Financial Analysis of Victoria Secret Essay
Financial Analysis of Victoria Secret
INCOME STATEMENT ANALYSIS
Victoria Secret appears to be a profitable company. Victoria Secret is part of L Brands whose operating income was at $ 211 million, up by $24 million from the last quarter. Specifically at Victoria’s Secret, sales increased by 4% to reach 5.4 billion but operating income decreased by 6% to 1.71 billion. It appears that Victoria Secret’s major expense was their Cost of Goods Sold, COGS, which totaled at 1.3144 billion. The gross profit percentage as at February 2013 was 47.87% (NASDAQ, 2014).
BALANCE SHEET ANALYSIS
Assets of Victoria’s Secret have steadily increased in the last three fiscal years. As at November 2013, return on Assets was at 12.73% up from 12.2% in January 2013. Return on equities has been high as well, at 105.39% in January 2012, up from 44% in 2011. Liabilities have also sadly increased in the last four years. Expenses have increased from $630 million in August 2013 to $645 million in November 2013 (L Brands, 2014). The Cost of Goods Sold has decreased however, from $1.527 billion in August 2013 to $1.314 billion in November 2013. Total liabilities were at $7.456 billion in November 2013, up from $6.933 billion in August 2013 (NASDAQ, 2014).
STATEMENT OF STOCKHOLDER’S EQUITY
Retained earnings were in the negatives for Victoria’s Secret stockholders. As at November 2013 it was -$519 million. Common stock was at $153 million but treasury stock was at a negative of -$740 million (NASDAQ, 2014).
STATEMENT OF CASH FLOWS
The net cash provided as a result of operating activities as at January 2014was at 1.279 billion dollars, while the net cash provided as a result of investing activities at -$106 million (L Brands, 2014). The net cash provided as a result of financing activities was also at a negative at -$78 million. The negative cash flows brought about by investing and financing activities imply that they have cost the company more money in their undertaking than they have brought in. However, the large cash flows brought in by operating activities are more than enough to cover the losses brought about by the other categories, so the negative cash flows do not worry me too much.
FINANCIAL RATIO ANALYSIS
After conducting the financial ratios for Victoria Secrets, it is clear to me that they are able to fulfill consumer demands while maintaining financial stability. Their Liquidity Measures ratios suggests that the company is able to adequately pay for the liabilities while investing assets in a strategic manner. Net Working Capital to Total Assets results show that Victoria Secret is able to efficiently turn assets and cover short-term liabilities. The company is in fair health, however there is a decline in 2011-2013, suggesting a slight trouble turning their assets into cash fast enough to cover their liabilities. For their collection period it takes about 7-8 days for Victoria Secret to collect cash, meaning that they collect cash quickly for reinvestment purposes. Victoria Secret depletes and replenishes their inventory at least five times per year to satisfy their consumer demand.
Fixed Asset Turnover for Victoria Secret proves that they are able to use their fixed assets effectively towards sales revenues. They are able to generate $4 to $5 of sales for every $1 that is invested in fixed assets. Their debt/leverage measures the low debt to total asset ratio implies that Victoria Secret assets are financed more through equity rather than debt and that they are using a conservative capital structure; ultimately, by keeping their debts low and manageable, they have a financial advantage. However, Victoria Secret may not be taking advantage of their increase profits that comes with financial advantage.
Victoria Secret’s gross profit margin is above industry norms, indicating that Victoria Secret is generating strong sales prices that are relative to their cost of goods sold. Victoria Secret’s operating profit margin ratio shows that they have complete and effective control of their operating costs, however their sales could be increasing faster than their operating costs. The net profit margin ratios suggests that Victoria Secret has a some cushioning that will help protect them in case of hard times. Victoria Secret is effectively managing and turning assets into generating earnings and income on new investments. Victoria Secret makes at least $2.50 per share and is generating a significant dividend for their investors, which leads investors anticipating a higher future growth.
During performing the sales forecast for Victoria’s Secret, I learned that for most part that Victoria’s Secret has an incline in their profits. They have however hit a few bumps here and there. The causes of this could be more cost for Victoria’s Secret purchasing materials and production of their products. Another reason for this could also be a slower rate in sales than usual. Like I said, for the most Victoria Secret has seen an incline in their profits and sales throughout the years.
Performing the percentage of sales forecast for Victoria’s Secret, I established a forecasted sales of 5 percent which means that they would have to have a sales of $2,808 compared to their last years $2,675. This is a very feasible number for Victoria Secret to achieve, considering that majority of their money in assets outweighs their liabilities. The EFN, External Financing Needed, for Victoria Secret is $2,855. This indicates that Victoria Secret would need to obtain External Financing Needed to achieve the $2,808 forecasted sales level, which 5% more of their current sales revenue.
