J Sainsbury plc Company Analysis - Case Study Example

Name: xxxxxx Tutor: xxxxxx Title: J Sainsbury plc Company Analysis Institution: xxxxxx Date: xxxxxx Introduction J Sainsbury plc is a public limited Company which was incorporated in the United Kingdom and whose shares are traded publicly on the London Stock Exchange. The Company is consequently domiciled in the United Kingdom and its address that is registered is 33 Holborn, London ECIN 2HT, United Kingdom. J Sainsbury plc was founded in the year 1869 and presently it operates close to 872 stores which comprises of 335 convenience stores and 537 supermarkets. It is in a joint ownership of Sainsbury’s Bank with Lloyds Banking Group and possesses two property joint ventures with The British land Company PLC and Land Securities Group PLC. The Sainsbury’s brand is built on a heritage of giving clients safe, fresh, tasty and healthy food. Fair prices and quality go together with approach to business which is responsible (J Sainsbury plc, 2010). Sainsbury’s stores have a special emphasis on food that is fresh and they strive to innovate on a continuous basis and provide product improvement in accordance with the needs of the customers. Close to 19 million customers are served every week and the market share is above 16%. The large stores provide around 30, 000 products and they also provide complementary non-food services and products in a majority of the stores. A home delivery shopping service that is internet-based is also in place to almost 90% of households United Kingdom households. Over 150, 000 people have been employed. In this analysis vital elements for running of this company are going to be looked at which will include: main sources of finance, company’s liquidity evaluation, company’s solvency evaluation, overall performance of the company and what are the risks involved and this will constitute credit and/or legal risks. The Group’s financial statements comprises of the results of the Company and all its subsidiaries, alongside with the Group’s share of post-tax results of its joint ventures. J Sainsbury plc Main sources of finance Sainsbury’s manages it financial obligation by means of diversification of funding sources, configuration of core borrowings with long-term maturities and maintenance of stand-by liquidity that is sufficient. By March the year 2010, Sainsbury’s possessed a total debt and facilities amounting to 3.0 billion pounds in place. Major funding of Sainsbury’s of 2.4 billion pounds is represented by 2.0 billion pounds CMBS debt, with 1.1 billion pound due in 2018 and 0.9 billion pound due in the year 2031 with more additional debt capacity of 0.2 billion pounds due 2014 and 0.2 billion pounds consecutively due 2015. Contingent liquidity is observed by means of committed facilities of 0.6 billion pounds. As at 2oth March 2010 there were no drawings which had been made against the committed facilities (J Sainsbury plc, 2010). Following the refinancing act that took place in the year 2006, the Group major finding has constituted long-term secured asset-backed loans which are supplemented by short-term bank lending. Consistent and accordingly with the strategy employed by companies that are property-rich utilizing funding platforms that are secured, Sainsbury’s has withdrawn its corporate family rating from Moody’s Investors Service and its corporate credit rating from Poor’s and Standard. The risks involved The process of risk management is closely aligned to increasing the company growth plan which is based on growing the business by means of the addition of new space, range, channels to the market and management of property. Risk is an important part of transacting business. The risk management system utilized in identification of the major risks the Group faces and to come up with and diligently monitor main controls is clearly outlined. Risk management is based on balance of risk and reward that is determined by means of careful assessment of both the potential impact and likelihood. The major risks identified by the Board and the mitigating controls corresponding to them are set out as follows: Acts of terrorism and Business continuity risks A major instance or act of terrorism could affect on the ability of the Group to trade. In the case of a potentially incident that is disruptive; plans that are detailed are in place to maintain Business continuity. The plans are on regular basis tested and updated. Economic and market risks The effect of the economic meltdown continues to drive the demand for value from customers. Challenges to the household disposable income, competitor pricing positions and product costs can have an impact on the performance of the Group in terms of both costs and sales. Emphasis continues on delivering quality products having an appeal that is universal at a range of price points ensuring value for all the customers. This is attained through the review of our key customer metrics that is continuous, price positions management that active, sales positions development, and increased marketing activity and promotion. Whereas pressures from external cost comprising of oil-related costs, business rates and commodity pricing affect the business, the Group continues working hard to alleviate the consequences of the cost pressures on customers and on the overall profitability through the delivery of cost savings. Environment and Sustainability risks The main risk facing the Group in this area is concerned to reducing the impact on the environment of the business with an emphasis on reducing packaging and other ways of reducing energy and waste usage across stores, offices and depots. Several initiatives are in place, which are being led by the Environment Action team and the Corporate Responsibility Steering Group to bring down the environmental effect and to meet the requirement of the customers in the area. Financial strategy and treasury risks The major financial risks are availability long-term and short term funding to cater for business needs and fluctuations in foreign currency rates and interests, which is ever impacted by the financial markets turbulence. The central treasury has the responsibility of the management of the Group’s liquid resources, requirements for funding, currency exposures and interest rate and the risks associated by it as outlined in the Annual Report and Financial statements of 2010. The treasury function has elaborate operating procedures and policies with are audited and reviewed on regular basis. Fraud risks The Group has framework of control that is strong in regard to potential fraud or any other dishonest behavior which is regularly assessed by internal