RAP 8 Tesco financial analysis.pdf

OXFORD BROOKES UNIVERSITY Research and Analysis Project Report Topic 8 The Business and Financial Performance of Tesco Plc Period 2006 to 2008

Submitted By: Syed Fahad Amjad ACCA Reg.No: 1346741 Mentoring By: Colin Biggs

The project is submitted as part of the requirements for the award of the BSc in Applied Accounting, Oxford Brookes University

November 2009 6458 words

Oxford Brookes University Research and Analysis Project

Acknowledgements I am grateful to my mentor Mr. Colin Biggs for his guidance and patience throughout the preparation of this project report. I would also like to thank my friends and family who supported me during the year.

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Business and Financial Performance of Tesco plc: Contents 1. Introduction 1.1 Topic 1.2 The Chosen Topic 1.2 The Organisation 1.3 Aims and Objectives

5 5 6 6

2. Information Gathering 2.1 Primary and Secondary Sources 2.2 Methods Used to Gather Information

8 8 9

3. Analysis and Presentation 3.1 Company Profile 3.2 Analysis of TESCO i. Profitability Ratios  Net Profit Margin  Operating Income Margin  Gross Profit Margin  Sales Growth  Return on Investments  Return on Equity  Earnings Per Share ii. Liquidity Ratios  Current Ratio  Acid Test Ratio iii. Financial Leverage Ratios  Total Debt to Asset  Debt to Equity  Interest Cover iv. Efficiency Ratios  Asset Turnover  Inventory Turnover  Debtors Turnover Days  Creditors Turnover

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10 12 13 14 16 17 19 20 21 21 22 23 24 25 25 25


4. Current Strategic Evaluation

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5. SWOT Analysis

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6. Conclusion

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7. References

30

8. Appendix 1

32

9. Appendix 2

35

10. Appendix 3

37

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1.0 INTRODUCTION 1.1 Topic My chosen topic is listed at number 8 in the project areas mentioned by Oxford Brookes University. The topic is related to the business and financial performance of an organisation over a period of up to three years that is from 2006 to 2008. The organisation on which I would be doing my research and analysis is Tesco Plc. For the benchmark treatment. I would compare Tesco Plc to J Sainsbury Plc. Both the companies operate in a similar industry and market and both are competitors to each other. The research is mainly based in relation to the shareholders and stakeholders viewpoint that have particular interest in the performance of Tesco plc and also about its future strategies. 1.2 The Chosen Topic The reason behind the selection of topic 8 is my good understanding of the financial aspects and issues of any organisation as I have studied in F7 of ACCA. Therefore, because of the familiarity of the topic I would be able to report a good research and analysis project. I would also use my knowledge about the ratios in order to provide more detailed performance indicators and the fluctuation which could be identified through ratio analysis of an organisation. Making analysis of a real organisation is completely different from the questions that are present in the examination. The fluctuations and unusual events in the organisation may create further problems which require practical and realistic approach. Although most of the information can be obtained through the desired organisation’s annual accounts, there are still many aspects of organisation which require more research in order to conclude the organisation’s performance in an appropriate manner. The information is usually obtained through primary and secondary sources of information. The project will help me to enhance my skills in analysing the performance of any organisation through the ratio analysis approach. It will also provide me with a guidance on how to practically write a real report keeping in mind all the knowledge which I would gain through this report. The report is not completely based on the financial factors, but it will also include the non financial factors that have affected Tesco plc in the last three years. My report’s main focus will be on the financial and operational performance of Tesco to determine the key of company strategy along with finding and defining the factors other than financial. This would allow me to build up my knowledge about the non financial indicators which affects

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organisation. All this research will increase my chances of presenting a better project report and also increase my techniques for data interpretation. 1.3 The Organisation Selection The reason behind the selection to analyse the financial position of Tesco plc is that it is the largest British retailer by both global sales and domestic market share with profits exceeding £2 billion. In 2008, Tesco became the world’s third largest retailer, the first movement among the top five since 2003. Originally specialising in food and drink, it has successfully diversified into areas such as clothing, consumer electronics, financial services, telecoms, health insurance, dental plan, retailing and renting DVDs, CDs, music download, internet services and software. Tesco has 2109 stores in the UK and internationally it has 1822 stores in which it covers US, Central Europe and Rest of Asia. Tesco employs approximately 273000 employees to cover its operations nationally and internationally. Therefore, I am very much interested to research on the strategy of Tesco plc to update my knowledge regarding the successful strategy of one of the largest retailer in the world today. Tesco has been able to establish a consistent strategy for growth, which has also allowed them to strengthen their core UK business and drive expansion into new markets. Tesco has brought jobs and investment to areas that other retailers had rejected. I would measure the risks which Tesco and its shareholders are or may face in the future. 1.4 Aims and Objectives The aim for this project report is to view the company’s performance according to the potential and ordinary shareholders point. Shareholders are always interested in the return of their investment. The main concern for them is whether the success of Tesco plc would continue at the same return or will there be an increase in return. Whether the success of Tesco plc would continue in the future and what further options available for future growth and investment for the company. Also the risks that Tesco plc is currently facing and the future risk factors which may create hindrance in the success of the organisation. All these questions require measures in such a way which could be understood by all the shareholders. Hence this leads to the method of ratio analysis through which company performance can be measured and understood by everyone concerned. Therefore, my evaluation will be based on Tesco’s past performance as well as its strategy. This would be done by analysing the financial statements of Tesco plc and also its business strategy for future growth.

