An Analysis Of the Financial Situation of TESCO PLC

An Analysis Of the Financial Situation of TESCO PLCIntroductionReason for natural selection of this topicThe selection of topic is establish on my reading near Tesco rapidly growing articles and its strategy for increase topic is based on quadruple vital contend partsGrowth in the UKTo expand by growing world(prenominal)lyTo be as strong in non- forage as in foodTo get customers into wise(a) marketing servicesFrom the list of suggested topics an analysis of the m singletary situation of an organization seems to be attractive and interesting topic. The making of this report help me in antithetical ways like indemnitys in analytical skills and meter focussing.Company ProfileJack Cohen established Tesco in 1919, when he began to sell nimiety groceries from a stall in the East End of London. In 1924, the first own-brand product sold by Jack was Tesco Tea. In 1932, Tesco became a private special(a) company. In 1983, Tesco stores (Holding) Ltd became PLC.Tesco became Bri tains biggest independent petrol retailer in 1995Tesco became the number one in this country with 17% of the market circumstances in 1995.Tesco is one of the largest food retailers in the world, operating around 2,700 stores.The group operates through multiple store formats, including Extra, Superstore, Metro, Express and hypermarkets.Tesco trading operationsUK (1,900 stores)European countriesAsiaTesco ProductsElectrical goodsHome entertainmentClothingPhoneswidebandHealthBeautyStationeryKitchen utensilsSoft furnishingsSeasonal goods take of productsValueFinestBrandedTesco and Retail industry profileGrocery market is one of the around evolving markets. Tesco is the third largest supermarket in retail industry world. contestation is directly with the small and independent chains and with other big names of retail industry. Todays consumer is changing their obtain patterns with the alterations in marketing strategies by the grocery market. Tescos is innovative in its marketing st rategy and maintain its impressive figure of market dish out by Brobdingnagian spending on marketing and fulfilling the wants and needs of customer. (RETAIL INDUSTRY REPORT cc7)It is 60 forms since Tesco was first listed on the London Stock Exchange, as Tesco Stores (Holdings) Ltd, with a shargon toll of 25 pence. It was only ten years ago that it laid out a new strategy for growth, a strategy which looked to find new customers, new markets, new products and new opportunities,thriving international air and assessing markets with over devil billion people. artificial lakehttp//www.tescocorporate.com/annualreview07/01_tescostory/tescostory.htmlTescos market sh be has surpassed 30% for the first time in 2005, providing further ammunition for consumer groups who want its dominance curbed.Sourcehttp//www.thisis specie.co.uk/news/article.html?in_article_id=401840in_page_ id=2Aims Objectives of the ReportAnalysis of recent performance of TescoAnalysis for the benefit of all s come backholders and shareholders early performance predictionMethods of analysisMethod to analysis the performance of Tesco is based on the competition with Sainsbury (leading British retailer).The main reason is to understand the concern of shareholders about their dividend income and growth of capital. Therefore the report is mainly focused on the following aspects SWOT anaalysisSWOT analysis of Tesco is about the internal and external factors, which helps me to understand the underway position of company. payabilityComparison of the profit with their rivalsLiquidityThis is the al just about concerned factor for the investor to know about. Usually companies are not forced into liquidation for not making profit, just when they dirty dognot pay their debts off.GrowthExpectations of shareholders in highly competitionFinancingFinancing should be accurate and appropriate towards their objectives.InvestmentAnalysis on enthronization towards future profitabilityShareholders returnAnalysi s on how effective the group is returning shares of shareholders.The few key factorsGearing ratio Gearing is a pulsation of financial leverage, demonstrating the degree to which a firms activities are funded by owners funds versus creditors funds and is the key indicator of the share prices.ROCE (return on capital employed)To examine the total long funds invested in the group to earn the return.EPS (Earning Per Share)Earning per share (EPS) is widely used by both present and future investors to gauge the profitability of a company. staring(a) profit marginCompares a companys performance with its competitors in terms of profit margin.Limitations of AnalysisRatios are static and it does not reflect the future trends habitually.Ratios are based on information in various articles and websites. It ignores the affect of inflation.Financial statements themselves