AFA Presentation (Finalized)

Advanced Financial AccountingInterpretation of Financial

Statements (1)

Content

• Client’s requirements• Industry background• Company background• Main Competitors• SWOT Analysis

Name: Ms. Wanna LuiAmt. of Investment: S$100,000Investment timeframe: 5 yearsExpected investment return: 5% p.a.

Introduction

Abt. Industry Co.’s Profile Competitors

SWOT

Client’s Profile

Selling commodities directly to consumers

Introduction


SWOT

About the Industry

Wide range of products and servicesSingapore’s retail industries generated

S$35 billion in salesProvided many job opportunities for locals

Competency is correlated to wide selection of products provided

With increased competitions, department store needs to consider on both breath and depth of their products

Introduction


SWOT

About the Industry

New shopping malls• Tampines 1, 313 @ Somerset, ION, Orchard Central & Iluma

Q1 2010 Forecast• Total retail sales will grow from an estimated US$28.19 billion (Year 2009) to US$40.40 billion by Year 2014

Conversion from Isetan Emporium (Singapore) Pte Ltd to Isetan (Singapore) Ltd; offered shares to the

public

Introduction


SWOT

Company Background

1970

Incorporated and headquartered in

Singapore

1972

Opened its first store; the 1st Japanese dept. store to be opened in

Singapore

1981

Trade in general merchandiseEngaged in the business of operating department stores, supermarket and trading in general merchandiseOffers corporate gifts, bulk buying and prizes & trophies for sports eventsProvides floral bouquets delivery & courier services

Introduction


SWOT

Company Background

Introduction


SWOT

Company Background

•Retailing

•Operating

Retailing

•Leasing of property

Others

Business Segment

Stores Operating in…

Scotts Orchard

Katong Tampines

Standalone Mango Boutique• Intl’ fashion designer lines, cosmetics

and family-oriented merchandise• Catering to both local and tourist

markets

Introduction


SWOT

Competitors

• Rank in accordance to Share Capital1. Metro – S$630,776,6762. C K Tang Ltd – S$236,984,2263. Robinsons – S$85,937,494• Compared to Isetan (S$41,250,000), the main competitor is…

Main Competitor

Introduction


SWOT

• Rank in accordance to No. of Outlets1. Metro – 42. C K Tang Ltd – 13. Robinsons – 3• Compared to Isetan (4), the main competitor is still…

Main Competitor

Introduction


SWOT

Introduction


SWOT

SWOT Analysis

Strengths

Introduction


SWOT

Sourcing & Merchandizing

Strengths of Isetan: Being a step ahead of Metro, Isetan will be able to attract more consumers to the exclusive brands they have.

ᴥ Secured exclusive brands & promotionsᴥ Wide range of international collectionᴥ Technology used to analyze customers buying patterns

ISETANᴥ Will be refreshing merchandise mix by improving new brands and new layoutsᴥ Will be incorporating more lifestyle concepts in stores

METRO

Product Quality

Strengths of Isetan: Improve customers’ satisfaction, thereby, able to retain and concurrently, attracting more consumers.

ᴥ Personalized shopping experienceᴥ Enhanced customer benefitsᴥ Places importance on listening to customers and serving their needs and wants

ISETANᴥ No personalized shopping experience

METRO

Introduction


SWOT

Distribution of Products

Strengths of Isetan: Having a bigger storage space will enable Isetan to maintain adequate goods to meet consumers’ needs. In addition, the risk of experiencing out-of-stock problem will be lower as compared to Metro’s. With the supermarket, Isetan has a wider range of products which in turn increases market share.

ᴥ A 7-storey high warehouse located in the area of Macphersonᴥ Presence of a supermarket

ISETANᴥ A single-storey warehouse & 3-storey office annex located along Pasir Panjang Rdᴥ No supermarket

METRO

Financing

Strengths of Isetan: Equity financing is less costly in the long run and bears lesser risk as compared to debt financing. For debt financing, companies are exposed to risks such as forex from their borrowings.

