Question

Background

Pure Sport plc was formed following the merger of Pure Limited and Sport Limited in 2016. It

is a listed company which designs, manufactures, markets and distributes footwear, sportswear

and leisurewear products in Asia, Europe and North America. Pure Sport plc employs

approximately 1,000 people at its three sites in the United Kingdom and Ireland, and supplies

products to over six million customers in 20 countries.

Pure Sport plc holds inventory of about 100,000 different components and product elements for

use in the manufacture of its products.

Organisational Structure and Market / Competitor Information

Pure Sport plc is organised into three divisions based upon its lines of business: Footwear

Division (FWD); Sportswear Division (SWD); and Leisurewear Division (LWD).

1. FWD’s primary products are sports shoes aimed at customers aged 12-30 years that are

fashion and exercise conscious at the same time. The average product price is in the lower

quartile when compared against competitors, with 90% of sales in this area coming from

the Asian market.

2. SWD focuses on high net income customers aged 25-45 years who value status and

emerging materials, design and technology on their high-performance product. The

average product price is the upper quartile when compared against direct competitors and

75% of sales for these products come from North America.

3. LWD’s products are aimed at customers aged 8-30 years who like to wear the latest trends

and styles and have great control and choice over their look. The average product price is

in the lower quartile when compared against direct competitors. Sales for these products

are divided 40% Asia / 37% North America / 23% Europe.

The company sells products direct to consumers by mail order, through retailers and aggregated

wholesalers; it also creates ‘white label products’ and sells clothing components and blueprints

to other manufacturers.

The present structure was established by Pure Limited in 1998 and continued after the merger

with Sport Limited. While the directors of Pure Sport plc consider continuity to be a very

important value, many of Pure Sport plc’s competitors have undertaken structural re

organisations in recent years. In 2016, Pure Sport plc commissioned a review of its

organisational structure from an independent consultancy firm. The consultants suggested

alternative structures which they believed Pure Sport plc could employ to its advantage.

However, Pure Sport plc’s directors believed that continuity was more important and no change

to the organisational structure occurred.

Pure Sport plc owns three freehold properties which it uses as administrative offices for each

of its three divisions. Each property had an expected useful life of 50 years on its date of original

acquisition (which was prior to the merger of Pure Limited and Sport Limited in 2016), and the

directors believe that this assumption will still be appropriate at 31 December 2019. It is

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company policy to depreciate the properties on a straight-line basis over their estimated useful

economic life.

FWD property SWD property LWD property

Date of acquisition 1 January 2010 1 January 2010 1 January 2010

Original cost £10,000,000 £10,000,000 £10,000,000

Net book value at 31 December 2019 £8,000,000 £8,000,000 £8,000,000

Market value at 31 December 2019 £6,000,000 £14,000,000 £10,000,000

In the financial statements for the year ended 31 December 2019, the directors of Pure Sport

plc are proposing to show the SWD and LWD properties at market value and the FWD property

at its depreciated historic cost. The directors believe the fall in the market value of the FWD

property is temporary and its value will rise in the next one to two years.

Product and Service Delivery

Consumers, retailers and wholesalers are increasingly seeking to collaborate with the designers

of Pure Sport plc’s products and the associated manufacturing and assembly processes. Pure

Sport plc’s directors view this as a growth area.

The directors of Pure Sport plc recognise that the company needs to develop web-based services

and tools which can be accessed by these partners. The traditional method of listing the

company’s range of products, designs and components in a catalogue is becoming less effective,

costly and cumbersome because customers are increasingly seeking specially designed custom

made products as the industry becomes more sophisticated.

In October 2019, the directors of Pure Sport plc advised the company’s solicitors to commence

legal action against one of its main suppliers claiming damages of £1,000,000 in respect of

losses sustained as a result of the supply of faulty raw material. According to legal advice, Pure

Sport plc has a very good chance of winning its case; although, it is unlikely to be settled before

the 2019 financial statements are finalised.

Financial Objectives

Pure Sport plc’s directors have generally taken a cautious approach to providing strategic

direction for the company. Most directors consider that this has been appropriate because Pure

Limited was unprofitable for the three years preceding the merger and needed to be turned

around. Also, most directors believe a cautious approach has been justified given the

constrained economic circumstances which have affected Pure Sport plc’s markets since 2016.

While shareholders have been disappointed with Pure Sport plc’s performance over the last

three years, they have remained loyal and supported the company’s directors in their attempts

to move the company into profit. The institutional shareholders however are now looking for

increased growth and profitability combined with a strategic vision for the future.

Financial Information

Pure Sport plc’s prepares its financial statements to 31 December each year and its historical

financial records over the last three years indicate:6

2018 2017 2016

£ million £ million £ million

Revenue 620 433 360

Operating profit 39 20 13

Profit for the year 21 9 5

Earnings per share 11.7 pence 5 pence 2.8 pence

Dividend per share 5.8 pence 0 0

Performance Review

Pure Sport plc’s three divisions have been profitable throughout the last three years. The

revenue and operating profit of the three divisions of Pure Sport plc for 2018 were as follows:

FWD Division SWD Division LWD Division Total

£ million £ million £ million £ million

Revenue 212 284 124 620

Operating profit 20 6 13 39

Capital Budgeting

Pure Sport plc has an internal audit department. The Chief Internal Auditor, who leads this

department, reports directly to the Pure Sport plc’s Finance Director.

Investigation by the Internal Audit department has revealed that managers with responsibility

for capital expenditure have often paid little attention to expenditure authorisation levels

approved by the company’s directors. They have justified overspending on the grounds that the

original budgets were inadequate and in order not to jeopardise the capital projects, the

overspends were necessary. It is perceived by the designers and most staff members that the

need to allow a great deal of customisation on products leads to difficultly in predicting costs

being incurred.

Strategic Planning

Pure Sport plc applies a traditional rational model in carrying out its strategic planning process.

This encompasses an annual exercise to review the previous plan, creation of a revenue and

capital budget for the next five years and instruction to managers within Pure Sport plc to

maintain their expenditure within the budget limits approved by the company’s directors.

The directors of Pure Sport plc stated in the company’s 2018 annual report, published in March

2019, that the overall strategic aim of the company is to:

‘Achieve growth and increase shareholder returns by continuing to design produce and

distribute high quality clothing and footwear products and components and develop

our international presence through expansion into new overseas markets.’

Requirment:

(a) evaluates the financial performance of Total Sport plc over the three-year period 2017 to
2019;
(b) considers how the directors of Total Sport plc can accelerate the growth of the company
and increase its profitability.

Answer 1

a) Evaluation of Financial Performance og Total Sports Plc:-

Particulars/ Year	2016	2017	2018
Revenue	360	433	620
Operating profit	13	20	39
Net Profit	5	9	21
EPS	2.8 pence	5 pence	11.7 pence
Dividend	0 pence	0 pence	5.8 pence

Revenue:- Increasing trend can be seen year on year basis. In the 1st year (i.e. 2016-17) revenue groeth is 20.28% and in 2nd year (i.e. 2017-2018) is 43.10%.

Operating Profit & Net profit:- These two also shows increasing trend. this means there is continual decrease in operational expense and other non operational activity.

Consequently to the increase in profit EPS and Diviend also increases on year to year basis.

And the 2018 Year has shown the best result as far,

b) Points to be considered by the director for increasing Growth and Profitability of Total Sports PLC. :-

(i) Increase in security of capital goods holding staff. So, that it cannot be improperly utilised.

(ii) Keep constant check over spending on capital goods. So that overexpenditure can be avoided.

(iii) Easier access to the products . With a user friendly access point higher demand for the goods can be achieved.