Financial analysis of Sainsbury plc and Tesco Plc - Essay Example

? Detailed Proposal The paper will provide a comparison of financial analysis of two major retailer companies in UK ly Sainsbury plc and Tesco Plc. Both these companiers are the leading food retailers in United Kingdom and they are the well known public listed companies in UK. The paper will highlight the Key features and the current strategies directed by the companies followed by the Calculation of financial ratios for each company, and Compare with earlier years, that allow to judge the financial performance and position for the company, and to interpret if the company's assessment of its own performance as shown in the Financial Highlights and Chairman's Statement a good representation. Then comparison of the two companies together, followed by comparison with the industrial average. The basic structure of this research essay will be divided to five sections: Firstly: Brief definitions of the company’s activities and their major business, when they operate as well as the current strategies directed by the company and also why choose these two firms; Secondly: The calculation of the financial ratios; Thirdly: Financial Analysis; Fourthly: the limitations of ratios; Finally summary and conclusions. This research essay will also make a research into thedifferent type of stock price prediction models and will select the time series model to predict the stock price for two years and then compare them with the actual stock price of the above companies and present the reasearch findings and will make a detailed analysis of the same.A intercompany analysis between Tesco and Sainsbury will be carried over and also a comparison with the industry’s average will also carried over to know how these companies are performing as compared to the industry’s average. 1. Short Narration of the Activities of the Companies Sainsbury Plc Sainsbury being a supermarket chain, J. Sainsbury Plc is a renowned retailer operating from London and also ventured into construction activities, real estate and owning a commercial bank in UK. Established in the year 1869, Sainsbury is having around 337 convenience stores and 557 Supermarkets, and Sainsbury owns a floor space ranging from 15,000 to in excess of 40,000 square feet and has supermarket branches throughout the UK and in the UK and about forty percent of these products are own brands of Sainsbury. Salisbury is having more than 5000 own brands in health and food sector. Apart from the grocery and food products, the majority of the Sainsbury stores offers fish and meat counters, a delicatessen, bread baked on the premises of Sainsbury, coffee shops, pharmacies, gas stations and restaurants. By sales value, Salisbury is the largest UK retailer of Fairtrade products as it sourced ethically and responsibly around ?280 million in the year 2011 alone. Under the brand names of Jackson’s and Bells Stores, Sainsbury manages its convenience stores and also offers a variety of the local brand mainly through the Shell franchise. Sainsbury also markets its own brands along with specialty and ethnic food products like Indian, American, Asian, Italian, low-priced products and organic products. Sainsbury also added house wares and clothing to its retail list of products. Sainsbury also owns a bank in collaboration with the Bank of Scotland, which was the first-ever bank owned by a supermarket in the UK, and its clients numbers have surpassed more than two million numbers as of date. With regard to land associated with the Sainsbury Supermarkets, it is being managed by Sainsbury Property Company and JS Developments, a Sainsbury’s real estate development company. State the different sectors in which saninsbury deals, % revenue In 2006, Sainsbury acquired 4 stores from Somerfield. (Plunkett 2008). As of 2011, Sainsbury is having in a week around 21 million customer transactions and have a market share around 16% in the UK. Sainsbury is offering employment to more than 150,000 individuals. During the year 2011, Sainsbury opened extra 47 convinient stores, and it had achieved a turnover of over ?1 billion. Sainsbury is servicing about 93% of UK households through an internet-footed delivery shopping services, and its annual turnover soared by 20% and the weekly orders now crossing more than 130,000 orders. During the year 2011, Sainsbury opened twenty-one new stores, twenty-four extensions and forty-seven convenience stores and there was an addition of about gross 1.5 million square feet of legroom. Tesco Plc Established in the mid 1920s, at present, Tesco is regarded to be the globe’s largest retailing stores thereby operating more than in 14 nations, including North America, across Europe and Asia and by offering employment opportunity to more than 492,000 individuals. Total Number of Employees of TESCO in 2011 & 2010 During the initial years in the year 1919, Tesco started its journey in a stall thereby offering surplus groceries in London East End area. Today, Tesco manoeuvres Tesco Extra hypermarkets, Tesco