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. FWDs 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. LWDs 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 plcs competitors have undertaken structural reorganisations 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 plcs 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 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

onsumers, retailers and wholesalers are increasingly seeking to collaborate with the designers of Pure Sport plcs products and the associated manufacturing and assembly processes. Pure Sport plcs 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 companys range of products, designs and components in a catalogue is becoming less effective, costly and cumbersome because customers are increasingly seeking specially designed custommade products as the industry becomes more sophisticated.

In October 2019, the directors of Pure Sport plc advised the companys 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 plcs 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 plcs markets since 2016.

While shareholders have been disappointed with Pure Sport plcs performance over the last three years, they have remained loyal and supported the companys 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 plcs prepares its financial statements to 31 December each year and its historical financial records over the last three years indicate:

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 plcs 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 plcs 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 companys 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 companys directors.

The directors of Pure Sport plc stated in the companys 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.

Requirement

Based on the information provided, prepare a presentation which:

(a) evaluates the financial performance of Pure Sport plc over the three-year period 2016 to 2018; 20 Marks

(b) considers how the directors of Pure Sport plc can accelerate the growth of the company and increase its profitability. 30 Marks

(c) discusses whether the policy put forward by the directors of Pure Sport plc with regards to the companys three freehold properties which it uses as administrative offices is acceptable. 20 Marks

(d) explains how the legal action against one of Pure Sport plcs main suppliers should be dealt with in the companys financial statements for the year ended 31 December 2019. 20 Marks

(e) identifies any further information required to complete your analysis of the companys financial performance and considers the possible limitations of your analysis. 10 Marks Total 100 Marks