1. Analysis of financial structure of Phillips Van Heusen?
2. Competitor analysis of the organization?
3. Primary risks faced by Phillips Van Heusen?
The success of every business firm depends upon the strategic financial decisions undertaken by the top managers of a particular firm. These financial decisions are involved upon the capital structure and individual analysis of a particular business firm. This report will take into consideration about the clothing retailer Phillips Van Heusen. Since the organization is looking for a debt portion of £20 million, therefore, an in-depth financial analysis will be useful to investigate about the financial structure of the business firm.
The financial status of the firm can be analyzed through the analysis of financial ratios. These financial ratios can be of great essence to forecast the future form of activities of the business organization Phillips Van Heusen. The financial ratios like debt-equity ratio, current ratio and profitability ratio of the firm will interpret about the feasibility of the firm on taking about the debt portion of £20 million. It can be seen that in the current financial year the debt-equity ratio of the firm is 78.74. This ratio interprets about the portion of debt over the equity capital of the organization. If this ratio is higher, then, it can be inferred that the organization is more exposed to financial risk. In the given case of the organization Phillips Van Heusen, debt equity ratio is higher. Therefore, it can be inferred that the debt portion of the organization is already higher. The current ratio of the organization is 2.23. The current ratio of a business firm interprets about the capability of the firm to meet the short-term obligations. Phillips Van Heusen is capable enough to match up with the short-term obligations in case of short term liabilities. However, this may not be the case of long term debt organizations. Therefore, segmentation of debt may be an important criterion for the business firm (Uk.finance.yahoo.com, 2015)
Therefore, it can be inferred that the company is highly liquid. This suggests that the organization is expected to meet up with their short term debt due to its liquidity nature. However, a higher form of current ratio can also be considered as misleading as the time taken to convert the working capital management into cash. The organization Phillips Van Heusen has already had a higher portion of debt of 3438700 (3.5 billion) in the current financial year, therefore, more amount of debt will hamper the cash conversion cycle of the firm.
Since, the organization is a going concern, therefore, the future of the organization can be at stake due to its highly liquid nature. This can be also considered as a financial risk of the organization. However, on the contrary, it may be also argued that new form of debt may increase the current liabilities and long term liabilities of the firm. But, it will additionally increase the debt-equity ratio. This may cause an effect to leverage portion of Phillips Van Heusen. In addition to this, the profitability of the clothing retailer is only 6.35%. Therefore, an additional debt may also decrease the profit margin of the firm.
However, the company can opt for the given debt portion of £20 million required to open their new stores. This can be done by minimizing the total amount of compensation paid to the directors or top-level managers of the firm. The return on equity is around 11.67 percent. Therefore, it is deduced that the compensation package paid to the directors are extremely liberal. This is mainly because; the firm is not stable enough in terms of its capital structure. In addition to this, the organization Phillips Van Heusen has a cash balance of £419 million. This total amount of cash can also be utilized by the firm to meet their debt requirements. Therefore, it is of great essence of the firm to evaluate and effective use of working capital cycle to meet the short term debt of the current fiscal year. On the other hand, it is also true that if the total cash balance of the firm decreases, then, the total operating expenses of the firm will also decrease. This can have an adverse effect on the firm (Nogué Corominas and Masclans Armengol, 2013).
In case of SWOT analysis of Phillips Van Heusen, it can be deduced that the biggest strength of the firm is that the firm has a higher liquidity in terms of their respective working capital cycle. In addition to this, other strength of the firm is that the organization has a higher amount of goodwill, which they can utilize for their respective creditors. This can be another advantage for the firm in terms of obtaining debt from the respective creditors to incur sources of funds. The beta of the firm is also in the lower side, which interprets that the stock prices of the firm is not volatile (Yermack, 2011)
The weakness of the firm Phillips Van Heusen is that they have a higher form of debt-equity ratio which caused the firm to expose to liquidity risk. Apart from this, the profit margin of the firm is lower; therefore, a higher amount of debt can hamper its profit margin (Wilson, 2013).