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Financial Analysis Financial statement analysis is a judgemental process. One of the primary main objectives is the identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. Probably the most widely used financial analysis technique is ratio analysis and these financial ratios are usually expressed in terms of percentages and times. The financial ratios which would be used for the analysis of Tesco plc financial operations and performance fall into the following categories.  Profitability ratios measure management’s ability to control expenses and to earn a return on the resources committed to the business. I would measure the profitability of Tesco through:       

Net Profit Margin Operating Income Sales Growth Gross Profit Return on Investment Return on Equity Earnings per Share

 Liquidity ratios measure a firm’s ability to meet its current obligations. I would measure the liquidity of Tesco by analysing its:  

Current Ratio Acid Test Ratio

 Leverage ratios measure the degree of protection of suppliers of long term funds and can also aid in judging a firm’s ability to raise additional debt and its capacity to pay its liabilities on time. I would used the following ratios to conclude the financial viability of Tesco concerning the payments to its long term debt:   

Total Debt to Asset Debt to Equity Interest Coverage Ratio

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 Efficiency, activity or turnover ratios provide information about management’s ability to control expenses and to earn a return on the resources committed to the business. The ratios which would be used to analyse its working capital management are:    

Asset Turnover Debtors Collection Days Inventory Turnover Ratio Creditors Payment Days

Non-Financial Factors I have also highlighted the major non financial factors which affected the relevant ratios more than the others and the reasons behind the importance of those non-financial factors. Strategic Analysis I will also analyse the strategy of Tesco which they have implemented successfully especially in the recent years as they become one of the largest retailers in the world and UK top retailer. SWOT Analysis I will also include a SWOT analysis to explain the current position of Tesco. A SWOT analysis is an instrumental framework to identify the strength, weaknesses, threats and opportunities for a company. The strengths and weaknesses are internal value creating or destroying factors such as assets, skills or resources a company has. The opportunities and threats are external value creating or destroying factors which a company cannot control. Future Growth This report will also emphasise on the future growth of Tesco plc in order to justify whether the strategy of Tesco plc is parallel to their growth. This will provide some evidence about their success in the future and whether Tesco plc will be able to continue with its turnover. Moreover, I will also put some light on the action taken by the competitor which may affect financial performance of Tesco plc.

2.0INFORMATION GATHERING There are two types of source of information, primary source and secondary source of information. The objective behind the classification of these two sources is to determine the accuracy and reliability of information. 2.1 SOURCES Primary Source Primary sources of information are those that provide first-hand accounts of the events, practices, or conditions. In general these are documents that were created by the witnesses or first recorder of these events at about the time they occurred and include diaries, letters, reports, photographs, creative work, financial records, memos and newspaper articles. Page 8


Secondary Source Secondary source of information is one that was created later by someone who did not experience first-hand or participate in the events or conditions. Some of the secondary sources will be from reference material, book, encyclopaedia, magazine, video or audio tape, TV, newspaper. All the information used in the project report is consist of Secondary Data and Information. 2.2 METHODS USED IN INFORMATION GATHERING For this report, I have used secondary source of information through which the analysis of Tesco plc be carried out. The information contains: Annual Report from year 2006 to year 2008 of Tesco Plc Annual reports contain the financial statements that are prepared at the end of each year. It would include Tesco plc’s profile, corporate structure, board of directors, chairman’s statement, the yearly overview, financial highlights, statement of corporate governance, statement of internal control, financial results analysis of shareholdings and the notice of annual general meeting. Annual Report from year 2006 to year 2008 of J Sainsbury Plc This report is important to make comparison with Tesco as most of my comments are based on ratios calculated from these accounts. I have chosen Sainsbury because it operates in the same retail industry and one of Tesco’s major competitors. Copies of the financial statements can be found in Appendix 3. Internet – Tesco and J Sainsbury Website Nowadays, internet is a global network of interconnected networks. Internet carries messages, documents, programs and data files that contain every kind of information. A lot of information is also obtained from financial times website including the updates regarding financial of Tesco, its operations and the opening of their own bank. www.ft.com Also I found current information on the Reuters website which also assisted me in evaluating the future growth of Tesco. The website is www.reuters.com Moreover the internet provided detail explanation about the primary and secondary source of information which was obtained from the website www.library.uiuc.edu Text Books Books can be used as reference to gain extra knowledge. One of ACCA paper, which is F7 ‘Financial Reporting’ text book from Bpp, which allowed me to get detailed knowledge about accounting such as the method of calculating ratios. Furthermore, I have used related accounting books as reference for my financial analysis. The books are titled as ‘Key

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Management Ratios by Ciaran Walsh, ‘Business Ratios and Formulas: A Comprehensive Guide’ by Steven M. Bragg and ‘100 IFRS Financial Ratios’ by P.N Schomig Newspaper/Media The types of newspaper which I used during my project are:    

Financial Times The Independent Evening Standard The Times

The reason to use newspapers as a source of information is because they provide an independent opinion about the organisation and also about the industry in which the organisation operates. It has also assisted to highlight the important ongoing changes in non-financial factors of the organisation. Library Research I also went to the British Library for general reading and research which was mainly concerned to the strategy of Tesco plc, the survey of the retail industry for the past period. I also read some old newspaper articles about Tesco and J Sainsbury. I was also able to access through database such as Financial Analysis Made Easy (FAME) which allows me to get the summary of the financial information of Tesco and J Sainsbury.

