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FINANCIAL AND NON FINANCIAL ANANLYSIS

J. Sainsbury (Sainsbury) PLC is a UK based food retailer with business interests in financial services. The company comprises Sainsbury's supermarkets, convenience stores; an internet-based home delivery shopping service and Sainsbury's Bank. J. Sainsbury is now a leading company in the distribution of consumer goods. The company operates 350 supermarkets and 300 shops which are branded as Sainsbury's Local and Bells Stores. Customers can also buy online via internet Sainsbury's to you. J. Sainsbury serves approximately 14 million customers on weekly bases (http://uk.finance.yahoo.com). The company employs around 150,000 employees and is headquartered in Holborn, London. J. Sainsbury offers a broad variety of produce and service aids including delicatessens, spirits stores and wine, bakeries, banks, clothing, florists, books, pharmacies, DVDs, CDs, wine, flowers, gifts and electrical goods. The company through its “Sainsbury Bank”, offers its numerous customers health related products, savings accounts, life coverage products, credit cards, car finances, personal loans, car insurance, travel insurance, home insurance, and pet care insurance. The company’s assorted product offerings rises cross business opportunities (DATAMONITOR 2008).

2. KEY RATIOS CALCULATED

A. PROFITABILITY RATIOS

2009

2008

1. Gross profit ratio = Gross profit/Sales revenue

1036

*100%

1002

* 100%

*100%

18911

17837

5.48%

5.62%

2. Net profit ratio =Profit after tax/Sales revenue

298

*100%

329

*100%

*100%

18911

17837

1.58%

1.84%

3. ROCE = EBIT /Total assets- C. Liabilities *100%

446

*100%

461

*100%

7114

7463

6.27%

6.18%

B. LIQUIDITY RATIOS

1. Current ratio = Current assets/ Current Liabilities

1591

1722

2919

2652

= 0.55

= 0.65

2. Quick/Acid test ratio = CAs - Inventories/ CLs

1591-689

1722-681

2919

2652

= 0.31

= 0.39

C. Gearing ratio = Total debts

64 *100

24 *100

Shareholders` equity * 100

4376

4935

=1.46%

= 0.49%

D. P/E ratio = Market price per Shares

20.66

19.31

Earnings per share

16.6p

19.1p

=1.24

= 1.01

3. OVERALL PERFORMANCE EVALUATION

3.1 FINANCIAL EVALUATION

PROFITABILITY RATIOS

Gross profit ratio has decreased from 5.62% in 2008 to 5.48% in 2009 this may be due to increase in cost of production or sales and/ or a decrease in selling prices

Net profit ratio in 2009 shows a further decrease of 1.58% less than 2008`s 1.84% indicating a lack of control on general expenses, thus more general expenses were incurred.

Return on Capital Employed ratio increased from 6.18% to 6.27% in 2008 and 2009 respectively which reflected management effectiveness and efficiency in utilising the economic resources in generating profit for shareholders.

LIQUIDITY AND DEBTS RATIOS

Current ratio has decreased from 0.65 to 0.55 in 2008 and 2009 respectively which is a weak and a bad signal since it and shows cash flow problems because the rule of thumb is 2:1.

Quick ratio has also gone down from 0.39 to 0.31 in 2008 and 2009 respectively and again this is also a bad sign since the company cannot settle its current liabilities because the standard requirement is 1:1(that is one asset to one liability).

Gearing ratio has increased to 1.46% in 2009 from 0.49% in 2008, meaning that there has been introduction of more debts finance in the company`s capital structure in 2009. This may have accounted for the cash flow problem highlighted above and must be noted that the smaller the gearing ratio the better.

INVESTMENT RATIOS

P/E ratio has gone up to 1.24p in 2009 from 1.01p in 2008 and this is a good signal for both the investors and the company since the higher the P/E ratio the better.

NON FINANCIAL EVALUATION- SWOT

Non financial performance evaluation has been done through the use of SWOT analysis.

S-Strengths

Broad offerings

Sainsbury has leveraged its retail network to provide financial services throughout Sainsbury’s Bank, which is a joint venture with Bank of Scotland. It is the first supermarket bank in the UK and has about 2.5 million customer accounts. The products offered by Sainsbury Bank include: health coverage products, life coverage products, instant access savings accounts, direct saver accounts, Visa credit cards, personal loans, car financing packages, car insurance, home insurance, travel insurance and pet care insurance. The company’s diverse product offerings increases cross selling opportunities (Dickinson 2008).

