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Acknowledgement

Extremely grateful to the lecturer of “Accounting for Decision Makers” Mr. Nishantha Hewawitharana, for the shared knowledge, helpful feedback
and all the support extended throughout the module. His teaching style enabled me to understand the accounting principles accurately.

Further my sincere appreciation goes to my friend Yogendraprasath Sathiyaseelan for supporting me to collate all the information and helping me
to do this analysis with good understanding. His continuous motivation enabled me to complete this assessment successfully.

Finally, many thanks go to ANC staff, our families and friends who always inspire me to reach greater heights.

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Table of Contents

1. EXECUTIVE SUMMARY ................................................................................................................................................................................................ 4

2. TESCO COMPANY PROFILE.............................................................................................................................................................................................. 5

3. TESCO FINANCIAL ANALYSIS ........................................................................................................................................................................................... 6

3.1. FINANCIAL STATEMENTS ANALYSIS....................................................................................................................................................................................... 6


3.1.1. HORIZONTAL, VERTICAL (COMMON SIZE) AND SEGMENT TURNOVER ANALYSIS. .................................................................................................................................... 6
3.2.1. PROFITABILITY, LIQUIDITY, EFFICIENCY, GEARING AND LENDING AND INVESTMENT RATIOS. ................................................................................................................... 21
3.2.2. CONCLUSIONS DRAWN FROM THE ANALYSIS OF TESCO’S FINANCIAL RATIOS. ................................................................................................................... 26
3.2.3. DU PONT ANALYSIS ................................................................................................................................................................................................................. 29

4. TESCO GROWTH STRATEGIES ....................................................................................................................................................................................... 30

........................................................................................................................................................................................................................................ 31

4. CONCLUSION. ............................................................................................................................................................................................................... 32

BIBLIOGRAPHY ................................................................................................................................................................................................................. 44

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1. Executive Summary
This report carries the Financial performance analysis of Tesco PLC. Analysis is done to evaluate the financial performance of the organization to
know where it is heading and whether the future contemplated is positive. Such evaluations are paramount in order to make vital decisions in the
company.

Hence this analysis covers the areas such as evaluation of the financial performance of the Company for the past 14 years along with a comparison
with their competitors Morrisons PLC and Sainsbury PLC on their financial performance, segmental analysis of TESCO PLC, recognition of the
future company targets and industry norms. And finally, to examine the business strategies of the Tesco Plc.

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2. Tesco company profile
Tesco is the leader in the UK retail industry with a market share of 27.1%. There are about 440,000 employees at Tesco PLC serving approximately
80 million customers each week. This is carried out in more than 6,800 TESCO stores and online. Tesco’s 6 giant KPI’s are,

(1) Sales, (2) Profit, (3) Cashflow, (4) Customers recommend us and come back time and again, (5) Colleagues recommend us as a great place to
work and shop, (6) We build trusted partnerships.

TESCO had a tragic fall in the sales in the year 2015 marking a loss of £6.4B. This is said to be the biggest loss suffered by a UK retailer. The
reason known to be the fall of the TESCO UK property value, deterioration of its competitiveness and erosion in the market. However, they had a
rapid recovery which will be elucidated more in the report below.

Source: (PLC, 2018)


Sainsbury
14.9%

9.9% Tesco
27.1%
5 13.9%
3. Tesco Financial Analysis

3.1. Financial statements Analysis


3.1.1. Horizontal, Vertical (common size) and segment turnover analysis.
Income Statement

Tesco’s performance based on vertical analysis of the income statement proves that while the group is yet to reach the performance of the good
old days 14 years ago, it has recovered from its weakest performance in 2015. The recovery is in place and is fueled by the increased efficiencies
and cost savings. The new management team appointed in 2015 had focused its efforts on stabilizing the core performance of the business, make
the operations linear and cut out unnecessary costs. The fruits of such efforts are seen in the growing financial performance over the years.

Cost of sales
It is evidenced in the vertical analysis that the cost of sales as a percentage of revenue is at 91%-94% range over the past 14 years. The competitor’s
analysis proved that while Sainsbury stays comparatively competitive at 93%, Morisons has a higher cost of sales at 96% as a percentage of
revenue. Tesco had its worst performance in terms of cost and profitability during the financial year ended 2015 in which the cost of sales had sky
rocketed to 103.87% leading to a gross loss for the group. But since then the company has constantly reduced the cost of sales.

