Shaver Shop Company Analysis Report PDF

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Shaver Shop Company Analysis Report for year 2007 to 2009...

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Shaver Shop Group Limited - Company Analysis Report

Team xx

Submitted as ACC10007 Company Analysis Report Due Date: 14th September 2020 eLA:

Executive Summary This company analysis report of the shaver shop focuses on the profitability, operating efficiency, liquidity, gearing and cash flows of the business over a period of three years, 2016, 2017, 2018. Shaver Shop Group Limited is a publicly listed Australian and New Zealand speciality retail store established in 1986 and specialises in the sale of grooming products through its 120 stores across Australia and New Zealand. An analysis of the profitability ratios is made. Its purpose was to show how profitable the shaver shop was over the years 2016 to 2018. According to the ROE, there was a significant increase in profits from 2016 to 2017 but dropped again in 2018. Mismanagement in the investments of equity is suspected to be a possible cause of the decrease. The ROA measures how much profit an entity can generate from its assets. Analysis of this ratio can help paint a more detailed picture of the issues surrounding the ROE ratio dropping, as it shows how Shaver Shop uses its equity to generate profit and its effect on the company’s profitability. From 2016 to 2017, the ROA ratio had increased by a 7.54 percentage point. However, in 2018, the ratio had dropped by a 5.45 percentage point. These figures strongly indicate mismanagement of assets, which ultimately showed in the ROE ratio changes. The gross profit margin has steadily decreased over the three years. This suggests that the profitability may be on a decreasing trend. The issue may be in the pricing of products that there is a decrease in gross profitability. A price increase may increase gross profits. The cash flow to sales ratio that was found shows that the growth in sales did not result in growth in cash flow. The efficiency analysis of Shaver Shop shows that the asset turnover ratio improved slightly from 1.71 times in 2016 to 1.74 times in 2018.The inventory turnover period for the organisation is more than the industry average of 66.97 days despite an increase in marketing and advertising budget in 2017 did not make any positive impact. The inventory turnover period increased from 95.41 days in 2016 to 106.42 days in 2018. The company recorded an improvement in the settlement period for account payable from 56.63 days in 2017 to 58.78 days in 2018 and likewise for account receivable, which improved from 62.21 days in 2016 to 52.16 days in 2018, thereby reducing the period of negative cash flow in the company activity cycle. 2

The liquidity ratios for Shaver Shop can have cause for concern as they should ideally be higher. With the company operating at 1.12 is sufficient for its operations, but a closer look at the acid test ratio reveals that a trend in significant deterioration (2016: 0.57, 2017: 0.29, 2018: 0.26). The company appears to be faring well as they are still quite profitable. The low scores could indicate that Shaver Shop is not carrying an excess of inventory. The Operating Cash Flow has seen some improvement over the 2016-2018 period from 0.42 to 0.74 times, suggesting that the cash problems are improving. Shaver Shop will need to monitor its liquidity and improvement can be made in being efficient in paying its bills and to increase its sales, thus increasing cash flow. Faster conversion of its inventory turnover will ultimately improve the numerator of the acid test/quick ratio. The overall gearing ratio significantly improved from 2017 to 2018 dropping from 19.47% down to 4.99% which is an improvement of 14.48%. This reduction demonstrates that Shaver Shop is financially stable, and the business has a smaller proportion of debt versus equity in 2018 compared to 2017. As the gearing ratio increased to 19.47% in 2017 from 12.00% in 2016, it meant that the company was more reliant on borrowed funds during 2017 that 2016. The shaver shop's financial reports from 2016-2018, showed that the company had an increasing reliance on debt to finance the total cost of their assets. Each year this debt to asset ratio increased. In 2017 the debt to asset increased 46.52%, due to increased borrowed funds and the repayments on these borrowed funds. In 2016 there was a reduced capacity to cover interest debts compared to 2017; this was due to 2016 being the year with the least amount of net profit. A 106% increase in profits in 2016 - 2017 resulted in the shaver shops interest cover ratio increasing by 511%. Overall the shaver shop can confidently cover all accrued interest and continue debt funding the company.

Shaver shop has a variety of business plans in place for long-term and short-term business goals. Online sales have increased 47% due to expanding their online marketing and their online sales platform to attract more business. The business is also 100% committed to product innovation to help the business evolve as current and future trends evolve. Shaver shop will also continue to develop marketing plans to attract more business.

