Financial Analysis of Sainsbury’s

Sainsbury’s is a British grocery store giant, the second biggest chain in the UK. Founded in 1869, it boasts a protracted record of providing groceries and family necessities. Sainsbury’s offers various keep codecs, from big supermarkets to comfort stores. They are recognised for his or her personal-emblem merchandise alongside popular labels. Beyond groceries, Sainsbury’s owns Argos, a catalogue retailer, and Habitat, a homeware emblem. They are committed to sustainability and offer loyalty packages to praise clients.

Sainsbury is incorporated in the United Kingdom and is listed on the London Stock Exchange. It is a public limited Company having a financial year of 52 weeks. The consolidated financial statements are prepared at year-end to represent the group accounts with the subsidiary figures.

This report presents the financial analysis data of Sainsbury for years 2009-2013 shedding light on financial performance and strength of the company.

Evaluation of Financial Statement

Statement of comprehensive income

The Statement of comprehensive income represents the company’s financial performance during the year. It clearly shows whether the Company has operations profitable or the business is going towards a loss. The Statement is also called the Score Card as it represents the Revenue and Cost figures to compute the net score of the Company.

Interpretation of Revenue

The revenue is earned through the retail business of the Company. The net sales represent the sales of fewer returns, the cost of sales, discounts to the various classes, and sales made as to the sample or on a promotion basis. The sales figures have increased during the current year from 22,294 to 23,303, making a difference of 1,009 (Sainsbury’s, 2014).

While analysing the revenue over the last five years, it has been noted that the Company has a modest level of revenue growth. The following table shows the critical analyses of the revenue figures over the last 5 years:

Table – Revenue Growth of Sainsbury over the years 2009-2013

SAINSBURY (in £ million)	2009	2010	2011	2012	2013
Sales (Including VAT)	20,383	21,421	22,943	24,511	25,632
Sales (Excluding VAT)	18,911	19,964	21,102	22,294	23,303
Sales area (000s sq ft)	16703	17750	19108	20347	21256
Trading Intensity per Sq ft	20.01	20.42	20.04	19.47	19.27
Growth in Sales (incl VAT)	5.7%	5.1%	7.1%	6.8%	4.6%
Growth in Sales (Excluding VAT)	6.0%	5.6%	5.7%	5.6%	4.5%
Like for Like Sales growth (incl. VAT)	5.5%	3.0%	4.7%	4.5%	4.3%

The table above shows that sales excluding VAT were much higher in 2009 than the current figure, which is 4.5%. Similarly, sales, including VAT, have also a reduced trend. The Company has had LFL sales growth since 2010, and before it, the revenue was down in 2010 due to strict economic constraints and lower demand for fuel.

The decrease in the year 2013 is again noticed based on challenging market conditions for the Company.

Revenue from the operating segments is recognised on a basis consistent with the income statement. All the segments are involved in the sales of goods and services of the industry.

Sainsbury earned a year-over-year increase in sales (excluding VAT) up to 4.5% in 2013. Sainsbury’s revenue strategy of increasing the proportion of higher-priced items with the taste of difference in the product has improved the revenue. In the current year, the sales increased by a nominal percentage due to economic conditions; however, in 2012, the revenue increased due to a 20% increase in online sales.

The supermarkets, additional stores and sales from the new stores were the main sources of the growth in revenue (Sainsbury’s, 2014).

Analyses of Customer Base

The company has developed an aggressive strategy for expanding new superstores and convenience stores in the country to increase sales space during the last five years. The company has invested in retail sales for the years as compared to its competitors.

According to this plan, the company has increased the total sales area by 5,074,000 sq. ft, which increased the sales to 21.3 million during 2013. Furthermore, per this plan, the weekly registered transactions were 23 million. The online system of Sainsbury’s can record approximately 190,000 online sales per week. Due to this rapid expansion plan, the management accomplished a good customer base and attracted and retained its customers.