devour limitations IAS 16 withal allows a selection between measuring non current assets at cost less amounts written off, or at revalued amount (FTC Foulks Lynch Paper 2.5, 2004).On the other flip IAS 17 leaves somewhat vague the cantnote between finance leases and operating leases. By classifying a lease as an operating lease, it is possible for a lessee to keep leased assets and their corresponding liabilities off the counterweight sheet (FTC Foulks Lynch Paper 2.5, 2004).The earning power of a business may well be affected by factors, which are not reflected in the financial statements.Executive SummaryTesco has shown improving results during the recent years and an excellent result this year as well compared to previous performance of the company. Tesco Groups result for the year 2006/07 is as follows disturbance -10.9%Operating profit -17.7%Profit before taxation-20.3%Group underlying profit-13.2 %Group trading profit-11.1 %Underlying diluted earning per share change magnitude by 11.6% on comparable basis, to 22.36p ( coda year-20.04).Final dividend has been proposed 6.83p per share (last yea r-6.10). This represents an increase of12%.Gearing level remained at 48% as last years.Cash outpouring is 265m compared to last year Cash inflow 165m last years.Above results represent the story of progress of the group, which reflects the consumer satisfaction, shareholders and stakeholders confidence in Tesco. Tesco generates their profits faster than revenue and the benefit in production.Information gatheringPrimary searchPrimary information is data, which is, collected specifically by or for the user, at source for example the make lovement accounts of a company (BPP Success in your Research Analysis Project 2005). close of my work is based on secondary sources. Secondary researchMost of my research is based on secondary type of research.AcademicReading the textbook provided the initial outline, approach, research suggestions and structuring for the project. Subscription publications such as Accounting and Business ceremonious library researchGoing to the British and Coryd on Library enabled me to gain access to the academic publications on research methods for business, as well as industry-specialist publications. Electronic researchFinancial Journals and Tesco website, which enabled me to obtain last three years annual and interim reports, and company presentations to analysts, investors and portfolio.ACCA website (http//www.accaglobal.com/) provided an easy-to- search database of articlesUsing Internet search engines (Goggle, Yahoo Finance) enabled me to collect a lot of information about Tesco and its competitors.Other Methods to Collect InformationSpecialist Accountancy Publications (Accountancy Age)Annual Accounts of CompanyTelephone calls, EmailAnalysts reportsNewspaper articlesDiscussions with superiorsAnalysis and demo(Note All the figures used below are taken from Tesco and Sainsburys annual accounts, except where mentioned) Strategic AnalysisCost LeadershipCost leadership is a generic strategic thrust that emphasizes providing products an d services at the lowest per unit cost in spite of appearance an entire market. Porter notes (1980) Cost leadership requires aggressive construction of efficient-scale facilities, brisk pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like RD, service, gross sales force, advertising, and so on (p. 35).from Porter, M. Competitive Strategy Techniques for Analyzing Industries and Competitors, New York The Free Press, 1980.Michael Porter suggested four generic business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of businesses activities are narrowing versus broad and the extent to which a business seeks to differentiate its products.The four strategies are summarized in the figure belowThis strategy is commonly associated with large-scale businesses like Tesco abideing standard products with rela tively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.Source http//tutor2u.net/business/strategy/competitive_advantage.htmSWOT AnalysisSTRENGTHLeading British MarketCustomer research and its on the lookout positioningEconomy of scaleWEAKNESSESLimitations in open up new outlets in UKOPPORTUNITIESGrowth in Non-Food retailsInvestment in international marketTHREATSThreats from rivalCompetition in overseas marketExtension in business makes it difficult to manageReputation riskSTRENGTHSBritains Market LeaderTesco is the market leader of retail industry in UK and holds 31.5%share of whole market as compared to its competitors ASDA Sainsburys who hold 16.7% and 16.0%.Source http//scotlandonsunday.scotsman.com/business.cfm?id=68862007Customer Research and its carefulpositioningTescos ability to empathies with its customers is the result of in-depth research, and has been key to its resoundingly booming entries into so many new markets. Their