ᴥ Equity financing

ISETANᴥ Debt financingᴥ Large amount of bank borrowings

METRO

Awards & Recognition

Introduction


SWOT

ISETAN

1979 – Most Courteous Store Award by STB 1981 – 1st dept. store to receive award from Skills Development Fund for training in Japan 1986 – Isetan Orchard was awarded outstanding planning & design in an intl’ competition 1987 – Sponsored Singapore’s 25th National Day Book to share its commitment in the pursuit of excellence 1997 – NTUC awarded plaque of commendation for good labor union relations; Member’s Choice Award by Diners Club 2009 – Improved Corporate Governance (Band 3 in 2008 to Band 2 in 2009)

2006 – Received more than double the no. of Gold & Silver excellence awards as compared to 2005 2009 – Improved Corporate Governance (Band 5 in 2008 to Band 2 in 2009) People Developer Standard certifications Singapore Service Class certifications

METRO

Human Resources

Directors are equipped with relevant industry experience Executives posses relevant qualification and work experience Employees retained despite of poor economy In-house and external training Bonuses rewarded = performance

Introduction


SWOT

Strengths - Isetan

Marketing & Promotional

Strategies

Vigilantly monitoring of changes to consumers’

needs Target customers includes both men and women Innovative merchandising and marketing strategies

Introduction


SWOT

SWOT Analysis

WeaknessStrengths

Introduction


SWOT

Dependency on Retail Segment

Weakness of Isetan: Investing in properties yields a higher return and since Isetan’s focus is not on investment properties, then it may have a lower net income as compared to Metro.

ᴥ Accounts for the major portion of incomeᴥ Risk ≠ Well-diversified (into other possible

sectors)

ISETANᴥ Diversified aspects of generating revenue ᴥ Risks are well-diversified into both retail and properties

METRO

Weakness - Isetan

Poor cash flow management

Position is not well-maintained in the industryᴥ Decreasing ROI for the past 5 FYᴥ 6.0% (FY 2004) to -0.6% (FY 2008)

ᴥ Positive cash flow from operating activities; Net decrease in cash & cash equivalentsᴥ Due to huge amt. of acquisition of financial assets (HTM)

Weakness - Isetan

Introduction


SWOT

WeaknessOpportunitie

s

Strengths

Introduction


SWOT

SWOT Analysis

$ Merger with Mitsukoshi Ltd (Jap. Dept. Store) Integrate wealthier clientele base = Boosts retail presence

In a better position to cope with intense competition

$ Robust economic growth (Overseas Expansion) ≈ 5.5% (Year 2009) & 6.9% (Year 2010)

Immense opportunities to diversify its operations in established nations

$ Jobs credit scheme (Relating to Year 2009) Cope effectively with economic downturn

Retains existing talents without affecting business

$ Development in e-shopping interface

A convenient platform to purchase goods

Attracts more consumers to patronize with a diverse selection of products

Opportunities

Introduction


SWOT

$ Promotion of tourism industry by Govt. Policies are adopted by Singapore Govt. to attract more tourists into Singapore

Weakness

Opportunities

Strengths

Introduction


SWOT

SWOT Analysis

Threats

Terrorism & Pandemic

Despite increasing revenue for 5 FYs

Amt. increased is decreasing drastically

14.91% (Yr 2004) to 3.26% (Yr 2008)

Economic slowdown = More cautious in spending

Businesses lose confidence

Changes in consumers’ fashion taste

Effects of inflation, global economic crisis

Fluctuating oil & commodities prices

Deterioration of business confidence

Introduction of new fashion brands

A surge in competitors in both town & suburban areas (313 @ Somerset, ION, Orchard Central…)

Deter people from patronizing

Held back for the fear of both terrorist attacks & pandemic

Economic conditions affecting retail industryChange in consumer trendsCompetitors within industryPoor revenue growth

Threats

Introduction


SWOT

~The End of IFS Part 1~

Q&A Session

Advanced Financial AccountingInterpretation of Financial

Statements (2)

Financial Year End

1 April 2008

31 March 2009

Met

ro

1 January 2008

31 December 2008

Iset

an

COMMON PERIOD

(9 months)

Are the profits of the company adequate and

sustainable?

Sales Ratio

Sales Ratio

Year 2007 Year 2008 %

328,637 339,360 +3.26Isetan

From year 2007 to 2008, Isetan’s Sales had increased by 3.26%.Despite tough operating environment, Isetan managed to register growth in Sales turnover.

