Financial Analysis of Sainsburys
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Published: Tue, 12 Dec 2017
The report is divided into four parts. Firstly, using ratios as a tool will help in analyzing and evaluating the financial performance of the Sainsbury obtained from the 2008 and 2009 annual report. To show the pattern of Sainsbury’s financial performance for the year 2007 to 2008 a trend analysis will be prepared. Also, developments in the supermarket industry will be analyzed and evaluated for the year 2008 and 2009.
Moreover, a ‘What If’ analysis of the probable financial performance of Sainsbury’s, had the downturn not occurred.
Lastly, conclusion of the report will be discussed how Sainsbury’s handled the downturn situation to reduce the effect on its financial performance and disclose if the company was prepared.
The Food retailing Industry is a huge and fast growing industry in UK .It is a complex and is a diverse market dominated by various corporate giants such as Tesco, ASDA, J Sainsbury’s. Price and quality of goods are the two key elements which the companies keep in mind to increase their sales and defend their position in this competitive market. In the year 2009, food retailing recorded sales figures of GBP 297,478.9 million, along with providing employment to 11.6% of the workforce in UK (Euro monitor, 2010). It is forecasted, by the year 2014 the sales would cross GBP 350,000 million (Euro monitor, 2010).
This assignment focuses on the third largest food retailer store in UK, i.e. J Sainsbury.
Sainsbury is a super market which will operates its business in retail sector from the year1869.
Sainsbury is started by James and Mary Ann Sainsbury’s. Sainsbury today operates a total of 827 stores comprising 537 supermarkets and 335 convenience stores(J Sainsbury 2010) .With their presence in various other markets such as financial services and Property management, grocery retailing remains their core business. In an industry which employs over 3,335,000 people and with sales figure of GBP 137,590 million (Euro Monitor), Sainsbury enjoys a market share of 16% and serving 19 million customers weekly with a product offering of 30,000 ( J Sainsbury, 2010).
QUESTION 1- An analysis and evaluation of the data available in the organizations’ annual reports. 30%
SAINSBURY’S RATIOS ANALYSIS
According to Maclaney and Atrill (2002), ‘â€¦ratios provide an overview of the
business’s financial condition’. Similarly, Wood (2002) stated, ‘Ratio analysis
is a first step in assessing an entity’. The effects of the downturn experienced
by Sainsbury are demonstrated by the following ratios below. A three year
trend analysis will focus on Sainsbury’s performance two years prior to the
downturn and the two years during the downturn.
Maclaney and Atrill (2002, p. 197) stated, ‘Profitability ratios provide an insight
to the degree of success in achieving the purpose of the business’.
Gross Profit Margin
Net Profit Margin
ROCE(Return on Capital Employed)
GROSS PROFIT MARGIN
This ratio tells us about how businesses control its production costs or manage its margins which are made from buying and selling of products. Gross margin is mainly quite stable (in percentage).
Gross profit= [Gross Profit / Revenue] x 100 (expressed as a percentage)
NET PROFIT MARGIN
Net profit tells us about the profitability after all cost are included. It shows what percentage of turnover is repeated by net profit.
Net Profit margin= Profit before interest and tax/ sales or turnover X 100
Net Profit Margin increased from 2.97% to 3.56% from 2008 to 2009 which is a 16% increase and by 0.53% over 2006 to 2009. The net profit margin shows how well Sainsbury’s control its overheads. These increases continue despite the economic slowdown showing their financial power. Because strategic plans were properly planned and executed and sales volume increased without increasing costs.
RETURN ON CAPITAL EMPLOYED
ROCE is sometimes referred to as the “primary ratio”; it tells us what returns management has made on the resources made available to them before making any distribution of those returns.
ROCE=Net profit before tax, interest and dividends (“EBIT”) / total assets (or total assets less current liabilities
An investor might compare the return on capital employed with the possible return if the money was invested elsewhere. ROCE from 2009-2010 increased from 9.46% to 10.21% mainly because of profit achieved from disposal which is used to finance overall operations. From 2008 to 2009, ROCE decreased by 2.36% because of oil related costs and increased business rates. Therefore, Sainsbury’s have to plan out some measures to get more profit from the business to attract investors.
LIQUIDITY RATIOS ANALYSIS
According to Robinson et. al (2009, p.795) liquidity ratios are ‘Financial ratios
measuring the company’s ability to meet short-term obligations’.
Also shows the same above, but excludes stock, which may be difficult to turn into case is some circumstances.