Interpretation of Cost of Sales

The cost of sales represents the total cost incurred, such as transportation costs, warehouse costs, the cost of operating retail outlets and the costs incurred till the point of sales stores (Mistry & Singh, 2012). The suppliers’ rebates, incentives and discounts are also recognised within the cost.

The cost of sales since last year has increased by 943 million during the current year; this represents the increase in operations and changes in prices of the primary goods.

Interpretations of Profits

Table – Profitability of Sainsbury over the years 2009-2013

SAINSBURY	2009	2010	2011	2012	2013
Gross Profit	5.48%	5.42%	5.5%	5.43%	5.48%
Net Profit	1.5%	2.9%	3.0%	2.7%	2.6%
Return on Equity	6.6%	11.8%	11.6%	10.6%	10.7%
Total assets turnover Ratio	1.88	1.84	1.85	1.81	1.84
Equity Multiplier	2.29	2.19	2.07	2.19	2.21
ROCE	10.1%	11.0%	11.1%	11.1%	11.2%

The profit figures are based on the three segments of the business operated by the Company. Significant operations and assets are located in the UK. The Company’s business is not related to the seasonal fluctuations except for the increase in operations and trading during the period leading up to events like Christmas.

The gross profit for the five years has been noticed consistently, and a slight increase is observed in 2011. The companies involved in food retaining offer various discount offers to the customers and experience fluctuations in revenue based on changes in these offers.

The profit in 2013 was higher due to increased revenue from fuel this year. The company’s net profit has been reduced in the current year due to the increased operating cost of the additional space. The revenue growth, approximately 6-7%, is not represented by the profit, which indicates that the company had increased marketing and admin costs during the year. The objective behind such usage may be to attain increased market share or maintain its existing market share at the cost of profitability. Another component of other income has also increased revenue for the Company. However, in the current year, this income has a negative effect as compared to the last year.

Taxation

The final expense deducted out of the profit of the Company is tax expense. The amount of tax calculated by the accounting treatment is different from the tax figures calculated by the tax authorities. The tax expense during the current year is 22% over the net profit before tax and the same was 25% in last year. The changes are due to the various tax announcements by the UK government.

The corporate tax rate has been reduced by 1% on the deferred tax balance during the year. The increased tax on the Company’s retirement plans partially reduces the effect. The profit after tax in 2013 is higher than the last year due to the impact of reduced tax rates.

 Evaluation of Consolidated Balance Sheet

The consolidated balance sheet represents a company’s performance after incorporating all the factors of profits and losses of the subsidiary and associated companies of the parent company (Hsu et al., 2012, pp. 198-225). This helps measure the financial stability and strength of the company’s available assets and liabilities. The Consolidated balance sheet of Sainsbury’s is evaluated based on significant differences in the balance sheet items, which are explained hereunder;

Total Assets

Property Plant and Equipment

The property plant and equipment have increased by 475 million during the current year (Sainsbury’s, 2014).

The Company has warehouses as part of its property, plant and equipment, which have been continuously increased over the last five years to meet the area and capacity requirements as per the expansion plan of the management.

Movement in property plant and equipment

The table above shows that the Company has expanded the supermarkets as the cost shown in financial statements is 50 million in last year and in the current year, the cost is 62 million in the case of land and buildings. Further, the Company has invested in the new subsidiary as well. As per financial statements note no. 11, the Company has acquired 100% of Property Company from BL Sainsbury Superstores Limited joint venture, which cost 21 million, and this is also a reason for the overall increase in the assets of the Company.

Intangible Assets

The intangible assets have increased from 160 million to 171 million during the current period.

Movement in property Intangible Assets

	In millions
Opening NBV	11
Addition (cost)	08
Disposal (cost)	(10)
Amortization	5
Closing NBV	14

The table above represents the movement in the intangible assets of the Company. The Company has goodwill as an intangible, which is recognised on a full basis. The impairment of goodwill test is conducted regularly by comparing the recoverable amount with the carrying value of each cash-generating unit of the business. Therefore based on the operating performance of all the cash-generating units, no impairment loss has been recognised.

