Managerial Finance - Research Paper Example

?Company Profile Sainsbury is one of the UK’s largest supermarket chains. The firm was founded 140 years ago which makes this company the longest standing UK major retailer food chain. The first store was opened in 1869 in Druly Lane. The company started selling its own branded products in 1882. In 1961 Sainsbury became the first food retailer to computerized distribution. Sainsbury in 1994 become the first major food retailer in the UK to sell fair-trade food. Today the company is very successful food retailer evidenced by the fact that in 2010 the firm had revenues of ?19964 million. J Sainsbury plc consists of Sainsbury’s - a chain of 547 supermarkets and 343 convenience stores and the Sainsbury’s Bank (Jsainsburys, 2011). One of the most innovative services offered by the company is its online servicing and delivery system. Customers can make their purchases online and Sainsbury will deliver to 90% of the UK households. The system generates over 100,000 orders per week. The firm has a division called Sainsbury Property that has a portfolio that includes 297 freehold and long leasehold properties and 43 joint venture properties (Jsainsburys). The retail operation of the company generates 19 million customers transaction every week. Five Business Ratios (2009-2010) 2009 2010 Net margin 289 / 18911 = 1.53% 585 / 19994 = 2.93% Current ratio 1268 / 4511 = 0.28 1797 / 2793 = 0.64 Return on capital 289 / 4157 = 6.95% 585 / 4966 = 11.78% Debt ratio 9836 / 5679 = 1.73 10855 / 5889 = 1.84 Earnings per share 16.6 32.1 Sainsbury vs. FTSE100 index This part of the paper will demonstrate a comparison between the market price of the Sainsbury common stock and the FTSE 100 index. The graph that show the movement in the price of the stock and the index are illustrated in appendix A and appendix B. In order to evaluate the results further qualitative information based on company news is going to be used to attempt to interpret the results of the graph. The FTSE graph shows many fluctuations in up and down with the steepest downward in July 2011. Overall the general trend of the index prices was that the price of the index went up during the last year. During the first quartile of the graph the trend in prices of the Sainsbury was very similar to the movement in the FTSE 100 graph. The price of the Sainsbury stock peak in September 2010 and it bottom out during April of 2011. A piece of news that always shakes the price of common stocks is the release of quarterly results. The latest quarterly results of the company were released in March 23, 2011. The graph illustrates that after the release of this piece of news the price of the stock after being the lowest point during the last year it began to steadily go up until May of this year. Analysis of Sainsbury financial performance In order to determine the viability of Sainsbury (J) as possible stock investment alternative this paper will analyze the company’s overall financial performance. The analysis includes their operations and how Sainsbury (J) compares with other similar stocks and its industry sector. By comparing key financial ratios we can visualize the overall financial position of the company and how the company compares to its overall industry sector in order to determine its attractiveness as a stock investment in a personal investment portfolio. Sainsbury (J) has become a leader in the grocery foods sector with a 16.9% market share in the UK. The company has made a number of fundamental changes in recent years in order to enhance overall competitiveness and fuel future growth. Sainsbury is known to be the world leader in Fair Trade Products with around 25% of all Fair trade Products in the UK. The company was also named Supermarket of the Year at the 2009 Retail Industry Awards for their efforts to innovate and adapt to changing customer needs over the last year. Sainsbury’s operational focus is centered accelerating future growth and sustainability. The five key operational areas the company focuses on in order to further increase its market share and drive future growth are: Great food at great prices-In order to further enhance the leadership position in the grocery sector the company will continue to strive to drive its customer’s passion for healthy, safe, and delicious food. Sainsbury will continue to work towards delivering top quality products and fair prices from suppliers which practice fair trade and utilize suppliers which source their products with integrity in mind. Accelerating future growth of complementary non-food and services-By focusing on expanding their business portfolio on companies and investments that value