PART ONE

PROJECT OBJECTIVES AND OVERALL RESEARCH APPROACH

1.1 Reasons for choosing project topic

The objective of writing this project is in partial fulfilment of being awarded the Bachelor of
Science degree in Applied Accounting of the Oxford Brookes University, United Kingdom.
The main reason for choosing the project topic, “An Evaluation of the Business and
Financial performance of J Sainsbury plc for the year ended 24 March 2006 – 22 March
2008”, was to assess and improve my professional ability to conduct a business and
financial analysis of a publicly listed company. Secondly, I have deep interest in
specialising as a financial analyst and wanted to use my research project as a springboard
to this career goal. Saunders, et al. (2007) opined that embarking on research enables the
development of knowledge in a particular field. Thirdly, I plan to develop a reusable
financial analysis model that can be used to analyse the financial performance of similar
companies in the retailing sector (in which J. Sainsbury plc operates).

1.2 Reasons for choosing J. Sainsbury plc as case study

There are four reasons for choosing J. Sainsbury plc:
Firstly, I decided to analyse the financial statements of this United Kingdom based
company, and not a Nigerian company, because its financial statements comply with
International Financial Reporting Standards (IFRSs) as adopted by the European Union (J
Sainsbury plc, 2008). My accounting studies have centred on the preparation and
presentation of financial statements in compliance with IFRSs. Compliance with IFRS
requires an explicit and unreserved statement of such compliance in the notes (IASB,
2003). Secondly, it was relatively easier to gain access to the annual reports and financial
statements of J Sainsbury plc online compared to those of Nigerian companies that have
not fully adopted financial reporting on the Internet. Thirdly, getting access to external data
such as economic data relating to the UK economy and the food and groceries retailing
sector was also relatively easier than getting such information about the Nigerian economy
and any particular industry.

Fourthly, I wanted to be able to develop content for my Skills and Learning Statement by
proving that my case study was on a foreign company to my country of domicile, which
required getting most of my core data using the Internet.

1.2.1 About J Sainsbury plc

J Sainsbury plc consists of Sainsbury’s Supermarkets – a chain of 504 supermarkets and
319 convenience stores and Sainsbury’s Bank (J Sainsbury plc, 2008).

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 Sainsbury’s Supermarkets is the UK’s longest standing major food retailing chain, having
opened its first store in 1869 (J Sainsbury plc, 2008).

Sainsbury’s Supermarkets provides over 30,000 food and non-food products and services,
including financial services provided by Sainsbury’s Bank to more than 16.5 million
customers per week.

1.3 Project Aims and Objectives

The main aim of my research is to evaluate the extent to which the company achieved its
‘Making Sainsbury’s Great Again (MSGA)’ plan set in 2004. This is to be done by analysing
its financial performance, financial position and changes in financial position over three
years (2006 to 2008). My findings would be used to justify its current ‘Recovery to Growth’
expansion plan (J Sainsbury plc, 2007).

To achieve my aims, I have set the following project objectives:

1. To examine the different models, tools and techniques of assessing the strategic
business and financial performance of companies.
2. To analyse the strategic direction and position of J. Sainsbury plc.
3. To evaluate the operating and investment management, financing decisions and
dividend policies of the company and their impact on the company’s growth and
profitability.
4. To analyse the cash flow position and management in order to assess the ability of
the company to achieve its ‘recovery to growth’ plans with or without additional
external finance.
5. To draw conclusions about the business and financial performance of J. Sainsbury
plc.

1.4 Research Questions

A key issue after choosing a project title and defining the project objectives is to focus the
project (BPP, 2005). To focus my research project I framed research questions to ensure a
clear sense of purpose and direction for the research process. One of the key criteria of
research success will be whether a set of clear conclusions is drawn from the data
collected (Saunders, et al. 2007).

The following research questions will enable me achieve my project objectives:

a) How did J Sainsbury plc position itself strategically?
b) Has the company been managing its operations efficiently and profitably?
c) Has the company been managing its short-term and long-term investments
efficiently and profitably?

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 d) What financing policies has the company pursued to achieve growth and
profitability?
e) What dividend policies has the company pursued to maximise shareholder value?
f) Has the company’s cash flow position improved?
g) Can the company achieve its ‘recovery to growth’ plans without additional external
finance?

1.5 Overall Research Approach

My overall research approach was to design a research methodology that enabled a clear
research purpose and design. The research methodology was to:
1. Conduct a review of the literatures on financial statement analysis of companies in
order to develop research questions and objectives.
2. Carry out a literature search of mostly, if not only, secondary data using different
methods and sources.

My research design comprises of my research strategy and purpose. The research strategy
adopted, because of the research topic chosen, is a single case study of J Sainsbury plc.
The research purpose is mainly an explanatory study. An explanatory study establishes
causal relationships between variables (Saunders, et al. 2007). I will search for
relationships between the various line items in the financial statements of the company
using various accounting techniques and conclude based on my research objectives and
questions. The mainly explanatory study, though with a mix of descriptive research, of the
business and financial performance of the company between 25th March, 2005 and 22nd
March 2008 will seek out comparative competitor analysis using Tesco plc financial
statements for the year ended 23 February 2008.

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 PART TWO

INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUES

2.1 Sources of Data and Information

The literature sources available to help develop a good understanding of and insight into,
previous research can be divided into three categories: primary (published and
unpublished), secondary and tertiary (Saunders, et. al., 2007).

My literature sources were primary and secondary. My primary literature sources included
the published company Annual Reports and Financial Statements of J Sainsbury plc and
Tesco plc. The Financial Statements were downloaded from their corporate websites. The
secondary literature sources I used included different books as referenced when quoted,
journals and government publications.

The journals used included the Student Accountant and Finance Matters of the Association
Chartered Certified Accountants (ACCA). In addition, I accessed some UK government
publications on the Internet.

2.1.1 Reasons for their use

I had different reasons for using different sources of data. I used books to evidence a
literature review of relevant materials and to gain better understanding of the theme of the
research. I read several articles to learn from ACCA members, examiners and contributors
on their view on financial statements analysis and financial issues relating to companies.
Getting access to basic economic, social and demographic information that related to the
UK economy required accessing the UK government publications online and other
websites.

2.2 Description of Methods used

The methods I used to collect the data and information used in my Research and Analysis
Project depended on the type of literature source it was. Most of the primary literature
sources used were collected by browsing and scanning the websites of J Sainsbury plc,
Tesco plc, UK Government and various other business and financial analysts’ websites.
The information gotten from the browsing of these websites included the Annual Reports
and Financial Statements, UK economic and statistical data, UK retail industry analysis and
other research projects.

The secondary literature sources used were collected by conducting a literature review of
different books at the ICAN Library, the National Library and my personal library. To
augment my sources of information, I acquired several books at a retail bookshop. In

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 addition, I used the Internet to access several professional journals, download relevant
articles, books and PowerPoint slides of business research and finance books.

