Investment analysis and Corporate Report Analysis: Sainsburys Supermarket Limited - Essay Example

? Investment and Corporate Report Analysis: Sainsbury’s Supermarket Limited Organizational Background Sainsbury’s Supermarket Limited, known simply as Sainsbury’s, is recognized as the United Kingdom’s third largest supermarket chain. As of most recent estimates the organization retained a 16.5% market share in the UK supermarket sector. The organization has a longstanding history having been formed in 1869 by John James Sainsbury in London, England. The organization rapidly developed during the Victorian era and by 1922 had become the primary grocer in England ("J sainsbury 142," 2011). Throughout much of the 20th century Sainsbury’s became recognized for its foregrounding of self-service retailing methods ("J sainsbury 142," 2011). In 1973 the organization went public and is today on the FTSE 100 Index. The Sainsbury family retains a reported 15% of the organization, as reduced from its 2003 35% level. Since the 2003 sale the current largest shareholder, at 26%, is the Qatari royal family ("J sainsbury 142," 2011). In the 1980s the company experienced its period of greatest success achieving its highest historic market share ("J sainsbury 142," 2011). The 1990s witnessed a slight decline and by 1995 Tesco had become the sector’s primary grocery retailer. In 2003 Asda, bringing Sainsbury’s to its current market position as third, further supplanted the organization. A. Financial Analysis In considering the extent that Sainsbury’s holds strong investment potential, this corporate analysis largely implements a value-oriented approach to security analysis. In large part articulated by seminal theorist Benjamin Graham and popularized by investor Warren Buffet, this approach to equity analysis considers investment viability in terms of the organization’s long-term strength and conservative valuation (Graham 1993). It follows that an examination of Sainsbury’s financials over an extended time period is necessary to gain a comprehensive understanding of the viability for investment into the organization. While financial ratios can be an effective means of corporate performance, it’s also recognized that they must be understood in relation to industry competitors. In addition, a qualitative narrative explication is advanced as a means of attempting to account for changes in performance and subsequent capital market movements. One of the most overarching concerns in terms of Sainsbury’s financial performance is revenue over the preceding years. Fig. 1 below demonstrates historic revenue streams and future projected streams. One notes that the organization experienced a sharp decline following 2004, but has since witnessed steadily rising revenue streams, a trend that is estimated to continue through at least 2013 ("J sainsbury plc," 2011). To a large degree this is an industry trend as competitor Tesco has also experienced consistent growth trends. Fig. 1 Sainsbury’s Revenue 2002-2013 In addition to revenue prices, another of the overarching considerations is the organization’s net income. In terms of net income the organization hasn’t experienced as similar an increase as in terms of revenue figures. In these regards, net income between 2007 and 2011 demonstrate a decline during the 2008 and 2009 years, conceivable as a direct result of economic recession. Still, the organization experienced a sharp increase in 2010, a trend that continued into the recent year as net income increased 9.4% from ?585 million to ?640 million ("J sainsbury plc," 2011). One considers that industry leader Tesco has experienced more steady revenue growth, demonstrating increases in all years between 2007 and 2011 ("Tesco plc," 2011). The cumulative understanding of these trends is that while Sainsbury’s experienced a period of declining growth during the early part of the last ten years, as well as significant setbacks during the 2008-2009 recessionary periods, there has nonetheless been a cumulative positive profit and revenue growth. While it’s recognized that the firm’s financial performance encapsulates a broad spectrum of accounting data, this report has implemented key financial ratios in gaining increased insight into organizational performance. There are a variety of profitability ratios that add direct insight into the company’s investment potential. Of course some of the most encapsulating ratios outside of direct revenue and net profit figures are those of the profit margin. In Sainsbury’s instance, the profit margin is coupled, as will be examined later, with prominent resource rations, including ROSF, ROCE, and ROTA. In all instances, the figures demonstrate steady improvement with the exception of a slight decline for the 2010 annual period. Still, Tesco’s 2011 6.35 operating margins demonstrates greater profitability. In considering the implication of this outside comparative industry elements one notes that management has functionally integrated its business operations such that margins are in direct accord with other profitability ratios. The implication is that to a large degree macroeconomic headwinds may have altered the shifting net income ranges. Another important consideration is Return on Shareholder Funds (ROSF). ROSF measures the net profit after taxation + preference dividend / by the ordinary share capital + reserves x 100 ("J sainsbury plc," 2011). Essentially this figure