The retail companies are doing very good business in spite of the downturn in economy in the last couple for year Reynolds, 2004. Retailing is one of the least affected sectors in this phenomenon. In this report, we focused on Sainsbury and analyzed it financial performance with the Marks & Spencer (M&S).
We have collected the raw accounting data from various sources. Then spread it into the excel sheet and analyzed it by applying simple accounting tools. Then we tried further to make it into a meaningful conclusion, for this, we have taken one another company M&S from the same industry and did some ratio analysis to get the true picture of company performance.
Reason for Choosing Ratio Analysis:
For the analysis part ratio analysis tools used, because it gives a clear snapshot of the performance of the company with respect to others or industry in which operate (Barry & Jamie, 2006). As this report tries to compare the financial performance of two, retail sector companies M&S and Sainsbury, hence it best feasible to use ratio analysis for that with limited amount of information (Gitman and McDaniel, 2008; Brigham, 2009).
A Brief about Sainsbury
J. Sainsbury plc giant comprises of 502 super stores and 290 convenience store was formed in 1869 (Sainsbury, 2009). It has joint venture in real estate and banking with other companies too. The Sainsbury brand is known for providing fresh, healthy, tasty and hygienic food without compromising on quality and cost. Sainsbury is name synonyms with constantly thriving for improved products in line and customer satisfaction.
Sainsbury offer more than 30000 products to fulfil the needs of more than 18 million footfalls within a week. Near to 88 % of the UK customer can place their order online too.
Corporate Objective
Great food at fair price
Accelerate the growth of complimentary non-food range and services
Reaching more customer through additional channel
Growing supermarket space
Active property management
A Brief about Marks & Spencer (M&S)
125 years back started from penny bazaar stall today M&S is a name known for high quality product at value price. It considered of one of the leading retailer in clothing, food and home product in UK (M&S, 2009). It is having a base of more than 21 million customers in UK, and still trying to focus on international market too, capturing 40 territories, having a staff of 78000 employee and back of 2000 suppliers in their back. M&S ensure that brand will continue to offer great value, satisfaction, quality, innovation and comfort to its customer.
Group having revenue of GBP 9.1 billion out of which 8.1 billion is from UK business, near about 90 %. The company future priority will be:
Increasing pace of change and operational efficiencies & execution in the business
Leveraging M&S reach by building more channels to market
To build global portfolio for the global customer
To maintain and build brand M&S
Analysis
The main focus of the report is analyze the difference between the financial statements of the Sainsbury and M&S. the research was intended to find out which company is more stable, profitable, optimally managed.
Analysis of Income Statement and Balance Sheet:
(All Values are in GBP Million)
Balance Sheet Comparison
Asset:
Total Asset
2009
2008
% increase/Decrease
Sainsbury
10,033
10,115
-0.8%
M&S
7,258.10
7,161.00
1.4%
From the above table it can be interpret that for the financial year 2008-2009 M&S total asset has grown by 1.4 % while fore Sainsbury it decreased by 0.8 % . though in absolute term Sainsbury neat about 1.5 times of M&S total asset.
Liabilities:
Total Liabilities
2009
2008
% increase/Decrease
Sainsbury
5,657
5,180
9.2%
M&S
5,157.50
5,197.00
-0.8%
It can easily seen from the liabilities point of view Sainsbury liabilities has grown up drastically by over 9% on the other hand for M&S it is -.8%.
Net Asset:
Net Asset
2009
2008
% increase/Decrease
Sainsbury
4,376
4,935
-11.3%
M&S
2,100.60
1,964.00
7.0%
The impact of of total asset and liabilities can be easily seen here. The asset for Sainsbury has been down by 11.3% while for M&S it has gone up.
Equity:
Total Equity
2009
2008
% increase/Decrease
Sainsbury
4,376
4,935
-11.3%
M&S
2,100.60
1,964.00
7.0%
Equity for the Sainsbury has been down by 11.3 % while for at the same time it has grown by 7% for M&S. it can be easily infer there are more investment available for M&S in the share market in comparison to Sainsbury. Or in other word investor are more interested towards M&S stock.
Income Statement Comparison:
Revenue
Revenue
2009
2008
% increase/Decrease
Sainsbury
18,911
17,837
6.0%
M&S
9,062.10
9,022.00
0.4%
From this, it is imperative for the financial year 2008-2009 the sales for Sainsbury.
Profit
Profit
2009
2008
% increase/Decrease
Sainsbury
289
329
-12.2%
M&S
506.8
821
-38.3%
Here it is find out that profit was declined for both the organization. Though sales has been increased by a handsome margin for Sainsbury and at par for M&S. the profit was vulnerable for both the organization.
Sales have been increased while the profit decreased it shows that both the firm earned lower margin for the period analyzed.
Financial statement analysis using ratio analysis
Ratio Analysis is one of powerful tool of financial analysis (Wild, 2006). It is used widely across the organizations, industry, and economy. A ratio is been defined as an indicative quotient of two mathematical expression and or a relationship between the similar things (Besley, 2007).
A ratio in isolation can't yield any result. To get a meaningful implication of a ratio anybody require comparing it with other company or with the requisite industry.
Generally, ratio can be classified in the following categories.
Liquidity ratio
Financial Gearing or capital structure ratio
Activity ratio
Profitability ratio
Investment ratio
Liquidity ratio:
Current Ratio
Quick Ratio or Acid Test
2009
2008
2009
Sainsbury
0.54
0.61
0.30
M&S
0.60
0.59
0.37
The liquidity ratios measure the firm ability to meet the current obligation or liabilities. Traditionally by thumb rule a current ratio of 2 is preferred. But it vary according to industries.