audit. A set of policies are put in place to provide colleagues with detailed guidance on behavior. Moreover, there procedures for ‘whistle blowing’ put in place to enable suppliers and colleagues to raise any concern about possible improprieties on a basis that is confidential. Internal audit conducts investigations that are detailed and highlights the findings to the Audit Committee for appropriate recommendations. Safety and health risks Prevention of loss of life or injury for both customers and colleagues is of outmost importance. Clear procedures and policies have been put in place, which are in accordance with the relevant industry standards and regulations and adherence to them is regularly audited and monitored. Infrastructure and IT systems risks The Group depends on its IT systems and operational infrastructure in order to efficiently trade. Any failure in these systems could have a very significant consequence on the business of the company. The Group also has extensive controls to maintain the efficiency and integrity of its systems that includes recovery plans that are detailed in the event of a failure that is significant. Upgrades and innovations to the system are ongoing for the improvement of both colleague efficiency and customer experience. Before the introduction of system changes testing that is normally rigorous is performed. Pension risks The Group has a number of pension arrangements which comprises of two distinct benefit schemes. The schemes are subject to risks in regard to their liabilities owing to changes in the life expectancy, future salary increases, and inflation, and risks concerning the value of investments and the returns obtained from such investments. A strategy for investment has been constituted by the pension trustees in the consultation with the company to bring down the volatility of liabilities, to manage cash and diversification of investment risk (Mard, 2002). Product safety The safety and quality of the products is of the highest importance and any set backs in attainment of standards would impact significantly the confidence of the customers. There are controls that are stringent that ensure product integrity and safety. Practices on food hygiene are taken extremely serious and are regularly monitored to ensure compliance with the standards. All aspects concerning product safety are governed through the Product Safety Committee. All the suppliers are looked upon to conform to the code of conduct of the Group for Socially Responsible Sourcing which was launched in the year 1998 and covers terms of trading that are fair, protection of children, worker health and safety, freedom of association, freedom of employment, equal opportunities, hours of work and wages (Greuning, H. Van, 2005). Regulatory environment risks According to Norton et al. (2006), the operations of the Group are subjected to a spectrum of regulatory requirement that are broad particularly in relation to competition, environmental, planning issues, tax, pensions and employment regulations and laws over the services and products of the Group. There is a governance process that is constituted to monitor development regulations and ensure that all prevailing regulations are accordingly complied with. Views across the estate are completed regularly to ensure compliance and more so the training needs are addressed accordingly. Risk management system has been constituted throughout the year and by the date of the approval of the Annual Report and Financial Statements. Observing that risk is an inherent part of conducting business, the system is designed particularly for identification of risks and gives assurance that the risks are fully managed and understood. It is also aided by a risk policy and guidelines on the application of the policy, which are communicated in the entire company. The process effectiveness is reviewed twice a year by the Audit Committee that promptly reports to the board. The Operating Board has a risk register which is reviewed regularly by the committee and discussed with the Board formally. The register outlines the major risks facing the company and goes ahead to identify the potential likelihood and impact of the risk at both net (post mitigating controls) and gross (pre mitigating controls) level. Where the net risks need further actions, these are agreed upon with specific timelines. The actions are monitored closely until they are implemented fully. Estimation of the overall performance of the company J Sainsbury’s plc has kept on outperforming in a market that is highly competitive, delivering further good profit growth. This is a demonstration of the strength of the universal customer appeal in what has been persistently economic conditions that are challenging. The success has been recognized not only by the customers by also by the retail industry, resulting in a hat-trick of Retail Industry Awards for Sainsbury’s, with ‘Community Retailer of the Year’, ‘Seafood Retailer of the Year’, as well as ‘Convenience Retailer of the Year’. Judges praised the stores pricing strategy, standards, fresh food growth, customer experience and ‘neighboring feel’ of the stores. The value that is being delivered is unique for the customers, by the means of combination of own brands and Nectar. The Company has continued to invest in ‘basics’, which goes from strength to strength, as customers keep looking at ways to save money. On the other end of the spectrum, ‘Taste the Difference’ range has been re-launched comprising of over one thousand one hundred premium products. The Company has maintained a balance across different promotions, with market-leading deals being matched with competitive prices. With cost of goods rising, the company has worked hard to maintain prices low for customers. The laid down campaigns has continued to strike a rapport with customers, for instance, ‘Value where it matters’, which offers customers and families in particular, excellent offers on leading brands. Each week, almost thirty thousands of the major competitor’s prices are checked to make sure that competitive prices are offered and value that is great to assist customers in the management of the household budget. More than previous before customers also look forward to the products on the shelves to be sustainably sourced and ethically. ‘Ethical’ products continue to grow, demonstrating the leadership skills in the area. The Company continues to benefit from Nectar and the competitive advantages that come with it. In the past six months a further 1.4 million customers have signed up to Nectar. There are close to 12 million Nectar card holders as more customers continue to join and enjoy the