The Research and Analysis Project Primark

Published Date: 23 Mar 2015

1. INTRODUCTION

TOPIC CHOSEN

The Research and Analysis Project report is written based on the Topic: The business and financial performance of Primark stores limited over the three year period 2007 to 2009. This report highlights more on the operations, strategy, business and financial performance of Primark stores limited. This is written in comparison to one of its competitors, BHS Limited.

REASON FOR CHOOSING THIS TOPIC

The reason why I have chosen this topic is that, as a student accountant, business and financial analysis is very important as it will widen my understanding of financial analysis of companies. I will be coming across them on the practise field and that I should be able to analyse them without any difficulty.

More so companies want to have a deep understanding of where their business is leading to and so tend to rely on their business and financial performance analysis. This will help them to recognise their strengths and weaknesses and not only that but also the opportunities and threats which lie ahead of them. It will also help companies forecast ahead of time based on the historical financial analysis made. In this way companies will be able to propose healthy strategies in the sustenance of their company warranting an uninterrupted growth in both sales and profitability.

Being a guideline in analysing the financial situation of a company, this analysis is also relevant and critical in modern day business worldwide as it outlines the complete image of the company in question.

REASON FOR CHOOSING THIS ORGANISATION

Being one of the most popular clothing retail stores Primark stores limited has gotten into the media in both good and bad name.

As a low cost-focus giant in the clothing industry, Primark stores limited has been attracting a very large market in the United Kingdom. Despite its low cost, it is also criticized on its low quality standard as compared to its competitors like Marks and Spenser, BHS and Debenhams.

With these high valued competitors having 'store wars' with Primark Limited, I have become keen to know how good Primark is doing in terms of its business and financial performance.

I am also very curious about the impact to the profitability of Primark on the ethical issues concerning Primark using child labours in third world countries to make its products. http://news.bbc.co.uk/1/hi/business/7467846.stm

I will also like to know how the recent economic downturn affected the financial performance of the business of Primark between the 2007 to 2009 periods.

With a recent change in turnover of 13.64% in 2009-2008, I am keen to know what contributed to this change. www.fame.bvdep.com.

Throughout this project, I have made a clear assessment between Primark stores plc and BHS limited.

AIMS AND OBJECTIVES OF THE REPORT

The main objective of this report is to analyse the business and financial operations of Primark stores limited.

This will be looking at whether it is worthwhile to invest in the low-cost clothing retailer, Primark. Since both potential and existing shareholders are keen on knowing the profitability and going concern of Primark stores limited, this will serve as a guide to them on whether it is worthwhile to sell their shares, invest in buying more shares from Primark or to hold on to what they already have in the company. I have therefore analysed the financial performance of Primark stores in both in comparison to its previous years and one of its main rivals in the United Kingdom.

This project goes further in assessing the internal and external environment of Primark using the SWOT analysis in analysing Primark's strength, weakness, Opportunities and Threats.

RESEARCH QUESTIONS

In this project I have looked into answering the following research questions so i can come out with a vivid conclusion as to whether it is financially viable for shareholders and potential shareholders to continue to invest their interest in Primark.

How successful is Primark in terms of its profitability and turnover as compared to its rivals in the same market?

What are some of the strengths and weaknesses, opportunities and threats affecting the going concern of Primark?

Has the Return on Capital Employed of Primark Improved with time?

Has the recent criticisms by the public on its ethical stance in using suppliers who use child labour affected its turnover adversely?

2. INFORMATION GATHERING

2.1 SOURCES OF INFORMATION

Annual reports for the financial years 2007 to 2009:

I was able to get access to the financial reports of Primark and BHS limited for the periods between 2007 and 2009. I then read through the three year results. This was a very important part of my work as these were compare specific information. Here it showed the financial statements and the financial ratios of both companies

Chairman of the Associated British Foods plc's report: this gave me access to the most recent report update on the revenue upsurge in the year 2010. This was helpful in updating my project because as at the time I had started this project, the 2010 financial report of Primark had not been released to the public domain and so the chairman's report from the parent company's annual statement provided me with some recent updates in relation to its subsidiary, Primark.

Books and journals:

I was able to get some background information relating to financial analysis of businesses by relying on books and journals. It helped me understood better the financial ratios and trends in the financial statement. It was a boost to my analysis as it enabled me to get deeper knowledge of results showing on the financial statements.

