1.0 Introduction 260
Tesco PLC is a multinational grocery store and is the third biggest retailer measured by profits. They have 6,809 stores globally including Hungary, India and China. However, this year Tesco had the biggest fall in the FTSE 100 causing shares reducing more than 5% with a 30% rise in group operating profits. Tesco’s prices had fallen 1.8% over the past year despite inflation. Also, Tesco has been losing customers to other retailers such as Aldi. However, the retailer has increased sales up to 0.9% by focusing on lower prices and better customer service. Another issue arose when Tesco was involved in a scandal two years ago, which cause a huge drawback on profits. However, this coming year sales are finally growing and according to Dave Lewis ‘Sales are up, profits are up, cash generation continues to strengthen and net debt levels are less than half what they were when we started our turnaround three years ago’. (BBC News, 2017) [online] [Accessed 6 Dec. 2017].
In this report, I will do a financial analysist of Tesco and Sainsbury’s using their financial statements measuring their financial position and cash flows and Solvency of both businesses. Due to food price inflation measured by the government around 2% caused lower consumer confidence meaning food prices are more expensive. Sainsbury’s pre-tax profits reduced by 8.2% as they had invested into Argos and price cuttings. Though a reduce in profits, Argos would enable Sainsbury’s to increase its markets share which will lead to bigger profits. (Butler, S,2017) [online] the Guardian. [Accessed 6 Dec. 2017].
2.0 Financial performance/ position
Regarding Tesco’s financial position, this year their gross profit and operating profit is lower than its previous year but they have a substantial increase with their return on capital employed. The reason for the decrease in gross profit and operating this year is due to inflation and therefore, Tesco’s grocery prices had fallen 1.8%. the cost of food inflation has increased 4% which is the highest food inflation since 2013. Also, it is said that the company’s net debt is down 27% which Tesco hope to cut costs in the coming year. Saying this, Tesco’s revenues have increased from 53,933 to 55,917. (Cox, J,2017). [online] The Independent. [Accessed 6 Dec. 2017].
In the image above, it is clear that Tesco have made a lot of their revenue in the UK and ROI and therefore the revenue is higher than its previous year. Sainsbury’s have an increase in their gross profit however, have a decrease in their operating profits and return on capital employed. Due to rising costs and falling consumer confidence there was an 8.2% fall in profits. BBC News. (2017) [online] [Accessed 6 Dec. 2017].
The rationalisation of a decline in operating and gross profit is the decline in sales. Although, Tesco’s sales revenue is higher Tesco has suffered a profit decrease. The reason for this is because of their exceptional items and cost of sales. This year Tesco had a net impairment loss of non-current assets which included a reversal of £103m in PPE and investment property. They also had a £53M net loss in impairments. It also shows that Tesco have had a £54M loss which related to the group shares of Impairments. This also had a negative effect on the businesses gross profit ratio.
In 2016, Tesco have had impairments of 299M.
3.0 Cash flow analysis
Cash flow statements allow organisations to see the incomings and outgoings of cash which represent operating activities of the business and how the cash is generated. This year, Tesco have an operating profit in continued operations but however made a loss in discontinued operations comparing to last year. This resulted in paying £47m corporation tax. Tesco have reduced their interest rates to 3% on loans up to £3000 up until April 2019. Therefore, this could be the reason why Tesco’s loans and advances to customers have increased by 8% giving it a total of £1,474m, thus the reduction of cash by £1,529.
Taking this further, Tesco had purchases of property, plant and equipment of £1,205 in 2017 and last year they had PPE of £871m. It states that there is an increase of PPE this year and could related to almost £5,000 head offices were axed and a closure of 48 underperforming Tesco stores. However, these changes were made as part of cutting costs to help the business improve their efficiency before their huge investment of £3.7bn takeover of booker which is a vast cash and carry company. (Butler, S,2017). [online] the Guardian. [Accessed 8 Dec. 2017]. However, Tesco did invest in joint ventures with third parties carrying out property investments covering shopping centres and standalone stores. They also have other interests in a number of joint ventures and associates.
Sainsbury’s have also made purchases of PPE of £530m. Sainsbury’s have reported strong trading performance in 2017/18 with like-for-like sales up 2.3%. They have also invested in new product lines, space expansion and one new supermarket. (MorningstarUK, 2017). [online] [Accessed 8 Dec. 2017].
