Profitability to come to a final profit of 115.7

 

Profitability

Despite a slowdown in the UK economy due to
various factors such as Brexit, there has been a 3.01% increase in revenue over
the three years. This is because of food being a necessity and so supermarkets
are not affected as much, although marks and spencer have seen a reasonable
decline in the sale of clothing. Their food sales accounted for 60% of their
turnover in 2017 at 5.6 billion pounds, the food sales increased by an average
of 3.73% each year from 2015- 2017 as a result of people preferring higher
quality food products as well as their Plan A scheme has attracted more eco-friendly
customers.

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Gross profit is driven by sales and so gross
profit increased from 2015 to 2016 by 3.5% but fell in 2017 by -0.98% because
of cost of sales increasing due to inflation and adverse exchange rate
conditions, some of the knock-on effects from Brexit still happening. The
increase in revenue was aided by several factors as mentioned
above. Gross profit margin is a measure of profitability in producing or
selling goods before other expenses are accounted for. The increase in gross
profit margin in 2015, however from 38.65% to 39.11% in 2016 however, was because
of revenue rising at a higher rate than costs at 0.77%, with one of the reasons
being that they had to absorb additional costs from adverse exchange rates rather
than raise prices as they had to try and compete with cheaper competitors such
as Tesco and Asda who are causing reductions in selling price across the sector.
In 2017 revenue only rose by 0.63% while costs rose by 1.67% causing their
gross margin to fall to 38.48%. This comes to show that M&S controlled
costs from increasing at the trend rate, one of the causes being that they successfully
reduced wastage that year.

Operating profit experienced a decrease by
16% from 2015- 2016 and a further decrease by 56.65% from 2016- 2017. This was
due to operating expenses such as employee costs, repairs and renewal costs
increasing.  Their operating profit has
had a negative correlation with revenue as can be seen through their operating
margin which has decreased over the two years from 6.80% in 2015 to 5.53% in
2016 to 2.38% in 2017.

The final net profit decreased by 77.3
million in 2016 due mainly to the increase in operating expenses such as
employee costs which included an increase in pensions and share based payments.
Surprisingly, despite the revenues, costs and operating expenses being similar across
the 3 years, there was a drastic decrease in profits by 71% in 2017. This is because
of their change strategic programs, this included the implementation of a
fairer pension scheme, the closing down of stores, mostly international, to allow
them to focus more on certain local stores. The closing down of stores, per
them, is particularly costly as they relate to redundancy, lease exit and
property dilapidations. This program has cost them 437 million, causing them to
come to a final profit of 115.7 million for the year. Overall, reflecting on
the income statement and profitability ratios, M& S have experienced a
fairly……..

 

Liquidity

Although
the liquidity ratios looks low over the three years, this is common in the cash
generative supermarket sector such as this as they only hold fast moving
inventories and all sales are made in cash. The industry average is 0.71:1 and in
2015 & 2016 it was 0.69:1 but decreased even further to 0.63 in 2017. This
is due to a fall in current assets in 2017 because of their store closures that
year reducing their assets and the wastage reduction scheme led to less
inventories of their perishable goods being held as well.