Mentor A lot of information support regarding report writing and presentation has been contributed by my mentor Mr. Colin Biggs. The information included communication and prioritising skills which helped me prioritise my data and sources to make sure all the sources were authentic and up to date.

2.0ANALYSIS AND PRESENTATION 3.1 Company Profile Tesco is an international and Britain's biggest and most profitable supermarket chain, is the darling of the City. Tesco became the market leader in 1995 and has continued to increase its market share ever since, reaching a staggering 31.5% market share in 2006, and taking 12.5% of total consumer spend in the UK. Tesco has also been voted as the best admired company and the most impressive aspect of Tesco’s triumph was the ‘margin of victory’. Tesco also came top in other categories, ‘Quality of Management, ‘Quality of Goods and Services’, ‘Ability to Attract, Develop and Maintain Top Talent’, ‘Value as a Long Term Investment’, Quality of Marketing’ and ‘Use of Corporate Assets.’

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3.2 ANALYSIS OF TESCO PROFITABILITY RATIOS Net Profit Margin Net profit margin in general shows the financial performance of a company. The graph below shows net profit of Tesco and Sainsbury for the past three years (£’m).

Table shows change in Net Profit Margin during the periods 2006-08 in (millions) Years Net Profit for Tesco Net Profit for Sainsbury

2006 1576 58

2007 1899 324

2008 2130 329

Change 35% 467%

Tesco Sales and operating profit has been increased in every year. Sales grew faster in other areas than the core business. There was progress and robust growth in newer areas such as nonfood, electrical, furniture and DIY and the online and catalogue non-food business. Tesco also invested in financing activities which also helps the profit to grow further. Cost of sales and other expenses were also increasing but Tesco still able to maintain healthy profit margin. Tesco’s net profit margin was increased more in the international market than its UK market. The column graph below shows the increase in its net profit in the UK and International Market.

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Sainsbury Though the profit in 2006 was very low, Sainsbury has increased its profits by cutting out their expenses by producing more products to cut down their cost per unit which were very high in 2006 as compare to 2007-08. Operating Income Margin The table below shows the Change in Operating Income Margin for 2006-08 periods in (millions)

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The table below shows the change in Operating Income during 2006-08 periods in (millions) Years Operating Income for Tesco Operating Income for Sainsbury

2006 2280 229

2007 2648 520

2008 2791 530

Change 22.4% 131%

Tesco Tesco has increased consistently its operating income margin during 2006-08 periods. The change of 22.4% during a 3 years period shows the strong growth. However, administrative expense incurred during 2008 caused a little fluctuation in the operating profit as the expenses increased by 13% in 2008 compared to 10% in 2007. Sainsbury On the other side, Sainsbury has increased its operating income margin substantially in 2007 and 2008. They have decreased the cost of sales and cutting out the administrative expenses especially in 2007 and 2008 to maintain a constant growth of operating profit. Gross Profit Margin The graph below shows the change in gross profit of Tesco and Sainsbury during 2006-08 periods

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The table below shows the increase in gross profit of Tesco and Sainsbury during 2006-08 periods in millions Years Gross Profit for Tesco Gross Profit for Sainsbury

2006 3028 1067

2007 3463 1172

2008 3630 1002

Change 19.8% -6.09%

Tesco There has been consistency in the growth of its gross profit. The increase in gross profit in 2007 was due to one-off events of adjustments of pensions. However, the change of 19.8% shows their strategy is consistent and Tesco has still maintained a healthy percentage of gross profit to its sales. During 2008, Tesco reduced its gross profit from 8.12% to 7.67% because of the price war that was going on due to the recession. However, Tesco was still able to show an increase in its sales of 2% along with the competitive advantage over the others by selling its products much cheaper than Sainsbury. Sainsbury There was a good gross profit percentage maintained by Sainsbury during 2006-07 periods. However, in 2008, the decrease in gross profit was due to less increase in sales as compare to increase in its cost of sales as Sainsbury expanded into Northern Ireland and it cost more to deliver the goods into this part of UK.

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Sales Growth Sales figures of Tesco and Sainsbury from year 2006 to year 2007 (millions)

Table below shows the change in sales of Tesco and Sainsbury. Years Sales by Tesco Sales by Sainsbury

2006 39454 16061

2007 42641 17151

2008 47298 17837

Change 19.88% 11.05%

Tesco Tesco’s sales growth in 2006-08 periods was increased by 19.88% at an average due to their growth in the international areas. The dominated the UK market and simultaneously increased their growth in Asia, Europe and Rest of World. In 2007, international sales grew by 17.9% at actual exchange rates which boost up the total sales growth. While in 2008, the online business was increased by 30% and their joint venture in telecom delivered profit for the first time. UK and International Market Sales Growth: The graph below shows the sales growth of Tesco in the UK and International Market.

