Sainsbury PLC and Tesco PLC Financial Analysis

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Executive Summary

Sainsbury PLC is the second leading superstore chain in the United Kingdom. Rivalry and competition in the retailing and merchandising industry have caused the company to face several challenges, whereas, Tesco PLC is the first largest retailing and merchandising company in the United Kingdom and the second-largest retailing company in the world after Wal-Mart. Tesco PLC has sustained its leading market position in the UK retailing industry since 1995. Tesco PLC has even remained effective to sustain its market position during an economical crisis. This report analyzes the financial performance and positioning of Sainsbury PLC and Tesco PLC in 2013 by using important financial indicators. The main focus of the report is to evaluate the profitability and solvency of these retail companies. In addition, the report identifies and analyzes different information required by users of financial information.

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Background

Sainsbury PLC is the parent company of Sainsbury’s store chains. It is among the leading retailing companies in the United Kingdom. It is the fastest-growing chain of stores in the Victorian era. In 1995, Tesco PLC took the leading position in the UK retail industry leaving behind Sainsbury PLC and other companies. In 2003, Sainsbury’s lost its market position to Asda, which excelled on better service strategy and location of its stores. In 2014, improved financial performance backed by strong strategies of Sainsbury PLC allowed the company to regain its position over Asda and yet again became the second largest retailing company in the UK. The improvement in Sainsbury’s operational strategies and performance suggest it can become a major competitor to threaten Tesco PLC in times to come.

Sainsbury PLC Financial Review

Analyzing the financial performance of Sainsbury PLC, it can be suggested that the company’s business strategies emphasize strengthening its brand image, competitive pricing, and providing complementary services to its customers. According to Sainsbury’s annual report (2013), the company’s online sales have contributed significantly to its business i.e. they contribute about 20 percent or £1.0 billion to its total sales. Sainsbury’s has been successful to develop a strong brand image, which has been the reason for about 17 percent increase in the overall sales of the company. In order to overcome the inflationary pressure, Sainsbury has been inclined towards operational cost savings that have allowed the company to save £100 million. The Group has undertaken several joint ventures, which have increased the company’s operating profit margin by about 5.1 percent.

Tesco PLC Financial Review

Tesco PLC’s annual report (2013) indicates a major decline i.e. 13 percent in the group’s trading profits. There is a need for the company to focus on those markets where it can sustain its leadership. Tesco PLC’s performance has been highly affected by the regulatory change in the UK and South Korea. An increase of about 1.3 percent in sales of the company has been determined, and Tesco Bank has shown a negative growth of 2.2 percent. The company aims to refresh its existing stores and invest in multinational channels to expand its business in Asia, which has shown the highest growth rate of 5.9 percent in comparison to other market segments of the company.

Financial Analysis

Sainsbury Tesco
2013 2013
Working Result Working Result
Profitability Ratios
Gross Profit Margin Gross Profit / Total Sales 1,277/23,303 5.48% 4,089/64,826 6.31%
Net Margin Operating Profit/ Total Sales 887/23,303 3.81% 2,188/64,826 3.38%
Mark-up Gross profit/Cost of Sales 1,277/22,026 5.80% 4,089/60,737 6.73%
Liquidity Ratio
Current Ratio Current assets/ Current liabilities 1,914/3,115 61.42% 13,096/18,985 68.98%
Acid test (Current assets – Inventory)/Current liabilities (1,914-987)/3,115 29.75% (13,096-3,744)/18,985 49.26%
Interest Cover Operating Profit/Interest Payable 887/99 8.87 2,188/228 9.55

Analyzing the financial indicators of Sainsbury PLC and Tesco PLC, it can be determined that the overall profitability of Sainsbury PLC has remained relatively less than Tesco PLC. The gross profit margin of Tesco PLC is 6.31 percent and that of Sainsbury PLC is 5.48 percent, which is due to the lower gross profit reported by Tesco PLC as compared to Sainsbury PLC. This reflects that the sales volume of Sainsbury’s has been higher than Tesco. Inflation has impacted the cost of inventory and goods due to which the gross profit of both companies has declined. Comparing sales of both companies, it can be observed that Sainsbury’s has a higher sales volume. Consumers’ purchasing power has been low, but Sainsbury’s brand value and competitive prices have enhanced the sales volume of the company. Its innovative plans and joint ventures have contributed to the sales growth of the company, whereas Tesco’s sales volume has relatively declined over the period due to poor marketing strategies. The net margin ratio indicates that Sainsbury PLC (3.81 percent) has higher net margin than Tesco PLC (3.38 percent). The operational activities of Tesco PLC have remained more effective than Sainsbury’s, which is the reason for Sainbury’s operating profits to be relatively lower than Tesco. This reflects that Sainsbury’s incurs higher administrative expenses that have eventually suppressed its operating profits. In addition, Tesco PLC has a higher interest mark up as compared to Sainsbury’s. Overall, Tesco has remained efficient to sell commodities at higher prices to their customer that has eventually increased its profitability.

