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Comparing Financial Growth Of Sainsburys Tesco And Morrisons Finance Essay

Sainsbury's Supermarkets is the UK's longest standing major food retailing chain. The company has it’s headquarter in Holborn Circus London, England.

The values of Sainsbury brand is made upon serving of customers with healthy, safe, fresh and tasty food. Sainsbury believes on providing quality and fair prices for their customers.

The company is providing services to over 18.5 million customers per week. The company have a market share of around 16 per cent. Sainsbury's stores have about 30,000 products and complementary non-food products and services. Sainsbury's also serving in clothing with name of TU clothing. With a range of clothes, having five years in cloths market it is getting popularity day by day. The company is also providing an internet-based home delivery shopping service which is available to almost 90 per cent of UK households. J Sainsbury plc comprises of Sainsbury's – a chain of 525 supermarkets and 303 convenience stores – and Sainsbury's Bank.

Sainsbury have two competitors, Morrison and Tesco which are compared in this report.

Morrison is the UK’s fourth largest food retailer with 403 stores. Their business is mainly food and grocery. It has 11.8%, market shares in grocery market.

Tesco plc is a British international grocery and general merchandising retail chain. It is the largest British retailer by both global sales and domestic market share, and the third largest global retailer based on revenue.

1.1 HISTORY OF THE COMPANY

Sainsburys was founded in 1869 by John James and Mary Ann Sainsbury. In 1882 company started own label products, with first product bacon. In 1916 Sainsburys set up a training school. In 1950s first self service store was started. 1961 it became the first food retailer to computerise the distribution of goods to its stores. In 2004 company launched TU fashion range, which included menswear, womenswear, kidswear and etc. Sainsburys were the first to launch own brand 1% fate milk in 2008. In 2009 Sainsburys was the largest retailer to completely remove battery farmed eggs from its shelves. In the same year Sainsbury's awarded the compassion in world farming “Good egg award”.

1.2 GOAL AND VALUES

Sainsbury's delivers an ever-improving quality shopping experience for their customers with great products at fair prices. The company aims to exceed customer expectations for healthy, safe, fresh and tasty food, making their lives easier everyday.

The values of the Sainsbury’s brand – passion for healthy, safe, fresh and tasty food, focus is on delivering great products at fair prices.

1.3 MARKET SHARE

According to the kantarworldpanel, Sainsburys have a market share of 16.3% which makes it fourth largest grocery company of UK. Tesco is leading with 30.4%, and ASDA is at 2nd number with 17%. Morrisons have 12.3% market share. (Figures of March 2010)

(For market share of last five years of Tesco, ASDA, Sainsbury and Morrison, see Appendix 1)

2.0 FINANCIAL RATIO ANALYSIS

Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment.

To know the financial position of Sainsburys plc, the ratios of most recent year 2009 and the previous years (2005, 2006, 2007, and 2008) have been calculated and weighed against each other. These ratios are also compared with other two companies Tesco and Morrison to understand the financial analysis of the Sainsburys.

2.1. PROFITABILITY

2.1.1 RETURN ON ORDINARY SHAREHOLDER’S FUND (IN PERCENTAGE)

Company

Year

2005

2006

2007

2008

2009

Sainsburys

-1.15

1.14

7.86

7.08

6.21

Tesco

16.19

17.46

19.03

19.03

17.46

Morrisons

2.58

-6.54

6.55

13.34

10.34

Figure 2.1.1 shows the ROSF ratio trends

ANALYSIS

This ratio measures the rate of return on the ownership interest (shareholder equity) of the common stock owners. ROSF shows how well a company uses investment funds to generate earnings growth. When this ratio is increasing, it shows a positive sign for company. According to this ratio Sainsbury position is improving from 2006 to 2007 but going down up to 2009. Tesco and Morrison ratios are also in decline after 2008. In 2009 Tesco and Morrison are in a better position. The net profit of Sainsbury is also decreased in 2009 as compared to 2008. The Sainsbury could not control its direct cost which resulted to reduce its profitability.