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Sales Contribution UK International

2006 32657 10480

2007 35580 11031

2008 37949 13824

%Change 16% 32%

The sales figures above are VAT inclusive. There is a continuous increase in sales of Tesco in its UK and International market showing a consistent successful growth. The international market has increased its sales contribution twice as compare to the UK market. This is because of Tesco’s successful implementation of their strategy to sell those products and food items which are more desirable in those markets. The significant increase in their international sales also shows that they have given a tough competition to the local supermarkets in those countries by selling the same items at lesser prices. Sales Growth in Non-Food According to the analysts ‘good value product has been driving Tesco’s non-food growth’ (source BBC news). Tesco’s general merchandise business has been resilient and it remains an important contributor to the growth. Tesco non-food sales again grew faster than the core business. In 2006, the non-food sale of UK alone was increased by 13% to £6.8 bn, while in 2007, it increased by 11.6% in the UK to £7.6 bn. The group non-food sales in 2007 was £10.4 bn including £2.9bn of sales internationally. Also, group non-food sales rose by 12% to £11.8bn which includes £3.5bn sales internationally and 9% increase to UK sales to £8.5bn. Among many non-food products, the most products which were sold in volume and value includes consumer electronics, stationary, DIY and clothings. All these products provided rapid growth to Tesco in the non-food area. Tesco Direct which was specifically designed to sell non-food products via website has also contributed towards the non-food sales growth. Page 16


Sainsbury Sainsbury has also increased its sales during 2006-07 periods. However in 2008 its sales growth was reduced due to increase in its cost of sales. Return on Investment The table below shows the percentage increase/decrease in return on investment Return on Investment Net Income Long term Liability + Equity Percentage Increase/Decrease

2006 1576 15045 10.48%

2007 1899 16655 11.40%

2008 2130 19901 10.70%

Tesco Based on the ratios calculation, the return on investment for Tesco has been increasing steadily between 2006, 10.48%, to 2007, 11.40%. Although there was a slightly decrease during year 2008, however, overall ROI is still looking healthy. The decrease of ROI during 2008 was due to increase of operating expenses which directly affects operating profit to decrease in the ratio of ROI. Return on Investment Net Income Long Term Liability + Equity Percentage Inc/Dec

2006 58 7937 0.7%

2007 324 6855 4.73%

2008 329 7510 4.38%

Sainsbury Sainsbury ROI has increased significantly from 2006, 0.73%, to 2007, 4.73% and a slight decrease was seen in 2008. Sainsbury cut down their operating expenses and simultaneously increased the sales in 2007-08 periods. Return on Equity The graph below shows the comparison between Tesco and Sainsbury Return on Equity.

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The table below shows the percentage increase/decrease in return on equity Return on Equity Net Income Equity Percentage Increase/Decrease

2006 1576 9444 16.70%

2007 1899 10571 18%

2008 2130 11902 18%

Tesco Tesco’s return on equity has been consistent throughout the period of 2006-08. There has also been a increase in the ratio during 2007 when the ratio increased from 16.70% in 2006 to 18% in 2007. The increase in the ratio was resulted due to the increase in the net income by 20% as compare to 2006 net income. One of the main non-financial factors that boost the return on equity was Tesco’s participation in a number of charity campaign. Tesco donated £8.7 million to sports for school and cancer research UK which helped them raise £53 million in equity (Business in the community, 2008). While in 2008, they were able to maintained the same percentage which represents good performance and shows further increase in future as the investment matures. Return on Equity Net Income Equity Percentage Inc/Dec

2006 58 3965 1.46%

2007 324 4349 7.45%

2008 329 4935 6.67%

Sainsbury Sainsbury increased its return on equity ratio significantly in 2007 when its percentage was climb from 1.46% in 2006 to 7.44% in 2007. The reason behind the increase of this ratio was due to the massive increase in their net income. Page 18


Earnings per Share It should be noted that last year’s EPS would be actual, while current year and forward year EPS would be estimates. The table below shows the EPS of Tesco for the period 2006-08. Earnings Per Share Ordinary Shares Weighted Ave. No. Of Shares EPS

2006 1570 7823 20.07

2007 1874 7936 23.61

2008 2124 7881 26.95

Tesco Tesco earnings per share have been increased during 2006-08 periods on a consistent basis. In 2006 the earnings per share was 20.07p which was increased during 2007 by 19% to 23.84p, and in 2008 it was further increased by 13% to 26.95 showing Tesco’s strong earnings and increasing return for investors every year. The table below shows share price of Tesco analysed from year 2006 to year 2008.

There was a decrease in share price during 2008. Recession has been the main reason behind the decrease of its share price as it hits all the largest retailers during 2008. However, by the end of 2008, Tesco share price started to boost up again as the graph shows. Earnings Per Share 2006 Ordinary Shares 176 Weighted Ave. No. of Shares 1692.2 EPS 10.40

2007 249

2008 337

1719.8 14.48

1767.2 19.07

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Sainsbury Sainsbury earnings per share have increased significantly during 2007 as it was 3.8p in 2006 which was increased in 2007 by 400% to 19.2p while in 2008 it has a slight decrease to provide EPS of 19.1p. Sainsbury has also maintained a strong EPS in 2006-08. LIQUIDITY RATIOS Current Ratio The table below shows the current ratio figures of Tesco for the period 2006-08. Current Ratio Current Assets Current Liabilities Ratio

2006 3919 7518 0.52

2007 4576 8152 0.56

2008 6300 10263 0.61

Change 61.0% 36.5% 14.75%

Tesco There has an overall change of 14.75% in the current ratio. Tesco’s current ratio in the recent past year 2006 was almost half to their liabilities 0.52:1 which could have resulted of having shortage of assets in meeting the liabilities. However in 2007 there was a increase in current assets and a slight decrease in current liabilities giving a ratio of 0.56:1. In 2008 the current assets were increased significantly as compared to the increase in current liabilities which allowed Tesco to have better current ratio of 0.61:1. The increase in current ratio must have helped in obtaining inventories even in bigger quantities to get more bulk discount in order to reduce the cost of sales. Sainsbury The table below shows the figures of Current Ratio from Sainsbury. Current Ratio Current Assets Current Liabilities Ratio