benefits of the scheme. Customers have been given more points offers in-store, together with coupons offered at till, with number of customers redeeming their coupons ever increasing. The unique way in which the Company utilizes insight provided by the data assisted in the ward of ‘Best use of data in retail’ given to the Company at the Data Strategy Award. The Company provides high standards of availability and customer services both in-store and online and it has continued to invest in the improvement of the shopping experience of the customer and service. Self-scan checkouts provide customers with more choice and consequently have been installed in a further 365 stores in the past six months in a move towards the improvement of shopper experience and reduction of queue times at the till. J Sainsbury’s has invested considerable resources in training and development. In the month of May, the Company opened Bakery College to ensure that one thousand five-hundreds colleagues are in a position to deliver great quality fresh products to the customers. Apprenticeships have continued to improve and expand and in the course of the year almost 200 new apprentices have been recruited across the meat, fish and bakery schemes (Miller & Bahnson, 2002). Sainsbury’s Bank being a trusted brand, has made progress further in what has remained a challenging market. The Bank has continued with innovation launching a market-leading ‘Gold Credit Card’ with unrivalled benefits offered by no other retailer, which has been extremely well received by financial commentators and customers. Close to a year on, the Double Nectar Reward scheme available on selected finance products has played a role of strengthening further the relationship with the core shoppers and grow the financial business. The reward approach which involves rewarding the Sainsbury’s Bank customer every time they do shopping in the store has witnessed customer numbers and customers with multiple products go up. J Sainsbury plc continues to perform excellently in economic environment that is challenging, continuing with the development of its offer and invest for the future, while delivering its growth strategy and maintenance of the balance sheet strength. The Company is also investing in long-term growth of the business and taking advantage of the market conditions to from the sale and leaseback of some of its supermarkets that are mature (Miller & Bahnson, 2002). Evaluation of the company’s liquidity Liquidity relates to the capacity of the business or ability of the business to pay its short-term debts as they become due. Consequently the focus is on the relationship between the current liabilities and assets. It provides specific information on the ability of the company to it’s immediate and short term obligations. The current ratio shows the company’s capability of meeting its current liabilities using its current assets. The current ration for J Sainsbury for 2010 was 0.66:1. J Sainsbury plc is indicating an increase in liquidity from the previous year (Rasmussen, 2003). The Group’s operational cash flow is largely predictable and stable demonstrating the low business risk profile of the sector of food retail. Forecasts for cash flows are produced on regular basis to help management in future liquidity requirement identification. The liquidity policy of the Group observes that committed funding is preserved to cover cash flow requirements over an 18-month period. The Company complies with the policy through the restructuring of core debt with long-term maturities, maintenance of a portfolio of standby credit facilities and pre-funding future cash (Miller & Bahnson, 2002). Evaluation of the company’s solvency In order to get finance any company should have solvency indicators that are good which will include debt ratio, times interest earned and many others. Whereas the debt of the company is rising a bit the situation is well under control. The Company can afford to finance its operations and get additional capital from other financial institutions. The main elements of the Group’s core funding comprise two long-term loans of 1,100 million pounds due 2018 and 850 million pounds due in 2031 secured on property assets which are held in two subsidiary companies. Moreover the Group has two unsecured bank loans totaling 150 million pounds due 2015 and 190 million pounds of convertible bonds due 2014 outstanding. Seasonal and short-term funding is sourced from the wholesale inter-bank money market where interest is charged at various spreads that are above LIBOR. For standby aims the Group has come up with two syndicated committed revolving credit facilities of about 400 million pounds due in February 2012 and 163 million pounds due in May 2011 and an additional 50 million pounds bilateral committed revolving credit facility due in May 2012. Interest on drawing under these facilities is charged at various margins over LIBOR. There are no drawings which are under committed facilities as at March 2010. Conclusion J Sainsbury’s plc is a famous company that has several subsidiaries that includes a bank. The financial statement and the report of the year 2010 reveal so much about the performance of the company. In this analysis the overall performance of the company has been reviewed, the source income and the risks involved in the business operation have been discussed. Finally the liquidity and solvency of the company during that time has also been closely scrutinized. This report will provide more insight in the performance of the company as at the 2010 period. Bibliography J Sainsbury plc Annual Report and Financial Statement, 2010, Retrieved August 29, 2011 from J Sainsbury plc. Interim results for the 28 weeks to 2 October 2010, Outperforming the market; with strong growth plans Miller P. B. W. & Bahnson P. R., 2002, Quality financial reporting, McGraw-Hill Professional, NJ. Alexander D. Britton A., 2004, Financial reporting Authors Edition7, Cengage Learning EMEA. Higson A., 2003, Corporate financial reporting: theory and practice, SAGE, London. Greuning, H. Van. 2005. International financial reporting standards: a practical guide. Edition3. World Bank Publications, Mard M. J., 2002, Valuation for financial reporting: intangible assets, goodwill, and impairment analysis, SFAS 141 and 142, John Wiley and Sons, London. Needles, B. E. Powers M., 2009, International Financial Reporting Standards, Cengage Learning, NY. Rasmussen N., 2003, Process improvement for effective budgeting and financial reporting, John Wiley and Sons. Norton C. L. Et al. 2006, Intermediate accounting: financial reporting and analysis, Edition2, Cengage Learning, 2006. Read More