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“An Evaluation and Critical Analysis of Financial & Business

Performance of Tesco PLC for financial years

2011, 2012&2013”

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Table of Contents Pg. #

1. Executive Summary 5

2. Introduction 7

3. Literature Review 7

4. Aims and Objectives 10

5. Methodology 10

6. Data Collection 11

7. Business Performance Analysis, Findings and Discussion 12

7.1 Political 12

7.2 Economic 12

7.3 Social 12

7.4 Technological 13

7.5 Environmental 13

7.6 Legal 13

8. Financial Performance Analysis, Findings and Discussion 13

8.1 Profitability ratios 13

8.1.1 Revenue Growth 14

8.1.2 Return on Capital Employed 15

8.1.3 Net Profit Margin and Growth 17

8.2 Efficiency Ratio 18

8.3 Gearing Ratio 19

8.3.1 Interest Cover 19

8.4 Investor Ratios 20

8.4.1 Earnings per Share 20

8.4.2 Dividend Growth 21

9. Conclusions & Recommendations 21

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10. References 24

11. Appendices (Financial Statements & Ratio Calculation (Formulas) 28

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1. Executive Summary

Tesco performance is getting bad to worst in last few years. In this research Tesco’s financial

and business performance has been evaluated to assess the reason behind this downfall in

performance. Period under research consideration is from 2011-2013and reason for choosing this

time period is start of decline in Tesco’s business performance which hits its low with worst

performance in year 2013 in last 20 years. Sainsbury’s has been chosen as similar market

competitor for comparison of financial and business performance of Tesco. Primary objective of

financial performance has been analysed through analysis of profitability, efficiency and investor

ratios. While secondary objective is impact of political, social, economic, technological,

environmental, legal and regulatory factors on the profitability and efficiency of business

performance has been carried out using PESTEL analysis. Tesco has performed healthy in 2011

but start declining during the year 2012 and had worst performance in 2013 from results of ratio

analysis due to tough economic and market conditions. In comparison Sainsbury’s growth was

steady over the 3 years period although a slight hick up in 2012 due to tough economic

conditions. Mixed approach of both qualitative and quantitative data has been used and data used

is of secondary nature i.e. financial statements of both Tesco and Sainsbury’s. Official websites

of both companies are the main source of data and reason behind gathering data from here is

accuracy and authenticity. Analysis and discussions has led to following overall performances of

both companies.

Overall Tesco’s performance in the under research period of 3 year starting from 2011-2013 is

disappointing as the company start losing its grip on the market leadership and had the worst financial and

business performance year 2013 which is first time in last 20 years of its business. It has raised serious

questions about Tesco’s future performance and group should quickly resolve these issues.

Sainsbury’s overall performance has been steady and sound during this 3 year period and they have

shown satisfactory growth in their business and they had a better run than Tesco in 2013 which can be

seen in the analysis and discussion above of different ratios comparison between Tesco and Sainsbury’s.

Third objective of this research was to assess whether Tesco still holds the leadership status and results of

discussions shows that although it still rank as market leader in UK but now the competition is getting

stronger and bad performances of Tesco in recent years might indicate towards loosing this status in

future.

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Recommendation like better strategic planning, concentration towards UK market, improvement in online

shopping and closing of loss making stores has been provided in the last section of this research report.

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2. Introduction

Tesco Plc is the biggest British multinational grocery store and general merchandise retailer, its head

office is located in Delamare Road, Cheshunt, Hertfordshire, England, United Kingdom (Tesco plc,

2015).According to telegraph article A history of Tesco: The rise of Britain’s biggest supermarket, Tesco

is the success story of 20th century in Britain as it grows from a single shop opened by Mr. Jack Cohen in

1919 to the second largest retailer in the world after Wal-Mart (Clark & Chan, 2014). Tesco has crossed

its shores of homeland UK where it has a market share of around 30% the retail giant has also got its foot

holding in more than 12 countries across Europe, Asia and North America (Tesco plc, 2014). Tesco plc

employs over 530,000 people and has the vision of providing the best customer service and shopping

experience to their customers. (Tesco plc, 2014). Year 2013 has been a tumultuous one for this

supermarket giant and Tesco has reported its worst performance for last 20 years (Clark & Chan, 2014).

3. Literature Review

Financial analysis is the evaluation of a firm's past, present and anticipated future financial performance

and financial condition (Drake & Fabozzi, 2012). Financial ratios are the principal tools of financial

analysis and they seek to measure and manage the success which can be measured in financial terms for a

company in its respective market (Bull, 2008). It is essential to compare the financial performance with

other competitors within the same industry because having comparison of the level of performance is a

one of the major tool to survive in a competitive market (Atrill & McLaney, 2006). There are different

measures associated with financial performance evaluation. Management can use different ratios for

identifying internal and external strengths. Traditionally, financial performance measures are split into

Profitability, Liquidity, Efficiency, Solvency (Basu, 2014). Financial performance plays an important part

in measuring performance management but relative importance of financial and non-financial indictors is

debateable as some time non-consideration of non-financial factor doesn’t satisfy all questions (Kaplan,

2014). It gives an idea to shareholders about the performance of company with respect to its market

conditions.

