The Retail Sector in the United Kingdom - Essay Example

?OVERVIEW OF THE RETAIL SECTOR IN UNITED KINGDOM The financial gurus and the investment pundits rate the Retail Sector of the United Kingdom as an “explosive” stock. It is ranked the as safe heaven and a smooth ride to consistent returns. The Retail Industry in the United Kingdom has been booming at a swift since the last decade. The same sector is expected to show growth by 15 percent in the next five years and show sales of more than GBP 312 billion in 2011. (Invest in UK, 2010) The importance of this sector can be gauged from the words of Napoleon Bonaparte who termed United Kingdom as a “Nation of Shoppers”. The retail sector is expected to show growth in all the categories and sub-divisions: electrical, groceries, clothing and footwear, cosmetics, home-ware, floor coverings and furniture, gardening as well as e-retail, in the coming years. (Tesco, 2010) The grocery and the e-retail will be the most important divisions in the coming years. According to British Retail Consortium, the sector sales in the country amounted to GBP 293 billion in 2010. The retail companies based in the United Kingdom provides services to millions of people around the globe leading in grocery, clothing, and home-ware. This sector supplies employment to 11 percent of the total workforce in the country: employing around 3 million people. It contributes 8 percent to the country’s GDP and accounts to be a major part of the country’s exchequer. (Invest in UK, 2010) The retail sector in the United Kingdom is oversaturated with the a small number of big players controlling the market. According to British Retail Consortium, there were 286,680 retail outlets in the country as of 2010. According to a research performed by the TNS Kantar Worldpanel, the three major players of the retail industry in the United Kingdom, with respect to market share, are: Tesco with 30.5 percent Sainsbury with 16.6 percent ASDA with 16.5 percent 1 Despite the setbacks in the economy: rising prices, fuel costs, spending cuts, the investors look forward to strong growth and positive sales growth in the retailing. They expect the economy to heal itself in the coming months and realize its true potential. Tesco A global merchandising and grocery store based in the United Kingdom leads the ‘Big Four’ supermarkets group. The brand is the largest within the boundaries of the country with a market share of 31 percent and the third largest in the global market with respect to sales revenue. The company operates in 14 different countries through 4,811 different types of stores. It provides everything under one roof: from grocery to appliances, clothing to shoes, tires to gardening tools as well as home wares. (Tesco, 2010) Tesco plans to invest GBP 27 million to reduce its carbon footprint by 2020. “At Tesco, we care about the environment and want to lead the way in preparing for a low carbon future. We are now ready to unveil the scale of our plans to use Combined Heat and Power to cut our carbon footprint2.” The brand is ranked as the second largest in the world with respect to profits. The brand in the fiscal year 2010 showed strong growth: sales showed an increase by 6.8 percent whereas it’s pre-tax profit increased by 10 percent. Therefore, the financial gurus believe that the company has now transformed itself into a fully globally diversified business and is en route to strong future growth. (Tesco, 2010) Sainsbury J Sainsbury, with a market share of 16.6 percent, is ranked as the second largest retailer in the United Kingdom. The company provides an enormous assortment of goods and services under one roof to its 19 million customers through the 872 stores spread across the country. The products range from grocery to appliances, tires to gardening, clothing to cosmetics as well as furniture. (Sainsbury, 2010) Sainsbury has become one of the pioneers of dedication. It has planned to invest GBP 40 million into the sustainable farming over the period of next three years that will allow the farmers to augment their productivity and quality of food products. "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 industry3". J Sainsbury recorded a revenue growth of 5.6 percent in 2010 and made sales amounting to over GBP 20 billion. The company has shown excellent progress over the year and possesses a strong balance sheet with market value of freehold property worth GBP 9.8 billion. (Sainsbury, 2010) Other Major Retailers: Morrison, Marks & Spencer and ASDA ASDA, the third largest retailer in the United Kingdom with a market share of 16.1 percent, is