2006 3845 4810 0.80

2007 1940 2721 0.71

2008 1722 2605 0.66

The current ratio in 2006 was 0.80:1. Also the ratio has been decreasing since 2006 and in 2007 it became 0.71:1 while in 2008 it has been reduced to 0.66:1 indicating further liquidity problems in the future may arise if the ratio keeps on declining. Acid Test Ratio Tesco The table below shows the figures of Tesco Acid Test Ratio during the period 2006-08. Acid Test Ratio Current Assets-Stocks Current Liabilities Ratio

2006 2455 7158 0.34

2007 2645 8152 0.32

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2008 3870 10263 0.38


The ratio shows a clear increase during 2006-08. In case of immediate payment of demand, Tesco could still pay one third of its customers. Tesco has kept on expanding its business in the UK and international market and also increased its ratio shows an excellent strategy to cope with its debtors and availability of cash. In 2008 because of increase in trade receivables and introduction of short-term investments further increased the ratio. Sainsbury The table below shows the Acid Test Ratio figures taken from Sainsbury’s Finanicial Statement during the period 2006-08. Acid Test Ratio Current Assets-Stocks Current Liabilities Ratio

2006 3269 4810 0.68

2007 1350 2721 0.50

2008 1041 2605 0.40

Sainsbury The ratio of Sainsbury has been decreasing from 2006 which 0.50:1 and decreased to 0.50:1 in 2007 while in 2008 it became only 0.4:1 showing decrease in cash and cash equivalents. The decrease in ratio during 2008 was due to increase in its ending inventory. FINANCIAL LEVERAGE RATIOS Total Debts to Assets Tesco The table below shows the figures of total debt and asset of Tesco for the period 2006-08. Total Debt to Asset Total Liabilities Total Assets Ratio

2006 13119 22563 0.58

2007 14236 24807 0.57

2008 18262 30164 0.61

Change 0.39 0.34 0.04

During 2006-08, as the table shows, Tesco has been on the move to expand its business as their financing or debt has been increasing, especially in 2008 where the debt financing increased rapidly. This is due to Tesco opened many stores internationally and as well in the UK and also invested heavily in its non-food products market to promote its new image. However, there was also a major increase in its assets in 2008 which made the ratio decrease slightly more. Sainsbury The table shows the figure of Sainsbury’s debt and assets for the period 2006-08 in millions. Total Debt to Asset Total Liabilities Total Assets Ratio

2006 8782 12747 0.69

2007 5227 9576 0.55

2008 5180 10115 0.51

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During 2006-07 period, Sainsbury was able to pay off the amount that they owed to their customers and other bank by obtaining the amount from those customers who owed the money from Sainsbury. While in 2008, Sainsbury increased its PPE as well as inventory to boost up its assets and reducing the liabilities by decreasing their short term borrowings. Debt to Equity The graph below shows the increase/decrease of debt to equity ratio of Tesco and Sainsbury for the period 2006-08.

The table below shows the debt and equity figures of Tesco for the period 2006-08 in millions. Debt to Equity Total Liabilities Equity Ratio

2006 13119 9444 1.39

2007 14236 10571 1.35

2008 18262 11902 1.53

Change 0.39 0.26 0.10

Tesco There has been fluctuation in the ratio of Tesco for the last 3 years. The increase in liability was caused as Tesco borrowed a lot of long term debt as well as short term debt to invest heavily into the international operations especially in the US in 2008 where it opened almost 50 stores. The long term borrowings were used to increase its sales growth in the international market as the UK market has no more expansion opportunities. There was also increase in its deferred tax liabilities. However, most of the funding has been done through retained earnings but still a considerable amount has also been obtained from external sources of finance. Sainsbury The table below shows the debt to equity figures of Sainsbury for the period 2006-08 in millions. Page 22


Debt to Equity Total Liabilities Equity Ratio

2006 8782 3965 2.21

2007 5227 4349 1.20

2008 5180 4935 1.05

The debt to equity ratio of Sainsbury in 2006 was very high 2.21. Sainsbury owed the amount from its bank customers and other banks which increased its liability significantly. However in 2007, Sainsbury efforts decreased the ratio to almost half 1.20 and during 2008 it was further decrease to 1.05. Interest Coverage Ratio It should be noted that the lower the interest coverage ratio, the larger the debt burden is on the company. Tesco The table below shows the figures for EBIT(Earnings Before Interest and Tax) and Interest Expense for the period 2006-08 in millions. Interest Coverage EBIT Interest Expense Ratio

2006 2362 241 10.20

2007 2779 216 12.86

2008 2866 250 11.46

Tesco has maintained healthy interest cover ratio during 2006-08 periods. Tesco is able to cover its interest expense with its profits. The ratio shows that Tesco is also able to pay the amount owed to its creditors when the payment is demanded. This also points out an advantage to Tesco of obtaining further debt as current figures of the ratio are positive for the company. Sainsbury The table below shows the figures for Interest Cover Ratio of Sainsbury for the period 200608 in millions. Interest Coverage EBIT Interest Expense Ratio

