Financial Analysis For Two Uk Retail Chains: The Case Of Morrisons And Tesco
1.0 Introduction
This report analyses and interprets Morrison and Tesco financial performance over a period of 5 years using the five major financial ratios of profitability, liquidity, gearing, asset management, and investment. To achieve this, the report will utilise the companies’ financial statements for the last five years – from 2008 to 2012. In addition, the report will offer a brief overview of the UK retail industry. Lastly, the report will discuss the limitations of each of the five financial analysis ratios. Overall, the report will argue that these two companies offer investors almost similar value yet they pursue different business models.
2.0 Brief Background of the UK Retail Market
Over the last ten years, the UK retail market has grown tremendously. The total retail market is worth more than £146.3 billion (as of 2008) from a low of £93.3 billion in 1998 (Li, 2008). Though this is relatively the lowest growth in 40 years, analysts believe that a growth of 1.2 percent is to be experienced in the second and third quarters of 2012 due to major events such as the London Olympics (SAS, 2011).
A research by IGD shows that consumers spend 52 percent of every pound on retail shopping with 21 percent of this spent in retail chains (Li, 2008). Nevertheless, the UK retail market has recently faced a number of uncertainties including the 2008 global recession and the Euro Zone crisis, shrinking consumer income, high unemployment rates, and an unresponsive credit system.
Currently there are more than 100 retail chains in the UK falling within the four major categories of convenience stores; traditional retail; online channel; and hypermarkets, supermarkets, and superstores. The four major retail chains are Tesco, Asda, Sainsbury’s and Morrison. Other notable retail chains include Waitrose, Marks & Spencer and Iceland.
3.0 Brief Overview of the Two Companies
Over the years, Morrison and Tesco have registered immense growth courtesy of their sound financial and operational strategies. Morrison occupies the fourth position with about 11.8 percent while Tesco occupies the first position with about 30 percent of the local market share (Li, 2008). Though the companies pursue different operational and financial strategies, their UK operations are subject to the same market and accounting regulations. As such, it is arguable that Tesco pursues the most responsive strategy.
Morrison has a simple business strategy. A strategy based on the desire to address the individual grocery needs for all its customers by providing fresh, affordable, quality food and outstanding customer service. This strategy is buoyed by an easily controllable internal supply chain – the company can constantly monitor the manufacturing and delivery of food products to guarantee freshness and customer service. Moreover, the company’s corporate strategy incorporates stakeholders’ needs while ensuring the company stays afloat in the highly competitive UK retail market (Morrison, 2012).
On the other hand, Tesco strategy is based on the urge to responsibly and effectively serve the needs of the communities it operates in. This is within the seven core pillars of its business strategy of expanding its operations within the UK, venturing into the international market, aggressive selling, responsive selling, creating high value brands, creating value for its stakeholders, and expanding retail services in all markets (Tesco, 2012).
4.0 Companies Strategic Differences
4.1 Morrison
Morrison registered huge group revenues in the last five financial years – £12,969 million in 2008 and £17,663 million in 2012. During the financial year 2011/2012, Morrison experienced a huge growth in customer numbers – a record number of customers visited its stores (about 0.4 million every week) (Morrison, 2012). This is an indicator that the company’s business strategy to offer fresh foods is bearing fruits. The fact that Morrison’s online channel is small demonstrates that customers are beginning to build faith in its business approach. Actually, the personalized business approach where experts in food areas such as fish interact with customers is gaining popularity among consumers.
Moreover, the company’s corporate compliance and social responsibility records are outstanding. Under the Corporate Compliance and Responsibility (CCR) Committee, the company ensures that it constantly improves core corporate responsibility and governance areas such as workplace health and safety, environmental management, ethical and competitive compliance, executive remuneration, as well as corporate responsibility. The company maintains a strong relationship with charitable organizations as well as government agencies – to date, it has achieved 14.6 percent reduction in carbon emission, a promising achievement based on the 30 percent overall reduction target set out in 2005. In addition, the company is on target to achieving zero waste directed to landfills by 2013 – only 5.6 percent is remaining (as of 2012). The company exceeded its annual target of raising £1 million for charity work – in the 2011/12 financial year, £2.3 million was raised (Morrison, 2012).