In case of opportunities, it can be inferred that the organization Phillips Van Heusen has a higher opportunity to diversify its products and cater into more market segments by opening of new stores. However, it can be inferred that the organization is opening two new stores to increase their respective market capitalization and growth rate of their owner’s equity.
The organization Phillips Van Heusen may face serious threats from its competitors. The major competitors of the organization include Perry Ills International Inc, Nine West Holding Inc, etc. This threat can be in the form of market share, customer base and effective utilization of business resources (Leykun, 2012).
The top three competitors of the firm are Perry Ills International Inc, Nine West Holding Inc and Ralph Loren Corporation. The competitor analysis can be performed in terms of market capitalization, revenue margin, earnings per share, etc. It can be observed that the market capitalization of the clothing retailer Phillips Van Heusen is on the higher side. However, in terms of revenue margin Ralph Loren Corporation is catching up with the organization. In addition to this, Phillips Van Heusen is also lagging behind in terms of net income margin with respect to its competitor Ralph Loren Corporation. Due to this reason, the firm needs to increase its sales and profit margin with respect to its competitors. This can only be done by increasing the number of stores, in order to increase the total amount of segmentation process and attain a higher level of core competency. For that, the organization may be required to incur a higher amount of debt and cause a change in their working capital structure. In addition to this, the organization is required to minimize the compensation packages of the directors (uk.finance.yahoo.com, 2015)
There are several risks faced by the organization Phillips Van Heusen. These risks are in terms of higher amount of debt, threat from competitors, highly liquid nature of the capital structure and low amount of profit margin. These risks are in the form of systematic risks of the firm. Effective utilization of resources in terms of their market capitalization can also be considered as another business risk for the firm. Apart from this, due to liberal compensation structure of the firm, Phillips Van Heusen is exposed to higher financial risk. The working capital management can be a major cause of concern for the firm as they are planning for expansion mode. These risks can hamper the sustainability nature of the firm which can further lead to their respective downfall.
These are the primary risks that the organization Phillips Van Heusen is facing to manage their operational activities effectively.
Various recommendations can be given to the organization Phillips Van Heusen in terms of procuring debt of 20 million. Since, the debt equity portion of the firm is on the higher side, therefore, the organization cannot incur more long term debts in terms of their present equity structure. In addition to this, it is important for the organization in incur short term debt as the liquidity ratio of the firm is extremely higher. Apart from this, it is of great essence for the firm Phillips Van Heusen to minimize and split their equity capital and take some amount of working cash out of their reserve and surplus. This will further help the organization to balance their capital structure in terms of their equity and debt. The total revenue of the firm has declined from the last few years along with the percentage of profit margin. Therefore, it is important for Phillips Van Heusen to increase their total amount of stores by segmenting $20 million by 80 percent debts and 20 percent equity. The company may opt for short term debts rather than long term debts.
The report concludes about the financial structure of Phillips Van Heusen and how the organization can utilize $20million debt in accordance to its capital structure and financial stability. Based on this, several recommendations have been given to the firm.
References
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Yermack, D. (2011). The Michelle Markup: The First Lady’s Impact on Stock Prices of Fashion Companies. Available at SSRN 1596803.
Fernandez, P. (2013). Price to earnings ratio, value to book ratio and growth. Value to Book Ratio and Growth (November 11, 2013).
Campaniaris, C., Hayes, S., Jeffrey, M., and Murray, R. (2011). The applicability of cluster theory to Canada’s small and medium-sized apparel companies. Journal of Fashion Marketing and Management: An International Journal, 15(1), 8-26.
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Uk.finance.yahoo.com, (2015). PVH Key Statistics | PVH Corp. Common Stock Stock – Yahoo! UK and Ireland Finance. [online] Available at: https://uk.finance.yahoo.com/q/ks?s=PVH [Accessed 23 Jul. 2015].
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