2006 229 155 1.47

2007 520 107 4.85

2008 528 132 4.0

Sainsbury’s interest cover ratio in 2006 was only 1.47. Sainsbury increased its ratio through increase in their profits and also by paying off some of their debts to their bank’s customers. EFFICIENCY RATIOS Asset Turnover The higher the turnover ratio, the better it is for the company. Page 23


Tesco The table below shows the figures of total assets and sales of Tesco during the period 200608 in millions. Asset Turnover Total Assets Sales Ratio

2006 22563 39454 1.75

2007 24807 42641 1.72

2008 30164 47298 1.57

Asset turnover ratio for Tesco during 2006-08 periods has reduced slightly. In 2006 the ratio was 1.75 which decreased to 1.72 in 2007 while in 2008 it was further reduced to 1.56. This means that Tesco has been able to generate sales of £1.56 for every £1 of assets it owned and used for the year. Sainsbury The graph below shows figures of Sainsbury’s assets and sales for the period 2006-08 in millions. Asset Turnover Total Assets Sales Ratio

2006 12747 16061 1.26

2007 9576 17151 1.79

2008 10115 17837 1.76

The asset turnover ratio of Sainsbury has increased during 2006-08 periods. The ratio was 1.26 in 2006 which increased to 1.79 in 2007 while in 2008 it was slightly decreased to 1.76. However, Sainsbury has also maintained a consistent increase in this ratio. Working Capital Analysis Tesco Ratio Stock Turnover Ratio Debtors' Collection Period Creditors Payment Period

2006 15 days 8 days 51 days



Debtors At an overall average, the collection days of debtors has increased in 2006-08 periods. However there is not a large increase of days in each year. As far as the receivable concerns, the increase by a 1 day each year is not significant for the company. The increase days compared to the increase in its debtors shows that Tesco has established a strong management program for its debtors. Inventory The inventory turnover days has increased in 2006-08 periods. However, the increase in days is not very significant. The increase in inventory was caused due to the expansion of its operation in the UK as well as international market where it opened massive number of Page 24


stores within a year of 2008. The inventory holding period is not of significant importance as compared to the inventory they had to put in considering their expansion. Creditors The increase in credit period is not significant but Tesco has to maintain its credit period on a consistent basis. If the turnover period keeps on increasing, this will affect its relationship with its supplier as the suppliers would receive their payments late. It would also affect Tesco’s creditworthiness. There is a need for them to review the management of their creditors. Sainsbury The table below shows the working capital figures of Sainsbury’s debtors, inventory and creditors for the periods 2006-08. Ratio Stock Turnover Ratio Debtors' Collection Period Creditors Payment Period




Debtors Sainsbury debtor’s days has been reduced in the period of last 3 years. It is as low as 4 days in recent years. This shows their WC cycle does not take long to convert stocks into cash. Inventory The inventory days period has also been very well established. It only takes a maximum of 15 days for the stock to go to the shelves for the sale. This shows their excellent management of inventory. Creditors The creditor’s payment period is reduced during 2008. The reduction shows their concern for the payment to their suppliers; they reviewed their payment program for the creditors and brought a change to assure the payments of their creditors is on time.

4.0 CURRENT STRATEGIC EVALUATION The objectives of the Tesco’s strategy are:  To grow the Core UK business  To become a successful international retailer  To be as strong in non-food as in food  To develop retailing services, such as Tesco Personal Finance, Telecom and tesco.com and  To put community at the heart of what we do

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Tesco’s current strategy has five areas in which it has divided its whole businesses.  Core UK  Non-Food  International  Retailing Services  Community Core UK The UK is our biggest market and the core of our business. They aim to provide all their customers with excellent value and choice. Tesco’s UK stores are divided into six formats, differentiated by size and range of products sold. Tesco Extra stores are larger in size, mainly out of town hypermarkets that stocks nearly all of the Tesco’s product ranges. There are more than 175 of these stores in the UK. Tesco Superstores are standard large supermarkets, stocking groceries and a much smaller range of non-food goods than extra stores. There are approximately 424 stores in the UK. Tesco Metro stores are sized between Tesco superstores and Tesco express stores. They are mainly located in city centers, the inner city and on the high streets of small towns. There are almost 160 stores of this format in the UK. Tesco Express stores are neighborhood convenience shops, stocking mainly food with an emphasis on higher-margin products (due to lack of economies of scale) alongside everyday essentials. They are approximately 827 stores operating in the UK. One Stop stores are the only category which does not include the word Tesco in its name. These are very small stores. There are about 513 stores of this kind of format operates in UK. Tesco Homeplus are the non-food ventures. Stores offer all of Tesco’s ranges except food in warehouse-style units in retail parks. There are currently 10+ stores operating in the UK. Non-Food The aim of Tesco is to be as strong in non-food as in food. This means offering the same great quality, range, price and service for the customers as they do in their food business. Tesco direct and Tesco homeplus has increased the non-food sales significantly. Tesco direct is designed to extend the reach of non-food offer by making it more available. It offers 11000 products online and 7000 on the catalogue. There has been a rapid increase in Tesco’s non-food sales in recent past. In 2008, the non-food group sales grown to represent 23% of the total Tesco sales.