On the other hand, executive remuneration is done in tandem with the company’s performance, business priorities as well as the environment in which it operates in. This has been on an increasing trend in the last five years relative to the PBT which has been on an increase in this period. To boost investor confidence, the companies CEO encourages major shareholders to regularly make input in the way major corporate governance activities are carried out.
4.2 Tesco
Tesco experienced increased revenues in the last five financial years despite operating in a highly competitive and unpredictable environment – £47,298 million in 2008 and £64,539 million in 2012. The company is actually a nice investment for potential and existing investors – it is registering huge sales and giving out its shareholders value for their investment through huge dividends.
However, unlike Morrison, Tesco has achieved phenomenal growth courtesy of the expansionist strategy it pursues – the company believes in expanding its markets into new product lines such as finance as well as new avenues for reaching out to its customers. It believes in growing its online presence as a way of adapting to customers’ new ways of doing things.
For example, whereas Morrison believes in adopting the “street market” approach, Tesco believes in expanding its business so as to successfully create more jobs, bring fresh foods to under-developed neighbourhoods, review the quality of its brands, step-up the innovation gear, reduce prices, build economies of scale, and open-up new stores to penetrate traditionally conservative markets. This is in tandem with the official slogan that “no one tries harder for customers” (Tesco, 2012: 11).
The company prides in increasing staff, training new employees, acquiring new equipments, and opening-up new stores. This is in tandem with the company goal of enhancing customer perceptions by providing the best shopping experience whose core pillars are “service, range, quality, price, availability and the store environment” (Tesco, 2012: 12).
5.0 Financial Analysis
5.1 Profitability Ratios
5.1.1 Morrison
Profitability 2012 2011 2010 2009 2008
GP 6.9% 7.0% 6.9% 6.3% 6.3%
NP 3.9% 3.8% 3.9% 3.2% 4.3%
ROCE 0.31% 0.27% 0.33% 0.27% 0.24%
ROE 12.8% 11.7% 12.1% 10.2% 12.7%
3.1.2 Tesco
Profitability 2012 2011 2010 2009 2008
GP 8.15% 8.48% 8.10% 7.76% 7.67%
NP 3.9% 4.0% 3.7% 3.6% 4.1%
ROCE 13.3% 12.9% 12.1% 12.8% 12.7%
ROE 15.81% 16.07% 15.91% 16.57% 17.94%
As the above tables show, Tesco has experienced a larger GP than Morrison but the two companies have relatively similar NP for the five year period. Moreover, Tesco has a relatively stable GP and NP while Morrison’s GP and NP have been erratic within the same period. Both companies registered a low NP in 2009 perhaps due to the effects of the global recession.
Overall, Tesco is more efficient in managing its operational costs than Morrison (Vance, 2003). Specifically, Morrison cannot seem to keep its costs of financing at low levels as shown by a smaller NP for the five year period. Additionally, Tesco has registered a large ROCE and ROE than Morrison in the same period.
This is an indicator that that Tesco keeps its costs of selling, financing, and investment at relatively low levels than Morrison. Perhaps this is because the company has a large market share compared to Morrison and hence enjoys economies of scale.
5.2 Liquidity Ratio
5.2.1 Morrison
Liquidity 2012 2011 2010 2009 2008
Current Ratio 0.57 0.55 0.51 0.53 0.50
Acid Ratio 0.24 0.24 0.24 0.38 0.32
5.2.2 Tesco
Liquidity 2012 2011 2010 2009 2008
Current Ratio 0.67 times 0.68 times 0.71times 0.74times 0.58 times
Acid Ratio 0.48 times 0.50 times 0.54 times 0.59 times 0.34 times
Tesco can meet its short term debt obligations easily than Morrison. Tesco liquidity has increased by a larger margin than that of Morrison over the last five years – Tesco’s current ratio and acid ratio for the last five years show a change of 0.09 and 0.14 respectively compared to Morrison’s 0.07 and -0.08 respectively. This large and positive range in current ratio and acid ratio indicates that Tesco has been steadily improving its ability to offset its short term liabilities than Morrison over the same period.
Actually, Morrison experienced a decline in acid ratio during the last five years, an indicator that the company is in deficit of short-term assets and can only meet its short term liabilities by selling inventories (Helfert, 2001). Overall, the company’s liquidity ratios are healthy by industry standards as the companies have faster inventory turnover rates.
