at the operational
level in 2011
2011 proved to be a difficult year for Thornton’s PLC. Despite a slight increase in overall revenues, both the gross profit margin and operating profit margin decreased considerably compared to 2010, due to rises in both fixed and variable costs. Return on Capital Employed also fell, compounding doubts about the group’s profitability, although Asset Turnover did improve, consistent with strong top-line performance driven by efficiency gains in manufacturing operations.
Analysis of operational profitability
This report seeks to examine the profitability of Thornton’s PLC, at ...view middle of the document...
5m due to adverse weather conditions during the Christmas period.
Operating profit margin
The operating profit margin, before exceptional items, decreased from 3.9% to 2.75%. This decline was in spite of an actual fall in pre-exceptional operating expenses of 3.2%, which resulted from the closure of 16 stores and the implementation of sustainable cost-saving initiatives.
Operating profits by division
Breaking down the operating profit by divisions reveals more about the company’s profitability. Retail, the larger of the two main divisions, experienced an 8.2% year-on-year decline in sales. All sub-divisions of Retail apart from Thornton’s Direct, had decreased revenue in 2011, attributable to widespread store closures during the year. While the operating margin for this sales division decreased, from 6.15% to 5.6%, decreased prevented it from falling more drastically.
In Sales & Operations, revenue increased, from £62.6m to £78.8m. This was thanks to continued positive relationships with supermarkets, strong improvements to manufacturing productivity and a 33.3% increase in export sales (although this still represented only a minor fraction of the company’s business). Even so, the operating margin for Sales & Operations decreased, from 22.4% to 19.5%, due to the five reasons stated above.
Operating profits after exceptional items related to restructuring
It is worth noting that, had the operating profit figures taken into account exceptional items, Thornton’s performance in 2011 would look considerably worse. During the year, exceptional operating expenses increased from £0.8m to £5.2m. These exceptional items consisted of: (i) impairment and onerous lease charges; (ii) outsourcing costs; and (iii) refinancing costs.
Impairment and onerous lease charges saw a significant increase from £0.78m to £4.33m, as a result of the poor performances of ‘own stores’ in the Retail division. Onerous lease charges relate to leasehold properties for which the Group is liable to fulfil rent or other property commitments, but in which the Group either no longer trades, or for which future trading cash flows are projected to be insufficient to cover costs. This exceptional item may exist on a forward-looking basis, as the Group closes down more and more stores. (It is an accounting decision whether to record these costs as exceptional items or as liabilities.)
The outsourcing costs and refinancing costs can be considered as one-off costs; especially the refinancing costs. These relate to professional fees for the arrangement of new bank facility agreements and the write-off of remaining unamortised arrangement fees from previous facilities, which were due to expire in August 2012. The renewal of bank facilities could be seen as a buffer to working capital and may back up the Group’s restructuring plan over the next three years.
Some further restructuring costs have also been identified, namely...