AYODELE_OLATIREGUN_OBU

8/8/2019 AYODELE_OLATIREGUN_OBU

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PART ONE

PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH

1.1 Reasons for choosing project topic

The objective of writing this project is in partial fulfilment of being awarded the Bachelor of

Science degree in Applied Accounting of the Oxford Brookes University, United Kingdom.

The main reason for choosing the project topic, An Evaluation of the Business andFinancial performance of J Sainsbury plc for the year ended 24 March 2006 22 March

2008, was to assess and improve my professional ability to conduct a business and

financial analysis of a publicly listed company. Secondly, I have deep interest in

specialising as a financial analyst and wanted to use my research project as a springboard

to this career goal. Saunders, et al. (2007) opined that embarking on research enables the

development of knowledge in a particular field. Thirdly, I plan to develop a reusable

financial analysis model that can be used to analyse the financial performance of similar

companies in the retailing sector (in which J. Sainsbury plc operates).

1.2 Reasons for choosing J. Sainsbury plc as case study

There are four reasons for choosing J. Sainsbury plc:

Firstly, I decided to analyse the financial statements of this United Kingdom based

company, and not a Nigerian company, because its financial statements comply with

International Financial Reporting Standards (IFRSs) as adopted by the European Union (J

Sainsbury plc, 2008). My accounting studies have centred on the preparation and

presentation of financial statements in compliance with IFRSs. Compliance with IFRS

requires an explicit and unreserved statement of such compliance in the notes (IASB,

2003). Secondly, it was relatively easier to gain access to the annual reports and financial

statements of J Sainsbury plc online compared to those of Nigerian companies that have

not fully adopted financial reporting on the Internet. Thirdly, getting access to external data

such as economic data relating to the UK economy and the food and groceries retailing

sector was also relatively easier than getting such information about the Nigerian economy

and any particular industry.

Fourthly, I wanted to be able to develop content for my Skills and Learning Statement by

proving that my case study was on a foreign company to my country of domicile, which

required getting most of my core data using the Internet.

1.2.1 About J Sainsbury plc

J Sainsbury plc consists of Sainsburys Supermarkets a chain of 504 supermarkets and

319 convenience stores and Sainsburys Bank (J Sainsbury plc, 2008).


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Sainsburys Supermarkets is the UKs longest standing major food retailing chain, having

opened its first store in 1869 (J Sainsbury plc, 2008).

Sainsburys Supermarkets provides over 30,000 food and non-food products and services,

including financial services provided by Sainsburys Bank to more than 16.5 million

customers per week.

1.3 Project Aims and Objectives

The main aim of my research is to evaluate the extent to which the company achieved its

Making Sainsburys Great Again (MSGA) plan set in 2004. This is to be done by analysing

its financial performance, financial position and changes in financial position over three

years (2006 to 2008). My findings would be used to justify its current Recovery to Growth

expansion plan (J Sainsbury plc, 2007).

To achieve my aims, I have set the following project objectives:

1. To examine the different models, tools and techniques of assessing the strategic

business and financial performance of companies.

2. To analyse the strategic direction and position of J. Sainsbury plc.

3. To evaluate the operating and investment management, financing decisions and

dividend policies of the company and their impact on the companys growth and

profitability.

4. To analyse the cash flow position and management in order to assess the ability of

the company to achieve its recovery to growth plans with or without additional

external finance.5. To draw conclusions about the business and financial performance of J. Sainsbury

plc.

1.4 Research Questions

A key issue after choosing a project title and defining the project objectives is to focus the

project (BPP, 2005). To focus my research project I framed research questions to ensure a

clear sense of purpose and direction for the research process. One of the key criteria of

research success will be whether a set of clear conclusions is drawn from the data

collected (Saunders, et al. 2007).

The following research questions will enable me achieve my project objectives:

a) How did J Sainsbury plc position itself strategically?

b) Has the company been managing its operations efficiently and profitably?

c) Has the company been managing its short-term and long-term investments

efficiently and profitably?


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d) What financing policies has the company pursued to achieve growth and

profitability?

e) What dividend policies has the company pursued to maximise shareholder value?

f) Has the companys cash flow position improved?

g) Can the company achieve its recovery to growth plans without additional external

finance?

1.5 Overall Research Approach

My overall research approach was to design a research methodology that enabled a clear

research purpose and design. The research methodology was to:

1. Conduct a review of the literatures on financial statement analysis of companies in

order to develop research questions and objectives.

2. Carry out a literature search of mostly, if not only, secondary data using different

methods and sources.

My research design comprises of my research strategy and purpose. The research strategy

adopted, because of the research topic chosen, is a single case study of J Sainsbury plc.

The research purpose is mainly an explanatory study. An explanatory study establishes

causal relationships between variables (Saunders, et al. 2007). I will search for

relationships between the various line items in the financial statements of the company

using various accounting techniques and conclude based on my research objectives and

questions. The mainly explanatory study, though with a mix of descriptive research, of the

business and financial performance of the company between 25th March, 2005 and 22nd

March 2008 will seek out comparative competitor analysis using Tesco plc financialstatements for the year ended 23 February 2008.


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PART TWO

INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUES

2.1 Sources of Data and Information

The literature sources available to help develop a good understanding of and insight into,

previous research can be divided into three categories: primary (published and

unpublished), secondary and tertiary (Saunders, et. al., 2007).

My literature sources were primary and secondary. My primary literature sources included

the published company Annual Reports and Financial Statements of J Sainsbury plc and

Tesco plc. The Financial Statements were downloaded from their corporate websites. The

secondary literature sources I used included different books as referenced when quoted,

journals and government publications.

The journals used included the Student Accountant and Finance Matters of the AssociationChartered Certified Accountants (ACCA). In addition, I accessed some UK government

publications on the Internet.

2.1.1 Reasons for their use

I had different reasons for using different sources of data. I used books to evidence a

literature review of relevant materials and to gain better understanding of the theme of the

research. I read several articles to learn from ACCA members, examiners and contributors

on their view on financial statements analysis and financial issues relating to companies.