Websites (electronic sources):

It was much easier and quicker to use the internet to research information. I used mainly the Primark website and the BHS website alongside the financial times and FAME.

Financial Analysis Made Easy(FAME):

This is an electronic source which provides financial analysis of the UK's leading companies. Results of the top 1.7 million UK and Irish companies for the last 10 years. This shows the statement of financial position, income statements and other information useful and relating to the financial analysis.

Emerald [electronic resource]. 

This gave me access to management research journals from MCB University Press. It therefore provides service access to more than 20,000 management articles, with a full text archive going back to 1994. I was able to read through some of the articles relating to financial analysis to gain more understanding on the topic chosen.

2.2 METHOD USED IN INFORMATION GATHERING

A major part of this research is done through researching secondary data. Being information already accessible by the public as reliance on publicly available information is relevant to this analysis. I first of all read through the annual report of Primark stores limited and BHS limited to get the understanding of how they have operated throughout the three years. I also read through their company profile from their websites and other competitor sites like BHS and Marks and Spenser to gain some more knowledge of their operation in the clothing retail market.

I was able to gather some more information through the use of the library and BBC documentary. Researching through the library was a bit difficult as compared to using the electronic library to research on the two companies.

The financial information between years 2007 and 2009 were considered and used in the analysis because as at the time of this project, the 2010 financial report had not been released to the public domain.

I was able to get customer's view on Primark by reading from complaints and complements made in a forum online at addresses like the www.ciao.co.uk.

I did most of my research using information from online source. i was a get the detailed financial information of both Primark and BHS from online as well. Apart from the online source, I was able to rely on books as well like the ACCA's Kaplan text books and that from BPP's text book. Further, i used the journals from ACCA student's accountant magazines to help me write and understand my research well.

The articles from the financial times Newspaper was also very helpful in my research as it gave me up to date information and occurrences in the retail industry.

ACCOUNTING TECHNIQUES USED

Some of the financial ratios used in answering and understanding of the research questions posed in 1.5 above were;

Revenue Growth ratio: this showed the trend of growth in revenue for the three year period 2007 to 2009 and also compared to BHS.

Profitability and return ratios: This showed how well Primark has improved in terms of Profitability for the three year period and also as compared to BHS.

Working capital ratios: this is an indicator of short-term financial credibility of Primark. This is the liquid capital available with the company to carry on with its day to day activities. This considered key ratios like the creditors payment period and stock turnover.

Efficiency ratios like the profit per employee and turnover per employee were all considered. This was able to show how efficient Primark has been managed in relation to its workers.

3. ANALYSIS AND PRESENTATION

3.1 PRIMARK COMPANY PROFILE

Primark Stores Ltd., a subsidiary of Associated British Foods plc (ABF), is a leading and expanding international clothing retailer.

As at December 2010, it operated a total of 215 stores in and around the UK with 150 stores in the UK, 38 in Ireland, 19 in Spain, 2 in the Netherlands and Portugal as well 3 in Germany and 1 in Belgium. Spain (Plenilunio) and Ireland, where it trades under the Penneys brand. It was first established in 1969 as Penneys in Mary Street, Dublin.

Primark carries a full range of departments: Women's wear, Lingerie, Children's wear, Menswear, Footwear, Accessories, Hosiery and Home. The company has several brands, which include Atmosphere, Secret Possessions, Primark Essentials (for Women, Men and Children's quality basics), Early Days, Rebel and Young Dimension.

Primark targets young, fashion-conscious under 35's, offering them high quality, fashion basics at value for money prices. Almost half of sales are in Women's wear. A quarter of sales is dedicated to Menswear and Children's wear, with other items constituting the remaining sales.

The company has developed computerised customs clearance, dedicated warehousing and distribution services to support the individual stores and facilitate stock control, thereby ensuring immediate sales analysis.

In the next few months a further 41 stores will be added, mainly those acquired from Littlewoods, with a total investment of some £700 million. New stores recently opened include Dundrum Town Centre and Dundalk (Ireland); Leicester, Lakeside Shopping Centre, Hull, Cardiff, Oxford, Metro-Centre, Sutton, Ayr and Leeds, Harlow, Preston, Luton and Maidstone. (www.primark.co.uk and www.fame.bvdep.com)

3.2 BHS COMPANY PROFILE

British Home Stores Limited otherwise known popularly as BHS is a private British retail department stores chain with its branches mainly in the high street locations, they primarily sell clothing and household items such as bed-linen, cutlery, crockery and lighting. The BHS operates a total store of about one hundred and eighty six (186) stores throughout the United Kingdom. The Company has been a constituent of the FTSE 100 Index, but is now part of the Arcadia Group since 2009.

