose of minimizing the risk of exchange rate fluctuation. They do so by
using derivatives of forward foreign currency contracts to manage its exposure. How
the hedging transactions are reported are fairly similar but differentiate in some
aspect. For example, H&M uses only two forms of hedging: forecast currency flows
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or contracted currency flows. Whereas, M&S describes three forms of hedging: a
hedge of a highly probable forecast or change in the cash flow, hedge of the
exposure to change in the fair value, and hedge on the exposure on the transaction
of net investments in foreign entities.
[Focus: A&F & PacSun]
Although the two companies both use U.S GAAP, we can still find significant
differences in their accounting policies choice. Such differences often end up
impacting their financial position, results of operations, and cash flows. The following
list of accounts demonstrate significant differences:
Basis of Presentation
Regarding the presentation, they both conform to U.S GAAP in that they both
include historical financial statements of, and transactions applicable to, the
company and reflect its assets, liabilities, results of operation and cash flows. One
difference arises in their treatment of “discontinued operations”, while both of them
do not include discontinued operations in their results of continuing operations, only
PACSUN discloses in significant detail the nature of its discontinued operations. For
example, the company specifically discloses that it follows the ASC Topic 205
“Presentation of Financial Statements-Discontinued Operations”, while A&F says
nothing on the subject. Additional information is needed to find out the specific
standards followed by A&F for its discontinued operations. Problems may arise in
their statements of cash flows as discontinued operations often are left with a certain
amount of cash flow after the closing of operations. It is important to find out what is
considered to be a significant cash flow in discontinued operations because that
amount may or may not be included in reporting statements.
Inventories
The companies operate under the lower of average cost or market utilizing
the retail method; however, A&F has recently adopted a new accounting policies that
impacts the inventory valuation method as well as costs and revenue. Taking effect
back in February 2, 2013, the company now uses the lower of cost or market under
the weighted average method. Before we discuss the impacts of the new accounting
policy, it is interesting to point out that even before its adoption, A&F did not disclose
any information as to basis of its estimates when valuing inventory. For example,
contrary to A&F, PACSUN discloses the basis of its inventory valuation estimates,
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“these estimates are based on a combination of factors, including current selling
prices, current and projected inventory levels, current and projected rates of sellthrough, known markdown and/or promotional events expected to create a
permanent decrease in inventory value, estimated inventory shrink and aging of
specific items”.
Again, A&F provides no information, it is important to find out the basis of
those estimates because the valuation of inventory is reflected in the cost of goods
sold, which in turn will be reflected in revenues. Now, coming back to A&F’s new
accounting policy: “the weighted average cost method”. This is a big change from the
previous retail method as under the weighted method, as the name implies, “The
weighted-average method relies on average unit cost to calculate cost of units sold
and ending inventory” as oppose to the retail method – the method would only work
where a category of inventory has a consistent mark-up. The cost-to-retail
percentage is multiplied times ending inventory at retail. Ending inventory at retail
can be determined by a physical count of goods on hand, at their retail value -. One
obvious change will be the valuation and costs associated with inventories, now the
average from all units costs are considered, it is no longer the lowest or market. As a
result, as long as there are no outliers in the costs of goods, the average should give
a fair valuation of unit costs, however if most items have approximately the same
costs but then a few items are disproportionately more expensive, the average unit
cost will be greatly offset. This probable valuation of costs offset will automatically
affect among others, the ending inventory, cost of goods sold, total profit, allowances
for inventory shrinkage and overall critical financial reporting data. Cash flow will be
affected, thus, if not careful, operating cash flow may be negatively impacted.
Leases
Operating leases are for both companies a sigficant business factor;
however, their importance is specific to each company, as a result, we find different
business strategies being used. For instance, for A&F, we find three important
provisions asosciated with operating leases, they are : construction allowances, rent
scalation and/or contingent rent provision. Whereas for PACSUN, four provision
stand out, they are : CAM charges, property taxes and percentage rent ranging from
2% to 20% when sales volume exceed certain minimum sales levels, rent scalation,
and cancellation or kick-out clauses.
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A&F seems to be more liberal when it comes to accounting policies for
operating leases simply because they don’t have as many safety nets as PacSun,
also, they take more risks. We see this in A&F’s lack of cancellation or kickout
clauses which allows PacSun to literally avoid future obligations if certain criteria are
met. Also, A&F is often involved in construction projects for certain lease
arrnagements, going so far as to record the construction plan ownership under
reporting statements if certain criteria are met, in other words, the company does
purchase buildings under certain criteria. Something that PacSun clearly is not
involved as they clearly disclose that “none of the company’s retail store leases
contain purchase options” and no building acquisition disclose can be found.
Clearly A&F is more risk tolerant in that regards.
PacSun is more conservative, more safety concerned. We see this in their
cancellation/kick out clauses which, again, allows them to avoid payment obligations
if sales do not exceed 1 million, or mall occupancy targets are not met. In fact, just
having one of these clauses means that throughout the business year, their will be
considerable low levels of sales volume and mall occupancy. Why else would this
provision exists if the danger weas relatively little? We find no such provision for A&F.
Provisions that are shared by both companies are the typical property taxes,
insurance, rent scalation, continget rent provisions based on sales volume. While
both must constantly pay for these, it would appear that such payments pose a much
heavier burden on PACSUN as sales volume and mall occupancy may at times
reach significant low levels (as implied by the need to have cancellation/kick out
clauses).
Property and Equipment
Both companies deal with property and equipment’s depreciation recognition
as well as impairment testing and charges. However, it appears that Abercrombie &
Fitch is much more conservative than PacSun. The reason is simply because the
accounting policies regarding depreciation and impairment are much more precise
and restrictive under A&F’s accounting standards. This can be seen in varied
instances when analyzing the policies. For example, when it comes to the
depreciation term or the asset’s useful life, we find considerable differences that end
up affecting financial statements such as the balance sheet, cash flow statement,
and business operations overall. Under A&F, a building’s useful life is only 30 years
as oppose to 39 for PacSun. Considering that the longer the asset’s life, the longer
the time that the asset is under depreciation and thus the longer before potential
repairs and/or complete replacement of the building are necessary, we can say that
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PacSun is more liberal when it comes to replacing its property and equipment as
A&F will much often be confronted with replacing needs before PacSun does.
Another example of PacSun’s liberal approach can be found in its lack of
mandatory annual impairment revision policy, something that the more conservative
A&F obviously has. “The company conducts an annual impairment analysis in the
fourth quarter of each year” (A&F 10k). This lack of planned impairment provision
obviously is more liberal as unless “events or changes in circumstances indicate that
the carrying value of such assets may not be recoverable” (PacSun 10k), no
impairment testing will be undertaken. This implies that whether impairment testing is
performed or not is entirely dependent on management’s ability to recognize the
need to perform such testing. A&F conservative approach becomes even more
certain when they go as far as detailing the proper way to conduct impairment testing.