Getting access to basic economic, social and demographic information that related to the

UK economy required accessing the UK government publications online and other

websites.

2.2 Description of Methods used

The methods I used to collect the data and information used in my Research and Analysis

Project depended on the type of literature source it was. Most of the primary literature

sources used were collected by browsing and scanning the websites of J Sainsbury plc,

Tesco plc, UK Government and various other business and financial analysts websites.

The information gotten from the browsing of these websites included the Annual Reports

and Financial Statements, UK economic and statistical data, UK retail industry analysis and

other research projects.

The secondary literature sources used were collected by conducting a literature review of

different books at the ICAN Library, the National Library and my personal library. To

augment my sources of information, I acquired several books at a retail bookshop. In


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addition, I used the Internet to access several professional journals, download relevant

articles, books and PowerPoint slides of business research and finance books.

2.3 Limitations of Information Gathering

One of the limitations I encountered was that there were so much secondary literature

sources to review and I was only able to review a small percentage of these sources. The

number of secondary literature sources available is expanding rapidly, especially as new

resources are developed and made available via the Internet (Saunders, et. al., 2007).

Another limitation was that I had limited access to many tertiary sources like abstracts,

indexes and citations as most online sources required a subscription fee my research

budget could not absorb. My project report is expected to be an academic piece of work

and hence must use academic sources (Saunders, et. al., 2007). Not having access to a

University library where I could access such academic literature was also a limitation.

The limitations of the information gathering process is also a function of the demerits of

using secondary data. Saunders, et. al. (2007) stated the following disadvantages, from the

viewpoint of the researcher, of secondary data:

a. There is no real control over data quality

b. The initial purpose may affect how data are presented

c. It may be collected for purpose that does not match research need

Based on the above disadvantages the conclusions of this Research and Analysis Project

are highly dependent on the Annual Report and Financial Statements of J Sainsbury plcand Tesco plc. Annual reports are complex and difficult to decipher (Vause, 2005).

Financial Statements, however, have a basic objective. Dunn (2002) stated that the basic

objective of Financial Statements was to provide information about the financial position,

financial performance and financial adaptability of an enterprise that is useful for a wide

range of users for assessing the stewardship of management and for making economic

decisions.

2.4 Ethical Issues on Information Gathering

The goal of research ethics is to ensure that no one suffers or is subjected to adverse

consequences from research activities (Cooper and Schindler, 2003). I considered such

ethical issues in carrying out my research project. I did not have to interview or interact with

any person within J Sainsbury plc. To address any ethical issue that may arise, I read the

Universitys Code of Practice Ethical Standards for Research involving Human Participants

as all students undertaking research were to comply with the Universitys Code of Practice

(OBU, 2008). I decided to adopt one out of the ten General Principles in the Code,


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Potential participants normally have the right to receive clearly communicated information

from the researcher in advance (OBU, 2000). In adopting this principle, I sent an abridged

consent form to the Company Secretary of J Sainsbury plc by electronic mail on the 1st of

July 2008, informing him that I was evaluating the company purely on publicly available

information.

2.5 Accounting and Business Techniques used

The accounting and business techniques used in evaluating the business and financial

performance of J Sainsbury plc include both qualitative and quantitative (financial and non-

financial) techniques. The business techniques were mainly qualitative in nature. The

accounting techniques on the other hand were purely quantitative and financial in nature.

2.5.1 Accounting Techniques

The following four accounting techniques were used.

Univariate Analysis: Ratio Analysis

Multivariate Analysis: Z-Score

Common-size Statements: Vertical and Horizontal Analysis

Cash Flow Analysis

Ratio Analysis is the use of a variety of ratios in analysing the financial performance and

condition of a business from various viewpoints, such as managers, owners, and creditors

(Helfert, 2001). A ratio is simply a statement of the relationship between two figures

(Patton, 2004). The ratios used were classified according to: Operating Management

Ratios, Investment Management Ratios, Financial Management Ratios and Shareholder

Ratios.

Multivariate Analysis has been widely used in predicting corporate failure (Alexander and

Britton, 1999). The analysis is done using three predictor ratios: The Altmans Z-Score,

Internal Growth Rate (IGR) and Sustainable Growth Rate (SGR). The Z-Score involves

using a set of five selected ratios that are assigned weights to produce a Z-Score. A Z-

Score below 1.8 is an indicator of probable failure, and a score of over 3 was seen as a

clean bill of health (Vause, 2005). The IGR is the growth rate that the company can achieve

without external funds, debt or equity (Brealey and Myers, 2000). The SGR is maximum

growth rate that a firm can sustain without having to increase financial leverage

(Investopedia, 2007).

Common-size statements normalize balance sheet and income statement items to allow

easier comparison of different-size firms (Reilly and Brown, 2002). Vertical Analysis

involves expressing all items in the financial statements as a percentage of one major line


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item. Horizontal Analysis involves comparing a companys performance to its previous

periods performance.

Cash flow analysis is carried out by examining the firms liquidity, and how the firm is

managing its operating, investing, and financing cash flows (Palepu et al., 2004).

2.5.2 Business Techniques

The following four business techniques were used.

PEST Analysis

Five-Forces Framework

SWOT Analysis

Balanced Scorecard

PEST analysis is an environmental scanning technique. It involves a scan of the external

macro-environment in which the firm operates and describes a framework for the analysis

of the following macro environmental factors, Political, Economic, Social and Technological

(ICMBA, 2007).

Five-Forces Framework helps identify the sources of competition in an industry or sector

(Johnson, et. al., 2006). The framework classifies the sources of competition into the threat

of new entrants, the threat of substitutes, bargaining power of buyers, bargaining power of

suppliers and competitive rivalry.

SWOT analysis, on the other hand, is an environment scanning technique that considers

both internal and external micro-environmental factors. SWOT analysis provides

information that is helpful in matching the firm's resources and capabilities to the

competitive environment in which it operates (ICMBA, 2007).