basically a subsidiary of Wal-Mart with an annual operating income of ?638 million. The company deals in all types of products ranging from grocery to electronics as well as financial services and has a huge popularity amongst the citizens due to its famous promotion campaigns. (ASDA, 2011) Marks & Spencer is another tough rival in the retail sector. It leads the UK retail in the clothing segment. It also provides high quality and variety of goods under one roof. The company provides services to 21 million people in a week. It is planning to enter the food segment that will provide a tough competition to Tesco, Sainsbury and Morrison. (Marks & Spencer, 2011) Morrison is a leading store and a member of ‘Big Four’ supermarkets in the United Kingdom. The company provides services to over 10 million customers in a week through its 425 different types of stores. Morrison excels 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) RATIO ANALYES BETWEEN TESCO & SAINSBURY Annual Accounts are statements that are prepared by the public listed companies. These statements are prepared by coordinated work of the company’s management for the employees, investors, customers and general public. The annual report comprises balance Sheet, profit & loss statement, cash flows, auditors’ statement as well as chairman’s comments. The chairman’s statement sums up the financial health of the company as well as the future prospects of the company. The statement also provides the company’s strategy used in the former years. The income statement communicates how much profit the company has made during the period, the revenues made and the expenses incurred. It also makes a comparison against the former year. The balance sheet appraises the financial position of the company on the last day of the period. It states what the company owns, what the company owes as well as the shareholders’ equity. The cash flow statement shows where the cash flowing through the business has come from and how it has been used by the company. It communicates the company’s financial strength to the investors. The auditors’ report provides the authenticity stamp for the accuracy of values and usage of procedures in the preparation of the financial accounts of the company. The annual report communicates the condition and the financial health of the company, the projected revenues and profits as well as the management concerns to the outside owners. With the help of these documents, the people can analyze the present condition as well as the future prospects and invest in the company. It, therefore, becomes a good starting point for the people considering investing into the shares of the company. Ratio analyses have been performed for both the companies based on the annual accounts of 2010. Liquidity Analysis Liquidity Ratios   Tesco Sainsbury Current Ratio 0.71 0.64 Quick Ratio 0.54 0.39 The liquidity analysis appraises the ability of the company to pay off its short term obligations when they are due. It basically refers to the safety net for the creditors of the company. A low ratio is of high concern to the creditors and investors. Both the companies have a poor current ratio as compared to industry average and therefore provide an insufficient protection to short term creditors. (Bloomberg, 2011) Tesco and Sainsbury hold 71p and 64p for every GBP 1 of short term liabilities respectively. More elaborate analyses show that Sainsbury holds much of its current assets in the form of inventories as compared to Tesco. Tesco holds 54p for every GBP 1 of short term liabilities as compared to Sainsbury holding 39p. This analyses shows that Tesco is in much better position to answer towards any untoward incident in the short run as compared to Sainsbury. Profitability Analysis Profitability Ratios   Tesco Sainsbury Gross Profit Margin 8.10% 5.42% Net Income Margin 4.10% 2.93% ROE 15.90% 11.78% ROA 5.08% 5.39% Quality of Income (In ? Mn) 2336 585 The gross margin assesses the efficiency and the productivity of the company’s assets and management and therefore, it is a vital ratio from an investors’ point of view. This margin is used to cover the indirect expenses. Both the companies have poor margins as compared to the industry benchmarks and lag way behind the leading margin holder Marks & Spencer. (Bloomberg, 2011) Tesco and Sainsbury contribute 8.1p and 5.4p to the gross profit for every GBP 1 sale made by the respective company. Marks & Spencer contributes over 35p to the gross profit for every GBP 1 sale made. This analysis shows that both the companies can work more efficiently in the coming years. The net