“The Company utilizes an undiscounted future cash flow model to test the individual
asset group for recoverability.” The model is specifically designed to assist
management in making sure that their initial impairment appraisal need is indeed
correct and that the asset in question truly needs to be tested. After performing the
model testing, “if the net carrying value of the asset group exceeds the undiscounted
cash flows, the company proceeds to step two”. Only then an impairment loss may
be recognized, factors used for the final evaluation “include but are not limited to,
management’s plans for future operations, recent operating results and projected
cash flows”.
Revenue Recognition
We find a couple of similarities such as accounting policies regarding
recognizing revenue only when the customers are in possession of the items so as
to ensure ownership transfer and credit a final sale. Also the way both account
for gift card sales as liabilities and refer to the remote likelihood of gift card use after
purchase as “gift card breakage” to accentuate the fact that customers may never
use their credit in stores. Beyond these general similarities which may simply be
industry jargo, we find differences. One is the way A&F records online sales or as
they call it, Direct-to-consumer, “sales are recorded based on an estimated date for
customer receipt of merchandise, which is based on shipping terms and historical
delivery time”, as oppose to PacSun who does not provide any information on
accounting policies for online activity. It is interesting to note, yet again, how
PacSun’s lack of policies reveal their liberal approach to business operations. On the
other hand, A&F is certainly being conservatist in their business orientation as
recording sales on estimation allows an average of recorded sales that would
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otherwise be recorded at random dates. After all, post services companies are not
able to always be certain to deliver on specified date, thus creating fluctuations as to
the recorded sales if the average method would not be used.
One problem that is certainly encountered throughout the business year is
the event that whoever is in charge of delivery actually never delivers the items due
to damage, lost, etc. The company must then go back and reverse that sale and
credit a liability instead. This may be simple to do but the fact remains that it is extra
work to do and monitor. Another difference can be found in the policy regarding gift
card breakage recognition, under PacSun, after 24 months of unused credit, the
company considers the liability as paid and transfers the amount to the sales
account. For A&F, we find no such policy, but instead we find that they recognize gift
card breakage based on historical redemption patterns but no further disclosure as
to what those patterns are. A final interesting comparison is revealed by the
difference in sales return allowances results, for A&F the amounts were $9.3 million,
$7.0 million and $10.3 million back in February 2, 2013, January 28, 2012 and
January 29, 2011. For PacSun, the numbers were $369,000 in Feb. 2, 2013,
$356,000 in Jan. 28, 2012, and $376,000 in Jan 29, 2011. As we can see the
numbers are much bigger for A&F who has reserves in the millions of dollars as
oppose to thousands for PacSun. This big difference reveals that the two
competitors are not of same size; without knowing their market shares, it is obvious
that A&F is a much bigger player. This difference in business size operations may in
the end be the reason why PacSun has a more liberal approach than A&F when it
comes to business operations and accounting policies. This may be true because as
a company increases in size, so does their costs and expenses, as a result, the
bigger you are the more you have to be careful and have well-tailored business
operations and accounting standards to ensure efficiency and profitability.
[Focus: US & Europe]
Considering that one company is U.S based and the other Swedish or
European based, we automatically know that the major difference between the two
will be their adherence to financial reporting standards. A&F follows GAAP standards
as oppose to H&M who applies IFRS standards. This single difference creates major
accounting differences when analyzed in greater details.
Basis of Presentation
The difference of presentations is day and night for these two companies, in
fact, not a single similarity can be found within the visual content of the basis of
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presentation reported under their significant accounting principles. To be sure, the
most general similarities do exists even if they are not seen. “The components of a
complete set of financial statements include: balance sheet, income statement, other
comprehensive income, cash flows and notes to the financial statements” (GAAP vs.
IFRS, The Basics). Beyond these basics, we only differences can be seen in the
actual information disclosed. To start, A&F calls it basis of presentation while H&M
calls it basis of preparation of the accounts. While this is just a minor difference, the
content that follows in it cannot be further apart from each other. A&F discloses three
main subjects : the general operations background of the company including general
financial data that will be found in their consolidated financial statements, their fiscal
year detailed information, and a quick disclosure on reclassification of prior period
amounts. H&M on the other hand, goes in great detail to make sure that the public
knows that IFRS standards are being applied, a quick mention of the use of historical
acquisition costs, and also stating the company’s functional currency as being the
Swedish kronor.
Finally, the company briefly discloses accounting standards followed by the
parent company. Standards such as the RFR 2 which is a Swedish Financial
Reporting Board’s recommendation that essentially means that IFRS is applied. A
final note on accounting for subsidiaries’ contributions to the parent company and
from the parent company to the subsidiaries is being disclosed. As it is now evident,
there are main general similarities between the two. We also know that when it
comes to the format of the basis of presentation, there is no particular format that
must be followed either in GAAP or IFRS as none of the companies analyzed fit an
exact clear cut model, but instead seem to all disclose information that they consider
crucial for their reporting needs. “ Differences between the two sets of standards
tend to arise in the level of specific guidance provided”. One of the many differences
is for instance, under IFRS, “Comparative information must be disclosed with respect
to the previous period for all amounts reported in the financial statements”. As
oppose to GAAP regulations that state that U.S companies “must follow SEC rules,
which typically require balance sheets for the two most recent years, while all other
statements must cover the three-year period ended on the balance sheet date” (The
Basics).
Leases
Accounting leases under both standards is not that different at all. In fact,
according to GAAP vs. IFRS The Basics, “The overall accounting for leases under
US GAAP and IFRS (ASC 840, Leases and IAS 17, Leases, respectively) is similar,
although US GAAP has more specific application guidance than IFRS. Both focus on
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classifying leases as either capital (IAS 17 uses the term―finance) or operating, and
both separately discuss lessee and lessor accounting”. The companies could not
adhere more to meeting the financial reporting standards. The former quotation is in
a nutshell the disclosures that can be found in both accounting policies regarding
leases. A&F is basically following the same general procedure as H&M but with
much more specific application guidance that is revealed through their detailed
information disclosures that are simply non-existent in H&M’s reporting.
This general pattern in A&F’s disclosures can be seen in several instances
such as: the declaration that the company is involved in construction project under
certain lease agreements, and that this is due to that the company determined that it
has substantially all of the risks of ownership during the construction project. At the
end of the project the company determines if the building qualifies for sale-leaseback
and account for it accordingly if criteria are met. They disclose information on
contingent rent that are determined as a percentage of total sales, rent escalation
clauses that take effect throughout the different operating leases life span. They
even have a clause regarding construction allowances that are accounted for as
deferred lease credit in the consolidated balance sheet, so as to suggest that it is
routine for them to get involved in construction contracts under their operating leases.