Generally companies struggled during last few years and financial position of Tesco in the market is

showing underlying profits fall by (6.9) % (Tesco plc, 2014) from being the leader of market. Although it

maintains its supremacy in supermarket for over the years but now it came under attack from private

shareholders at its annual meeting on Friday June 27, with some accusing Britain’s biggest retailer of

‘arrogance’ and ‘abusing’ investors (Felsted, 2014). According to guardian article in recent studies of

Goldman Sachs, one of five UK supermarket must close to restore profits growth and Tesco has been

hardest hit in the current scenario (Wood, 2014). Mintel estimated market value of UK supermarket

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industry in 2013 to be £102,558m, showing slight dent on the upward curve due to the financial crisis in

2009/2010 (guardian, 2012).The following picture shows the supermarket giant Tesco facing problem

despite big brand name as its market share is on decline from 2011-2013.

\

Market share Source (BBC, 2014)

Comparison is the key in obtaining meaningful information from ratio analysis. Establishing whether

things are improving or declining for the company through comparison of ratios over time within the

same business or to see whether the company you are analysing is better or worse than average within its

specific business sector (BPP Learning Media Ltd, 2011a, p.300).Ratio analysis has been used in this

research to look at Tesco’s financial performance by comparing it with Sainsbury’s. The Financial

statements of both Sainsbury’s and Tesco has been prepared in accordance with international financial

reporting standards with having similar year end dates.

There are some limitations related to ratio analysis as described below: (BPP Learning Media Ltd, 2011a,

p.330)

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It’s nearly impossible for having the same business and financial risk profile even the Sainsbury’s

and Tesco are operating in the same industry because Tesco having better access to borrowing at

cheap rates and because of this would have higher level of gearing.

Accounting policies to choose greatly influence the ratios .For example, one company may

choose not to revalue its assets to maintain or increase its ROCE.

Window dressing or creative accounting techniques can be used to manipulate ratios.

Business analysis is a set of tools and techniques to analyse organisation structure, policies and its

operations and proposing suggestions and recommendations to remove any roadblocks (Carkenord,

2014).According to business expert Bischel in 2003, usually financial measures are the one used for the

performance management and analysis but certain aspect of the business must be measured through Non-

financial measures or indicators. Managers need to first determine what sort and type of non-financial

measures they should use in terms of performance measurement after that measuring factors needs to be

completed. Next and most important step would be collection of data they would use in their analysis.

After overcoming these obstacles there would be an effective performance measurement system in place.

(Bichsel, 2003).

PESTEL model is a business analysis technique that would be used for analyzing general environment

and the internal and external factors that are favorable and unfavorable for supermarket players to achieve

their goals. It focus on Political, Economic, Social, Environmental and legal issues relating to companies

and how they are effecting their performance (BPP Learning Media Ltd, 2011b, p.26 & p.115).

According to stern studies out of seven ways to measure business financial performance three appear on

the financial statements, three do not, and one is outside the business altogether.

From your financial statements

1. Profitability 2. Health of company 3. Balance sheet strength means company’s assets relative to its

liabilities

Business items not found on the financial statements

4. Risk attached to a business 5.Owner’s time invested in business 6. Fair market value (FMV) of

business 7. Owner’s net worth leading to any value to shareholders wealth (Stern, 2010).

During period of 2011-2013, Political and Economic factors has affected the supermarkets greatly, Tax

and other government policies like political factor concerning UK leaving Europe has impacted in a big

way and because of this the consumer buying is on declining side and growth of the big supermarket

companies are on hold or making losses in general and according to different studies one out of five

supermarket giant has to close their stores.

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Financial analysis is a good technique of determining a company’s health and stability (Griffin, 2014)

however according to Debarshi in 2011, there are some limitations attached to it as well like

Non-exhibition of current financial position as usually prepared on historical cost basis.

Financial statements cannot predict the future results.

Financial statements ignore the ‘Qualitative’ aspect of the business.

In order to do research on financial and Business performance of Tesco and analysis of its performance it

must be compare against its competitor Sainsbury’s. Sainsbury’s operate in the same sector as Tesco and

there is rivalry between both companies in the market.

4. Aims and Objectives:

Analysis of the business and financial performance of Tesco during turbulent period of 2011-2013 for

Tesco and its comparison with industry rival is the core objective of this research project. Although other

objectives like key factors contributing towards success of Tesco over a vast span of period and

challenges this giant retailer facing presently also make an important part of this research. Tesco has seen

its declining phase during Period from 2011-2013 and that’s the reason behind choosing this time period

for research.

Research Aims:

1) To find out, whether in financial terms Tesco has performed better than its competitor

Sainsbury’s for the past three years?