margin appraises the capability of the company to control its indirect expenses. Tesco has a better margin as compared to Sainsbury and contributes 4.1p to the net profit as compared to 2.9p for every GBP 1 sale that is made. At the same time, Tesco has a much better quality of income as compared to Sainsbury as well as the industry average. Tesco record a profit of over GBP 2 billion whereas Sainsbury records a net profit of just GBP 0.5 billion. The return on equity determines the return that is earned by the owners of the company. Tesco has a better return as compared to Sainsbury’s. (Bloomberg, 2011) Tesco leads the industry with a return of 23p to the owners for every GBP 1 invested in the company. The return on asset assesses the return earned by the investors: equity holders as well as creditors of the company. It evaluates the efficient usage of the money by the company. Both the companies rank average as compared to the industry benchmarks. (Bloomberg, 2011) Tesco and Sainsbury record a return of 5.1p and 5.4p for every GBP1 invested into the company. Efficiency Analysis Activity Ratios   Tesco Sainsbury Account Receivables Turnover 30.1 92.90 Inventory Turnover 19.4 26.90 Total Assets Turnover 1.20 1.80 The receivable turnover appraises the efficiency of the collections of the company as well as their credit policy. Sainsbury has a much better ratio as compared to Tesco. It collects its receivables every 4 days whereas Tesco collects its receivables every 12 days. This shows that Sainsbury has a better credit policy and ensures more efficient collection. The inventory turnover evaluates the efficiency of the company in the inventory management. Both the companies rank above average as compared to the industry average. (Bloomberg, 2011) Sainsbury leads the sector and is able to sell of its stock 27 times in year. Tesco is able to sell its stock 19 times in the same period. This represents the high efficiency of Sainsbury. The total asset turnover assesses the ability of the company in the usage of the assets. A higher ratio represents a better efficiency. Both the companies rank above average as compared to the industry average. (Bloomberg, 2011) Sainsbury generates GBP 1.8 as compared to GBP1.2 by Tesco for every GBP 1 invested in the assets. Market Test Investment Ratios   Tesco Sainsbury EPS-Basic 29.33 32.11 EPS-Diluted 29.19 31.6 Price to Earnings 14.6 11.3 Dividend Yield 3.52% 4.45% The earnings per share represent the returns on each issued share of the company. Tesco and Sainsbury have been giving out huge return to its stockholders in the former years including 2010. Sainsbury gave out 32p per share followed closely by Tesco with 29p per share. At the same time, Sainsbury has a better price to earnings multiple compared to Tesco. The investors will be paying only ?11.3 for ?1 of Sainsbury’s earnings and ?14 for ?1 of Tesco’s earnings. As compared to the industry benchmarks and averages, both the companies have better payout ratios for the investors. (Bloomberg, 2011) Share Price Movements The table shows the analysis of the share price movements of the two stocks, Tesco and Sainsbury, on the London Stock Exchange for a period of one year effective from 1st April 2010. Sainsbury Tesco STDEV 23.1 17.5 High 395.0 454.4 Low 312.9 377.5 Range 82.1 76.9 The analysis into the share price movements shows that Tesco shares are much less volatile as compared to Sainsbury. Tesco is a much less riskier share with a more consistent return to the investors. At the same time, Recent Company and Economic Happenings The shares on the London Stock Exchange are all affected by any changes in the economic policies, in the investor’s comments about the company and/or the specific company’s actions in the market. With the news in the market that the government plans to cut the spending as well as the steady inflation has raised the concerns of the retail industry. This will lure the shoppers on controlled spending in the retail 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 prices4" The Independent stressed on the decreasing consumer expenditure due to the high fuel prices, tax increments as well as the insecurity of their jobs. ) "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 prospects5."The BRC-KPMG survey conducted in this year also supports the decreasing expenditure trend as the non-foods retailer sections saw falling sales in the first months of the current year. At the same time, the foods items showed growth and held positive prospects for future growth. (Thompson, 2011) The Sainsbury shares in the market saw a small rising surge with