Tescos Financial Performance - Case Study Example

Tesco Tesco is the largest British retailer. plc is a UK-based international grocery and general merchandising retail chain. It is the largest by global sales and domestic market share, with profits exceeding £3 billion. Tesco has over 3,700 stores globally that and employ over 440,000 people. Tesco operates in 13 countries outside the UK ¨C Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland in Europe; China, Japan, Malaysia, South Korea, Thailand and India in Asia, and the U.S. . Tesco has grown from a market stall, set up by Jack Cohen in 1919. The name Tesco first appeared above a shop in Edgware in 1929 and since then the company has grown and developed, responding to new opportunities and pioneering in many innovations. By the early 1990s Tesco faced strong competition and needed a new strategy. We were good at buying and selling goods but had begun to forget the customers. Sir Terry Leahy, who became Chief Executive in 1997, asked customers the simple question - what are we doing wrong?". We then invested in the things that matter to customers. For example, we launched our loyalty scheme Clubcard and Tesco.com, our internet home shopping service. Going the extra mile for customers has been key to our growth. We want to make customers lives easier and better in any way we can. We want to appeal to every customer and give them a reason to come back to Tesco. Originally specializing in food and drink, it has diversified into areas such as clothing, consumer electronics, financial services, telecoms, home, health and car insurance, dental plans, retailing and renting DVDs,[4] CDs, music downloads, Internet services and software.(Tesco plc) Globally, it is the third largest retailer based on revenue, behind Wal-Mart and Frances Carrefour. Profit wise it ranks second to Carrefoure. Among its local competitors most significant ones are Morrisons,Sainsbury and Asda. The following graph shows Tesco’s market shares locally(TESCO MAIN SUBMISSION TO THE COMPETITION COMMISSION (CC) INQUIRY INTO THE UK GROCERY RETAILING) According to TNS World panel Tescos share of the UK grocery market in the 12 weeks to 30 November 2008 was 30.9%, up 4.3% on 12 weeks to 2 December 2007. Across all categories, over £1 in every £7 (14.3%) of UK retail sales is spent at Tesco. Tesco also operates overseas, and non-UK revenue for the year to 24 February 2007 was up 18% on 25 February 2006. Supermarket Consumer Spend (£000s) Market Share November 2008 +/- from \December 2007 2008 Tesco 6,351,531 30.9% ▲ 4.3% Asda 3,410,431 16.8% ▲ 7.8% Sainsburys 3,175,543 16% ▲ 6.1% Morrisons 2,233,137 11.8% ▲ 10.3% Wal mart had sales of $287bn (£160bn) in 2004-5, more than its three closest rivals put together(Deloitte 2006 Global Retailing Powers study). Walmart had put its feet in China.Following suit Tesco aggressively expanded in China, while Wal-Mart plans to hire 150,000 staff there over the next five years. While Wal-Mart is dominant in the US, Tesco has got a head start on it in some key emerging markets. US firms Kroger, Costco and Target, Dutch firm Ahold and Germanys Aldi complete Deloittes list of the worlds top ten retailers. Globally Tesco is world’s largest Uk retailer followed Sainsbury,Morrison ,Marks and Spencer and Kingfisher.( Wal-Mart three times rivals size ) Tesco’s financial performance Efficiency ratios Efficiency ratios cover how well a company utilized its assets. In case of a merchandising company inventory turnover or stock turnover is a pertinent measure to gauge efficiency of operations. Inventory turnover measures the number of times inventory is sold or used over in a period such as a year. It is given by: In 2008 the inventory turnover of Tesco was 328.55 which increased from 370.55 in 2007 .In 2006 the inventory turnover was found to be 386.88 . These figures are very good compared to the industry average of general merchandising companies, all small and large in UK which was reported as 8.83 in 2006. A good inventory turnover means the holding cost of inventory is low signaling heavy customer traffic and accuracy in forecasting done by Tesco. This also means Tesco spends less money on rent, utilities, insurance, theft and other costs of maintaining inventory. This would in turn have positive effects on net income and profitability.(General merchandise stores ,Corp Average Financial Ratios) Asset turnover is another important efficiency ratio that measures the efficiency of a companys use of its assets in generating sales revenue or sales income to the company. In this respect too Tesco has been out performing the industry average of 11.37 reported in 2006.The asset turnover of Tesco has been 34.23 in 2006 which jumped up to 37.28 in 2007 but stooped to 35.46 in 2008. Liquidity Current ratio The current ratio is an indication of a firms market liquidity and ability to meet creditors demands. It is measured by current assets/ current liabilities. Tesco’s liquidity position is seen to be better than industry average of 1.06 in 2007.In 2005,2006 and 2008 the current ratios are below 1 which means that the company might have troubles meeting short term obligations. The following table shows the current ratios from 2005 through 2008. 2005 0.567605634 2006 0.498935887 2007 1.137632406 2008 0.58384488 Compared to Wallmart which is another big wig in the merchandising business,Tesco falls low on current ratio. Current ratio of Wallmart was .82 in 2008 and .9 in 2007). Quick ratio Another important ratio is Quick ratio which is also a measure of gauging liquidity position but it excludes in inventory. It is given by Cash+ cash equivalent +marketable securities+ accounts receivable _______________________________________________________________ Current liabilities Profitability Tesco had reported an 11.8% rise in annual profits for 2007 to £2.846bn,.In 2007 Tesco’s group sales rose to £51.8bn, up 11%. As recession had hit most businesses very hard Tesco seemed to be unaffected by recession. Prices had risen by about 1.5% across the board, but increases in food prices masked price cuts in non-food items. Despite this, Tesco remained positive in its growth and sales revenue In the words of Chief executive Sir Terry Leahy "Consumers are worried but theyre still spending - its just that theyre more careful how they spend.” And they knew Tesco was the right place to spend.