Sales Ratio Analysis - Isetan

Achieved through combination of actions:• Securing exclusive brands and promotions• Improve on products and events which had good

response• Leverage on technology to analyze customer buying

pattern• Optimized merchandising and marketing programmes

From year 2007 to 2008, Isetan’s Sales had increased by 3.26%.Aspects to be considered for Isetan’s sustainability of its sales

Sales Ratio Analysis - Isetan

• Broad-based slowdown in Singapore economy• Competitors introducing new fashion brands• New upcoming malls in Orchard shopping belt and

suburban area• Isetan Scotts’ men’s level underwent major remodeling• Enhance sales service through in-house/external staff

training• Introduced product advisor service for babies

department

Year 2008 Year 2009 %

Sales Ratio

224,409 200,285 -10.75Metro

From year 2008 to 2009, Metro’s Sales had decreased by 10.75%.In face of slowdown consumption and tourism, Metro’s sales were affected.

Sales Ratio Analysis - Metro

Factors attributable the generating and sustaining of sales:• Four “Accessorize” specialty shops opened in

Singapore• Strategies to continually refresh merchandise mix• Adopting new marketing platforms• Improving store layout/Incorporate more lifestyle

concepts• Slowdown of Singapore economy• Metro City Square due to open in 3QFY2010

Gross Profit Margin

Gross Profit (2007) = 328,637 – (1,836+237,735) = 89,066

Gross Profit (2008) = 339,360 – (89 + 247,794) = 91, 477

Gross Profit Margin Ratio

Year 2007 Year 2008 %

Isetan 89,066/ 328,637 = 27.10%

91,477/ 339,360= 26.96%

Gross Profit Margin Ratio =

Gross Profit

Sales

-0.14

From year 2007 to 2008, Isetan’s GPM had decreased by 0.14%.There is a minor fluctuation of Gross Profit Margin Ratio between two years.

Gross Profit Margin Analysis - Isetan

There is an increase in purchases of inventories and related costof $10,059.

However, there is a substantial decrease in changes in inventories of finished goods of $1,747.

• Cost of goods have risen due to change in commodity price

• Isetan’s may have weak pricing power (bargain sales)• Unsold items forced to sell it at lower price• Goods are price elastic, Isetan’s sales may be affected.

Gross Profit Margin Analysis - Isetan

However, the downward trend in gross margin suggest that cost of goods sold is increasing which can affect future gross profit.

Hence, from the above analysis it can be deduced that Isetan’s still generally efficient in managing its COGS.

From year 2007 to 2008, Isetan’s GPM had decreased by 0.14%.

Year 2008 Year 2009 %

Metro

Gross Profit Margin Ratio

47,410/ 224,409 = 21.27%

45,211/ 200,285= 22.57%

+1.30

Gross Profit Margin Ratio = Gross Profit

Sales

From year 2008 to 2009, Isetan’s GPM had increased by 1.30%.This indicates that Metro is efficient in managing its cost of sales and are more liquid with more cash flow.

Gross Profit Margin Analysis - Metro

There is a decrease in sales of $24,124 and cost of sales of $21,925.

The increase in GPM could mean that Metro has a favorable pricing power in midst of rising cost of sales.

Net Profit Margin

Exceptional Items

Net Profit Margin Ratio

Year 2007 Year 2008 %

Isetan14,849/ 328,637 = 4.52%

(14,787-1,621)/ 339,360= 3.88%

Net Profit Margin Ratio = Net Profit

Sales

-0.64

From year 2007 to 2008, Isetan’s NPM had decreased by 0.64%.This indicates that company is generating 0.64 cents less in profit for every dollar in sales compared to previous year.

Net Profit Margin Analysis - Isetan

Contributing factors:• Higher expenses like depreciation and rent• Exceptional items accounted for (Gain on dilution of

share)

Year 2008 Year 2009 %

Metro

Net Profit Margin Ratio

66,283/ 224,409 = 29.54%

39,623/ 200,285= 19.78%

-9.76

Net Profit Margin Ratio = Net Profit

Sales

From year 2008 to 2009, Metro’s NPM had decreased by 9.76%.This indicates that company is generating 9.76 cents less in profit for every dollar in sales compared to previous year.

Net Profit Margin Analysis - Metro

Contributing factor:• Fair value of adjustment on investment properties

resulted huge deficit • Efforts by authorities to stabilize

Are the profits adequate and sustainable?