Balanced Scorecard helps in the identification of four key performance measures of

Customer Perspective, Internal Business Process Perspective, Innovation and Learning

Perspective, and the Financial Perspective. This method is a balanced approach to

performance measurement as a range of qualitative and quantitative parameters are taken

into account for evaluation (Kazmi, 2002).

2.5.3 Limitations of Accounting Techniques

The following are the limitations of the accounting techniques I used.

1. Financial ratios seldom provide answers, but they do help to ask the right questions

2. There is no international standard for financial ratios (Brealey and Myers, 2000)


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3. Ratios are computed on historical figures that might no longer be realistic and could

also be easily distorted by inflation, different accounting policies and practices

(Scott, 2004)

2.5.4 Limitation of Business Techniques

A question central to company analysis is how to recognise a sound strategy (Vause,

2005). The greatest limitation of applying business techniques in company analysis is that

these models only assist in identifying the relevant variables, without being able to

recognise which strategy is the best considering the companys circumstances.


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PART THREE

RESULTS, ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS

3.1 DESCRIPTION AND PRESENTATION OF RESULTS

3.1.1 Description and Presentation of Business Performance

Strategy analysis is an important starting point for the analysis of financial statements

(Palepu et. al., 2004). Business performance can only be measured in the context of a

strategic analysis of the company.

Corporate Strategy

Sainsbury pursues a differentiation strategy mainly in terms of offering a broad range of

quality products and engaging in competitive pricing of its products. The differentiation

strategy is complemented by five principles which set the company apart from its major

competitors. The five principles are: (1) The best for food and health (2) Sourcing with

integrity (3) Respect for the environment (4) Making a positive difference in the community

(5) A great place to work.

These principles enabled the company to win several awards including, Supermarket of the

Year at the Retail Industry Awards in October 2007 for the second year running. It was

awarded an A Grade by Greenpeace (The only one awarded to a major supermarket) at

the National Consumer Councils Green Grocers award. It also was awarded Best Volume

Retailer and Most Improved Supermarket by Compassion in World Farming for its

commitment to improving animal welfare.

New Product Development

Sainsbury offered a broader range of products through its development of complimentarynon-food products and services in addition to its traditional food products. This effort

primarily extended the product offering to its customers. To cater for the new product

development strategy, the company embarked on new space development.

New space development

New space development (Table 3.1) increased by 3.4% in 2006 and by 4.8% and 4.4% in

2007 and 2008 respectively. Overall, during the period under review retail outlets (including

Supermarkets and Convenience Stores) grew by 13.2%. In terms of Sales area, this

increased by 2.2% in 2006 and by 3.8% and 3.1% in 2007 and 2008 respectively. Overall,

during the period under review Sales area grew by 9.4%.

Year 2005 2006 2007 2008

Retail Outlets 727 752 788 823Sales Area(000 Sq. Ft.)

16,370 16,725 17,364 17,901

Table 3.1 New Space Development (Source: J Sainsbury 2008 Annual Report)


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Operational Efficiency

The company increased operational efficiency by various means. It improved on its stores

checkout process through self checkout and bi-optic scanner technology, expanded its

depot facilities, installed a new transport management system, reorganised it distribution

network, and centralised some shared services.

Corporate Governance

A company cannot be a success without sound management. Corporate Governance refers

to how a company is directed and controlled. The Board of Directors of J Sainsbury Plc

comprises of ten persons (2007: 8 persons).

The Board is comprised of experienced people in the food retailing industry, whose

competence as measured by their years and field of experience are commendable. The

average age of the entire Board was 51 years, an average age of 45 years for the

Executive Directors and 54 years for the Non-Executive Directors (Table 3.2). This is an

indicator that the company is still in capable hands. If it is the late 50s for Executive

Directors and is over 60s for Non-Executive Directors, the Board may be getting past its

sell-by date, with directors more concerned with serving their time than the shareholders

interests (Vause, 2005).

Table 3.2 J Sainsbury Plc: Board of Directors (Source: J Sainsbury Plc 2008 AnnualReport)

Overall, it appears the Board complied with principles of the Combined Code on Corporate

Governance 2006, by ensuring Board composition was balanced, 16 Board meetings were

held and attendance by the Directors was near 100%, relevant committees were set up and

were functional, Board evaluation is in place and carried out, roles and responsibilities were

divided accordingly between Executive and Non-Executive Directors, and internal control

and risk management were continually reviewed.

Name Board Designation Age

Philip Hampton Chairman 54

Justin King Chief Executive 46

Darren Shapland Chief Financial Officer 41

Mike Coupe Trading Director 47

Val Gooding Non-Executive Director 57

Gary Hughes Non-Executive Director 46

Bob Stack Non-Executive Director 57

John McAdam Senior Independent Director 60

Anna Ford Non-Executive Director 64

Mary Harris Non-Executive Director 42


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The only exception during the year was the Audit Committee which had only two

Independent Directors as members instead of three until 1 August 2007 when a Non-

Executive Director was appointed (Sainsburys, 2008). No changes were made to the

Board in 2008/09.

Strategic Alliances

The Group has three strategic alliances with its joint venture partners. Sainsburys Bank is

joint venture with HBOS plc, providing financial services to Sainsburys customers. The

service has been fully integrated into the core supermarket offer, in line with its new product

development strategy. This translated to more products and revenue streams for the

Group.

During 2008 financial year, the Group formed two 50:50 joint ventures with Land Securities

and British Land Plc. This was to continue the Groups active property strategy of

increasing its control over its key trading assets. The two joint ventures were considered

and approved by the Board to synergise its strategy. Land Securities will combine the retail

and development expertise of the two companies to develop Sainsburys supermarkets and

British Land Plc will extend and develop trading stores to improve the customer offer and

value (Sainsburys, 2008).