Steady growth in revenues

Sainsbury witnessed a steady growth in its sales in the past few years. The company recorded revenues of £17,837 million in FY2008, an increase of 4% over 2007 and a further increase in 2009 £18,911. Sales grew at a CAGR of 5% during 2006–2008. The company’s sales exceeded the three year target of £2.5 billion. Moreover, the company also witnessed a steady growth in same store sales. The same store sales for FY2008 grew by 3.9% over 2007, marking 13 quarters of consecutive expansion of same store sales. Consistent revenue growth indicates efficient deployment of the growth strategy (Rigby and Braithwaite 2008), (Sainsbury plc annual report 2008).

Growing private brands

Sainsbury has increased its private brand products portfolio over the years. The company offers about 450 organic products under the “Sainsbury’s SO organic” brand. Sainsbury’s larger stores carry a full range of over 700 Sainsbury’s organic products. “Basics”, Sainsbury’s fastest growing own-brand range, covers many different products. Sainsbury generated incremental sales, and around 50% of its customers buy from both “Basics” and Sainsbury’s premium range, “Taste the Difference” (Ttd). “TU”, Sainsbury’s own clothing range also recorded 40% increase in sales in FY2008 making Sainsbury eleventh largest UK clothing retailer.

W-Weaknesses

Sluggish growth in profits

Sainsbury generated weak profit growth rates in FY2008, operating profits declined marginally while net profits grew at a sluggish rate. The operating profit decreased by 0.6% over FY2007 to reach £500 million in FY2008. Employee costs, which recorded an annual increase of 9.6% in FY2008, were a major contributor to the increase in operating costs. Net profit recorded a sluggish annual growth rate of 1.2% in FY2008, to reach £329 million. A large annual increase, of 23.4%, in finance costs was a primary reason for wiping out the net profits. Weak growth in profits, in spite of 4% per annum growth in revenues, indicates a poor cost structure and high exposure to the debt market.

Weak liquidity position

The liquidity of the company is declining. The cash and cash equivalents declined by 36.3% from £1,128 million in FY2008 to reach £719 million in FY2009. The net debt increased by 11.1% in the same period. A weak liquidity situation could impact on the growth potential unfavourably; it is also possible to further increase Sainsbury’s exposure to the debt market.

O-Opportunities

Increasing demand for organic products

Increasing consumer consciousness of environmental and health issues alongside increasing resistance concerning genetically customized food stuff. This has led to the rapid increase in requirement for organic products. One of the fastest rising categories of their retailing is natural and organic food products segment. Retail sales of organic food in the UK were approximately £2 billion.

Increasing online sales

Online shopping has steadily grown in popularity in the UK. Online selling, as a proportion of total retail sales in 2005 were about 7% in the UK and it grew to 15% in 2008. Internet sales rose by 80% from £2.34 billion in 2008 to £4.2 billion in 2009. Verdict expects online spending to reach £28.1 billion by 2011.

Growth plans

Sainsbury has chalked out a growth plan for 2007–10. The company is focusing on store growth and channel growth to maximize profits. Sainsbury plans to increase the store space by 10% by 2010. In line with this strategy, Sainsbury is expanding its network of supermarkets and convenience stores. The company opened four new supermarkets, extended two, and refurbished nine in the first quarter of 2009. Sainsbury also opened 27 convenience stores. (Killgren 2008b).

T-Threats

Rising labour wages in UK

Labour costs are rising in the UK. The UK government announced that the adult minimum wage rate would rise to £5.73 in October 2008 from £5.52 an hour in October 2007. Previously it has increased from £5.05 per hour in October 2005 to £5.35 in October 2006 to £5.52 per hour in October 2007.The wage rate for those aged 18 to 21 years will be increased to £4.77 by October 2008 from £4.60 per hour in October 2007 and the wage rate for workers aged 16 to 17 years would be increased to £3.53 by October 2008 up from £3.40 per hour in October 2007.

High interest rates in UK

Although the Bank of England cut interest rates in April 2008, they still remain at high levels. Interest rates in the UK stood at a high of 4.5% at the end of January 2006. This was further raised to 5.25% in January 2007 and reduced to 5% in April 2008. High interest rates have discouraged credit card borrowing as consumers become more conservative in its use. Consumer credit in 2006 grew at its slowest pace since 1994. DATAMONITOR estimates that the consumer credit advances will continue to grow at a slow pace till 2011.