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Table of Contents Executive Summary ………………………………………………………………………. 2 Table of Contents …………………………………………………………………………. 4 Introduction and Purpose of Analysis ……………………………………………………... 5 Company and Industry Background …………………………………...…………………... 5 Company ……………………………….…………………………………………... 5 Industry …………………………………………………………………………...... 6 Analysis of the Financial Report Data ……………………………………………………... 6 Profitability …………….…………….…………………………………………...... 6 Efficiency …………………………………………………………………………... 7 Liquidity ……………………………………………………………………………. 9 Gearing Analysis ……………………………………………………………………10 Gearing Ratio ………………………………………………………………. 10 Debt to Asset ratio ……………………………………………………….… 11 Interest Cover ratio ………………………………………………………… 11 Cash Flow Analysis ………………………………………………………………………... 12 Other Relevant Information ………………………………………………………………… 12 Conclusion ………………………………………………………………………………….. 13 Reference ...…………………………………………………………………………………. 14 Appendices …………………………………………...…………………………………….. 15 Appendix A - Financial Ratio Calculation …………………………………………. 15 Appendix B - Team Charter ………………………………………………………... 21 Appendix C - Team Contract ………………………………………………………. 25

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Introduction and Purpose of Analysis This company analysis report of Shaver Shop Group Limited focuses on the profitability, operating efficiency, liquidity, gearing and cash flows of the company over a three-year period - 2016, 2017 and 2018. This in-depth analysis report includes all calculations of the required ratios and an in-depth explanation into each of the analysis conducted. Shaver Shop is an Australian and New Zealand retailer that specialises in grooming projects. They are a highly successful business and currently have 120 stores across the two countries they operate in. After analysing the last three years of Shaver Shop’s finances, we have also provided a summary of the businesses’ current financial situation and have provided some recommendations to help improve their finances. This analysis also provides an assessment of other non-financial information that is relevant to the businesses’ current state of financial affairs. Recommendations are also made to ensure Shaver Shop continues to make a profit and improve their business finances.

Company and Industry Background Company Shaver Shop is an Australian and New Zealand speciality retailer of male and female personal grooming products established in 1986 by Gary and Mary Tyquin, with the first store opening on Lonsdale street, Melbourne CBD, Victoria, Australia. The company was formerly known as Lavomer Riah Holdings Pty Limited, but the name was changed in May 2016 to Shaver Shop Group Limited with its head office at Chadstone, Australia.

The company aspires to be the market leader in ‘all things related to hair removal’ and offers grooming products under different categories such as electric shavers, beard trimmers, hair clippers, body groomers, manual shavers, and oral care and massage products for men; and hair removal, hair styling, beauty, oral care, and massage products for women (Shaver Shop, n.d). Shaver Shop mainly engages in retail, and its business relations are established with customers, so it is crucial to keep updated customer group information. The company currently has 120 stores across Australia and New Zealand while also offering its products online through its website with a promise of excellence in customer service to both online customers and traditional “bricks and mortar” shoppers (Shaver Shop, n.d). 5

Shaver shop expansion strategy focuses on organic growth, including buybacks of franchised stores, rather than acquisitions. Shaver Shop was listed on the Australian stock exchange on July 1, 2016. Industry Shaver Shop operates in the consumer product industry in the broader Australian retail market. Within this, Shaver Shop specialises in the retail of personal care appliances and wet shave products, serving the hair removal and personal care needs of its customers. Shaver Shop conducts business through physical stores and online, together with managing a franchise store network.

Shaver shop faces competition from specialty retail stores in the household products subindustry and departmental stores such as The Good guy, Kmart, JB Hifi. The company’s competitive advantage may deteriorate due to action(s) of its competitors and or new entrants into the market if it fails to respond to the changes in the market and evolve with the current technological advancement. Shaver shop also faces threats from manufacturers who decided to sell directly to the consumer. The economic situation and government policy of the country is a major threat to the survival of Shaver Shop and therefore the management needs to be proactive in sustaining the company's survival.

