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The Analysis of Sainsbury Financial Performance

Introduction

This report will perform a financial analysis, which aims to find the key effects of Sainsbury’s financial market and performance over the recent economic recession period.

The report will be dissected into four aspects. Firstly, an overview of Sainsbury’s will be discussed. Secondly, Sainsbury’s financial tools will be introduced. Thirdly, an analysis of the company’s performance using financial ratios as a tool will be obtained from its annual report of 2010. Furthermore, value drivers of Sainsbury’s in 2010 will be analysed.

In addition, an analysis of Sainsbury’s performance will be considered through three perspectives, those being ‘what happened? How it happened? Why it happened?’ Finally, conclusions of the report will identify the main value drivers and key effects of Sainsbury’s performance and give a suggestion to benefit the company’s future.

Sainsbury’s Historic Performance And Overview

Sainsbury’s was founded by John Sainsbury and Mary Ann Sainsbury in London in 1869 (Sainsbury’s, 2010).

According to the official website Kantar (2010), Sainsbury’s is the third largest supermarket chain in the UK. There are approximately 150,000 employees and a total of 872 stores comprising 547 supermarkets and 343 convenience stores are in operation. Sainsbury’s provides service to over 19 million customers a week. Furthermore, the “internet-based” home delivery shopping service can be available to almost 90 per cent of UK households (J Sainsbury’s PLC, 2010).

As at 25 June 2010, the situation of UK’s supermarket market share was showed like this:

According to Kantar (2010), the latest industry figures show that Tesco held 30.8% of the market. Asda held 16.9%, Sainsbury’s own 16.1% and Morrisons was 11.9 per cent. Therefore, Sainsbury’s main competitors are Tesco, Asda and Morrisons. Furthermore, all its competitors are increasing their market share except for Asda. Sainsbury’s improved its market share to 16.2% from 15.9% in 2010, which is closer to that of ASDA (Sainsbury’s, 2010).

Total revenue from 2006 to 2010 (£m)

(Sainsbury’s, 2006-2010) (Morrison, 2006-2010) (Tesco, 2010)

Sainsbury’s market share is not only expanding, but its revenue has also been increasing steadily since 2006. Sainsbury’s has performed better than Morissons over this time period, but is still a long way behind Tesco in terms of overall annual revenue.

3. Historic Performance Analysis

Sainsbury’s ratio analysis:

Peter et al. (2008) claims that “financial ratios provide a quick and relatively simple means of assessing the financial health of a business.” Hence, several profitability ratios, liquidity ratios and efficiently ratios will be used in the report. Purpose is providing an insight to measure the company’s performance.

Profitability ratio analysis

Gross Profit Margin

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)(Tesco, 2010)

Gross profit margin (GPM) decreased slightly by 0.20% during the period from 2008 to 2010. The main reason was the economic recession. During the recession sales increased from 2006 to 2009 but recession affected the number of suppliers to decrease result in expenses increased slightly more, leading to a small decrease in GPM. At that time, Sainsbury’s extended their business to be divers, which is aim to avoid the effect of disposable household income decline (Sainsbury’s, 2009). Morissons GPM is more favourable than Sainsbury’s, with Tesco’s GPM the highest.

Net Profit Margin

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)(Tesco, 2010)

The bar chart above showed that the Net Profit Margin (NPM) of 2010 and 2009 were equal at 3.56%. Although the economic recession began in 2008, Sainsbury’s continued to increase its NPM by 0.59% during 2008 to 2010 and by 0.53% from 2006 to 2010. The main reason is the appropriate store’s space extending strategy to increase sales volume whilst maintaining costs (Sainsbury’s 2010). Compared with Morrisons, whose NPMs are higher than Sainsbury’s, though it sells less volume than Sainsbury’s. And Tesco’s NPM has been maintained at a high level of approximately 6% since 2006.

Return on Capital Employed

* Restated for the impact of IFRIC 13and IFRS 2.

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)(Tesco, 2010)

Sainsbury’s ROCE had dramatically increased from 7.10% to 9.46% from 2008 to 2009. The main reason was an increase in profits from the sale of properties, which is useful to the overall financial strategy. Sainsbury’s continued to execute this strategy but reduced the sale of properties in 2010. This trend shows their ability to better utilise their assets and attract more investors. Compared with Morrisons, whose ROCE rose in 2010 to 9.80%, and is higher than Sainsbury’s 8.80% in the same year. Tesco’s still maintains a high level but fell at little in 2010.

