The purpose of this report is to conduct financial analysis on Tesco Plc, a publicly listed corporation in the United Kingdom specializing in the production and provision of foods and grocery products. And based on the financial analysis results, this report will make investment recommendations to the investor on whether the investor should purchase Tesco's share. To achieve so, this report firstly provides a thorough profiling of Tesco's business operation and analyzes the firm's general competitive strategies in the retailing market. Secondly, this report analyzes Tesco's financial performance over the past five years by using the relevant financial and ratio analysis; third, the management performance of the firm is analyzed by focusing on its efficiency, liquidity and gearing aspects. Moreover, this report analyzes the movement of Tesco's share price between 1st October 2009 and 1st November 2009 and compares the five year performance of Tesco with that of its close market rival in the UK, J. Sainsbury Plc. The results of financial analysis indicate that Tesco has huge potential for growth and profitability in the next few years, and therefore this report recommends that the investor should purchase Tesco's shares and hold them for long term investment
SECTION 1- THE PROFILE OF TESCO
Before entering into detailed discussion and analysis of Tesco's performance over the past five years, this report will first provide a thorough profiling of the firm's businesses. According to the information given in the firm's website ("Our history", tescoplc.com), Tesco started as a tea packets retailers in 1919. Soon after its establishment, Tesco quickly expanded itself into other food and grocery product categories and opened its first supermarket in Edgware in the UK. After decades of development, Tesco has now become the world third largest grocery retailer with annual revenue of GBP 59.4 billion (Tesco 2008). Moreover, according to Tesco's 2008 annual report, Tesco currently has 4,331 stores 14 geographical locations across the world (China, Czech Republic, Hungary, Japan, Malaysia, Poland, Republic of Ireland, Slovakia, South Korea, Thailand, Turkey, UK and US), and employs more than 470, 000 people in the abovementioned geographical locations.
Over past few years, Tesco has pursued a hybrid competitive strategy that combines differentiation and cost leadership that allows the firm to diversify its product portfolio and geographical presence, while providing low cost food and grocery products to consumers. Specifically, underlying this differentiation competitive strategy is a series of acquisitions in different geographical locations and the development of new products and services. For instance, as documented in the firm's 2006 annual statement, in 2005, Tesco expanded its UK property portfolio by forming a sale and leaseback joint venture with Consensus Business Group, one of the UK's largest private properties companies with a GBP 4 billion commercial property portfolio. Moreover, in 2006, Tesco launched a new internet telephone service, a range of horse riding products, a range of fishing products. In particular, Tesco entered the UK's non-food catalogue retailing segment, a segment that has traditionally been dominated by Argos, by opening Tesco direct.
In addition to the various expansion strategies in the UK, the home market of Tesco, Tesco has also aggressively expanded its operations in the overseas market, particularly the high growth emerging market in Asia Pacific region. For instance, in 2004, Tesco expanded its operation in the Chinese market by forming a 50-50 joint venture with Ting Hsin, a leading supermarket chain operator in China. In 2008, Tesco expanded its operations in South Korea by acquiring 36 hypermarket store from the E-Land Group. And currently, Tesco is establishing a wholesale cash & carry business in India.
SECTION 2 - TESCO'S FINANCIAL PERFORMANCE BETWEEN 2005 AND 2009
The focus of this section is to analyze the financial performance of Tesco between 2005 and 2009. To this end, this report will mainly utilize the financial information contained in the Tesco's 2005 - 2009 annual reports; and in addition to the discussion of the trend in the firm's general financial indicator, this report will also utilize the relevant financial ratio analysis to assist in the analysis of the firm's financial performance.
Tesco has experienced tremendous increase in its overall revenues during the period. Indeed, the following graph provides information on the growth of Tesco's total sales over the period. In 2005, the total sales of Tesco worldwide were about GBP 37,000 million. By the end of fiscal year 2009, Tesco recorded total sales of 59, 400 million, which is more than 161% of the level of total sales in 2005. This means that over the past five years, the total sales of Tesco has expanded more than 12% per annum.
