TESCO Company Analysis - Case Study Example

Corporate Finance Introduction: History TESCO has its history way-back in 1919 when Jack Cohen sold groceries from a stall in East London Our History”, 2009) The name ‘TESCO’ comprises of the initials ‘TES’ of Mr. T.E. Stockwell, a tea supplier and Jack’s surname ‘CO’. (“Our History”, 2009) In 1929 he opened his fist store in Burnt Oak, Edgware, North London as ‘TESCO’ store. In 1932 TESCO Stores Limited becomes a public limited company. (Our History, 2009) The Guinness Book of World Records enrolls its name as the largest store in Europe. (“Our History”, 2009) Marks & Spencer like TESCO celebrates its 125 glorious years from an ordinary penny bazaar to one of the leading retailers in UK. In 1884 Michael Marks, who was a Russian-born Polish refugee, established a stall at Leeds Kirkgate Market. (“History of Marks and Spencer”, 2009) Later on a partnership with Tom Spencer a cashier from IJ Dewhirst acquired premises and marked the transition of a new business. Both Tom and Spencer died after then. (“History of Marks and Spencer”, 2009) Products TESCO Plc diversified its market operations in varied products and services. It store-types includes, Extra, Superstore, Metro, Express and Tesco.com. Store offerings include food-retail, non-food retail, petrol stations and home-living range. TESCO Personal Finance includes Life Insurance, Pet Insurance, Home Insurance, Travel Insurance, Motor Insurance, Savings Accounts, Personal Loans, Secure Investment Bonds and Online Mortgage Finder. (“Major Products and Services”, 2004, p.12) Telecom services are hoping to make a definite mark in the industry. To get access of the huge customer base worldwide TESCO has been successful in selling a broad range of products via internet through TESCO Direct. (“Annual Report and Financial Statements of Tesco”, 2009) M&S deals in clothing for men and women, entertainment and travel accessories, food and wine products, kids-wear, household goods, home care products, air-care products, electronic equipments, Insurance products, loan schemes, savings & investment products, etc. (“Yours M&S”, 2009) Customers TESCO values its customers. ‘Customer Question Time’ forum and online feedback panel ‘Shopper Thoughts’ helps to provide important feedback from the customer base. (“Annual Report and Financial Statements of Tesco”, 2009, p.32) Latest introduction of feedback technique through mobile phone, e-mail or comment card called ‘Fizzback’ and understanding of customer choices through ‘Clubcard’. (“Annual Report and Financial Statements of Tesco”, 2009, p.32) M&S believe customers would be paying for the value of the good not for the price it bears. It values customers’ experience of quality, value, service, innovation and trust. (“Annual Report and Financial Statements of Marks&Spencer”, 2009, p.17) Market competition TESCO faces tough competition from Wal-Mart, J Sainsbury and Morissons in the retail sector. (Tesco Sees Strong Competition, 2009) Due to tough market competition and decrease in the value of Sterling coupled with inflation TESCO tried to maintain sustainable price for the products. M&S’s performance in recent times have been ordinary compared its competitors Next and Debenhams. (“M&S is losing fight against its competitors after seeing market share fall”, 2009) It has been losing its fight against its competitors as share prices fall drastically. Company’s strengths and weaknesses: Strengths of TESCO TESCO’s core competency lies in bringing out cheaper products at affordable prices. It provides value for the money spent by its customers. Increasing market share, Insurance, tesco online, brand value, reinforcement of UK market leadership are some of its strong points. (“SWOT Analysis”, 2004, p.14) In the field of financial services it has acquired remaining 50% of TESCO Personal Finance from Royal Bank of Scotland which will strengthen its hold in the financial services arena into a full-service retail bank. (“Annual Report and Financial Statements of Tesco”, 2009, p.5) TESCO with its consistent growth strategy has made significant