This report analyses the financial and non-financial contents of J Sainsbury Plc's annual report. The analysis is primarily based on the annual reports for the year ended 2009 and 2010. However, the analysis also takes in to account earlier annual reports for J Sainsbury and relevant industry data. This report is divided in to two parts. The first part describes the business vision of J Sainsbury and then, the financial performance of the company is discussed in relation to previous years as well industry performance. The second part of the report provides an analysis of the narrative parts of J Sainsbury Plc's annual reports. At the end of each part concluding remarks are outlined as well.
Business Vision
Justin King the Chief Executive Officer (CEO) of J Sainsbury Plc outlined the vision for the company in the following words: "Our vision is simple; we are here to serve customers well with a choice of great products at fair prices and by so doing, to provide shareholders with strong, sustainable financial returns" [1]
"Sainsbury plc's present focus is to improve the performance of the core UK supermarket chain. Whilst doing so we will continue to explore and develop growth opportunities in other markets. Through implementing 'Managing for Value' we will stretch our ambitions and challenge the conventional wisdom within the Company, thereby unlocking our potential and delivering value." [2]
J Sainsbury plc's objective is to meet its customers' needs effectively and thereby provide shareholders with good, sustainable financial returns. It aims to ensure all employees have opportunities to develop their abilities and are well rewarded for their contribution to the success of the business. Its policy is to work with all of its suppliers fairly, recognising the mutual benefit of satisfying customers' needs. It also aims to fulfil its responsibilities to the communities and environments in which it operates.
Environmental responsibility is one of the key elements of the Group's approach to corporate social responsibility. J Sainsbury plc seeks to control its direct impacts by responsible management of energy consumption, waste management and seeking to reduce the environmental impacts of its own-brand products. In addition, it recognises that food retailing is responsible for many indirect impacts on the environment. Where the company cannot control these directly, it seeks to use its influence to help bring about improvement. [3]
The above discussion shows that Sainsbury has a clear vision and strategy in place which is easy to understand and leaving a positive impact on the business.
Furthermore, the Business vision and strategy is well supported by Sainsbury business goals operating in parallel to achieve the maximum results. Sainsbury delivers improved quality shopping experience to the customers with great products at fair prices. Sainsbury goal is to make customer life easy by delivering them fresh, safe, healthy and tasty food. To achieve the goal they have focused on being, best for food and health, commit to source with integrity, show respect to the environment, make a positive difference to the community and provide a great place to work. This is what they value and is the reason for their positive difference from other companies operating in the supermarket industry.
Business Highlights
In 2004 when Justin King joined Sainsbury as a CEO he described it as "a burning platform destined to either swim or sink". After Applying the model and business plan called 'Making Sainsbury's Great Again' (MSGA), Sainsbury has made progress and currently stands in the top list of best companies in the industry.
Currently Sainsbury is operating through its network of total 872 stores including 537 supermarkets and 335 convenience stores (Sainsbury annual report 2010). Sainsbury has made admirable progress in establishing itself in the industry. In order to analyse its financial position and standing in the market an analysis of the financial performance of the company is carried out in the following section. The analysis is carried out in two parts. First, a trend analysis of the company performance over the last two years (2009-2010) is carried out. Second, Sainsbury's performance is compared with its major competitors and the sectors as a whole.