2.3 Limitations of Information Gathering

One of the limitations I encountered was that there were so much secondary literature
sources to review and I was only able to review a small percentage of these sources. The
number of secondary literature sources available is expanding rapidly, especially as new
resources are developed and made available via the Internet (Saunders, et. al., 2007).

Another limitation was that I had limited access to many tertiary sources like abstracts,
indexes and citations as most online sources required a subscription fee my research
budget could not absorb. My project report is expected to be an academic piece of work
and hence must use academic sources (Saunders, et. al., 2007). Not having access to a
University library where I could access such academic literature was also a limitation.

The limitations of the information gathering process is also a function of the demerits of
using secondary data. Saunders, et. al. (2007) stated the following disadvantages, from the
viewpoint of the researcher, of secondary data:
a. There is no real control over data quality
b. The initial purpose may affect how data are presented
c. It may be collected for purpose that does not match research need

Based on the above disadvantages the conclusions of this Research and Analysis Project
are highly dependent on the Annual Report and Financial Statements of J Sainsbury plc
and Tesco plc. Annual reports are complex and difficult to decipher (Vause, 2005).
Financial Statements, however, have a basic objective. Dunn (2002) stated that the basic
objective of Financial Statements was to provide information about the financial position,
financial performance and financial adaptability of an enterprise that is useful for a wide
range of users for assessing the stewardship of management and for making economic
decisions.

2.4 Ethical Issues on Information Gathering

The goal of research ethics is to ensure that no one suffers or is subjected to adverse
consequences from research activities (Cooper and Schindler, 2003). I considered such
ethical issues in carrying out my research project. I did not have to interview or interact with
any person within J Sainsbury plc. To address any ethical issue that may arise, I read the
University’s Code of Practice ‘Ethical Standards for Research involving Human Participants’
as all students undertaking research were to comply with the University’s Code of Practice
(OBU, 2008). I decided to adopt one out of the ten General Principles in the Code,

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 ‘Potential participants normally have the right to receive clearly communicated information
from the researcher in advance’ (OBU, 2000). In adopting this principle, I sent an abridged
consent form to the Company Secretary of J Sainsbury plc by electronic mail on the 1st of
July 2008, informing him that I was evaluating the company purely on publicly available
information.

2.5 Accounting and Business Techniques used

The accounting and business techniques used in evaluating the business and financial
performance of J Sainsbury plc include both qualitative and quantitative (financial and non-
financial) techniques. The business techniques were mainly qualitative in nature. The
accounting techniques on the other hand were purely quantitative and financial in nature.

2.5.1 Accounting Techniques

The following four accounting techniques were used.
• Univariate Analysis: Ratio Analysis
• Multivariate Analysis: Z-Score
• Common-size Statements: Vertical and Horizontal Analysis
• Cash Flow Analysis

Ratio Analysis is the use of a variety of ratios in analysing the financial performance and
condition of a business from various viewpoints, such as managers’, owners’, and creditors’
(Helfert, 2001). A ratio is simply a statement of the relationship between two figures
(Patton, 2004). The ratios used were classified according to: Operating Management
Ratios, Investment Management Ratios, Financial Management Ratios and Shareholder
Ratios.

Multivariate Analysis has been widely used in predicting corporate failure (Alexander and
Britton, 1999). The analysis is done using three predictor ratios: The Altman’s Z-Score,
Internal Growth Rate (IGR) and Sustainable Growth Rate (SGR). The Z-Score involves
using a set of five selected ratios that are assigned weights to produce a Z-Score. A Z-
Score below 1.8 is an indicator of probable failure, and a score of over 3 was seen as a
clean bill of health (Vause, 2005). The IGR is the growth rate that the company can achieve
without external funds, debt or equity (Brealey and Myers, 2000). The SGR is maximum
growth rate that a firm can sustain without having to increase financial leverage
(Investopedia, 2007).

Common-size statements “normalize” balance sheet and income statement items to allow
easier comparison of different-size firms (Reilly and Brown, 2002). Vertical Analysis
involves expressing all items in the financial statements as a percentage of one major line

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item. Horizontal Analysis involves comparing a company’s performance to its previous
period’s performance.

Cash flow analysis is carried out by examining the firm’s liquidity, and how the firm is
managing its operating, investing, and financing cash flows (Palepu et al., 2004).

2.5.2 Business Techniques

The following four business techniques were used.
• PEST Analysis
• Five-Forces Framework
• SWOT Analysis
• Balanced Scorecard

PEST analysis is an environmental scanning technique. It involves a scan of the external

macro-environment in which the firm operates and describes a framework for the analysis
of the following macro environmental factors, Political, Economic, Social and Technological
(ICMBA, 2007).

Five-Forces Framework helps identify the sources of competition in an industry or sector

(Johnson, et. al., 2006). The framework classifies the sources of competition into the threat
of new entrants, the threat of substitutes, bargaining power of buyers, bargaining power of
suppliers and competitive rivalry.

SWOT analysis, on the other hand, is an environment scanning technique that considers
both internal and external micro-environmental factors. SWOT analysis provides
information that is helpful in matching the firm's resources and capabilities to the
competitive environment in which it operates (ICMBA, 2007).

Balanced Scorecard helps in the identification of four key performance measures of

Customer Perspective, Internal Business Process Perspective, Innovation and Learning
Perspective, and the Financial Perspective. This method is a balanced approach to
performance measurement as a range of qualitative and quantitative parameters are taken
into account for evaluation (Kazmi, 2002).

2.5.3 Limitations of Accounting Techniques

The following are the limitations of the accounting techniques I used.
1. Financial ratios seldom provide answers, but they do help to ask the right questions
2. There is no international standard for financial ratios (Brealey and Myers, 2000)

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 3. Ratios are computed on historical figures that might no longer be realistic and could
also be easily distorted by inflation, different accounting policies and practices
(Scott, 2004)

2.5.4 Limitation of Business Techniques

A question central to company analysis is how to recognise a sound strategy (Vause,
2005). The greatest limitation of applying business techniques in company analysis is that
these models only assist in identifying the relevant variables, without being able to
recognise which strategy is the best considering the company’s circumstances.

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 PART THREE
RESULTS, ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS
3.1 DESCRIPTION AND PRESENTATION OF RESULTS
3.1.1 Description and Presentation of Business Performance
Strategy analysis is an important starting point for the analysis of financial statements
(Palepu et. al., 2004). Business performance can only be measured in the context of a
strategic analysis of the company.

Corporate Strategy
Sainsbury pursues a differentiation strategy mainly in terms of offering a broad range of
quality products and engaging in competitive pricing of its products. The differentiation
strategy is complemented by five principles which set the company apart from its major
competitors. The five principles are: (1) The best for food and health (2) Sourcing with
integrity (3) Respect for the environment (4) Making a positive difference in the community
(5) A great place to work.
These principles enabled the company to win several awards including, ‘Supermarket of the
Year’ at the Retail Industry Awards in October 2007 for the second year running. It was
awarded an ‘A’ Grade by Greenpeace (The only one awarded to a major supermarket) at
the National Consumer Council’s ‘Green Grocers’ award. It also was awarded ‘Best Volume
Retailer’ and ‘Most Improved Supermarket’ by Compassion in World Farming for its
commitment to improving animal welfare.