Liabilities and Capital

Liabilities

The liabilities of the Company have increased during the current year by 250 million (Sainsbury’s, 2014). The major increase is represented by the increase in retirement benefit obligations of the Company, borrowings and other payables of the Company.

The Actuarial valuation has verified the retirement benefits obligations, the figure has been increased due to an increased rate of interest cost and an increase in the actuarial losses. The effect of the ease in future salaries and pension rates has also been taken more than the last year’s expected figures.

Capital

Further, after the analyses of the capital and reserves figures, it is noticed that the Company has accumulated more reserves in the current year than the last year, which has boosted the figure of overall capital of the Company. The Company has transferred its profit to the retained earnings more than the last year due to increased profit levels in 2013.

Examination of the Statement of Cash Flow

Objectives of Cash Flow Statement

The cash flow statement shows the inflow and outflow of the cash available to the Company. The cash flow statement is prepared in two ways that are direct and indirect methods. The main objective of the cash flow is to determine the impact of accrual-based accounting; it converts the accrued transactions into cash and then interprets the total liquid cash position of the Company (Goldwater & Fogarty, 2011, pp. 16-29).

Return on capital employed

Return on capital employed =  Earning before income and Tax/Capital Employed

The purpose of calculating this ratio is to interpret the percentage of earnings of the company concerning the capital invested by the shareholders of the Company. The ratio indicates that the Company earned 9.26% income over the capital employed in 2013, while the same was 9.5% in 2012.

The slight decrease is due to increased current assets during 2013, which affects the denominator here hence the ratio is significantly lower than in 2012 (Sainsbury’s, 2014). The capital increase has left a dilutive effect on the income until the next stores mature.

Gross Profit Margin

The Gross profit looks at the earnings of the Company only after deducting the direct cost incurred on the production,

The ratio shows the Company’s profitability for the revenue during the year. The Company has turned 5.5% of its revenue into operating profit during both years. The companies involved in the food industry attract and retain consumers by offering various promotion schemes; during the last 5 years, initially, the Company faced a downturn in the GP ratio, then its offered coupon sales and offered a festive discount to result in growth in GP ratio.

Current ratio

The Current ratio shows the liquidity of the Company and measures the financial position of the Company. The ratio is calculated to determine the percentage of current liabilities that could be paid off after using the current assets available to the Company.

In this case, the Company can pay 60% of its short-term debts out of its current assets in 2013; the same was the position in last year. In the retail business, the companies have a low current ratio. The increase in the current ratio has been noticed for the last 5 years. However, the Company should strengthen its liquid position to make the available assets twice its current liabilities.

Debt equity ratio

This ratio is calculated to avoid bankruptcy and other financial losses to the Company.

The ratio in the year 2013 is 88%, and the same was 83% in the last year. The reason behind the eased ratio is that the Company has been involved in more liabilities than the last year due to increased retirement obligations in the year 2013.

Conclusion

According to the analysis of Sainsbury, the company is worth investing in at the current share price. The company’s revenue has been steadily growing over the past years, and the market share is expanded with the help of the Rapid expansion plan. Further, the revenue growth is remarkable in increasing the company’s overall GP margin and Net profit, which also shows a healthy EPS.

The management also has a positive vision for the increase in dividends to shareholders. The Company has covered its Finance and taxation costs, and there are no significant contingent liabilities and commitments towards the company. Looking at the key performance indicators, there is a high probability that Sainsbury’s will grow in the future. The company’s investors are advised that there is no inherent risk in buying the company’s shares at the time.

References

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Mistry, D. S., & Singh, S. K. (2012). A Study of Cost and Sales Trend of Indian Passenger Vehicle Industry as Determinants of Profitability. JIM QUEST, 8(2), 21.

Sainsbury’s. 2014. Financial Statement. [online] Available at: https://www.jsainsbury.co.uk/media/1616189/sainsburys_ara.pdf [Accessed: 6 Jul 2014].

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