The same general concepts are applied for H&M but with less detailed information
disclosure as to the specific guidance for accounting. H&M reports that just as A&F
they distinguish between Operational and Financial leases under the same criteria,
whether “ financial risks and benefits associated with the ownership have essentially
been transferred from lessor to lessee, regardless of whether the legal ownership
lies with the lessor or the lessee”.
One major difference that exists between the two standards are the
recognition of a gain or loss on a sale and leaseback when the leaseback is an
operating leaseback or a financial leaseback. However, only A&F is subject to such
clauses as H&M discloses that it holds no financial leases and does not disclose
information on whether it engages on construction project under financial leases but
we also find no information on construction allowances, thus we can conclude that
the company never gets involved in such projects. A&F on the other hand does deal
with such sale-leaseback provisions and states that “ if the arrangement does not
qualify for sale-lease back treatment, the company continues to amortize the
obligation over the lease term and depreciates the asset over its useful life”.
Compare that to IFRS standards that H&M would be subject to if they ever deal at all
with sale-lease back accounting, “Gain or loss is recognized immediately, subject to
adjustment if the sales price differs from fair value” (The Basics). As we can see,
there are general similarities in basic operational or financial leases recognition but
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under GAAP, as it was shown, the specific guidance regarding accounting for them
is much more specific.
Changes in Accounting Principles And Disclosure Requirements
This is an interesting subject to discuss as although major similarities and
differences exists between the two standards, the fact remains that there are more
similarities than differences. When differences do exist, they often tend to be of
minor adjustments and/or simply offer a wider or restricted choice of selection in
accounting policies. According to GAAP vs. IFRS, The Basics,
“the fact that the two sets of standards are generally more alike than different
for most commonly encountered transactions, with IFRS being largely, but not
entirely, grounded in the same basic principles as US GAAP. The general
principles and conceptual framework are often the same or similar in both
sets of standards, leading to similar accounting results. The existence of any
differences — and their materiality to an entity’s financial statements —
depends on a variety of specific factors, including the nature of the entity, the
detail of the transactions, interpretation of the more general IFRS principles,
industry practices and accounting policy elections where US GAAP and IFRS
offer a choice “.
Taking the aforementioned quotation into account, we find that for H&M
accounting principles have not changed from the previous year; however, a total of
nine new principles and disclosures requirements have been published but are not
yet scheduled to take effect. These new various requirements take effect at different
dates after this fiscal year ends. On the other hand we find no published new
requirements scheduled to take effect for A&F, it appears that U.S GAAP is not as
frequently altered as IFRS. However, we do find a voluntary change in accounting
principles for A&F, they have decided to “change its method of accounting for
inventory from the lower of cost or market utilizing the retail method to the weighted
average cost effective February 2, 2013” (A&F annual report). This new method
mandates that the company considers all costs incurred to acquire the inventory and
spreads those costs to all units. Such a method has inevitable consequences on
financial statements in varied ways.
There are three major advantages of using such a method. First is the
consistency advantage. As oppose to other costing methods where multiple costs
are usually used, the weighted average method has only one cost to be determined
and uniformly applied to all units produced for the reporting period. Second is
lessening of paperwork requirements. Because the accountant only needs one
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calculation, he only has to keep a few sheets documenting this lone cost calculation
as oppose to keep track of all transactions costs that are prevalent in other costing
methods. Finally, because consistency is high, and the fact that the weighted
average costing method is very popular in the industry (according to A&F), the
company gains in comparability in relation to its competitors, thus facilitating
strategic planning and analysis.
Going back to the involuntary planned accounting policies changes for H&M
as dictated by new IFRS standards, we find a mix of consequences when the
implementation finally takes place. Two of them are, IAS 1 –Presentation of Financial
Statements- changes to the presentation of other comprehensive income, and the
IAS 19, Employee benefits – amended. Regarding the first planned change, “the
revision involves changes to the grouping of transactions reported under other
comprehensive income. Items that are recognized in profit and loss are to be
recognized separately from those items that are not recognized in profit and loss”. Of
importance to note is that this change will only affect the way other comprehensive
income statements are presented, but nothing beyond that. The second planned
change in question is a bit more problematic as the amendments do affect benefit
pension plans recognition, thus affecting the content of financial reporting. For
instance, gains and losses of qualified benefit pension plans must now be
immediately recognized in other comprehensive income. Another consequence of
the amendments is that now, termination benefits are to be recognized at the
following time when the offer of the benefit cannot be withdrawn or in accordance
with IAS 37 as part of restructuring of the business. Simply put, the company has
less freedom to apply accounting loopholes designed to offset unwanted business
performance when it comes to pension plans. For example, whereas before the
company was able to recognize gains or losses by taking advantage of the corridor
approach, now such outcomes must immediately be recognized without the
possibility of amortization offered by the corridor approach. “When gains or losses
cause Accumulated Other Comprehensive Income to go past its limit (or corridor),
the account has grown too large and it must begin to be amortized. The amount that
is in excess of the corridor is then divided by the average remaining number of
service years who are expected to receive benefits under the plan”
(Investopedia.com).
As previously mentioned in the opening of this accounting policies changes
segment, GAAP and IFRS standards have more similarities than differences.
Although this discussion is rather short in the scope of the subject, it was shown that
for the most part in the accounts discussed, IFRS updates have relatively low impact
in financial reporting. This is specially true of companies who have always used
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IFRS. Companies switching from one standard to another have a lot of conversion
requirements to meet, although those requirements are often similar in nature to
GAAP requirements, the fact remains that even minor changes accumulate to form
heavy duty work. To end this section on a positive note, it is interesting to point out
that GAAP and IFRS’s similarities do provide hope that someday soon there will be
only one global reporting standard that will unite the countries of the world in a global
network of accounting principles. However, this is obviously more easily said than
done because the factors that enter into account cannot easily be persuaded and
unfortunately, global cooperation is needed for such a complex task. In the end only
the following quotation upholds: “We believe that the success of a uniform set of
global accounting standards also will depend on the willingness of national
regulators and industry groups to cooperate. Local interpretations of IFRS and
guidance that provides exceptions to IFRS principles would threaten the
achievement of international harmonization” (The Basics).
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Part 4
Overall Disclosure and Information
Presentation
H&M is the only company that includes parent financial statements. It is
obvious that H&M’s parent operations will be less than the group by subtracting noncontrolling interest from the numbers.
Parent information is presented quite
similarly to H&M’s group information. In that, it also includes the four major keys to
the financial statements: income statement, balance sheet, statement of cash flows,
and changes in equity. The statements use the same line items as well to describe
operations. Thus, comparison between parent and group statements is easy.