New Product Development

Sainsbury offered a broader range of products through its development of complimentary
non-food products and services in addition to its traditional food products. This effort
primarily extended the product offering to its customers. To cater for the new product
development strategy, the company embarked on new space development.

New space development

New space development (Table 3.1) increased by 3.4% in 2006 and by 4.8% and 4.4% in
2007 and 2008 respectively. Overall, during the period under review retail outlets (including
Supermarkets and Convenience Stores) grew by 13.2%. In terms of Sales area, this
increased by 2.2% in 2006 and by 3.8% and 3.1% in 2007 and 2008 respectively. Overall,
during the period under review Sales area grew by 9.4%.
Year 2005 2006 2007 2008
Retail Outlets 727 752 788 823
Sales Area 16,370 16,725 17,364 17,901
(‘000 Sq. Ft.)
Table 3.1 – New Space Development (Source: J Sainsbury 2008 Annual Report)

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Operational Efficiency
The company increased operational efficiency by various means. It improved on its stores’
checkout process through self checkout and bi-optic scanner technology, expanded its
depot facilities, installed a new transport management system, reorganised it distribution
network, and centralised some shared services.

Corporate Governance
A company cannot be a success without sound management. Corporate Governance refers
to how a company is directed and controlled. The Board of Directors of J Sainsbury Plc
comprises of ten persons (2007: 8 persons).

The Board is comprised of experienced people in the food retailing industry, whose
competence as measured by their years and field of experience are commendable. The
average age of the entire Board was 51 years, an average age of 45 years for the
Executive Directors and 54 years for the Non-Executive Directors (Table 3.2). This is an
indicator that the company is still in capable hands. If it is the late 50s for Executive
Directors and is over 60s for Non-Executive Directors, the Board may be getting past its
sell-by date, with directors more concerned with serving their time than the shareholders’
interests (Vause, 2005).

Name Board Designation Age

Philip Hampton Chairman 54
Justin King Chief Executive 46
Darren Shapland Chief Financial Officer 41
Mike Coupe Trading Director 47
Val Gooding Non-Executive Director 57
Gary Hughes Non-Executive Director 46
Bob Stack Non-Executive Director 57
John McAdam Senior Independent Director 60
Anna Ford Non-Executive Director 64
Mary Harris Non-Executive Director 42
Table 3.2 – J Sainsbury Plc: Board of Directors (Source: J Sainsbury Plc 2008 Annual
Report)

Overall, it appears the Board complied with principles of the Combined Code on Corporate
Governance 2006, by ensuring Board composition was balanced, 16 Board meetings were
held and attendance by the Directors was near 100%, relevant committees were set up and
were functional, Board evaluation is in place and carried out, roles and responsibilities were
divided accordingly between Executive and Non-Executive Directors, and internal control
and risk management were continually reviewed.
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The only exception during the year was the ‘Audit Committee which had only two
Independent Directors as members instead of three until 1 August 2007 when a Non-
Executive Director was appointed’ (Sainsbury’s, 2008). No changes were made to the
Board in 2008/09.

Strategic Alliances
The Group has three strategic alliances with its joint venture partners. Sainsbury’s Bank is
joint venture with HBOS plc, providing financial services to Sainsbury’s customers. The
service has been fully integrated into the core supermarket offer, in line with its new product
development strategy. This translated to more products and revenue streams for the
Group.

During 2008 financial year, the Group formed two 50:50 joint ventures with Land Securities
and British Land Plc. This was to continue the Group’s active property strategy of
increasing its control over its key trading assets. The two joint ventures were considered
and approved by the Board to synergise its strategy. Land Securities will combine the retail
and development expertise of the two companies to develop Sainsbury’s supermarkets and
British Land Plc will extend and develop trading stores to improve the customer offer and
value (Sainsbury’s, 2008).

PEST Analysis

POLITICAL ECONOMIC
• Competition Commission Laws • Increasing inflation
• Environmental laws • Decreasing level of disposable
• Globalisation of financial markets income
(Carl, 2008) • General increase in prices (CPI and
• UK Government’s reductions in tax RPI)
rate (Carl, 2008) • Credit squeeze/crunch

SOCIAL
• Strong health and safety concerns
• Active charitable efforts/projects
• Increasing concerns about obesity
(Carl, 2008)
TECHNOLOGICAL
• Growth/Increase in Internet/online
shopping
• Automation in the checkout process
• Better supply chain management
through RFID (Carl, 2008)

Diagram 3.1 – PEST Analysis of Sainsbury

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 Five Forces Analysis
BARGAINING POWER OF BUYERS
- Powerful and fragmented buyers
- Numerous (16.5m per week) buyers

BARRIERS TO ENTRY COMPETITIVE RIVALRY THREAT OF

- Huge capital requirements
-Economies of scale
-Local knowledge (Carl,
2008)
- Network of distribution
channels
- Brand identity
- Huge market share held be the SUBSTITUTES
major retailers (Tesco, Sainsbury’s, - Stocking several substitute
ASDA and Morrisons) products
-High Concentration Ratio - Internal industry threat
-Long history of competition (Carl, 2008)
- Disciplined industry

BARGAINING POWER OF
SUPPLIERS
- Many competitive and powerful
suppliers (e.g. P & G, Cadbury, etc)
-Smaller suppliers (farmers) not
significant
-Highly concentrated purchasers

Diagram 3.2 – Five Forces Analysis of Sainsbury

SWOT Analysis

STRENGTHS OPPORTUNITIES
• Long history • Expansion to European and Asian
• Professional and experienced market
management • Diversification into related markets
• Strong brand name • Online sales (Carl, 2008)
• Increasing business growth (Carl,
2008)
• Environmentally-friendly
organisation

WEAKNESSES THREATS
• Concentration on UK market • Hostile take-over bids
• Over-dependence on brand name • Perception as a UK brand only
• Increased regulations

Diagram 3.3 – SWOT Analysis of Sainsbury

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Balanced Scorecard

CUSTOMER PERSPECTIVE FINANCIAL PERSPECTIVE

• Increase in customers per week • Improved ROCE
• Decrease in overall UK market • Decreased liquidity
share • Reduced gearing
• Relative increase in operating
income

STRATEGY

INTERNAL BUSINESS PROCESS INNOVATION AND LEARNING

PERSPECTIVE PERSPECTIVE
• Cost savings target • Development of ‘own’ brand
• New transport management system products
• Self checkouts and shelf ready • New channel developments
packaging • Employee retention
• Active property management

Diagram 3.4 – Balanced Scorecard for Sainsbury

3.1.2 Description and Presentation of Financial Performance

J Sainsbury Plc displayed an overall strong performance as evaluated using two
benchmarks. The two benchmarks used were the Group’s past period financial results and
its major competitor’s (Tesco Plc) financial results. Interpretation of accounts is highly
subjective and requires skilled judgement bearing in mind the limitations of these
benchmarks (Alexander and Britton, 1999).

