Sainsbury Plc's Financial Strategy - Example

5th December Sainsbury plc’s financial strategy As the competition becomes stiff for local firmsand international companies, various strategies have been put in place with an aim of putting at bay the competitors and increasing the company profitability. With a control of more than 17% of the UK supermarket sector, Sainsburys is the third largest supermarket in UK. Despite its early establishment by Mary Ann and James Sainsbury, the firm faced a stiff competition from Tesco and Asda in 1995 making it to occupy the third position. Sainsburys is headquartered in Holborn Circus. To ensure that its products are effectively distributed in the local and neighboring markets, the supermarket has established a number of subsidiaries in the UK market. Under the leadership of David Tyler and Justin King the company chairman and chief executive respectively, Sainsbury’s has more than 150,000 employees. This has resulted to a significant increment on the company revenue that stood at £21.102 billion in 2011. This paper, evaluate Sainsbury plc’s financial strategy by analyzing its financial performance in the last few years. To expand its customer’s base and generate more revenue that is needed to undertake its operations, Sainsburys has opened a number of stores, supermarkets and a significant number of hypermarkets. To ensure that the supermarket is financial strong to cater for its short-term and long-term liabilities, Sainsburys operates Sainsburys Bank whose key objectives is to sell financial products. One of the major factors that Sainsburys has adopted to enhance its financial performance was the formation of a joint venture with Lloyds Banking Company among other firms. Major strategies that Sainsburys has adopted to strengthen its financial position is merger and acquisitions (Adizes 35). As depicted earlier, the supermarket generated total revenue of £21.102 billion in 2011. This was an increase of 19% from the revenue generated in 2010 financial year. In terms of the net profit, Sainsburys gained a net profit of £640 million in 2011 which indicated an increase of 9.4% from the financial year 2010 net profit. Net debt and cash flows Sainsbury’s Annual Report and Financial Statement 2012 indicate that as a result of the increase in the investment, the net debt of the company increased from £1,814 million in 2011 to £1,980 million in 2012. This was however, offset by reasonable cash that was generated from leasebacks and sales. Table indicating cash generated from operations and net cash from operating activities by Sainsbury’s in 2011 and in 2012 financial years. Figures are in £ million. Cash generated from operations 1291 1388 Interest paid (142) (126) Corporation tax paid (82) (158) Net cash from operating activities 1067 854 Net cash used in investing activities (883) (902) Issue of shares proceeds 14 17 New debt 391 45 Borrowings repayments (65) (79) Dividends paid (285) (269) Source- Sainsbury’s Annual Report and Financial Statement 2012 Financing of Sainsbury operations According to the board of the directors, Sainsbury’s is focused at effectively managing its finances by maintaining appropriate stand-by liquidity, reducing the risks of refinancing and diversifying the sources of funds. Two of the major long-term loans that are vital in the operations of Sainsbury’s include loans of £1,036 million and £843 million that are due on 2018 and 2031 respectively. The company has provided its property assets as the security for the loans. Other key sources of funds includes unsecured loans of £499 million, finances leases of £143 million, and convertible bonds issued to the public amounting to £190 million. Based on the profitability of the company, the board is focused at repaying the loans in the next five years. In order to have adequate cash to cater for short term and urgent liabilities, Sainsbury’s maintains a revolving credit facility amounting to £690 millions (Modigliani and Miller 263). According to the 2012 Sainsbury’s balance sheet, shareholders funds amounted to £5,629 million and increment of £205 million as compared to the 2011 balance sheet. This increment is based on the continued increase on the level of investment and continued positive growth. Sainsbury’s company has embarked on expanding its space thus resulting to increased value of property, equipment and plant by £545 million. As the Sainsbury’s continue to expand its operations and increase shareholders returns and profits, various investors have expressed interest in 3% or more shares of the company. For example, Judith Portrait a renowned trustee of various charitable organizations in interested in 3.92% of voting rights, M1 Capital Limited 3.02%, Legal and General Group company 3.99%, Qatar LLC 25.99% while Lord Sainsbury of Turville is interested in 4.99% (Sainsbury’s Annual Report and Financial Statement 2012) According to the 2011 Sainsbury’s income statement, the company made an operating profit of £738 million. While in 2010, it attained an operating income of £671. Based on the high costs of finance as the company engage in expanding its investment portfolio in 2011, the underlying profit before tax increased by only 9% in 2012 as compared to 2010 finance year. As a result of the increase in the profit before tax from £733 million to £827 million in the 2010 and 2011 financial years respectively, the income tax of the company increased from £148 million to £187 million. However, this did not have negative results on the share prices and divided paid to the shareholders as shown on the table below. Underlying basic prices per share 26.5p 23.9p Percentage change 10.9 Basic earnings per share 34p 32p 7.2 Divided per share 15.2p 14.2p 6.3 Source- Sainsbury’s Annual Report and Financial Statement 2012 One of the notable strategies that the supermarket has initiated to expand its financial resources is by developing new businesses. By investing in sectors such as energy, pharmacy