Further, for this analysis as well, only group statements will be under assessment as
all other companies include group (consolidated) numbers.
The differences in fiscal year start and end dates are dependent on company
procedures. To note, that each company’s fiscal year has a different start and
finish. A&F and PacSun’s 2012 fiscal year counts 53 weeks. This may be a
difference considering extra days of accounting included. However, this difference
is not significant enough to note as a priority. Under discussion will be PacSun, A&F,
H&M, and M&S’s financial statements. A critique and assessment of detailed
disclosures will be addressed. Further, possible and highly probable causes will be
discussed. The Income Statement including Revenue, Cost of Goods Sold,
Operating Profit/Loss, “The Bottom Line”, Earnings Per Share, and Comprehensive
Income will be examined. Next, the Balance Sheet including Non-current Assets,
Current Assets, Non-current Liabilities, Current Liabilities, and Equity will be
discussed. Finally, Cash Flows and Changes in Equity/Shareholders’ Equity will be
discussed in detail. Following, there will be an assessment with a readability rating
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of the financial statements concluding with any unanswered questions of the
financial statements.
Income Statement
Each company’s income statement includes a statement of operations and
comprehensive operations. H&M and M&S both differentiate their income
statement information from their comprehensive income statement information with
two different sections on the page. Also, PacSun, A&F, and M&S all call their
income statement consolidated statements of operations and comprehensive
operations. H&M, however, uses the term group instead of consolidated. To note,
the term ‘group’ is interchangeable with ‘consolidated’ and used for all H&M
statements. Also, income statements for H&M and M&S both use the most recent
comparative information while PacSun and A&F uses the last two previous periods
of financial position. Clearly stated on PacSun, H&M, and M&S on the income
statement is the fiscal year end of the periods. Nowhere on A&F’s income
statement are the dates. It does however state to look at Note 4 for further
information. Note 4 explains that inventory valuation was changed affecting the
income statement with cost of goods sold that in turn, effects all other numbers
related to net sales after cost of goods sold is withdrawn.
Revenue
Revenue is named and calculated differently for each company. Namely,
A&F and PacSun lists net sales as the first line item on their income statement. Both
companies also showed an increase in net sales from fiscal year 2011. For H&M
the equivalence of revenue is Sales including VAT (value–added tax). It also is the
top line item on the income statement. VAT accounts for the Group’s income
generated. It is a bit over 14 percent of the total amount that accounts for sales.
H&M also includes as a second line item Sales excluding VAT, that is, respectively,
20,149 million SEK below Sales including VAT. A major part of H&M’s business is
with the sale of clothing and cosmetics to consumers. Considering this, it could be
likely to conclude that H&M, with its goodwill and brand loyalty, add many layers of
VAT. This assumption could be made with the logic that H&M is trying to show a
clear and honest representation of the company’s financial position considering it
has franchises worldwide. Lastly, M&S indicates revenue at the top line with the
title of Revenue. To note, M&S also included VAT in the previous annual reporting
period, 2011. All information for M&S has been changed to suite equal comparison
for 2012. It is highly likely that M&S excluded VAT for different reasons, but most
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of all, to show a clear depiction of the companies true earnings and operational
success over the year.
Cost of Goods Sold
Cost of good sold for H&M is including right beneath Sales excluding VAT.
Similarly, under net sales for both PacSun and A&F is also cost of goods sold.
However, M&S does not list cost of good sold on their income statement. With
further analysis, cost of goods sold is under note 3 in the notes of the financial
statement in the Expense Analysis. Also, gross profit (gross margin) is not cited on
the actual income statement of M&S. Underneath revenue on the income
statement is operating profit. M&S is identifying the most important number for
investors and the public to see by having operating profit be the second line item on
the income statement. This may be to emphasis these numbers rather than other
numbers. This may be because through the last couple year’s cost of goods sold
has increased higher in relation to revenue. Thus, as it is not clearly stated, it is not
seen on the income statement. Next, cost of goods sold accounts for roughly 75
percent of PacSun's net sales, 62 percent of M&S revenue, 41 percent of H&M’s
Sales excluding VAT, and lastly 38 percent of A&F’s net sales.
Though the
numbers are not directly comparable, it is good to note that PacSun’s net sales in
submerged by its cost of goods sold. On the other hand, A&F’s revenue is
generated at a much larger rate than cost of goods sold leaving about 62 percent
available for all other expenses. This indicates that A&F does the best job at
creating a value for their product comparative to the similar operations given some
space for variations in accounting practices and business practices.
Operating Profit/Loss
Operating profit accounts for cost of goods sold, selling expenses, general
and administrative expenses, and other operating expenses.
A&F titled operating
profit Operating Income while M&S and H&M title it Operating Profit. To highlight,
M&S includes non-GAAP measures to get their operating profit total. This is
unique in that non-GAAP measures are constructed for M&S to show a clear
depiction of their current financial position. PacSun and A&F are not allowed to
have this while H&M seemingly did not need it. Next, PacSun suffered from an
operating loss in the last three fiscals years of operation. The loss has been
incrementally less through each fiscal year but resulted in operating loss for fiscal
year 2012 at $38 million. More so, M&S clusters selling with administrative expenses
while H&M separates them. This does not change operating profit as similar
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categorizations are deducted to get operating profit/loss.
“The Bottom Line”
H&M and M&S both title their ‘bottom line’ as Profit for the Year. This is
attributable to IAS 1 that deems this an optimal descriptive name for the category.
A&F and PacSun deem their ‘bottom line’ as Net Income/Loss. Each company
except M&S’s bottom line increases from the previous period. Considering,
PacSun suffered from a net loss though it was not as severe as the previous periods
net loss decreasing by almost 50 percent. Next, M&S decrease from fiscal year
2011 was by just over 18 percent.
This was the first period of loss after the 2008
recession hit M&S’s market. This could be due to a number of factors and most
likely new stores. It would not be concluded that the economy was an issue
because revenues have kept a steady increase over the years. Thus, the amount
of money M&S is using has increased, in turn, decreasing their bottom line lower
than 2011’s profit for the year.
Earnings Per Share
Earnings per share are listed for each company in a different way. H&M
includes Earnings per share with number of shares. M&S indicates basic/diluted
earnings per share.
Also, underlying basic/diluted earnings per share.
Underlying basic earnings per share is calculated factoring in underlying profit before
tax. For M&S, this shows a more vivid depiction of earnings per share by taking
out income tax expense and all adjustments made for non-GAAP measures.
Numerically, instead of calculating earnings per share with £489.6 million, underlying
earnings per share uses underlying profit before tax at £705.9 million. This change
increases underlying basic earnings per share by 2 pounds. M&S, by doing this,
identifies earnings per share before taxes as a better assessment of performance.