is implemented as a means of determining how efficiently the organization has implemented the shareholder’s funds. In this context of understanding the organization experienced a significant increase from 2008 (7.99) to 2009 (15.48). A similar figure was demonstrated in 2010, with further increases to 19.06 in 2011. Notably, the organization is still significantly short of its 30.05 ten year high of 2006, but still has made great strides since its recessionary period. Another prominent area of investigation is concern related to Return on Capital Employed (ROCE). ROCE is a measure of a firm’s implementation of capital invested with further emphasis on debt obligations. Particularly this ratio instrument allows investors to ensure that invested capital and debt-obligations are put to efficient use; as one might expect this figure is closely linked to ROSF. Examining Sainsbury’s ROCE figures, the organization experienced a significant low of 2.9% in 2006. This figure strongly increased to 7.6% in 2007 and has increased in all years, with the exception of 9.5% to 8.8% drop between the 2009 to 2010 periods. Similarly, the Return on Total Assets (ROTA) is another notable measure of how well organization implements resources at its disposal. For Sainsbury’s ROTA, while at a lower figure, remained coupled with ROSF annual increases and decreases. While it would be slight conjecture, the closely linked nature of these resource figures appears demonstrative of macroeconomic factors, as well as varying degrees of company risk ventures, rather than necessarily poor managerial practices. One considers these figures in relation to major competitor Tesco ("Tesco plc," 2011). In these regards, one considers that Sainsbury’s has, perhaps surprisingly, made more efficient use of resources as it has demonstrated greater rates of efficiency in key financial ratios of ROTA with an 8.82% rating to 5.56% for Tesco. While this is indicative of greater management efficiency one must also consider that Sainsbury’s subordinate operating margins demonstrate greater room for improvement. Still another prominent area of concern is in terms of liquidity ratios. Broadly speaking these figures will indicate the extent and efficiency with which the organization will be able to meet its debt obligations. The organization’s current ratio (assets/liabilities) indicates its direct ability to meets its outstanding obligations. When compared to the organization’s profitability ratios Sainsbury’s current ratio is reveals a notable discrepancy. One considers that while the profitability ratios had risen and declined in conjunction, the same proportionality does not occur when comparing the current ratio with these profitability numbers. The implications of this are that while the 2011 profits demonstrate an increase from 2010, there is also a higher degree of leveraging, with a .40 ratio. This is compared to a .6 ratio for major competitor Tesco ("Tesco plc," 2011). While not entirely catastrophic, one might consider that such a correlation slightly detracts from the perspective of Sainsbury’s as growing. The same figures are indicative of the liquidity ratio, demonstrating a significantly declining from the 2009 rate. Still, one considers the nature of the sector as grocery as such these lower than standard current ratios are indicative of an industry that is able to receive groceries on credit and then sell to customers. As such, the lower current ratios are actually indicative of an organizational strength as suppliers are actually funding the businesses. Another group of essential financial indicators are those directly related to equity valuation. Fig. 2 contains equity valuations for Sainsbury’s (blue), the FTSE 100 (red), and TESCO (light blue) since 2007. Fig. 2 Valuation Chart One is struck by the extremely high valuation Sainsbury had going into and throughout much of 2008. While the rapid decline is clearly attributable in part to the economic crisis, one also recognizes that the sharp decline was significantly sharper than either than the FTSE 100 index or the industry leader TESCO. This finding could potentially indicate that while Sainsbury experienced a 2008 recessionary decline, one should not expect a post-recession return to this valuation, as it appears an inflated number. The current P/E ratio stands at a modest 10.7, making it the moderate ranked relative to sector standards. One can compare this price to earnings ratio to the Tesco’s 11.23 number, the differential seemingly indicative of a larger investor faith in Tesco’s growth potential ("Tesco plc," 2011). Still, dividend per share has steadily risen since 2007, with a 13.55% growth during this period ("J sainsbury plc," 2011). One considers that from a value investment perspective Graham has argued that steady and consistent dividend offerings is indicative of a strong and sound organization. The earnings per share have also increased with a five-year rate of 55.00; this is the largest growth for any company in its sector. This can be compared to Tesco’s rate during this period of 10.58 ("J sainsbury plc," 2011). The great discrepancy in this figures demands further investigation. In these regards, it appears that the significant growth is more attributable to past inefficiencies rather than current efficiencies, as there was a substantial increase between the 2009 and 2010 years. Furthermore, Tesco’s five-year figure is greater than