the same principles of quality, innovation, and customer value the company strives to expand the choices for its loyal customer base. Sainsbury’s investment in non-food complementary business has grown three times faster than their traditional grocery business. Reaching more customers through additional channels- The company is expanding in new markets such as opening 51 new convenience stores between 2009-2010 with plans to open an additional 75-100 convenience stores for 2010/11.The company is also working on further developing and enhancing their online business. Their online business is growing rapidly with over 20% of the total ales and reaching over 90% of UK households. Growing in supermarket space- By opening new store locations and expanding the size and range of products offered in their established locations. For 2009/10 the company opened 38 new supermarket locations and expanded 13 supermarket locations. Furthermore, the company is on track to meet their target of increasing total retail gross space 15% by March 2011. Active Property Management- By extending their asset basis by owning their company’s store real estate, Sainsbury will have a chance of taking advantage of potential development opportunities while providing maximum operational flexibility and maximizing value. The company invested a total of 2.3 billion pounds on property investments increasing their total property portfolio holdings to 9.8 billion pounds. Sainsbury continues to outperform the competition thanks to its focus on providing healthy, tasty food with a universal appeal. For the year 2009/10, the company’s sales increased 6.9% and a like-for-like sales increase of 4.3%.Despite the UK recession Sainsbury enjoyed a growth in market share and overall profitability due to their convenience, low prices, and customer loyalty. Net profit before tax was up 17.9% to 610 million. As a result of the increased profitability the company declared a dividend of 14.2 pence, an increase of over 7.6 over the previous year. Furthermore the dividend is covered 1.68 times by retained earnings according to their policy for dividend cover of 1.5 to 1.75 times. Sainsbury as a potential investment continues to provide steady growth in its overall business scope, sound property investment practices, improving return on capital as well as a strong balance sheet. With strong operating cash flows to support future expansions and business investment programs the company is well poised to meet its operational and financial goals for 2010/11. An analysis of the financial ratios of Sainsbury shows their EPS increased from16.6 to 32.1, an increase of around 93% from 2009. An increase in earnings per share is a positive sign. The net margin of the industry sector was 1.3% and 1.1% for 2009 and 2010 (Dun & Bradstreet). Sainsbury had a 1.53% net margin for 2009 and 2.93% in 2010 which shows that the company had a much higher overall return than the industry sector. A higher profitability metric is a positive result. Furthermore the overall net margin for the industry decreased while Sainsbury almost doubled the net margin performance. The current ratio of the company in 2009 was .28 and in 2010 it was .62. The current ratio increased by more than 100% between 2008 and 2009. The current ratio of Sainsbury was low due to the fact that it was below 1.0 in both 2009 and 2010. The current ratio shows the ability of the firm to pay off its short term debt. The debt ratio improved from 1.73 to 1.83 between 2009 and 2010. This is a positive sign because the debt ratio was above 1.0. The debt ratio shows the ability of the company to pay off its long term debt. The return on capital ratio improved significantly from 6.95% to 11.78%. A higher return on capital is a desirable result. Sainsbury increased its return on capital metric by 69% between 2009 and 2010. Overall Sainsbury seems to be improving its financials every year. They are in line with their projected financial performance and with extensive expansion plans. The future looks bright for UK’s biggest food retailer. Based on the fundamental analysis of the business and its operations it seems like Sainsbury (J) would be a good long term stock investment as part of diversified investment portfolio. Appendix A: FTSE 100 Index (last year values) (Yahoo). Appendix B: Sainsbury plc stock prices (last year) (Yahoo). References Dun & Bradstreet. 2011. “Key Business Ratios: Grocery Stores” 11 May 2011. Jsainsburys.com. 2011. “Our Business” 10 May 2011. Yahoo.com. 10 May 2011. “Basic Chart: Sainsbury (LSE). 10 May 2011. Yahoo.com. 10 May 2011. “Basic Chart: FTSE 100” 10 May 2011. < http://uk.finance.yahoo.com/q/bc?s=%5EFTSE> Read More