Figure 1 - Tesco's Total Sales Worldwide (2005 - 2009)
Source: Tesco Plc Annual Report and Financial Statements 2009
In addition to such tremendous growth in the firm's total sales worldwide, the growth in Tesco's underlying profit before tax has also been highly impressive over the past five years. The growth in the firm's underlying profit before tax is captured by the following graph. In 2005, the level of Tesco's underlying profit before tax was about GBP 19, 000
Figure 2 - Tesco's Underlying Profit before Tax
Source: Tesco Plc Annual Report and Financial Statement 2009
million. And by the end of fiscal year 2009, Tesco's underlying profit before tax has grown by more than 63% to GBP 31,000 million. Most impressively, despite the fact that the UK's as well as other mature markets' retailing industry (e.g. the USA and Japan) was badly hit by the 2007/08 global financial crisis and the resulted global recession (Hopkins 2009), Tesco still managed to achieve an average growth rate of 12% between 2007 and 2009. Such impressive financial performance of the firm over the past five years clearly indicate that Tesco Plc is a firm very sound financial fundamentals that allow the firm to remain highly profitable during one of the most tumultuous periods in world's economic history.
Indeed, the strong profitability of the firm can also be appreciated by examining the various key profitability ratios computed for the firm: 1) gross profit ratio; 2) return on shareholders equity and 3) return on capital employed. According to Drury (2003) and Dyson (2003), both the gross profit ratio is measures of profits as percentage of a firm's revenue. Moreover, this ratio is a key indicator of a firm's level of profitability as they represent the proportion of each unit of revenue retains as gross or net profit. Additionally, as pointed out by Broadent and Cullen (2003), return on shareholder's equity is a measure of firm's profitability by examining how much profit a firm makes by utilizing the shareholders' funds and the return on capital employed is a measure on how much return is a firm generating from the capital employed in businesses.
The results of the three profitability ratio analysis between 2005 and 2009 are summarized in the table 1. While the gross profit ratios are calculated by utilizing the
Table 1 - The Results of Profitability Ratio Analysis
Gross Profit Ratio
Return on Shareholders' Funds
Return on Capital Employed
financial information contained in the firm's annual statements, the figures for return on shareholders' funds and return on capital employed are directly given in the firm's 2009 annual statement (Tesco 2009: 125). Moreover, it should be stress the figures total revenue used in this report for calculations are sales excluding VAT.
As revealed by the ratios contained in table 1, between 2005 and 2009, Tesco's gross profit ratio, the return on shareholders' funds and return on capital employed remained roughly constant during the period, indicating that Tesco has remained its strong profitability during the entire period. Nevertheless, despite Tesco has maintained its general profitability during this five year period, the relatively large negative movements in its gross profit ratio and return on shareholder's funds between 2007 and 2008 indicate that the 2007/08 global financial crisis and the resulted economic recession nevertheless had negative influence on the firm's profitability.
The profitability of Tesco can also be analyzed by computing and analyzing the changes in the firm's key investment ratios over the past five years. The investment ratios will be looked at include 1) earnings per shares (EPS), and 2) price earning ratio (P/E). It is understood that EPS is a an indication of how much a firm's profit is allocated to each of the outstanding shares in the market and that this ratio is a key determinant of the share price of company's stock as it provides information on how much an investor will earn by investing in the share (Broadent and Cullen 2003; Drury 2003). Additionally, the P/E ratio compares the share price of a firm to the average earnings generated by one unit of the firm's share. Therefore, this ratio provides information on investors' expectation on the future return from the investment in the firm's share. Tesco's earnings per share and price earnings over the past five years are summarized in the following table.
Table 2 - Tesco's Investment Ratio
Earnings per shares
Price Earning Ratio
As shown in table 2, Tesco EPS exhibit a strong upward trend between 2005 and 2009. While in 2005, its EPS was just 17.52p, the figure rose to 27.50p by the end of fiscal year 2009. This upward trend clearly indicates that over the past five years, Tesco's equity provides remarkable return to its investors. Yet, the large decline in the firm's P/E ratio between 2008 and 2009 may indicate that investors have downgraded their expectation on the future returns of the share.
SECTION 3 - THE MANAGEMENT PERFORMANCE OF TESCO BETWEEN 2005 AND 2009
After a detailed discussion on Tesco's financial performance between 2005 and 2009, the next stage of this investment report is to analyze the management performance of Tesco over the past five years. In particular, this section will calculate and utilize the relevant efficiency ratio, liquidity ratio and gearing ratio to analyze the firm's management performance.
It is understood that the different liquidity ratios are used to measure how efficiently a firm is to manage its working capitals including trade receivable, trade payable and inventory. Due to the lack of information on the amount credit sales given by Tesco to its customers, this report only contained information on Tesco's average payment period
Table 3 - Efficiency Ratio
Age of Payable
Inventory Turnover Period
and average inventory turnover period. It is understood that a firm's average payment period indicates the average number of days a firm required to reimburse its credit purchases to its debtors. As shown in table 3, the average age of payable over the past five year is 57.6 days. While Tesco's age of payable shows sign of deterioration from 2006, the extent of deterioration is very insignificant.