results in its core operations in the UK and subsequently exploit the overseas market. By keeping the prices of products under control and moving towards expansion plans TESCO aims at taking market position in the recession. TESCO’s competitive position has been further strengthened by the work done on pan-European sourcing. (“Annual Report and Financial Statements of Tesco”, 2009, p.13) TESCO world’s 3rd largest grocery retailer in the world, is operating in 14 countries and has an employee strength of 4, 70,000. (“Annual Report and Financial Statements of Tesco”, 2009, p.4) It has 4,331 stores worldwide. (“Annual Report and Financial Statements of Tesco”, p.4, 2009) The company’s international sales strongly grew by 30.6%. (“Annual Report and Financial Statements of Tesco”, 2009, p.32) The group’s UK retail has been sourcing them with the highest revenue around 50% of ₤59.4 billion of sales. (“Annual Report and Financial Statements of Tesco”, 2009, p.9) The company recorded an operating profit of ₤3,206 million during FY09, an increase by 15% (last year ₤2,788 million). (“Annual Report and Financial Statements of Tesco”, 2009, p.32) Weaknesses of TESCO TESCO seems to be too reliant on UK market which is already yielding the highest returns for the company. In UK TESCO’s sales growth is 47% FY09 with sales marked at ₤41.5 billion. (“Annual Report and Financial Statements of Tesco”, 2009, p.9) It cannot be regarded as a weakness as TESCO has been doing quite well in other continents too. Sales growth has decreased by 4% compared to last year’s 25% thus maintaining at 21% FY09. (“Annual Report and Financial Statements of Tesco”, 2009, pp.5-9) One of the significant areas is reduction of debts. As new acquisitions are taking place and they require to service as a result they slip behind their competitors. Moreover TESCO has a vast area of product range and any acquisition can be understandable but too many of those can lessen visible earnings and quality. (“SWOT Analysis”, 2004, p.16) The England-based company has a total debt of ₤9.6 billion ($15.6 billion). (“Tesco’s debt-fueled growth sparks investor backlash”, 2009) Over the recent years, company’s risk tolerance has been gradually increasing. It is a matter of concern that its borrowings accounted to 3.96 times earnings before interest, tax, depreciation and amortization. (“Tesco’s debt-fueled growth sparks investor backlash”, 2009) TESCO’s valuation of stock has declined 13 times (7.5%) compared to its smaller competitor J Sainsbury Plc. (“Tesco’s debt-fueled growth sparks investor backlash”, 2009) J Sainsbury had relatively higher growth that of 12% that accounts to about 19 times. (“Tesco’s debt-fueled growth sparks investor backlash”, 2009) Company’s overseas performance has been moderate. In China and Japan business fell whereas in Eastern Europe business was taken away by economic slowdown. (“Tesco’s debt-fueled growth sparks investor backlash”, 2009) So no major indicator could perform. The retailer entered the US market in 2007 and till date it has 115 outlets. (“Tesco’s debt-fueled growth sparks investor backlash”, 2009) It is in the mood of expanding more but it will take 2-3 years time to get to the level of break-even point. Strengths of Marks & Spencer Marks & Spencer’s strength is its supplier base. It stresses in detail on the supplier control management. The suppliers use modernized and efficient techniques. This has been seen in the merchandise and store layout facilities too. Another most important factor that M&S convince us is its ability to understand customer trends and preferences. It also tries to maintain higher quality standards. (“A Case Study on Marks and Spencer”, 2008) Marks & Spencer is regarded to be able to create opportunities and initiate change due to its committed staff and good management to manage its employees in a professional manner. On the other hand, UK’s leading clothing retailer enjoys a market share of 10.7% marginally down from last year’s 11%. (“Annual Report and Financial Statements of Marks&Spencer”, 2009, p.46) The group totally incurred revenue of ₤9.1 