Metro stores (grocery stores –mid-sized) Tesco superstores (giant grocery stores), One Stop stores and Tesco Express stores (convinient stores). Now, Tesco is the leader in the UK retail supermarket business and also market leader in food-retail business with large-range of customer appeal, market-leading processes and systems, broadest variety of formats and the globe’s leading customer loyalty programme namely Clubcard. Tesco is not only the largest employer in the UK thereby offering attractive rewards and pay structures to its employees and also playing a pivotal role in engaging in climate change. Comparing to any other competitor in the industry, Tesco is also generating exceptional financial performance with highest sales figures ,return on capital employed and profit margin. The sales figures of leading UK food brands in the year 2010 were given as under: Walkers Crisps ? 0.5 bn, Warburton ?0.7 bn, Coca-Cola ?1 bn and Tesco Values and Finest ?1.1 bn . The above figures indicate that among various retailes in UK , TESCO acts as a market leader in UK.Tesco’s core strength is the customer loyalty programme namely Clubcard as it is having more than 15 million loyal customers as contrasted to 13 million customers in the year 2008-09. As per the given data, Tesco is enjoying highest customer loyalty among UK retailers – Tesco enjoyed about 29.7% whereas its competitors like Sainsbury enjoyed 15.9% , Wim Morrison 14.5%, and Asda 18.5 % (Tesco Annual Report 2011:20). Tesco’s gross sale in the year 2011 was ? 67.6 billion from that of ?51.8 “billion in 2008.” Its 2011 sales break-up was as follows: UK ? 44.6 bn, Europe ?10.6 bn, Asia ?11.6 bn, and in US ?0.5 bn. Further, Tesco’s bank reported in the year 2011a gross revenue of ?0.9 bn. Tesco’s underlying revenue before tax was at ? 2.8 bn in 2008 whereas in 2011, it stood at ?3.8 bn. UK operation contributed about 68% of Tesco’s revenue and 25% of its trading profit contributed by Europe, US and Asia region’s operation and Tesco’s bank contributed about 7% of its trading profit in the year 2011. In 2011, Tesco employed 492,714 people as against 444,127 people in 2008. Tesco had a total space of 103.6 m sq.ft in 2011 as against 76.9 m sq ft space in 2008. In 2011, Tesco’s total stores were 5380 as against 3751 stores in 2008. In the year, 2011, Tesco introduced more than 2000 improved and new products and had about 10 m self-service transactions during a week. In 2010-11, Tesco had opened more than 200 new stores and in the year 2010-11, about 8- million customers had visited to its Express stores than what had been in 2009-10. Tesco is having five dedicated buying offices in UK, and it had ? 1billion of sale of local products in the year 2011 as compared to ?850 million in the year 2010. Among the UK retailers, Tesco is the first ever to introduce a dedicated website to local foods. If we compare the prices of Tesco’s ;products with that of prices of its competitor Asda , about 80% of Tesco’s price is either similar to Asda’s products price or less than that of Asda’s price. Comparison of Aggregate revenues , total number of employees and total assets of TESCO and SAINSBURY for the year 2011 2. The Calculation of the Financial Ratios Ratios are a useful tool in interpretation of financial statements. We will use ratios to measure profitability, liquidity and working capital management. We will also consider ratios that measure the capital structure of the business and the risk of a business. Ratio analysis offers valuable info about the financial structure of a company. Company financial ratios can be compared not only with its past performance but also be compared with the other companies in same industry to know about their strength. For instance, it is arduous to evaluate the Tesco’s performance in isolation, but if it is compared with the other competitors in the same industry like ASDA, Sainsbury, it might be offering valuable info for the researchers and the company officials (Lofthouse 2001). At the same juncture, the current financial data of Tesco can be contrasted with its past year data to review the present performance of the company, and it also offers to insight to an investor to evaluate which company is good for investment . Market Shares of Supermarkets in UK – An Analysis Super Market 12 weeks to 8 August 2011 12 weeks to 8 August 2010 % change TESCO 30.5 30.8 2.6 ASDA 17.1 17.6 1.2 SAINSBURY’S 16.1 16.1 3.6 MORRISONS 11.7 11.6 4.6 Co-Operative’ 6.9 6.4 11..7 Source: Kantar/Reuters -http://www.guardian.co.uk/business/2011/aug/16/supermarkets-market-share-kantar TESCO ?m SAINSBURY ?m 2011 2010 2011 2010 Revenues 60931 56910 21102 19964 Cost of sales 55871 52303 19942 18882 Gross Profit 5060 4607 1160 1082 Operating Profit 3811 3457 851 710 Net Profit 2671 2336 640 585 Comparison of Revenues , Cost of sales , Gross Profit , Operating Profit & Net Profit of TESCO & SAINSBURY for the year 2010 & 2011 The ratio well calculated for two years (2011) and (2010) for both companies as following you may include a calculation of all