Operating Profit

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Vertical Analysis – Income Statement TESCO PLC

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Vertical – Income Statement Sainsbury PLC (Appendix 4 income statement of Sainsbury)

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Vertical – Income Statement Morrisons PLC (Appendix 8 income statement of Morrisons)

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Vertical analysis of the income statement

Tesco’s performance based on vertical analysis of the income statement proves that while the group is yet to reach the performance of the good
old days 14 years ago, it has recovered from its weakest performance in 2015. The recovery is in place and is fueled by the increased efficiencies
and cost savings. The new management team appointed in 2015 had focused its efforts on stabilizing the core performance of the business, make
the operations linear and cut out unnecessary costs. The fruits of such efforts are seen in the growing financial performance over the years.

Cost of sales

It is evidenced in the vertical analysis that the cost of sales as a percentage of revenue is at 91%-94% range over the past 14 years. The competitor’s
analysis proved that while Sainsbury stays comparatively competitive at 93%, Morisons has a higher cost of sales at 96% as a percentage of
revenue. Tesco had its worst performance in terms of cost and profitability during the financial year ended 2015 in which the cost of sales had sky
rocketed to 103.87% leading to a gross loss for the group. But since then the company has constantly reduced the cost of sales.

Operating profit

Our analysis showcases that Tesco enjoyed Operating Profit margins above 5.75% in the past and reached its peak at 6.5% in 2011. The group
recorded its worst performance in 2015 by accumulating a loss of 10.1%, the performance since then had improved on a year on year basis and
has reached 3.2% during 2018. The main contributor to this rise in operating profit margin is the cost efficiencies as evidenced in cost of sales and
administrative expenses which reduced to 2.84% of revenue in 2018 compared to 4.52% in 2015.

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Profit for the year

The margins are thin in this industry and the profit margins of 4% enjoyed by the group in 2005 have reduced. In 2015 a loss of 10.13% was
recorded but the recovery had been swift as the group reached profit of 2.1% on revenue in the year 2018. What makes the performance of Tesco
even more desirable is the performance of the competitors, Sainsbury recorded only a 1.1% profit as a percentage of revenue and Morrisons
recorded 1.4%.

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Horizontal - Income Statement TESCO PLC

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Horizontal - Income Statement Sainsbury PLC

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Horizontal - Income Statement Morrisons PLC

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Horizontal Analysis - Income Statement TESCO PLC
Tesco’s performance year over year showcases continued growth. In the 14 years that we have analyzed the performance initially grew at a slow
pace, dipped in to losses and then has recovered.

Revenue

Gross Profit Profit for the year Operating Profit


10.00% 10.00% 10.00%
5.00% 5.00%
5.00%
0.00% 0.00%

2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005

2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
-5.00% -5.00%
0.00%
-10.00% -10.00%
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005

-5.00% -15.00% -15.00%

Revenue had grown from GBP 33,866M in 2005 to GBP 57,491M in 2018, a growth of almost 70%. While this is less than the revenue the group
recorded in 2014 of GBP 63,557M it seems as if the growth pains that the group sustained, and the recovery measures had strengthened the core
of the group and the growth seems to be sustainable. In 2018 the revenues of Sainsbury and Morrisons grew respectively by 9% and 6%.
Considering the comparatively low revenues of the competitors Tesco’s growth of 2.8% still stands strong.

Cost of sales
The cost of sales showcases a continued reduction in costs, the management that was appointed in 2015 made reduction in costs and investing in
efficiencies a priority and the results are evident of their efforts.

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Administration expenses
The administration expenses are yet another area that has shown considerable improvement. Over the 14 years that was analyzed the administration
expenses continued to increase year over year and it reached its peak when it increased by 55% from 2014 to 2015. The efforts of the management
had led the expenses to drop compared to the previous years two significant drops noticed were in 2016 and 2018 where the administration expenses
reduced by 28% and 18% respectively. This is significant achievement considering the fact that the two competitors, Sainsbury and Morrisons,
weren’t able to replicate the same.

Finance costs
The financing costs have increased year over year and had increased from GBP 235M in 2005 to GBP 631M but it is noteworthy that the finance
costs show a downward trend from the year 2016.