2.1.2 RETURN ON CAPITAL EMPLOYED (IN PERCENTAGE)

Company

Year

2005

2006

2007

2008

2009

Sainsburys

2.25

4.36

9.04

8.53

8.42

Tesco

16.65

18.84

20.66

18.82

15.92

Morrisons

5.03

-4.12

8.09

11.89

11.93

Figure 2.1.2 shows the ROCE ratio

ANALYSIS

ROCE ratio is an indicator of how well a company is utilizing capital to generate revenue. When this ratio is increasing, it indicates a positive sign for company.According to this ratio Sainsburys position is not so good at end of 2009 as compared to other two companies. The net profit is decreased and long term liabilities increased in 2009. Tesco trend is decreasing from last three years but Morrison is slightly better than last year.

2.1.3 NET PROFIT MARGIN (IN PERCENTAGE)

Company

Year

2005

2006

2007

2008

2009

Sainsburys

0.93

1.61

3.41

3.43

3.25

Tesco

6.29

6.28

6.73

6.45

6.32

Morrisons

2.31

-1.98

3.62

5.18

4.92

Figure 2.1.3 shows the NPM ratio

ANALYSIS

This ratio shows what percentage of sales become net income. Tesco and Morrison trends are going down in last years, Sainsbury position is also going down in 2009. Overall Tesco and Morrison are at good position in 2009. This ratio shows that Sainsbury makes 3.25 pence on every £1.00 of sales in 2009

2.1.4 GROSS PROFIT MARGIN (IN PERCENTAGE)

Company

Year

2005

2006

2007

2008

2009

Sainsburys

4.33

6.64

6.83

5.62

5.48

Tesco

7.78

7.67

8.12

7.67

7.76

Morrisons

24.88

24.58

5.1

6.31

6.28

Figure 2.1.4 shows the GPM ratio

ANALYSIS

This ratio shows what percentage of sales become gross income. According to this ratio Sainsbury position is not so good as compared to last years and other companies are in better position as compared to Sainsbury.

The performance of the company is decreased in last two years. Tesco`s performance is also decreased in 2008 but slightly improved in 2009. Morrison`s performance is almost unchanged from 2008 to 2009. The sales trend of Sainsbury is increasing in last five years, so the management of the Sainsbury have to control their cost. It is not a good sign ( decline in GPM) according to shareholders and managers point of view.

2.2. EFFICIENCY

2.2.1 AVERAGE INVENTORIES TURNOVER PERIOD

Company

Year

2005

2006

2007

2008

2009

Sainsburys

14.03

14.04

13.48

14.76

14.07

Tesco

15.3

14.67

17.89

20.34

19.44

Morrisons

17.03

12.17

11.36

13.28

13.24

Figure 2.2.1 shows the ITP ratio trends

ANALYSIS

This ratio shows how many times company's inventory is sold and replaced over a period. As the ratio is low simultaneously the company is performing well. According to graph of last five years Sainsbury inventory turnover is good but Morrison position is better than Sainsbury.

Sainsbury have almost a static trend in inventory days during last five years. There is a small increase in 2008 and then slightly decreased in 2009. Tesco and Morrison have same trends as Sainsbury from 2007 to 2009. Inventory days increased for these two companies in 2008 and then in 2009 there is a small decrease in the ratio. In overall Morrison has low inventory days as compare to Tesco and Sainsbury.

2.2.2 AVERAGE SETTLEMENT PERIOD FOR RECEIVABLES

Company

Year

2005

2006

2007

2008

2009

Sainsburys

0.65

0.75

0.64

0.65

0.95

Tesco

8.29

8.25

9.24

10.12

12.08

Morrisons

1.13

2.51

2.28

2.59

5.56

Figure 2.2.2 shows the SPR ratio trends

ANALYSIS

This ratio measures the average number of days customers take to pay their bills. When this ratio is high among other competitors it means company is not performing well. According to this ratio Sainsbury position is at best , even though there is a increase in settlement time for receivables in 2009. Receivables time for Tesco is significantly high as compared to Morrison and Sainsbury. From 2008 to 2009, Tesco and Morrison ratios rose sharply.