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International International sales of Tesco contribute almost over half of the total group sales. The increase in level of sales to such an extent shows their successful operations internationally. In 2007/08, Tesco also opened its stores in the US to compete with stores of US. Tesco is investing heavily in its international market. In 2008, Tesco opened 508 new stores out of which over 350 were outside UK. Retailing Services Tesco has followed its customer into the growing world of retailing services, aiming to bring simplicity and value to complex markets. Their services are performing well with sales in their online businesses up by over 30% in 2008. Tesco Personal Finance having a joint venture with Royal Bank of Scotland getting back to a faster rate of growth. Tesco telecom has also provided growth in its operations. The joint venture with O2 having a loss in 2006/07 seen an excellent profitability of 39% mainly because of its strong growth in customer base. Hardware sales were also increased. This has shown Tesco’s encouraging efforts to bring back the venture in profits which were going down in the last couple of years. Community This was not the part of Tesco strategy until 2008, where they also included community as their important part in the strategy. The main idea behind the inclusion of this part is to ensure the society and communities that Tesco’s are doing efforts to decrease the effects of carbon. Through their unique Green Clubcard Scheme, they able to reduce the carrier bags by over 1 billion. Tesco was also named as the best Charity of the Year by raising £4.4m for the British Red Cross. They have also invested £25m to create a Sustainable Consumption Institute. All these efforts and inclusion of the community as one of their main areas of strategy shows how effectively they implement their strategies.

5.0 SWOT ANALYSIS The SWOT analysis includes the strengths, weaknesses, opportunities and threats which Tesco is facing or may face in the future. Strengths  Tesco is the largest retailer in UK and the third biggest retailer in the world. This shows that supermarkets trends are lead by Tesco in UK  Tesco has excellent customer base, even in the recession time, Tesco’s profits were up as Tesco was able to cut down prices to perform well in a price war competition and customers were satisfied with the products prices that it offered  Tesco international market is increasing and they are heavily investing outside the UK. The investment is justified as in 2008, the international sales were almost over half of the Tesco’s total group sales

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

Tesco have successfully grown from food to non-food business and their non-food business has spread rapidly. With leading the food market share, Tesco is becoming popular as a non-food store as well

Weaknesses  UK recession has caused almost all the supermarkets profit and sales growth. Tesco’s sales growth still increased by 12%, but the recession showed Tesco has still needs to implement a strategy to deal with such critical situation where customers are cautious and become more selective about the products Opportunities  Tesco has excellent prospects to grow in its non-food area. They entered non-food with strong planning and have attained good success through Tesco direct and Tesco Homeplus stores. Tesco has targeted US in 2007 to open its stores and has successfully implemented the strategy. They are also concentrating in opening stores in different countries around the world to grow further in their international market Threats  Tesco has grown so rapidly in the last decade and with such a strong strategy implementation that they have taken over the UK retail market. There is no such threat to its strategy at present, but as they are expanding internationally and in non-food area to increase its investments which ultimately increase its sales. There might be a possibility of over gearing by investing too much of its debt in investments, or it might also foresee a possibility of over trading as their sales rate are increasing more rapidly internationally than in the UK

6.0 CONCLUSION Tesco has been consistent in its recent performance and also increasing its operations. Their international market has a significant impact on its total group sales as it contributes over half of the sales in 2008. Tesco being the third largest retailer of the world has shown excellent growth in and outside the UK. They are seeking different countries to capture the market. During 2007 they opened their stores in US which turned out a successful investment. Tesco after becoming the biggest retailer of UK is now competing with Carrefour and Wall Mart for the number one spot. Their last decade’s performance shows their consistent success is their customer base market. Tesco follow customer’s requirement and provide the quality product in the lowest possible rate. For shareholder viewpoint, the EPS in the last 3 years has increased and likely to increase in the future. Also, their entry into non-food did not take longer to make an impression on the leaders of non-food area. In UK, they are facing Currys and Marks & Spencer as their first competitors. However, during the last couple of years, Tesco’s performance under non-food area is exceptional. Through Tesco Direct and Homeplus stores their non-food sales contributes about 12% of the total group sales showing an excellent strategy. They have also joint venture with O2 for telecom and Financial services with the Royal Bank of Scotland which also contributes to the nonfood sales. Their future strategy is simple:

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 

To be as strong in non-food as in food To capture the international market and also capture the number one spot in retailers rating Tesco is investing heavily in its international market and also in non-food area. They are spreading into different businesses rather than just operating as a core retailer showing their wide planning. There is a lot of potential in Tesco for investments. Their ROI for the last 3 year is an evidence of good return. They are also not facing any big threats from anywhere. Therefore, I would strongly suggest institutional investors to invest in Tesco as it’s still a growing organization having excellent strategy.

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REFERENCES 

Walsh, C. 2006. Key Management Ratios (4th Ed.). Great Britain: Ashford Color Press Ltd.



Bragg, S.M.2006. Business Ratios and Formulas: A Comprehensive Guide (2nd Ed.).Hoboken, New Jersey: John Willey & Sons, Inc.



Bull, R. 2007. Financial Ratios: How To Use Financial Ratios To Maximize Value And Success For Your Business. Great Britain: CIMA Publishing, Oxford.



BPP, 2008. Financial Reporting International. Great Britain: BPP Learning Media Ltd, London.

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Wiehle, U., Deter, H., Diegelmann M. & Schomig, P.N.2005. 100 IFRS Financial Ratios. Germany: Cometis AG

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Saunders, M., Thornhill, A. & Lewis, P.2006. Research Methods For Business Student (4th Ed.). Great Britain: Pearson Education Ltd.