Quick Ratio= Current assets less stock / Current liabilities
If the quick ratio of the business is less than 1:1, it signifies that the current assets are less and will not cover its current liabilities. It can be seen from the above table that the entire quick ratio are less than 1:1. Again, retailers have their strong cash flow. They can operate comfortably with acid test ratios of less than 1. Nevertheless, Sainsbury has a remarkable debtor payment period and recovered debts quickly even during the downturn.
It shows whether the business can pay debts due within one year from assets that is expected to turn into cash within one year.
Current Asset= Current assets/ Current liabilities
From the above table it means that Sainsbury has sufficient assets to match their current liabilities. The current ration in 2009 dropped marginally below the company’s average. The reason for current assets to decrease is by mostly investing thoroughly in long term ventures or because current liabilities are growing at a faster rate than current assets. Sainsbury used their liquid assets to finance their business through marketing and promotions to make it profitable, hence profitable during the downturn.
ACTIVITY RATIOS ANALYSIS
Robinson et. al (2009, p.789) stated, ‘Activity ratios are ratios that measure
how efficiently a company performs day-to-day tasks, such as the collection
of receivables and management of inventory’.
Fixed Asset Turnover
Inventory turnover ratio
FIXED ASSET TURNOVER RATIO
Fixed assets turnover indicates the sales being generated by the fixed asset base of a company, like ROCE, it is sensitive to the acquisition, age and valuation of fixed assets.
Fixed asset turnover = Sales or Turnover / Fixed assets
INVENTORY TURNOVER RATIO
This ratio shows how long it takes for a company to turn its stocks into sales. The shorter the stock days ratio, the lower the cost to the company of holding stock, the value of this ratio is very dependent on the need for the stock and so will vary significantly depending on the nature of a company’s business.
Inventory turnover ratio = [Stock or inventory / cost of sales] X 365
INVESTMENT RATIOS ANANLYSIS
Return on Equity
Earnings Per share
RETURN ON EQUITY
Return on equity shows how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. For example: profit after taxation and taxation
Return on equity= Earnings after tax and preference dividends / Shareholders funds
From the above table it seems in the 2009-2010 Sainsbury’s ROE ratio is very high 9.51 as compare to last year 2008-2009 it was 5.23. This means Sainsbury’s has earned a good profit and shareholders are willing to invest money in the company and can get better dividend.
EARNINGS PER SHARE
Earnings per share measures overall profit generated from each share in existence over a particular period.
Earnings per share= Earnings after tax and preference dividends / Number of issued ordinary shares.
According to the financial statement of Sainsbury’s the company has issued more shares in all three years 2008 to 2010, that the reason Sainsbury’s Earnings per share has increased in 2009-2010. The number of shares has increased with the increase in profit.
It shows the debt’s weight in the capital employed. For example: long term lease agreements involve fixed payments and may be added to both non-current debt and capital employed.
Gearing= Long-term debt / Capital employed X 100
From the above table it seem there is increase in gearing ratio from 2008-2009 which means they have many debts to pay. It is difficult to invest money in this year. But, there is decrease in gearing ratio from 2009-2010 which is 4.34 less from last year. So it means it is less risky to invest money this year as Sainsbury do not have many debts to pay.
This ratios tells us how business can cover the interest payment
Interest Cover= Profit before interest and tax / interest charges
In the year 2008-2009 the ratio is very reduced which states that Sainsbury’s do not have sufficient profit to pay interest to its debtor. However, in 2009-2010 the ratio improved which means that Sainsbury’s earned huge profit and can pay interest to its debtors.
LIMITATION OF RATIO ANALYSIS
Ratios are very important part in the business. However, there are certain limitations to be aware of:
Ratios are only reliable as the data that has been entered. Ratios analysis is calculated from past data and will not help in predicting future.
Use of quantitative data- qualitative factors such as skills of the management, rate of change in market and industrial record are also need to b considered.
Figures in balance sheet only relate to that day- changes every day and the one chosen on the day may not be typical and thus ratios calculated from that data are not necessarily correct.
COMPETITORS RATIO ANALYSIS
TESCO COMPANY PROFILE
Tesco was started by Jack Cohen in 1919. Tesco is biggest food retailer in the world, having 2482 stores in UK and giving employment to more than 472000 people (287669 in UK) who serve millions of customer around the world. Tesco has a largest market in UK, where it operates under signs of Extra, Superstore, Metro and Express. Tesco offers more than 40000 products to customers including clothing and other non-food lines. Tesco enjoy a market share of 31% in UK and operates its business in 13 countries across Europe, Asia, and the United States. Tesco main focus is to provide excellent service to all customers (Tesco, 2010). In the 2010, food retailing recorded sales figures of 42.3 billion (Tesco, 2010)
RATIO COMPARISON BETWEEN SAINSBURY’S AND TESCO
ROCE(Return On Capital Employed)
Return on Equity
As per the research and study about the different financial ratios of the two food retailing company in United Kingdom. If we compare the current asset of Sainsbury’s is 1.56 and Tesco is 2.93 which is 1.37 less from Tesco. Sainsbury need to improve its current ratio by increasing its current assets relative to its current liabilities. Sainsbury’s can recover its current assets by controlling its company’s credit and can recover its current liabilities by reducing short-term creditors.