Moreover, it is understood that the ratio of inventory turnover period provides information on the time required for a firm to sell and replace its inventory and this ratio measures the efficiency a firm manages its inventory of unsold goods or materials (Drury 2003). As summarized in table 3, while Tesco's inventory turnover period increases from 2006 onwards, the increase in the inventory turnover time is also highly insignificant. Moreover, Tesco inventory turnover period declined again from 2008 and 2009. Based on such findings, we can thus conclude that Tesco's efficiency in managing its working capital has remained roughly constant over the past five years.
As rightly pointed out by Weetman (2003), one of the key indicators of a firm operating performance is whether the firm can maintain liquid by quickly converting its assets into cash, and/or receive regular and strong cash flow so that its short-term liabilities can be honoured and that its working capital can be maintained. Therefore, this report will now turn to examine the Tesco's level of liquidity over the past five years; and this can be done by computing and examining the current ratio and quick ratio.
It is understood that the current ratio is a measure of a firm's short-term liquidity level while the quick ratio is a measure of a firm's overall liquidity (Lucey 2003); generally speaking, if a firm has more assets than liabilities or has a current or quick ratio greater than 1, then the firm is regarded as having strong financial strength. . Tesco's current ratios and quick ratios over the past five years are given in table 4. While both the current ratio and quick ratio indicate that Tesco seems to be highly leveraged in its
Table 4 - The Liquidity Level of Tesco
operations, the liquidity condition of the firm has gradually increased since 2006. In particular, the quick ratio of the firm has risen from 0.38 in 2008 to 0.63 in 2009, indicating that the firm has paid back a large proportion of long term debt over the year.
Finally, this report will examine the gearing or the leverage aspect of the firm by calculating and analyzing the firm's gearing and debt ratio; both of these two financial ratios provide information on the amount of debt in the firm's capital structure and therefore on the financial risks of the firm (Broadent and Cullen 2003). As summarized in table 5, Tesco has become highly leveraged in fiscal year 2009 as indicated by the sharp increase in its debt equity ratio and its debt ratio. Currently, since debt has accounted for a very large proportion of Tesco's capital structure, the huge imbalance
Table 5 - Gearing Aspects of Tesco
Debt Equity Ratio
Between the firm's debt capital and equity capital indicates the insolvency risks of the firm have greatly increased between 2008 and 2009.
SECTION 4 - THE FIANCNING OF TESCO
In this section, we will discuss how Tesco has financed its businesses. It has long been recognized in the literature of finance that a firm's capital structure mainly consists of debt and equity; that is, that debt financing and equity issuing are the two primary methods for which businesses use to raise their finance (Kraus and Lizenberger 1973). In a perfectly efficiency world in which there is perfect information, no tax, no bankruptcy, debt financing and equity issuing are perfect substitute and therefore the cost of financing is the same for either methods (Modigliani and Miller 1958). However, the present business world is far from perfect, the various imperfections such as the existence of asymmetric information and of business and income tax have profound implications in the ways in which firms finance their businesses.
As revealed by the various liquidity and the gearing ratios, over the past five years Tesco has heavily used debt to finance its businesses and currently debts account for a very large proportion of the firm's capital. Indeed, according to the information given in Tesco's 2009 annual statement, while the amount of borrowings were only 8, 056 (borrowings classified as both current and non-current liabilities), the amount of borrowings rose sharply to 16, 450 million during the year. On the other hand, the amount of equity in the firm's capital structure as of the end of 2009 (GBP 12, 995 million) is the same as that as of the end of 2008 (GBP 11, 902 million).
While the use of debt financing allows Tesco to reduce the cost of double taxation resulted from equity financing, the heavily use of debt financing nevertheless increases the bankruptcy or insolvency costs associated with the firm (Harris and Raviv 1991). Nevertheless, given that Tesco is a firm with very strong economic fundamentals with continued strong growth in revenue and profitability, it is believed that Tesco has the financial capability to pay back its debts.
SECTION 5 - THE SHARE PRICE OF TESC OOVER 1ST OCTOBER 2009 AND 1ST NOVEMBER 2009
The figure below summarizes the movement in the share price of Tesco between 1st October 2009 and 1st November 2009. As clearly demonstrated in the figure 4, between 1st October 2009 and 1st November 2009, the share price of Tesco in general exhibited a strong downward trend, rising from GBP 393.7 pence on 1st October 2009 to GBP 408.49 pence on 30th October 2009 and indicating a monthly return of 3.7%. Given the very strong financial performance of Tesco over the past few years, and particularly during the 2007/08 financial crisis and the subsequent economic recession, on 21st October 2009, Nomura, a prominent Japanese investment banks raised its price target on Tesco from
Figure 4 Movement of Tesco's Share Price
Source: Yahoo Finance 2009
504p to 526p (The Irish Time 2009). As commented by Nomura, "in the next five years of dsicplied growth, we estimate that Tesco will effective create a new company, with sales of £27.3 billion. We estimate this 'new company' alone is worth £16.4 billion, or 209 per share".