Inadequate exposure to international markets

Sainsbury competes with number of companies which have their operational presence in the UK and in other international markets. For instance, Tesco operates in the UK and other European and Asian countries, ASDA (Wal-Mart's subsidiary in the UK) has operations in 15 countries worldwide, and Marks and Spencer (the UK-based leading international department store retail chain) operates a retail chain in Ireland and Hong Kong besides the UK. By contrast, Sainsbury operates only in the UK. Limited presence in international markets puts Sainsbury is in a disadvantageous position in relation to diversification in revenue streams and access to growth markets in Asia (DATAMONITOR 2008)

COMMENTARY

Through this analysis, it can be noticed that Sainsbury's is an iconic British food brand, much loved and accepted by its consumers. Even though it has been suffering previously but from 2004 its image and more significantly profitability, have improved enormously. Nonetheless, it is not insulated to numerous external uncertainties like recession and increasing material costs as analysis of PESTEL would have highlighted. Even though it has shown steady growth it is significant for Sainsbury's to go the next level by competing Tesco plc, its major rival in the industry by thinking of global expansion. This in combination with its growing property range and alternate ventures should assist in enhancing the strong growth path, as well as tiding over threats in its external environment. The ratios may indicate a weak financial performance but it is clear that the company`s share price has been moving up steadily as the share diary in the appendix indicate (http://www.lse.co.uk/SharePrice.asp)

RECOMMENDATION

It is evident from the ratios that Tesco PLC`s overall performance in 2009 has experience a decline as compared to the 2008 results. The company seem to have cash flow managing problems and therefore depending so much on debts finance. This is notwithstanding the levels of profitability since the profitability is just a concept but does not mean cash. The levels of debts finance have increased extensively which may have been as a result of the liquidity difficulties identified in both current and quick ratios. Management needs to access the levels of debts and device a more practical strategy in dealing with these leverages. Since failure to investigate and deal with these problems of liquidity could force them in to liquidation because they are now posing going concern issues.

CONCLUSION

There are a number of financial ratios that could have been calculated from the financial statements which can be of much significant in assisting management, shareholders and investors in gaining a much understanding of the business ‘financial performance. Notwithstanding the significance role ratios play in analysing financial statements, it is necessary to also note that they must be used in conjunction with other sources of data since it application in isolation may be bias and misleading. It is all too easy to compute and use these ratios in a simplistic and trivial way. The ratios cannot be better than the information on which they are prepared which involve the use of the traditional historic cost account concepts and conventions which involve assumptions and management own judgements. While financial ratios do provide a useful structure for the interpretation of the information contained in the financial statements, they in themselves do not give an absolute basis for assessing the performance of companies and their management (Abraham et al. 2008).

REFERENCES

Belverd E. Needles, Marian Powers, Susuan V. Crosson, (2005). Financial and Managerial Accounting.

Courtis, J.K., (1996, 1978) Annual report financial ratio component consistency, Asian Review of Accounting, 4(1): 146-162.

DATAMONITOR (2009), Available at www.datamonitor.com

Dickinson, H. (2008). http:// www. kpmg.co.uk/industries/cm/r/ht.cfm#ii [Online]. [Accessed 5th May 2008].

Gallizo J.L., F. Jiménez and M. Salvador, 2003, Evaluating the effects of financial ratio adjustment in European financial statements, European Accounting Review, 12(2): 357-377.

O’Connor M., 1973, on the usefulness of financial ratio analysis to investors in common stocks, The Accounting Review, 48(2): 339-352.

Rigby, E. and Killgren, L. (2008) 'Sainsbury buys back sites to fuel non-food growth', Financial Times, London, 27 March.

Rigby, E. (2008) 'Sainsbury attacks 'scandal' of price inquiry', Financial Times, London, 3 May.

J Sainsbury plc (2008). Annual Report 2008 available at http:// www. j-sainsbury.co.uk/ar08/downloads/Sainsbury_Review_2008.pdf [Online]. [Accessed 7th August2008].

Killgren, L. (2007). 'Sainsbury launches property venture', Financial Times, London, 14 November.

http://finance.yahoo.com/q/hp?s=JSAIY.PK&a=11&b=31&c=2009&d=11&e=31&f=2009&g=m, Accessed 16 August 2010

http://uk.finance.yahoo.com/q/pr?s=SBRY.L, Accessed 08- 08-2010.

http://www.lse.co.uk/SharePrice.asp?shareprice=PMO,2010 Accessed 2010 August-14

http://www.lse.co.uk/SharePrice.asp?shareprice=SBRY, Accessed 15- 08-2010

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