2) To identify the effect of Political, economic, social, technological, environmental and legal

factors on profitability and business performance of Tesco.

3) Is Tesco still regarded as market leader in supermarket industry by achieving its goals?

5. Methodology:

This is an archival research based on secondary data collection from financial statements and then their

analysis (Saunders et al, 2009). Secondary data usually collected by someone else for some other purpose

but for research purpose another researcher can analyses and evaluate it (Crossman, 2014).Financial

statements like balance sheets, income statements and cash-flow statements of Tesco for previous 3 years

is a secondary source of data available for research. Balance sheet is a good source of analyzing financial

position of a company. Ratios will be calculated after gathering data from Tesco and Sainsbury’s

financial statements. According to Mohana in 2011 “ratios are popular tools for financial analysis of a

firm” and they provide users with better understanding of the financial strengths and weaknesses of a

company. Although ratios are an easy way to understand the business financial aspects but they have their

limitations as well (Jan, 2013).

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In this research a mixed approach of data will be analysed and evaluated i.e using both qualitative and

quantitative method. The ratios will be calculated on the basis of quantitative data, while the business

performance will be analysed through qualitative data approach. The central premise of mixed methods

research is the use of both quantitative and qualitative approaches in combination provide better

understanding of the research rather than a single approach alone (Creswell & Clark, 2007, p.5).

6. Data Collection:

Collection of data for this research paper is based on the secondary source of information available and

following are the different sources used for collection of information:

Internet:

Tesco’s website www.tesco.com and Sainsbury’s website www.sainsburys.co.uk were used for

the history, financial statements, recent news, strategies and annual reports for collection of data.

Google and Yahoo search engines were also used for accessing the relevant information

regarding this research.

However gathering reliable information from internet is a difficult but cautious approach was

used in this respect. Financial times, Guardian and telegraph are some of the quality website

explored for news and articles related to this research.

Books, newspaper & articles :

Different Accounting related books like BPP University F5, P2 for different accounting

techniques and ratio analysis. Also other books used for this research like Creswell book on

designing and conducting a research will be used.

The Economist, Financial Times related articles are also one of the sources used.

Advantages of secondary source data (Beri, 2010)

This method is Economical or cost effective as collecting primary data can be costly.

Collection of secondary data saves much of time and leads to early completion of the report.

Disadvantages of secondary source data (Bajpai, 2011)

Secondary data may not be relevance to research.

Reliability and accuracy of data collected cannot be guaranteed.

Secondary data is usually outdated.

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Financial statements of both companies Tesco and Sainsbury’s were firstly analysed by calculating

different accounting ratios and then by comparing against each other and previous years. After that the

Business performance of Tesco is analysed by using SWOT & PESTEL business models.

7. Business Performance Analysis, Findings and Discussions:

The limitation of using PESTEL analysis is ever-changing macro environment where factors are variable

and exposed to changes in the environment and also it needs large amount of information to be process

and analysed, so some of the important and critical factors can be missed out (Henry, 2008).

7.1 Political

Being a multi-national organization operating in more than 12 countries and it has suppliers from

different parts of world, the political situation in that country can affect Tesco in an extreme way.

According to annual report in 2012, In Hungry the new political regime levied favourable sales taxes and

that affected Tesco’s performance in a big way leading to a growth of 5.2% in groups trading profits. In

2011 UK government increased VAT rate from 17.5% to 20% (BBC, 2011) and this impacted Tesco in a

big way.

7.2 Economic

Tesco is a multinational company and should be aware of consequences of different number of economic

variables such as interest rates, taxation laws, exchange rates, inflation rates and consumer spending it

faced.

External factors like fuel prices affects profitability of Tesco. As Tesco is a retail business and

transportation/logistic is an integral part of this business and higher costs can in turn can decrease the

profits of it. Hedging techniques can be used in reducing substantial losses due to these uncontrollable

factors.

The recent recession after 2007 is still having its impact on the overall global economy hence leading to

decreased consumer spending.UK market contributes 65% to the total revenue of Tesco and recently

UK’s economy went through double dip recession (BBC News, 2012) which created a hot issue of

Tesco’s high degree of reliance on UK market.

7.3 Social

UK social customer behaviors are changing as there is an increased demand for green and organic foods

than before and Tesco needs to keep these ever-changing patterns in view and should develop business

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strategy accordingly. Also recently there is change in customer trends towards carbon products. Recent

research of Carbon Trust shows that despite the recent tough economic climate there is increase in

demand of consumers for lower-carbon products and services (Morrison, 2011).Because of above the

customer’s awareness towards impacts of carbon footprints on environment and are demanding labelled

carbon ratings on products.