PEST Analysis

POLITICAL ECONOMIC

Competition Commission Laws

Environmental laws

Globalisation of financial markets(Carl, 2008)

UK Governments reductions in taxrate (Carl, 2008)

Increasing inflation

Decreasing level of disposableincome

General increase in prices (CPI andRPI)

Credit squeeze/crunch

SOCIAL TECHNOLOGICAL

Strong health and safety concerns

Active charitable efforts/projects

Increasing concerns about obesity(Carl, 2008)

Growth/Increase in Internet/onlineshopping

Automation in the checkout process Better supply chain management

through RFID (Carl, 2008)

Diagram 3.1 PEST Analysis of Sainsbury


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Five Forces Analysis

Diagram 3.2 Five Forces Analysis of Sainsbury

SWOT Analysis

STRENGTHS OPPORTUNITIES

Long history

Professional and experiencedmanagement

Strong brand name

Increasing business growth (Carl,2008)

Environmentally-friendly

organisation

Expansion to European and Asianmarket

Diversification into related markets

Online sales (Carl, 2008)

WEAKNESSES THREATS

Concentration on UK market

Over-dependence on brand name

Hostile take-over bids

Perception as a UK brand only

Increased regulations

Diagram 3.3 SWOT Analysis of Sainsbury

BARGAINING POWER OF BUYERS- Powerful and fragmented buyers-Numerous (16.5m per week) buyers

BARGAINING POWER OFSUPPLIERS-Many competitive and powerfulsuppliers (e.g. P & G, Cadbury, etc)-Smaller suppliers (farmers) notsignificant-Highly concentrated purchasers

COMPETITIVE RIVALRY-Huge market share held be themajor retailers (Tesco, Sainsburys,ASDA and Morrisons)-High Concentration Ratio-Long history of competition-Disciplined industry

THREAT OFSUBSTITUTES-Stocking several substituteproducts-Internal industry threat(Carl, 2008)

BARRIERS TO ENTRY-Huge capital requirements-Economies of scale-Local knowledge (Carl,2008)-Network of distributionchannels- Brand identity


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Balanced Scorecard

CUSTOMER PERSPECTIVE FINANCIAL PERSPECTIVE

Increase in customers per week

Decrease in overall UK marketshare

Improved ROCE

Decreased liquidity

Reduced gearing

Relative increase in operating

income

INTERNAL BUSINESS PROCESSPERSPECTIVE

INNOVATION AND LEARNINGPERSPECTIVE

Cost savings target

New transport management system

Self checkouts and shelf readypackaging

Active property management

Development of own brandproducts

New channel developments

Employee retention

Diagram 3.4 Balanced Scorecard for Sainsbury

3.1.2 Description and Presentation of Financial PerformanceJ Sainsbury Plc displayed an overall strong performance as evaluated using two

benchmarks. The two benchmarks used were the Groups past period financial results and

its major competitors (Tesco Plc) financial results. Interpretation of accounts is highly

subjective and requires skilled judgement bearing in mind the limitations of these

benchmarks (Alexander and Britton, 1999).

Consequently, twenty two financial ratios were computed to develop a well-rounded picture

of the Groups financial performance for the period reviewed. In addition, common-size

horizontal and vertical statement analysis were made to assess the performance trend of

the Group. The assessment and calculations were based on the original financial data

available in the Group financial statements. It is safest never to rely entirely on someone

elses analysis, particularly if this is offered by the company being studied (Vause, 2005).

3.1.2.1 Univariate Analysis

The Univariate analysis or ratio analysis is one of the means by which financial statements

are interpreted. The ratios used have been divided into four groups as follows:

A. Operating Management Ratios1. Return on Equity (Chart 1)Return on Equity (ROE) is the primary driver of corporate value (Walsh, 1996). The

measure shows how well the board is making the shareholders money work (Tennent and

STRATEGY


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Friend, 2005). The ratio inc

by 10.5% in 2008.

For Tesco, ROE has remain

2. Return on Capital Employ

Return on Capital Employ

(Ranganatham and Madh

shareholders and other pro

and 2007, and dropped by 6

For Tesco, ROCE dropped

3. Return on Total Assets (

Return on Total Assets (RO

the overall profitability of th

plcs ROTA increased by 20

Tescos ROTA dropped 13

0.00%5.00%

10.00%

15.00%

20.00%

2006

Sa

2.89%

Chart 2 - R

1.46%

7.45

2006 2007

Sainsbu

Chart 1

reased by 410% between 2006 and 2007, but

ed almost stable dropping by 0.3% between 20

ed (Chart 2)

d (ROCE) is the return on capital invested

mathi, 2006). This is from the perspecti

viders of capital. ROCE increased by 162.92

.97% in 2008.

y 11.79% in 2008.

hart 3)

TA) is the primary driver of ROE (Walsh, 1996)

e resources at the companys disposal. In 20

1.7%. However, in 2008 it dropped by 3.5%.

between 2007 and 2008.

20072008

20072008

insbury

Tesco

7.59%7.06%

15.90%14.02%

turn on Capital Employed (ROCE %)

6.67%

17.96% 17.90%

2008 2007 2008

y's Tesco

-Return on Equity (ROE %)

dropped slightly

07 and 2008.

in the business

ve of both the

between 2006

. This measures

07, J Sainsbury


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4. Gross Profit Margin and

Gross Profit Margin offers

(Vause, 2005). J Sainsbur

and 2007 and dropped by 1

2007 and dropped slightly i

the profitability of a comp

producing and supplying g

2005).

In 2008, the Tesco Plcs Gr

and 5% respectively.

B. Investment Manag

1. Working Capital to Sales

One very important balance

indicator of the adequacy a

and investments) is to relat

initially decreased in 2007 b

In 2008, this ratio decrease

20062007

Sainsbur

1.80%5.43

Chart 3

6.64% 6.83%

1.43%3.03%

2006 2007

Sainsbury

Chart 4 - Gro

Gross Profit M

perating Profit Margins (Chart 4)

reasonable indication of the basic profitabili

Plcs gross margin increased slightly by 2.9

7.7% in 2008. Operating Profit Margin increas

2008 by 2%. Operating Profit Margin offers a

any after taking into consideration all the

oods or services and the income from sellin

ss Profit Margin and Operating Profit Margin dr

ment Ratios

(Chart 5)

-sheet concept is working capital (Merrill Lynch

nd consistent management of working capital

e it to sales revenue (Vause, 2005). For J S

11.6% and then increased by 9.5% in 2008.

for Tesco by 5.1%.