Analyzing the liquidity ratio of Sainsbury PLC and Tesco PLC, it can be observed that Tesco PLC is more liquid than Sainsbury’s. However, Tesco has acquired more debt than Sainsbury. Tesco ensures the availability of assets to meet its current and long-term obligations, whereas Sainsbury’s obligations are relatively more than its assets. In addition, the long-term solvency of Tesco PLC is better than Sainsbury. This reflects that Tesco has been inclined to ensure the availability of internal equity. To be more solvent, it is recommended that Sainsbury should enhance the availability of its current assets, particularly cash.

Users of Financial Analysis

The above financial analysis focuses on the profitability and leverage measures of both companies. Therefore, the possible users of the financial analysis can be investors, creditors, and managers. In particular, investors and creditors are highly concerned with determining the financial positioning and performance of the company and are interested in its ability to utilize the investment or to pay off loans it acquires (Black & Al-Kilani, 2013). The information shall be highly valuable for investors to compare and determine the investment potential and market positioning of the company as compared to its competitors in the industry (Lee, 2009). The managers use the information to determine the profitability of the company in comparison to its competitors. This allows the management to evaluate the strategies of the company with its peers.

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The usefulness of Supplementing Financial Analysis

Supplementary financial measures are useful as they provide a much clear and more understandable view about the company’s performance based on which users can make their decisions better. Such measures have become increasingly popular among investors and financial evaluators as they provide detailed information about the financial performance of a company (Atrill & McLaney, 2004). Often companies do not define the financial measure; they use selective information to reflect the financial performance of their business (Lee, 2009). This suggests that investors and preparers must look into the complexity and subjectivity of the financial information (Atrill & McLaney, 2004).

Conclusion

Analyzing the financial information of Tesco PLC (2013) and Sainsbury PLC (2013), it can be determined that the profitability and leverage measures of Tesco PLC have been higher than Sainsbury PLC. This reflects that Tesco’s strategies and operational activities have been more effective than Sainsbury’s (Collier, 2003). This has resulted in Tesco PLC sustaining its strong brand image and value due over the years due to which customers are more inclined to make their purchases from Tesco than Sainsbury. In addition, the innovative marketing and pricing strategies of Tesco have attracted more customers (Dyson, 2007). On the contrary, Tesco PLC faces challenges in its segmental operations in the United Kingdom and South Korea. Therefore, the company is more focused to enhance and expand its business internationally. On the other hand, Sainsbury PLC strives to strengthen its brand image, and therefore, the company focuses on providing complementary services and gaining customers’ loyalty (Atrill & McLaney, 2004). Sainsbury’s strategies and operations have significantly improved in the current year which has been reflected through its profits. In addition, the joint ventures of Sainsbury are the major factor that has enhanced the performance and profitability of the company.

List of References

Atrill, P & McLaney, E 2004, Management Accounting for Decision Makers, Financial Times Prentice Hall , London.

Black, G & Al-Kilani, M 2013, Accounting and Finance for Business, Pearson, London.

Collier, PM 2003, Accounting for Managers: Interpreting accounting information for decision-making, John Wiley, Chichester.

Dyson, J 2007, Accounting for Non-Accounting Students, Prentice Hall / Financial Time, London.

Lee, AC 2009, Financial Analysis, Planning & Forecasting: Theory and Application, llustrated edn, World Scientific, London.

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BusinessEssay. (2022, August 5). Sainsbury PLC and Tesco PLC Financial Analysis. Retrieved from https://business-essay.com/sainsbury-plc-and-tesco-plc-financial-analysis/

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BusinessEssay. (2022, August 5). Sainsbury PLC and Tesco PLC Financial Analysis. https://business-essay.com/sainsbury-plc-and-tesco-plc-financial-analysis/

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"Sainsbury PLC and Tesco PLC Financial Analysis." BusinessEssay, 5 Aug. 2022, business-essay.com/sainsbury-plc-and-tesco-plc-financial-analysis/.

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BusinessEssay. (2022) 'Sainsbury PLC and Tesco PLC Financial Analysis'. 5 August.

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BusinessEssay. 2022. "Sainsbury PLC and Tesco PLC Financial Analysis." August 5, 2022. https://business-essay.com/sainsbury-plc-and-tesco-plc-financial-analysis/.

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BusinessEssay. "Sainsbury PLC and Tesco PLC Financial Analysis." August 5, 2022. https://business-essay.com/sainsbury-plc-and-tesco-plc-financial-analysis/.