The overview industry
There are 92,796 grocery stores in the UK. They can be split into four sectors which are convenience Stores, Traditional retail, Supermarkets and online channel. The whole market is worth £146.3bn. Food and grocery expenditure accounts for 52p in every £1 of the retail spending. The companies that we are going to look at are Tesco PLC, J Sainsbury PLC, Morrison and Mark and Spencer.
- Tesco PLC.
- Wm Morrison Supermarket PLC. (Morrisons)
Morrisons is the fourth largest food retailers in the UK. It runs more than 365 stores, 13 manufacturing sites and 12 distribution centers throughout England and Scotland. It is engaged in the business of food and beverage retailing through supermarkets. It offers a variety of products, which include fresh foods, groceries, pharmaceuticals, diary based products, garden furniture, home and leisure products, alcoholic and non-alcoholic beverages.
The Annual Report shows that the company has GBP 14,528.00 million sales during the fiscal year ended January 2009, an increase of 12.02% over 2008.The operating profit of the company was GBP 671.00 million during the fiscal year 2009, an increase of 9.64% over 2008. Creditors, current tax liabilities and other financial liabilities increase in 2009 leading the total liabilities raise, an increase of 13.75% from 2008.
The Return on capital employed (ROCE) for 2009 is 8.58%, an increase of 1.14% over 2008. This shows that more profits are being generated from investment in 2009. The Asset Turnover for 2009 is 1.90 times, 0.32 times more than 2008. From that, we are able to see how well the company is doing, as far as generating revenue for the business. An increase for the asset turnover indicates that the resources are efficiently use in the marketing and sales, and producing an excellent return. The business has net profit margin of 4.51% for 2009, a decrease of 0.21% from 2008. Net profit margin shows how much profit a firm makes for every £1 it generates in sales or revenue. And the gross profit margin for 2009 is 6.28%, there is 0.03% decrease from 2008. This indicates that the rate decrease in cost of goods sold are higher than the rate of decrease in sales, hence the decreased efficiency.
Current Ratio for the company in 2009 is 0.5, same as 2008, the current liabilities exceed current assets, and company may have problems meeting its short-term debt. The quick ratio also shows that the company doesn't have enough current assets to cover their current liabilities.
The inventory turnover ratio shows that the stocks is able to cover the sales 29.43 times in 2009, an increase of 0.09 times over 2008 and the inventory turnover days for 2009 are 13.24, and 13.24 days in 2008. It is showing that how many times a company's stock is sold and replaced over a period. Trade receivables turnover for 2009 is 6.15 days and 5.6 days for 2008. It takes longer to collect the debt from the debtors in 2009. Trade payables turnover for the company illustrates that in 2009 Morrison has longer pay back time, 48.08 days, and 47.25 days for 2008.
Primary Investment Level
Operation return on Equity of Morrison shows an increase of 0.51% from 2008 to 2009. This means that there is a raise in the profit Morrison generates with the money shareholders have invested. The Financial leverage multiplier of the business was 14.49% during the fiscal year ending January of 2009, shows an increase of 0.51% over 2008.
Morrison had negative working capital, as current liabilities were £2.02 million when the total current assets were only £ 1.07 million. With negative working capital, the company will have problems in expanding. However, negative working capital in and of itself is not necessarily bad, and could illustrate that Morrison is very efficient at turning over inventory. During the fiscal year ending January of 2009, Morrison's long term liabilities was £1.05 million and total liabilities were £3.71 million. In 2009, accounts receivable for Morrison were £180.00 million, which is equivalent to 5 days of sales. This is slightly higher than 2008, when it had 3 days of sales in accounts receivable.
J Sainsbury Plc
J Sainsbury Plc's main activity is to provide grocery and related retailing services. It is the third largest grocery seller in the UK and it has around 16% of market share. It has 823 stores throughout the United Kingdom. Some of the products it is selling are its own brand products. It also provides internet-based home delivery service.
The company operates within a low margin industry. Sainsbury's revenue has increased 6% from the financial year of 2008 to 2009 but gross profit has only increased 3%, which makes the gross profit stays at around 5.5% for the two years. There is a significant increase in net profit of 27% in 2009 because administrative expense is much lower during 2009. The net profit margin increases from 2.97% to 3.56% because of the changes in revenue and operating profit.
The cost of goods sold increased 6% and closing inventory rises 1 %, this result in a slight improvement in inventory turnover, when 2009 was 26 times and 25 times at 2008. There is also a slight increase in asset turnover of 0.12 because of the increase in revenue and a tiny decrease in capital employed. The collection periods and payment period were 4 days and 51days respectively, both of them are similar with 2008.
Comparing the two years assets and liabilities, Sainsbury's total assets have decreased and total liabilities have increased leads to 2.5% increase in financial leverage multiplier. Looking at the non current assets of the company, there was 495 retirement benefit asset at 2008 but none on 2009. The value of property, plant and equipment has increased about 400m because the total areas of Sainsbury stores have increased 3.2% although the number of stores has decreased. The rest of the assets for the two years are quite similar results in small decrease in capital employed. Total liabilities increased by 18% with 140m increase in long term borrowings and this can be because funds were required to invest into the new stores.
At the end of both years, Sainsbury has negative working capital. The current ratio for 2009 was 0.55 and 0.65 in 2008. The fact that it has negative working capital may means that it could has difficulties in expanding and this can be the reason that the company needs to close down some of its smaller stores to open larger stores. The acid test ratios are 0.302 and 0.350 in 2009 and 2008 respectively. The different between the current ratio and acid test ratio in the two years are 45% and 46% of the current ratios which means that Sainsbury's current assets are highly depend on inventories. During the year, the capital employed decreases and the increase in net profit before interest and tax result in the return on capital employed increases from 5.24% to 6.71%.