Trend Analysis
4.1. Profitability
Table 1: Profitability Ratios for 2009-2010
Year
2010
2009
Operating Profit Margin %
3.67%
2.46%
Gross Profit Margin %
5.42%
5.48%
Return on Capital Employed %
9.09%
6.55%
Return on total Assets %
6.75%
4.64%
Table 2: Revenue and Gross Profit for 2009-2010
Year
2010
2009
Change %
Revenue
19964
18911
5.56% (increase)
Gross profit
1082
1036
4.44% (increase)
Table 3: Operational profit, Current liabilities and Total Assets for 2009-2010
Year
2010
2009
Change %
Operational profit
733
466
57.3 (increase)
Current Liabilities
2793
2919
4.32 (decrease)
Total Assets
10855
10033
8.19 (increase)
Table 3 shows that profitability of the company has increased by 57.3%. Similarly, Table 1 shows that operating profit margin of the company has increased from 2.46% to 3.67% in 2010. Furthermore, Return on Total Assets (ROTA) and Return on Capital Employed (ROCE) have also increased slightly in 2010 when compared to 2009. By analysing the financial reports, the major factors contributing to this increase are as follows. First, J Sainsbury was able to capture 0.2% market share from its rivals resulting in the increase in revenue by 5.6% (source: Sainsbury annual report 2010). In customer terms Sainsbury was attracting and serving a million more customers a week from the last year. Another main factor is the tight control on costs such as reduction in Administrative expenses by 5%. Similarly, Sainsbury was also able to achieve cost efficiency saving of 75% over cost inflation by providing self checkout, bioptic scanners, smart online picking, simple structures in stores, centres and reduced usage of water and energy. Furthermore, net finance cost decreased by 30.1% from 113million to 79million mainly as a result of the decrease in the Retail price Index (RPI). Income tax charge at this year was 148million compared to the 177million of last year with an underlying tax rate of 28.5 per cent compared to 29.1 per cent in 2009 and an effective tax rate of 20.2 per cent to 38.0 per cent in 2009.
Sainsbury is in a very healthy financial position, as the business is a strongly cash-generative business and delivered an operating cash of 1.2 billion pounds in the current year. It also has the ability to manage the load of its debts clear from the point as Sainsbury reduced its debt by 122 million to 1549 million from 1671 million in 2009. Sainsbury is in strong asset backing position from the freehold property estate which has significant development potential. As the estimated market value of freehold property assets was 9.8 billion, an increase of 2.3 billion since last year (Source: Sainsbury annual report 2010). Sainsbury has continued to manage working capital closely and cash generated from operations includes a further year-on-year improvement in working capital of 92 million. This has been achieved through tight management of inventories which are up less than two per cent on last year, and continued improvements of trade cash flows.
Sainsbury's strong financial and operating performance over the last couple of years in these difficult financial times (recession) is very promising and reassuring for shareholders. In addition to its good operating performance and strong financial position Sainsbury has bright plans for the future as well. Sainsbury is on track for growing space and growing sales. To extend the reach of Sainsbury brand it is opening new convenience stores and developing online operations increasing its sales by just fewer than 20 per cent and be in reach of about 90 per cent households. For this purpose they have opened 51 more convenience stores and about 8000 non food products available for sale online. They have also opened 38 new superstores by adding over 1.1 million to the assets of overall increase of 6.8% in growth and have intension to increase it to 15% by 2011 (source: Sainsbury annual report 2010) [4] .
4.2. Liquidity, Efficiency, and Stability
Table 4: Liquidity Ratios
Liquidity Ratios
2010
2009
Current Ratio
0.66 : 1
0.54 : 1
Acid Test (Quick Ratio)
0.41 : 1
0.30 : 1
Table 5: Efficiency Ratios
Efficiency Ratios
2010
2009
Fixed Asset Turnover
2.22 times
2.24 times
Debtor collection period
1.30 days
0.95 days
Creditors payment period
32.58 days
33.35 days
Stock holding period
16.7 days
17.3 days
Stock Turnover
28.44
27.45
Table 6: Stability Ratios
Stability Ratios
2010
2009
Gearing Ratio %
63.81 %
66.09 %
Interest Cover Ratio
5.95
4.15
Table 4 shows that the liquidity ratios of Sainsbury have improved in 2010 in comparison to 2009. This has been achieved through tight management of inventories, which are up less than two per cent on last year, and continued improvement of trade cash flows. Similarly, the cash and cash equivalents have increased by 33.5%, this increase is brought about by the increase in sales and cash generated from operating activities. The availability of cash has enabled the company to pay off its current liabilities which led to the current liabilities being decreased by 4.32%.