5.3 Asset Management
5.3.1 Morrison
Asset Management 2012 2011 2010 2009 2008
Stock Turnover 23.27days 25.83 days 26.71 days 48.58 days 39.90 days
Asset Turnover 3.3 3.0 3.1 3.2 3.0
5.3.2 Tesco
Asset Management 2012 2011 2010 2009 2008
Stock Turnover 20.02days 21.21 days 22.91 days 22.27 days 21.31 days
Asset Turnover 3.70 3.42 3.90 4.18 3.98
Morrison stock turnover period has been on a decrease since 2008 except in 2009 when it shot from 39.90 days to 48.58 days. Nevertheless, the company seem to be enjoying a relatively stable yet decreasing stock turnover rate over the last five years, with 2012 being its worst year. Tesco too has been experiencing decreasing stock turnover rate over the years.
This phenomenon could have been occasioned by the shrinking of disposable income among consumers in the UK during this period. Nevertheless, Tesco has a slightly higher asset turnover than Morrison, an indicator that the company is more efficient in turning its assets into revenue. Overall, the two companies seem to be experiencing stable asset turnover in the last five years.
3.4 Gearing Ratio
3.4.1 Morrison
Gearing 2012 2011 2010 2009 2008
Debt Ratio 27.26% 15.07% 18.67% 14.20% 12.40%
Interest Cover 20.70 times 21.02 times 15.11times 11.18times 10.2 times
3.4.2 Tesco
Gearing 2012 2011 2010 2009 2008
Debt Ratio 38.41% 40.85% 54.0% 74.38% 52.06%
Interest Cover 9.56 times 8.176 times 6.0 times 6.6 times 11.1times
Though Tesco has a higher debt ratio than Morrison, it is clear that Morrison has a more futuristic financial approach. This approach allows for the maximization of funding from long-term lenders at the expense of short-term ones. It is therefore not a surprise that Tesco has a lower interest cover ratio than Morrison as it seems the company prefers utilising short-term finance and reinvesting its profits while suppressing long-term finance.
3.5 Investment Ratio
3.5.1 Morrison
Investment 2012 2011 2010 2009 2008
Dividend pay-out 1.6% 1.5% 1.4% 1.3% 0.9%
Dividend per share 10.70p 9.60p 8.20p 5.80p 4.80p
EPS 26.68p 23.93p 22.80p 17.39p 20.79p
Price/earnings 11.40 11.60 14.10 15.60 15.20
3.5.2 Tesco
Investment 2012 2011 2010 2009 2008
Dividend pay-out 0.5% 0.5% 0.6% 0.6% 0.5%
Dividend per share 14.76p 14.46p 13.05p 11.96p 10.90p
Earnings Per share 34.98p 33.10p 29.33p 27.14p 26.95p
Price/earnings 8.50 11.10 13.20 11.50 14.60
Tesco has been paying higher dividends to its shareholders compared to Morrison yet it has a low dividend pay-out ratio for the last five years. The reason for this phenomenon is because Tesco has huge net income that converts to higher earnings per share. Moreover, Tesco has a low price-earnings ratio because its earnings per share is much higher than that of Morrison for the five years period – Tesco earnings per share has increased from a low of 26.95p in 2008 to a high of 34.98p in 2012 compared to Morrison which has grown from 17.39p in 2009 to 26.68p in 2012. Both companies have registered a decreasing PE in the last five years, with Tesco registering the lowest PE. This can be interpreted to mean that both companies offer investors almost the same value for their money.
4.0 Conclusion
Both Morrison and Tesco have experienced immense growth. This growth is as a result of pursuing robust business models that allow them to offer value to their stakeholders. Morrison pursues a somehow lean business model, while Tesco pursues an agile one hence the difference in their total share in the UK market. Overall, both companies offer their shareholders almost the same value for their money as they have almost similar profitability capabilities, short-term debt payment capabilities, asset management capabilities, long-term funding utilization capabilities, investment capabilities yet they pursue significantly different business approaches. As Vance (2002) posits, the five broad categories of financial ratios are not exhaustive in giving the true financial picture of a company but they have succeeded in giving investors a clear glimpse of where the two companies are headed.