Analysis of Financial Report Data Profitability The profitability ratio for Shaver Shop shows significant improvement from 2016 to 2017. As shown in Appendix figure 3, the ROE has increased from 9.84% to 16.19%. This shows that there has been a significant increase of profit generated for the Shaver Shops owners. However, from 2017 to 2018, the ROE decreased to 11.12%. This may indicate that there has been mismanagement and ultimately resulted in reinvesting equity capital in unproductive assets. To confirm this, the ROA which measures how efficiently a company is using its total assets to generate profit was at 8.80% in 2016 and increased to 16.34% in 2017. This reflects how Shaver Shop is using its debt leverage extremely effectively in its capital structure. This is seen in the average total assets in appendix A in which the ROA shows that there is more debt from 2016 to 2017. The ratio has noticeably increased as there is more profit in 2016 compared to 2017, thus showing a strong indication of effective debt leverage.

The ROA

then dropped to 10.89% in 2018. This could mean that Shaver Shop may have over-invested

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in assets and failed to produce revenue growth as a result of trying to reproduce last year’s success. This affects the ROE directly, therefore decreasing it dramatically. In terms of profitability, Shaver Shop gross profit margin had seen a minor decrease from 42.49% in 2016 to 41.72% and 41.32% in 2017 and 2018 respectively. This suggests that the profitability of the company is on a slow decreasing trend. Although Sales have increased each year, from $106,711,001 in 2016 to $142,567,549 and $154,936,604 in 2017 and 2018, the overall gross profit has decreased each year. This indicates that the pricing on shaver shops products may be too low and is in need of an increase. Although low costs and discounts are favourable to the customer and shaver shops' brand image, over time they may become accustomed to buying products for a lower price and refuse premium pricing.

If

Shaver shop manages to increase its prices, due to its high volume of sales each year, more profit can potentially be made. If a percentage point equals a cent, the Cash flow to sales ratio for Shaver shop shows that 4.48 cents was made for every dollar of sales revenue in 2016. This figure drops to 2.40 cents in 2017. This indicates that the growth in sales is not producing growth in cash flow. This means that the company is getting paid more slowly for goods and services because of poor receivables management. In 2018 shaver shops cash flow to sales ratio has significantly increased to 10.03%, indicating that receivables are managed much more efficiently and that there is a higher ability to generate more available cash.

Efficiency Efficiency ratios look at how effective an entity - in this case, Shaver Shop Group Limited, manages its assets and turns its investment decision into cash (Birt et al. 2019, p. 299).

Table 1: Efficiency Ratio for Shaver Shop from 2016 - 2018

The ability of Shaver Shop to convert a dollar investment in assets into sale revenue in dollars remains relatively the same over the three years. In 2016 an investment of $1 in assets generated $1.71 of sales revenue and it rose to $1.78 in 2017 before it dropped to $1.74 in 7

2018. Shaver Shop experienced an upward trend in the inventory turnaround period over the three years. In 2016, it took an average of 95.41 days and it increased to 103.75 days in 2017 before reaching 106.42 days in 2018. This is more than the industry average of 66.97 days in 2017 and 64.71 in 2018 (CSIMarket 2020). This shows that the company advertising and marketing strategy was not effective despite an increase of over 2.3 million dollars in advertising spending between 2016 and 2017. Although Shaver Shop inventory is not perishable, it requires high turnover to maintain low margins and to ensure that the inventories do not become obsolete. Considering the efficiency of the Shaver Shop in managing its debtors and inventory, the settlement period for account receivable decreased from 62.21 days in 2016 to 50.28 days in 2017 before going up to 52.16 days in 2018. This indicates an improvement in the management of debtors and an increase in cash flow, this couple with an improvement in settlement period for account payable from56.63 days in 2016 to 58.78 days in 2018 also has an impact on the reduction of negative cash flow period.

Figure 1: Shaver Shop Group Limited Activity Cycle for 2016, 2017 and 2018 In 2016, Shaver Shop had an activity cycle of 157.62 days and cash cycle of 100.99 days and in 2017, the activity cycle decreased to 154.03 days but an increase in the cash cycle to 106.14 days. The activity cycle went up in 2018 to 158.58 days and a cash cycle of 98.8 days.

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The increase in the activity cycle also has a significant impact on the liquidity position of Shaver Shop, given the fact that it must finance the investment in inventory and debtors.