ratios for both companies in the Appendix then discuss on each category 1-Liquidity: The liquidity ratios indicate the amount of cash (or liquid assets) available at the company’s disposal. The current ratio of the company is the ratio of the current assets to the current liabilities It indicates the liquidity position of the firm and its ability to cover the current liabilities with the liquid assets. (Weetman 2006). Liquidity Ratio will analysed based on calculation of: Both Sainsbury and Tesco are the major supermarkets in UK , there is no wonder that both have a ratio >1 as their current liabilities is more than the current assets or their current assets could not help them to overcome their current liabilities in case of any crisis. Both the companies have to concentrate on the working capital management, especially their inventories. Inventory management has to be strengthened in both the companies. As per Axsater (2006), they have to concentrate on their food-industry operations and the management of these companies have to expand a more urbane approach in estimating their food products demand so as to have clear control over their inventory effectively. Further, it is suggested that between the alternatives of low inventory cost and customer satisfaction, both the giants should concentrate more on customer satisfaction as this is the key drive for any organisation’s success. For increasing the cost efficiency , inventory management is essential but initiatives requires to be invested to make sure that the customer satisfaction will not be swayed negatively because unavailable products and small stocks. (Augustin 2011:6).check reference style 2-Profitability: Analyse how effective the firm is at generating profits given sales and or its capital assets. The profitability of a company can be analyzed using the gross profit margin ratio, Net profit margin and return on capital employed. -Profit Margin: The profit margin is the measure of the company’s ability to earn the profit from the generated revenue. This is a very important and crucial ratio as this depicts the earning capacity of the company. (Weetman 2006). Profitability ratios offer a brainstorm to the magnitude of success in accomplishing this target. (Mclaney & Atrill 2002:197). Both for investor and shareholders, profitability ratios are important as it helps to evaluate the corporate earnings. The profitability ratios will be helpful to the following: To evaluate the aggregate performance of a company To indicate how profitable is the company To investigate the profit achieved by a company Can be employed to study how well a company is operating, to contrast the past performance with its current performance. Gross Profit Ratio and Net Profit Ratio Both the Tesco’s and Sainsbury’s gross profit and net profit ratio have come up slightly in both the years 2011 & 2010. It is good sighn, but Both companies should concentrate on cost reduction strategies to improve the profitability . Further , both the companies should also engage in improviing the revenue to increase the profitability . Return on Equity (ROE) and Return on Capital Employed (ROCE) ROCE measures the income generating ability of the capital employed by the shareholders. (Weetman, 2006). This ratio is of high importance as it indicates the rate of return obtained by investing the capital in the business. ROCE is a measurement mechanism of relative profit that not only includes the shareholder’s funds but also funds lent by creditors and banks and hence, indicates the productivity of the assets of the company. It is a useful tool of detective work to trace the cause of a change in return on capital employed, which can be due to profitability or efficiency in the use of assets. “Return on Capital Employed (ROCE) “ “EBIT / Total Assets – Current Liabilities “ Or PAT/ Total Equity + Long term borrowings If you compare the ROCE achieved by both the Tesco and Sainsbury, you can understand that there has been an increase in ROCE in 2011 as compared to year 2010 in both the companies. The following reasons may be attributed to such an increase in ROCE; Without a corresponding increase in the capital employed, if there is an increase in the net profit. Though sales are at previous year levels, the cost is being reduced by the companies. Without an increase in the cost, if there is an increase in the sales revenues. To maintain the level of net profit by reduction of capital employed to engender this magnitude of revenues. PAT/ Capital employed x 100 % Capital employed = Total Equity + Long term borrowingsAs compared to Sainsbury, Tesco’s ROCE seems to have strong ROCE indicators. Tesco’s aim is to take its ROCE to the “level of 14.6% by 2014/15.” Tesco is confident in achieving this growth by implementing operational improvement, by accelerating growth in asset margin and asset turnover, mingled with enhanced capital efficiency by augmenting their property programme and change in work-in-progress to assets. Further, Tesco’s strong ROCE performance is basically dependent