References
Helfert, E.A. (2001). Financial analysis: Tools and techniques: A guide for managers. New York, NY: The McGraw-Hill Companies.
Li, E. (2008). Supermarket chains and grocery market in the UK. Shanghai, China: China Europe International Business School.
Morrison PLC (2012). Annual report and financial statements 2011/12. Wm Morrison Supermarkets PLC.
SAS (2011). UK retail 2012 & beyond. [Online]. Available at: HYPERLINK “http://www.sas.com/offices/europe/uk/downloads/press/sas-verdict-retail2012.pdf/” http://www.sas.com/offices/europe/uk/downloads/press/sas-verdict-retail2012.pdf/ (accessed June 22, 2012).
Tesco PLC (2012). Annual report and financial statements 2012. [Online]. Available at: HYPERLINK “http://www.tescoplc.com/files/pdf/reports/tesco_annual_report_2012.pdf/” http://www.tescoplc.com/files/pdf/reports/tesco_annual_report_2012.pdf/ (accessed June 22, 2012).
Vance, D.E. (2003). Financial analysis and decision making: Tools and techniques to solve financial problems and make effective business decisions. New York, NY: The McGraw-Hill Companies.
Appendices
Appendix 1: Morrison
Ratio Formulae 2012 2011 2010 2009 2008
GP Revenue – COGS/ revenue x 100 (17,663- 16,446/ 17,663) x 100 = 6.9% (16,479 – 15,331/ 16,479 ) x 100 = 7.0% (15,410 – 14,348/ 15,410) x 100 = 6.9% (14,528 – 13,615/ 14,528 ) x 100 = 6.3% (12,969 – 12,151/ 12,969 ) x 100 = 6.3%
NP Net profit/ sales x 100 (690 / 17,663) x 100 = 3.9 (632 /16,479) x 100 = 3.8% (598/15,410)x100=3.9% (460/ 14,528) x 100 = 3.2% (554/ 12,969) x 100 = 4.3%
ROE Net income/ shareholders equity x 100 (690/ 5,397) x 100 = 12.8% (632 /5,420) x 100 = 11.7% (598/4,949) x 100 = 12.1% (460/4,520) x 100 = 10.2% (554/4,378) x 100 = 12.7%
ROCE EBIT/ (Assets – CL 973/ (5,397 – 2,303)= 0.31 904/ (5,420 – 2,086) = 0.27 907/(4,949- 2,152)=0.33 671/ (4,520 – 2,024) = 0.27 612/ (4,378 – 1,853) = 0.24
Current ratio CA/CL 1,322/ 2,303 = 0.57 1,138/ 2,086 = 0.55 1,092/ 2,152 = 0.51 1,065/ 2,024 = 0.53 909/ 1,853 = 0.49
Acid (quick) ratio CA – Stock/ CL 1,322 – 759/ 2,303 = 0.24 1,138 – 638/ 2,086 = 0.24 1,092 – 577/ 2,152 = 0.24 1,065 – 299/ 2,024 = 0.38 909 – 325/ 1,853 = 0.32
Stock turnover Sales/ inventory 17,663/ 759 = 23.27 16,479/ 638 =25.83 15,410/577 =26.71 14,528/ 299 = 48.58 12,969/ 325 = 39.90
Asset turnover Revenue/ assets 17,663/5397 = 3.3 16,479/5420 = 3.04 15,410/4949 =3.1 14,528/4520 = 3.2 12,969/ 4,378 = 3.0
Debt ratio Total debt/Assets x 100 1471/5,397=
27.26% 817/5,420 =
15.07% 924/4,949 =
18.67% 642/4,520 =
14.20% 543/4,378 =
12.40%
Interest cover ratio EBIT/interest expense 973/47 =
20.70 904/43 =
21.02 907/60 =
15.11 671/60 =
11.18 612/ 60 =
10.2
Dividend payout ratio Dividends/ net income 10.70/690 =
1.6% 9.60/632 =
1.5% 8.20/598 =
1.4% 5.80/460 =
1.3% 4.80/554 =
0.9%
Dividend per share Dividend – special dividend/ shares outstanding 10.70 (picked from the full FY results) 9.60 (picked from the full FY results) 8.20 (picked from the full FY results) 5.80 (picked from the full FY results) 4.80 (picked from the full FY results)