billion (0.4%) and an adjusted group’s profit before tax which is down by 40% yielded ₤604.4 million. (“Annual Report and Financial Statements of Marks&Spencer”, 2009, p.78) M&S as whole recorded an operating profit of ₤870.7 million (“Annual Report and Financial Statements of Marks&Spencer”, 2009, p.109) Weaknesses of Marks & Spencer In M&S buyers often need to make choices on the stocked clothing range that has wide appeal to the public. There it lacks in comparison to its competitors’ collection that could outperform the market. They also lack behind in introducing up to date fashionable apparels in relation to the latest trends and environmental changes. It is more dependent on British suppliers for products often make them less competitive. They are of the view that British suppliers could only provide them with best quality products. As a result competitors using overseas suppliers get cost benefit and can put them on sale at discounts. (“A Case Study on Marks and Spencer”, 2008) There is enough scope for improvement for M&S as they need to go more global and strengthen up its businesses and in spite of the global recession they need to gear up for products that are more affordable to customers. Financial Ratios TESCO Plc’s Performance TESCO Plc Variables Values 2007 2008 2009 Operating Profit 2,648 2,791 3,206 Sales/revenue/operating income 46,611 51,773 59,426 Profit After Tax 988 2,150 1,178 Total Assets 13,636 16,380 24,524 Equity 6,515 7,085 7,657 Currents Assets 4576 6,300 14,045 Current Liabilities 3,576 3,963 3,995 Total Debts 5,024 6,182 9,600 Interest Paid 374 410 562 Inventory 1,931 2,430 2,669 Source: Computed from Tesco Annual Report (2007-09) Marks & Spencer’s Performance Marks & Spencer Variables Values 2007 2008 2009 Operating Profit 1,044 1,211 871 Sales/revenue/operating income 8,588 9,022 9,062 Profit After Tax 659.2 821 507 Total Assets 5,381 7,161 7,258 Equity 1,648 1,964 2,101 Currents Assets 846.4 1,182 1,390 Current Liabilities 1,606 1,989 2,307 Total Debts 1,950 3,078 2,491 Interest Paid 123.4 197.1 88.9 Inventory 416 489 536 Source: Computed from M&S Annual Report (2007-09) TESCO’s performance measured by profitability, leverage, liquidity and efficiency ratios TESCO Plc Ratio Formula Values Comments 2007 2008 2009   Operating Profit Margin Operating Profit/Sales 0.057 0.054 0.054 Tesco has gained a higher profit margin than its previous years. Net Profit Margin Profit After Tax/Sales 0.021 0.042 0.020 Tesco makes 0.02 for every ₤1 of sale. Figures have decreased greatly. Return on Assets Profit After Tax/Total Assets 0.07 0.13 0.05 Tesco generates less than that it generated in 2008 which is comparatively quite higher than 2007 from its assets it deployed. Return on Equity Profit After Tax/Equity 0.152 0.303 0.154 Tesco generates 14.9% (0.154/0.303)*100 from the capital invested by its owners. Return in 2008 was better than its previous year. Debt Ratio Total Debts/Total Assets 0.3 0.4 0.4 Tesco has ₤0.4 in debt for every ₤1 of assets. So it can be said that as it is less than 1 hence the business is in good health. Debt to Equity Ratio Total Debts/Total Equity 0.8 0.9 1.3 Tesco has ₤1.3 of debt and only ₤1 in equity to meet its obligation. It has done enough to mitigate its debt. Interest Coverage Ratio EBIT(Revenue-Operating Income)/Interest Paid 116.9 119.5 100.0 Tescos earnings has been very less compared to last years earnings. 2009 saw the lowest in three years. Current Ratio Current Assets/Current Liabilities 1.3 1.6 3.5 Tesco has ₤3.5 of current assets in order to meet ₤1 of its current liability. It is far better than its previous years. Quick Ratio Current Assets-Inventory/Current Liabilities 0.7 1 2.8 Tesco has ₤2.8 of quick assets to meet ₤1 of its current liability. Thus it is very able to meet its current obligations. Asset Turnover Ratio Total Sales/Total Assets 3.4 3.2 2.4 2009 saw lesser utilisation of or obsolence of fixed assets with lowest compared to 3.4 in 2007 Current Asset Turnover Net Sales/Current Assets 10.2 8.2 4.2 The productivity level of Tesco’s current assets has been comparatively lesser