Consequently, twenty two financial ratios were computed to develop a well-rounded picture
of the Group’s financial performance for the period reviewed. In addition, common-size
horizontal and vertical statement analysis were made to assess the performance trend of
the Group. The assessment and calculations were based on the original financial data
available in the Group financial statements. It is safest never to rely entirely on someone
else’s analysis, particularly if this is offered by the company being studied (Vause, 2005).

3.1.2.1 Univariate Analysis

The Univariate analysis or ratio analysis is one of the means by which financial statements
are interpreted. The ratios used have been divided into four groups as follows:

A. Operating Management Ratios

1. Return on Equity (Chart 1)
Return on Equity (ROE) is the primary driver of corporate value (Walsh, 1996). The
measure shows how well the board is making the shareholders’ money work (Tennent and

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Friend, 2005). The ratio increased by 410% between 2006 and 2007, but dropped slightly
by 10.5% in 2008.

For Tesco, ROE has remained almost stable dropping by 0.3% between 2007 and 2008.

Chart 1 -Return on Equity (ROE %)

17.96% 17.90%

7.45% 6.67%

1.46%

2006 2007 2008 2007 2008

Sainsbury's Tesco

2. Return on Capital Employed (Chart 2)

Return on Capital Employed (ROCE) is the return on capital invested in the business
(Ranganatham and Madhumathi, 2006). This is from the perspective of both the
shareholders and other providers of capital. ROCE increased
increased by 162.92% between 2006
and 2007, and dropped by 6.97% in 2008.

For Tesco, ROCE dropped by 11.79% in 2008.

Chart 2 - Return on Capital Employed (ROCE %)

20.00%
15.00% 15.90%
7.59% 14.02%
10.00% 2.89% 7.06%
5.00%
0.00%
2006 2007
2008
2007
2008
Sainsbury
Tesco

3. Return on Total Assets (Chart 3)

Return on Total Assets (ROTA) is the primary driver of ROE (Walsh, 1996). This measures
the overall
rall profitability of the resources at the company’s disposal. In 2007, J Sainsbury
plc’s ROTA increased by 201.7%. However, in 2008 it dropped by 3.5%.

Tesco’s ROTA dropped 13% between 2007 and 2008.

 Chart 3 - Return on Total Assets (ROTA %)

10.67%
5.43% 5.24% 9.25%
1.80%

2006
2007
2008
2007
2008
Sainsbury
Tesco

4. Gross Profit Margin and Operating Profit Margins

Ma (Chart 4)
Gross Profit Margin offers a reasonable indication of the basic profitability of a business
(Vause, 2005). J Sainsbury Plc’s gross margin increased slightly by 2.9% between 2006
and 2007 and dropped by 17.7% in 2008. Operating Profit Margin
Margin increased by 111.9% in
2007 and dropped slightly in 2008 by 2%. Operating Profit Margin offers an assessment of
the profitability of a company after taking into consideration all the normal costs of
producing and supplying goods or services and the income from selling them (Vause,
2005).

In 2008, the Tesco Plc’s Gross Profit Margin and Operating Profit Margin dropped by 5.5%
and 5% respectively.

Chart 4 - Gross Profit and Operatiing Profit Margins

Gross Profit Margin (GP %) Operating Profit Margin (%)

8.12% 7.67%
6.64% 6.83% 6.21%
5.62% 5.90%
3.03% 2.97%
1.43%

2006 2007 2008 2007 2008

Sainsbury Tesco

B. Investment Management Ratios

1. Working Capital to Sales (Chart 5)
One very important balance--sheet
sheet concept is working capital (Merrill Lynch, 1997). A useful
indicator of the adequacy and consistent management of working capital (excluding cash
and investments) is to relate it to sales revenue (Vause, 2005). For J Sainsbury plc, this
initially
ly decreased in 2007 by 11.6% and then increased by 9.5% in 2008.

In 2008, this ratio decreased for Tesco by 5.1%.

 Chart 5 - Working Capital to Sales %

2006 2007 2008 2007 2008

Sainsbury Tesco

-7.12% -7.48%
-7.73% -7.81%
-8.63%

2. Total Asset Turnover (Chart 6)

The Total Asset Turnover (TAT) measures how well investment in assets is able to
generate sales. TAT in J Sainsbury plc was up by 0.53 times in 2007 but dropped by 0.03
times in 2008.

Tesco’s TAT dropped by 0.15 times in 2008.

Chart 6 - Total Asset Turnover (times)

2008 1.57
Tesco

2007 1.72

2008 1.76
Sainsbury

2007 1.79

2006 1.26

C. Financial Management Ratios

1. Liquidity ratios (Charts 7 and 8)
A simple guide to the ability of a company to meet its short-term obligations is the Current
ratio (Vause, 2005). Stricter methods include the Quick and Cash ratios. Sainsbury’s
Current ratio has dropped by 0.09 and 0.08 times, in 2007 and 2008 respectively. Quick
ratio has dropped by 0.18 and 0.13 times, in 2007 and 2008 respectively. However, Cash
ratio initially rose by 0.20 in 2007 and then dropped by 0.13 times in 2008.

For Tesco, Current ratio rose by 0.07 times in 2008. Quick ratio and Cash ratio increased
both increased by 0.08 times in 2008.

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 Chart 7 - Liquidity Ratios (Sainsbury)
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2006 2007 2008
Sainsbury
Current Ratio (times) 0.79 0.70 0.62
Quick Ratio (times) 0.67 0.49 0.36
Cash Ratio (times) 0.21 0.41 0.28

Chart 8 - Liquidity Ratios (Tesco)

0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2007 2008
Tesco
Current Ratio (times) 0.51 0.58
Quick Ratio (times) 0.27 0.35
Cash Ratio (times) 0.13 0.21

2. Operating Cash Flow ratio (Chart 9)

The Operating Cash Flow (OCF) ratio measures the proportion of short-term financial
obligations that can be settled from cash flows generated from a company’s operating
activities. Sainsbury’s OCF has increased by 93.8% and 22.6% in 2007 and 2008
respectively.

Tesco’s OCF fell by 7% in 2008.

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 Chart 9 - Operating Cash Flow Ratio (times)

0.60
0.31 0.38 0.43
0.40 0.16 0.40
0.20
0.00
2006 2007
2008
2007
2008
Sainsbury
Tesco

3. Debt-to-Equity
Equity Ratio (Chart 10)
The debt-to-equity
equity ratio measures the amount of debt capital relative to equity capital
(Robinson et. al., 2008).
). This ratio
ratio decreased by 7.6% in 2007 and further decreased by
21.2% in 2008 in Sainsbury.

