Financial Performance and Analysis of Sainsbury Plc

Supermarket cell J Sainsbury Plc was established in 1869 by John James and Mary Ann Sainsbury in the UK. The business was started in weak circumstances but it took a short period to be known as qualitative food market providing affordable prices. From 1882 the company started to sell products under its label. Since, there has been a considerable increase in the number of shops. At present Sainsbury's owns 872 selling objects in progressive sites, which are selling around 30,000 different kinds of products. The revenue for 2010 reached £21,421. For 2009 Sainsbury's was named Supermarket of the Year. For nowadays the company is considered as world's leader in fair-trade and is the largest UK retailer of freedom food. The company holds strong competition with other dominant supplier companies in UK such as Tesco Plc and Morrison Plc.

Appendix A

Historic performance and analysis

Whilst analysing sales growth from 2007 to 2010 it results hesitant data. Sales for 2007 indicate on growth about 7.0% whilst for 2008 the sales growth was slightly reduced about 4.2%. The growth for 2010 is 5.0% but in compare with previous statement it is reduced as for 2009 sales growth was 5.6%. In contrast the operating profit from 2007 to 2010 has increased with 80%.

The profit analyses for five years period indicates that the company has increased its profit perceptibly as for 2006 the profit of the year was £58m, for 2010 the year profit is £582m.

Given data indicates that j Sainsbury has positive profitability but 2010 performance looks much better this can be explained with stock which was bought from cheaper supplier for keeping the lower expenses than in previous year (2009) therefore company has updated its responsibilities of business.

The Sainsbury's income statements points out that gross profit percentage are higher but net profit percentage is low this may be explained with high operating costs (day to day costs - wages, rent and insurance), which urges company to take out too much profit from the business. Therefore action is required to reduce operating costs.

Sainsbury's does not have high gross profit for given five years, in addition the percentage of gross profit margins are reducing slightly. Whilst 2006 the Morrisons profit margin was 1.1% for 2010 there was achieved higher gross margins 7.4%. As overall the companies are holding satisfactory percentages but there is needed work to achieve cheaper costs of goods, or increase somehow its selling prices. If raw materials and wages will considerably rise, the gross margin will reduce.

Basically Sainsbury's has positive Net profit Margins. However from given five years Morrison Plc generally has higher margin data except 2006, whilst they have invested big amount into property equipment and profit margin was negative as it fell to -2.6% but for next year their net profit margin was updated onto 3.0%. Somehow Sainsbury organised to achieve disburse of account for properties without negative data but during five years period there was not any substantial rise. There is similar situations regarding ROCE (return on capital employed). for 2010 Sainsbury's ROCE is 6.8% which is at a reasonable stage, means that if the sales will disappear the company still will be able to balance its current obligations with enough convertible funds. In contrast Morrison's 2010 ROCE analyses are higher about 9.8% which indicates increase from 2006 where it had -4.2% but for next year competitors grew to 5.0%. The interest rate of Sainsbury at the bank is higher than is seen, therefore it may be questionable for investors to put the money in.

After 2006 the shareholders funds of j Sainsbury has sufficiently increased return on equity for 2006 was 1.46% whilst for 2010 it reached 11.78%. Morrison's had harder circumstances as for 2006 it had -6.85% of return of shareholders funds but 2010 statement indicates that they achieved 12.08% - higher ROE percentage than Sainsbury's did.

Whilst discussing liquidity ratios of j Sainsbury there is important data regarding acid test ratio. For 2006 quick ratio points on 0.7:1 this is not considered satisfactory for the company. It is more complicated for next years as the quick ratio time is reducing as for 2009 it was 0.3:1. In result it might be argued that the company does not have enough working capital. From another point the company is in a better position compared with Morrison's, which is bearing around 0.2:1 within whole 5 years. The final picture of liquidity ratios seems poor as it has not reached 1.5:1 in any year and are much less than norm. This kind of result is explained with high payables in balance sheet, which is over 2,000m each five years. There is not big gap between current and liquidity ratios which says that the company is still able to cover it bills. If the given liquidity ratios had more healthy data it would not be so complicated for the group to meet debts that need to be paid for the near future. This result similarly with previous ratios indicates that investment in Sainsbury's does not look advantageous or secured.

Since 2006 the company keeps strong efficiency ratios. For five year history the company takes around 14 days to sell stock. The quick turnover of stock points that the sales profit of the stock is generated quicker but fast turnover is one of the reasons of the company's low gross profit margin. J Sainsbury is not keeping its stock in warehouse too long which in result allows business to not increase their fixed assets. Morrison's turnover period is quite similar but they take less time about 11 days (for 2007) to sell their stock.

Furthermore the statements show quite positive numbers regarding settlement period for trade receivables. For 2006 it needed 7 days to collect the debts but last four years look considerably improved as from 2007 to 2010 customers take 4 days to pay the debt to company. In contrast Morrison takes from 5 to 6 days for the same time period.

There is similar situation regarding creditor payment period Sainsbury's manages to get amount back from suppliers within 34 days (2010) which is similar with Morrison's indicator. Therefore there is less risk to lose money by both companies.

For last five years the efficiency ratio of Sainsbury illustrates on managing its working capital effectively.