than the previous years. Inventory Turnover Net Sales/Equity 7.2 7.3 7.8 Tesco has been able to do well to rotate its inventory in sales 7.8 times in one fiscal. Source: Computed from Tesco’s Annual Report (2007-09) Marks & Spencer’s performance measured by profitability, leverage, liquidity and efficiency ratios Marks & Spencer Ratio Formula Values Comments 2007 2008 2009   Operating Profit Margin Operating Profit/Sales 0.122 0.134 0.096 The profit margin for M&S has been on the lower side from the previous year. Net Profit Margin Profit After Tax/Sales 0.077 0.091 0.056 M&S makes 0.056 for every ₤1 of sale. Profit margin has been on the lower side. Return on Assets Profit After Tax/Total Assets 0.12 0.11 0.07 M&S made best use of of its assets employed as it has been able to maintain the return on the assets. Return on Equity Profit After Tax/Equity 0.4 0.41 0.24 Tesco generates (0.24/0.41)*100= 58.5% from the capital invested by its owners. 2008 saw the greatest rise in the value over the three years. Debt Ratio Total Debts/Total Assets 0.36 0.43 0.34 M&S has ₤0.34 in debt for every ₤1 of asset. So it can be said that the business is in healthy condition. Debt to Equity Ratio Total Debts/Total Equity 1.2 1.6 1.2 M&S has ₤1.2 of debt and only ₤1 in equity to meet its obligation. It has greatly declined from ₤1.6 last year. Interest Coverage Ratio EBIT(Revenue-Operating Income)/Interest Paid 61.14 39.63 91.14 It shows that M&S has acquired the highest earnings in three years for meeting its interest payments. Earnings 2009 have taken a great leap from 2008. Current Ratio Current Assets/Current Liabilities 0.53 0.59 0.6 M&S has ₤0.60 of current assets in order to meet ₤1 of its current liability. Though it is better than the previous years but low. Quick Ratio Current Assets-Inventory/Current Liabilities 0.27 0.35 0.37 M&S has ₤0.37 of quick assets to meet ₤1 of its current liability. Thus it is enabling to meet its current obligations. Asset Turnover Ratio Total Sales/Total Assets 1.6 1.3 1.2 Utilization of assets to the fullest is not seen as 2009 shows the lowest compared to 2007. Current Asset Turnover Net Sales/Current Assets 10.1 7.6 6.5 The productivity level of M&Ss current assets is the lowest in three years. Inventory Turnover Net Sales/Equity 5.2 4.6 4.3 M&S has been able to rotate its inventory in sales 4.3 times in one fiscal which is lowest in three years. Source: Computed from Marks&Spencer Annual Report (2007-09) Dividend Policies To determine the dividend pay-out ratio of both the companies, dividends declared and the share prices offered by the companies during the last five years is taken. The share prices mentioned denotes the prices existed as on 31st March of the respective years. The graphs of both the companies are represented below: Source: Computed from TESCO Annual Report (2005-09) It is observed that in spite of economic turmoil TESCO have been able to retain a better position in terms of dividend yield. With 11.9% dividend in this fiscal, TESCO have been able to retain a healthy position in the market. Share prices shows a dip in 2009 compared to the previous years, highest rise being in 2007. DPR saw its second highest rise to 0.00552 in the last five years. It implies that TESCO though invested in ventures during this crisis have been able to generate returns for the investors. It has been able to stabilize the returns generated over the years. Source: Computed from M&S Annual Report (2005-09) On the other hand, M&S though their share prices dipped drastically in this fiscal but their dividend returns is proportionately higher. As a result of recessionary effect M&S had reduced dividend by 20.9%. Share prices fell miserably in the market. The company had to temporarily halt their brand promotion activities and extending of market presence internationally. Summary: The report tries to explain the financial condition of two head-to-head companies TESCO and Marks & Spencer. It has tried to focus on the aspects that an investor looks in order to invest in any of these shares. TESCO follows the strategy to diversify its business and