2.2.3 SALES REVENUE TO CAPITAL EMPLOYED

Company

Year

2005

2006

2007

2008

2009

Sainsburys

2.41

2.7

2.66

2.49

2.59

Tesco

2.65

3

3.07

2.92

2.52

Morrisons

2.18

2.08

2.23

2.3

2.42

Figure 2.2.3 shows the SRCE ratio trends

ANALYSIS

It is the ratio of sales revenue to the capital employed which tells whether the capital is properly employed or not and how much sales generated from employed capital. According to this ratio Sainsbury position is improving in last years and its position is best as compared to other companies. Company sales trend in last five years is increasing and at higher rate than the capital employed. Tesco ratio is falling after 2007, while Morrison is continuously improving in terms of sales return on capital employed, which shows a positive trend for company.

2.2.4 SALES REVENUE PER EMPLOYEE

Company

Year

2005

2006

2007

2008

2009

Sainsburys

156078

166954

179592

184648

194358

Tesco

139378

144507

133972

136789

149244

Morrisons

126956

130211

147213

154880

161683

Figure 2.2.4 shows the SRPE ratio trends

ANALYSIS

The ratio indicates that the company is utilizing their employee effectively in the generation of sales. It specifies the revenue generated per employee. Sainsbury employees are generating more income as compared to other two companies. Sainsburys ratio is increasing during 2005 to 2009 smoothly and it is at best position after 2009. Whereas Tesco trend is gone down from 2006 to 2008 and slightly increased after 2008. Morrison is also performed well during last five years.

2.2.5 AVERAGE SETTLEMENT PERIOD FOR PAYABLES

Company

Year

2005

2006

2007

2008

2009

Sainsburys

34.96

34.54

38.97

36.92

35.29

Tesco

32.95

28.38

30.73

32.94

34.59

Morrisons

44.99

32.19

30.96

34.6

38.68

Figure 2.2.5 shows the SPP ratio trends

ANALYSIS

This ratio shows the average time taken for a business to pay its trade payables. Decreasing trend in this ratio means the company is performing well. Sainsbury has performed well from 2007 to 2009 with a flat decrease in the RPP ratio. Other two competitors Tesco and Morrison are not good in last few years as the trend of both companies is increased.

2.2.6 OPERATING CYCLE

Company

Year

2005

2006

2007

2008

2009

Sainsburys

-20.28

-19.77

-24.85

-21.5

-20.27

Tesco

-9.36

-5.46

-3.6

-2.49

-3.06

Morrisons

-26.84

-17.51

-17.31

-18.74

-22.88

Figure 2.2.6 shows the OC ratio trends

ANALYSIS

This ratio gives the average time period between purchase of commodity and receiving cash after its sale. If a company has long operating cycle it means they are not performing well. Usually in grocery market, companies like Sainsbury, Tesco and Morrison has their operating cycle in negative value which indicates that company may be utilizing cash generated after sales for their business. Which does not leaves a good impact of company in the market and in stakeholders. Sainsbury and Morrison have a high operating cycle as compare to Tesco. Sainsburys operating cycle is decreased after 2007 where Morrison`s trend for OC is increase during 2008 and 2009.

2.3. LIQUIDITY

2.3.1 CURRENT RATIO

Company

Year

2005

2006

2007

2008

2009

Sainsburys

0.59

0.8

0.71

0.65

0.55

Tesco

0.57

0.52

0.56

0.61

0.78

Morrisons

0.53

0.49

0.41

0.45

0.77

Figure 2.3.1 shows the CURRENT ratio trends

ANALYSIS

This ratio give an idea about company`s ability to pay back its short term liabilities with its short term assets. According to this ratio Sainsbury position is declining from 2006 to 2009. It is not a good trend so managers of Sainsbury should take action to control their short term loans. Tesco & Morrison trends are increasing. In overall Tesco’s position is best as compared to other two companies.