7.4 Technology

For companies to remain competitive in today’s market they need to work on technology factor which is

becoming increasingly important for success. According to Tesco’s annual report on-line shopping is

becoming the new norm of today’s world and for the year ended 2012 Tesco saw an increase of 40% in

online sales in global sales while UK market sales increased by 40% of sales. Trends has been similar in

the following years and despite the troublesome last two years 2013 & 2014 and there is increase in

online shopping and grown by 25% in 2013 and 11% respectively (Rigby, 2014).According to Tesco

annual report 2012 growing online is the priority for organisation in way to adapt customer changing

needs.

7.5 Environment

In 2010 Tesco opened world’s first zero carbon store in Ramsey-Cambridgeshire to pave path for its plans

to be carbon free business (Finch, 2010). In viewing the customers change in thinking and shift towards

carbon footprints and human impact on environment through carbon emission. According to Annual

report 2011, Tesco has taken up this issue very seriously and has allocated quite big amounts towards

research in this regard and has committed itself to be a zero carbon business by 2050.

7.6 Legal & Regulatory

Tesco being a multinational organisation needs to comply with number of legal factors which vary from

one country to another. It has to make sure that the local regulations on different work ethics such as

working conditions, health and safety, minimum wages and other trading requirement and taxation issues.

Non-compliance of any of the above mentioned factors can cause a huge impact on Tesco’s operations.

According to annual reports in 2012 there is going to be change in the trading hours in South Korea for

the large retailers in the country. This can have a knock-on-profits as the reduction in trading hours will

affect the revenues being generated (Tesco plc, 2012a, p.5) and according to telegraph article in 2012 the

Tesco said pre-tax profits fell 11.6pc to £1.7bn in the half-year to August (Ruddick, 2012).

8. Financial Performance Analysis, Findings and Discussion:

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8.1 Profitability ratios :

8.1.1 Revenue growth:

2013 2012 2011

Revenue 64,826 64,539 60,455

TESCO plc Growth % 0.44% 6.76% 6.23%

Revenue 23,303 22,294 21,102

Growth 4.50% 5.65% 5.70%

Revenue (£m/year)

SAINSBURY’S

Source Appendices

In years 2011 and 2012 Tesco enjoyed a healthy growth in its revenue (exc. vat) in contrast to year 2013,

company saw little or almost no growth in revenues for the year ended 2013 due to tough economic

conditions. The new legislation in South Korea about restriction on store opening hours badly hits

Tesco’s performance outside UK (Tesco plc, 2013c, p.4).Only 1.8% increase in revenue from UK market

which is largest market contribute 66% of the revenue and negative contribution of -5.5% for the financial

year ending 2013 are also reasons behind(Tesco plc, 2013c, p.1).

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2011 2012 20130

1

2

3

4

5

6

7 6.236.76

0.44

5.7 5.65

4.5

Revenue growth

tesco sainsburry's

Keeping in view the tough economic situation in retail market Sainsbury’s performed well for the year

ending 2013. In terms of growth and revenue Tesco outperformed by Sainsbury’s during year

2013.According to chairman statement in Sainsbury’s annual report it was another good year and they

outperformed the market (J Sainsbury plc,2013a, p.2).

Healthy growth in revenues for year ended 2011 and 2012 was mainly due to strong international

performance of Tesco in Asian market and Tesco group managed to increase its revenue by more than

10% for the year ending 2012 (Tesco plc, 2012.FC) and according to chairman statement in annual report

of 2012 groups business sales increased globally.

In comparison Sainsbury’s delivered good performance in years 2011 & 2012 even though there was

tough consumer environment according to chief executive Justin king (BBC News Business,

2011).Despite the fact Tesco is bigger and more diversified Sainsbury’s enjoyed more stable growth.

Tesco invested £1 billion in its UK market to boost it up which is their home & largest market and is

having disappointing performance at the moment. Tesco also need some radical steps in addition to their

investment in UK market to quickly come up with solution for the big and ever growing challenges which

it is currently facing right now.

8.1.2 Return on capital employed

Tesco PBIT (£ M) Capital Employed(£ M) ROCE

2011 4,124 29,475 13.99%2012 4,252 31,601 13.46%2013 2,419 31,144 7.77%

Sainsbury’s PBIT (£ M) Capital Employed(£ M) ROCE2011 943 8,457 11.15%2012 937 9,204 10.18%2013 930 9,580 9.71%

Source Appendices

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2011

2012

2013

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%

13.99%

13.46%

7.77%

11.15%

10.18%

9.71%

sainsbury's tesco

ROCE is an important tool helps in analyzing that how much capital is invested in a business to how

much profits it generates or how effectively is business utilizing its investments. Both Sainsbury’s and

Tesco shows similar ROCE pattern which has declined in period from 2011-2013.

Tesco strong performance during years ended 2011-2012 can be due to the higher ROCE for these years.

There was an increase in capital employed during the year ended 2012 and it is due to Tesco’s investment

in assets which leads to slight downfall in Tesco’s ROCE. According to the annual report of Tesco

decisions like investing in assets and increasing capital employed shows company’s long term

strengthening of the business which impacted the financial performance of the company.