2008 20072008

Tesco

5.24%

10.67%9.25%

Return on Total Assets (ROTA %)

5.62%

8.12%7.67

2.97%

6.21%

2008 2007

Tesco

s Profit and Operatiing Profit Margins

argin (GP %) Operating Profit Margin (%)

y of a business

between 2006

ed by 111.9% in

n assessment of

ormal costs of

g them (Vause,

opped by 5.5%

, 1997). A useful

(excluding cash

insbury plc, this

%

5.90%

2008


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2. Total Asset Turnover (Chart 6)

The Total Asset Turnover (TAT) measures how well investment in assets is able to

generate sales. TAT in J Sainsbury plc was up by 0.53 times in 2007 but dropped by 0.03

times in 2008.

Tescos TAT dropped by 0.15 times in 2008.

C. Financial Management Ratios

1. Liquidity ratios (Charts 7 and 8)

A simple guide to the ability of a company to meet its short-term obligations is the Current

ratio (Vause, 2005). Stricter methods include the Quick and Cash ratios. Sainsburys

Current ratio has dropped by 0.09 and 0.08 times, in 2007 and 2008 respectively. Quick

ratio has dropped by 0.18 and 0.13 times, in 2007 and 2008 respectively. However, Cash

ratio initially rose by 0.20 in 2007 and then dropped by 0.13 times in 2008.

For Tesco, Current ratio rose by 0.07 times in 2008. Quick ratio and Cash ratio increased

both increased by 0.08 times in 2008.

-7.73%

-8.63%-7.81%

-7.12%-7.48%

2006 2007 2008 2007 2008

Sainsbury Tesco

Chart 5 - Working Capital to Sales %

1.26

1.79

1.76

1.72

1.57

2006

2007

2008

2007

2008

Sainsbury

Tesco

Chart 6 - Total Asset Turnover (times)


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2. Operating Cash Flow ratio (Chart 9)

The Operating Cash Flow (OCF) ratio measures the proportion of short-term financial

obligations that can be settled from cash flows generated from a companys operating

activities. Sainsburys OCF has increased by 93.8% and 22.6% in 2007 and 2008

respectively.

Tescos OCF fell by 7% in 2008.

2006 2007 2008

Sainsbury

Current Ratio (times) 0.79 0.70 0.62

Quick Ratio (times) 0.67 0.49 0.36

Cash Ratio (times) 0.21 0.41 0.28

0.000.100.200.300.400.500.600.700.800.90

Chart 7 - Liquidity Ratios (Sainsbury)

2007 2008

Tesco

Current Ratio (times) 0.51 0.58

Quick Ratio (times) 0.27 0.35

Cash Ratio (times) 0.13 0.21

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Chart 8 - Liquidity Ratios (Tesco)


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3. Debt-to-Equity Ratio (Ch

The debt-to-equity ratio me

(Robinson et. al., 2008). Thi

21.2% in 2008 in Sainsbury.

Tescos debt-to-equity ratio i

4. Interest Coverage Ratio (

Interest Cover Ratio measu

increased its interest cover

0.82 times in 2008.

Tescos interest cover drop

0.00

0.20

0.40

0.60

20062

Sain

0.16

Chart 9 -

61.31% 56.63%

0.00%

20.00%

40.00%

60.00%

80.00%

2006 2007

Sainsbury

Chart 10 - Deb

rt 10)

sures the amount of debt capital relative to equ

s ratio decreased by 7.6% in 2007 and further

increased by 25.5% in 2008.

hart 11)

es how many times interest is earned (IRA, 20

y over 3 times in 2007 as compared to 2006.

ed by 0.77 times in 2008.

007

2008 20072008

sbury

Tesco

0.31 0.38 0.430.40

perating Cash Flow Ratio (times)

44.62%53.92%

67.69%

2008 2007 2008

Tesco

-to-Equity Ratio (%)

ity capital

ecreased by

8). Sainsbury

his dropped by


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D. Shareholder Ratios

1. Dividend Payout Ratio (D

The Earnings Per Share (E

discussion of a companysexpresses the relationship

dividends, while the Earning

as dividend.

Sainsburys reduced DPR

increased by 144% and red

For Tesco, both DPR and E

2006

2007

2008

2007

2008

Sain

sbury

Tesco

1.67

Char

211%

51%

-111%

49%

2006 2007

Sainsbury

Chart 12 - Breakdown

Dividend Payout Ratio (%)

PR) and Earnings Retention Ratio (ERR) (Char

S) is one of the most widely quoted statistics

erformance (Walsh, 1996). The Dividend Paybetween a companys earnings and the c

s Retention Ratio (ERR) is the balance of earn

by 75% in 2007 and increased it by 19.6

ced by 20.4% in 2007 and 2008 respectively.

R have not changed between 2007 and 2008.

5.46

4.64

11.91

11 - Interest Cover (times)

61%40% 40%

39%60% 60%

008 2007 2008

Tesco

of EPS into DPR and ERR

Earnings Retention Ratio (%)

t 12)

when there is a

out Ratio (DPR)sh paid out in

ings not paid out

in 2008. ERR

2.68


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20

2. Dividend Yield (DY) (Charts 13 and 14)

Dividend Yield links the current share price to the dividend received (Vause, 2005). DY in

Sainsbury dropped by 26.9% in 2007 and increased by 104% in 2008.

In Tesco, DY increased by 25.9% in 2008.

3. Earnings Yield (EY) and (Charts 15 and 16)

The Earnings Yield (EY) shows the relationship that EPS bears to the share price (Walsh,

1996). Sainsburys EY increased by 203.5% and 68.8% in 2007 and 2008 respectively.