A firm should ensure that it must be able pay its current obligation, it should neither under liquid nor over liquid. If it don't have required liquidity then it won't be able to pay its short term obligation hence it will affect its credit rating which result bad image in the market. On the other hand if it is over liquid then there is no use of excess underlying asset.
Gearing or Capital Structure ratio:
Debt-equity ratio:
Debt-equity ratio
2009
2008
Sainsbury
1.29
1.05
M&S
2.46
2.65
It can be easily inferred from the above table that Debt-equity ratio for Sainsbury is much lower than M&S which shows Sainsbury is less exposed to market in comparison to M&S. M&S is more volatile as much as twice to Sainsbury because it has more than twice of debt than equity. Over the passage of time, it can be seen Sainsbury ratio has been increased while for M&S it decreased.
Interest-Cover ratio:
Interest cover ratio
2009
2008
Sainsbury
2.36
5.39
M&S
5.52
9.18
M&S is having higher interest-cover ratio which suggest that it has more financial strength to meet its obligation than Sainsbury.
Activity ratio:
Inventory turnover ratio:
Inventory turnover ratio
2009
2008
Sainsbury
10.73
10.31
M&S
30.70
31.82
Sainsbury has the ability to turn around then inventory faster than M&S. Sainsbury turned its inventory over a period of 10 days while the same is done by M&S in around 31 days.
Sales revenue to capital employed ratio:
Sales revenue to Capital employed
2009
2008
Sainsbury
2.45
2.17
M&S
1.79
1.73
Here we can see Sainsbury has utilized it asset more sagely than M&S. they have generated high revenue with similar amount of capital employed.
Profitability ratio:
Return on ordinary shareholder's fund:
ROSF
2009
2008
Sainsbury
5.81
5.77
M&S
22.84
40.83
ROSF is the measure of operating profit earned on the shareholders fund. Here for M&S it's quite high. M&S capital structure is based on debt more heavily than equity it might be the one of reason for these numbers.
Return on capital employed (ROCE)
ROCE
2009
2008
Sainsbury
8.72
6.44
M&S
17.18
23.21
M&S win the battle from Sainsbury from ROCE point of view though due to high ratio of debt here performance decrees if we compare it from ROSF, still much satisfactory.
Operating Profit Margin:
Operationg Profit Margin
2009
2008
Sainsbury
3.56
2.97
M&S
9.61
13.43
M&S is having high profit margin, which suggests that M&S work on high margin, or sells their product at high price or in the other way it can be said M&S produces their product in more cost effective way. The COGS is low hence, they earn more profit on that.
Gross Profit Margin:
Gross Profit Margin
2009
2008
Sainsbury
5.48
5.62
M&S
7.79
12.51
Gross profit margin for M&S less the operating margin and for Sainsbury it increased. It suggest that Sainsbury has earned profit other than their core business while on the same hand M&S loosed it.
Investment ratio:
Earning Per Share:
EPS
2009
2008
Sainsbury
16.6
19.1
M&S
39.3
49.2
EPS for M&S is higher than Sainsbury. Which suggest shareholder of M&S gets more incentive than Sainsbury.
Dividend Per Share (Pence):
Dividend Per Share
2009
2008
Sainsbury
30.00
36.00
M&S
14.20
12.0
Sainsbury has more dividend payout than M&S in both year. It can be said M&S is might be having better investment opportunities rather than paying out dividend. As its is already on higher end of debt.
P/E Ratio
P/E Ratio
2009
Sainsbury
22.43
M&S
9.82
P/E ratio suggests the quality of earning. How much the investor needs to pay for a single dollar of earning. Sainsbury is having a higher P/E ratio, which means that an investor has to invest GBP22.43 in Sainsbury for earning per GBP while GBP9.8 in M&S for the same earning. It can be said that Sainsbury is overpriced and company is not performing up to the expectation or may be investor thinks that there are more future opportunities for the company.
Limitation
Though the researcher tries to collect the authentic data, Quality and authenticity of data can affect the results. The inflation has its role to play too, different standard compliance by companies for presenting their balance sheet and P&L accounts by different companies, which can distort the finding. As for ratio analysis, benchmarking is prudent, because ratio is a relative term it cannot be analyzed in isolation. Finally, one limitation was shortage of knowledge, which pretends me to make this report one of the best.
Interpretation & Conclusion:
Considering balance sheet, it can be seen net asset for M&S gone up. P&L statement suggest that in absolute term the profit for M&S is more than Sainsbury though it has sharply declined than Sainsbury in 2009 compare to 2008.
Both firms are at par in terms of liquidity and better than, other firms (William Morrison plc & Tesco Plc). Hence, they have enough liquid assed to finance their short-term obligation.
Activity ratio favours more to Sainsbury as inventory turnover ratio is less for Sainsbury and sales revenue to capital employed is higher. This shows that Sainsbury has employed their resources more sagely.
From the profitability point view, Sainsbury is far better than Sainsbury for the analyzed period. ROSE, ROCE, operating profit margin, gross profit margin all ratio indicate a better performance of M&S over Sainsbury.
As far as investors are concerned, from the analyzed data it can educe EPS, dividend payout, P/E ratio are better for M&S than Sainsbury for the analyzed period.
Recommendation:
Sainsbury is required be more focused on the operating activities (systems, process, machinery etc). As its activity ratio are not good as M&S, which are affecting the whole profitability. It may result a bad show off by investment ratios, and affect the company reputation in the market. Sainsbury has a good liquidity and having enough equity hence it can attract short and long term financing from the market, which would lead to better returns for the shareholders.