Balance Sheet of TESCO PLC, SAINSBURY PLC and MORRISONS PLC along with their horizontal and vertical calculations are
annexed at Appendix 1,2,3,5,6,7,9,10,11

Segmental Analysis

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Income Statement According to Segments of TESCO PLC

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Balance Sheet According to Segments of TESCO PLC

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Tesco’s operations are divided in to the following categories:
1. UK operations
2. International operations (Asia and Europe) and
3. Tesco Bank

Tesco aggressively expanded in the Asian and European market till 2015, the international operations grew from a meager 21% in 2005 to an
astounding 45% in 2015. An accounting scandal of GBP 263 Mn, reducing sales and declining profits, disputes with overseas suppliers such as
Loreal, other international competitors such as Asda competing and winning in terms of costs and the failing internal control practices in the
international operations such as the Polish operations have all lead to a deterioration of the international operations. In 2018 the International
operations have fallen back to 27% of the total UK revenue. This indicates a shift in business and a new direction of the company. Tesco now

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seem to focus on strengthening the core operations in UK while only prioritizing the most profitable operations abroad. The capital investments
overseas had been frozen, and the focus has shifted to UK. This strategy has financially and strategically supported the group as the revenues and
profit margins have are showing a sense of growth compared to the disastrous results in 2015.

Tesco Bank had historically been contributing 2% of the total group revenue. Over the 14 years that had been analyzed, we witness this recurring
theme. It is understandable since this isn’t the core competence of the group but an auxiliary service that adds value to the overall operations of
the business.

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3.2. Financial Ratios
3.2.1. Profitability, liquidity, efficiency, gearing and lending and investment ratios.

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Profitability Ratios

Gross Profit Margin Net Profit Margin


10% 6%
8% 4%

6% 2%

4% 0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-2%
2%
-4%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 -6%
-2%
-8%
-4%
-10%
-6% -12%

ROCE Asset Turnover


4.00
20%
15% 3.50

10% 3.00
5% 2.50
0%
2.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-5%
1.50
-10%
1.00
-15%
-20% 0.50

-25% -
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-30%
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Liquidity Ratios

Current Ratio
1,600.00

1,400.00

1,200.00

1,000.00

800.00

600.00

400.00

200.00

-
1 2 3 4 5 6 7 8 9 10 11 12 13

Liquid Ratio
1,400.00

1,200.00

1,000.00

800.00

600.00

400.00

200.00

-
1 2 3 4 5 6 7 8 9 10 11 12 13
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Efficiency Ratio

16.00 Trade Receivables Ratio Trade Payable Ratio


14.00 80.00

12.00 70.00

10.00 60.00

8.00 50.00

6.00 40.00

4.00 30.00

2.00 20.00

- 10.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 -
1 2 3 4 5 6 7 8 9 10 11 12 13 14

Inventory Turnover
25.00

20.00

15.00

10.00

5.00

-
1 2 3 4 5 6 7 8 9 10 11 12 13 14
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Gearing and Lending Ratios

Interest Cover
15.00

10.00

5.00

-
1 2 3 4 5 6 7 8 9 10 11 12 13 14

(5.00)

(10.00)

Gearing Ratio
80%

70%

60%

50%

40%

30%

20%

10%

0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
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Investment Ratios

ROE
40%

20%

0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
-20%

-40%

-60%

-80%

-100%

*Earnings per share basic and earnings per share diluted is calculated in the table above.

3.2.2. Conclusions drawn from the analysis of Tesco’s financial ratios.

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Profitability Ratios

The profitability ratios portray the picture of how Tesco had been performing at very high profitability level in the past and it eroded constantly
till it reached alarming levels in 2015, where significant losses were made and then slowly but steadily has recovered lost ground.

Ratio 2005 2015 2018


Gross Profit Margin 8% -4% 6%
Net Profit Margin 4% -10% 2%
ROCE 16% -27% 10%
Asset Turnover 3.36 1.21 1.27

The table above depicts how the best year of performance in terms of profitability is 2005 and the worst is 2015. 2018 is a period of recovery that
doesn’t fall in to the two extremes. The competitor analysis proves that Tesco is performing comparatively better in all areas considered above.