In Tesco, EY increased by 25.8% in 2008.

2.42%

1.77%

3.61%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

2006 2007 2008

Sainsbury

Chart 13 - Dividend Yield (%)

2.16%

2.72%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2007 2008

Tesco

Chart 14 - Dividend Yield (%)


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21

3.1.2.2 Multivariate Analysis

Three multivariate predictor ratios were computed:

1. Altmans Z-Score (Chart 17 and 18)

Z-score uses statistical techniques to predict a company's probability of failure. The Z-

Score attributable to Sainsbury increased by 1.93 points to 4.94 in 2007 and decreased by

1.1 points to 3.83 in 2008.

For Tesco, Z-Score decreased by 2.15 points to 5.20 in 2008.

1.15%

3.49%

5.89%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2006 2007 2008

Sainsbury

Chart 15 - Earnings Yield (%)

5.35%

6.73%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%7.00%

8.00%

2007 2008

Tesco

Chart 16 - Earnings Yield (%)


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2. Sustainable Growth Rate (SGR) (Chart 19 and 20)

A sustainable growth rate (SGR) is the maximum growth rate that a company can sustain

without having to increase financial leverage. Sainsburys SGR increased by 326.5% in

2007 and then decreased by 29.4% in 2008.

For Tesco, SGR decreased slightly less than 0.01%.

3. Internal Growth Rate (IGR) (Chart 19 and 20)

An Internal Growth Rate is the maximum rate a firm can expand without outside sources offunding (Harvey, 2004). This growth is generated by cash flows retained by company.

Sainsburys IGR has continued to grow from 2006 to 2008, increasing by 49.28% in 2007

and 2.54% in 2008.

For Tesco, IGR dropped slightly by 0.01%.

3.00

4.93

3.83

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2006 2007 2008

Sainsbury

Altman's Z-Score

7.35

5.20

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2007 2008

Tesco

Altman's Z-Score

Chart 17

Chart 18


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23

3.1.2.3 Common-Size Statements

Common-Size Statements contain items expressed as a percentage of a base figure,

useful for purposes of analysing trends and changing relationship among financial

statement items (Harvey, 2004).

-1.62%

3.67%2.59%

15.28%

22.81% 23.39%

2006 2007 2008

Sainsbury

Chart 19

Sustainable Growth Rate (%) Internal Growth Rate (%)

10.70% 10.66%

22.95% 22.78%

2007 2008

Tesco

Chart 20

Sustainable Growth Rate (%) Internal Growth Rate (%)


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24

Table 3.3 - Common-Size Vertical Analysis of Group Balance Sheet

Sainsbury Sainsbury Sainsbury Tesco Tesco2006 2007 2008 2007 2008

NON-CURRENT ASSETS 69.84% 79.74% 82.98% 81.55% 79.11%CURRENT ASSETS 30.16% 20.26% 17.02% 18.45% 20.89%TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00%

CAPITAL AND RESERVES 31.11% 45.42% 48.79% 42.61% 39.46%NON-CURRENT LIABILITIES 31.16% 26.17% 25.46% 24.53% 26.52%

CURRENT LIABILITIES 37.73% 28.41% 25.75% 32.86% 34.02%TOTAL EQUITY ANDLIABILITIES

100.00% 100.00% 100.00% 100.00% 100.00%

Table 3.4 - Common-Size Horizontal Analysis of Group Balance Sheet


NON-CURRENT ASSETS 100.00% 85.78% 109.91% 100.00% 117.96%CURRENT ASSETS 100.00% 50.46% 88.76% 100.00% 137.67%TOTAL ASSETS 100.00% 75.12% 105.63% 100.00% 121.59%

CAPITAL AND RESERVES 100.00% 109.68% 113.47% 100.00% 112.59%NON-CURRENT LIABILITIES 100.00% 63.09% 102.75% 100.00% 131.48%CURRENT LIABILITIES 100.00% 56.57% 95.74% 100.00% 125.90%TOTAL EQUITY ANDLIABILITIES

100.00% 75.12% 105.63% 100.00% 121.59%

Table 3.5 - Common-Size Vertical Analysis of Group Income Statement


Revenue 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Sales -93.36% -93.17% -94.38% -91.88% -92.33%Gross Profit 6.64% 6.83% 5.62% 8.12% 7.67%Operating Profit 1.43% 3.03% 2.97% 6.21% 5.90%

Profit Before Taxation 0.65% 2.78% 2.69% 6.22% 5.93%Profit for the financialyear

0.36% 1.89% 1.84% 4.45% 4.50%

Table 3.6 - Common-Size Horizontal Analysis of Group Income Statement


Revenue 100.00% 106.79% 104.00% 100.00% 110.92%Cost of Sales 100.00% 106.57% 105.36% 100.00% 111.46%Gross Profit 100.00% 109.84% 85.49% 100.00% 104.82%Operating Profit 100.00% 227.07% 101.92% 100.00% 105.40%Profit Before Taxation 100.00% 458.65% 100.42% 100.00% 105.65%

Profit for the financialyear 100.00% 558.62% 101.54% 100.00% 112.16%


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25

3.1.2.4 Cash Flow Analysis

Table 3.7 - Percentages Rules on Group Cash Flow Statement

Sainsbury Sainsbury Sainsbury Tesco Tesco

2006 2007 2008 2007 2008

Cash Inflows

Operating activities 25.24% 78.15% 78.71% 36.76% 27.37%

Investing Activities 5.50% 13.37% 17.90% 11.22% 8.49%

Financing activities 69.16% 7.63% 3.39% 52.02% 64.14%Tax 0.10% 0.85% 0.00% 0.00% 0.00%

TOTAL CASH INFLOWS 100.00% 100.00% 100.00% 100.00% 100.00%

Cash Outflows

Investing activities -18.58% -77.40% -80.28% -35.61% -28.22%

Tax 0.00% 0.00% -5.05% -5.67% -2.31%

Financing activities -67.44% -7.72% -3.86% -52.71% -56.09%

Dividends -4.24% -13.18% -14.04% -4.86% -5.30%

Interest paid -5.15% -8.95% -9.70% -3.91% -2.74%

TOTAL CASH OUTFLOWS -95.40% -107.25% -112.93% -

102.76%

-94.65%

Percentage Increase/-decrease inCash

4.60% -7.25% -12.93% -2.76% 5.35%

3.1.3 Limitations

The first limitation in analysing Sainsbury financial statements with its major competitor

(Tesco) was the non-coterminous year end of both companies. Sainsburys year end is

March while that of Tesco is February.

