An annual report is a ‘portrait’ of the business. It embeds a sense of achievement, as well as, future prospects into the minds of the company, as well as, its readers (Sanders, 1949).
JJB Sports plc is one of the foremost vendors of sports goods in UK. They have been facing a tough and challenging time over the years which are reflected in their annual report. Emphasis is mostly given on the way through which the company can complete a successful turnaround. The annual report begins with the description of the problems they are facing and promising a bright future for the company ahead.
Annual reports are the source of financial and non financial strategies and activities of the company over a year. They provide relevant information to relevant parties about the operations of the company and how well the company has performed over year, as well as, what are the new strategies being employed by the business (CPA Australia Ltd., 2012).
This report will critically analyze and assess the initial section of the annual reports and accounts of JJB Sports plc consisting of the Overview, Business review and Governance section of the annual report 2011. The annual report will be analyzed from an investor’s point of view, and information from the report will be used to gauge the performance and future prospects of investment in the organization. Critical assessment of the initial three sections of the annual report 2011 will be done followed by the extent of relevance of investment information in the annual report.
The overview begins with a brief statement by the Chairman, Mike McTighe who admits to the turmoil that the company is facing and then goes on to list the steps that the company has taken to correct the issues. The steps include raising capital for the firm, restructuring the business plan which includes expanding the existing portfolio of the company without taking significant risks. The business plan is in general a turnaround plan which will reinstate the company as the leading retailers of sports goods just like the way they were before the problems ensued. The achievements of the company are listed, most important of them being able to reduce costs which are likely to generate more profits for the firm in the future. The chairman statement continues with acknowledgement to the board members who have been pivotal to the turnaround process followed by the acknowledgement to the employees. The one issue with the acknowledgement is that it is implied that the company has restructured their senior team which can be perceived as a negative and desperate step by many readers, most importantly investors who may doubt the credibility of the company if they come to know that the board is inefficient and needs constant replacement.
The Chief Executive’s review follows the Chairman’s statement. The CEO just like the director starts off with explaining that the company’s current situation may last a long time; however, steps are being taken to rectify all the past issues and the company is now revamping their structure and strategy to operate. The emphasis on a new senior team employed by the company is clear. The future prospects are mainly promises of a better tomorrow compared to today without establishing any solid fact that might suggest. Then, the CEO’s review goes on to explain the losses that the company had to face over the year. The reasons for the loss are mainly the lack of performance by procurement, as well as, availability of cash for stocking purposes. The company did recently expand into the online version of their store, which is a positive step towards achieving their targets and had doubled their earnings from the online front compared to the last year.
Electronic media have made it easier to read and even analyze all the information using specific software, but there is no alternative to the human element (Back et al., 2001). The operating review of the company lists down the operating losses that the company faced over year and compared it with the past years operating performance. The results suggest that the sales revenue for the company grew over the year; however, due to higher increase in the cost of sales the company had to face a higher gross loss than the past year (Refer to appendix A). Moreover, the company discontinued its noncore retailing operations for the year in an attempt to reduce the losses sustained in the past year, but the result was not positive, and the company had to face higher loss from its core business in 2010 then both the operations combined in the past year (JJB Sports PLC, 2011).
The KPI’s did not provide a better picture for the company except for showing growth in revenues and gross margin, and all the results were unsatisfactory (Appendix B). The net loss per share also rose to 61.8 pence per share from the last year figure of 20.84 pence per share.
The key risks that the company faces are economic conditions, competition, key employees, suppliers, availability of credit, financial risks, business continuity, revenue dependence, cost saving, leased property portfolio, as well as, some other minor risks. The amount of risks faced by the company is high, and the realization of those risks is a good possibility in light of the performance of the company.
Like every organization JJB Sports also recognizes the importance of corporate social responsibility (CSR). Many CSR activities are planned for the future instead of being followed today. The company follows the labour laws as per regulation, as well as, tries to reduce the adverse environmental effect that they have. They have a well worked employee management plan in place which is a positive sign, keeping in mind that the company is facing a tough time and employee management is the least of their concerns at the moment.
The governance section starts off with describing the board of directors. Their experiences and educational background suggest that they are more than capable of bringing the company back to life. The company also continues to comply with the corporate governance principles according to the set rules set aside by the Financial Reporting Council. Research has suggested that the text is the most integral part of the annual report rather than the financial statement (Means, n.d.), and governance report is an integral part of that text.
The company’s listing in the London Stock Exchange was cancelled, and their shares are now admitted to AIM. The company still maintains a strong relation with the shareholders, and the board of directors actively seeks input from all parties who have invested in the company. Moreover, the company had to take dire action to keep the firm as a going concern. Further capital was raised, while several costs related to Bank were waived off due to higher and consistent losses. The company also issued new shares to get an inflow of funds to cover the losses. This action might hurt the company in the long run unless they over turn their losses. Financing the losses through debt will result in the accumulation of debt which will hurt the going concern aspect of governance.
The remuneration report suggests that the company pays market competitive wages to their directors, and that no director is part of his own remuneration process. The remuneration of directors suggests that the departure of a few directors has cost the company a lot of money in terms of bonus and other costs (refer to appendix C). In time when the company was short of cash, they were able to pay huge bonuses to their directors even when their performance as per the indicators was not worthy. A lot of share schemes are followed by the company which allows the directors to be part of the company and actually invest in it, possibly to enhance performance once personal gains and losses are associated. In totality, it is observed that the directors are given fair remuneration, sometimes a little unfair for the company. The company has given a lot of bonuses to the directors in terms of share schemes and other benefits. These benefits can only be justified based on their performance. There is no way to gauge the performances of some directors who have just recently joined the business; however, the policies and strategies implemented by them look promising. There is no way to judge the level of success that the turnaround process has brought, but it can be estimated that it will take a lot of time to bring the company back from the depths.
Potential investors rely too much on the annual reports because they think that they provide the whole picture of the company. In reality, the reporting authorities have allowed certain loop holes that companies can use and with hold some information that might be crucial for an effective investment decision. There is also some information that is non-financial in nature and several potential investors are looking for such information (Beattie, McInnes and Fearnley, 2004). There is a need to disclose additional information on the annual reports for that purpose.
It is also common practice that the firms that generate high profits have simpler annual reports because they have nothing to hide, but those with losses have such complex annual reports that are extremely difficult to read and to spot financially relevant information with ease is not an attribute found in them (Li, 2008).
An explanation to the complex loss reports is that it is extremely easy to write and praise the company when they are generating favourable profits but it is equally hard to write and describe the losses situation in annual reports, which might be the reason for the long and complex reports (Bloomfield, 2008).
Sometimes even the loss firm’s annual reports information is complete, but it does not provide a detailed picture of the future prospects of the company. The company might not be making profits now or even in the near future but has enormous potential to grow. This does not show in the annual reports. Also, in cases of loss firms, there are several variables whose financial information cannot be interpreted correctly (Schleicher, Hussainey and Walker, 2007).
Information given on the annual reports can be manipulated for personal gain of the company. Also, integral information required to make an informed guess about the company might be with held in case the information tilts the investment decision to negative. Annual reports are meant to be dull and boring so that shareholders and readers only read the parts that are integral for them and skip the rest even when there is vital information about the future written in the report which had to be disclosed due to regulatory restrictions.
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