The Financial Statements for Morrison - Essay Example

?Introduction The paper analyzes the usefulness of financial ments for Morrison when it made a decision and placed a bid to acquired Safeway. Itanalyzes the impact of financials on the valuations and bid. The company finally completed its acquisition of Safeway on 8-Mar-04 for 3 billion GBP. Morrison Supermarkets operated within the chain of supermarkets in UK. The supermarkets of Morrison offer a variety of products like fresh as well as frozen foods, fruits, vegetables, groceries, spirit, soft drinks, pharmaceutical products and household products. The company currently operates with more than 450 stores. Morison was incorporated in 1899 in Brandford, UK. The company currently has a market cap of GBP 8.02 billion with a share price of GBP 303.3. Safeway is one of the biggest food as well as drug retailers in North America. Within US and Canada the company operated within 1692 stores as of Mar-2011.The Company currently has a market cap of $8.93 billion with current share price of $24.25. Compared to Morrison, Safeway was incorporated in 1990 in California. Analysis The financial statements of both the companies before and after the takeover are as follows: Morrison Balance sheet as of 2010 and 2004: 2010 (million GBP) 2004 (million GBP) Assets Non-current assets 7,666 1,739 Current Assets 1,094 492 Liabilities Current Liabilities (2,152) (814) Non-current Liabilities (1,659) (100) Net Assets 4,959 1,357 Dividends 363 174 Profit Retained 2,008 1,143 Merger Reserve 2,578 Capital Employed 4,949 1,317 Morrison Income statement as of 2010 and 2004: 2010 (million GBP) 2004 (million GBP) Turnover 15,410 4,959 Cost of sales (14,348) (3,696) Gross Profit 1,062 1,263 Operating profit 907 306 As can be seen above the difference in assets, liabilities, turnover and profits of the company in 6 years after the company acquired Safeway. The turnover has gone up by 210.75% and operating profit has gone up by 195.44%. The nets assets of the company following the takeover have gone up by 265.4%. All these are good signs for the company and represents that the company had followed the positive outlook following the merger. This means that the company has maintained the aggressive growth rate even after the takeover of Safeway in 2004. Next analysis of company would be stock price analysis of past 7 years following the takeover of Safeway. This is discussed as follows: The stock price analysis shows the positive outlook for the company. It shows how the stock has continued to provide return to its investors even after the takeover of Safeway. The analysis of stock chart for 2004 shows the positive investor sentiment following the takeover. This is also due to high presence of company in retail industry in UK. The food and retail sector represents the biggest industry in the United Kingdom, providing employment to more than four million people in production, manufacturing, retailing and distribution. Retail sector accounted for 9% of the GDP of the country in 2003 (Datamonitor, 2003). In last few years, UK’s supermarkets have been under increasing scrutiny in regard to their treatment with suppliers, in own-label products, still the development of supply networks in the country had been an integral part of supermarket strategies in the past decade. The US$ 9 trillion Retail industry is one of the world’s largest industries and still growing. 47 of the Global Fortune 500 companies & 25 of Asia’s Top 200 companies are retailers. Even as the developing countries are making rapid strides in this industry, organized Retail is currently dominated by the developed countries with the USA, EU & Japan constituting 80% of world. (Global retail Business) Retail is a significant contributor to the overall economic activity the world over: the total Retail share in the World GDP is 27% while in the USA it accounts for 22% of the GDP. The share of organized Retail in the developing markets ranges between 20% - 55%. Over recent months these three risks have abated or disappeared: • The UK has escaped from deflation, contrary to our expectations six months ago. • Tesco has fully closed the gap in sales growth with the other Big 3 after two years of underperformance • International LFL is stabilizing as the base eases and the local economies recover. We believe LFL was already positive at the end of the year in countries such as Ireland, Korea, Thailand, Turkey, China and Poland. • Analyst expects UK CAPEX to fall significantly from 2010, boosting free cash flow generation after two years of no free cash flow in the UK. This will allow the group to reduce net debt by about ?1bn per annum The comparative analysis of the company following the takeover is as follows: The main highlight from the chart above is the rapid catch up of Morrison, which has gone from selling 30% less food than Tesco per sq ft in 2003-04 to just 10% less at present. Sainsbury has also made good progress – over the same period, it has narrowed the gap from 20% to an estimated 12.5%. We estimate that Asda is roughly at the Tesco level, based on publicly available sales and space data. According to TNS Kantar, the Company had gained the market share in Ireland at the Christmas while the Dunnes Stores, that had an exceptionally strong 4th quarter in FY08 based on the intensity of an aggressive value club promotion, became the biggest loser. The twelve-week period saw a significant 6% drop in the total value of the country’s grocery market to €2.1bn however, based on TNS comments, analysts believed Morrison had ended the year with positive LFLs. Aldi and Lidl increased their share from 7.3% to 8.3%. The average household in the country spent €1,355 in the market on the twelve-week Christmas period, a dropdown of €139, or 9.3% considering the same period an year ago. Company is quite realistic about the fact that it cannot grow food sales at the pace of the last decade. The company’s growth during the last 15 years has to be seen as exceptional as it was possible to a great extent thanks to the consistent failure of other companies such as Sainsbury, Safeway and Somerfield/ Kwik Safe. However, these companies are now either well managed or in the hands of well managed companies, and are no longer the easy source of market share they used to be, rather the contrary. Analysts also believe, based on the experience in other markets, that in large markets it is difficult (costly) to grow market share above c33%. Industry Leader Tesco already reaches c90% of the UK population compared to Morrison and Sainsbury in the 60-70% range. Morrison is growing sales not by capturing many new customers but rather by selling more to existing customers. This can be done via store openings, which can lead to some cannibalization, and by selling non food (via extensions and online) and services, which is the primary focus of Morrison’s growth. Conclusion A positive outlook can be seen when the company’s financial performance is compared following the takeover. Analysts view Morrison’s expansion in the United States with a different format as a positive. At this stage management are not 100% sure about how well adapted the concept is to the local markets and whether Morrison will succeed or not in the end but analysts applaud Morrison’s out of the box thinking and its decision to use a differentiated, capital light, limited range format, which has proved quite successful in Europe in its different versions. In conclusion, Morrison has best in class sales densities, best in class margins and best in class ROIC in the UK. The differential versus peers has inevitably narrowed in the last few years, but it is important that it maintains superior sales densities and operational excellence if it wants to maintain its high margins and ROIC. In this respect, it is important and positive to see that Morrison has stopped underperforming the other Big 3 in the UK. References (n.d.). Retrieved May 7, 2011, from http://www2.toyota.co.jp/en/vision/production_system/index.html AcNielsen Aus. (n.d.). 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