that of Sainsbury’s. The financial performance metrics are essential to gaining a greater insight into company performance. Still, they must be understood in the context of organizational change. In this context of investigation one must consider the two pivotal instances of organizational change over the previous decade – 2004 and 2007. In 2004 the organization after experiencing declining revenues the organization changed CEOs and announced a commitment to ‘Making Sainsbury’s Great Again’. One notes that tremendous structural changes in terms of layoffs and supply chain management occurred during this period, as well as a selling of the organization’s American subsidiary. The campaign was in part a success as the organization has experienced increasing revenues since these changes. Still, by 2007 declining profit margins resulted in increasing takeover interest resulting in Delta Two, a Qatari investment company, taking over significant shareholder interests. From this takeover period the organization has since greatly increased earnings per share as well as increased profits over a five-year span. Ultimately, these changes indicate an organization with relative degrees of inconsistency for a major grocery retailer. Still, the recent upsurge is undeniably a positive indicator. B. Strategic Communication within the Organization Introduction While the organization’s financial performance data is highly important to gaining a comprehensive investment perspective, further insight can be gained through examining the non-financial aspects of the organization’s annual report. There exists a strong array of financial accounting theory that considers the implications of organizational communications within the spectrum of investment contexts. These theories have largely fallen under systems-oriented approaches. In examining communication strategies within Sainsbury’s Supermarket Limited, this research implements the systems-oriented legitimacy and stakeholder theoretical paradigms. Chairman Statement The Chairman Statement by David Tyler contains a number of notable considerations. The statement is divided into a variety of sections, however the ‘Our Performance’ section is highlighted in red, seemingly indicating increased organizational importance. Two notable elements emerge in this section, the first being emphasis on importance improvement and the second being the emphasis on profit margins. These elements come to constitute two of the more poles of Sainsbury’s strategic initiatives. The opening statement further contains reference to the recent financial crisis through nothing the “challenging year for customers with increases in the cost of living and uncertainty about job prospects causing them to shop around for the best value” ("J sainsbury annual," 2011, p. 14). Within this context of understanding one considers the prominent systems-oriented legitimacy theory. The primary argument of legitimacy theory is that, “external factors influence corporate management to seek to legitimise activities. The theory provides an explanation of management's motivation to disclose environmental information” (Deegan & Unerman 2011, p. 320). In these regards, legitimacy theory can be in part used to explain Sainsbury’s emphasis on the nature of economic occurrences. Indeed, ‘fair value’ becomes a prominent theme throughout the report. In addition, the statement places considerable emphasis on ethical values indicating the emphasis on Fairtrade goods and RSPCA Freedom Food products. Language Used There is a wide array of linguistic concerns within the organization’s annual report. One considers the report’s emphasis on terms related to profit margins. Frequently used words include: profitability, value, fair, and low cost. The implementation of such language seems to function along a number of avenues. One considers that the organization’s profit margins are highly limited to relative to leading industry competitors. In this context of understanding these linguistic elements function as a means of emphasizing what some might deem one of Sainsbury’s weaknesses with an actual strategic advantage. Other prominent language relates to stakeholder interests. Stakeholder theory “examines the interaction between the corporate entity and the various stakeholders, with prominent consideration given to the extent that stakeholders influence or shape management decisions” (Luenberger 2002, p. 471). To a large degree the reports concerns with gaining market share and increased store efficiency measures demonstrate a concern with these elements. Coupled with these, as noted earlier, are prominent legitimacy concerns are surprisingly high emphasis on social and environmental concerns. To a degree it appears that this emphasis is in-line with environmental modernist trends. Everett and Neu (2000) note environmental modernism is a movement linking profit gain to environmental responsibility. Still, it appears that the Sainsbury’s pursuit of such environmental responsibility goes beyond simple corporate social responsibility and actually constitutes a strategic approach to development and market growth. Visual Elements There are a number of notable considerations in terms of visual elements. One notes that visual communication through design articulation reveals a tremendous amount about branding and tacit strategic interests. A general investigation into the report reveals the company’s orange and