Liquidity The Shaver shop finds itself in a decent position. The company’s current ratio of 1.12 indicates an acceptable and efficient management of its working capital, meaning for every dollar of liability, there is 1.12 dollars' worth of assets to cover any liabilities for its shortterm obligations. However, over the last few years, this figure has dropped from the previous year, slightly more than double (2.29 in 2017). With the removal of receivables and inventory, we get an even more clear picture of Shaver Shop’s position and liquidity risk in being able to cover its liabilities. Over the years spanning 2016-2018, Shaver Shop’s acid test ratio has declined from .57 to .26. While this is low, the figures reflect a high number of stock and inventory. To meet its financial obligations should things go south, the company would need to sell some of its stock to stay afloat. For every dollar in assets, Shaver Shop only has .26 cents in current assets to cover every dollar of liabilities. The acid ratio of .26 indicates Shaver Shop’s reliance on operating cash flow and external finance.

Table 2: Liquidity Ratios 2016-2018

The numbers do not give a complete picture as the liabilities over the years increased due to the company’s store buy-back strategy from its franchisees. This will have a higher return in the future but is not reflected directly when we look only at the liabilities.

A simple trend analysis sheds more light on the company’s liabilities and borrowings. Using 2016 as the base year, we can measure how Shaver Shop’s liabilities moved up in an index. 9

For the Current Ratio analysis, there is an increase in 2017, then a dip in 2018: 100 (2016), 114 (2017) and 56 (2018). For the Acid test Ratio, the numbers are relatively steady between 2017 and 2018, but we observe quite a significant jump in the company’s Operating Cash Flow showing a massive increase from 2017 and 2018 where the cash flow almost tripled (index of 60 to 176). To get a good idea of how Shaver Shop is performing in the retail industry, it would be advantageous to compare ratios with a competing company.

Table 3: Current Ratios vs Trend Analysis

2016 2.01 times Trend 100

2017 2.29 times 114

2018 1.12 times 56

Analysis Acid Test Ratio 0.57 times Acid Test Ratio Trend 100

0.29 times 51

0.26 times 46

Analysis Operating Cash Flow

0.25

0.74

60

176

Current Ratio Current Ratio

0.42

Operating Cash Flow100 Trend Analysis

Gearing Analysis Gearing Ratio Gearing ratios measure the proportion of long-term debt to the structure of the business which in this case is Shaver Shop Group Limited. As shown in Appendix A, the gearing ratio for the Shaver Shop, significantly improved from 2017 to 2018. In 2017 the gearing ratio was 19.47% and in 2018, it was 4.99%; this is an improvement of 14.48%. By having a reduction in the gearing ratio, this shows that the business is financially stable in the market and it shows that the Shaver Shop has a smaller proportion of debt (borrowed funds) versus equity in 2018 compared to the 2017 financial year. The increased gearing ratio from 12.00% in 2016 to 19.47% in 2017, means that during 2017, the company was more reliant on borrowed funds which decreases the financial stability of the company and their operations. In 2017 shaver shops’ non-current liabilities increased due to borrowing $7,187,132 more than they did in 2016. In 2018 shaver shops non-current liabilities dropped to a three-year low of $3,098,700 and had a total reduction of $11,183,022 compared to the previous financial year (2017). 10

2016-2017

2017-2018

Increase/decrease in gearing 12.00% → 19.47% ratio

+5.47%

19.47% → 4.99% -14.48%

Debt to Asset Ratio The Shaver Shops financial reports from 2016 - 2018, showed that the company had an increasing reliance on debt to finance the total cost of assets. This debt to asset ratio increases each year as shown in the table below. 2016-2017

2017-2018

Annual Increase in Debt to $19,725,350 →$28,902,080

$28,902,080 →$30,771,579

asset ratio.

+6.46%

+46.52%

As seen by the above figures and calculations in the appendix, liabilities have increased at a larger rate than the total company assets. The large liability increase in 2017 was mainly caused by an increase in borrowed funds (loans) and the repayments that come with borrowing money.

Interest Cover Ratio The interest cover ratio determines how easily a company can pay the interest accrued by their current on their outstanding debts. The reduced capacity to cover interest debts in 2016 compared to 2017 and 2017 was due to 2016 being the year where the least amount of Net profit was made. A 106% increase in profits from 2016 to 2017 resulted in the Shaver Shops interest cover ratio increasing by 511.3%. The overall Interest cover ratios, along with the positive numbers in the balance sheet showing the net profit and growth demonstrates and supp...