In 2010 Sainsbury was managed more efficiently when compared to 2009. This is evident from Table 5, which shows that all efficiency ratios have improved in 2010. The improvement in all these efficiency ratios is brought about by, 22.61 % increase in like for like sales, 24.63% increase in total sales, and 2.0% increase in trading intensity per square foot (per week) in 2010.
Similarly, Table 6 shows that Sainsbury is more stable financially in 2010 when compared to 2009. This stability is due a 7.87% decrease in net debt in 2010, the reduction in net debt was driven by the cash generated from the capital raise in June 2009 and strong operational cash flows, including another good working capital performance, offset by capital expenditure on the acceleration of the store development programme and outflows for taxation, interest and dividends
4.3. Investors' earnings
The basic earnings per share (EPS) for Sainsbury's shareholders increased by 12.7% to 23.9 (21.2 pence in 2009). This increase in EPS brought about by 102.4% increase in underlying profit after tax. Basic earnings per share were up 93.4%, at 32.1 pence (16.6 pence in 2009), more than the increase in underlying earnings per share primarily due to the surplus on joint venture property valuations. [5]
The Board has recommended a final dividend of 10.2 pence per share (9.6 pence in 2009), which will be paid on 16 July 2010 to shareholders. This will increase the full year dividend by 7.6% to 14.2 pence per share (13.2 pence in 2009). Similarly, the dividend is covered 1.68 times by underlying earnings (1.61 times in 2009).
The above discussion shows that Sainsbury could be considered as a good business to invest in, from the perspectives of existing shareholders as well as potential investors. Because, the company is growing, the EPS is increasing year by year and the company has enough cash to pay dividends to its shareholders.
Comparison with competitors and industry
Table 7: Sainsbury's financial Performance in relation to industry group (5 companies)
Variables
No of
comp
Sainsbury
Median
Turnover (000)
5
19,964,000
15,410,000
Profit(Loss) before Tax (000)
5
733,000
562,000
Current Ratio
5
0.66
0.66
Profit Margin (%)
5
3.67
5.57
Return on Share holders' Funds (%)
5
14.76
17.34
Return on Capital Employed (%)
5
9.09
12.98
Solvency Ratio (%)
5
45.75
45.79
Gearing Ratio (%)
5
63.81
48.32
(Source: FAME Database)
Table 8: Sainsbury's financial performance compared with two major Competitors
Sainsbury Plc
Tesco Plc
Morrison Plc
Turnover (000)
19,964,000
56,910,000
15,410,000
Profit(Loss)before tax (000)
733,000
3,176,000
858,000
Current Ratio
0.66
0.73
0.51
Profit Margin (%)
3.67
5.58
5.57
Return on Shareholders' Funds (%)
14.76
21.76
17.34
Return on Capital Employed
Solvency Ratio (%)
9.09
45.75
10.58
31.71
12.98
56.50
Gearing Ratio (%)
63.81
116.35
37.83
(Source: FAME Database)
Table 7 compares Sainsbury's financial performance with the industry group median (consists of 5 companies, where as Table 8 compares Sainsbury's financial performance with two of its major competitors (Tesco and Morrison)
Table 7 shows that in terms of turnover and profit before taxation Sainsbury has outperformed the industry. This is good news for investors as the company is able to generate sales. However, all other performance measures in Table 7 show that Sainsbury is performing well below the industry median. Again, this is worrying news for existing shareholders, because they could get more return on their investment if they invest in any other company in the sector. This could mean that J Sainsbury is a less attractive business for new investors to invest and they will be more attracted towards other business in the same sectors.
Table 8 shows that Sainsbury is outperformed by market leader Tesco Plc in all respects. Similarly, when compared to Morrison Plc, apart from turnover, Sainsbury is far behind Morrison Plc also.