A&F indicates ‘earnings per share’ as (1.) net income per share from
discontinued/continued operations, (2.) income from discontinued operations, net of
tax, and (3.) net income per share. Similarity, PacSun has these categories listed.
This is due to application difference. Each category on the income statement
constitutes a different calculation, particularly in regard to continuing and
discontinued operations that under US GAAP must be presented on the income
statement. Overall, all four companies indicate earnings per share.
Comprehensive Income
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For PacSun, Net loss and Comprehensive loss are equal at $52.1 million.
This is true because PacSun’s operations are only in the US and major
categorizations under other comprehensive income like translation differences and
hedging are not necessary for the company. PacSun lists comprehensive loss in the
middle of their income statement right below net loss. For A&F, comprehensive
income was due to marketable securities and foreign currently translation
adjustments to their functional currency. With that said, A&F had an increase from
their 2011 comprehensive income. Likewise, H&M’s total comprehensive income for
the year it was impacted by translation differences, changes in hedging reserves,
and tax attributable to change in hedging reserves. This is the final line item on the
income statement for both A&F and H&M. Finally, M&S had a lot of movement for
their total comprehensive income. Actuarial losses on retirement benefit schemes
and cash flow and net investment hedges account for the majority of the impact for
M&S. M&S includes right below total comprehensive income for the year noncontrolling interests and equity shareholders of the company. This gives investors
useful information on regard to group and parent operation differences and equity of
the shareholders of the company. In comparison to 2011 fiscal year, M&S suffered
a major loss in total comprehensive income for the year down by almost 53 percent.
A majority of this loss is inclusive in the actuarial losses on retirement benefit
schemes in 2012 compared to the gain in 2011.
Balance Sheet
The balance sheet for each company has a very similar detailed analysis.
A&F and PacSun name their balance sheet Consolidated Balance Sheet. H&M,
consistent with its other statements is group and M&S is Consolidated Statement of
Financial Position. Another major differential would be the balance of the equation
(discussed in part 2) and organization of line items. Again, the major difference in
the equation is for M&S is the equation balances at net assets with total equity. Line
items organization will be discussed subsequently. Overall, for H&M major
sections from top to bottom are Fixed Assets (separated by intangible, tangible, and
long-term receivables), current assets, then equity, long-term liabilities, and finally
current liabilities. A&F and PacSun both list their sections in a similar fashion.
That is, current assets followed by non-current assets. Then, current liabilities
followed by long-term liabilities and finally shareholders’ equity. This approach is
systematic in following US GAAP standards, which underlines many other
regulations that prescribe the format of line items.
Lastly, M&S’s major categories
in order are non-current assets, current assets, current liabilities, non-current
liabilities, and finally equity. This variation is different from the other companies.
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Non-current Assets
Non-current assets are somewhat short in regard to line items for A&F and
PacSun. PacSun includes property and equipment, deferred income taxes, and
other assets. Similarly, A&F has property and equipment, non-current marketable
securities, and other assets.
Considering, M&S and H&M have a lot more line
items. Specifically, M&S has intangible assets, property, plant and equipment,
investment property, investment in joint ventures, other financial assets, retirement
benefit assets, trade and other receivables, and derivate financial instruments.
H&M groups their non-current assets with the title Fixed Assets and it is divided into
three groups. The first is intangible assets: brands, customer relations, leaseholder
rights, capitalized expenditure, and goodwill. The other is tangible fixed assets with
building and land and equipment, tools, fixtures, and fittings. Lastly, long-term assets
are the three sections categorized under fixed assets. This separation lets the
reader clearly see total numbers under the three categorizes and variations in the
amounts of each.
H&M separates building, land, and equipment into two sections (1.) building
and land and (2.) equipment, tools, fixtures, and fittings. H&M seems to deem a
better term as building rather than property. This is most likely because H&M is
more concerned with the retail space and outlet location than the actual land.
Further, the section equipment, tools, fixtures and fittings is the majority portion of
total building, land, and equipment. Considering this, it tells investors that H&M
invests heavily into the stores presentation, displays, structure, and other things
rather than the other things. Under further analysis, H&M and M&S both an indepth analysis and categorization of the components of this line item. H&M and
M&S’s in-depth analysis is much more detailed than A&F and PacSun.
Interestingly enough, in comparison for each company, 66 percent of M&S total
assets are PPE while 43 percent for A&F, 40 percent for PacSun, and a low of 32
percent for H&M. The disclosures for H&M and M&S are clear including the notes
while for A&F and PacSun are rather vague and not descriptive.
Current Assets
Under US GAAP, A&F and PacSun both give the most liquid items first while
there seems to be no apparent order for H&M and M&S. The line items vary from
company to company with the exception of inventory that accounts for all four
companies. However, H&M’s operations define inventory as Stock-in-Trade.
That is, as goods are being transferred and as goods are in store they are priced
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differently. This is because most of H&M’s business is done with franchisees and
international locations. Inventory spends a lot of time traveling. Accounted for on
the books as the other companies do it may be an unrealistic image of H&M’s true
business operations. It is clear why inventory is such a large portion of the balance
sheet each company depends on its inventory for sales. The other differences
accommodate the scope of business each company participates in. For instance,
M&S Money handles lots of financial movement. Thus, under current assets, other
financial assets and derivative financial instruments could attribute to this line of
business they do. Also, PacSun and H&M both have prepaid expenses under
current assets. As retailers, this could be gift card amount yet to be redeemed.
Discussed more in section 5, A&F changed their inventory valuation system in this
report to better align the company’s focus.
Overall, total assets for each company decreased from fiscal year 2011 to
fiscal year 2012. This may be influenced by the international landscape of
recession still present during these times after the 2008 crash. Also, this may be
attributed to each company taking stronger measures to control the books, as each
company would do that year after year.
Non-current Liabilities
For A&F and PacSun non-current liabilities is titled long-term liabilities.
Deferred lease credits, leasehold financing obligations, and other liabilities account
for total long-term liability items for A&F. PacSun’s line items are deferred lease
incentives, deferred rent, long-term debt, and other long-term liabilities. M&S’s line
items are retirement benefit deficit, trade and other payables, borrowings and other
financial liabilities, derivative financial instruments, provisions, and deferred tax
liabilities. Lastly, H&M’s line items are provisions for pensions and deferred tax
liabilities. A&F’s total long-term liabilities accounts for 41 percent of their total
liabilities. PacSun has a total that accounts for 54 percent while M&S accounts for
a close 55 percent. For H&M, long-term liabilities accounts for only 14 percent of
total liabilities. That is, most of H&M’s liabilities are current liabilities. A&F’s longterm liabilities decreased from the previous year while PacSun, H&M, and M&S’s
long-term and non-current liabilities increased.