Tesco’s debt-to-equity
equity ratio increased by 25.5% in 2008.

Chart 10 - Debt-to-Equity
Debt Ratio (%)
80.00% 61.31% 67.69%
56.63% 53.92%
60.00% 44.62%
40.00%
20.00%
0.00%
2006 2007 2008 2007 2008

Sainsbury Tesco

4. Interest Coverage Ratio (Chart 11)

Interest Cover Ratio measures how many times interest is earned (IRA,
(IRA, 2008). Sainsbury
increased its interest cover by over 3 times in 2007 as compared to 2006. This dropped by
0.82 times in 2008.

Tesco’s interest cover dropped by 0.77 times in 2008.

 Chart 11 - Interest Cover (times)

Sainsbury Tesco 2008

2007 11.91

2008 12.68
4.64
2007
5.46
2006 1.67

D. Shareholder Ratios
1. Dividend Payout Ratio (DPR) and Earnings
Earnings Retention Ratio (ERR) (Chart 12)
The Earnings Per Share (EPS) is one of the most widely quoted statistics when there is a
discussion of a company’s performance (Walsh, 1996). The Dividend Payout Ratio (DPR)
expresses the relationship between a company’s
company’s earnings and the cash paid out in
dividends, while the Earnings Retention Ratio (ERR) is the balance of earnings not paid out
as dividend.

Sainsbury’s reduced DPR by 75% in 2007 and increased it by 19.6% in 2008. ERR
increased by 144% and reduced by 20.4% in 2007 and 2008 respectively.

For Tesco, both DPR and ERR have not changed between 2007 and 2008.

Chart 12 - Breakdown of EPS into DPR and ERR

Dividend Payout Ratio (%) Earnings Retention Ratio (%)

211%
49% 39% 60% 60%

51% 61% 40% 40%

2006 2007 2008 2007 2008

-111%
Sainsbury Tesco
 2. Dividend Yield (DY) (Charts 13 and 14)
Dividend Yield links the current share price to the dividend received (Vause, 2005). DY in
Sainsbury dropped by 26.9% in 2007 and increased by 104% in 2008.

In Tesco, DY increased by 25.9% in 2008.

Chart 13 - Dividend Yield (%)

4.00%
3.50% 3.61%
3.00%
2.50% 2.42%
2.00%
1.77%
1.50%
1.00%
0.50%
0.00%
2006 2007 2008

Sainsbury

Chart 14 - Dividend Yield (%)

3.00%
2.72%
2.50%
2.16%
2.00%

1.50%

1.00%

0.50%

0.00%
2007 2008

Tesco

3. Earnings Yield (EY) and (Charts 15 and 16)

The Earnings Yield (EY) shows the relationship that EPS bears to the share price (Walsh,
1996). Sainsbury’s EY increased by 203.5% and 68.8% in 2007 and 2008 respectively.

In Tesco, EY increased by 25.8% in 2008.

20
 Chart 15 - Earnings Yield (%)
7.00%
6.00% 5.89%
5.00%
4.00%
3.49%
3.00%
2.00%
1.00% 1.15%

0.00%
2006 2007 2008

Sainsbury

Chart 16 - Earnings Yield (%)

8.00%
7.00% 6.73%
6.00%
5.00% 5.35%

4.00%
3.00%
2.00%
1.00%
0.00%
2007 2008

Tesco

3.1.2.2 Multivariate Analysis

Three multivariate predictor ratios were computed:
1. Altman’s Z-Score (Chart 17 and 18)
Z-score uses statistical techniques to predict a company's probability of failure. The Z-
Score attributable to Sainsbury increased by 1.93 points to 4.94 in 2007 and decreased by
1.1 points to 3.83 in 2008.

For Tesco, Z-Score decreased by 2.15 points to 5.20 in 2008.

21
6.00
4.93
5.00
3.83
4.00
3.00
3.00

2.00

1.00

0.00
2006 2007 2008

Sainsbury

Chart 17 Altman's Z-Score

8.00 7.35
7.00
6.00 5.20
5.00
4.00
3.00
2.00
1.00
0.00
2007 2008

Tesco

Chart 18 Altman's Z-Score

2. Sustainable Growth Rate (SGR) (Chart 19 and 20)

A sustainable growth rate (SGR) is the maximum growth rate that a company can sustain
without having to increase financial leverage. Sainsbury’s SGR increased by 326.5% in
2007 and then decreased by 29.4% in 2008.

For Tesco, SGR decreased slightly less than 0.01%.

3. Internal Growth Rate (IGR) (Chart 19 and 20)

An Internal Growth Rate is the maximum rate a firm can expand without outside sources of
funding (Harvey, 2004). This growth is generated by cash flows retained by company.
Sainsbury’s IGR has continued to grow from 2006 to 2008, increasing by 49.28% in 2007
and 2.54% in 2008.

For Tesco, IGR dropped slightly by 0.01%.

 Chart 19
Sustainable Growth Rate (%) Internal Growth Rate (%)
22.81% 23.39%

15.28%

3.67% 2.59%

-1.62%2006 2007 2008

Sainsbury

Chart 20
Sustainable Growth Rate (%) Internal Growth Rate (%)
22.95% 22.78%

10.70% 10.66%

2007 2008

Tesco

3.1.2.3 Common-Size Statements

Common-Size Statements contain items expressed as a percentage of a base figure,
useful for purposes of analysing trends and changing relationship among financial
statement items (Harvey, 2004).

23
 Table 3.3 - Common-Size Vertical Analysis of Group Balance Sheet
Sainsbury Sainsbury Sainsbury Tesco Tesco
2006 2007 2008 2007 2008
NON-CURRENT ASSETS 69.84% 79.74% 82.98% 81.55% 79.11%
CURRENT ASSETS 30.16% 20.26% 17.02% 18.45% 20.89%
TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00%

CAPITAL AND RESERVES 31.11% 45.42% 48.79% 42.61% 39.46%

NON-CURRENT LIABILITIES 31.16% 26.17% 25.46% 24.53% 26.52%
CURRENT LIABILITIES 37.73% 28.41% 25.75% 32.86% 34.02%
TOTAL EQUITY AND 100.00% 100.00% 100.00% 100.00% 100.00%
LIABILITIES

Table 3.4 - Common-Size Horizontal Analysis of Group Balance Sheet

Sainsbury Sainsbury Sainsbury Tesco Tesco
2006 2007 2008 2007 2008
NON-CURRENT ASSETS 100.00% 85.78% 109.91% 100.00% 117.96%
CURRENT ASSETS 100.00% 50.46% 88.76% 100.00% 137.67%
TOTAL ASSETS 100.00% 75.12% 105.63% 100.00% 121.59%