market research doesnt stop at new customers, but queers existing customers buying habits too.Tesco has expanded its customer base by its increased efforts to embrace customers from all levels of society, and all income brackets. For example, two popular food product ranges the luxury range called Tesco Finest and the budget version, Tesco Value are both carried within all of its stores.Sourcehttp//www.growthbusiness.co.uk/expansion/259636/what-tesco-can-teach-us.thtmlEconomy Of SCALETescos has massive buyer power over suppliers these economies of scale allow Tescos to compete fiercely on price without imperiling its own margins in a mature industry in which aggregate revenue growth is unspectacular.WEAKNESSES LIMITATIONS IN OPENING NEWOUTLETSThe massive volume of sites under v ictimisation and owned by the supermarket groups, and particularly by Tescos, is a central plank in a new Competition rush investigation into the grocery sector.The Commission is considering to review the rules that govern store openings. Under current guidelines, a retailer keen to open in a particular town must merely prove that the location needs a new supermarket. The national market share of that supermarket chain is not taken into account.The Commission will also take a close look at the controversial issue of land cashboxing retailers supposed practice of buying vast tracts of land merely to thwart rivals from opening on them.Source http//www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/04/30/cctesco30.xmlOPPORTUNITIESGrowth in non-food sectorAccording to Retail research company Verdict, in 2007, for e rattling 10 spends on non-food shopping, 1 will be spent at the supermarkets.And Tesco is set to become the UKs number one non food retailer, with Verdict predicting it will capture 3.6 percentage of the non-food shopping market this year, overtaking the current number one GUS (owner of Argos and Homebase) which currently has 3.5 percent market share.Source http//www.clickajob.co.uk/news/tesco-to-become-uk-s-largest-non-food-retailer3675.htmlTesco stores sell some non-food, it is Tescos Superstore and Extra formats that offer the biggest choice. These offer electrical, home entertainment, clothing, health and beauty, stationery, cook shop and soft furnishings, add-on seasonal goods such as barbecues and garden furniture in the summer. The company has launched a highly successful range of own brand goods from microwaves to garden furniture.Source http//www.999today.com/homeandgarden/news/story/1804.htmlInvestment in International MarketInternational growth forms a key element of Tescos four-part strategy and the business currently trades in 12 countries outside the UK, mainly in Asia and Central Europe. Over half of Tescos selling space is now ou tside the UK.Sourcehttp//www.tescocorporate.com/page.aspx? investerid=14163CB2412F41B1BD7765AC8DBE49EBTotal international sales grew by 5.3% to 11.0 billion. On a comparable 52-week basis, sales increased by 17.9% at actual rates. International contributed 564 million to trading profit, up 10.8% at actual rates (up 18.0% on a comparable 52-week basis). (Annual Report)The US represents the biggest job for Tesco expansion in international world.The fact that the USA has been such an embarrassing graveyard for almost every British retailer that has opened there merely adds an extra shudder to Tescos plans. J Sainsbury, Marks Spencer and Dixons have all returned from stateside adventures with their tails between their legs.With this in mind Tesco has gone to extraordinary lengths to keep its plans secret. It has also carried out one of the most thorough pieces of market research in corporate history to ensure that its efforts are not lost in translationSource http//www.telegraph.co.uk /money/main.jhtml?xml=/money/2007/06/10/cntesco110.xmlTescos new US convenience store chain is struggling to attract shoppers. If Fresh Easy fails, it will add to the list of UK retail brands unavailing to break into the US and also be very dilative to international returns.ThreatsThreats from RivalsTesco is facing a lot of competition from its local and international rival. It has diversed its business in different products, which increased its competitors so it requires more efforts and attention to deal with the competition and to secure its position in the market.Competition faced in overseas marketsConsistently maintaining the No 1 position in the UK, Sir Terry and Tesco are looking overseas for growth. Over the last decade Sir Terry has led Tesco into Asia and Europe, opening stores in different countries. America is the major item on the table and India is expected to follow. Managing the international business takes up an increasing amount of attention and clear understand ing of political, spending, apparitional and many other factors.Reputation riskTesco is the largest