Further, over the month, it is found in the financial media that Tesco is planning to further expand its operation in Asia Pacific region by launching online grocery marketplace in Thailand (Bangkok Post 2009). And due to the huge profitability that Tesco has generated over the past few years, Tesco recently opened a super-warehouse for home deliveries in Greenford, creating 500 jobs in the current economic recession (Russell 2009). Moreover, Tesco has recently announced that it will further expand into the Europe's broadband, home telephone and mobile market by doubling the number of its in-store phone shops in the UK to 200 by the end of 2010 and a total of 500 by 2015 (Mobile Exec 2009).
SECTION 6 - A COMPARISON OF TESCO PLC WITH J. SAINSBURY PLC
In this section, the financial performance of Tesco Plc will be compared with that with its closest rival in the UK retailing industry, J. Sainsbury Plc (hereafter Sainsbury). A detailed examination of Sainsbury "Five Year Financial Record" section on its 2009 annual statement found Sainsbury has achieved highly respectable growth over the past five years. Indeed, while the growth in Sainsbury's revenue is not as impressive as that in Tesco's, Sainsbury's total revenue rose from GBP 16, 573 million to GBP 20, 383 million over the past year, indicating an overall growth rate of more than 22 percent. In addition, Sainsbury also recorded a highly remarkable growth in its underlying profit before tax, rising from GBP 249 million in 2005 to GBP 543 million in 2009 or an overall growth rate 118%. Moreover, Sainsbury's earnings per shares rose from merely GBP 8.3 pence in 2005 to the current level of 22.1 pence, indicating that the profitability of Sainsbury has significantly improved over the past five years. Nevertheless, since Tesco Plc still has a higher amount of revenue and profits and therefore a higher amount of earnings per share, the average return in Tesco's share is still much higher than that in Sainsbury's shares.
CONLCUSION AND RECOMMENDATIONS
The purpose of this report is to analyze Tesco's financial and operating performance over the past five years and to make investment recommendations based on the financial analysis. This report has found that over the past year, Tesco has undergone huge expansion both in the UK and overseas markets and recorded very remarkable growth in its general profitability. Further, this report has also revealed Tesco has maintained a high operating and management efficiency over the past five years as indicated by the various ratio analyses. And given the strong upward trend in Tesco's share price and that Tesco is much more profitable than its close rival - J. Sainsbury Plc, this report thus recommends that the investors should make purchase Tesco's shares and hold them for long term investment. Indeed, this investment report predicts that it is highly likely Tesco will remain its profitability over the next few years; it is almost certain that the investment in Tesco's shares will offer the investors substantial returns.
I am the project leader of this group project for the course unit Decision Making for Manager. In this part, I will provide an individual reflection on my experiences of participating in this group work. First, I would like to provide some information about my roles and my tasks in this project. As the project leader, I necessary assume the role of monitoring the progress of this project, allocating and managing the tasks given to the other two members to ensure that all the works are conducted and accomplished in the highest standard. In addition to the various general managerial tasks, I assumed a specific task that is directly related to the content of this group project; that is, that given my excellent quantitative skills, I conducted all ratio analysis in this group project and I assumed the role of monitoring the share price of Tesco over a five week period.
I believe that my biggest achievement in the undertaking of this group project is that I have gained valuable experience in managing and leading team and therefore I have gained extremely valuable leadership skills. Indeed, the success of this project cannot be solely dependent on the intellectual abilities and knowledge of one single team member; but rather, the summation of the knowledge and efforts of the members in the team can always produce to the most optimal outcome. Therefore, in order to maximize the outcome of the group work, I held a series of brain storming meeting in cafes and restaurants to exchange opinions and ideas.
Since this is a team project, it is necessary that each member of the team must be allocated to some specific tasks according to their abilities and interests and that I must have a clear understanding of the teammates' individual strengths and weaknesses in the academic field. Participating in this group work and being team leader in this project exactly provided me the opportunity to learn how to observe and evaluate the strengths and weaknesses of others in an objective manner.