Company Strategy

In a highly competitive marketplace in which all UK retailers are fighting to sustain their sales against a slowdown in consumer spending, Primark is doing remarkably well.

The UK high streets and malls are packed with no-frills fashion retailers. That means that Primark has plenty of competitors all aiming at the same type of customers. It is not easy to sell cheap fashion. Well-established rivals such as BHS and Matalan are struggling, while results at Primark are booming.

The market segment targeted by Primark is the fashion conscious under-35s with the slogan "Look good pay less". It offers fashionable clothes at very competitive prices (for example, jeans for £4) and reasonable quality: in other words, a value for money strategy. In competitive strategy terms, Primark is a pursuing a classic 'focus cost leadership' strategy.

The American management professor Michael Porter of Harvard University developed a well-known approach to the competitive strategy of firms. He argued that companies could achieve a higher rate of profit (or at least potential profit) in one of two ways: they could either provide a product or service that is identical to that provided by rival companies, but at a lower cost than rival firms, or they could provide a product or service that is differentiated from that of rival firms such that customers would be prepared to pay more for their product than for a rival firm's product. (R. M Grant (2005)).

The first approach would mean that the firm has a cost advantage over rival firms, allowing it to pursue a 'Cost Leadership' strategy; the second approach would mean that they had a differentiation advantage, allowing it to pursue a 'Differentiation' strategy. Firms selling a 'no-frills' product are usually attempting a cost leadership strategy, such as Easyjet (UK) or SouthWest (USA) airlines. The 'focus' part of Primark's strategy is the specific customer segment it focuses on i.e. that of the under-35s. It is not attempting to sell to everybody. It has selected a particular customer segment, just as the '18-30' holiday company has selected a clear market segment based on age group within the leisure industry.

In the last three years Primark has got a lot of things right. Some of its strongest successful competitors are BHS, TK Maxx and George at ASDA. However, although all three are in the 'value' segment and therefore have similar market positioning, the other three have different strategies to that of Primark. TK Maxx sells heavily-discounted prestige brands and George at Asda has created its own private-label brand mostly at out-of town stores. Primark is a high street retailer which has a family of brands and focuses much more on buying, logistics and supply chain management rather than branding.

In its pursuit of ever-lower costs, teams of buyers in UK and Ireland travel internationally both to identify fashion trends and to seek out the most competitive suppliers. The company uses computerised customs clearance (speed to market) and dedicated warehousing and distribution facilities, such as the giant warehouse owned and run by the logistics company TNT but dedicated solely to Primark stock distribution. This one warehouse is centrally located for the whole UK market, near a junction of the M1 motorway and it houses 50% of Primark's UK stock, receiving 30 lorry loads each day. (This warehouse was destroyed by fire in November 2005). Computerised warehousing and distribution systems are linked to computerised daily sales and stock information (rapid restocking of fast-selling items) by size and colour for each item in every store to optimise turnover. (www.open2.net)

FINANCIAL ANALYSIS

3.4.1 Revenue Growth

2009

2008

2007

PRIMARK

1,743,006

1,533,794

1,298,396

BHS

1,121,045

850,241

864,453

Source: www.fame.bvdep.com

Figure 1

From the above graph of Primark stores limited, the revenue has improved significantly since 2007. This has risen from 1,298,396 in year 2007 by 18% to 1,533,794 in 2008 and then further to 1,743,006 by 13.6% in 2009. This has been very amazing as these upsurges in revenue are coincidentally at the same period as when the global economic downturn took effect. The increase in revenue could be as a result of the recent new Primark stores opened across the United Kingdom and other European countries.

On comparing this to the BHS limited, BHS limited also performed well and better in year 2009 with a 31.8% rise above that of year 2008 despite the drop of 1.67% in 2008.

Primark stores outperformed BHS limited in the share of the clothing retail market as it continues to grow its revenue every year.