has been successful in many occasions in the recent years. In fact statistics shows it has been the market leader outside UK. M&S has also been performing quite well though this fiscal they concentrated mainly to strengthen their core activities of General Merchandise and Food. They had strongly expanded their international presence by improving their product portfolio. Conclusion: TESCO’s organic strategical growth banks mainly on their skills in understanding customer preferences, development of property, supply chain management, development of new product and adapting to needs of the local customers. (“Annual Report and Financial Statements of Tesco”, 2009, p.7) Marks & Spencer had its priorities set. It prepares to retain market position in General Merchandise, improve the performance level in food, strengthen its international base, maximize margins from sale, maintain healthier balance sheet, control costs and uphold their managerial ethics. (“Annual Report and Financial Statements of Marks & Spencer”, 2009, p.5) It also plans to accelerate itself with the fast changing customer choices, optimize its business operations particularly China, India and Southern and Eastern Europe. (“Annual Report and Financial Statements of Marks&Spencer”, 2009, p.9) Investors would be benefited in the long-run on their funds invested in TESCO. With strong management at its end TESCO aims to deliver the best returns to its shareholders. Recommendations: Investors wanting to invest in shares have options of investing in both the companies. Critical examination would show TESCO enjoying a greater competitive advantage over Marks & Spencer in terms of their share prices which is much on the higher side. TESCO’s international market have been growing and yielding good returns though statistics do not support. This is basically due to the global crisis the market has been experiencing off late. Whereas, M&S is yet to go deep into the market, prices of goods are high. In spite of market expansion TESCO have been able to sustain their growth rate with their strong strategic management. Hence, TESCO would be a better option than Marks & Spencer. References 1. “Our History”, 2009. OUR HISTORY. Available at: http://www.tescoplc.com/plc/about_us/tesco_story/# (accessed on: July, 2009). 2. “History of Marks and Spencer”, 2009. MARKS & SPENCER. Available at: http://www.examstutor.com/business/resources/companyprofiles/marksandspencer/history.php (accessed on: July, 2009). 3. “Tesco Sees Strong Competition”, 2009. TESCO SEES STRONG COMPETITION Available at: http://www.marketresearchworld.net/index.php?option=com_content&task=view&id=1129&Itemid=77 (accessed on: July, 2009). 4. “Major Products and Services”, 2004. DATAMONITOR, TESCO Plc. Available at: http://people.exeter.ac.uk/wl203/BEAM011/Materials/Lecture%204/TESCO%20Company%20Profile.pdf (accessed on: July, 2009). 5. “M&S is losing fight against its competitors after seeing market share fall”, 2009. M&S is losing fight against its competitors after seeing market share fall. Available at: http://www.marketingnews.co.uk/2009/04/ms-is-losing-fight-against-its-competitors-after-seeing-market-share-fall/ (accessed on: July, 2009). 6. “Your M&S”, 2009. Shop all Departments. Available at: http://www.marksandspencer.com/Shop-all-Departments/b/44311030 (accessed on: July, 2009). 7. “A Case Study on Marks and Spencer”, July 2008. A Case Study on Marks and Spencer. Available at: http://bizcovering.com/major-companies/a-case-study-on-marks-and-spencer/ (accessed on: July, 2009). 8. “Tesco’s debt-fueled growth sparks investor backlash”, June 2009. Business Satndard. Available at: http://www.business-standard.com/india/news/tesco%5Cs-debt-fueled-growth-sparks-investor-backlash/361743/ (accessed on: July, 2009). 9. “Annual Report and Financial Statements of Marks&Spencer”, 2009 Available at: http://annualreport.marksandspencer.com/pdfs/MandS_AnnualReport_2009.pdf (accessed on: July, 2009). 10. “Annual Report and Financial Statements of Tesco”, 2009 Available at: http://www.investis.com/tesco/pdf/repp2009.pdf (accessed on: July, 2009). Read More