and banking, Adizes 35 argues that Sainsbury’s has created a strong trust for its investors. In the same way, the company has initiated the Nectar loyalty programme that ensures that its customers win double points once they use Sainsbury’s banking services. Additionally, the supermarket has embarked on expanding its space as well as creating value on its properties. For example, in 2012, Sainsbury’s added 19 new supermarkets and 28 convenience stores in the UK market. In terms of creating property value, the company property estate is currently valued at £11.2 billions. This is projected to rise by £83 million in 2012 as a result of the development activities that the supermarket will undertake. Another notable source of funds that the supermarket has adopted is the re-launching of car insurance. With an increase of approximately 150% year-on-year insurance sales, the company has obtained adequate resources that it has utilized in the expansion of its space. In the same way, Sainsbury’s has expanded its travel money services making the revenue generated by the services to increase by 85%. To expand its customer base and generate more revenue to cater for the expansion and employees salaries, Sainsbury’s has embarked on providing high-profile awards to its consumers through its bank. Some of the services that have been initiated by the bank includes personal loan provider, low rate credit card, consumer moneyfacts 2012 and your money direct 2011 among others. A key acquisition that was adopted by Sainsbury involved Global Media Vault ltd in 2011. Through the merger, the supermarket generated significant online market revenue as well as considerable sales of its films and books, some of its major products in the market. In its efforts to appropriate returns from its investments, Sainsbury’s emulates the culture of savings and strict control of its capital expenditure. For example, over the past 5 years, the company has attained a costs operational savings of over £600 million. This is due to the improved productivity, simplification of process in the stores and introduction of modern technologies in the warehouses. Table indicating the 5 year savings that have enhanced the financial stability of Sainsbury’s Financial year Savings in £million 2007/08 150 2008/09 100 2009/10 145 2010/11 100 2011/12 115 Source- Sainsbury’s Annual Report and Financial Statement 2012 Sainsbury’s dividend policy In 2012, the board of directors recommended and approved a final divided of 11.6 pence. This is in line with the company policies to give the shareholders interim and final divided as a way of appreciating their role of enhancing the expansion of their company. The dividend depicted a 6.6% increment as compared to total divided paid in the 2011 financial year. One of the aspects of the Sainsbury’s divided policies is to give a dividend that covers 1.5 to 1.75 times the underlying earnings. With the provision of the 11.6 pence per share, the company covered 1.75 times the underlying earnings thus making the board to be at par with the company dividend policy. It is notable to note that since the final dividend was recommended on May 8, 2012 it was not depicted by the company balance sheet as a liability as at March 17, 2012. To ensure the shareholders remain committed to expanding their investments in the company, Sainsbury is focused at increasing its shareholders returns. For example, the board is aimed at increasing it’s dividend to cover two times of the underlying earnings. An appropriate financial strategy for Sainsbury over the next 3 years Over the next 3 years, I recommend that Sainsbury’s expands its operations to cover the developing countries. As the global economy recovers from the recent economic downturn, local and international companies have taken initiatives to participate in stock exchange markets in foreign countries. By participating in financial markets in developing economies, Sainsbury’s will expand sources of funds thus enhancing effective entry in foreign countries. In the same way, the company should invite investors from other countries. This can be achieved by adopting extensive marketing strategies in less developed countries. Additionally, Sainsbury’s should come up with more facilities in its bank to cover wide range of customers in the new markets. In this way, it will significantly expand its revenue as well attain its objective of increasing shareholders dividend on an annual bases. Conclusion Based on the above discussion it is clear that for a company to maintain a stable financial position, it is essential to consider the diversification or resources and proper management of the cash inflows and expenses. Despite the increased competition in the UK supermarket sector, Sainsbury’s has emerged as a competitive company based on the efforts by the board of directors to initiate adequate mechanisms to control the company costs. Through diversified investments in the energy, banking and pharmacy sectors, Sainsbury’s has not only increased it annual profits but also it has provided its shareholders with high returns. Additionally, the provision of effective banking services has resulted to the increment of cash inflow an aspect that has made the company to increase its stand-by liquidity. In this way, it has also increased the value of its property and equipment through the expansion of space strategies. Been a supermarket that is focused at creating wealth for its shareholders and expanding customer base, Sainsbury’s has attracted the attention of majority of investors from UK an aspects that is imperative for future performance of the company. Works Cited Ichak, A. The 10 Stages of Corporate Life Cycles. London: Sage. Print. Modigliani, F and Miller, M. The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 1958, 48 (3): 261–297. Sainsbury’s Annual Report and Financial Statement 2012. Available from http://www.j-sainsbury.co.uk/media/649393/j_sainsbury_ara_2012.pdf. Read More