Financial Performance Review

Ottarkar's plc Review

To Investors

Subject: Ottarkar's plc Financial Performance Review (2004-2005)

Ottakar's is one of the leading book retailers in the UK. It was founded in 1987 and listed on the London Stock Exchange in 1998. With its long experience in bookselling, Ottakar's tries to distinguish itself by offering extensive book ranges as well as excellent services to its customers across its 131 stores in England, Scotland and Wales. The company believes that it acquired 8% of total market share in the book market.

Overall, Ottakar's financial performance in 2005 was better than that of 2004 as a result of an impressive growth in book market stimulating by growing interest from customers. Beside that, the positive improvement in the company ranging from better buying discipline to changing in its departments such as financial and commercial department. These contributed to a considerable growth in sales performance and higher gross margin.

Profitability Ratios

Ottakar's achieved a strong growth in sales (turnover) at 12.7% to Ј173.2 million in 2005. (Like for like sales increased by 3.5% representing 2.4% of the growth of total sales) As can be seen from Gross profit margin, it increased from 42.19% in 2004 to 43.02% in 2005. The main reasons for this increase might result from higher sales revenue through the product mix from Hammicks stores coming into line with Ottakar's plc stores as well as the satisfactory performance of the new and refurbished stores that opened during the 52 weeks to 31 January 2004. Besides, the successful of "The Real Read" and "Ottakar's Originals"marketing campaigns contributed to impressive sales growth. In addition, a rise in sales might be generated from Costa Coffee concessions which Ottakar's plc introduced in its "Lifestyle" format stores. Ottakar's believes that there was a commercial compatibility of books and coffee and these lifestyle format stores represents 50% of Ottakar's total selling space. According to Chairman's Statement, greater gross margin was also driven by a positive improvement in buying discipline, reducing shrinkage and measuring to minimize obsolete stock.

In 2005, there was a slight increase in Operating profit margin which made up of 4.74% compared with 4.51% in 2004. Although the company earned greater operating profit and sales, an increase in operating profit margin ratio was limited. This due to higher operating expenses in form of administration costs since the company tries to upgrade its function infrastructure including the cost of changes in financial department and the departure of the previous Finance Director. Additionally, a soaring inflation trend led to higher selling and distribution costs as can be seen in greater occupational cost, rising rent and rates and higher store payroll and property cost.

Moreover, the growth of operating profit was more than that of capital employed which directly contributed to an increase in Return On Capital Employed (ROCE). This means that funds were being employed effectively, leading to higher rate of profit when compared with capital invested. There was a barely noticeable change in Return On Shareholders' Fund (ROSF) ratio (17.11% in 2004 compared with 17.15% in 2005). This might see as a consequence of the increase in both net profit after tax and total shareholders' fund in nearly equal proportion.

Efficiency Ratios

To take a look at Stock held/ Rate of turnover, it can be seen that the company might encounter stock management problem since the huge stocks of books were held longer than in the previous year. This means that a lot of money would be tied up in stocks and could not be used in other profitable activities. However, trade debtors' collection period became shorter from 0.99 day in 2004 to 0.77 day in 2005. This improved ratio suggests that the company could control its debtors collection procedure more effectively providing more cash flow to the company. Otherwise, it might be the nature of its retail business that the sales usually generate in cash as can be seen that credit sales to customers accounted for less than 1% of the total sales of the company. To consider trade creditor's settlement period, the company experienced a shorter period for paying off its debt in 2005. This situation might occur when its suppliers put strong pressure on the company to settle its debt on time. This also indicates that the company would have shorter time to use its short term financing to fund other activities of the company. On closer analysis, the company unlikely to encounter with credit management problem in this current year since its trade debtors' collection period (0.77 day) was considerably shorter when compared with its creditors' settlement period (64.56 days).

However, ones should bear in mind that trade debtors' collection period and trade creditor's settlement period provided the average figures which might not give a correct interpretation because both ratios could be distorted by a few large customers/suppliers who are very slow or fast payers/payees.

Regarding asset turnover rate, it continued to grow from 4.14 times in 2004 to 4.45 times in 2005. This shows that the company could utilize its asset and transform to sales more efficiently.

Financial Ratios

Ottakar's gearing ratio increased considerably. It leapfrogged from around 65.83% in 2004 to 81.26% in 2005. The underlying reasons for this marked increase might mainly due to an enormous rise in short term loan which rose substantially from Ј2.54 million to Ј10.8