• Sales ↑ 3.26% which achieved through sales strategy• Gross Profit Margin ↓0.14% due to increase in cost of goods

sold and decrease in changes of inventories of finished goods• Net Profit ↓0.64% due to higher expenses like depreciation

and rent

Profits are adequate, Isetan managed to register growth in Sales turnover and able to pay dividends to its shareholders despite economic downturn.

Profits are sustainable because•Isetan Scotts’ men’s level underwent major remodeling•Enhance sales service through in-house/external staff training•Technology used to analyze customers buying patterns

Is the co. investing enough to safeguard future profitability?

Fixed Asset Turnover Ratio

Year 2007 Year 2008 %

Isetan 328,637/ 86,548 = 3.80

339,360/ 88,216 = 3.85

FA Turnover Ratio = Sales

Net Fixed Asset

+1.32

From year 2007 to 2008, Isetan’s FA ratio had increased from 3.80 to 3.85.This indicates an increased efficiency utilization of FA (property, plant & equipment) to generate sales.

Fixed Asset Turnover Ratio Analysis - Isetan

As there are more additions of office & shop equipment, the amt. of FA bal. increases as well, from $86,548 to $88,216 (% of 1.92)

As Isetan launched its personalized shopping experience & improved its customer satisfaction, it was able to retain & attract more customers.

Thereby, leading to an overall increase of FA turnover.

Fixed Asset Turnover Ratio Analysis - Isetan

The increases in FA is matched by a corresponding increase in sales, from $328,637 to $339,360 (% of 3.27)

Hence, from the above analysis, it can be deduced that the increase in the FA turnover ratio is mainly due to the increase in sales.

From year 2007 to 2008, Isetan’s FA ratio had increased from 3.80 to 3.85.

Year 2008 Year 2009 %

Metro

Fixed Asset Turnover Ratio

224,409/ 11,874 = 18.90

200,285/ 11,965= 16.74

-11.43

FA Turnover Ratio = Sales

Net Fixed Asset

From year 2008 to 2009, Metro’s FA ratio had decreased from 18.90 to 16.74.

Fixed Asset Turnover Ratio Analysis - Metro

However, the amt. was partially net off against the amt. of leasehold land & building reclassified as investment properties.

This indicates there may be a declined efficiency in the utilization of FA (property, plant & equipment) to generate sales.

The main contributing factor that resulted in an increase of net FA balance was the revaluation surplus of freehold land.


As Metro is considered to be a step slower than Isetan in revitalizing their merchandise, for instance, securing exclusive brands, they tend to lose customers.


Its warehouse is not as big as Isetan’s, therefore, it is possible that Metro faced out-of-stock situations, hence, unable to cater to customers’ demands.

The resulting increase of FA is from $11,874 to $11,965 (% of 0.77)


Thereby, leading to an overall decrease of FA turnover.


Hence, from the above analysis, it can be deduced that the decrease in the FA turnover ratio is mainly due to the decrease in sales.

As a result, sales figures declined from $224,409 to $200,285 (% of 10.75).

Is Isetan investing sufficient?

Based on the above ratios calculate, Isetan’s FA turnover ratio is lower than Metro’s.

This indicates that Isetan is more active in acquiring FA to generate future income.

Which is supported by the reports of Isetan acquiring additional shop equipment So as to cater to its newly launched product strategy of enhanced customer benefits

Are the finances of the company sensibly and effectively structured?

Debt-Equity Ratio

Year 2007 Year 2008 %

Isetan 68,112 / 158,796 ≈ 0.43

69,706 / 171,986≈ 0.41

Debt-Equity Ratio = Total Liabilities

Total Shareholder’s Equity

-4.65

From year 2007 to 2008, Isetan’s debt-equity ratio has decreased from 0.43 to 0.41As the ratio is less than 1, it implies that Isetan has sufficient assets to cover its long-term obligations.

Debt-Equity Ratio Analysis - Isetan

Low risk of insolvency by adopting a conservative financing strategy of relying entirely on equity rather than debt Not as “highly leveraged”• Retail industry and not capital-intensive • Not expanding too much in year 2008 • Announcement of expansion plans in Nex Mall in Year 2009• Will only have a definite impact on its ratio only in FY 2009

From year 2007 to 2008, Isetan’s debt-equity ratio has decreased from 0.43 to 0.41The decrease was due to an increase in its retained earnings which was a result of its dividends being paid out. The dividends paid out were 2 cents per share.