the news of the Qatari Investment Authority (QIA) looking forward to a takeover. This speculation will show more growthin the share prices in the coming months. (Reuters, 2010) The financial gurus in the market believe that the Sainsbury shares in the market are undervalued and will show immense growth in the coming years. “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 more6.” (Hall, 2010) Sainsbury scored a record Christmas sales in the former year. "We are delighted that we delivered a record Christmas performance and have grown market share over the quarter, up 0.3% to 16.6%7." The shops also saw a huge inflow of the customers into their shops: 900,000 people more than the usual. (Thomas, 2011) But at the same time, the company did not meet its first quarter sales forecasts and lagged behind. The reasons being cited for this abysmal performance are the tough weather and consumer environment. (Modlock, 2011) This failure to meet the targeted sales in the first few months on the year has slowed the growth prospects of the company. Indirectly, this has reflected on the exchange as the shares have dropped in the world market. (Kennedy, 2011) In the same environment, Tesco lagged behind the rivals, Sainsbury and Morrison in the Christmas sales. The company recorded half the growth of what the investors had predicted. But at the same time, the international and Direct Tesco sales showed strong growth and compensated the weak Christmas sales. "The group has continued to make good progress, helped by strong growth across our international businesses, which delivered over half of the group's growth8.” Asia recorded the highest growth of 24.4 percent. (Modlock, 2011) Tesco has planned to invest GBP 400 million in the expansion of the business to the North East. The expansion will increase the sales as well as profit to the company. It is also expected to create more than 4000 jobs in the region. This will a much appreciated gesture in these hard times. (Dent, 2010) CONCLUSION The financial gurus rank the retail sector in the United Kingdom as a safe heaven for investors around the globe. They believe that the sector will show immense growth in terms of retail traffic as well as the revenue. The analyses show that Tesco is a smooth investment that will provide growth as well as consistent returns. It is a well diversified company in terms of products as well as locations. Therefore, independent recessionary periods and policies are least likely to affect its share prices. The company has shown intensification in the international markets where it has penetrated in almost all the regions. At the same time, it has revived its sales in the local market and maintained its supremacy in the world. The in-depth ratio analyses show that Tesco has sound liquidity ratios, better profitability ratios as well as higher long investment returns as compared to the Sainsbury. It does lag behind in the management efficiency at some points where Sainsbury is much better positioned. Both the companies have low margins and have huge potential for growth in future. Tesco has made huge expansionary plans that are likely to penetrate more into the market share of the competitors. This will allow the company to maintain its supremacy in the major regions. At the same time, Sainsbury moves into building better relations with the supply chain by providing them eco-friendly technology that will increase their productivity. Therefore, the financial analyses, the share price movements and news reporting as well as the investors comments suggest that Tesco shares are a better investment as compared to Sainsbury shares. BIBLIOGRAPHY (2010) Retail. [online] Available from: [Accessed on Mar 29th, 2011] Bloomberg Businessweek. (2011). Morrison PLC. [online] Available from: [Accessed on Mar 29th, 2011] Bloomberg Businessweek. (2011) Sainsbury (J) PLC. [online] Available from: [Accessed on Mar 29th, 2011] Bringham, E. F. Houston, J. F. (2008) Fundamentals of Financial Management. Cengage Learning. Dent, K (2010)/ Tesco Planning GBP 400 million Investment in North East. [online] Available from: [Accessed on Mar 29th, 2011] Gordon, K. (2011) Morrison’s In GBP1 Billion Share Buyback, Invests In US Online Grocer. [online] Available from: [Accessed on Mar 29th, 2011] Gordon, K. (2011) ASDA Warns of Tough Consumer Environment. 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[Online] Available from: < http://uk.finance.yahoo.com/q/ks?s=TSCO.L > [Accessed on Apr 1st, 2011] www.asda.com www.bookergroup.com www.morrisons.co.uk www.marksandspencer.com www.sainsburys.co.uk www.tesco.com Read More