Moreover, participating in this group work and being the team leader has enhanced my communication and team working skills. In particular, I learned that what make a successful leader does not only depend on a person's actual skills and knowledge. Rather, a good leader needs to be capable of influencing the minds of others and of making others to listen and obey to the authority of leadership. And to make others listen and obey, the leader needs to be both democratic and autocratic. In other words, a successful leader does not only need to consider the voice of the underlings, but also need to be firm and forceful of his/her own decisions. For example, through leading the team, I learn that self-governance is never sufficient to ensure people working and respecting tasks deadlines. But rather, showing negative emotions such as anger and annoyance can sometimes satisfactory to push the rest of the two members to get their work done.
In this section, I will reflect upon my experience of participating in this group project for the module Decision Making for Manager. In the first place, I would like to briefly mention my role in this project. Given that I possess a better research and reading skills in the group, my primary role in this project is therefore to collect all the related information and data that are necessary for the accomplishment of this group project. Throughout the undertaking of this project, I consulted a variety of sources for information in order to assist in the writing and analysis tasks of other group members; these sources include Tesco's company website, the financial times, and a variety of web-based sources including Google Finance, Google Books, Reuters, and Bloomberg. In addition to data collection, I also undertook the role of data display and data organization to ensure that my teammates could always found the data I collected easily assessable and understood.
The undertaking in this group project has significantly sharpened my skills in researching, in assimilating a large amount of business information and more importantly in team working. Indeed, it is realized that the rapid advancement in information and personal computer technology since the last two decades of the 20th century has radically transformed the ways in which businesses are conducted. To succeed in the current information era, firms and more correctly their agents - managers must be able to locate, assimilate and exploit a vast volume of market information to create competitive advantages for their products and services. Yet, regrettably, it is deeply felt that while the management courses in the university teach students the how to analyze business information, the management courses do not pay much emphasis on teaching students the techniques of looking for and locating business information efficiency and effectively.
Yet, through undertaking this project, I have acquired some special instincts in looking for business information. Moreover, through undertaking this project, I have improved my IT skills in using computer software such as Microsoft Word and Excel to organize complex quantitative and qualitative information and make the quantitative and qualitative easily accessible and understandable by other users. These skills are clearly highly beneficial for my future careers in the corporate world as a manager.
Moreover, the undertaking of this research project has also sharpened my team working skills. Indeed, in today's business world, team working is regarded as indispensable properties of being an employee as well as being a manger as it is impossible for an individual to efficiency and effectively copes with the complex business issues nowadays. Through the participation in this project, I have gained valuable experiences in dealing with people of different thoughts and opinions. Particularly, I feel that my skills in defending my positions and in conciliating conflicts with team mates have greatly enhanced. In sum, the participation in this group project has been very valuable to my training as a future manager in the corporate business world.
As a requirement for the course module Decision Making for Manager, I participated in a group project with other to members to prepare a financial analysis report with two of the members. The experience in participating in this group project is highly educational. I have gained very useful technical and technical skills for my future career as a management accountant. In this section, I will reflect on my experience in participating in this group project. My main tasks in this group project include 1) writing the section on the literature of firms' financing decisions and the financial decisions of Tesco; 2) writing the session on comparative analysis of firms' performance in the UK retailing industry; and 3) the session on recommendation by utilizing the information and data collected from by drawing on the ratio analysis by the other members.
One of the most beneficial learning outcomes of participating in this project is that it gives me an opportunity to learn how to assimilate a large volume of information and how to construct the information into oral expression and oral writing. Indeed, since English is not my native language and the bulk of education was not conducted in English, I have always found my self of struggling in putting complex ideas into verbal expression and languages. Through the participation of this project, my communication skills in general and English communication skills in particular have greatly improved as the regular discussion with my teammates gave me a highly valuable opportunity to practice how to construct complex ideas into formal, complex and coherent English conversation. Moreover, it is needless to mention that the writing in the sections on comparative performance analysis and on recommendations provided a highly valuable educational experience to learn how to assimilate business information into academic writing.
Further, through the participation in the group project, I have acquired important subtle skills in working as a member of a team and making contribution to other team members to achieve common goal. I have learned that respecting the efforts of others is the most important factor to become a successful team member and that there are a number of subtle inter-personal issues involved in respecting others. For instance, I feel that sometimes it is highly desirable of just listening without making any comments of the opinions of others, even though such opinions might be problematic or even silly. In addition to respect, I have also learned that trust is also a significant factor behind the harmony of the cooperation among team members and the success of group work. To foster trust, it is necessary that each member respects the task deadlines agreed in the group meeting and keeps the group informed if there are any unexpected circumstances preventing the meeting of deadlines.