Sainsbury’s had ROCE quite similar in year 2011 & 2012 and there was only a slight downfall in ROCE

in 2013 as compared to Tesco. The reason behind steady ROCE in case of Sainsbury’s is due to good

business performance and slight downfall in 2013is due to marginal increase in capital employed.

Tesco’s huge fall in ROCE for the year ending year 2013 is due to decrease in profits level of the group

and annual report of Tesco also communicates that the decrease in ROCE is a reflection of the company’s

bad trading profit performance (Tesco plc, 2013, P.16-17).Although Tesco invested in capital employed

in 2012 but in 2013 due to implications of write-down value of property and impairment of goodwill lead

to decrease in the ROCE value.

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8.1.3 Net profit margin and growth:

Tesco Net Profit (£ M) Revenue (£ M) Net Profit MarginNet ProfitGrowth

2011 2,671 60,455 4.42% 14.34%2012 2,814 64,539 4.36% 5.35%2013 120 64,826 0.19% -95.70%

Sainsbury’s Net Profit ( £ M ) Revenue £ M) Net Profit MarginNet profit Growth

2011 640 21,102 3.03% 9.40%2012 598 22,294 2.68% -6.56%2013 614 23,303 2.63% 2.68%

Source Appendices

Net profit ratio is an important ratio which gives information about the performance of a company in

respect of generating profits from every £ of revenue it is earning (Khan et al, 2010).

In last 20 years up till 2012 Tesco never saw a decrease in its profits (Wood, 2012) and first time in 2013

it saw huge downfall in its profits, which leaded to huge downfall in Net profit margin. According to

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2011 2012 20130

0.5

1

1.5

2

2.5

3

3.5

4

4.5

4.424.36

0.19

3.032.68 2.63

net profit margin

tesco sainsburry

Tesco’s annual report huge decrease in trading profits due to fall in trading profits of Tesco bank and

Europe market by -37.8% and -15% respectively (Tesco plc, 2013, p.FC2) and partially because of its exit

from USA market where it invested more than £1.2bn for exit and decision to leave Japan increased total

loss from discontinued operations to be £1266m.

Tesco only had a marginal decrease in its profit margins in the year ended 2013.

In year 2011 and 2012 Tesco performed really good and enjoyed healthy profit margins because of the

strong performances in international market. These profits went through a big downfall in 2013 and the

reason behind this major effect on profits can be due to the regulatory changes in South Korean market,

big investments in UK declining market and challenging European economic conditions (Tesco plc,

2013).

Sainsbury’s had a up and down pattern in last 3 years, showing strong growth in year 2011 & 2013 while

a negative growth of 6.56% in 2012 and this decrease in 2012 is due to the tough economic conditions of

retail market and recession in UK in general.

In summary Tesco after solid growth in 2011 could not continue this growth in 2012 & 2013 due to poor

UK performance in 2012 and bad performance in 2013 was due to closure of USA and Japanese

business .Group saw profits going down for the first time in 2013 for the last 20 years. While in

comparison Sainsbury enjoyed mixed fortune in terms of profits growth, after decrease in profits in 2012

the company bounced back with an impressive performance in 2013.

8.2 Efficiency Ratios:

2013 (Days) 2012 (Days) 2011 (Days)

TESCOReceivable

Days14 15 14

SAINSBURYReceivable

Days5 5 6

TESCO Payable Days 67 69 69

SAINSBURY Payable Days 45 47 48

Source Appendices

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Evaluation of business efficiency about maintaining a good balance in paying back to suppliers and in

amounts received from credit customers is an important tool, receivable days and payable days ratio can

be used for this purpose (Pignataro. 2013).

Tesco has higher number of receivable days than Sainsbury’s meaning it is taking longer than Sainsbury’s

to get back its money from credit customers. Although it’s a good comparison but in this situation it

cannot be that useful as it will be in any other situation because Tesco is a multinational diversified

company and is much bigger business than Sainsbury’s so it is arguable that to retain its customer base

and their confidence group is relaxing towards its credit customers. Payable days in case of Tesco is a

positive sign that company is paying back in two months’ time and keeping working capital available.

8.3 Gearing Ratios:

8.3.1 Interest cover

2011 2012 20130

2

4

6

8

10

12

8.54

10.2

5.27

8.13

6.79 6.55

TescoPBIT (£

M)Finance costs(£ M) Interest cover

2011 4,124 483 8.542012 4,252 417 10.22013 2,419 459 5.27

Sainsbury’sPBIT (£

M)Finance costs(£ M) Interest cover

2011 943 116 8.132012 937 138 6.792013 930 142 6.55

Source Appendices

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One ratio which is really important for the lenders to look upon is the interest cover ratio as this ratio tells

them that what number of times a company can pay out finance cost or interest payment out of its profits

generated during a year (Khan & Jain, 2006).