( Tesco sees profit rise to £2.8bn) Growth was reported as 3.5% when most businesses were slopping down due to recession. (Tesco’s profit up to record $2.85 bn )Online and non-food items helped to boost Tescos UK business, while sales from its international stores also showed strong growth, up 25.3% in 2007. Tesco shares rose 7.29%, or 28.50 pence, to 419.50p in 2007.( Tesco sees profit rise to £2.8bn) Comparing Tesco with a close competitor in retail business in UK, Sainsbury sales of Sainsbury was 15202 in 2005 and 16061 in 2006 whereas sales of Tesco were 33866 in 2005 and 39454 in 2006.Considering profitability Sainsbury had a gross margin of 4.3% in 2005 and 6.6% in 2006.*=(Sainsbury 5 year financial summary)Tesco’s gross margins were much better than Sainsbury’s. In 2006 gross margin of Tesco was 26.6% in 2007 it was 22.6% and in 2008 it was 25%. Comparing Tesco’s gross margin with its international competitor Wal mart was 23% in 2006.In 2006 Net income of Tesco was 52906 exceeding Wal mart’s which had a Net income of 12,731.In 2007 Tesco ‘s Net income exceeded Wal mart’s. Tesco had a net income of $32302 and Wallmart had a net income of $11284 in 2007.In 2008 Tesco again ruled the category by making a net income of $30545 while Wallmart made a net income of $11231.  Return on assets is another important profitability ratio. ROA can be computed as: ROA=EBIT/Equity This number tells you what the company can do with its assets. To be specific, it tells how many dollars of earnings they derive from each dollar of assets they control. It’s a useful number for comparing competing companies in the same industry. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets. Return on assets is an indicator of how profitable a company is before leverage(Investopedia). In 2006 Tesco’s ROA was 2.5.It was 1.88 in 2007 and 2.54 in 2008.The industry average in 2006 was 11.37.Here as we can see Tesco had ROA’s less than that of the industry which means it needs to utilize its assets more efficiently to produce more net Income. Another important ratio in calculating profitability is return on equity. Return on Equity (ROE, Return on average common equity, return on net worth, Return on ordinary shareholders funds/equity measures the rate of return on shareholders equity . It measures a firms efficiency at generating profits from every unit of shareholders equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. (Investopedia) Return on equity is given by NI/equity. In 2006 ROE was 6.19,in 2007 it was 4.45 and in 2008 it was 6.48. This means that ROE on equity of Tesco has been falling. It may be a result of recession that investors might have pulled out their investments leading to a lower equity and hence ROE. Conclusion Tesco has been seen to perform really well on almost every front of financial aspect whether it be utilizing assets, maintaining efficiency or keeping up with profitability. Most of its ratios are well above the industry average. In the local UK retail industry Tesco’s major competitors are Asda, Sainsbury and Morrisons. A financial ratio analysis proves Tesco to be ahead of these competitors .In the international area Wal mart and Carrefour are Tesco’s biggest competitors. In almost all financial fronts ,Tesco beats its gigantic competitors too. Even during times of recent recession Tesco seemed to be little effected by it. In fact the sales registered a growth of 3.5% in 2007.Only in profitability analysis of ROA Tesco’s performance was seen to be lower than that of industry which is an area Tesco needs to work on. Amongst the current financial challenges that Tesco need very vehemently work on are resisting the pressure on sales posed by recession that the world is experiencing. Revenues can be increased during these difficult times of recession by expanding abroad in merging markets like the subcontinent. More discount stores will lead to people saving up more in times of recession and hence Tesco will experience more revenues by grabbing market volume of nearby high frequency stores as people would have a special preference to buy from discount stores like Tesco. Tesco plc,about us http://www.tescoplc.com/plc/about_us/ TESCO MAIN SUBMISSION TO THE COMPETITION COMMISSION (CC) INQUIRY INTO THE UK GROCERY RETAILING MARKET,2005(www.tesco.com/talkingtesco/p/inc/StatementofCase.pdf) Wal-Mart three times rivals size , Last Updated: Wednesday, 26 April 2006, 23:00 GMT 00:00 UK ,(http://news.bbc.co.uk/2/hi/business/4946448.stm) Balance sheet ,Tesco plc 2005,2006,2007,2008 , available at http://www.tescoplc.com/annualreport09/(accessed December 25 2009) Income Statement ,Tesco plc 2005,2006,2007,2008 , available at http://www.tescoplc.com/annualreport09/(accessed December 25 2009) General merchandise stores ,Corp Average Financial Ratios 2006(http://www.bizstats.com/reports/corp.asp?industry=General+merchandise+stores&profType=ratios&var=&coding=45.2) Wall Mart’s financial statements,(http://www.reuters.com/search?blob=wall+mart) Tesco sees profit rise to £2.8bn ,Page last updated at 17:05 GMT, Tuesday, 15 April 2008 18:05 UK ( http://news.bbc.co.uk/2/hi/business/7347769.stm) Tesco’s profit up to record $2.85 bn, Published: 16 Apr 2008, (http://www.thesun.co.uk/sol/homepage/news/money/article1046616.ece#ixzz0ab0fhXTN) J Sainsbury plc, corporate website,5 year summary financial results(http://www.j-sainsbury.co.uk/index.asp?pageid=286) Return on asset (http://www.investopedia.com/search/searchresults.aspx?q=return+on+asset) Return on equity, (http://www.investopedia.com/search/searchresults.aspx?q=return+on+equity) | Read More