FINANCIAL ANALYSIS OF THE SAINSBURY
EXECUTIVE SUMMARY
- Sainsbury, one of the top retailers of UK, has been analyzed in this report. This report analyzes the business model of the company.
- The report analyzes the income statement of the company over the last five years. The financial statements of the company analyzed are from the years 2008 to 2012. These statements have revealed that the performance of the company has been improving and the sales of the company are growing at an average growth rate of 5.73%.
- Cash flow statements of the company of the last five years are presented and these statements are analyzed in this report. The cash flows of the company have improved particularly in the last two years. The company is also investing a good portion of cash flows in investment activities. Operational activities are yielding good and positive results.
- Tesco is the market leader of retail industry in UK. Sainsbury is ranked as the third company in terms of market share. The financial performance of Tesco is better than Sainsbury. However, the performance of Sainsbury is better than the overall performance of retail industry of UK. Sainsbury was able to maintain its profit margin even during recessionary periods when Tesco has reported losses.
CRITICAL EXPLANATION OF BUSINESS MODEL AND LOCATION WITHIN MARKET
Business model of Sainsbury
Sainsbury founded in 1869 as a small retail business. The company has over the years developed as one of the largest retailers in UK industry. The development of the model and the accomplishment of the long term goals such as quality, value and services to the customers have enabled the business in acquiring the competitive edge for the organization. Customer satisfaction and continuing good performance of the business have played important role in the success of the company.
The business strategy of Sainsbury depends on acquiring excellence and emphasizing on the values which are different from those of the competitors. The growth in the customer retention and scope of the business can be acquired by creating the property value within the society. Besides this developing the new business, complementary channels and services, compelling product range and great food are the attractions using which the organization aims at accomplishing both the goals.
(Sainsbury a, 2014)
The existing workforce of the organization exceeds 157,000 employees. The weekly transactions which take place at Sainsbury amounts to 23 million customers and the number are growing as the time passes. The total stores owned by Sainsbury are 1106 from which 583 are supermarkets and 523 are convenience stores (Sainsbury, 2013). These details show the position of Sainsbury and its market strategy.
Business model of Tesco
Operating in the retail industry segment the business operates by catering the needs of the customers and making the consumer goods available to them. The secret behind the growth of Tesco is its growth structure. The policies of Tesco were stably applicable until the global economic recession disrupted the existing model of the organization due to which the managers had to change the business model. The actions by the strategic managers were to rectify the existing week comings of the organization and regain the positions which were held by the organization in the previous years. The sole objective of the strategies is to stabilize the position of the organization and make the shopping experience memorable for the shoppers.
Tesco’s business model is dependent on the factors such as people, creating value, responsible actions, innovating and building the brand name of the organization. This maximizes the potential of the organization and strengthens the sustainability. The core objectives of the management as assessed from the annual report shows strengthening of Tesco brand, uses the related technology and the social media for the development and progress of the business at a global level.
Sainsbury’s position and standing in the industry
The overall position of Sainsbury is very stable in the industry. The position of the industry is improving and the company is on the verge of acquiring all the growth outcomes. Sales of the company for the year 2013 have increased by a mere 4.3%. Like for like sales figure has increased by 1.8% in 2013 as compared to the previous year. Operating profit of the business was recorded at £829 million and the profit before tax of the organization was recorded at £756 million. The full year’s dividend per share for the organization was recorded at 16.7p (Sainsbury, 2013).
(Sainsbury, 2013)
5- YEARS SUMMARY OF INCOME STATEMENT AND METRICS
(Sainsbury, 2013)
(Sainsbury, 2013)
EXPLANATION OF KEY NUMERICAL ISSUES PERTAINING TO THE INCOME STATEMENT
Revenues of Sainsbury have been growing at a good rate of around 6% to 5.57%. The average growth rate of Sainsbury is 5.73% in the last five years.
Gross profit margin of Sainsbury is approximately 5.5% in the last five years. However it has declined slightly in 2012 and 2010 to 5.43% and 5.42% respectively. The annual operating margin excluding expectation items has an average of 3.61%. Thus it shows the amount of profits that the company is generating from its operational activities. However, there has been an increasing trend found as it was as low as 2.97% in 2008 which has increased to 3.92% in 2012. Moreover, the annual operating profit margin after exceptional items has an average of 3.26% in the last five years. However, this ratio is showing fluctuations.