Second, no two companies are exactly alike in the nature of their operations (Weetman.2003). Sainsbury is majorly a UK-based company while Tesco operates in several

countries. This makes the size of Tesco much more than that of Sainsbury.

Third, the effects of some complex transactions such as Share-Based payments and

pensions schemes on the Group Income Statement and Balance Sheets were ignored.

Fourth, the figures used in the analysis were not adjusted for inflation. The Consumer Price

Index (CPI) is the official measure of Inflation (Finance Blog, 2008). The CPI on a quarterly

based ranged between 1.9% and 3% between 2006 and 2008 (ONS, 2008).

Fifth, the analysis did not consider segmental and business unit performance; rather, all

computations were based on group results.


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26

3.2 ANALYSIS OF RESULTS

3.2.1 Analysis of Business Performance

J Sainsbury plcs business performance will be put into perspective in line with the

description of results above.

Corporate Strategy

The food retailing sector in the UK is highly competitive and Sainsbury has responded to

this by practically adopting a differentiation strategy. The different strategies implemented

reveal the fact that it is setting itself apart from its competitors. Firstly, the company has

performed well in its focus on the environment and this has been recognised by several

environmentally conscious organisations like Greenpeace.

Secondly, Sainsburys new product development strategy especially in the non-food

retailing sector and investing in several own-label products and brands is ensuring its

position in the UK domestic market is consolidated.

Overall, Sainsbury has greatly moved towards forward vertical integration in order to

achieve the cost savings target it set in the MSGA Recovery plan.

Operational efficiency and competitive advantage

In order to accommodate the new products into its outlets without affecting existing shelf

space, a new space development strategy was put in place. This has enabled the company

to not only increase the number of retail outlets but also increase the total sales area in

both new and existing retail outlets. As the sales area increased it was very idealistic thatoperational efficiency was to be pursued since more people were being attracted to the the

supermarkets. Operational efficiency was achieved through a focused value chain

improvement.

A value chain is a linked set of value-creating activities (Wheelen and Hunger, 2000). The

industry value-chain is external to the company and this determines how it achieves

competitive advantage. In terms of its industry value-chain, Sainsbury formed strategic

alliances with Land Securities plc and British land plc to improve on its retailing and

property development expertise which has been a source of competitive advantage over

the years.

Sainsburys internal value-chain of activities was overhauled in 2008 by expanding its depot

facilities, installing a new transport management system, reorganising its distribution

network and improving on self-checkout processes and technology.


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Overall Business Analysis

The different strategies and tactics the company implemented ensured the company

achieved significant improvement in sales growth, cost savings and profitability in the last

three years. As a result the company delivered on its Making Sainsburys Great Again

(MSGA) recovery plan, which was set in October 2004. The Making Sainsburys Great

Again recovery programme is now complete, and all of the targets have been met or

surpassed (Samuel, 2008).

3.2.2 Analysis of Financial Performance

Univariate Analysis

Helfert (2001) posited that the financial performance of a business should be analysed from

the view points of managers, owners and creditors.

Appendix 2 shows all ratios computed for Sainsbury and Tesco. Because there are so

many variations on the methods of calculating ratios in accounting, it is extremely important

to practise a useful and informative layout (Weetman, 2003). The table below defines which

variables were used in arriving at the computed ratios.

1. Analysis of financial performance from managements viewpoint

RATIOS DEFINITION OF WORDS 2006 2007 2008

Operating

Management

Ratios

Return onEquity

(ROE %)

x 100%

1.46% 7.45% 6.67%

Return onCapital

Employed(ROCE

%)

x 100%2.89% 7.59% 7.06%

Return onTotal

Assets(ROTA %)

x 100%

1.80% 5.43% 5.24%

GrossProfit

Margin(GP %)

x 100%

6.64% 6.83% 5.62%

OperatingProfitMargin

(%)

x 100% 1.43% 3.03% 2.97%

Investment

Management

Ratios

TotalAsset

Turnover(times)

times

1.26times

1.79times

1.76times

Table 3.8 - Ratios of major interest to management


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The Return on Equity and the Return on Capital Employed both show an improvement in

2007 and 2008 compared to 2007, though it was slightly lower in 2008 compared to 2007.

The improvement was due to an improvement in the use of assets (as measured by Total

Asset Turnover) and the increase in Operating Profit Margin.

In 2008, Return on Capital Employed fell as a result of a larger fall in Gross Profit Margin

than by the slight fall in Operating Profit Margin and Total Asset Turnover. This fall in GrossProfit Margin suggests that Sainsburys competitive pricing for its products and services is

properly synchronised with the rising costs of its inputs.

The drop in Return on Total Assets was not as much as both ROE and ROCE, which still

corroborates the fact that reducing margins and increasing costs of goods sold are

impacting these ratios. Sainsbury should try to control costs more effectively.

Overall, Sainsbury has performed relatively better than Tesco based on the six ratios.