Tesco enjoyed huge profits during 2011 & 2012 and for that reason Tesco had a healthy interest cover

ratio for these two years. In comparison interest cover ratio of Sainsbury’s is lower than Tesco in 2011 &

2012, which resulted because of decrease in profits and increased in finance cost but still it’s a healthy

interest cover ratio. In 2013 Tesco’s interest cover ratio gone down in a big way mainly because of

declining profits level .However there is only a marginal decrease in Sainsbury’s ratio due to slight

decrease in profits.

8.4 Investors Ratios:

8.4.1 Earnings per share:

2011 2012 2013

tesco 33.1 34.98 1.54

sainsbury's 34.4 32 32.6

2.57.5

12.517.522.527.532.5

tesco

sainsbury's

33.1 34.98

1.54

34.432 32.6

tesco sainsbury's

pence

EPS is a good measure of a firm’s profitability and is an important measure for investors to look upon

company’s ability that how much earning a company is generating per share (Sheeba, 2011).Tesco

enjoyed good earnings trends during years 2011 & 2012 which resulted in higher EPS during these two

years but due to decision to exit from the US and Japanese markets and economic conditions there is a

huge downfall in earnings in 2013 which had an impact on EPS.

In comparison Sainsbury’s showed a steady EPS for the three years and is quite big number in year 2013

where Tesco’s EPS is 1.54 and Sainsbury’s 32.6.

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8.4.2 Dividend Growth:

2011 2012 2013

tesco 10.80% 2.07% 0.00%

sainsbury's 8.13% 6.62% 3.70%

1.00%

3.00%

5.00%

7.00%

9.00%

11.00%

10.80%

2.07%0.00%

8.13%6.62%

3.70%

dividend growth

Tesco dividends are on downward slope over the three years under consideration with no growth in the

final year and the reason behind this downfall is the poor performance of the group during year 2012 &

2013 and in these three years Sainsbury overtook Tesco dividend growth in 2012 where it showed an

increase of 6.62% as compared to Tesco’s 2.07% and according to Sainsbury’s chairman they remained

focused on delivering good performance and making good returns to shareholders (J Sainsbury’s

plc,2012, Pg.3).In 2013 again Sainsbury remained ahead of Tesco in dividend growth with growth of

3.70% to no or 0 growth.

9. Conclusions and Recommendations:

Tesco being the market leader in the first two years 2011 & 2012 showed good financial performance and

were still holding the strong international presence through its diversification and multinational status.

However start of the decline can be seen during these two years but this becomes prominent in year 2013,

when the group hits the lowest profits for the first time in last 20 years. This was a big setback for a

company which was losing its glory for last few years due to tough economic conditions and start of

recession after 2007.

UK was the main market of Tesco but its poor economy, difficult retail market conditions were the major

reasons for worst performance in 2013.Big decisions such as closing down its loss making US business

and spending an extra £1.2bn for closure also impacted a big way on the profits of year 2013.

Tesco’s major concern is their UK market as their competitors are started to outperform Tesco in all

spheres of business. CEO of company has observed this situation and according to annual report of Tesco

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they already spent £1bn in its UK market to boost its declining leadership and to improve its customer

shopping experience.

In this research the use of PESTEL helped in identifying some of the Political factors like the Hungarian

governments tax regime impacted Tesco’s performance during year 2012 but overall Tesco maintained a

good mutual partnerships with most of the governments it doing business within their country. Economy

also plays an important role as the struggling economy of UK during this period under research impacted

Tesco performance in a big way. Social culture also plays an important role as different market got

different social behaviors like now a days large working women shoppers prefer ready to eat meals.

Technological and environmental factors also plays an important role in performance of a company as

online sales and less carbon emission programs helps in boosting the sales and creating a fresh face for

Tesco. Legal and regulatory factors played a big role in Tesco’s poor performance during year 2013,

where business hour regulation in South Korea impacted heavily.

Recommendations:

Lack of strategic planning:

This is a key issue in entering a new market, although Tesco would have done some good market

feasibility research during their decision to enter USA but due to some loop holes in that report

resulted in a bad outing in US market. As company had never enjoyed any profits during all time

and had to spend £1.2bn on their exit. Now as the company is entering into different territories of

Asian continent so they should understand the culture and market forces of this region which are

completely different from European or American markets and they should keep in mind the

respective social and environmental values of these regions as these non-financial factor plays an

important role in the business and financial performance of the company.

Attention towards UK business:

Although Tesco still dominated the UK market during this period of 3 years but the group

performance is on declining side after 2013,Tesco’s position as market leader is now gradually on

its way to low levels. Tesco need to pay special attention towards its UK market competitors who

are offering cheap alternatives to consumers who cannot afford luxury or more expensive items

due to tough economic conditions. Group invested in this market but it needs to invest more both

in human capital as well as non-human capital. Also Tesco needs to consider the ever increasing

multi ethnic society and should try to make their stores more ethnic to attract more customers

from all around the world ethnic groups (Foerster and Kreuz, 2007).