Liquid ratio analysis

Current Ratio

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)(Tesco, 2010)

Peter et al. (2008) claim that normally if the current ratio is 2:1, it means that the business will have sufficient liquid resources. However, Sainsbury’s is a retail company and the retail industry usually has lower current ratios, between 1.5:1 and 1:1 (Findout, 2010). Therefore, working capital shortage is an issue that could be discovered through the current ratio of Sainsbury’s, though Sainsbury’s current ratio is better than that of Morrisons. Sainsbury’s current ratio of 2009 decreased slightly mainly because of investments in long-term ventures and increases in current liabilities. Fortunately, in 2010, the current ratio increased significantly to 0.66, which means that the ventures already had returns or Sainsbury’s successfully controlled the current liabilities. Sainsbury’s have to improve its current ratio by two relative factors, one is to increase current assets and the other one is to reduce its current liabilities. Sainsbury’s could adopt two solutions which is controlling credit and reducing creditors.

(Sainsbury’s, 2006-2010)

The bar chart of Quick Ratio indicates a stable decrease of over 50% from 2006 to 2009 but it increased rapidly to 0.41 in 2010. Moreover, Sainsbury’s has a strong payable turnover and repays debts quickly even during the period of economic slowdown. Hence, the decrease in the quick ratio could be caused by the activities of investing in long-term, which aim to improve profitability and increase market share.

Efficiency ratio analysis

Receivable Turnover (days)

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)

Sainsbury’s receivable turnover is steady, only 4 days, during the recession and beyond. That is because they have made an effort to execute this kind of principle. Nevertheless, as a retailer, the huge amount of sales is almost always cash is a remarkable feature so good controlling is necessary. Compared with Morrisons, Sainsbury’s has shorter receivable turnover, which is a benefit for working capital and cash flow.

Payable Turnover (days)

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)

The payable turnover of Sainsbury’s decreased from 39 days to 34 days during the period from 2007 to 2010. Being a retailer, they are willing to return for a long time. However, the recession affected suppliers’ receivable time, which became shorter. Furthermore, extending its payable turnover is benefit for its working capital. In 2010, both Sainsbury’s and Morrisons are 34 days.

Inventory Turnover (days)

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)

Sainsbury’s inventory turnover is fast at approximately 14 days. It indicates that the value of average inventory will be sold in around two weeks. Although the inventory turnover increased to 15 days in recession, it has recovered to 13 days in 2010, which is the same as 2007, before the recession. However, the non-food inventory of Sainsbury’s like household and domestic items still has a longer maintained period to circulate. From 2006 to 2009 Sainsbury’s inventory turnover was longer than Morrisons. In 2010, this situation changed, because of the online sales and delivery system, Sainsbury’s sells faster now.

Gearing ratio analysis

Gearing Ratio

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)

The gearing ratio increased by 10.5% from 2008 to 2010, representing that the changes, which prepared to live during the economic recession generated more risks. Imports became more expensive due to Interest rates fell down significantly and the market instability affected gearing ratio to increase. Morrisons’s gearing is less than half of Sainsbury’s in 2010.

Investment ratio analysis

Earnings per share

(Sainsbury’s, 2006-2010)(Morrison, 2006-2010)(Tesco, 2010)

Sainsbury’s EPS was not affected by the decline in the country’s economy, but Tesco and Morrisons fell during the downturn in 2009. The reason could be that Sainsbury’s balance sheet and cash flow statements showed that Sainsbury’s would have well future expansion space.

Value Drivers

It is clear from the financial ratios analysis that Sainsbury’s is performing significantly well. This aspect will focus on the value drivers affecting the business and will assess Sainsbury’s performance, with specific reference to Tesco and Morrisons who operate within the same business area.

4.1 Non-food

Sainsbury’s (2010) claims that less than 15 per cent of the £ 166 billion non-food market in UK presently are occupied by supermarket retailers, which is a huge opportunities. Several years ago Sainsbury’s most important value driver was the sale of food and domestic products. However, nowadays Holding (2010) claims that Sainsbury’s most important value driver is boosted mainly by non-food and online purchases as the data of quarterly sales have accelerated. The Chief executive King (2010) claims that “its TU clothing range was 'leading the charge' in non-food sales, while online sales were up 25% and 'progressing well'.” Jefferies (2010) also states that as a key area for the Sainsbury’s drive, non-food business such as clothing and home wares was still profitable and continued to increase at three times the rate of food. In addition, Tesco already has a very complete non-food selling system and sales are £13.1bn, increased by 6.2% in 2010. Non- food is Tesco’s main value driver now as well. In contrast, Morrisons just started this development of non-food. However, according to Craven (2010), most of Morrisons’s stores are too small to accommodate for non-food selling, so Morrisons is still not a competitor in the non-food area of the industry. Finally, King (2010) claims that “expansion plans were paying off with new space contributing a further 2.3% to sales growth, excluding fuel.”