Profitability and Return Ratios

3.5.1 Operating Profit Growth

2009

2008

2007

PRIMARK

86,015

76,274

96,426

BHS

-53,535

15,203

35,500

Source: www.fame.bvdep.com

Figure 2

With a high profit of 96,426 in year 2007, the operating profit fell from 96,426thGBP in 2007 to 76,274thGBP in 2008 which represents 26%, In spite of this fall in 2007, Primark began to get better with a good operating profit of £86,015thGBP in year 2009. The fall in the profit between years 2007 and 2009 was because some expenses like Administration expenses was constantly increasing from 131,745thGBP in 2007 to 223,912thGBP in 2009. Apart from this, the cost of sales had also increased from 1,070,225thGBP in 2007 to 1,433,079thGBP in 2009. These contributed to the slight fall in profit as at 2009.

On comparing the results of the operating profit to that of BHS, in year 2007 BHS did well in ensuring it maintained a profit level of 35,500thGBP but could not do better than Primark Stores in the same year and even years 2008 and 2009. BHS profit began to fall in year 2008 and later drastically fell from 15203 in 2008 into a loss of 53,535thGBP in year 2009.

Overall I will say that despite the 2008 fall in the operating profit of Primark, it outperformed BHS significantly.

3.5.2 Profit after Interest and Tax

2009

2008

2007

PRIMARK

29,795

14,714

44,102

BHS

-62,022

17,554

27,638

Source: www.fame.bvdep.com

Figure 3

Similar to the operating profit growth discussed above, the profit after interest and tax have also experienced a downward slope from 44,102thGBP in year 2007 to 14,714thGBP in year 2008 but then rose to 29,795thGBP in year 2009. There was a net interest as follows, year 2007 had a 46,604thGBP with year 2008 having £55,737thGBP and year 2009 having a 38,422thGBP. Also, the annual taxation was 19,750thGBP for 2007, 2008 paying 41500thGBP whereas in 2009 they paid 29,795thGBP. These significant amounts of interests and taxations for the years also partook in the adverse effect on the profit after tax and interest.

The huge interest list was as a result of the interests being paid to the bank, hire purchase, leasing and other interests paid.

Comparatively, the BHS profit after tax also fell even more drastically than Primark, it had a profit after interest and tax at 27,638 in year 2007 but then later fell into a loss in 2009 at -62,022thGBP.

3.5.3 Profit Margin

2009

2008

2007

PRIMARK

2.94

1.87

4.92

BHS

-5.54

2.53

4.46

Source: www.fame.bvdep.com

Figure 8

Primark stores plc was able to achieve a favourable profit margin throughout the three years from 4.92% in 2007 to 2.94% in 2009. This was a slight fall from 4.92 to 2.94. This was partly due to the ineffective control of costs and sales in Primark.

But on comparing this to BHS ltd, BHS had a good profit margin of 4.46% but then reduced to 2.53% in 2008 and then further to -5.54 in 2009.

3.5.4 Net Assets Turnover

2009

2008

2007

PRIMARK

8.73

8.39

6.32

BHS

4.09

3.11

3.39

Source: www.fame.bvdep.com

Figure 12

This measures the ability of Primark to manage its net assets very well to generate revenue.

This is calculated by dividing the sales revenue of Primark against its capital employed. Primark was able to get a relatively reasonable figure of 6.32times as at 2007compared to BHS which had 3.39times. Primark's net asset turnover continued to rise from 6.32times in 2007 to8.73times in 2009. This is an indication that Primark has efficiently been able to manage its net assets very well. Compared to that of BHS who's net assets indicates that there could be inefficient management of its net assets.

3.5.5 Return on Capital Employed (%)

2009

2008

2007

PRIMARK

25.68

15.69

31.06

BHS

-22.63

7.85

15.11

Source: www.fame.bvdep.com

Figure 14

One of the major reasons why people make investment is to get a satisfying return on capital invested. Therefore the return on capital employed is used to measure the success of a business in achieving its objectives

Primark's return on capital employed shows the relationship between its profit and its capital employed.

From the above, we can see that Primark had a reasonable return on capital employed for 2007 of 31.06% but decreased to 15.69% and 25.68% in 2008 and 2009 respectively. This indicates that the percentage of return on capital employed by Primark into its business is becoming low and that it is a sign of inefficiencies in its business this can therefore be attributed to the decrease in the margin of profit in 2007 and 2009.