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Collis, J. & Hussey, R.2003. Business Research: A Practical Guide For Undergraduate And Postgraduate Students (2nd Ed.). New York: Palgrave Macmillan.

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Dawson, C. 2007. A Practical Guide To Research Methods: A User-Friendly Manual For Mastering Research Techniques And Projects (3rd Ed.). Great Britain: How To Books Ltd.

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Braithwaite, T. & Urry, M. (2008, December 02). Tesco’s Sales Growth Beats Forecasts. London: Financial Times.

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Rigby, E. (2008, November 10). Sainsbury Loses Strongholds To Tesco. London: Financial Times.

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Leahy, J. (2008, August 12). Tesco Breaks Into Indian Grocery Market. India: Financial Times.

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Rigby, E. & Braithwaite, T. (2008, May 12). Shoppers Positive On Tesco’s US Stores. London: Financial Times.

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Croft, J. & Rigby, E. (2008, June 01). Tesco To Buy RBS Share In Finance Division. London: Financial Times.



Thompson, J. (2008, November 13). Tesco Challenges Argos With Catalogue Outlets. London: The Independent.

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Williams, H. (2008, April 15). Tesco Profits Rise In Challenging Market. London: The Independent.

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Hawkes, S. (2008, April 12). Tesco To Monitor Millions Of Consumers Around The World. London: The Sunday Times. Source: Dunnhumby.

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Dangerfield, A. (2007, January 16). The Continue Rise of Tesco Non-Food. London: BBC News.

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Thompson, J. (2007, November 26). Tesco Reveals Aggressive International Expansion Plan. London: Retail Week

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Thorniley, T. (2008, May 01). UK Grocery Inquiry is a Tesco Victory. London: Daily Mail.

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Craven, N. (2007, September 30). Tesco Expects to Set New Profits Records. London: Financial Mail.



http://www.tescoplc.com/plc/ir/ar/archive/



http://www.jsainsburys.co.uk/index.asp?pageid=20&year=archive

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APPENDIX 1.0

Tesco Plc

Gross Profit Margin Revenue Gross Profit

Net Profit Margin Revenue Net Profit

Return on Equity Net Profit Capital Employed

Current Ratio Current Assets Current Liabilities

Acid Test Ratio Current Assets Less: Inventory Current Liabilities

Stock Turnover Days Closing Stock Cost of Sales Average Cost of Sales (Cost of sales/365)

2006

2007

2008

39454 3028 7.67

42641 3463 8.12

47298 3630 7.67

39454 1576 3.99

42641 1899 4.45

47298 2130 4.50

1576 9444 16.6

1899 10571 17.96

2130 11902 17.89

3751 7518 0.49

4168 8152 0.51

5992 10263 0.58

3751 1464 9444 0.24

4168 1931 10571 0.21

5992 2430 10263 0.34

1464 36426

1931 39401

2430 43668

99.79 14.66

107.94 17.88

119.63 20.31

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Debtors' Collection Days Closing Debtors Revenue Per Day

Creditors' Payment Days Closing Creditors Cost of Sales Per Day

Debt to Equity Long-term Creditors Total Equity

Interest Cover Net Profit Interest Expense

Earning Per Share Net Profit Attributable To Shareholders Number of Shares

892 108.09 8.25

1079 116.824 9.23

1311 129.58 10.11

5083 99.79 50.93

6046 107.94 56.00

7277 119.63 60.82

5601 9444 0.37

6084 10571 0.36

7999 11902 0.40

2362 241 10.20

2779 216 12.86

2866 250 11.64

1570 7823 0.20

1892 7936 0.23

2124 7881 0.26

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Sainsbury Plc

Gross Profit Margin Revenue Gross Profit

Net Profit Margin Revenue Net Profit

Return on Equity Net Profit Capital Employed


Acid Test Ratio Current Assets Less: Inventory Current Liabilities

Debt to Equity Long-term Creditors Total Equity

2006

2007

2008

16061 1067 6.64

17151 1172 6.83

17837 1002 5.61

16061 58 0.36

17151 324 1.88

17837 329 1.84

58 3965 1.46

324 4349 7.44

329 4935 6.66

3845 4810 0.80

1940 2721 0.71

1722 2605 0.66

3845 576 4810 0.68

1940 590 2721 0.50

1722 681 2605 0.40

3972 3965 0.50

2506 4349 0.36

2575 4935 0.34

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APPENDIX 2.0 FORMULA’S 

Net Profit Margin Net Income Sales



Operating Income Margin Operating Income Sales



Gross Profit Margin Gross Profit Sales



Return on Investments Net Income Long-term Liability+Equity



Return on Equity Net Income Equity



Earnings Per Share Ordinary Shares Weighted Ave. Number of Shares






Acid Test Ratio Current Assets-Stocks Current Liabilities



Total Debt to Assets Total Liabilities Total Assets



Debt to Equity Total Debt Total Equity



Interest Cover Earnings before Interest & Tax Interest Expense



Asset Turnover Sales Total Assets

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

Stock Turnover Period Average Inventory Cost of Goods Sold/365



Debtors Turnover Period Average Gross Receivables Sales/365



Creditors Turnover Period Creditors Cost of Goods Sold/365

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RAP 8 Tesco financial analysis.pdf

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