Selling online

According to Craven (2010), the £5bn-a-year online grocery market is controlled by Tesco, Asda and Sainsbury's. Sainsbury’s online business is increasing swiftly with sales over £500 million one year, which represents a strong growth of 20%. Moreover, this business is gaining some beneficial effects for profitability. Sainsbury’s has covered almost 90 per cent of UK households through online sales. In July 2009, there were over 8,000 non-food products available online. Sainsbury’s will continue introducing their ‘click and collect’ service strategy (Sainsbury’s, 2010). Morrisons has not established their online selling system. It wants to build it this year (Craven, 2010).

Club card and bank

Nowadays, Sainsbury’s and Tesco both have their own club card, the latter being introduced first and is the most successful of its type in UK. Sainsbury’s club card (Nectar card) has significant relationship with Sainsbury’s bank’s Nectar Credit card. Moreover, Sainsbury’s Bank is another mainly value driver, which generating a pre-tax operating profit of £19 million (Sainsbury’s, 2010).

The Nectar card is their main financial product. Compare with Tesco bank Club card, as follow:

(Wait, 2010)

The table above shows how Sainsbury’s Master Card offers a straightforward 0% on both balance transfers and purchases for 12 months and allows you to double your nectar points. Hence, Nectar card is more attractive to customers compared with Tesco’s.

According to Wait (2010), there are four questions to compare the club cards of Sainsbury’s and Tesco as follow:

(Wait, 2010)

Through the table above, Tesco only allows customers to collect points online in a few retailers but Sainsbury’s has 443 online partner retailers. Therefore, the Nectar card is more convenient for online shopping (Wait, 2010). Although, since 1995, Tesco started to accumulate card holders and the amount of club card’s holders has reached 15 million (TESCO, 2010), Sainsbury’s nectar card holders increased by over 1 million last year to 16.8 million. Nectar loyalty scheme has exceeded Tesco to become the largest in UK (Sainsbury’s, 2010).

Property

Compared with Tesco’s properties, the total amount of Sainsbury’s property is much less, but Sainsbury’s has an outstanding ability to utilize its property. Sainsbury’s freehold property market value increased by £2.3 billion to £9.8 billion in 2009, and £0.7 billion of this was delivered by investment and development activity. This was related to “294 wholly-owned freehold and long leasehold stores.” Fortunately, CEO King claims that “85 per cent have development potential two property joint ventures containing 43 supermarkets.” (Sainsbury’s, 2010)

Conclusion

From the financial ratio analysis above it has been discovered that some issues have been exposed. For example, current ratio and through property disposal maintain profit increase trend during economic recession. The solutions would be to copy Tesco, who have launched its stores in Asia and received a good return. Sainsbury’s would discover its new value drivers from Asia as well. Hence, this could solve these problems in terms of increasing profitability through increasing the amount and space of stores to service for more customers resulting in increased revenue. Undeniably, Sainsbury’s is a giant in the UK grocery industry and it has survived the difficult recession period. Moreover, Sainsbury’s has been working on the right way of development and Sainsbury’s future looks safe and prosperous.

References

Craven, N. (2010). Morrisons is set to challenge online rivals

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.thisismoney.co.uk/news/article.html?in_article_id=513749&in_page_id=2#ixzz15UhlnJow

Findout. (2010) Financial Ratios

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.findoutinfo.com/direct/CD001?stylesheet=USE315.xsl#PAR1

Holding, D. (2010). Sainsbury Still Has the Edge

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.fool.co.uk/news/investing/company-comment/2010/10/06/sainsbury-still-has-the-edge.aspx

Jefferies, T. (2010). Sainsbury shoppers hungry for low prices

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.thisismoney.co.uk/markets/article.html?in_article_id=518015&in_page_id=3#ixzz15UdXWmZP

J Sainsbur PLC. (2010) company overview

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.j-sainsbury.co.uk/index.asp?pageid=12

Kantar Worldpanel UK Grocery Market Share Analysis. (2010)

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.kamcity.com/namnews/mktshare/2010/kantar-aug10.htm

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http://www.j-sainsbury.co.uk/index.asp?pageid=188&caseid=archive)

Sainsbury’s. (2010) Nectar takes top spot in race for customer loyalty

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.j-sainsbury.co.uk/index.asp?PageID=424&section=&Year=2010&NewsID=1229

Tesco. (2010) Annual Report and Financial Statements 2010. London: 35 Communications press

Wait, R. (2010) Sainsbury's is better than Tesco

Retrieved Nov 15th, 2010 from World Wide Web:

http://www.lovemoney.com/news/get-the-best-deal/shopping-around/sainsburys-is-better-than-tesco-4857.aspx

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