2.3.2 ACID TEST RATIO

Company

Year

2005

2006

2007

2008

2009

Sainsburys

0.48

0.68

0.5

0.39

0.31

Tesco

0.34

0.33

0.32

0.38

0.63

Morrisons

0.53

0.23

0.21

0.25

0.28

Figure 2.3.2 shows the ATR ratio trends

ANALYSIS

The acid test ratio is more narrow measure of liquidity than the current ratio. This ratio tells whether the company have enough short term assets to pay back its liabilities without selling its inventories. Sainsbury position is declining during last years but it is still better than Morrison’s. however Tesco position is best.

2.4. GEARING

2.4.1 GEARING RATIO (IN PERCENTAGE)

Company

Year

2005

2006

2007

2008

2009

Sainsburys

28.45

36.65

38.8

35.43

37.54

Tesco

35.69

28.47

29.86

36.82

57.48

Morrisons

35.67

34.22

28.49

24.87

28.07

Figure 2.4.1 shows the GR ratio

ANALYSIS

This ratio is about the involvement of long term loaner to the total long term capital of a company

This shows that a company with high gearing (high leverage) is more vulnerable to downturns in the business cycle. Sainsburys ratio is increased in 2009 but over all it is in between Tesco and Morrison. Tesco has a very high ratio in 2009. Morrison is at good position in 2009. Sainsburys ratio shows that it has more long term stability compared Tesco.

2.4.2 INTEREST COVER RATIO

Company

Year

2005

2006

2007

2008

2009

Sainsburys

1.12

1.67

5.46

4.63

4.15

Tesco

9.06

10.27

13.28

12.21

7.18

Morrisons

3.23

-3.27

6.01

11.2

11.92

Figure 2.4.2 shows the ICR ratio

ANALYSIS

This ratio is used to determine how easily a company can pay interest on outstanding debt. According to this ratio Sainsbury position is almost unchanged during last 3 three years. It is showing that company is able to pay back interests from its profit. Morrison has continuously increasing trend where as Tesco is going down which indicates that there interests are increasing according to their profit.

2.5. INVESTMENT

2.5.1 DIVIDEND PAYOUT RATIO

Company

Year

2005

2006

2007

2008

2009

Sainsburys

416.39

225.86

43.21

54.1

75.43

Tesco

40.33

38.79

37.32

37.29

40.86

Morrisons

196.76

-39.07

39.52

19.49

28.48

Figure 2.5.1 shows the DPR ratio trends

ANALYSIS

It is the ratio which gives the relationship between the dividends announced for the year to the profit after taxation. According to investor point of view this ratio should be high. Sainsbury has a decline from 2005 to 2007 but it is improving after 2007 which is a good sign for investors. Tesco has a still trend during last 5 years where Morrison’s trend in last 3 years is nearly equal to Tesco. Sainsbury has a better position among these three companies.

2.5.2 DIVIDEND YIELD RATIO

Company

Year

2005

2006

2007

2008

2009

Sainsburys

4.44

2.56

2.71

3.4

4.14

Tesco

1.93

2.2

2.46

2.78

3.05

Morrisons

1.42

1.42

1.53

1.84

2.22

Figure 2.5.2 shows the DYR ratio trends

ANALYSIS

Dividend yield ratio is an investment ratio which shows the company`s dividend per share to existing share price. From graph it is clear that Sainsbury has a very good position as compared to Tesco and Morrison. DYR ratio is increasing from last 3 years which is a positive trend for shareholders. Sainsburys investor are getting more dividend returns. Tesco and Morrison trends are also increased in last few years. This ratio presents that all three companies are improving in terms of dividends per share.