Improvement in online shopping facilities:

22 | P a g e

To create a competitive advantage over their rivals, Tesco should improve their online shopping

facilities. They should create an environment where the potential customers would feel protected,

assured and will feel more secure that their personal information would not leak out. For more

dependable and fast online process Tesco should create their website free of couplets and hackers

and this will lead to sharing of more information between internet customer and retail giant.

Closing of loss generating big stores and opening small stores in UK:

To maintain its profits and business in eastern European market, Tesco will do more investment

on setting up small stores (Cunliffe, 2013).Tesco should adopt that strategy for its UK market as

well by closing down the big stores which are not generating any profits for last few years and

should try to open small stores with less running costs to reduce their losses.

23 | P a g e

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tagName=financial_x0020_performance_x0020_measures&weburl=http%3a%2f

%2fkfknowledgebank.kaplan.co.uk&listid=1d06790a-eef1-4037-8b41-

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%2fWiki+Pages%2fFinancial+Performance+Indicators+(FPIs).aspx . [Accessed 09/04/2014].

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40)

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27 | P a g e

11. Appendices

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Tesco PLC Group Income Statement

£m

2013 2012 2011

Revenue 64,826 64,539 60,455Cost of sales -60,737 -59,278 -55,330 Gross Profit 4,089 5,261 5,125Administrative Expenses -1,562 -1,652 -1,640 Profit arising on property-related Item -339 376 432 Operating Profit 2,188 3,985 3,917 Share of post-tax profits of joint ventures & associates 54 91 57 Finance Income 177 176 150 Finance Costs -459 -417 -483 Profit before tax 1,960 3,835 3,641Taxation -574 -879 -864Profit for the year from continuing operations 1,386 2,956 2,777

loss for the year from discontinued operations -1,266 -142 -106Profit for the year 120 2,814 2,671

EPS 1.54 34.98 33.1DIvidend per share 14.76p 14.76p 14.46p

Discontinued operations

Year 222008 7

£m £m

29 | P a g e

Tesco PLC Group Balance Sheet

2013 2012 2011Non-current assets:Goodwill and other intangible assets 4,362 4,618 4,338Property, plant and equipment 24,870 25,710 24,398Investment Property 2,001 1,991 1,863Investment in joint ventures and associates 494 423 316Other investments 818 1,526 938Loans and advances to customers 2,465 1,901 2,127Derivative financial instruments 1,965 1,726 1,139Deferred tax assets 58 23 48

37,033 37,918 35,167Current assets:Inventories 3,744 3,598 3,162Trade and other receivables 2,525 2,657 2,330Loans and advances to customers 3,094 2,502 2,514Loans and advances to banks andother financial assets - - -Derivative financial instrument 58 41 148Current tax assets 10 7 4Short term investments 522 1,243 1,022Cash and cash equivalents 2,512 2,305 2,428

12,465 12,353 11,608Non-current assets classified as held for sale 631 510 431

13,096 12,863 12,039

£m £m £m

30 | P a g e

Tesco PLC Group Balance Sheet (continued)

2013 2012 2011

Current liabilities:Trade and other payables -11,094 -11,234 -10,484Financial liabilities: Borrowings -766 -1,838 -1,386 Derivative financial instruments and other liabilities -121 -128 -255 Customer deposits and deposits by banks -6,015 -5,465 -5,110Current tax liabilities -519 -416 -432Provisions -188 -99 -64

-18,703 -19,180 -17,731

-282 -69Net current liabilities -5,889 -6,386 -5,692Non-current liabilities:Financial Liabilities:Borrowings -10,068 -9,911 -9,689Derivative financial instrument and

Post-employment benefit obligations -2,378 -1,872 -1,356Deferred tax liabilities (1,006 -1,160 -1,094Provisions -272 -100 -113

-14,483 -13,731 -12,852Net assets 16,661 17,801 16,623Equity:Share capital 403 402 402Share premium account 5,020 4,964 4,896Other reserves 685 245 40

Equity attributable to owners of the parent 16,643 17,775 16,535Minority interests 18 26 88Total equity 16,661 17,801 16,623

Other liabilities -759 -688 -600

Retained earnings 10,535 12,369 11,197

£m £m £m

Liabilities of the disposal group classified as held for sale

31 | P a g e

J Sainsbury’s PLC Group Income Statement

2013 2012 2011

Revenue 23,303 22,294 21,102Cost of sales -22,026 -21,083 -19,942 Gross Profit 1,277 1,211 1,160Administrative Expenses -457 -419 -417 Other Income 67 82 108 Operating Profit 887 874 851Finance income 19 35 32 Finance Costs -142 -138 -116 Share of post-tax profit/(loss) from joint ventures 24 28 60 Profit before taxation 788 799 827Income Tax expense -174 -201 -187 Profit for the financial year 614 598 640

EPS 32.6 32 34.4 Dividend per share 16.7 16.1 15.1

Year 222008 222008 7

£m £m £m

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J Sainsbury’s PLC Group Balance Sheet