Tesco has disposed subsidiaries this year which they received £205m whereas last year the disposal of the subsidiary was £3,237. Tesco has sold Dobbie garden centres to an investor group for £217m. The cash received from this deal will allow Tesco to open 35-store estates that will be used for corporate purposes. Last year the business also sold its south Korean business, Homeplus, for £4.2bn which was intended to make progress and improve their balance sheet. (Tugby, L, 2017). [online] [Accessed 8 Dec. 2017].
They have received proceeds from sale of property of £512m which Tesco are looking to pay down as much of the £700m of debt as they can strengthen its balance sheet ad regain its investment grade status. Ft.com. (2017). [online] [Accessed 8 Dec. 2017].
Sainsbury’s did not dispose of any subsidiaries this year but however, purchased more subsidiaries of £548m. They also had a disposal of assets of £55m. Sainsbury’s is closing down 38 of its own phone shops and intend to cut costs by £500m as they struggle with the return of food inflation and rising wages. (Hardy, E. 2017). [online] [Accessed 8 Dec. 2017].
Furthermore, Tesco have had both a negative impact on their financing activities in 2017 and 2016. 2017 had a figure of £1,387m and 2016 £604m. This year, their increase on borrowings are £185m and have repayments of £2,036m. Comparing this to its previous year, Tesco’s increase on borrowings were £586 but also had repayments of £1,328. This clearly proves Tesco are trying to reduce their debts quickly as their borrowings this year have reduced and their repayments have increased from 2016. Moreover, Sainsbury’s did not have any new borrowings this year however, they have a repayment on long term borrowings of £130m which also proof that the business is reducing their debt without borrowing more.
In addition, Tesco do not pay dividends as they want to continue to make strong process and more sales. At the moment sales are high and profits are growing which allow cash generations to strengthen. Tesco want to build strong performance and create long-term sustainable value to their stakeholders before paying dividends. The net cash generated in 2017 is £2,558 and in 2016 £2,434 where generated. Although looking at the profit and loss account Tesco made a loss of £54m this year but last year made a profit of £129m. Although, they made a loss this year their net cash generated in 2017 is higher to its previous year. This shows Tesco is generating cash from their profits which the business had already intended to do. (Ft.com, 2017). [online] [Accessed 8 Dec. 2017]. Also, the interest paid in 2017 is £41m and in 2016 it is £3m. However, the cash generated from operations is a lot higher therefore it proves the business is sustainable. Although, Tesco do not pay dividends, the non-executive chairman states they intend to pay dividends in the next financial year as they believe dividends will grow in that financial year. Sainsbury’s pay dividends of £230m and had dividends of £234m in 2016. The reason why it is a little lower in 2017 is due to a reduction of 16% as they want to pay an affordable dividend by underlying earnings. (Interactive Investor, 2017). [online] [Accessed 8 Dec. 2017].
4.0 Investors/Solvency
Tesco’s gearing ratio has slightly increased this year from 64.38% to 75.74%. This is due to the repayment of borrowing they have made. Also, their equity this year is lower than its previous year by £2,178m which caused their retained earnings to be significantly lower than 2016 as no dividends where paid. This also could be related to the £54m loss they had incurred. Due to a high ratio, it can cause Tesco’s existing debt become more expensive due to interest rates. The gearing ratio for Sainsbury’s 38.45% this year which is a little bit higher than 2016. Comparing this to Tesco, Sainsbury is at a much better position as they do not have any borrowings this year and they also had made a profit.
Although, the P/E ratio for 2017 is higher than 2016 with a figure of £417.45, Tesco’s profits increased 30% but shares fell. Tesco’s profits grew £1.28bn which caused the sales to grow this year. Tesco won approval for the £3.7bn booker takeover which will be completed next year.
This show that Tesco’s shares are up and down throughout the years in comparison to Sainsbury’s. The blue line shows Tesco’s shares had fallen in late 2015 to 2016. In January 2015, Tesco said they would close 43 unprofitable stores which allowed the shares to increase. However, in January 2016 the chart shows the share dropped significantly due to profit reducing by £500m because Tesco needed to employ more workers and sort out their financial dealings with suppliers. (Anon, 2017). [online] [Accessed 5 Dec. 2017]. In 2017, the shares have increased and are steady as like-for-like-sales increased by 2% which helped the sales growth. Sainsbury’s reduces dividends against profits but both businesses have increased in 2017.