Although in the previous sections we discussed that, profit margins, gearing ratios, liquidity ratios etc have improved in 2010 for Sainsbury, but comparing all these performance indicators with the industry median and competitors, we get a much clearer picture of the company's financial health. Taking in to account the industry and competitors comparison data, it could be said that the financial position of J Sainsbury is not very attractive both for existing shareholders and potential investors. The company needs to be managed more efficiently in order for it to be able to compete with in the market and attract investors. Therefore, there is still plenty of room for improvement for J Sainsbury plc.
Conclusion
Based on the above analysis, discussion, and industry comparisons it can be said that although Sainsbury's performance has improved in the past few years, but still the company needs to improve further. The company is way behind its major competitors in the market. However, as discussed earlier the company has grown continuously over the past five years or so; this is good news for existing shareholders and potential investors. Because, this shows that the company is on the right track and it has the potential to compete with the market leader.
Part B
Communication
The purpose of the financial statements and financial reports is to communicate with the company's stakeholders (Murphy and Peck, 1980). Sainsbury's uses visual representations like maps, charts and pictures to make the reports easy to understand. All the key financial performances like total sales, profits and cash flows are presented with the help of visual representation making them easy to understand and more helpful for decision making. Sainsbury has also used colour theory [6] to communicate their corporate statements. Sainsbury's representative colour is orange with the general appearance of bright and glowing, mental association of warm metallic and autumnal, direct association of thanksgiving and with the objective impression of energy and liveliness. Colour increase brand recognition by 80% and is a visual and physiological stimulus (Rosbergen et al., 1997). Sainsbury also uses electronic communication to communicate with its shareholders as it is in legislation. Sainsbury keep in touch with their investors by arranging regular meetings. The board continuously receives feedback on the views of major investors and the investor's relations program. The board is answerable to the shareholders in the Annual general meeting which is usually in the mid of July [7] .
Accounting narratives plays an important role in the financial reporting of a company. Narratives provide a more comprehensive overview of a company annual performance. According to Clatworthy and Jones (2003) financial narratives include the following:
Business Review
Chairman's report
Corporate social responsibility
Corporate governance
Business Review
Sainsbury jointly operates with Sainsbury bank, Lloyds Banking Group, Land securities Group plc and the British land company plc. Sainsbury is performing well continuously for the last four years in serving customers according to their needs and expectations. They are in line with their strategy and making progress in capturing market shares (these claims are well supported by financial statements). They are committed to deliver to 90 per cent of the household in the UK. This is evident from the fact that, currently Sainsbury's sales increased by 5.6%, profit before tax increased by 57.3% and profit after tax increased by 102.4%. Sainsbury was able to transfer the benefits of these increases to the shareholders, as the basic earnings per share have increased by 93.4% resulting in 14.2p dividend per share paid in 2010 compared to 13.2p in 2009 [8] .
Chairman's Statement
In Narratives the chairman's statement is considered to be very important, as it sheds light on the company's current position as well as the future. The chairman's statement could have major implications on the investment behaviour of investors. Sainsbury has performed very well over the past few years, so there is almost no bad news in the chairman's statement. The only bad news in the current year mentioned by the chairman is an external factor (i.e. recession). Chairman has mentioned that, recession could harm the progress of the business. But, even in these difficult times the business was able to grow, improve its profitability and market shares. Overall, as explained in the chairman report "Sainsbury is a growing business with strong balance sheet, valuable property assets and an improving return on capital" [9] . The financial analyses in the previous sections show that chairman of Sainsbury is justified in making all these claims.
Corporate Responsibility
4.1 Sourcing with Integrity
Sainsbury achieved the goal of committing to source great British products in seasons by supporting the UK farmers to make them capable of learning new skills, create sustainable business along with long-term relationship and maintaining high quality according to the customer expectations i.e. Sainsbury sells more British apples and pears than any other retailer in the UK. As the largest retailer of fair-trade products Sainsbury paid 16 million dollars in social premiums to bring improvements to education, healthcare, and local infrastructure along with other projects to communities in developing countries (Source: Sainsbury annual report 2010). Again these claims made by Sainsbury's management could be verified by financial statements.
