Retail Sector in the United Kingdom - Essay Example

Retail Sector in the United Kingdom Executive Summary The investor should hold onto the shares of J Sainsbury PLC for the consistent small returns and optimal future long term returns. Sainsbury has shown a remarkable revenue growth as well as pre-tax profits in 2010 even at the time of recession and spending cuts. The in depth financial analyses and the share price movements illustrate that the company has sound liquidity ratios, better management efficiency as well as higher investment returns as compared to the Morrison. At the same time, the company lags behind in the margins as compared to the market leaders and therefore, shows a huge potential for growth in the coming years. Sainsbury has shown that it has a strong management as well as capacity to increase the efficiency and the turnover as compared to its rival Morrison. The investor companies also believe that Sainsbury share are undervalued and have the potential to show huge growth and reflect on the true price in the long run. Consequently, the economic conditions of the country are heeling very slowly. The recent spending cuts by the government will impact the non-food sector which will show weak growth in the next few months. But the food sector will still show growth and therefore, Sainsbury and Morrison will still show positive growths. Introduction The report focuses on the Retail Sector in the United Kingdom: with the major emphasis on the financial analyses of Sainsbury and Morrison. The aim of this report is to provide the investor with the best company for the investment with sound argument and logical analyses. The report will briefly analyze the retail sector in the United Kingdom as well as the growth prospects in the future. This will be followed by the financial and share price analyses of the two chosen options: Sainsbury and Morrison. It also provides the recent economic and company announcements that are likely to be reflected on the stock investments of the FTSE. Finally, the report provides a concluding statement on the basis of the investor statements and financial analyses. The report takes into consideration the 2010 annual reports of the two companies including the Chairman’s Statement. It also briefly goes into statements of the other market leaders: Tesco and Marks and Spencer, if and when needed. The report also takes into account the BSR-KPMG research on retail spending; also the relevant articles in the Reuters and Independent as well as the Bloomberg analyses. The investor is looking for fairly small consistent returns in the short run but looks forwards to huge capital gains in the long run. He is risk prone and is not affected by small deviation on the exchange. He already owns Sainsbury shares worth GBP 25,000. Overview of the Retail Sector in the United Kingdom The Retail Sector in the United Kingdom has been flourishing at a rapid pace in the last decade. The same sector is still believed to expand in the next five years by about 15 percent. (Invest in UK, 2010) The retail sector is expected to show growth in all the categories and allied sub-divisions: electrical, groceries, clothing and footwear, cosmetics, home-ware, floor coverings and furniture, gardening as well as e-retail. (Tesco, 2010) This rapid growth even in the face of small recessionary periods highlights the importance of the sector. The retail sector in the United Kingdom accounts for 11 percent of the total workforce in the country: employing around 3 million people and contributes to 8 percent of the country’s GDP. The annual year 2011 is expected to see annual sales of the sector to rise to 312 billion. (Invest in UK, 2010) The TNS World Panel grocery market share report as of 29th April 2009 state that the three big players of the retail industry in the United Kingdom, with respect to market share, are: Tesco with 31 percent ASDA with 17 percent Sainsbury with 16 percent 1 The investment companies and the financial gurus rate the Retail Sector in the United Kingdom as a heaven and a safe course to earning consistent returns. With an expected 15 percent growth in the respective sector, the investors look forward to strong future. Despite the minor setbacks in the spending budgets by the government, the economy is heeling itself and the investors expect the country to increase their spending in the coming fiscal year. Sainsbury J Sainsbury, with a market share of 16 percent, is ranked as the third largest retailer in the United Kingdom. The company provides service to 19 million a week through its 890 different types of stores around the country. It provides its clientele with an enormous assortment of products ranging from grocery to appliances, tires to gardening, clothing to cosmetics as well as furniture. (Sainsbury, 2010) The company is also investing huge amounts of money, estimated to be £40 million, into the sustainable farming for the next three years. This will allow these farmers to produce more crops in the coming years. "The dedicated Sainsbury's dairy development group is a successful example of how retailers can help support British farmers and we hope this will be echoed across all sectors