CAPITAL AND RESERVES 100.00% 109.68% 113.47% 100.00% 112.59%

NON-CURRENT LIABILITIES 100.00% 63.09% 102.75% 100.00% 131.48%
CURRENT LIABILITIES 100.00% 56.57% 95.74% 100.00% 125.90%
TOTAL EQUITY AND 100.00% 75.12% 105.63% 100.00% 121.59%
LIABILITIES

Table 3.5 - Common-Size Vertical Analysis of Group Income Statement

Sainsbury Sainsbury Sainsbury Tesco Tesco
2006 2007 2008 2007 2008
Revenue 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales -93.36% -93.17% -94.38% -91.88% -92.33%
Gross Profit 6.64% 6.83% 5.62% 8.12% 7.67%
Operating Profit 1.43% 3.03% 2.97% 6.21% 5.90%
Profit Before Taxation 0.65% 2.78% 2.69% 6.22% 5.93%
Profit for the financial 0.36% 1.89% 1.84% 4.45% 4.50%
year

Table 3.6 - Common-Size Horizontal Analysis of Group Income Statement

Sainsbury Sainsbury Sainsbury Tesco Tesco
2006 2007 2008 2007 2008
Revenue 100.00% 106.79% 104.00% 100.00% 110.92%
Cost of Sales 100.00% 106.57% 105.36% 100.00% 111.46%
Gross Profit 100.00% 109.84% 85.49% 100.00% 104.82%
Operating Profit 100.00% 227.07% 101.92% 100.00% 105.40%
Profit Before Taxation 100.00% 458.65% 100.42% 100.00% 105.65%
Profit for the financial 100.00% 558.62% 101.54% 100.00% 112.16%
year

24
 3.1.2.4 Cash Flow Analysis

Table 3.7 - Percentages Rules on Group Cash Flow Statement

Sainsbury Sainsbury Sainsbury Tesco Tesco
2006 2007 2008 2007 2008
Cash Inflows
Operating activities 25.24% 78.15% 78.71% 36.76% 27.37%
Investing Activities 5.50% 13.37% 17.90% 11.22% 8.49%
Financing activities 69.16% 7.63% 3.39% 52.02% 64.14%
Tax 0.10% 0.85% 0.00% 0.00% 0.00%
TOTAL CASH INFLOWS 100.00% 100.00% 100.00% 100.00% 100.00%

Cash Outflows
Investing activities -18.58% -77.40% -80.28% -35.61% -28.22%
Tax 0.00% 0.00% -5.05% -5.67% -2.31%
Financing activities -67.44% -7.72% -3.86% -52.71% -56.09%
Dividends -4.24% -13.18% -14.04% -4.86% -5.30%
Interest paid -5.15% -8.95% -9.70% -3.91% -2.74%
TOTAL CASH OUTFLOWS -95.40% -107.25% -112.93% - -94.65%
102.76%

Percentage Increase/-decrease in 4.60% -7.25% -12.93% -2.76% 5.35%

Cash

3.1.3 Limitations
The first limitation in analysing Sainsbury financial statements with its major competitor
(Tesco) was the non-coterminous year end of both companies. Sainsbury’s year end is
March while that of Tesco is February.

Second, no two companies are exactly alike in the nature of their operations (Weetman.
2003). Sainsbury is majorly a UK-based company while Tesco operates in several
countries. This makes the size of Tesco much more than that of Sainsbury.

Third, the effects of some complex transactions such as Share-Based payments and
pensions schemes on the Group Income Statement and Balance Sheets were ignored.

Fourth, the figures used in the analysis were not adjusted for inflation. The Consumer Price
Index (CPI) is the official measure of Inflation (Finance Blog, 2008). The CPI on a quarterly
based ranged between 1.9% and 3% between 2006 and 2008 (ONS, 2008).

Fifth, the analysis did not consider segmental and business unit performance; rather, all
computations were based on group results.

25
3.2 ANALYSIS OF RESULTS
3.2.1 Analysis of Business Performance
J Sainsbury plc’s business performance will be put into perspective in line with the
description of results above.

Corporate Strategy
The food retailing sector in the UK is highly competitive and Sainsbury has responded to
this by practically adopting a differentiation strategy. The different strategies implemented
reveal the fact that it is setting itself apart from its competitors. Firstly, the company has
performed well in its focus on the environment and this has been recognised by several
environmentally conscious organisations like Greenpeace.

Secondly, Sainsbury’s new product development strategy especially in the non-food

retailing sector and investing in several ‘own-label’ products and brands is ensuring its
position in the UK domestic market is consolidated.

Overall, Sainsbury has greatly moved towards forward vertical integration in order to
achieve the cost savings target it set in the MSGA Recovery plan.

Operational efficiency and competitive advantage

In order to accommodate the new products into its outlets without affecting existing shelf
space, a new space development strategy was put in place. This has enabled the company
to not only increase the number of retail outlets but also increase the total sales area in
both new and existing retail outlets. As the sales area increased it was very idealistic that
operational efficiency was to be pursued since more people were being attracted to the the
supermarkets. Operational efficiency was achieved through a focused value chain
improvement.

A value chain is a linked set of value-creating activities (Wheelen and Hunger, 2000). The
industry value-chain is external to the company and this determines how it achieves
competitive advantage. In terms of its industry value-chain, Sainsbury formed strategic
alliances with Land Securities plc and British land plc to improve on its retailing and
property development expertise which has been a source of competitive advantage over
the years.

Sainsbury’s internal value-chain of activities was overhauled in 2008 by expanding its depot
facilities, installing a new transport management system, reorganising its distribution
network and improving on self-checkout processes and technology.

26
 Overall Business Analysis
The different strategies and tactics the company implemented ensured the company
achieved significant improvement in sales growth, cost savings and profitability in the last
three years. As a result the company delivered on its ‘Making Sainsbury’s Great Again’
(MSGA) recovery plan, which was set in October 2004. The ‘Making Sainsbury’s Great
Again’ recovery programme is now complete, and all of the targets have been met or
surpassed (Samuel, 2008).

3.2.2 Analysis of Financial Performance

Univariate Analysis
Helfert (2001) posited that the financial performance of a business should be analysed from
the view points of managers, owners and creditors.

Appendix 2 shows all ratios computed for Sainsbury and Tesco. Because there are so
many variations on the methods of calculating ratios in accounting, it is extremely important
to practise a useful and informative layout (Weetman, 2003). The table below defines which
variables were used in arriving at the computed ratios.