The BHS had a very low return on capital employed in year 2009 at -22.63% after falling from 15.11% in 2007. This is not very good for BHS as it implies inefficiencies in business operation for BHS.

3.5.6 Return on Shareholders' Funds (%)

2009

2008

2007

PRIMARK

34.73

22.02

40.69

BHS

-143.74

9.50

20.83

Source: www.fame.bvdep.com

Figure 15

This is the relationship between the profit after interest and tax and shareholder's funds. And it is measured as net profit divided by shareholder's investments.

As the main goal of every company is to maximise profit, this ratio will help to measure the extent to which this profit is attained. Both the incumbent and the prospective shareholders of Primark will find this ratio particularly important. This is because it will be able to show to them how efficient the resources of Primark have been put to use.

From the above we can see that Primark stores had a high return on shareholder's funds at 40.69% in 2007 but then decreased to 22.02% in 2008 and 34.73% in 2009. This shows that as at 2007, the shareholders of Primark was able to get good return from their investment into the clothing retail business. But then they found their return in the subsequent years reducing. This is also because of the reduction in the profit margin between 2007 and 2009.

Comparing this to BHS, it had a good return on shareholder's funds in 2007 at 20.83% but then drastically decreased to -143.71% in 2009. This is as a result of its 2009 profit margin or -5.54%.

Here i will say despite the fall in Primark's return on shareholder's funds, it is seen to be performing better than BHS in the same industry.

3.5.7 Return on Total Assets (%)

2009

2008

2007

PRIMARK

3.76

2.23

5.21

BHS

-10.65

4.97

8.51

Source: www.fame.bvdep.com

Figure 16

This measures Primark's earnings before interest and taxes against its total net assets. This will show how effective Primark is using its assets to generate earnings before contractual obligations must be paid. In year 2007, Primark had a high return on total assets of 5.21% which indicates that Primark is investing wisely and that it is highly probable that it will be making profit through this. It later fell to 2.23% and 3.76% in 2008 and 2009 respectively but as compared to BHS which fell to -10.65%, Primark was able to maintain its strength in maximising Profit by investing wisely despite the fall in 2008 and 2009.

Risk Ratio

3.6.1 Current Ratio

2009

2008

2007

PRIMARK

0.27

0.26

0.21

BHS

0.59

0.75

0.81

Source: www.fame.bvdep.com

Figure 4

The current ratio of Primark shows at what ratio Primark stores' current assets can settle its current liabilities for a particular period. In other words, it will show the ability for Primark to settle its short-term debts obligation as they fall due.

There is a recommended general threshold of 2:1, it is generally accepted that any ratio below the level of 2:1 shows that the company is facing liquidity problems. In other words if a company's current ratio is below the 2;1 then it means the company's current assets is not able to cover its current liability.

From the above, we can see that Primark's current ratio is far below the recommended general threshold of 2:1 and that this indicates that Primark has been experiencing liquidity problems throughout the three years from 2007 to 2009. From the balance sheet of Primark stores, we can see that it had total current assets of 311,444thGBP in 2009, 285,747thGBP in 2008 and 219,237thGBP in 2007 but had an excessive current liability of 1,162,552thGBP in 2009, 1,101,359thGBP in 2008 and 1,019,899thGBP in 2007. This could be the reason for the adverse state of Primark's current ratio. The excessive upsurge in the current liability was due to increase in short term loans and overdraft throughout the three year period

Meanwhile, BHS seem to have performed a bit better than Primark even though it could not reach the recommended threshold as well and a fell from 0.81times in 2007 to 0.75 in 2008 and then later to 0.59 in 2009.

3.6.2 Gearing%

2009

2008

2007

PRIMARK

683.57

745.16

579.48

BHS

757.34

33.77

74.14

Source: www.fame.bvdep.com

Figure 7

This shows that the percentage of capital employed financed by the debt and long-term finance is quite high. High gearing is also associated with a higher finance cost and that the higher the gearing the higher the risk to equity holders. This is because the dependence on borrowing and long-term funding is high. Though there are no recommended best levels in gearing, it is advisable that Primark sustain a reasonable balance between its debt and other long-term borrowings with equity.

The gearing level for Primark stores is very high in all three years with 579.48% in 2007, 745.16% in 2008 and then 683.57% in 2009. From the balance sheet of Primark, we can see that the total long-term borrowings including debt had increased from 48,646thGBP in 2007 to 52,009thGBP in 2009 but with equity capital remaining constant at 50,000thGBP throughout the three years.