2.5.3 EARNINGS PER SHARE

Company

Year

2005

2006

2007

2008

2009

Sainsburys

3.49

3.45

19.16

19.14

16.62

Tesco

17.44

20.07

23.84

26.95

27.5

Morrisons

4.14

-9.46

9.33

20.79

17.39

Figure 2.5.3 shows the EPS ratio trends

ANALYSIS

This ratio shows the earnings available to share holders to the number of ordinary shares in issue.

Tesco`s trend is continuously increasing during last five years but Morrison has variations and after 2008 it has decreasing trend. Sainsburys has increased in 2006-2008 but in 2009 its trend also decreased. According to investors point of view Sainsburys managers should take immediate action to increase their earnings per share.

2.5.4 PRICE/EARNINGS RATIO (P/E)

Company

Year

2005

2006

2007

2008

2009

Sainsburys

97.05

97.93

17.66

17.67

20.35

Tesco

24.95

21.68

18.25

16.15

15.83

Morrisons

70.2

-30.71

31.12

13.97

16.7

Figure 2.5.4 shows the P/E ratio trends

ANALYSIS

This investment ratio shows the market value of a share to the earnings per share. To know the company position P/E ratio is compared with other companies. High ratio gives an idea that in future investors can expect higher earnings. The graph is representing that all three companies has almost same ratios after 2007. But still Sainsbury has little edge over Tesco and Morrison.

LIMITATIONS

Financial ratios are not true representative of the financial situation of a company. These have certain limitations which are enlisted below.

Financial ratios are calculated on the basis of income statement and balance sheet, which may not represent the actual year ending figures.

Financial ratios only concerned with the numeric figures, these numbers cannot give the actual factors which are behind these trends.

If a calculated ratio is giving a negative trend, it does not mean that the business has problems. May be there are some managerial or business reasons which can favour the decisions of management.

Every analyst has different approach for calculating financial ratios, which leads to different calculation results.

Financial ratios show the historical position of the company, so the future position can not be assessed appropriately.

CONCLUSION

From analysis of the financial ratios it is very clear that Tesco is leading in most of the ratios, while Morrison has some positive trends in its ratios. Sainsbury is performing well as compared to Morrison. Ratio analysis also shows that Sainsburys is improving its performance after 2007. Meanwhile company have to improve some financial figures.

The cost of sales of Sainsburys is increased during last years and the net profit is decreased. In fact in 2009 the net profit margin and gross profit margin of the company is decreased which is not a good sign according to stakeholder’s point of view. But interestingly the dividend payout ratio has an increasing trend which is a good indication for investors who already have shares or they are interested to invest in Sainsburys. Looking the operating cycle of all three companies Tesco has a better operating cycle. The Sales revenue to capital employed of Sainsburys is increased as compare to Tesco which is going down.

It is observed that Sainsburys is investing in UK to have a greater share in the market. If over all performance of the company is observed, it has an improvement in last few years. Sainsburys is slightly behind ASDA and there is a possibility that in near future Sainsbury will become at the 2nd position in UK grocery market. So having future stability of the company in mind, it is suggested that the share holders and investor should take an optimistic and positive approach towards investment in the company.

APPENDICES

APPENDIX 1

THE MARKET SHARE OF SAINSBURYS, TESCO AND MORRISONS

MARKET SHARE (in %)

DATE

SAINSBURY'S

MORRISON’S

TESCO

Mar 10

16.30

12.30

30.40

Nov 08

15.90

11.40

30.90

July 08

15.90

11.40

31.20

Nov 07

16.0

11.20

31.30

June 07

16.22

11.22

31.55

Jun 06

16.04

11.32

31.38

(http://www.kantarworldpanel.com, accessed on 27th April 2010)

APPENDIX 2

CALCULATIONS FOR SAINSBURY’S RATIOS OF 2009

1. Return on Shareholders’ Funds =

100 *(Net Profit after Taxation - Preference Dividends) / (Ordinary Share Capital + Reserves)

= 100*(289-0) / [(4376+4935)/2]

= 6.21 %

2. Return on Capital Employed =

100*(Profit before interest & taxation) / (Share capital + Reserves +Long term Liabilities)