• However, its directors have maintained that the final dividend of 7.5 cents share will be paid out as usual like FY 2007 • This will only affect it FY 2009 accounts

From year 2007 to 2008, Isetan’s debt-equity ratio had decreased from 0.43 to 0.41• Solely depends on equity financing.

• Advantage: Low insolvency risk, less costly in the long run & bears lesser risk as compared to debt financing• Downside: Pressures by Isetan to ensure that they retain its shareholders and its share price


• If Isetan uses debt financing, it will be exposed to risks such as forex from their borrowings• However, it is advantageous since it is possible for them to use these finances to generate more earnings & is tax deductible

There is NO Interest

Expense!!

Isetan’s financial leverage is relatively good since it has a low debt-equity ratio and does not have to worry about interest expenses that come with borrowing.

Overall Analysis for Isetan

Times Interest Earned Ratio

Year 2007 Year 2008 %

Isetan 18,632 / 0≈ N.A.

18,264 / 0≈ N.A.


EBIT

Interest Expense

N.A.

=

From year 2007 to 2008, Isetan has negligible change in its TIE Ratio

Times Interest Earned Analysis - Isetan

Retail Industry and has an elastic demand for its goods dependent on consumers sentiments

Isetan has adopted the conservative strategy of equity financing alone for its operations

Does not have to worry about the obligations that comes with debt borrowing. Due to this, it has negligible times interest earned.

Debt-Equity Ratio

Year 2008 Year 2009 %

Metro 345,705 / 888,219

≈ 0.39

376,870 / 936,572≈ 0.40

Debt-Equity Ratio = Total Liabilities

Total Shareholder’s Equity

+2.56

From year 2008 to 200, Metro’s debt-equity ratio have increased from 0.39 to 0.40As the ratio is less than 1, it implies that Metro has sufficient assets to cover its long-term obligations.

Debt-Equity Ratio Analysis - Metro

Unlike Isetan, Metro has adopted a strategy of having a mixture of debt financing with equity financing.

The increase in its debt-equity ratio is due to the increase in its long-term liabilities which is being held by its jointly controlled entities in China.

From year 2008 to 200, Metro’s debt-equity ratio have increased from 0.39 to 0.40Its equity reserves have increased is not due to any issue of shares to its shareholders but is mainly due to its foreign currency translation reserve as well as its revenue reserves


By using debt financing, Metro may be able to use it to finance its operations and generate earnings as reflected in cash flow statements increase in its cash generated from operations

From year 2008 to 2009, Metro’s debt-equity ratio have increased from 0.39 to 0.40• Advantages of Debt financingo Gain tax benefitso Obligations are limited only to the loan repayment

period. o Less expensive for Metro in the long-term


• Disadvantages of Debt Financingo Might cause Metro too much to handle and finance its

investments in China subsidiaries and its business activities


Year 2008 Year 2009 %

Metro 86,482 / 11,232≈ 7.70

38,947 / 10,283≈ 3.79


EBIT

Interest Expense

-50.78

=

From year 2008 to 2009, Metro’s TIE ratio has decreased from 7.70 to 3.79

Times Interest Earned Analysis - Metro

This shows that Metro may have a higher debt burden and a greater possibility of insolvency.• Retail industry which is very volatile• Heavily dependent on consumers spending power and their preferences, demand is very elastic. • Very important for Metro to maintain a high interest coverage ratio.

From year 2008 to 2009, Metro’s TIE ratio has decreased from 7.70 to 3.79

Times Interest Earned Analysis - Metro

Metro’s TIE ratio of 3.79 might not give investors the confidence that they will be able to pay its interest obligations when it falls due.

However, its debt-equity ratio of 0.40 shows otherwise.Its debt-equity ratio establishes that Metro • Maintains a relatively low risk of facing insolvency issues since it has a balanced strategy of using both debt and equity financing.

Is Isetan’s finances effectively structured?

Based on the above ratios calculate, Isetan’s Debt-Equity Ratio is comparative with Metro

This indicates that Isetan has good financial leveraging, low risk of insolvency. However, there is room for improvements

Due to Isetan’s conservative policy of maintaining equity financing

Could improve its finances through debt financing to improve revenue

~The End of IFS Part 2~

Q&A Session