Respect for Environment
Sainsbury has great concerns for environment and has taken the environmental issues very seriously. Sainsbury has shown this by running its business in the most environmentally responsible way possible. Sainsbury has also provided support to its customers to be environmentally responsible. Sainsbury as a first retailer in UK committed to phase out harmful gases from refrigeration by trying hard to reduce the direct and indirect impact of business on environment. As a recognition proof of its efforts, Sainsbury has been awarded an 'A rating' in the consumer Focus 'Green to the Core'.
Making Positive Difference to Community
Sainsbury's main aim is not only providing great services and quality food, but they have also shown good progress in making positive differences to the communities and being a good neighbour. To fulfil this aim Sainsbury has taken a number of steps, such as, providing donations to charities and by providing local job and local business opportunities. Sainsbury was awarded as the 'People Organisation' by CBI in 2009 Human Capital Awards and gold accreditation from 'investors in People' for the excellence of board ranging, managing people and for commitment to improve business through investment in people (Source: Sainsbury annual report 2009).
From the above discussion Sainsbury's commitment to corporate social responsibility is very clear. They take it very seriously and are conducting business in an ethical and socially responsible manner as they have converted fifth of its online delivery fleet to green electric vehicles (source: Sainsbury annual report 2010). Sainsbury has a corporate social responsibility committee on board, which shows their commitment towards corporate social responsibility. They have invested heavily to bring improvements to the environment and their neighbourhood. Which is very good sign for environmentally concerned shareholders as well as for potential investors [10] .
CORPORATE GOVERNANCE
5.1. Sainsbury Board
The Sainsbury's board comprises of four executive directors and six Non executive directors. The roles of chairman and Chief Executive are carried out separately by two different individuals and their responsibilities are clearly defined. Non executive directors are independent and they bring wide and varied commercial experience to board. The board structure of Sainsbury is in full compliance with all the provisions of the UK Corporate Governance code issued by the Financial Reporting Council (FRC). It is one of the requirements of the code for listed companies in the UK, that at least half of the board excluding Chairman should be composed of independent non executive directors (www.frc.org.uk). This shows that Sainsbury's has adopted the best practices of corporate governance mechanisms, which is reassuring for investors' confidence.
5.2. Internal Control and Risk Management
The internal controls of Sainsbury are very effective to ensure successful operations of the company. Mechanisms are also in place to safeguard the company against any potential risks. Sainsbury has reviewed the effectiveness of its internal control mechanisms which is carried out by the audit committee. Throughout the year the audit committee works side by side with the management and board to analyse, mitigate, identify and manage risks involved in achieving their objective. Sainsbury also have a risk policy communicated throughout the company and is reviewed by the audit committee to report to the board.
The effectiveness of Sainsbury's internal controls and risk management systems is evident from the fact that the company was able to cope with the recent financial crises and remained profitable during economically difficult times. Therefore, this is good news for shareholders, because it shows that their investments are in safe hands.
5.3. Remuneration policy
The remuneration policy of Sainsbury is also designed very well, because, a large proportion of the directors' remuneration is linked to performance i.e. 60 to 65% of the remunerations is variable and is based on achieving targets. This also sends a positive signal to shareholders and perspective investors; it shows that the interests of directors are aligned with the interest of shareholders [11] .
Conclusion
On the basis of the above discussion it could be argued that, Sainsbury has complied with the recommended provisions of the UK corporate governance code, which shows that the company is well governed and proper mechanisms are in place to protect the interest of shareholders. Claims made in the narrative report are well supported by data in the actual financial reports. This also shows that the transparency policy of the business. Last, but no the least the company is carrying out its business in a socially responsible way. All these factors send a positive signal to both existing shareholders and potential investors.