Current liabilities
A&F, H&M, and PacSun all have one similar category: Accounts Payable.
M&S does not have this line item. PacSun seems to not have a lot of liabilities
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outside of accounts payable and other current liabilities. PacSun’s current liabilities
did increase from the previous period. For H&M, current liabilities account for 86
percent of total liabilities on their balance sheet. Accrued expenses and prepaid
income account for a major portion of H&M’s current liabilities. Under Note 20, it
discusses the five categorizations that create this liability: Holiday pay liability, social
security costs, payroll liability, costs related to premises, and other accrued
overheads. In essence, these costs are high for H&M relate to the most important
part of H&M’s operational effectiveness – employees and stores. This tells that
H&M has a high value on these items and why it is different than the other
companies. The current liabilities are mostly on in-store costs with employee
payroll accounts for the rest. For M&S, current liabilities are trade and other
payables, borrowing and other financial liabilities, partnerships liabilities to the Marks
& Spencer UK pension scheme, derivative financial instruments, provisions, and
current tax liabilities. For A&F, current liabilities are accounts payable, accrued
expenses, deferred lease credits, and income taxes payable. Again, it seems that
both companies under US GAAP (PacSun and A&F) have line items under liabilities
in order while M&S and H&M have no significance to order.
Equity
A&F and PacSun include detailed listings of stocks outstanding, par value,
and shares authorized on preferred and common stock options. Paid-In capital and
retained earnings are also listed on the balance sheets. Compared to H&M and
M&S’s balance sheet, detailed information about stocks is not given. Plus, H&M
and M&S classify this section as equity as a broad term compared to stockholders’
equity by A&F and PacSun. This is ideal as both H&M and M&S both have a larger
scope of equity than just shareholders equity. H&M lists four line items as share
capital, reserves, retained earnings, and profit for the year. M&S accounts for
issued share capital, share premium account, capital redemption reserve, hedging
reserve, other reserve and retained earnings to get total shareholders’ equity.
Furthermore, M&S then includes non-controlling interests in equity. This tells
readers the difference between consolidated and parent company operations.
Even with that, M&S total equity increased while A&F, PacSun, and H&M’s total
equity on the balance sheet decreased.
Cash Flows
PacSun, A&F, and M&S all title their ‘cash flow’ statement as consolidated
statements of cash flows. As for H&M, it is titled differently corresponding to the
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same pattern as its other statements as group cash flow statement. PacSun and
A&F cumulate all operating cash movements into the final Cash and cash
equivalents of the year. For PacSun, cash and cash equivalents accounts for, at
end of fiscal year, $48.8 million respectively. This number is the same on the
balance sheet. The same could be said for A&F. End of period for cash and
equivalents on the cash flows statement is the same number on the balance sheet
for cash and equivalents. However, H&M final number is titled cash flow for the
year. Still understood, this outlines the cash flow position of the company after
dividends, investments in fixed assets, changes in short-term investments under one
year. H&M lists on the balance sheet as Liquid Funds. Liquid Funds for H&M
includes cash and bank balances, short-term investments less than three months
from the date of acquisition. In totality, these items carry no significant risk. Also,
M&S finishes their statement with closing net cash. This variation in title still
accounts for the company’s cash flow for the financial year. Also, closing net cash is
not the same number as cash and cash equivalents on the balance sheet. The
order for each company’s three main sections is identical. In order, operating,
investing, and finally financing activities are presented on the cash flow statements.
PacSun and M&S have negative cash flows from the previous period while A&F and
H&M had positive cash flows from the previous periods. Even with a negative cash
flow, both companies have been projected to continue to adopt the going concern
basis in preparation of their financial statements.
Financing Activities
Dividends have been paid in fiscal year 2012 by A&F, H&M, and M&S. For
all three companies, this line item is located under cash flows from financing
activates. PacSun has never declared dividends. This is because PacSun’s
current operations have liabilities that prohibit the company from paying out
dividends. This, again, is due to the size of PacSun and its major expansion
projects it is currently undergoing. Compared to all three other companies,
dividends outstanding are exponentially bigger. This is due to many factors like
business maturity, size, market factors, and competitive advantages. For H&M, all
financing activities account for one line item, that is dividends. That tells that H&M
did not add any loans or change any. More so, H&M did not issue or sell more
stock. This is a debt for H&M yet a worthy one because investors like to see the
company earning profits and giving out dividends. Meanwhile, M&S had a lot of
changes and additions to loans with line items such as issuing medium-term notes
and redemption of medium-term notes. Considering, M&S Money, part of M&S
may play a large role in this. This information tells the public about ways M&S uses
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its money to keep the company growing, also a positive factor when investors are
assessing the company.
M&S outlines their movement concerning net debt as it coincides with closing
net cash. This little section at the bottom of the statement is titled reconciliation of
net cash flow to movement in net debt. It includes net cash inflow from activates,
increase in current financial assets, decrease in debt financing, partnership liability to
the Marks & Spencer UK pension Scheme (non-cash), and exchange and other noncash movements. Meanwhile, H&M includes a similar-yet-different section
discussing liquid funds at beginning and end of the finical year with cash flow for the
year and exchange rate effect cumulating the difference between the periods.
Changes in Equity/Shareholders Equity
PacSun and A&F titles their statement Consolidated statements of
Shareholders’ Equity. Considering, both companies are following US GAAP
standards. H&M titles their statement Group changes in equity. M&S titled their
statement Consolidated statement of changes in equity. Again, H&M has used
group instead of consolidated statements throughout their reporting statements.
Furthermore, both PacSun and A&F include three years under their analysis while
M&S and H&M only include two. This gives the reader more information in regard
to patterns and changes overtime.
Changes in equity elaborates on the numbers on the balance sheet while
corresponding previous years totals to show the pinpoint fluctuations over the
different periods. With that said, PacSun, A&F, and M&S bottom line totals for
fiscal year 2012 correspond to balance sheet totals. However, H&M’s balance
sheet has less line items than the number of columns in changes in equity.
Specifically, on the balance sheet it states Reserves and on the changes in equity
statement it says translation effects and hedging reserves. This separation allows
the reader to understand the different fluctuations overtime with this line item in
separate categories. H&M felt the need to do this and it allows the reader to see
how much translation effects have on the business while hedge reserves protect
revenues for the company.
Readability Rating (Overall Clarity, Clearly Defined Categories, and Useful
Information)
PacSun’s financial statements are somewhat difficult to read. Again, as
A&F’s balance sheet, Total Non-Current Assets is not presented. Also, the cash
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flow statement includes a section called supplemental disclosures of cash flow
information. This section should be included in the different activities yet is stated
underneath the final equation. With all that said, aesthetically, PacSun’s
statements are very bland and hard to navigate. The use of space, color, and
dimensions are all lacking and this reflects on the numbers. For instance,
PacSun’s Consolidated statement of shareholders’ equity includes three comparative
periods. It is very hard to see where one period begins and one ends. The space
is not used considering half of the page is free. The lack of color and tight
dimensions of the statement also are not helpful in navigating through the statement.