retailer in the UK expectations of the Group are high. Failure to protect the Groups reputation and brand could lead to a loss of trust and confidence. This could result in a celestial latitude in the customerbase and affect the ability to recruit and retain good people. (Annual Accounts)Extension in makes it difficult to manageTescos extension itself is big challenge. The competition commission is enquiring about Tescos land swear holding and in some areas not approval for store development is one example. Tescos diversified its business in different segment which means downfall in one will have impact on other business area as well.Review of 2007 resultsGroup SummaryGroup sales, including VAT, increased by 8.1% to 46.6bn (last year 43.1bn) and by 10.9%on a comparable 52-week basis. At unvaried exchange rates, sales increased by 7.9% and10.8% respectively.Group operating profit rose by 17.7% to 2,648m. Total net Group property profits were 139m, comprising 98m in the UK, a 6m loss in Asia and a 47m profit within Joint Ventures and Associates.Return on capital employedIn April last year, Tesco renewed its freight to increasing their post-tax return on capital employed (ROCE), having exceeded their 2004 aspiration two years early. The strong performance of the business delivered slightly higher ROCE in 2006/07 at 12.6% (last year 12.5%), (Including the one-off benefit from Pensions A-Day, ROCE was 13.6%). This represents good progress and was achieved despite carrying the extra start-up costs and investment in the US and Tesco Direct as well as the desegregation costs and capital employed in their International acquisitions and increased stake in Hymall. This means that ROCE is on track to meet their new target. (Annual Accounts)Whereas, Sainsbury has shown magnificent improvement in their ROCE (2.76% in 2006 and 6.3% in 2007) (refer to Appendix) but stil l has to do a great deal of effort to challenge the market leader in terms of absolute figures.Return on capital shareholders fundThe Groups total shareholder return performance (i.e. share price movements plus dividends reinvested) for the year 2006 and 2007 relative to the FTSE hundred king of companies is 143116 for FEB 06 and 195132 for FEB07. This index has been selected to provide an established and Broad-based comparator group of retail and non-retail companies of similar scale to Tesco, once against which the Groups TSR performance can be flyerd. There has also been a very strong performance in TSR over the last three and five years against a comparator group of our major retail competitors in the UK, Europe and the US.Source http//www.tescocorporate.com/annualreview07/pdf/review/annual_review_and_sfs_2007.pdfGross Profit MarginProfit earned is the sales revenue less cost of goods sold. The relation between them is the gross profit margin, which in terms of percentage sh ows profit make out of sales. Gross profit margin is obtained by dividing gross profit by sales.Tesco Group sales, including VAT, increased by 8.1% to 46.6 billion (2006 43.1 billion) and by 10.9% on a comparable 52-week basis. At constant exchange rates, sales grew by 7.9% and 10.8% respectively. Group profit before tax increased by 18.7% to 2,653 million (2006 2,235 million) and by 20.3% on a comparable 52-week basis. Underlying profit before tax (excluding IAS 32 and IAS 39 and the non-cash elements of IAS 19, which are replaced by the normal cash contributions) increased to 2,545 million, up by 11.8% (13.2% on a comparable 52-week basis Gross Profit Margin is 10.24% which increased by 4.70% compared to Sainsburys Gross Profit Margin of 10.29% which increased by 7.41%. This shows that Tesco has well control on cost cutting and productivity programme and focusing on the sales growth severe to keep the prices at lower margin. While, Sainsburys improvement demonstrates well pursu e of their recover plan in which they acknowledge cost control as well.Asset TurnoverAsset turnover is the relationship between sales and assets i.e. sales per nominal value of Asset. This ratios has dropped from 2.62 for 2006 to 2.58 for the year 2007 indicating slight inefficiency of asset utalisation.