In comparison to the BHS ltd, BHS was able to sustain a below 100% gearing level between years 2007 and 2008 at74.14% and33.77% respectively. It later rose significantly in 2009 at 757.34% above its previous years and Primark stores in that same year. This shows that both Primark and BHS are prone to the risk of not being able to settle their debt.

3.6.3 Interest Cover

2009

2008

2007

PRIMARK

2.33

1.51

2.37

BHS

-17.22

7.49

10.73

Source: www.fame.bvdep.com

Figure 9

Interest cover indicates the number of times a firm's profit before interest and tax for a given accounting period can cover its related interest cost. This will show clearly the ability of Primark to pay its interest with its available profit. This ratio can also be used to access the firm's borrowing capacity and also to assess its risk of increasing its debts in the future.

From the above, we can see that the interest cover for Primark stores was at 2.37 times in 2007 but then fell to 1.51times and 2.33times in 2008 and 2009 respectively. This level of interest cover is not very high and this indicates that the ability of Primark to cover its interest with its available level of profit is quite low. This can also indicate that the level of financial distress that can be suffered by Primark in the near future should the interest cover keep reducing can run high and this may affect its future borrowings.

In comparison to BHS ltd, BHS was able to sustain a high interest cover than Primark in year 2007 at 10.73time but then fell to 7.49times in 2008. It later fell significantly to -17.22times in 2009. This shows that even in BHS ltd, they are very likely to suffer a great financial distress in year 2009 and to make matters worse may also affect their future borrowing capacity.

Working capital ratios

3.7.1 Creditors Payment Period

2009

2008

2007

PRIMARK

19.82

20.64

16.5

BHS

39.44

29.19

30.07

Source: www.fame.bvdep.com

Figure 10

The creditors' payment period ratio measuring how long on average it takes a Primark to pay its creditors. This is calculated by dividing the trade creditors total figure shown in its accounts by its cost of sales, or sales, and then multiplying by 365days (www.finance-glossary.com).

The company was able to pay cash to its suppliers and other creditors within 16.5day (approximately 17days) in 2007 but then rose to 20.64days (approximately 21days) and 19.82 days (approximately 20days) in 2008 and 2009 respectively.

Primark stores has been able to maintain a reasonably good period in paying off its debt and should it continue to increase its credit period, Primark stores will be able to rely on the available funds to maintain growth till the payment period is due.

The upsurge in creditor days is also an indication that Primark stores could be experiencing cash flow problems and so is relying on credit purchases.

It is a good business practices that Primark continue to maintain a reasonable period to pay off its debts but will be unethical should the period exceed their payment days.

Similarly, BHS also has been able to increase its payment days from 30.07days to 39.44 days in 2007 and 2009 respectively. But unlike Primark the number of days taken by BHS in all three periods is higher. This means that it takes BHS ltd much more days to pay its creditors than that of Primark and that there is a risk of it exceeding its payment period.

3.7.2 Stock Turnover

2009

2008

2007

PRIMARK

6.71

7.07

7.59

BHS

10.15

10.91

10.84

Source: www.fame.bvdep.com

Figure 11

The stock turnover ratio is a relationship between Primark's cost of goods sold of a period in time and its cost of average stock during a particular period. This is expressed in number of times. Stock turnover ratio indicates the number of times the stock has been turned over during the period and assesses the efficiency with which Primark is able to manage its stock. This ratio shows whether Primark's investment in stock is within proper limit or not. http://www.accountingformanagement.com/stock_turn_over_ratio.htm

From the above table, we can see that as at year 2007 Primark had a stock turnover of 7.59times but the decreased to 7.07times in 2008 and further to 6.71times in 2009. Having a decreasing stock turnover implies that Primark has invested a lot in stock and that there are some indications of poor quality of goods, accumulation of stock and also slow-moving cloths. This could mean inefficient management of stock because the cloths are not frequently sold but majority is held.

Similarly, BHS has also decreased its stock turnover from 10.84times in 2007 to 10.15times in 2009.

There is no rule of thumb for the interpretation of stock turnover ratio but norms may be different for different companies depending upon the nature and condition of business.