Interest coverage ratio shows the ability of the company to pay off its interest expense. This ratio of the company is showing improvements. The average ratio for the last 5 years is 5.41. Interest coverage ratio was 4.015 in 2008 and this has increased to 7.336 in 2011 and then it slumped to 6.33 in 2012.
Net profit margin of Sainsbury has an average of 2.4%. This ratio decreased in 2009 but then it increased in 2010 and 2011. However in 2012, the net profit margin declined from 3.03% to 2.68%.
CRITICAL ANALYSIS OF REVENUE USING MATHEMATICAL MODE L
Sainsbury has been showing a constant increase in terms of revenues. Moreover, the profitability ratios of the company are also showing an increasing trend. Sainsbury was not as much affected by recession as other companies in the industry such as Tesco. Therefore there was only a slight decline in the sales and profitability of Sainsbury than other firms in the retail industry. However, as the economic situation started to improve, many had predicted that the sales of retail industry would further grow if the firms are able to offer quality customer satisfaction and quality customer experience.
(IGD, 2013)
An average annual growth rate of Sainsbury in the last five years is 5.73% which reflects the retailer has focused a lot on providing exceptional customer services and making the shopping experience wonderful for the consumers. The business model of Sainsbury is highly focused on different aspects as presented in the first figure of the report.
Developing new business is one of the important aspects of the strategy and business model of Sainsbury. The workforce of the company has exceeded 157,000 employees. Growing space and creating property value is the other strategy of the business model. The number of stores of Sainsbury is increasing and now the total number of stores has increased to1106. This year 14 supermarkets and 87 convenience stores have been added. Moreover, the company is investing in different sectors to continue its growth and to further enhance its profits (Sainsbury b, 2014)
Complementary services and channels is another important area in which Sainsbury is focusing. Because of focusing on this aspect, the Sainsbury’s Bank has successfully able to earn profits in fifth consecutive years (Sainsbury c, 2014). Compelling general merchandize and clothing is the other area being focused by the management of Sainsbury. This year, General Merchandize sales have exceeded £1 billion in the history (Sainsbury d, 2014). Great food is the other strategy adapted by the company. The company focuses on fresh, quality and valuable food (Sainsbury e, 2014)
The revenue of the company has been growing at an annual rate of 5.73%. Thus it reflects that the business model of the company is not only improving the customers but also the financial performance of the company.
CRITICAL ANALYSIS OF OTHER ASPECTS OF THE INCOME STATEMENT USING RELEVANT MARGINS
Performance of Sainsbury has been showing improvements over the past few years. The profitability and revenue are growing for the company. However there are concerns as the profit margin of the company have shown fluctuations in the past five years. Thus it is showing that the revenues of the company have been showing an increasing trend. Thus it is a positive sign for the company however the alarming sign is that the ratio of increase in revenues is not the same as the increase in the profits of the company. Because of this reason the net profit margin of the company is fluctuating.
There are different factors that are influencing the performance of the company. The increasing competition is one of the major factors that influence the performance of the company. The market is led by Tesco and followed by ASDA. Sainsbury is considered as the third firm in the market in terms of market share. Thus competition is one of the major factors that is influencing the overall sales and profitability of the company. The following diagram represents the market share of the company and other firms in the retail industry of UK
(Mortimer , 2013)
In order to meet the competition and attract more customers, Sainsbury has claimed that the prices offered at Sainsbury are not more than top two retailers in UK. Moreover, coupons have been issued for discounts as well as to convert customers into long term customers.
Recession has also impact the consumer purchasing power and this influenced the overall economic condition. The sales of Sainsbury were not influenced by recession as much as the sales of other companies like Tesco. Tesco reported negative net income during 2010 and 2011 whereas Sainsbury was able to maintain its profitability. However, as the economy is recovering and showing signs of growth and improvement, this would further help the firms in the retail industry to grow. Economic indicators of UK have been presented below showing the gross earnings, household income and CPI along with consumer confidence.
