Financial Statement Analysis of J Sainsbury Plc and Walmart - Case Study Example

Financial Statement Analysis of J Sainsbury Plc. and Walmart

Purpose of the Analysis

The purpose of this analysis is to compare the performance of two companies. The analysis will go through key ratios that will help determine how Walmart Stores, Inc. and J Sainsbury Plc. perform. The report includes a strategic review of the firms as well as an analysis of the ratios that indicate profitability for the two firms and graphical representation of the information provided by the financial statements of the two firms. The conclusion will further elaborate what the ratios imply to the firms and their competitors as well as what the firms should do to strengthen their position in the market.

Strategic Review of the Firms

Walmart

Walmart is the world’s leading retailer. The firm uses different formats in the operation of its stores. Among the formats I applies in the stores include specialty electronics, cash and carry, restaurants, home improvement, drug stores, apparel stores as well as convenience stores. Its product lines are varied and include entertainment, apparel, grocery, hardlines, home as well as health and wellness. The company sells its merchandise through private labels such as Hometrends, Everstart, Mainstays, Equate, George, No Boundaries, Faded Glory, Marketside and Great Value. Financially, the company’s revenue for the financial year ending January 2015 was $485,651 million. That was an increase of 2% from the previous year. The company recorded an operating margin of 5.6% for the same period. The net margin was 3.4%.

The company has some strengths, weaknesses, opportunities as well as threats. Some of its strengths include a strong market position, customer-centric business operations and high inventory turnover ratio. Its weaknesses include legal proceedings and a failure to manage operating expenses. The biggest threat to the company is the expansion of competitors accompanied by foreign exchange risks and stringent regulations. These may hinder its growth in the future. The expansion of online retailing as well as the retail market in the US offers an opportunity for the company to grow.

The company enjoys a presence in the US, Puerto Rico and Mexico. It also has business operations in Central America, Africa, Europe as well as Asia Pacific. In total, the company has a presence in 27 countries running about 6,290 stores internationally as well as 4,516 stores in 50 states in the US. The company supports its stores through 314 distribution facilities all over the world. Having a strong market position gives the company an edge over its competitors such as Target. It is able to generate more revenue as it is able to reach a wider market compared to its main competitors. That enhances profitability. The bigger market share also results in high inventory turnover. With high inventory turnover, the company is able to realize profits faster than its competitors.

Walmart has some challenges. The challenges mainly come in terms of operating expenses. The company has had difficulties controlling the operating expenses. One of the company’s goals was to achieve a lower growth rate in terms of operating expenses while at the same time having a higher growth rate for sales and operating income. However, it failed to achieve the objective for the years ending January 2014 and January 2015. Instead of decreasing, the operating expenses seem to be increasing. Walmart registered an increase in sales over the financial year ending January 2015. However, due to high operating expenses, the company’s return for its investors was low.

Sainsbury

J Sainsbury is the third largest food retailer in the UK. In recent times, there has been a change in the way people do their shopping. That has had some effect on the food retailing industry. There have been many challenges for food retailers including Sainsbury due to the evolution in shopping habits. It has therefore become necessary for firms to change with the changing times. Due to these hard times, Sainsbury has seen a drop in sales in recent times. For instance, in September 2014, the company recorded a 2.8 percent fall in sales. Such falls have very dire financial implications on the firm.

The company potentially faces a threat in the make of Aldi and Lidl. The two are discounters whose entry into the market threatens to cause trouble to the food retailers. Already, the leading retailers are feeling the effect of the discounters as they eat up part of their market share. With reduced market share, the firms are finding it hard to increase or even maintain their sales volumes. Therefore, their profits are dropping as revenue drops. Given the current market conditions, Sainsbury has had to come up with a strategy to strengthen its position. The firm is investing in the most noticeable areas for its customers. The aim is to focus on the products and categories that most customers are aware of. The company is trying to win over customers from Aldi through lowering prices of some of its products such as its own brand nappies. The strategy also aims at improving quality in baby care products as well as fresh produce. The company aims to use the pricing strategy to overcome competition.

Sainsbury is experimenting with new concept supermarkets. They want to make shopping trips easier. The company aims to remodel some of its stores to avail more space for non-food as well as third party operators. Although the company is making some changes to its stores, it does not plan to convert them into department stores. The move to create more space for non-food offers is a step in the right direction for the company. Although the company has mainly dealt in food, introducing other products diversifies the firm to increase its reach. The introduction of clothing and home ranges is possible without the risk of compromising its authority in food retail. With the advantage of new technologies and store designs, the firm can come up with new concepts to improve the shopping experience.

Accounting Analysis

The company prepares financial statements in accordance to existing principles. However, the two companies include too much information in their statements. The financial statements end up having too much information. They are crowded and may take some time for someone to comprehend the information completely. By grouping the items together and collapsing them in fewer items or subgroups, the companies would be able to present the same information in a way that is easily understandable. It would take less time to prepare and easily understandable by all. The financial statements of the two firms indicate that Walmart is bigger than Sainsbury. It has a bigger value for its assets as well as shareholder equity. The company also has higher income compared to Sainsbury.

Profitability Analysis

The profitability for both companies fluctuates over the years. For Sainsbury, its ROCE drops from the year 2011 to 2013 before it rises in 2014 and then finally drops in 2015. For Walmart, the ROCE drops in 2012 and then rise in 2013. It then drops again in 2014 before rising again in 2015. Although the two companies display similar behavior, Walmart has a higher ROCE over the years compared to Sainsbury. That would therefore suggest that Walmart is more profitable than Sainsbury. In the first level decomposition, both companies display similar trends for RNOA. The RNOA value for Sainsbury falls in 2012 and 2013. It rises in 2014 before dropping again in 2015. The RNOA for Walmart drops in 2012, rises in 2013, falls again in 2014 and finally rises in 2015. The FLEV value for Sainsbury rises in 2012 and 2013, then falls in 2014 before rising again in 2015. For Walmart, it rises in 2012 and then drops each year to 2015. On average, Walmart has better values for NBC and SPREAD. The trends demonstrate similar patterns in the values as they rise and fall from one year to the other. None of the two firms has constant growth in any of the variables. The outcomes keep varying all the time. In the second level decomposition, Walmart registers better profit margins than Sainsbury. That indicates that Walmart generates more profit from its revenues that Sainsbury. However, when it comes to asset turnover, Sainsbury has higher values. That indicates that Sainsbury is better when it comes to using assets to generate profits. It is able to generate higher earnings from its assets and therefore is more efficient. In the third level decomposition, Walmart has better values for both profit margin and asset turnover. That implies efficiency in the way Walmart is using its resources to generate revenue. It would therefore be a better option for someone wishing to invest.

Conclusions

The two companies both engage in retail business. While Walmart is highly diversified in product range, Sainsbury is just getting started on diversification. While they record fluctuating results every year, Walmart seems to have better financial ratios to indicate greater profitability. However, given that the company has been in the retail business for a while, the fluctuations would therefore mean that the company is having some problems in managing operational costs. Due to the challenges it is facing, the company is unable to have stable profits. The company should therefore look into the causes for these fluctuations in order to arrest the trend as it may affect the overall growth of the firm.