Moreover the company has more risk when it has high loans the gearing ratio for 2006 was 100.2%. This is impelled because of loan for property as mentioned before. Instead of this Sainsbury paid its loans on time and has reduced gearing for 2007 to 57.6%. But later the company again raised its gearing ratio for 2010 onto 62.3%, which is considered as high gearing and more risky for the business. The result does not show any complication to pay the loans back. If looking at Morrison's they have a notably better situation as for 2010 their gearing ratio is 33.5% which is not considered as high data.

The above mentioned loans do not look risky if taking into account the explanation of company. After the huge refinancing of the business in 2006, "Sainsbury's has funded itself through the secured debt market". As there are used shorter-term credit lines which are not described as unsecured or outstanding debts. The company points on more need of funding required plans and cares less about the corporate rating by saying that Sainsbury's has £3 billion debt and facilities which may be used to cover current debts for goals or for required developments.

For late 2010 J Sainsbury's earns 18.2p per share. Five year statements show an increase on EPS as for 2006 the company was earning 15.2p per share. In contrast with Morrison, Sainsbury earns less as Morrison has gained 26.2p per share for 2010. This kind of earnings is provoked as Morrison has less risk factor therefore it earns more on share than Sainsbury.

Summary of historical review points on importance to reduce risk factors by balancing loans which will improve gearing ratio. Sainsbury's has profitable ROCE 6.8% for 2010 which had grown about 1.8%, somehow it is not enough high as it is still lower than bank interest rate. The company as well have enough current assets to cover the payment schedule of its current liabilities with a margin of safety to avoid loss regarding current assets.

Value Driver

The analyses of company statements clarifies that the business is being updating well. Here will be discussed the main reason - value drivers of the supermarket which reinforces the company performance, as well it will be compared with Tesco Plc.

As a leading food retailer for 2010 it is found 250 lines of products in J Sainsbury. The company keeps focusing on high qualitative fresh food moreover the group has been named as world's largest fairtrade by values regarding fresh meet like beef, pork, lamb, cheese and egg supplies. Sainsbury trademark has won more quality food awards than any other retailer for 2010. For now there is 19 million customer transactions per week, a million more than in 2009. The company manages to launch trading of non-food products which show 3 times faster grow than TU clothing or food sales. The increase of product line has grown the operating profit to £19 million.

Moreover J Sainsbury has launched non-food online trading from 2009. The catalogue is listing 8,000 products available nationally with delivery service. In result the online sales has increased rapidly by 20%. Innovation supported supermarket with 5.1% sales increase as revenue has updated from 20.4 to 21.4% as for march 2010 (Cio. 2010). The UK dominant market Tesco Plc launched its non-food online trading earlier in 2006 with similar amount (8,000) of products (Higginson. 2007). This resulted online sales growth by 30% and underlying sales grew by 5.9% in total of £150 million (Charlton. 2007). Web sites offer different price range on different products, as example bestseller new computer game "call of duty" which retailer price is £54 pounds, here Sainsbury's are selling for £26, whilst Tesco as "marketing for fans" offers it for £25 (Saggan. 2010). Sainsbury's web market development is still weak in comparison with Tesco's, but the company still stays close with giant trader which latest online year income is around £5 billion (Digitalstrategyconsulting. 2010).

In contrast Guardian (2010) has published the latest data which explains that Sainsbury's have more progress than Tesco regarding trading. The above mentioned online sales have increased with 25% for October 2010. The total sales are 5.2% whilst like-for-like sales have climbed to 2.9%. These results will upgrade the annual profit forecasts. Unexpectedly Tesco reported 0.4% growth of like-for-like sales which in contrast excludes VAT. Some analysts explained the case as the reason of fall in sales volumes of Tesco (ibid).

The chief executive of Sainsbury's Justin king challenges "We've delivered another strong performance and grown market share". The group plans to increase Vat up to 20% from 17.5% for January. Moreover the non-food lines are increasing three times more than food rate, whilst food range is going to increase for September with 1,000 product range. This comes from gained popularity of new bistro range.

Conclusion

The development of the company indicates on its strong reinforcement. As the chairman of J Sainsbury David Tyler declared they manage to: update revenue, controlling product quality and creating outperformed competition. The chief executive Justin King added for 2010 total sales have increased 6.7% whilst over five years the increase reached 25%. In addition there is sharp increase of customers as a result of qualitative product with balanced price. After all the company is creating about 6,000 new jobs per year and thus supports the UK economy.

"Sainsbury's is a strongly Cash-Generative business" says the chairman and points on operating cash flow (£1,2 billion in last year). "We have strong asset backing from our Freehold property" he adds to indicate that they are ready to continue the way to leadership of trading.

(1985 words)

Bibliography

J Sainsbury Plc Annual report 2006

J Sainsbury Plc Annual report 2007

J Sainsbury Plc Annual report 2008

J Sainsbury Plc Annual report 2009

J Sainsbury Plc Annual report 2010

Morrisons Plc Annual report 2006

Morrisons Plc Annual report 2007

Morrisons Plc Annual report 2008

Morrisons Plc Annual report 2009

Morrisons Plc Annual report 2010

Tesco Plc Annual report 2010

Tesco Plc annual report 2007

All the used graphs on this essay are made from above mentioned reports.

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