on Tesco’s strategic goals and also mirrors the drivers of its long-run shareholder value. Since 2009, Sainsbury engaged in the investment in space growth, and this has resulted in dilutive effect on revenues as the stores established, whilst enhancing the value of capital used. (Tesco AR 2011:48). Tesco’s ROCE is steadily increasing and pois6ed to be at 14.6% in 2014/15. This growth will be mainly driven by improvement in operations, the growth in margin and asset turnover, mingled with enhanced capital efficiency. The increase in ROCE is mainly contributed by the business operations from Europe, Asia, the UK, the US and the Tesco Bank. (Tesco AR 2011:50). As compared to the year 2010, Sainsbury’s ROCE has slight increase in 2011 but lags behind the Tesco’s. The growth in ROCE was less than as compared to the last year for Sainsbury is mainly attributed to aggregate impact of Sainsbury’s stepped up investment in space growth from June 2009. This has really had an adulterated effect on revenues as the stores mature thereby augmenting the value of capital employed. (Sainsbury AR 2011:21). Return on Equity (ROE) = Net Income/ Equity shares With the help of ROE, one can understand how effectively a business can reinvest its earnings and hence, create growth. In case of Sainsbury, the ROE has increased slightly in the year 2011 as compared to the year 2010. However, for Tesco, there has been a substantial increase in ROE in the year 2011 as compared to the year 2010. Tesco has definitely more advantages as it is having higher margins as compared to Sainsbury. With high margins, Tesco has definitely more advantages as it is having higher margins as compared to Sainsbury. With high margins, Tesco is able to compete more efficiently than that of its competitors like Sainsbury. Further, Tesco is having an upper hand in the price war as it can slash the price for a product to the minimum profit level or at cost price to attract more customers from Sainsbury and other competitors. Likewise, when in case of recession, Tesco with strong ROE, can remain tough when its’ competitors face difficulty and when good times surfaces, Tesco can reap the incentive due to destabilised competition. 3-Financial or Activity ratio: This ratio can be indicator of how rapidly firm converts various accounts into cash or sales. In general, the sooner management can convert assets into sales or cash, the more effectively the firm is being run, and that can be analysed based on calculation of: Assets turnover ( Tracy 2006:36). Stock Holding period The inventory holding decides the size of the inventory pertaining to annual cost of products sold. If the warehousing and manufacturing process is longer, the higher is the inventory cost. Business managers will like to function with the lowest magnitude of inventory, thereby not disturbing the sales due to products becomes out of stock when there is a demand for it from their regular customers. Hence, supermarkets have to invest in inventory substantially to keep adequate stocks. If the holding period of inventory is longer than what is needed, then, excessive capital is blocked up in the inventory. If the company is cash poor, it may like to have larger inventory and not adequate balance in the bank. The above ratio is very crucial to the super market business as the supermarket has to maintain adequate inventory to meet their customer demands and to avoid stock-outs scenarios. The customer’s satisfaction should be weighed against the lost profit opportunities. It is advisable to compare the company’s inventory holding period with that historical trends and with that of competitors as it would offer constructive benchmarks.(Jones 2007:481). The stock holding period for the both companies had increased in the year 2011 and this indicates that both the companies want to have inventory stock high instead of losing the customers. That is why, both the companies have high negative current liabilities. To reduce the operational cost, both the supermarkets do not want to have just-in-time inventory policy as they pay high attention to the satisfy the customer’s demand. Appendix 1. Current ratio 2.Acid test ratio TESCO PLC ?mn 2011 2010 Net Current Assets -inventory 8276 8663 Net current liabilities (17731) (16015) Acid test or quick ratio -0.47 -0.54 3.Gross Profit Tesco Plc Sainsbury Plc 2011 2010 2011 2010 Gross Profit 5060 4607 1160 1082 Sale x 100 60931 56910 21102 19964 Gross Profit Margin 8.30% 8.095% 5-50% 5.42% 4.Net Profit Ratio Tesco Plc Sainsbury Plc 2011 2010 2011 2010 Operating Profit 3811 3457 851 710 Sale x 100 60931 56910 21102 19964 Operating Profit Margin 6.25% 6.07% 4.03% 3.56% ROCE Tesco plc 2011 2010 Sainsbury plc 2011 2010 PAT (Equity+Ltb) ROCE 2671 29475 9.06 2336 30008 7.78 PAT (Equity+Ltb) ROCE 640 8457 7.59 585 8062 7.25 Source: (Sainsbury AR 2011:21) Stockholding Period = (inventory *365days/cost of sales) TESCO ?m Sainsbury ?m 2011 2010 2011 2010 Inventory 3162 2729 812 702 Cost of sales 55871 52303 19942 18882 stockholding 21 19 15 14 period Read More