Liquidity Ratios

Tesco had been able to improve current ratio year on year; it matches the industry and competitor norm at 0.70 during 2018.
The quick asset ratio has seen an improvement in the past but had deteriorated in 2018. This dip is understandable since the growing revenue
required increased inventory balances.

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Efficiency Ratios

The trade receivable, trade payable and inventory turnover ratios have more or less stayed the same and have complied the industry norms. Tesco
had been able to negotiate better terms than the two competitors.

Gearing and lending

The significant improvement in gearing ratio of Tesco from 71% in 2015 to 59% in 2018 is a material growth. While the gearing ratio was only
40% in 2005 the growth of the group had to be funded through borrowed funds and the increase un gearing is aa direct result of the same.

The interest cover has reduced from 9 times to 3 from 2005 to 2018 but in 2015 it was a negative 8.73 times, proving that the road to recovery had
reduced the risk of the company.

Investment

The return on equity is showcasing a recovery from the highs of 18% to the lows of 80%, at 19% in 2018.

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3.2.3. Du Pont Analysis

The Dupont Analysis showcases that the return on equity is a product of the profit margin, turnover of assets and the equity multiplier. In the case
of Tesco, the Return on Equity had constantly grown year over year, while it had fallen from 31% of 2005 to (76%) in 2015 it had recovered to
11% in 2018. The Profit margin had been volatile and had varied from 4% to (10%) but had stabilized at 2% in 2018.

The turnover generated by the assets had been almost a constant 125% range in the past 05 years but at its highest it was 336% in 2005. The equity
multiplier had shown improvement where it had grown from 233% in 2005 to 429% in 2018.

The Du Pont analysis showcases the recovery of Tesco in terms of its Return on Equity.

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4. Tesco Growth strategies
As elucidated in the introduction Tesco after the downfall in the year 2015 has continuously used different growth strategies to rise back to the
good old golden days standards. Subsequently they had a rapid recovery with the implementation of six strategic drivers in 2016.

They can be listed as,

(1) Differentiated brand that creates long-term value.

(2) Reduce operating costs by £1.5bn by the year 2019/20,

(3) To reach £9bn cash from operations cash in 3years.

(4) To broaden the mix to generate 3.5% – 4.0% group margin

(5) To maximize value from property and

(6) Innovation. Thus, it makes it very interesting to analyze the financial reports of Tesco as elucidated below.

It is believed these strategies helped TESCO rise back to the expected standards. Figure shown below is extracted from the 2016 annual report on
how the above strategies has shown its impact through their KPIs.

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4. Conclusion.
The financial analysis of Tesco Group provides interesting insights in to a business that had reached the highest highs and the lowest lows. The
highs were not supported by strong financial and operational discipline and gave rise to an aggressive beyond Britain strategy that led to the group
facing financial difficulties, regulatory and financial scandals, having to concede defeat to competitors and losing trust of customers in growing
international markets and most importantly the inability of the company to stay true to the fundamental promise of the group of being the most
cost effective supermarket chain. This was a challenge to the very core of the business. With the change of management and a new reinforced
focus on the UK operations the company quickly shifted gears to focus on the core markets, freeze overseas expansion, reduce costs and strengthen
the efficiencies of the business. The group now has recovered from the disastrous results in 2015 but the glory days are still far away. The road to
recovery will be a hard ne but at this phase with a burning desire and an unrelenting focus it isn’t an impossible dream.

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Appendices
Appendix 1 Balance Sheet

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Appendix 2 Balance Sheet Vertical Analysis

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Appendix 3 Balance Sheet Horizontal Analysis

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Appendix 4- Competitor-Sainsbury PLC -Income Statement

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Appendix 5 Competitor-Sainsbury PLC -Balance Sheet

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Appendix 6 Competitor-Sainsbury PLC -Balance Sheet-Horizontal Analysis

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Appendix 7 Competitor-Sainsbury PLC -Balance Sheet-Vertical Analysis

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Appendix 8 Competitor-Morrisons PLC -Income Statement

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Appendix 9 Competitor-Morrisons PLC -Balance Sheet

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Appendix 10 Competitor-Morrisons PLC -Balance Sheet - Vertical Analysis

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Appendix 11 Competitor-Morrisons PLC -Balance Sheet – Horizontal Analysis

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