to deliver what is needed to ensure a thriving food and farming industry2". The company made a huge revenue of over for £20 billion in 2010 displaying an increase of 5.6 percent as compared to the last year. (Sainsbury, 2010) The company has performed exceptionally well and continues to provide healthy and fresh food. Sainsbury believes in achieving the zenith of success by taking innovation and quality to new levels. Morrison Morrison, with a market share of 12 percent, is a leading store and a member of ‘Big Four’ supermarkets in the United Kingdom. The company provides services through its 425 different types of stores to the people to over 10 million customers in a week. It specializes in the food category with the vision: “Food Specialist for everyone”. At the same time, it also deals in the homecare, clothing and electronics. (Morrison, 2010) Morrison has recorded annual sales amounted to an excess of £15 billion in 2010, showing an strong increase of 6 percent as compared to 2009. It plans to utilize its strong balance sheet position to acquire new spaces, new technology and new manufacturing capabilities while providing the customer with the best quality service and food. The company is en route to achieve its vision and exceed the levels. (Morrison, 2010) Other Major Retailers: Tesco, Marks & Spencer, ASDA and Booker Tesco is global retailer based in United Kingdom: ranked as the third largest retailer with respect to revenues and second largest with respect to profits. It currently leads the UK retailing market with market share of 31 percent and annual revenues crossing £2 billion. It shows rapid growth each year and proves to be a strong competitor to Sainsbury and Morrison with the same product line. (Tesco, 2010) Marks & Spencer is another global chain based in the UK with the largest clothing market in the country. It is a high premium store that offers a variety of products under one roof. It is researched that over 21 million people visit Marks & Spencer store each week. The company is now building its way into the food market and will provide a tough competition in the future. (Marks & Spencer, 2010) ASDA is the second largest retailer in the United Kingdom with a market share of 17 percent. It is basically a subsidiary of Wal-Mart with an annual operating income of £638 million. The company deals in grocery, electronics and financial services and has a huge popularity amongst the citizens due to its famous promotion campaigns. (ASDA, 2010) Booker is the largest wholesale store with respect to food in the country with annual revenues crossing £3 billion. The company provides services to a large number of people with its 18,000 product assortment. It received the “Green wholesaler of the year” award in 2010 which has raised its equity amongst the countrymen. (Booker, 2010) Therefore, these are some of the strong competitors to Sainsbury and Morrison playing in the same field and catering with the same product line. Financial Comparison between Sainsbury and Morrison The two companies have been analyzed for the annual year 2009-10 from the liquidity, profitability, efficiency and investment point of views. Simultaneously, these companies have also been evaluated against the retails sector benchmarks in the United Kingdom. Liquidity Analysis Ratios Liquidity Ratios   Sainsbury Morrison Current Ratio 0.64 0.51 Quick Ratio 0.39 0.24 The company’s ability to pay off the short term obligations is depicted by the current ratio. It represents the safety net for the creditors of the respective company. As compared to the retail sector benchmark, both the companies have weak liquidity position. (Bloomberg, 2010) Sainsbury is in a slightly better position as compared to its rival Morrison. It has 64p for every £1 of the current liabilities. In-depth analysis show that Morrison holds a greater percentage of its current assets in the form of inventories and falls to a very weak liquidity position. On the other hand, Sainsbury holds a lower percentage of stock in its warehouses. The acid test or the quick ratio is a better indicator of the liquidity position. Sainsbury holds 39p as compared to Morrison holding 24p for every £1 of the current liabilities. Profitability Analysis Ratios Profitability Ratios   Sainsbury Morrison Gross Profit Margin 5.42% 6.89% Net Income Margin 2.93% 3.88% ROE 11.78% 12.08% ROA 5.39% 6.83% Quality of Income (In £ Mn) 585 598 The gross profit margin evaluates the efficiency of the management as well as production facilities and is an important measure from an investment point of view. As compared to the retail sector benchmark, both the companies have a very low gross profit margin. (Bloomberg, 2010) Morrison has a better gross margin as compared to Sainsbury’s gross margin. The former contributes 7p to the gross profit for every £1 of sale that is made. This profit is used to cover the administrative and the operating expenses incurred by the company. Compared to these companies, Marks & Spencer, a strong rival, has a gross margin of 36 percent and leads the retail sector. (Bloomberg, 2010) This illustrates the weak position of the two companies in the management and production efficiencies. The