profitability of
Thorntons plc at the operational level in 2011

Executive Summary

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 the operational level, in 2011. Four performance indicators are considered: Gross Profit Margin, Operating Profit Margin, Return on Capital Employed and Asset Turnover. These measures, considered together, serve to highlight different aspects of the company’s performance.

Gross profit margin The gross profit margin decreased from 49.66% in 2010 to 46.16% in 2011; this was due to a higher percentage increase in COGS (the cost of goods sold) than in sales revenue. Thornton’s management has attributed the decline to the following five factors: (i) A significant rise in commercial sales as a proportion of total sales - because these sales are made at wholesale prices, less profit is made after deducting COGS; (ii) A drive towards lower-margin products in both own-store and commercial sales, reduced the overall gross profit margin; (iii) Despite hedging activities against inflation and unexpected rises in costs, increases in the cost of raw materials (e.g. more than 20% for dairy products and over 50% for sugar) still had an impact on the overall margin; (iv) Higher levels of discounting and promotional support costs, intended to boost sales, were incurred during the year;