red color scheme. In addition to being an in-store element these colors dominate the annual report. Further investigation into photographs and pro forma numbers demonstrate what could be referred to as a highly generalized and unremarkable approach to branding. In these regards, the organization has included cliched characteristic pictures of food in aisles, people picking food on fields, and happy employees. Accompanied with these images, however, are notable pro forma statistics and awards that attest to a general commitment to legitimacy. Further analysis reveals a chart that is featured throughout the report in various areas. The chart is structured like the inside of an orange and contains within it the organization’s strategic initiatives. These include: active property management, great food at fair prices, growing supermarket space, reaching more customers through additional channels, and accelerating the growth of complementary non-food ranges and services ("J sainsbury annual," 2011). The cumulative effect of these visual elements, while not entirely inspiring or creative, reveals an organization concerned with strong fundamentals and a value approach to gaining market share. Summary of Communication Effectiveness There are a variety of concerns in terms of Sainsbury’s overriding communicative effectiveness. One notes that the organization has crafted an annual report that appears under critical analysis to present an organization committed to steady growth and conservative innovation. It’s recognized that from a design perspective the report lacks the visual aplomb that would be indicative of an organization committed more to fringe markets or rapid growth. Instead the report’s overriding communication presents a strategic approach to capitalizing on slow food and environmentally sustainable food products, coupled with a value approach to food sales. Even as the overarching communicative articulation is slightly bland, these strategic initiatives demonstrate a strong concern with market trends, consistency, and slight growth potential in value-oriented retail. Conclusion In proposing investment recommendations regarding Sainsbury’s Supermarket Limited there are a number of important considerations. In terms of financial performance the organization has demonstrated strong, if slightly inconsistent performance over the past decade. To an extent declining 2004 revenues seems attributable to an organization that had simply fallen into a trap of institutional myopia and as such failed to change with the rapidly changing social climate. Since the 2004 period revenue rates have been on a steady incline. In part this appears an aspect of general industry success as competitors experienced similar increasing revenues. While the organization’s operating margins are low, they demonstrated consistent net profit increases over a five-year span. The organization remains leveraged further than industry competitors, but the strong return on equity and resource figures demonstrate a management team that has made the best use of its invested capital. One notes that the organization has placed an emphasis on improving store efficiency as well as strong concern on environmental modernism through socially conscious food measures. To this extent it seems that while the organization is relatively highly leveraged it has produced significant shareholder value with these funds. Further consideration is given to the organization’s communication strategy. In this context of understanding, the organization has communicated a stolid, steady, and consistent approach to operations. This report recommends investment in Sainsbury’s. In terms of pure invest considerations, the current equity valuation demonstrates a price to earnings ratio that is moderate compared to sector standards and has factored into it a reasonable expectation for future growth. One of the most attractive aspects of investment potential in the organization is that while the European macroeconomic spectrum is unfavorable, the organization has taken the unique approach of promoting market share through value, as evidenced through the already low operating margins. These elements, coupled with the steady dividend offering, long-standing history, and efficient management, presents an organization posed for consistency and reliability. Ultimately, the combined impact of these elements makes Sainsbury’s a reliable value investment. References Graham, B. (1993) The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel. New York: Collins Business. Deegan, C. & Unerman (2011) Financial Accounting Theory, 2nd edition. McGraw Hill. Everett, J. Neu, D. (2002) ‘Ecological modernization and the limits of environmental accounting?’ Blackwell Publishers Ltd. Gray, R. (2006). ‘Social environmental and sustainability reporting and organizational value creation?’ Accounting, Auditing & Accountability Journal Vol. 19 No. 6 J sainsbury 142 years of history. (2011). Retrieved from http://www.j-sainsbury.co.uk/about-us/sainsburys-story/ J sainsbury annual report and financial statements 2011. (2011). Retrieved from http://www.j-sainsbury.co.uk/ar11/ J sainsbury plc. (2011). Retrieved from http://markets.ft.com/research/Markets/Tearsheets/Summary?s=SBRY:LSE Luenberger, David (2002). Investment Science. Oxford University Press. Tesco plc. (2011). Retrieved from http://markets.ft.com/research/Markets/Tearsheets/Financials?s=TSCO:LSE Read More