net income margin evaluates the ability of the company to control its indirect expenses. Morrison contributes around 4p to the net income for every £1 of sale that is made by it as compared to Sainsbury contributing 3p to the net income only. As compared to the industry average, both the companies rank average with respect to the net margin. (Bloomberg, 2010) The return on equity determines the profit earned by the equity holders in the company. It represents efficiency of the utilization of the owners’ money by the management. Both the companies have some of the best returns as compared to the retail industry in the United Kingdom. (Bloomberg, 2010) Sainsbury and Morrison both provide around for every £1 invested by the respective companies’ equity holders. The return on asset is another measure that appraises the optimal utilization of the assets in the company. Both the companies have some of the best returns as compared to the retail industry (Bloomberg, 2010) Morrison provides a higher return of 6.8p for every £1 invested by the company’s equity holders and creditors as compared to 5.4p provided by Sainsbury. This signifies that Morrison uses its assets more efficiently. The quality of income shows that both the companies are comparable with the net income just over £580 million. Compared to sector’s leader Tesco with the net profit amounting to over £2 billion, these companies have a long way to go to become the market leaders. Efficiency Ratios Ratios Activity Ratios   Sainsbury Morrison Account Receivables Turnover 92.90 76.70 Inventory Turnover 26.90 24.90 Total Assets Turnover 1.80 1.80 The account receivables turnover represents the number of times account receivables are collected from the debtors of the companies. Higher efficiency and tight credit policy is represented by a high ratio whereas a low ratio signifies difficulties with the collections. Both the companies have an above average ratio as compared to retail sector benchmarks. (Bloomberg, 2010) Sainsbury and Morrison both show a stricter credit policy with the collections done every 4 days and 5 days respectively. The inventory turnover identifies the efficiency in the inventory control in the company. Both the companies have an above average turnover as compared to the retail industry benchmarks. (Bloomberg, 2010) Sainsbury ranks one of the best in the retail sector. The company is able to sell its stock 27 times in a year as compared to Morrison’s ability to sell 25 times in the same period. It can also be said that Sainsbury holds the stock in her hands for just 14 days. Therefore, Sainsbury outclasses the other rivals in the stock management and controls. The total assets turnover signifies the efficiency of the company in utilizing the assets of the company in generating revenues. Both the companies generate £1.8 for every £1 that is invested in the assets. Compared to the industry giants, they rank average with respect to the optimal utilization of the assets. Booker, a retail rival in the United Kingdom, generates £ 4.1 for every £1 invested in the assets and has been ranked as one of the best. (Bloomberg, 2010) Investment Ratios Ratios Investment Ratios   Sainsbury Morrison EPS-Basic 32.1 22.8 EPS-Diluted 31.6 22.4 Price to Earnings 11.3 11.9 Dividend Yield 4.45% 3.42% The earnings per share signify the return earned on each issued share of the company. Sainsbury provides a better return to the investors in the form of earnings as well as dividends. An investor earned 32p on every share as compared to 23p on every share of Morrison. At the same time, Sainsbury has a best price to earnings multiple compared to the rival. The investors will be paying only £11.3 for £1 of Sainsbury’s earnings. Share Price Movements Figure 1 shows the share price movements of the two stocks, Sainsbury and Morrison, on the London Stock Exchange for a period of one year effective from 21st March 2010. Figure 1: Share Price Movement Sainsbury Morrison STDEV 23.5 12.4 High 395.0 306.3 Low 312.9 257.6 Range 82.1 48.7 Figure 1 shows that the price of Sainsbury share has risen more than that of Morrison. Further analysis into the price movements shows that the Sainsbury share has been more volatile as compared to Morrison share on the London exchange. Sainsbury has shown a wider range and a higher deviation in the last one year effective from 21st March 2010 depicting a risky investment but with a higher return. The graph also shows that the Sainsbury share price has shown a stronger growth in comparison to the share price of Morrison giving the Sainsbury share holders a huge capital gain. Recent Economic and Company Announcements The changes in the economy, the investor’s comments and the company actions all affect the shares on the exchange. With the news around the corner that the government plans to cut the spending as well as the steady inflation has raised the concerns of the retail industry. The inflation will entice the shoppers on controlled spending in the market. (London Evening Standard, 2010) "The majority of retailers, including Marks and Spencer's, continue to show concern for 2011 citing the rise in VAT, the impact of the government spending cuts, and