SUBSTANTIAL GROWTH RATE ANALYSIS
Victoria Secret has had a steady growth over the analyzed period. It has not been too slow or too fast, but one that shows that they are adequately handling the progressive growth of the company. This shows that Victoria Secret is paying close attention to all details of the organization.
CONSEQUENCES FACED BY FIRMS THAT GROW AT A RATE THAT IS NOT CONSISTENT WITH THEIR SUSTAINABLE RATE
Growing too fast as crazy as it may sound, does have potential consequences for the organizations. These consequences could come in the form of the organization not being able to fulfill customer demand, hire and/or train capable employees to accommodate for the growth, and difficulty in obtaining cash to support the growth. When an organizations too fast it will need more capital to support the growth. On the reverse side, a growth too slow can be as destructive as growing too fast.
Slow growth can have the consequences of wanting or needing to expand their organization, however if they do decide to expand without the support of a sufficient revenue; then the organization runs into potential trouble with investors. If Victoria Secret grew at a rate where it was difficult for them to be consistent with their sustainable rate, then they would have either to find additional funding or consider eliminating some of their debt.
IF THE FIRM GREW AT A RATE ABOVE OR BELOW THE SGR, HOW DID IT FINANCE ITS EXCESSIVE GROWTH OR REWARD ITS STOCKHOLDERS FOR THE UNDERPERFORMANCE
Since Victoria Secret has a sustainable growth rate that is steady, they did not need to finance an excessive growth or reward their stockholders for an underperformance. Victoria Secret’s continued growth and success will depend on their ability to open and operate new stores and to expand and even remodel existing stores in a manner that is not only timely but also on a profitable basis. Accomplishing their new and existing store expansion goals will depend upon a number of factors, including their ability to collaborate with developers in order to obtain suitable sites for new and expanded stores, the hiring and training of qualified personnel, and the integration of new stores into existing operations. However, there are risks associated with these growths, which could be having a negative effect on their results of operations, financial condition and cash flows.
Upon my initial analysis on the financial performance of Victoria Secret, I assumed that were a profitable company. After performing the financial ratios analysis, forecast of sales analysis, and the substantial growth analysis; my assumption proved to be correct. Victoria Secret proves to be the most profitable business owned by L Brands. Granted Victoria Secret has had their fair share of bumps in the road, but because of their strategic financial plan, those bumps did not have a great deal of import financial for them.
What I have learned from doing the financial analysis on Victoria Secret is that they are an organization who takes knowing their financial performance seriously. They know, understand, and most importantly can successfully create financial strategic plans can serves as a tool for their success, as well as prepare them in case of a “rainy day”. This is where majority of organizations fail in performing a financial analysis and preparing a financial strategic plan. Most organizations do not want to believe or even admit to the potential of having a “rainy day”, because in their eyes it sets them up for failure. Victoria Secret obviously knows the importance of embracing the idea of a “rainy day” and prepares for it, which is one of the many reasons they are such a successful organization.
Conducting the financial analysis on Victoria Secret also proves that my prediction about how they are able to turn assets into income to can pay for their liabilities as well as have enough left over to reinvest back into the organization. Victoria Secret clearly understands that growth is crucial for the success of the organization while at the same keeping their growth maintainable without getting themselves into financial trouble. It is clear that Victoria Secret knows the importance of knowing how to do a financial analysis of their organization’s financial performance and using the analysis to build a strategic financial plan. I do believe that if Victoria Secret keeps a diligent watch on their financial performance and does regular financial analysis, they can continue to be a force to be reckoned with that they have been in the retail industry.
Baral, S. (2013). _The Challenge of Attaining Sustaintable Growth ._ Retrieved from http://prj.co.in/setup/business/paper77.pdf
Business Town. (2003). _Pro Forma Balance Sheets._ Retrieved from http://www.businesstown.com/accounting/projections-balance.asp
Business Town. (2003). _Pro Forma Income Statements._ Retrieved from http://www.businesstown.com/accounting/projections-statements.asp
Hoovers. (2014). _Victoria’s Secret Stores, LLC. ._ Retrieved from http://www.hoovers.com/company-information/cs/competition.Victorias_Secret_Stores_LLC.d793812b13b17deb.html
L Brands. (2014). _Financials._ Retrieved from http://www.lb.com/investors/financial_information/financials.aspx
L Brands. (2014). _SEC Filings._ Retrieved from http://www.lb.com/investors/company_info/sec_filings.aspx
Lane, M. (2014). _Percentage of Sales Method._ Retrieved from Business Finance Online: http://www.zenwealth.com/businessfinanceonline/FF/PercentageOfSales.html
Lutz, A. (2013). _Why The Lingerie Industry Can’t Compete With Victoria’s Secret._ Retrieved from http://www.businessinsider.com/victorias-secret-will-beat-competition-2013-9
NASDAQ. (2014). _L Brands, Inc. Stock Report._ Retrieved from http://www.nasdaq.com/symbol/lb/stock-report