= 100*(614) / [(4376+4935)/2 + (2738+2528)/2]

=8.42%

3. Net Profit Margin = 100*(Profit before interest & taxation) / (Sales revenues)

= 100*(614) / (18911)

= 3.25%

4. Gross Profit Margin = 100*(Gross Profit) / (Sales revenue)

= 100*(1036) / (18911)

= 5.48%

5. Average Inventories Turnover Period = 365 *(Inventories held) / (cost of Sales)

= 100*(689) / (17875)

= 14.07 days

6. Average Settlement Period for Trade Receivables = 365*(trade receivables) / (Sales revenue)

= 365*(49) / (18911)

= 0.95 days

7. Sales Revenue to Capital Employed =

(Sales Revenue) / (Share capital + reserves + long term liabilities)

= (18911) / [(4376+4935)/2 + (2738+2528)/2]

= 2.59 times

8. Sales Revenue per Employee = (Sales Revenue)/ (number of employees)

= 18911/97300

= £194358 per employee

9. Average Settlement Period for Trade Payables = 365*(trade payables)/ (cost of Sales)

= 365*(1728) / (17875)

=35.29 days

10. Operating Cycle = AITP + ASPR – ASPP

= 14.1 + 0.94 - 35.29

= - 20.25 days

11. Current Ratio = (Current Assets) / (Current Liabilities)

= (1591) / (2919)

= 0.55 times

12. Acid Test Ratio = (Current Assets - Inventories) / (Current Liabilities)

= (1591-689) / (2919)

= 0.31 times

13. Gearing Ratio = 100*(Long term Liabilities) / (Share capital + reserves + Long term liabilities)

= 100*(2738) / [(4376+4935)/2 + (2738+2528)/2]

=37.54%

14. Interest Cover Ratio = (Profit before Interest and taxation) / (Interest payable)

= (614) / (148)

= 4.15 times

15. Dividend Payout Ratio = 100*(Dividend for the year) / (Net profit after taxation)

= 100*(218) / (289)

= 75.43%

16. Dividend Yield Ratio = 100*[(Dividend per share) / (1-t)] / (Market share value)

Where t = 10%, = 0.1 (dividend tax credit)

= 100*(12.6 / 0.9) / (338.3)

=4.14%

17. Earnings per Share = (net profit after taxation) / (Number of ordinary shares in issue)

= (289) / (1738.50)

= 16.62 pence

18. Price/Earnings (P/E) Ratio = (Market share value) / (Earnings per share)

= (338.3) / (16.62)

= 20.35 times

APPENDIX 3

VALUES OF SAINSBURYS USED FOR ABOVE CALCULATIONS

SAINSBURYS ( 2004 – 2010)

VARIABLE NAME

2009

2008

2007

2006

2005

2004

Cost of Sales

17875

16835

15979

14994

14544

-

Current Assets

1591

1722

1940

3845

2988

-

Current Liabilities

2919

2652

2721

4810

5036

-

Dividend for the Year

218

178

140

131

254

-

Dividend per Share

12.6

10.35

8.25

7.8

13.51

-

Gross Profit

1036

1002

1172

1067

658

-

Interest Payable

148

132

107

155

127

-

Inventories

689

681

590

576

559

-

Long Term Liabilities

2738

2538

2506

2178

1793

1766

Market Value per Share (on 30th April 10)

338.3

338.3

338.3

338.3

338.3

-

Net Profit after Taxation

289

329

324

58

61

-

Number Of Employees

97300

96600

95500

96200

97400

-

Number Of Shares

1738.5

1718.7

1691.3

1679

1749.9

-

Preference Dividends

0

0.2

0.4

1

113

-

Profit Before Interest And Taxation

614

611

584

259

142

-

Sales Revenue

18911

17837

17151

16061

15202

-

Trade Payables

1728

1703

1706

1419

1393

-

Trade Receivables

49

32

30

33

27

-

Capital Employed + Reserves

4376

4935

4349

3886

4027

5018


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