If we compare the quick ratio of Sainsbury’s is 0.41 which is less than 0.14 as we compare it with Tesco quick ratio 0.56. The decline in Sainsbury’s quick ratio may have resulted from investing in long term activities. Tesco has enough funds to pay off his liabilities.
Both Sainsbury and Tesco have strong balance sheet, interest cover for Sainsbury is 6.1 and on the other hand Tesco its 5.7 which is slightly low from Sainsbury. However, Sainsbury appears to be little better. This collateral allows them to borrow at lower rate and generate cash via sale and lease back schemes if they are in a pinch. Tesco coverage ratio has fallen from 10.6 to 5.7 now because of raising debt in a low interest environment.
Return on capital employed (ROCE) of Sainsbury’s is 10.21 and on the other hand Tesco it is 13.06 which is 2.85 high from Sainsbury’s. There can be couple of reasons for Tesco of its high ROCE: net profit is increasing without an increase in capital employed or sale revenue is increasing without an increase in cost. Sainsbury have to think about some measures to attract more investors.
Operating margin of Sainsbury’s is 3.56 which is less than 1.61 from Tesco 5.17 operating margin.
From the above table we see gearing ratio of Sainsbury is 48.93 and on the other hand Tesco it is 90.94, about 42.01 less from Tesco which means from an investor point of view it is risky to invest in the Sainsbury’s company.
From the above table we see Return on equity of Sainsbury’s is 9.51 and on the other hand Tesco it is 12.04 which is 2.53 high from Sainsbury’s. It showed that Tesco has earned high profit and shareholders willing to invest more money in the company and can get better dividend paid.
QUESTION 2- An analysis and evaluation of the development in the financial markets during the last two years with reference to their effects on your chosen organization. 20%
RECESSION is a normal part of a business phase, though, one-time crunch events can cause the onset of a recession. In the global recession of 2008-2009, many large financial institutions bought their attention to the risky investment strategies. As a result
Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. The global recession of 2008-2009 brought a great amount of attention to the risky investment strategies used by many largeÂ financialinstitutions, along with the truly global nature of the financial sytem. As a result of such a wide-spread global recession, the economies of virtually all the world’s developed and developing nations suffered extreme set-backs and numerous government policies were implemented to help prevent a similar future financial crisis.
A recession generally lasts from six toÂ 18 months, andÂ interest ratesÂ usually fall in during these months to stimulate the economy by offering cheap rates at which to borrow money.
Sainsbury’s works in a highly competitive market. The UK food retailing industry is mainly ruled by four big players- Tesco, Asda, Sainsbury and Morrison’s. Together they all control approximately 75% of the UK’s market. Market leaders are adopting low cost strategy which is benefited to consumers and increasing demanding. High competition in market makes market leaders to become highly innovative to grow market share by focusing on value, price, advertising and customer satisfaction.
DEVELOPMENT IN THE UK’S SUPERMARKET INDUSTRY
The supermarket in the UK are no longer controlling themselves to just supplying food products to consumers. In 2008, financial downturn made supermarket industry to spread their risks at a time when food inflation climbed, to diverse into areas such as finance, mobile and broadband markets. This diversification provides opportunities to slowdown sales in food product, as they achieve sales in other areas. In 2008, the supermarket industry recorded £123 billion in consumer spending a huge difference when compared to £119.8 billion in 2007. This show clearly to remain competitive their strategies and financial strength were successful during the downturn period.
Taxation Policy- rate of corporation tax was decreased by government from 30% to 28%. This means supermarkets profit will be greater by saving substantial amount of money.
Government interference- government put his rights of price fixing among major supermarkets which poses a threat as they may have to control prices.
Increase in employment- in UK employment figures rise to 164,000 in 2008.
Inflation- because of fall in prices of crude oil, inflation rate decreased.
Rate of interest- interest were decreased by 2% in 2008, consumer spending were increased.
Disposable income- real disposable income can be ‘squeezed’ as ONS discovered that with earnings growth on a downward trend due to the failing labour market families. This can affect the supermarkets sales.
Lifestyle changes- people are becoming more health conscious and purchasing healthy foods. During the downturn, people started preparing home cooked meals rather eating out which is expensive due to food inflation.