Earnings per share Net income/outstanding common shares 26.68 (picked from the full FY results) 23.93 (picked from the full FY results) 22.80 (picked from the full FY results) 17.39 (picked from the full FY results) 20.79 (picked from the full FY results)
Price/earnings ratio Market value/ earnings per share 11.40 (picked from the full FY results) 11.60(picked from the full FY results) 14.10(from the full FY results) 15.60(picked from the full FY results) 15.20(picked from the full FY results)
Appendix 2: Tesco
Ratio Formulae 2012 2011 2010 2009 2008
GP Revenue – COGS/ revenue x 100 64,539 – 59,278/ 64,539 = 8.15% 60,455- 55,330/ 60,455 = 8.48% 56,910 – 52,303/ 56,910 = 8.10% 53,898- 49,713/ 53,898 = 7.76% 47,298 – (43,668/ 47,298 = 7.67%
NP Net profit/ sales x 100 2,814/ 72,035 =
3.9% 2,671/67,074 = 4.0% 2,336/62,537 = 3.7% 2,138/ 59,426 =
3.6% 2,130/ 51,773 =
4.1 %
ROE Net income/ share holders equity x100 2,814/ 17801 =
15.8% 2,671/ 16623 =
16.1% 2,336/ 14681 =
17.9% 2,138/ 12906 =
16.6% 2,130/ 11873 =
17.9%
ROCE EBIT/ Total assets – Current Liabilities 13.3% (picked from the full FY results) 12.9% (from full FY results) 12.1% (picked from the full FY results) 12.8% (picked from the full FY results) 12.7% (picked from the full FY results)
Current ratio Current assets/ Current liabilities 12,863/19,180 = 0.67times 12,039/17,731 = 0.68times 11765/ 16,015 = 0.73 times 13479/17595 = 0.77 times 6,300/ 16,015 = 0.39 times
Acid ratio Current Assets – Inventory / Current Liabilities 12,863-3,598/ 19,180 = 0.48 times 12,039-3,162/ 17,731= 0.50 times 11,765 – 2,729/ 16,015 = 0.56 times 13,479 – 2,669/ 17,595 =
0.61 times 6,300 – 2,430 / 10,345 = 0.37 times
Stock turnover Sales/ inventory 72,035/ 3,598 = 20.02 days 67,074/ 3,162 = 21.21 days 62,537/ 2,729 = 22.91 days 59,426/ 2,669 = 22.27 days 51,773/ 2,430 = 21.31 days
Asset turnover Revenue/ assets 65,166/ 17801= 3.70 56,910/1662=3.42 56,910/14681= 3.88 53,898/ 12906 = 4.18 47,298/ 11873 = 3.98
Debt ratio Total debt/ total assets x 100 6,838/17801 = 38.41% 6,790/ 16623 = 40.84% 7,929/ 14681 =
54.0% 9,600/ 12906 =
74.38% 6,182/ 11873 =
52.06%
Interest cover ratio EBIT/ financing costs 3985/ 417 =
9.56 times 3917/ 483 =
8.1 times 3457/ 579 =
6.0 times 3169/ 478 =
6.6times 2791/ 250 =
11.1 times
Dividend payout ratio Dividends/ net income 14.76p/ 2,814 =
0.5% 14.46p/ 2,671= 0.5 % 13.05p/ 2,336 =
0.6 % 11.96p/ 2,138 = 0.6% 10.90p/ 2,130 = 0.5%
Dividend per share Dividend – special dividend/ shares outstanding 14.76p (picked from the full FY results) 14.46p (picked from the full FY results) 13.05p (picked from the full FY results) 11.96p (picked from the full FY results) 10.90p (picked from the full FY results)
Earnings per share Net income – special dividend/ outstanding shares 34.98p (picked from the full FY results) 33.10p (picked from the full FY results) 29.33p (picked from the full FY results) 27.14p (picked from the full FY results) 26.95p (picked from the full FY results)
Price/earnings ratio Market value per share/ earnings per share 8.50 (picked from the full FY results) 11.10 (picked from the full FY results) 13.20 (picked from the full FY results) 11.50 (picked from the full FY results) 14.60 (picked from the full FY results)