(Appendix B) compared to Sainsburys which improve from 2.02 to 2.50(Appendix C).Tescos figure has decreased but it still is better than Sainsburys that shows Tesco is utilizing its assets more efficiently.Gearing and LiquidityGearing represents long-term debt in relation to shareholders funds. A gearing ratio of about one-third is usually regarded as acceptable for a company, suggesting that it is not over-reliant on external borrowing. A figure in excess of this indicates a higher-geared company. High gearing ratios are most suitable to those companies with steady and reliable profits, whose earnings are sufficient to cover interest payments and where total dividends are low. Howe ver, wide fluctuations in profitability would make a highly geared company extremely vulnerable t market conditionsSource http//vig.pearsoned.co.uk/catalog/uploads/Griffiths_C02.pdfHigh gearing indicates a high proportion of debt in the capital structure. High-geared companies are deemed to be financially risky, because interest payments have to be met, regardless of profitability.Tescos gearing ratio has increased slightly from 60.39 to 62.87, on the other hand Sainsburys gearing ratio decreased by 44.74%. But with a high interest cover good current and forecast profitability and low level of net debt the high gearing ratio should not present Tesco with any problems. (See Appendixes)A combination of retained profits, long and medium-term debt, capital market issues, commercial paper, bank borrowings and leases finance Tescos operations. The objective is to ensure continuity of funding. The policy is to smooth the debt due date profile, to arrange funding ahead of requirements and to maintain sufficient undrawn committed bank facilities, and a strong credit rating so that maturing debt may be refinanced as it falls due.The Groups long-term credit rating remained stable during the year. Moodys and A+ by Standard and Poors rate Tesco Group A1. New funding of 1.8bn was arranged during the year, including a net 0.5bn from property joint ventures and 1.2bn from medium-term notes (MTNs). At the year-end, net debt was 5.0bn (last year 4.5bn) and the average debt maturity was nine years (last year six years). (Annual Accounts 2007) present-day(prenominal) ratioThis ratio shows indicates the companys ability to meet its short-term obligations. The higher the ratio, the more liquid the company is. Current ratio is proportion between current assets and current liabilities. If the proportion between current assets and current liabilities is more than 2 then that company is generally considered to have good short-term financial strength. If current liabilities exceed curr ent assets, then the company may have problems meeting its short-term obligations.The current ratios of Sainsburys group are better than that of Tesco group. For 2007, the ratios were .561 and .711 for Tesco and Sainsburys respectively. (See Appendix)This means there is less assurance that Current liabilities of Tesco could be paid quickly comparative to Sainsbury. But the other point of concern is that Tescos has shown an improvement by 7.69% whereas Sainsburys current ratio shows a decline of 11.25% that again indicates not very effective management and utilization of assets as compared to Tesco. concern coverIt states how many times a company can repay the interest from the current earning. The higher the cover, the safer the company is from liquidity crisis.Tesco improved its interest cover from 9.48 to 12.32(Appendix B) whereas Sainsburys improved its interest cover from 1.47 to 4.76(Appendix C).Tescos increased profits have improved its interest cover. Tesco is a highly geared company but it delivers great return to investors so there is no threat that it would not be able to cover its interest cost.LIMITATIONS specific to the ratio analysisThere are limitations to the usability and comprehensibility of these rations and the analysis made from them. Almost all of these ratios are inter-linked and interdependent and shows fluctuations if a few variables are gauged. Also, there are more than one agreed criteria for the choice of nominators and denominators so care must be taken while considering them in absolute figures (e.g., as more than 2 Quick ratio is considered excellent) and for comparisons between two or more entities.A better asset turnover ratio might as well be because of the under valuation of assets and a decline might as well be because of acquisition of assets of increase in the market value f the assets as most of the assets held by retailers as Tesco and Sainsburys are in the real estate.Current ratio has been defined good or worse depends on industries as well, as debt is cheaper than equity Industry such as retail where Tesco has working capital days in negative (i.e. they have a chance to earn interest on the sales they have made as their suppliers finance those sales.) the more a company is geared (but within the safety margin) the better will its performance be, as the interest cover is evenhandedly handsome.Growth and investmentsTescos has been investing in new markets overseas, seeking out new opportunities for growth and ways of generating long-term returns for shareholders. Tesco is also investing in diversified nature of business like investment in software properties and recently investment in gardening are proof of well pursuit of its diversifying strategy.Group non-food sales have grown to 10.4bn, including 2.9bn in International. Sales growth, in the UK alone, was11.6% in the year, with total non-food