Overall, the information stated on each statement coincides with the other
statements and makes a proper analysis of the company providing useful information.
Final analysis indicates that PacSun does present useful information yet is the least
clear to read.
A&F’s financial statements overall are easy to read.
One important note would be
concerning the balance sheet line items. A&F does not explicitly state line item
total non-current assets. A&F doesn’t even place non-current assets into a clearly
identified category. Total Assets overall and Total Current Assets are presented
but not the total for non-current assets. With that said, the criteria of readability are
here. A&F’s financial statements are clear, the categorizations are understandable,
and the information is useful.
M&S’s financial statements overall are quite easy to read. Aesthetically,
M&S’s color-coding and use of space is superb. A heavier green accents all
current year numbers on each statement while sections differentiate totals and end
numbers. Also, the balance sheet equation depicts Net Assets. All other
companies do not state Net Assets. This allows a reader to see that assets
triumph liabilities. Further, it balances the equation in an understandable way with
net assets equally total equity that really illuminates the company’s operations. On
the other hand, M&S’s income statement does not include cost of goods sold or
other categories that are subtracted from revenue to get operating profit. Gross
profit is not stated either while revenue and operating profit are the first line items of
the income statement. This information is given later but not on the balance sheet.
Plus, Non-GAAP measures are included in this analysis; yet, all line items for nonGAAP measures are included underneath operating profit. The line items are out
of order and the direction of numbers shifts up and down as you go down the income
statement. The income statement does include a separate section for
comprehensive income that is clear and includes useful information. Lastly, noncontrolling interest is included throughout the statements on the income statement,
balance sheet, and changes in equity statement. This calculation allows readers to
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see and understand the difference between consolidated and parent company
ownership. This information is useful to make proper assessments about the
comprehensive operations of M&S. Overall, M&S statements are clear with defined
categories and useful, unique information for the reader.
H&M’s financial statements overall are first class. Notably, the balance
sheets double column approach makes it very understandable. Differentiations
between categories that are large like building, land, and equipment into two
separate line items gives more useful information on the balance sheet. Also, the
group cash flow statement is clear and line items present useful information in regard
to categorization. The information is concise and understandable. Further, H&M
presented its changes in equity statement with fiscal year 2012 on top and the
previous period below. On the other hand, all three other companies have fiscal
year 2012 at the bottom of the changes in equity statement underneath previous
year items. This difference is most likely for readers to first see the current
reporting and if they like to dig deeper they can. Overall, H&M’s financial statements
rate the highest in readability with clear information, understandable line items and
useful information in regard to operations and industry important information even
including parent information.
Unanswered Questions
One unanswered question is concerning PacSun’s consolidated statement of
cash flows. That is, why is the information like cash paid for interest and cash paid
(refunded) for income taxes underneath the final analysis of cash and cash
equivalents, end of year? If the information is already included, where is it included
and why is it then specified at the bottom. Another unanswered question would be
for H&M. On the group balance sheet it indicates that Retained Earnings are 28.7
billion SEK, respectively. However, the statements and information in the financial
statements do no make it clear of how the calculation was summed together. It
does discuss retained earnings on the group changes in equity statement yet still
does not define where the total amount of retained earnings came from.
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Part Five
Throughout the report we have focused on all four company’s financial
statements such as Income Statement, Balance Sheet, Cash Flow Statement, and
Stockholders Equity Statement. Financial records provide value information about a
company’s performance and the value of the company. In addition, accounting
records provide measurement elements used by other players in the industry.
Nevertheless, a company’s financial statements not only provide relevant information
to the company but also to investors, creditors, and other stockholders. Different
financial statements focus on different areas of financial performance.
Income Statement: Inventory & Cost of Goods Sold
All of the financial reports are important for many reasons, but the following
are particularly important to the clothing retail industry for significant reasons. Income
statement, cash flow, and balance sheet are key financial indicators because they
are projectors of profit and loss. Retailers need an effective inventory management
system to account for inventory purchases, inventory stored on the shelves and
inventory sold to customers. Retail accounting requires knowledge of the inventory
and how each sale impacts the business. Consequently, retail business operations
consist heavily on inventory which are goods or property held for sale in the ordinary
course of the business. It is not to be confused with assets acquired to operate the
normal functions of the business such as plant and equipment. Thus, a condensed
income statement would project sales, which is income or profit generated from
buying or selling inventory, and cost of sale- used to show total cost of inventory sold
during the period.
In essence two distinct entries are entered in the ledge: first to record the
sale and then to record the inventory change. When a sale is made the retailer will
record a sale of merchandise by debiting cash and crediting sales. Furthermore,
when the retailer sells merchandise it has lowered its inventory, hence it will need to
record a change in inventory by debiting cost of merchandise sold and credits
merchandise inventory for the value of the inventory sold to the customer. It’s
important to note that an increase in inventory is not always a cause for alarm.
Sometimes inventory will increase as a result of new stores opening or the
expansion of existing stores. To find the root cause of inventory growth a comparison
will need to be made between inventory increase and store expansion.
As noted below important benchmarks figures for a retail environment are
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sales, gross margins, operational expenses and inventory turnovers. Financial
reports provide key tools which are intuitive of a company’s financial forecast.
An income statement also measures a company’s sales and expenses
during a specific time. The function of the profit and loss statement is to total all
sources of revenue and subtract all expenses related to the revenue, allowing for the
company to examine its financial progress during the time period being examined.
For retailers cost of goods sold or the cost of sale is the total price paid for th
e products sold during the accounting period. The cost of the sale is separated from
selling expenses or administrative expenses. Accounting for retailers work differently
than for professional companies because they don’t record cost of goods sold. The
se types of companies receive income from fees, commissions, and royalties a
nd do not have inventories of goods. The costs to generate services will be in
cluded in the selling and administrative expense and the general expense secti
ons of the income statement. (Zion Business).
