* Part I
Due to various challenges the LEGO Group (LEGO) has launched a seven-year strategy; so, the following will examine the financial progress within the first four years in addition to figures from 2003; the year before the introduction of the repositioning strategy.
At the outset LEGO needed urgent financial reinforcement, essentially to secure its existence. Firstly, to secure the stabilization of the firm, the management made drastic economic measures. In this regard, some financial information given in the income statement seems reasonably interesting.
A couple of these adjustments are set in motion by the “restructuring costs and other special items” already in 2003; yet, tighten all the more in 2004. As the belt got tightened it had a sudden effect – a 177.4% increase from the 2003 to the 2004 results. This suggests that LEGO completed severe devaluations and sacks of employees. However, such streamlining is not only achieved in 2004. Once more the “restructuring costs” was critical in 2006; still, step by step the consequence of such performance has had a positive impact for the general progress of LEGO demonstrated by the “reversal of impairment of fixed assets”.
Also, the production cost has dropped by 11.1% from 2003 to 2007 – making up 43.5% en route for 35.0% respectively as part of revenue. Another notion is the significant cut within “sales and distribution costs”, “administrative expenses”, and “other operating expenses” – brought in and affecting a 20.8%, 33.1%, and 19.5% decrease from 2003 to 2007.
As gross profit has really increased in the period of 2003-2007, from 56.5% to 65.0% of revenue, one might argue that LEGO have obtained either an improved product mix or increased prices of their goods.
When all is said and done net profit implies considerable improvements. Although the causes behind the remarkable increase of 207.3% from 2003 to 2007 might be indifferent, by and large LEGO succeeded to modify costs rather than strengthen revenues to make this improvement.
Besides, when looking at the balance sheet, some striking indications are to be found. Firstly the sharp decrease within “property, plant, and equipment”. Along the time horizon given, 2003-2007, this fraction has decreased by 81.1%. When examining the vertical analysis “property, plant and equipment” constrained 60.7% of non-current assets in 2003, whereas in 2007 the figure demonstrates simply 19.2%. However, “proceeds from sale of property, plant, and equipment” is mainly a short term financial lifebuoy for LEGO, as indicated in the statement of cash flows.
Nevertheless, on the subject of assets, non-current is now surpassed by current. This is, besides the above mentioned, particularly provoked by an increase in “cash at bank and in hand” and “other receivables”.
In terms of key ratios the “quick and acid-test” peak of 2.7 in 2005 links, among other factors, to the mentioned takings derived from the sale of “property, plant and equipment”. Ultimately, the year of 2005 seems like the point in time where LEGO gains momentum.
Moreover “total asset turnover” supports the upward efficiency of LEGO; as it measures whichever firm’s capability of using its assets in relation to an increase in sales. (Subsequently, the higher a ratio – the better)
KEY RATIOS| 2003| 2004| 2005| 2006| 2007|
Quick or acid-test| 1.1| 1.8| 2.7| 1.1| 1.4|
Total asset turnover| 0.7| 0.8| 0.9| 1.1| 1.3|
* Part II
The streamlined reorganizing and financial progress of LEGO has undoubtedly facilitated and insulated the firm for upcoming challenges. The financial crisis strikes many businesses; in spite of this, LEGO literally meets the uncertain obstacles with money in the pocket and the...