1. Analysis of financial performance from management’s viewpoint

RATIOS DEFINITION OF WORDS 2006 2007 2008
Return on ܲ‫ݐ ݎ݋݂ ݐ݂݅݋ݎ‬ℎ݁ ݂݈݅݊ܽ݊ܿ݅ܽ ‫ݎܽ݁ݕ‬ 1.46% 7.45% 6.67%
Equity x 100%
ܶ‫ݕݐ݅ݑݍܧ ݈ܽݐ݋‬
(ROE %)
Return on ܱ‫ݐ݂݅݋ݎܲ ݃݊݅ݐܽݎ݁݌‬ 2.89% 7.59% 7.06%
Capital x 100%
ܶ‫ ݏݐ݁ݏݏܣ ݈ܽݐ݋‬− ‫ݏ݁݅ݐ݈ܾ݅݅ܽ݅ܮ ݐ݊݁ݎݎݑܥ‬
Employed
(ROCE
%)
Management
Operating

Return on ܱ‫ݐ݂݅݋ݎܲ ݃݊݅ݐܽݎ݁݌‬ 1.80% 5.43% 5.24%

Ratios

Total x 100%
ܶ‫ݏݐ݁ݏݏܣ ݈ܽݐ݋‬
Assets
(ROTA %)
Gross ‫ݐ݂݅݋ݎܲ ݏݏ݋ݎܩ‬ 6.64% 6.83% 5.62%
Profit x 100%
ܴ݁‫݁ݑ݊݁ݒ‬
Margin
(GP %)
Operating ܱ‫ݐ݂݅݋ݎܲ ݃݊݅ݐܽݎ݁݌‬ 1.43% 3.03% 2.97%
Profit x 100%
ܴ݁‫݁ݑ݊݁ݒ‬
Margin
(%)
Total ܴ݁‫݁ݑ݊݁ݒ‬ 1.26 1.79 1.76
Management

times
Investment

Asset ܶ‫ݏݐ݁ݏݏܣ ݈ܽݐ݋‬ times times times

Ratios

Turnover
(times)

Table 3.8 - Ratios of major interest to management

27
 The Return on Equity and the Return on Capital Employed both show an improvement in
2007 and 2008 compared to 2007, though it was slightly lower in 2008 compared to 2007.
The improvement was due to an improvement in the use of assets (as measured by Total
Asset Turnover) and the increase in Operating Profit Margin.
In 2008, Return on Capital Employed fell as a result of a larger fall in Gross Profit Margin
than by the slight fall in Operating Profit Margin and Total Asset Turnover. This fall in Gross
Profit Margin suggests that Sainsbury’s competitive pricing for its products and services is
properly synchronised with the rising costs of its inputs.

The drop in Return on Total Assets was not as much as both ROE and ROCE, which still
corroborates the fact that reducing margins and increasing costs of goods sold are
impacting these ratios. Sainsbury should try to control costs more effectively.

Overall, Sainsbury has performed relatively better than Tesco based on the six ratios.

2. Analysis of financial performance from creditors’ (long-term and short-term) viewpoint

RATIOS DEFINITION OF WORDS 2006 2007 2008

Current ‫ݏݐ݁ݏݏܣ ݐ݊݁ݎݎݑܥ‬ 0.79 0.70 0.62
Ratio ‫ݏ݁݅ݐ݈ܾ݅݅ܽ݅ܮ ݐ݊݁ݎݎݑܥ‬ times times times
Quick ‫ ݏݐ݁ݏݏܣ ݐ݊݁ݎݎݑܥ‬− ‫ݕݎ݋ݐ݊݁ݒ݊ܫ‬ 0.67 0.49 0.36
Ratio ‫ݏ݁݅ݐ݈ܾ݅݅ܽ݅ܮ ݐ݊݁ݎݎݑܥ‬ times times times
Cash ‫ݏܽܥ‬ℎ ܽ݊݀ ‫ݏܽܥ‬ℎ ‫ ݏݐ݈݊݁ܽݒ݅ݑݍܧ‬+ 0.21 0.41 0.28
Management

Ratio ܵℎ‫ݏݐ݊݁݉ݐݏ݁ݒ݊݅ ݉ݎ݁ݐݐݎ݋‬ times times times

Financial

Ratios

‫ݏ݁݅ݐ݈ܾ݅݅ܽ݅ܮ ݐ݊݁ݎݎݑܥ‬
Operating ‫ݏܽܥ‬ℎ ݃݁݊݁‫ݏ݊݋݅ݐܽݎ݁݌݋ ݉݋ݎ݂ ݀݁ݐܽݎ‬ 0.16 0.31 0.38
Cash ‫ݏ݁݅ݐ݈ܾ݅݅ܽ݅ܮ ݐ݊݁ݎݎݑܥ‬ times times times
Flow
Ratio
Debt-to- ‫ ݏ݃݊݅ݓ݋ݎݎ݋ܾ ݉ݎ݁ݐ݃݊݋ܮ‬+ ܵℎ‫ ݏ݃݊݅ݓ݋ݎݎ݋ܾ ݉ݎ݁ݐݐݎ݋‬61.31% 56.63% 44.62%
Equity ܶ‫ݕݐ݅ݑݍܧ ݈ܽݐ݋‬
Interest ܱ‫ ݐ݂݅݋ݎܲ ݃݊݅ݐܽݎ݁݌‬+ ‫݁݉݋ܿ݊ܫ ݁ܿ݊ܽ݊݅ܨ‬ 1.67 5.46 4.64
Cover ‫ݏݐݏ݋ܥ ݁ܿ݊ܽ݊݅ܨ‬
Working ‫ ݕݎ݋ݐ݊݁ݒ݊ܫ‬+ ܶ‫ݐ݋ ݁݀ܽݎ‬ℎ݁‫ ݏ݈ܾ݁ܽݒܴ݅݁ܿ݁ ݎ‬− -7.73% -8.63% -7.81%
Capital to ܶ‫ݐ݋ ݁݀ܽݎ‬ℎ݁‫ݏ݈ܾ݁ܽݕܽ݌ ݎ‬
Management

‫ ݔ‬100%
Investment

Sales % ܴ݁‫݁ݑ݊݁ݒ‬
Ratios

Table 3.9 - Ratios of major interest to creditors (long-term and short-term)

Overall, the short-term liquidity position of Sainsbury has fallen between 2006 and 2008 as
indicated by the current and quick ratio. This arose as a result of the increasing use of
negative working capital to finance sales albeit being the industry norm. Positively,

28
 operating cash flow has steadily increased since 2007 indicating that Sainsbury can offset
close to one-third of its short-term obligations from cash generated from operations.

For the long-term creditors, Sainsbury has attempted to reduce gearing which, as indicated
by a reducing debt-to-equity ratio, has meant an improving ability to settle finance costs as
indicated by an impressive improvement in the interest cover.

Sainsbury’s short-term liquidity is a little worse off than that of Tesco but its long-term
stability in terms of gearing is slightly better though Tesco has a better interest coverage.