higher commodity prices3" Another news analysis in the Independent mentioned that the consumers are cutting on their expenditures due to the increasing fuel prices, uncertainty over jobs and tax augments. This analysis is also supported by a survey conducted by BRC-KPMG which concluded that non-food retailers saw weak and falling sales in the ongoing year. At the same time, the big ticket items were hit the most by the reined consumer spending. The food items showed strong growth even in these circumstances. It is also believed that the food retailers will show strong growth prospects. (Thompson, 2011) "The suspicion is that consumers will be very cautious in their spending over the coming months in the face of serious headwinds. Given that consumer spending accounts for some 65 per cent of GDP, this is a serious concern for growth prospects4." At the same time, the recent speculation in the market that the Qatari Investment Authority (QIA) is spending money to buy the Sainsbury shares to virtually takeover the company. This speculation has caused a rise in the share price and is expected to show more growth. (Reuters, 2010) At the same time, the investors believe that the Sainsbury shares are undervalued and will show a strong growth in the future. “The retailer appears to be undervalued. He added that Sainsbury's market capitalization is £6.4bn and yet its freehold property is likely to be worth £10bn or more5.” The company also has a huge potential to increase its gross margin which is certainly lagging behind the market leaders in the industry. (Hall, 2010) Morrison has announced to buy back shares worth GBP1 billion over the next two years and plans to invest in an American online grocer for a 10 percent stake. This will allow the company to learn more the internet grocery business and then utilize the opportunity in the United Kingdom market. The internet retail business is certainly on the rise and is expected show strong prospects in the future. (NASDAQ, 2011) “The company said it will buy back GBP1 billion in shares over the next two years and committed to double-digit annual dividend growth as it raised its full year dividend 17% to 9.6p.6” Conclusion The retail sector in the United Kingdom is ranked by the investors as the safest heaven in the financial market. The financial gurus believe that the sector will show strong positive growth in the coming years and broaden the revenue base of the respective companies. The financial, the share price and the recent economic happenings illustrate that Sainsbury is a safe haven retail investment in the country that depicts increasing revenues, profits and consistent returns to the investors. Sainsbury has shown a strong growth in its price trend over the last year along with a higher dividend payout ratio as well. The company has sound liquidity ratios, better management efficiency as well as higher investment returns as compared to the Morrison. At the same time, the company lags behind in the margins as compared to the market leaders and therefore, shows a huge potential for growth in the coming years. Sainsbury also is investing billions into the eco plans and farming that are likely to give the company the necessary boost as well as put the company in the driving seat in the long run. The investors also believe that the Sainsbury shares are underpriced and likely to jump in the company years depicting a huge potential for long term investment returns. “UK supermarkets look reasonably priced and shares in J Sainsbury in particular have been left behind by the market and still represent good value for money with a decent dividend yield of 4.14%7” BIBLIOGRAPHY (2010) Retail. [online] Available from: [Accessed on Mar 21st, 2011 Bloomberg Businessweek. (2011). Morrison PLC. [online] Available from: [Accessed on Mar 21st, 2011] Bloomberg Businessweek. (2011) Sainsbury (J) PLC. [online] Available from: [Accessed on Mar 21st, 2011] Bringham, E. F. Houston, J. F. (2008) Fundamentals of Financial Management. Cengage Learning. Gordon, K. (2011) Morrison’s In GBP1 Billion Share Buyback, Invests In US Online Grocer. [online] Available from: [Accessed on Mar 24nd, 2011] J Sainsbury PLC. (2011) Company Overview. [online] Available from: [Accessed on Mar 21st, 2011] Just Food (2010) UK: Sainsbury's extends sustainable farming investment. [online] Available from: [Accessed on Mar 21st, 2011] London Evening Standard (2010). Spending cuts 'will hit pace of UK's economic growth'. [online] Available from: http://www.thisislondon.co.uk/standard-business/article-23880791-spending-cuts-will-hit-pace-of-uks-economic-growth.do [Accessed on Mar 22nd, 2011] Morrison PLC. (2011) Company History. [online] Available from: [Accessed on Mar 21st, 2011] Morrison PLC. (2010) Annual Report & Financial Statements 2010. [online] Available from: [Accessed on Mar 21st, 2011] Reuters. (2010) Sainsbury shares rise on renewed Qatari bid talk. [online] Available from: [Accessed on Mar 22nd, 2011] Sainsbury PLC. (2010) Annual Report & Financial Statements 2010. [online] Available from: [Accessed on Mar 21st, 2011] Warren, C. S. Reeve, J. M. (2006) Financial and Managerial Accounting. Cengage Learning Read More