2. Analysis of financial performance from creditors (long-term and short-term) viewpoint


Finan

cial

Management

Ratios

CurrentRatio

0.79times

0.70times

0.62times

QuickRatio

0.67times

0.49times

0.36times

CashRatio

+

0.21times

0.41times

0.28times

OperatingCashFlowRatio

0.16times

0.31times

0.38times

Debt-to-Equity

+

61.31% 56.63% 44.62%

InterestCover

+

1.67 5.46 4.64

Inv

estment

Man

agement

R

atios

WorkingCapital toSales %

+

100

-7.73% -8.63% -7.81%

Table 3.9 - Ratios of major interest to creditors (long-term and short-term)

Overall, the short-term liquidity position of Sainsbury has fallen between 2006 and 2008 as

indicated by the current and quick ratio. This arose as a result of the increasing use of

negative working capital to finance sales albeit being the industry norm. Positively,


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operating cash flow has steadily increased since 2007 indicating that Sainsbury can offset

close to one-third of its short-term obligations from cash generated from operations.

For the long-term creditors, Sainsbury has attempted to reduce gearing which, as indicated

by a reducing debt-to-equity ratio, has meant an improving ability to settle finance costs as

indicated by an impressive improvement in the interest cover.

Sainsburys short-term liquidity is a little worse off than that of Tesco but its long-term

stability in terms of gearing is slightly better though Tesco has a better interest coverage.

3. Analysis of financial performance from Owners viewpoint


Shareholder

Ratios

BasicEarnings per

Share

( ) 3.80pence

19.20pence

19.60pence

Dividend per

Share

( ) 8.00

pence

9.75

pence

12.00

penceDividend

Payout Ratio(%)

100%

211% 51% 61%

DividendCover

100%

0.48times

1.97times

1.63times

EarningsYield (%)

100%

1.15% 3.49% 5..89%

Price-to-earnings

Ratio

87.04 28.65 16.98

DividendYield (%)

100%

2.42% 1.77% 3.61%

Predictor

Ratios

SustainableGrowth Rate

(1 ) -1.62% 3.67% 2.59%

InternalGrowth Rate

100%

15.28% 22.81% 23.39%

AltmanZ-Score

See Appendix 2 3.00 4.93 3.83

Table 3.10 - Ratios of major interest to owners (shareholders)

Earnings per Share increased between 2006 and 2008, indicating a better profitperformance for shareholders. The price earnings ratio dropped significantly, indicating

dwindling confidence in the stock market about the ability to maintain this new level of

profit. A low P/E is not necessarily good, nor a high one bad, since market expectations

must be taken into account (Dunn, 2006).

The dividend cover has increased in 2007 and 2008 as against 2006 and is now more than

one, meaning there is more likelihood of maintaining the current level of dividends, since


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Sainsbury has a favourable payout ratio. This increase in dividend cover is caused by a

higher proportional increase in earnings per share compared to dividend per share. The

dividend yield fell in 2007 and rose in 2008, despite the increased dividend per share,

caused by the impact of the market price which rose in 2007 and dropped again in 2008.

Sainsbury has a clean bill of health based on its Z-scores for the three years under

consideration. The Internal Growth Rate also indicates that the company can grow in size

to a level where further efficient use of assets would mean an increased return on

investment, though the Sustainable Growth Rate predicts that Sainsbury would need to

increase leverage if it is to grow by more than 4%.

Overall, Tesco is the better for it in terms of performance from the viewpoint of owners. This

might not be unconnected to the reason Sainsbury has tried to please its shareholders,

even by paying as much as 211% of its earnings in 2006.

4. Analysis of financial performance using common-size statements

Sainsbury has increased its investments in non-current assets, as a result of the new space

development strategy, between 2006 and 2008. This increase has been funded mainly by

equity which grew by 27% over the same period. The company has also relatively reduced

its non-current liabilities as well as its working capital requirements. The reverse is the case

for Tesco, which reduced investments in non-current assets, increased non-current

liabilities and working capital. Tescos equity relatively reduced between 2007 and 2008.

5. Analysis of financial performance using cash flow analysis

Weetman (2003) stated that any ratio analysis which seeks to interpret liquidity,

management performance or financial structure should be related to the information

provided by cash flow statement. Sainsburys cash position reduced all through from 2006

to 2008, even though it was able to increase cash generated from operations.

This was caused by the massive investment in property, plant and equipment coupled with

increasing dividend and interest payments in the years under review. Overall, Sainsburys

cash flow position was not as good as that of Tesco which has had an improvement in cash

flow position.


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3.3 CONCLUSIONS

My project objectives have enabled me to examine several strategic business and financial

analysis tools and techniques which led to understanding Sainsburys strategic direction

and position.

As a result, I can conclude that Sainsburys:

operating decisions have yielded positive results as profitability has improved over the

years.

investment management decisions have been efficient in terms of use of assets though

in terms of the level of investments between non-current assets and working capital the

picture is mixed.

financing decisions have tended more to building up equity by reducing gearing.

dividend policies are liberal and favourable to shareholders notwithstanding declining

cash flow position.

cash flow position has declined and consequently the company might have to resort to

external finance to fund its recovery to growth plans.

On the whole, Sainsbury has performed above average as it has displayed an

understanding of its business environment by reengineering its value chain and taking

appropriate financial decisions in the face of stiff competition from its competitors.

By my conclusions, the answers to my research questions are stated thus:

a) Sainsbury has positioned itself as UKs longest standing major food retailing chain and

differentiates itself on the bases of its range of fairly-priced products, a strong ethical

approach to business and continuous leadership and innovation. The result of which

puts it in number two position in the market.

b) The company has managed its operations and investments profitably and efficiently.

c) Sainsburys financing policies rely more on use of equity to fund its growth.

d) Sainsbury has implemented a steadily increasing dividend policy to improve

shareholder value.

e) Its cash flow position has not improved substantially.

f) The companys recovery to growth plan may only be achieved if it raises additional

external finance.


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3.4 RECOMMENDATIONS

I hereby recommend that Sainsbury should:

Continue the present strategy of the Board of Directors.

Implement a proactive succession planning to replace the current Chairman and the

Chief Executive.

Implement a global strategy and/or expansion programme to other major European and

Asian markets.

Raise substantial equity and/or debt to fund its growth plans.

AYODELE_OLATIREGUN_OBU

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