2013 2012 2011Non-current assets:Property, Plant & Equipment 9,804 9,329 8,784

Investment in joint ventures 532 566 502Available for sale financial assets 189 178 176Other receivables 38 38 36Derivative financial instruments 47 37 29

10,781 10,308 9,678Current assets:Inventories 987 938 812Trade and other receivables 306 286 343Derivative financial instruments 91 69 52Cash & cash equivalents 517 739 501

1,901 2,032 1,708Non-current assets held for sale 13 - 13

1,914 2,032 1,721Total assets 12,695 12,340 11,399

J Sainsbury’s Plc Group Balance Sheet (continued)

2013 2012 2011

Current liabilities:Trade and other payables -2,726 -2,740 -2,597Borrowings -165 -150 -74Derivative financial instruments -65 -88 -59Taxes payable -148 -149 -201Provisions -11 -9 -11

-3,115 -3,136 -2,942Net current liabilities -1,201 -1,104 -1,221

Non-current liabilities:Other payables -173 -137 -120Borrowings -2,617 -2,617 -2,339Derivative financial instrument -4 -1 -Deferred income tax liability -247 -286 -172Provisions -39 -63 -62Retirement benefit obligations -766 -471 -340

-3,846 -3,575 -3,033Net assets 5,734 5,629 5,424Equity:Called up share capital 541 538 535Share premium account 1,075 1,061 1,048Capital redemption reserve 680 680 680

Retained Earnings 4,060 3,715 3,374

Total equity 5,734 5,629 5,424

£m £m £m

Other reserves -623 -365 -213

`£m £m £m

Intangible assets 171 160 151

33 | P a g e

Revenue Growth

2013 2012 2011

Revenue 64,826 64,539 60,455

TESCO plc Growth % 0.44% 6.76% 6.23%

Revenue 23,303 22,294 21,102 Growth 4.50% 5.65% 5.70%

Formula

% increase or decrease in Revenue= [Revenue for the current year – Revenue for the last year / Revenue for the last year] x 100

Revenue (£m/year)

SAINSBURY’

Return on Capital Employed

Tesco PBIT (£ M) Capital Employed(£ M) ROCE

2011 4,124 29,475 13.99%2012 4,252 31,601 13.46%2013 2,419 31,144 7.77%

Sainsbury’s PBIT (£ M) Capital Employed(£ M) ROCE2011 943 8,457 11.15%2012 937 9,204 10.18%2013 930 9,580 9.71%

Formula

[PBIT / Capital Employed] x 100

Net Profit Margin

Tesco Net Profit (£ M) Revenue (£ M) Net Profit MarginNet ProfitGrowth

2011 2,671 60,455 4.42% 14.34%2012 2,814 64,539 4.36% 5.35%2013 120 64,826 0.19% -95.70%

Sainsbury’s Net Profit ( £ M ) Revenue £ M) Net Profit MarginNet profit Growth

2011 640 21,102 3.03% 9.40%2012 598 22,294 2.68% -6.56%2013 614 23,303 2.63% 2.68%

Formula

[Net profit for the current year – Net profit for last year / Net profit for the last year] x 100

[Net Profit after tax / Revenue] x 100

34 | P a g e

Recieveable & Payable Days

2013 (Days) 2012 (Days) 2011 (Days)

TESCOReceivable

Days14 15 14

SAINSBURYReceivable

Days5 5 6

TESCO Payable Days 67 69 69

SAINSBURY Payable Days 45 47 48

Interest Cover

TescoPBIT (£

M)Finance costs(£ M) Interest cover

2011 4,124 483 8.542012 4,252 417 10.22013 2,419 459 5.27

Sainsbury’sPBIT (£

M)Finance costs(£ M) Interest cover

2011 943 116 8.132012 937 138 6.792013 930 142 6.55

35 | P a g e

Formula Sheet

Ratio Calculation

Gross Profit Margin [Gross Profit / Revenue] x 100

Net profit Margin [Net Profit after tax / Revenue] x 100

Return on Capital employed (ROCE) [PBIT / Capital Employed] x 100

Capital employed Total assets less current l iabil ities

Percentage increase or decrease in Revenue [Revenue for the current year – Revenue for the last year / Revenue for the last year] x 100

Percentage increase or decrease in Gross profit [Gross profit for the current year – Gross profit for last year / Gross profit for the last year] x 100

Percentage increase or decrease in Net profit [Net profit for the current year – Net profit for last year / Net profit for the last year] x 100

Percentage increase or decrease in cost of sales [cost of sales for the current year – cost of sales for last year / cost of sales for the last year] x 100

Current Ratio Current Assets/ Current Liabil ities

Dividend Growth (Current year dividend – previous year dividend) / Previous year dividend x 100

Interest Cover PBIT / Interest

Receivable Days Receivables / Total Sales x 365

Payable Days Payables/ Cost of Sales x 365

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