Shares and Shareholders
Sainsbury's payout ratio increased from 2008 to 2009. Sainsbury's earning per share decreased from 19.1p to 16.6p but dividend increased from 12p to 13.2p. This can be because the company retained more profit previous year for expanding during the year of 2009. If a firm chooses to retain some of its profit to reinvest the funds, the stock price may increase because future dividends may be higher. The interim dividend and final dividend for 2009 rose by 20% and 10% respectively but the share price of the two years are similar. During the year ended 2009, the financial leverage multiplier and return on capital employed rises, this leads to operating return on equity increased. This means that every pound of the shareholder's funds earn a higher net profit.
Marks and Spencer Group PLC
The group's major activities are retailing clothes, food, home products, beauty products and many other kinds of goods. The group has over 622 stores in the United Kingdom including over 130 franchise businesses, operating in 30 countries. It has 278 stores in the whole worldwide.
Marks and Spencer Group PLC reported £9.06 billion sales for the year ending March 2009. This has a increase of 0.4% than 2008 which were £9.02 billion. The increase of food sales was more than double the company's total growth rate: sales from £4.47billion to £4.52 billion which were up 1.1% in 2009. On the other hand, sales of general products fell 0.2% to £4.54 billion.
Marks and Spencer Group PLC paid dividends 15.00p per share. Since the stock is currently trading at 372.30p, this implies a dividend yield of 4.0%. During the 12 months ending 9/26/2009, the company reported earnings of 32.00p per share. Thus, the company paid 46.9% of its profits as dividends.
The cost of goods sold totaled £6.84 billion in 2009 which was 75.5% of sales. This gross profit is lower than the company achieved in 2008 when cost of goods sold totaled 61.4% of sales. The company's profit before interest, taxes, deprecation and paying off were 12.5% of sales. This is worse than the company achieved in 2008 which was 15%. In 2009, earnings before extraordinary item at Marks and Spencer Group PLC were £508.00 million. This profit is lower than the level the company achieved in 2008, when the profit margin was 9.1% of sales. The company's return on equity in 2009 was 26.0%. This was significantly worse than the already high 49.9% in 2008.
As of march 2009, the value of the company's inventory total £536.00 million. Since the cost of goods sold was £6.84 billion for the year, the company had 29 days of inventory on hand. In terms of inventory turnover, this is an improvement over March 2008, when the company's inventory was £488.90 million, equal to 32 days in inventory.
At the end of 2009, Marks and Spencer Group PLC had negative working capital, as current liabilities were £2.31 billion while total current assets were only £1.39 billion. The fact that the company has negative working capital could indicate that the company will have problems in expanding. However, negative working capital in and of itself is not necessarily bad, and could show that the company is very efficient at turning over inventory, or that the company has large financial subsidiaries. As of march 2009, the company's long term debt was £2.12 billion and total liabilities were £5.16 billion. The long term debt to equity ratio of the company is 1.01. As of march 2009, the accounts receivable for the company were £120.50 million, which is equal to 5 days of sales. This is a little higher than at the end of 2008, when Mark and Spencer Group PLC had 5 days of sales in accounts receivable.
Comparing four companies
Tesco's revenue of 54,327million at 2009 and 47,298 million at 2008 is the highest. It is even higher than the total of the other three companies. Mark and Spencer have the least revenue but it is the most profitable. Its gross profit margin of 37% and 39% at 2009 and 2008 respectively is quite high compare to the other three which are in between 6% to 8% and its net profit margin is the highest too. One of the reasons that its gross profit margin is much higher can be because Mark and Spencer concentrate on its own brand products which goods usually cost less to purchase while the other three only sells some own brand products.
Share and Share holders
From 2008 to September, 2009, the growing patterns of the four companies' share prices are quite similar. Morrison has the highest share price while Mark & Spencer's share price is the lowest. Tesco and Sainsbury's stock value are quite similar and are only small differences with Morrison's stock value. Although Mark and Spencer's share price is the lowest out of the four but it pays more dividend in the two years then the other three companies. Tesco's earning per share has increased from 2008 to 2009 while the other three companies decreased, however all four companies are paying more dividend per share for the year ended 2009 then 2008.
Tesco has a current ratio of 0.6 in 2008 and 0.8 in 2009 which is higher compared to the other 3 company's value. Mark and Spencer follows with a ratio of 0.6 in 2008 and 2009, and Sainsbury with 0.6 in 2008 and 0.5 in 2009. Morrison come the last with a ratio of 0.5 in 2008 & 2009. This mean Tesco has a better short-term financial strength than the others overall. While there could be exceptions for this industry. If inventory turns over much more rapidly than the accounts payable become due, then the current ratio will become smaller.
In 2008 Tesco has the highest quick ratio of 0.6, compared to Sainsbury's 0.4, Morrison's and M&S's 0.3 means Tesco has the highest liquidity over the other company, it has better ability to meet current obligations using liquid assets. While in 2009 they all turn up with a ratio of 0.3.
- IGD - http://www.igd.com/index.asp?id=1&fid=1&sid=7&tid=26&cid=94
- Annual Reports: Tesco - http://www.tescoplc.com/annualreport09/
- Morrison - http://www.morrisons.co.uk/Global/Images/Corporate/Annual%20Report/Morrisons_Report.pdf
- Sainsbury - http://www.j-sainsbury.co.uk/index.asp?pageid=4
- M&S - http://corporate.marksandspencer.com/investors