3. Analysis of financial performance from Owners’ viewpoint

RATIOS DEFINITION OF WORDS 2006 2007 2008

Basic (ܽ‫)ݕݎݑܾݏ݊݅ܽܵ ݕܾ ݀݁ݐݑ݌݉݋ܿ ݏ‬ 3.80 19.20 19.60
Earnings per pence pence pence
Share
Dividend per (ܽ‫)ݕݎݑܾݏ݊݅ܽܵ ݕܾ ݀݁ݐݑ݌݉݋ܿ ݏ‬ 8.00 9.75 12.00
Share pence pence pence
Dividend ‫ܵ ݎ݁ܲ ݀݊݁݀݅ݒ݅ܦ‬ℎܽ‫݁ݎ‬ 211% 51% 61%
‫ ݔ‬100%
Shareholder

Payout Ratio ‫ܵ ݎ݁ܲ ݏ݃݊݅݊ݎܽܧ ܿ݅ݏܽܤ‬ℎܽ‫݁ݎ‬

(%)
Ratios

Dividend ‫ܵ ݎ݁ܲ ݏ݃݊݅݊ݎܽܧ ܿ݅ݏܽܤ‬ℎܽ‫݁ݎ‬ 0.48 1.97 1.63

Cover ‫ ݔ‬100% times times times
‫ܵ ݎ݁ܲ ݀݊݁݀݅ݒ݅ܦ‬ℎܽ‫݁ݎ‬
Earnings ‫ܵ ݎ݁ܲ ݏ݃݊݅݊ݎܽܧ ܿ݅ݏܽܤ‬ℎܽ‫݁ݎ‬ 1.15% 3.49% 5..89%
Yield (%) ‫ ݔ‬100%
ܻ݁ܽ‫݁ܿ݅ݎܲ ݐ݁݇ݎܽܯ ݀݊݁ݎ‬
Price-to- ܻ݁ܽ‫݁ܿ݅ݎܲ ݐ݁݇ݎܽܯ ݀݊݁ݎ‬ 87.04 28.65 16.98
earnings ‫ܵ ݎ݁ܲ ݏ݃݊݅݊ݎܽܧ ܿ݅ݏܽܤ‬ℎܽ‫݁ݎ‬
Ratio
Dividend ‫ܵ ݎ݁ܲ ݀݊݁݀݅ݒ݅ܦ‬ℎܽ‫݁ݎ‬ 2.42% 1.77% 3.61%
Yield (%) ‫ ݔ‬100%
ܻ݁ܽ‫݁ܿ݅ݎܲ ݐ݁݇ݎܽܯ ݀݊݁ݎ‬
Sustainable ܴ݁‫( ݔ ݕݐ݅ݑݍܧ ݊݋ ݊ݎݑݐ‬1 – ‫ )݋݅ݐܴܽ ݐݑ݋ݕܽܲ ݀݊݁݀݅ݒ݅ܦ‬-1.62% 3.67% 2.59%
Growth Rate
Predictor

Internal ܴ݁‫ݏ݃݊݅݊ݎܽܧ ݀݁݊݅ܽݐ‬ 15.28% 22.81% 23.39%

Ratios

Growth Rate ‫ ݔ‬100%

ܶ‫ݏݐ݁ݏݏܣ ݈ܽݐ݋‬

Altman See Appendix 2 3.00 4.93 3.83

Z-Score

Table 3.10 - Ratios of major interest to owners (shareholders)

Earnings per Share increased between 2006 and 2008, indicating a better profit
performance for shareholders. The price earnings ratio dropped significantly, indicating
dwindling confidence in the stock market about the ability to maintain this new level of
profit. A low P/E is not necessarily good, nor a high one bad, since market expectations
must be taken into account (Dunn, 2006).

The dividend cover has increased in 2007 and 2008 as against 2006 and is now more than
one, meaning there is more likelihood of maintaining the current level of dividends, since
29
Sainsbury has a favourable payout ratio. This increase in dividend cover is caused by a
higher proportional increase in earnings per share compared to dividend per share. The
dividend yield fell in 2007 and rose in 2008, despite the increased dividend per share,
caused by the impact of the market price which rose in 2007 and dropped again in 2008.
Sainsbury has a clean bill of health based on its Z-scores for the three years under
consideration. The Internal Growth Rate also indicates that the company can grow in size
to a level where further efficient use of assets would mean an increased return on
investment, though the Sustainable Growth Rate predicts that Sainsbury would need to
increase leverage if it is to grow by more than 4%.

Overall, Tesco is the better for it in terms of performance from the viewpoint of owners. This
might not be unconnected to the reason Sainsbury has tried to please its shareholders,
even by paying as much as 211% of its earnings in 2006.

4. Analysis of financial performance using common-size statements

Sainsbury has increased its investments in non-current assets, as a result of the new space
development strategy, between 2006 and 2008. This increase has been funded mainly by
equity which grew by 27% over the same period. The company has also relatively reduced
its non-current liabilities as well as its working capital requirements. The reverse is the case
for Tesco, which reduced investments in non-current assets, increased non-current
liabilities and working capital. Tesco’s equity relatively reduced between 2007 and 2008.

5. Analysis of financial performance using cash flow analysis

Weetman (2003) stated that any ratio analysis which seeks to interpret liquidity,
management performance or financial structure should be related to the information
provided by cash flow statement. Sainsbury’s cash position reduced all through from 2006
to 2008, even though it was able to increase cash generated from operations.

This was caused by the massive investment in property, plant and equipment coupled with
increasing dividend and interest payments in the years under review. Overall, Sainsbury’s
cash flow position was not as good as that of Tesco which has had an improvement in cash
flow position.

30
3.3 CONCLUSIONS
My project objectives have enabled me to examine several strategic business and financial
analysis tools and techniques which led to understanding Sainsbury’s strategic direction
and position.
As a result, I can conclude that Sainsbury’s:

operating decisions have yielded positive results as profitability has improved over the
years.

investment management decisions have been efficient in terms of use of assets though
in terms of the level of investments between non-current assets and working capital the
picture is mixed.

financing decisions have tended more to building up equity by reducing gearing.

dividend policies are liberal and favourable to shareholders notwithstanding declining
cash flow position.

cash flow position has declined and consequently the company might have to resort to
external finance to fund its “recovery to growth” plans.

On the whole, Sainsbury has performed above average as it has displayed an

understanding of its business environment by reengineering its value chain and taking
appropriate financial decisions in the face of stiff competition from its competitors.

By my conclusions, the answers to my research questions are stated thus:

a) Sainsbury has positioned itself as UK’s longest standing major food retailing chain and
differentiates itself on the bases of its range of fairly-priced products, a strong ethical
approach to business and continuous leadership and innovation. The result of which
puts it in number two position in the market.
b) The company has managed its operations and investments profitably and efficiently.
c) Sainsbury’s financing policies rely more on use of equity to fund its growth.
d) Sainsbury has implemented a steadily increasing dividend policy to improve
shareholder value.
e) Its cash flow position has not improved substantially.
f) The company’s “recovery to growth” plan may only be achieved if it raises additional
external finance.

31
3.4 RECOMMENDATIONS
I hereby recommend that Sainsbury should:

Continue the present strategy of the Board of Directors.

Implement a proactive succession planning to replace the current Chairman and the
Chief Executive.

Implement a global strategy and/or expansion programme to other major European and
Asian markets.

Raise substantial equity and/or debt to fund its growth plans.

32