Increase in Technology- new technology was adopted to make the service convenient and customer satisfaction which lead to a competitive advantage and increase sales.
Green issues- by using less plastic, recycling wastes and adopting environmental friendly procedures, supermarkets are investing in green issues. Profit are used for this issue but increases sales as more customer demand for environmental friendly products.
Restriction on foreign trade- customer demand for substitutes as goods are becoming more expensive due to imports taxes and tariffs.
EFFECTS OF FINANCIAL MARKET ON SAINSBURY
Weakened sterling caused decrease in the UK exchange rate during 2008-2009. From April 2008 to December 2008, continued decline reaching at 1.0219 GBP which made exported goods cheaper but imported goods were more expensive causing adverse effect on businesses. Sainsbury’s most food products are imported, with British pound still on Back foot (Coventry 2010), buying products from others countries will be more expensive. This will result in high purchasing costs; ultimately customers have to suffer this.
In 2008, Sainsbury experienced a slow growth when compared to past results. Due to the downturn Sainsbury adapted some measures to increase its profitability in 2009. Some of the changes they made are discussed below.
Increase in food inflation, rise in employment and decrease in disposable are the effects of the downturn that made Sainsbury to adapt some changes for a better performance.
Household budget were under burden from the effect of the downturn. Sainsbury had to reduce the cost of basic products which customer faced as the biggest squeeze of income in 50 years. To improve layout, increase space, future hedge with suppliers and reduce unnecessary cost, marketing strategy need to be shifted to focus more on cost as well as adjust value chain. As customers were demanding low cost products, Sainsbury adjusted according to demand.
Interest rate and CPI annual inflation rate decreased and standard of living changes are also the effects of downturn. Due to decreased interest and CPI inflation rate it benefited Sainsbury as more customers were able to take advantage of lower borrowing. Sainsbury took advantage of this by reducing prices and strengthened marketing of their cheaper own label products. People living of standard changes as the economy dipped, more people decided to make home cooked meals just to reduce the cost attached to eating out. Penny pinched consumer were dependant on Sainsbury to provide low cost vegetables and meats.
Competitive rivalry and customer reliability caused Sainsbury to focus more on price, value and advertising while strengthened excellent customer service. Sainsbury annual report (2009) specified that a clear strategy was developed to focus on five areas:
Great product at fair prices
Additional marketing channels to reach more customers
Increase growth of non-foods items
Increase space and property management
QUESTION 3- ‘What if’ analysis of the possible financial performance that might have existed had the downturn not occurred. 30%
Sainsbury’s always been challenging to adopt any changes in the market. The condition of the Sainsbury’s was not bad during the recession period but there were some changes that Sainsbury need to adopt so as to remain competitive.
Let’s make out what will be the condition of Sainsbury’s what if there was no financial downturn.
Exchange rate would not have decreased which made import goods cheap and export goods expensive. Buying products from other countries would be cheap and because of the high prices of products customer will not be suffered. Decrease in food inflation would not have affected family budget plan which were in downturn period. Basic products were being available at low cost and customers don’t have to shift their standard of living as they no more will be dependent on the home cooked products.
Sainsbury’s made a lot of profit during the recession period, if there was no recession Sainsbury would have earned more profit. As the Sainsbury’s policies are so strong during its recession time they were earning huge profits. So Sainsbury should not change its policy so as to earn more profit because customer are willing to pay high prices for the quality products.
As of financial crises Sainsbury’s manpower were decreased and less people were willing to more work than what was expected on less salaries. If there were no recession then things would have been different, employees would be getting sufficient salary and would have been willing to give best performance. Recruitment opportunity would be more to recruit new employees in the organisation.
Due to the competition in the market it leads Sainsbury to focus more on prices and value strengthening excellent services. Sainsbury’s made some measures to remain competitive. If there were no financial downturn then customers would not have to pay high prices for the products.
If there were no downturn then Sainsbury’s don’t have to improve its layout, increase space, future hedge with suppliers and reduce unnecessary cost. Marketing strategy need not to be shifted to focus more on cost instead of giving better services or high quality products to customers.
If we compare the financial performance of Sainsbury’s from the year 2008 to 2010, we can say it is rising as a company. Sainsbury’s is earning huge profit every year. There are increasing the share in the market and market is interested in investing the money. There are many improvements that need to be considered if we compare the data from the year 2008 to 2010.
Though, if we compare the financial performances of the Sainsbury’s and Tesco it can be said that Sainsbury’s are still far behind Tesco. The ratio figures of Tesco states that Sainsbury’s still need to do strong planning so as reach near Tesco. In the competitive market, investors have a choice of investment.
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