Primark and BHS are in the clothing retail industry and that their products can only go out of fashion after a long period of time if the stock turnover keeps low.

Efficiency ratios

3.8.1 Turnover per Employee (Unit)

2009

2008

2007

PRIMARK

79,856

73,567

68,419

BHS

54,646

57,259

59,388

Source: www.fame.bvdep.com

Figure 17

Unlike that of BHS which had a decreasing turnover per employee from 59388units in 2007 to 54646units in 2009, Primark as at 2007 had a turnover per employee for the year 2007 as 68419units rising to 73567units and 79856units in 2008 and 2009 respectively. This shows that the employees of Primark worked really hard to increase their turnover units. As a matter of fact, employees can put in their very best if there is the motivation. it is possible that Primark motivated its employees through so the best sales can be gotten.

3.8.2 Profit per Employee (Unit)

2009

2008

2007

PRIMARK

2,350

1,376

3,365

BHS

-3,028

1,446

2,647

Source: www.fame.bvdep.com

Figure 18

The profit per employee as at 2007 was 3365 units for Primark but as at 2008 it reduced sharply to 1376unit and then rose slightly to 2350units in 2009. The reason could be that as at the period between 2008 and 2009, there was a recession and that customers were a bit restrained in their buying. This has therefore affected the overall profitability of Primark.

Compared to that of BHS ltd, as at 2007 the profit per employee was 2647 units but diminished significantly to -3028units in 2009, this confirms the of -53,535thGBP loss made as 2009.

STRAGETIC EVALUATION

3.9.1 Primark's SWOT analysis

This analysis has been designed to critically evaluate the Strengths Weaknesses and their present Opportunities and potential Threats of Primark.

Strengths

Primark's purchasing power allows them to do a bulk purchasing and in the end passing the benefits to customers from these economies of scale.

They also tend to keep their overheads as low as possible wherever they can.

With their modern logistical, Primark stores have up-to-date fashion, as soon as it reaches them.

Because of the good quality but low priced product of Primark, it has successfully attracted customers thereby expanding its customer base. This is as a result of their cost-saving strategy to business which has been adopted. (www.news.sky.com).

Primark also has a target of attracting people below the age of 35

With over 400 first tier suppliers Primark gets more flexibility thus lowering their suppliers power to bargain.

Primark has a close relationship with their suppliers allowing them to understand their requirements.

Primark takes advantage of the low labour cost outside of the UK with only about 2% of its suppliers in the UK or Ireland.

With an effective and efficient research team working tirelessly around the world to find modern trends in providing the most fashionable clothes for its customers.

With a better cash flow and constant increase in profit yearly, Primark has so far proven they are effectively taking care of the market segment they have identified and that they have the right systems in place.

Since 2005, they have continuously been winning several awards like the value for money award by Prima High Street Fashion Awards for 3 years continuously plus the Retailer of the Year award by BCSC Gold Awards 2 years also continuously. (www.primark.co.uk).

Weaknesses

Critics have stood against Primark accusing them for having unethical working conditions. In 2005 it was called the least ethical clothes shop and ranked 2.5 out of 20 on an ethical index. In 2008, BBC exposed Primark, when it carried out an investigation about its suppliers and found out that their overseas suppliers in countries such as India were using child labour and had poor working conditions for the workers.

Primark denied having any knowledge of this and has since taken several steps to combat this issue.

Primark does little in terms of advertisement which is an advantage to its competitor's.

Primark has not yet taken advantage of the online sales nor catalogue is common these days among most major clothing firms and that this has become one of its major weaknesses.

There is the perception by some customers and non customers that Primark's products are of poor quality and that its rivals have tried to differentiate by selling good quality products. (www.primark.co.uk)

Opportunities

Primark has the opportunity to purchase and sell high quality clothes to fashion conscious people thereby sharing their high quality products and services overseas having been successful in establishing themselves as a good brand which is evident by their financial success.

They have the advantage of going global.

Primark also has the added opportunity to diversify for example by expanding their market to cater older generations as well. (www.primark.co.uk)

Threats

Primark's main threat is the competition it faces from other clothing companies in and around the United Kingdom like BHS, Next, Zara and more.

Moreover, there are some new entrants in the market like Armani who are introducing cheaper lines as well, this they call the Armani exchange. Even though Armani is not as lower price as Primark, their product is perceived to be of a higher quality than that of Primark.