(Sainsbury, 2013)
Consumer spending was declined to negative growth as presented in the graph however it is now improving which would further help Sainsbury to grow and improve its sales and profitability:
(Sainsbury, 2013)
Although the economic situation will be challenging in this year as stated by John Rogers, CFO at Sainsbury, however still Sainsbury would continue to grow as it has been in the last few years.
CRITICAL COMPARISON WITH THE COMPETITORS
The retail industry is highly competitive. The performance of the company is analyzed against average performance of the retail industry in the following image. Profitability of the company has been better than the industry average. Thus it is showing that the company has performed better than the overall industry. Sainsbury is the third in company in the retail industry in terms of market share and it is also reflected in the financial performance of the company.
(Business week, 2014)
The financial performance of Sainsbury is analyzed against the performance of Tesco. As the size of Tesco and Sainsbury is different, therefore financial ratios are used to analyze the performance of the two companies. The following table shows profitability ratios of the two companies:
Tesco is the market leader and it is also reflected after analyzing the financial ratios of the company. The net profit margin of Tesco is 5.26 whereas the net profit margin of Sainsbury is only 2.44. In 2013, the net profit margin of Tesco was 9.6% whereas Sainsbury recorded only 2.63%. Moreover, return on assets of Sainsbury is 4.59% and Tesco recorded return on assets of 5.5%. Return on capital of Tesco is higher than Sainsbury. However, return on equity of Sainsbury is better than Tesco. Sainsbury reported return on equity of 9.96% whereas Tesco had a return on equity of only 7.76%.
So it can be said that the company’s performance has been better than the overall performance of the industry. However Tesco, the market leader has performed better than Sainsbury.
SUMMARY CASH FLOWS
CRITICAL EXPLANATION AND ANALYSIS OF CASH FLOWS
The cash flow statements of the company are improving. Cash flow statements are indicating that the performance of the company has improved. The company has been showing an improving trend in the last five years. During the year 2008-2010, the overall performance of the company in terms of cash flows was not satisfactory. However as the overall economic situation improved, this has also improved the cash flow position of the company. The net profit of the company has also been improved in the last 2 years or so and the sales of the company have been improving. Therefore all these factors have helped in improving the position of the company and in improving the cash flows.
Cash from the operational activities have been improving over the last five years as presented in the cash flow statement. The cash of the company is used more in investing activities and this is impacting the overall cash flow statement. Investment in investing activities is helpful in increasing the other income of the company as presented in the income statement. Thus the company is not only earning from its operational activities but from investment activities as well.
References
Business week. (2014). Sainsbury (J) Plc (SBRY:London). Available from http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=SBRY:LN [Accessed January 22, 2014]
IGD. (2013). UK Grocery Retailing. Available from http://www.igd.com/our-expertise/Retail/retail-outlook/3371/UK-Grocery-Retailing/ [Accessed January 22, 2014]
Mortimer, G. (2013). FactCheck: is our grocery market one of the most concentrated in the world?. The Conversation, Available from http://theconversation.com/factcheck-is-our-grocery-market-one-of-the-most-concentrated-in-the-world-16520 [Accessed January 22, 2014]
Sainsbury a. (2014). Business strategy & objectives. Available from http://www.j-sainsbury.co.uk/about-us/business-strategy-objectives/ [Accessed January 22, 2014]
Sainsbury b. (2014). Developing new businesses. Available from http://www.j-sainsbury.co.uk/about-us/business-strategy-objectives/developing-new-businesses/ [Accessed January 22, 2014]
Sainsbury c. (2014). Complementary channels & services. Available from http://www.j-sainsbury.co.uk/about-us/business-strategy-objectives/complementary-channels-services/ [Accessed January 22, 2014]
Sainsbury d. (2014). Compelling general merchandise & clothing. Available from http://www.j-sainsbury.co.uk/about-us/business-strategy-objectives/compelling-general-merchandise-clothing/ [Accessed January 22, 2014]
Sainsbury e. (2014). Great food. Available from http://www.j-sainsbury.co.uk/about-us/business-strategy-objectives/great-food/ [Accessed January 22, 2014]
Sainsbury. (2013). Annual Report. Available from http://www.j-sainsbury.co.uk/media/1616189/sainsburys_ara.pdf [Accessed January 22, 2014]