Generally, businesses that make or buy goods to sell may deduct the cost of
goods sold from their gross receipts in computing business income. This information
applies if the business is a manufacturer, wholesaler or retailer, or if engaged in any
business that makes, buys or sells goods to produce income. The opposite occurs to
personal service businesses, such as doctors, lawyers, carpenters or painters except
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for personal service businesses that sell or charge for the materials and supplies
normally used in the course of business. (IRS, 2006)
The clothing retail industry must account for an inventory and generally use
an accrual method of accounting for income as well as expenses. The following
items need to be taken into consideration when computing COGS:
• Inventory at the beginning of the year
• Purchases less cost of items withdrawn for personal use
• Labor costs (generally applies to manufacturing and mining operations)
• Materials and supplies (generally a manufacturing cost)
• Other costs (generally applies to manufacturing and mining operations)
• Inventory at the end of the year
For many companies, inventory is at the heart of the operating cycle and
must be carefully managed and controlled. If a company doesn’t have enough
inventory on its shelves to meet customers’ demand, it will lose sales. On the other
hand, too much inventory will increase carrying costs such as storage and interest
costs as well as increase the risk of obsolescence. Wal-Mart has long been
recognized as a world leader in its effective use of technology to manage and control
its inventory and distribution
Even though inventory is an asset, it can have a major impact on net income.
That is because all inventory accounting systems allocate the cost of inventory
between ending inventory and cost of goods sold. Therefore, the valuation of
inventory affects cost of goods sold, which in turn, affects net income. Merchandise
inventory represents the largest asset owned by most retail companies and as so a
company’s current asset value can be found on the balance sheet.
A successful clothing retailer is able to manage, control and account for vast
and varied inventories. For example, one of Wal-Mart’s key performance measures
is the comparison of inventory growth to sales growth. In the recessionary economy
of 2009, Wal-Mart’s sales grew by only 1 percent. In response, it was able to shrink
its inventory by 4 percent—an indication that Wal-Mart was effectively managing and
controlling its inventory in response to economic pressures. Once a company makes
a sale from their inventory, the cost of the inventory becomes an expense called cost
of goods sold. Cost of goods sold (or cost of sales) represents the outflow of
resources caused by the sale of inventory and is the most important expense on the
income statement of companies that sell goods instead of services.
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To correctly interpret and analyze financial statements, one must understand
inventory accounting. Accounting for inventories requires a matching of costs with
revenues based on an appropriate inventory costing method. Management is
allowed considerable latitude in determining the cost of inventory and may choose
among several different costing methods. In addition, GAAP allows certain
departures from historical cost accounting for inventory. These choices that
managers make affect the balance sheet valuation of inventory, the amount of
reported net income, and the income taxes payable from year to year. (cornerstone)
Apparel retail companies practice one of four methods for inventory costing:
Specific identification, First-in, First-out (FIFO), Last-in, Last-out (LIFO), and
Weighted-average cost. The methods are used depending on the circumstances or
the company’s financial interest. The FIFO methods is commonly used when
inventory costs are rising because it produces the highest ending inventory and the
highest gross profit. Managers prefer the FIFO method because during periods of
rising costs, it results in a higher ending inventory, lower cost of goods sold, and
higher reported profit than does LIFO. On the other hand, managers may not want to
use the FIFO method during period of rising costs, FIFO results in higher taxes. This
method is also known as the balance-sheet approach because the amount it reports
for ending inventory is closest to the current cost of inventory.
Contrary, the LIFO methods is used when inventory costs are declining
because it produces the highest ending inventory and the highest gross profit. LIFO
is preferably use when inventory costs are declining because it produces the highest
ending inventory and the highest gross profit. LIFO is commonly referred to as the
income-statemetn approach because the amount it reports for cost of goods sold
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realistically matches the current costs of goods sold. At times when costs are rising,
managers prefer to use the LIFO method because it results in the lowest amount of
reported profits and thus, the most tax savings.
Companies are free to choose among the four inventory costing methods, and
the inventory accounting policy decisions that are made can have major effects
onthe financial statements.
However, when purchase prices vary, the FIFO, LIFO and average cost meth
ods will produce different amounts for ending inventory, cost of goods sold and, ther
efore, income. To properly analyze financial statements, it is necessary to understan
d the impact of changing prices on inventories and income. Proper management of
these decisions, within the bounds of generally accepted accounting principles
and good business ethics, can also affect the timing of income tax payments
and the judgments of creditors, stockholders, and others. Therefore, it is import
ant to understand the consequences of these accounting choices. (cornerstone)
Proper management of inventory is needed for a retail company because
having too little inventory reduces the selection of product available to customers
and having too much inventory can leave a store having outdated inventory.
Because inventory is a current asset in the balance sheet and the cost of inventory
that was sold during the period is reported in the income statement is clear why
financial statements are key to the proper record keeping. Manufacturing and
merchandising companies rely heavily on balance sheets and income statements
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because they are companies that earn revenue by selling inventory.
Cash Flow: Investment
In a challenging environment a key performance indicator is a company’s
market share and market growth. International operations impact accounting
principles such as foreign exchange rate and long term investment. For this reason,
it’s important to evaluate sales and profits, but also asses the cash flow statement.
Three of the four companies analyzed in this report operation internationally. H&M,
M&S and A&F have achieved strong global presence at different exponential rates.
Each of these has its own distinct advantages, but it's important to know how
these advantages play out. For example, during tough economic times, the discount
retailers tend to outperform the others. The opposite is true when the economy is
thriving. The more successful retailers attempt to combine the characteristics of
more than one type of retailer to differentiate themselves from the competition.
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Conclusion
Based on our findings, we’ve concluded that the European companies have
had a faster rate of expansion internationally compared to the American companies.
Nevertheless, all companies reported either a drop in sales or a growth stop during
the 2008 U.S and global recession. In fact, the economic downturn has made
collaborations between top designers and retail chain stores somewhat of an
accidental necessity. The unprecedented collaboration is commonly known as
recession chic, which H&M is a staple leader, combining its high street retailer
experience with luxury designers. Yet not all of the companies have had the
necessity to turn to strategic alliances.
For example, PacSun has the advantage of focusing on solely to the U.S.
market because it has no international operations. The U.S. based retail clothing
company has a competitive advantage in the west coast by providing a brand rooted
in the culture and organic lifestyle of California. Whereas, A&F has the ability to profit
not only from a high domestic market share but also from the continuing expansion
throughout Europe and Asia. The American retailer is able to compete not only
domestically but internationally by carrying an upscale brand image to foreign
markets desirable of American brands. M&S, although international, is unable to
profit from the American public as it does not carry operations in the U.S.
Nevertheless, the British company leads as one of the top performers in terms of
profits and revenue. This may very well be due to its higher market share compared
to PacSun and A&F.
Lastly, H&M takes the lead as the top performer in terms of sales, income
and global presence. The Swedish company is not only a retail leader in its domestic
market but it also dominates international markets with over 2,600 stores and more
than 104,000 employees worldwide, spread across 48 countries including the United
States. The company now ranks as the second largest global clothing retailer. In
conclusion, a company’s success is not only reliant on the controllable aspects of
accounting principles on financial statements but also on the uncontrollable
underlying macro-environmental factors affecting the clothing retail industry.
100
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