Their lack of advertisement can draw customers away to its competitors like BHS, Armani and Marks and Spenser. (www.primark.co.uk)

Recent Development

In the course of writing this project, the parent company of Primark, the Associated British Foods Plc published its 2010 annual report and highlighted the recent upsurge in the revenue of Primark. The chairman of the Associated British Foods Plc disclosed that Primark had an exceptional year in 2010 where revenue had increased by 18% with like-for-like sales growth of 6% and also profit jumping to 35% ahead.

He also said that the stores in continental Europe, in particular those in Spain performed beyond what was expected and this has been an encouragement for expansion into new markets like these. The UK, being the most important market for Primark had like-for-like sales to be very strong, particularly by comparison with other high street retailers. According to the report, the weak economy in Ireland, had an unfavourable result on its trading.

Profit was 35% ahead and operating margin improved substantially from 10.9% to 12.5%. This improvement was largely driven by economies of scale as revenues increased, and by sterling's relative strength against the US dollar in the first half which benefited the cost of goods sourced in dollars and sold in the second half. However, we expect some of this margin improvement to be eroded in the coming financial year due to higher cotton prices and freight costs and increases in VAT, already implemented in Spain and planned for the UK in January 2011. Primark continues to lead the growing value sector of the market with its on-trend product offering and commitment to maintaining its position of price leadership on the high street. http://www.abfreports.com/operating-review/retail.htm.

Conclusion

Primark, along with its competitors, operated in an extremely tough consumer environment. It was however able to deliver excellent sales and maximise profit proving that its merchandise and pricing are attractive in all market conditions

Primark has grown constantly over the past three years despite the recent economic downturn which led to the collapse of so many retail firms in the industry across the globe. It is one of the few clothing retail companies which continuously made profit despite the economic calamity.

Apart from this, Primark has also been criticised recently by the media for engaging suppliers who use child labour for production of the products they sell. Even though this is against the Child Labour Prohibition and Regulation Act 1986, it was expected that these criticisms would affect the profitability of the firm. But from the above analysis, it can be seen that despite these criticisms, the company continued to be maximise profit.

Despite the fact that non-Primark customers are continuously questioning the quality of Primark's products, Primark has been successful in competing very well in the retail clothing industry especially against rivals like BHS and TKMax.

Primark has continuously stayed focus on selling low cost clothing to its customers despite the competition in the UK clothing retail market.

Primark's performance for the last three years has been impressive because of the following reason;

Primark is doing well because it understand its customers' requirements very well, and thus provides high fashion items at cheap prices. By far they have been smart in their selection of which catwalk fashion items to copy for its market.

Also, they have a very clear market positioning at the cheap end of the market. And thus helps them avoid some of the 'stuck-in the-middle' positioning problems faced by other competitors such as BHS and Marks and Spenser.

Looking from the above analysis, we can also see that they manage their costs very well. This is obviously crucial for businesses pursuing a low-cost strategy.

Primark's' is at the moment using the 'no-frills' strategy and still looks to the future as a cost leader. Their cost leadership strategy would be perfectly sustainable if Primark continues in its effective cost management. In other to continue to be a market leader with this strategy, I believe Primark must practically not just be low cost but lowest cost in their market segment.

So far so good, I will say that Primark's strategy has worked very well for them, however they need to consider how long they will continue holding this success and differentiate itself from its rivals.

This project can be concluded by mentioning that the clothing retail industry in the United Kingdom is facing high levels of competition between various players. But the end result shows, the consumers are most benefited from it.

Apart from this, looking at the profit per employee, it is obvious that the employees are well motivated to sell more to maximise profit for the organisation.

RECOMMENDATION

In other for Primark Stores to continue in their best financial and strategic performance, the must carry on to better their supply chain and vendor base to maintain cost leadership and possibly speed to market, in other words they can be the first to bring the latest fashion and trends to the market, fill the gaps in their portfolio.

Primark should also be considering advertising especially their collection and in new markets. They can also start an online business and implement and communicate to customers their efforts towards having the most ethical working conditions, concern for environment and human values.

Furthermore, they must expand to markets where they can replicate their model. They may not be able to expand to developing and emerging markets as in these markets they may not have any competitive advantage.

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Contemporary Strategy Analysis 4th edition Chapters 7, 8 & 9

R. M Grant, Blackwell

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