sales increasing to7.6bn (included in reported UK sales). In non-food product which shown growth incl ude clothing sale grew by 16%, health beauty sales increased by 9%, toys and support sale rose by 35%, stationery and DIY both sales grew up by 23%, consumer electronic sales rose by 35%. (Annual Accounts)Investors OutlookThe EPS is primarily a measure of profitability and states earnings/profit earned for one share and so an increasing EPS is seen as a good sign.Tescos Basic earning per share from continuing operations has raised from 20.20p to 23.61p compared to Sainsburys Basic earning per share which has raised from 3.8p to 19.2p which is massive. (See Appendix)Tescos returns are well ahead from Sainsburys basic earning per share thats why Tescos share price gives better return to shareholder. map below shows the comparison between the share price of Tesco against one of its competitors namely Sainsbury and against the FTSE 100 index over two years. Tesco has performed slightly better than the FTSE 100 index over the second half of the year but Sainsburys performance is much bet ter which has been amplified by the rumor of takeover bid of Sainsburys by Delta two and Qatar and also the role played by the successful Sainsburys recovery plan.Total shareholder return (TSR), which is measured as the percentage increase in the share price, plus the dividend paid, has increased by 36% in 2006/07, its largest value increase for ten years and the fastest percentage growth rate for three years. Over the last three years, TSR has grown 87% compared with the FTSE100 average of 58%. Over five years, the increase has been 102% compared to the increase in the average for FTSE100 companies of just 50%. (Annual Account)ConclusionTescos modish results show that it has been another successful year for Tesco.The most encouraging thing about Tescos performance is that Tescos coped well with the head-wind from recovering competitors, rising costs and tough conditions in some markets. Tescos come through in good shape and have done it by staying focused on doing the right thing s for Tescos customers and at the same time investing for future growth. (Annual Accounts)Tesco chief executive Terry Leahy verbalize, Overall sales growth has strengthened in the period, with international delivering a particularly strong performance, and the UK has again done well, with good growth in our core food categories.Its non-food offering Tesco Direct, and the groups online grocery operation tesco.com had both delivered very strong sales in the quarter, said the company.Sourcehttp//icwales.icnetwork.co.uk/business-in-wales/business-news/2007/12/05/good-progress-for-tesco-in-autumn-sales-91466-20203900/Tesco has laid solid foundations for future growth. Tesco is always looking to improve the way the owners of the business benefit from that growth.It has also been a good year for shareholders return. Of course, Tescos shares are higher in buoyant markets but Tescos is also doing more to contribute. Dividends are up to approaching 800 million, driven by last years change in policy, combined with the effect of our rising flow of property profits now ranking for dividend. Tescos also bought back and cancelled almost 470 million price of our own shares so far.(Annual Accounts)Tescos financial performance in 2006/07 was excellent. Turnover of 46,611m grew by 8.1%, diluted earning per share of 23.31m grew up by 17% and dividend per share 9.64 increased by 11.7%, putting Tesco in top place in retail industry in the UK. (Appendix A)Tescos position holds strong position in UK and now Tesco is concentrating towards International markets for improved return for its shareholders and to establish its business and loyalty of customers around the world. Tescos produced very good performace particularly against the background of political uncertainty and economic problems in three of its markets Hungary, Thailand and southern Korea. This demonstrates that International now has the size and momentum to get through these things and still deliver.Tescos got much str onger in Central Europe, through rapid growth in new space and acquisition. In Asia as well, having done the groundwork in a couple of our newer markets, weve used acquisition to get on faster.(Annual Accounts)The biggest challenge in international market is its fresh move in the US market. If Tescos get fails in US it would be a disaster for their strategic planner.According to CNN, Tescos is aiming to open 200 Fresh Easy outlets by February 2009, with projections suggesting that annual sales could hit US$4bn,But Michael J Dennis, a senior research analyst with Minneapolis investment bank Piper Jeffrey, described sales at the chain to date as a disaster.Based on interviews with suppliers, he said sales were running at about US$60,000 a week 70% down on targeted weekly revenues of