J. Sainsbury Plc. Financial Management Case study

Outline:

 Introduction p2

 J. Sainsbury Financial performance analysis p3

 The importance of Qualitative factors p8

 Corporate governance p9

 References p11

 Bibliography p11

 Appendices p12

Introduction:

J. Sainsbury Plc. is a holding company composed of three main divisions; Sainsbury's Supermarkets Ltd., Sainsbury's Convenience Stores Ltd., and Sainsbury's Bank, and the group’s headquarters are located in the city of London. J. Sainsbury Plc. is one the largest retail companies in the U.K, as they stand in second position of the largest supermarkets’ chain in the country with a market share of 16.9%.( Sarah Butler, 2015) The company was founded in 1869 by John James Sainsbury with a single shop in London, and rose to be the first retail company in 1922. However, they were dethroned by Tesco and Asda, who took the first and second places respectively (Lynsey Barber,2015) ; they stayed third in market share until 2014 were they rose back to second place. (Ruddick Graham, 2014)

J. Sainsbury manages a sophisticated economic, social and environmental value chain, with 24 million customer transactions each week, which are delivered by 161,000 colleagues and over 2,000 direct suppliers located in over 55 countries. In addition to that, it is their financial services that are in charge of operating Sainsbury’s Bank, which is a joint venture involving J. Sainsbury and Bank of Scotland (Market Watch, 2006).

This report/analysis consists of three main parts. The first part is going to be an analysis of the financial performance of J. Sainsbury Plc. during the last 3 years, in addition to identifying the financial actions taken by said company during that same period and evaluating how mush were the financial actions effective. The second part is going to be a small evaluation of the importance of qualitative factors that financial analysts have to take into account when trying to evaluate the future financial performance of a company. Then last but not least, we are going to appraise the accuracy of the statement “corporate governance helps ensure achievement and retention of shareholders’ wealth”, using the case of J. Sainsbury Plc..

J. Sainsbury Financial performance analysis:

As mentioned in the introduction this first section aim to analyze the financial performance of J. Sainsbury Plc. during the last 3 years (2013, 2014, 2015), in addition to that it also aims to identify the financial actions taken by J. Sainsbury Plc. during that same period and to evaluate how mush were the financial actions effective. In order to do a proper financial performance analysis, there is a numbers of financial tools that one should absolutely take into consideration, otherwise the analysis would not be based of quantitative factual data. The financial tools to be used are the Income statements, the Balance Sheets, and financial ratios. (Alexander, 2001)

First by looking at the income statement we can easily deduce that the company revenues (Group sales) decreased from to 2014 to 2015, even though the sales increase in the previous period (2013 to 2014). In fact the group sales increased by 2.81% between 2013 and 2014 but decreased by 0.9% between 2014 and 2015. Even though technically speaking sales grew by 1.87% which is a good trend for this specific period, the fact that there was a slight decline in the second half of the period can indicate the start of a new trend, this will be more clarified in the following years. However we have to add that according the group’s 2015 Annual Report, in the financial performance notes section, note 3 clearly says that even though the income statement indicates a loss and not a profit, this does not really represent the group’s performance as certain items recognized in the reported loss or profit before tax can fluctuate a lot in each year making the reported earnings of the group very volatile, and this does not reflect the group’s performance, and according to their report it is more useful to consult the underlying performances (Appendix A4) (J. Sainsbury Plc. Annual Report 2015). We also learn from the income statements that most of the group’s revenues come from their retail sales as they constitute in average 99.58% of their sales, although it is clear that that ratio was in decline during that period ( refer to appendix A1).

In the income statement we can also see that the post-tax income from the group’s joint ventures decreased by 75% during these three years, moving from £ 24,000,000 to £28,000,000 to 6,000,000, meaning that one or some of the joint venture that the group is involved in are not performing well or in the worst case making losses, which pulls down the sum of their shares of the profit from the joint ventures. One of the most important joint ventures of J. Sainsbury Plc. group is the Sainsbury Bank. Sainsbury Bank is a joint venture between the group Sainsbury Plc. and Bank of Scotland, and up until 2014 J. Sainsbury Plc. had 50% of it, until they decided that they needed more control in order to increase the number of Bank customers and other various objectives. The transaction is supposed to take place according to a well set plan that spans over a period of 42 Months in order to move the Bank into what described as “flexible modern banking platform”. What is interesting is that J. Sainsbury Plc. mentioned in their website that the transaction will be funded by internal resources, which lead to believe that it is due to particular transaction that the profits from the share of J. Sainsbury Plc. in their joint ventures decreased dramatically in 2015 income statement in comparison with the previous years.

“Transaction will be funded from internal resources and is accretive to underlying EPS” (www.j-sainsbury.co.uk)

One additional reason J. Sainsbury Plc. chose to fully acquire Sainsbury Bank is that according to them it is going to be a highly efficient cash generator in the years to be. And if we add this to the fact according to a study done by Jason Cates in 2012, the group’s long term liabilities overtook the short term ones and were at 53.24% long term liabilities and 46.73% short term liabilities, and in their annual 2015 report the liabilities shown in the Balance sheet were 37.24% short term liabilities and 62.76% long term liabilities. On a corporate strategic level this means that the group is mainly aiming at long term goals, and they are going to need to generate cash in a much faster rate to be able to pay back these debts, which makes acquiring Sainsbury Bank, a Bank which they qualified as “Highly cash Generative in later years” (www.j-sainsbury.co.uk), more sensible.

Now let us get a look at J. Sainsbury Plc. financial ratios. Analyzing the Financial ratios of a group is going to provide us with very helpful data about the financial structure of the company. They are usually used in comparisons in order to highlight the financial situation or the financial performance of the company. These comparisons are often comparisons between different companies’ ratios, or comparisons within the same company but between past and current data in order to give any investor leverage to judge by himself and decide if a company is worth investing in. (Lofthouse, 2001) we also have to add that it is not obligatory to use all the ratios as using only the ones we have use for I perfectly fine.

We can group the financial ratios into multiple groups as each group cover a certain topic of the financial analysis. These topics are:

 Profitability

 Liquidity

 Gearing

 Investment ratio

Ratio 2015 2014 2013

ROCE 12% 12% 12%

GPM 5.08% 5.79% 5.47

NPM (0.34%) 4.21% 3.78%

To assess the profitability of the group we can use the following ratios:

Return on capital employed (ROCE), which shows efficiently are capitals employed in the company, in other words it shows how much profit is made from each Pound invested; the higher the ROCE is, the better. In the table above we can see that the return on capital employed ration (ROCE) stays unchanged at 12% during these three years, a trend that can be considered good, as we can at least say that the return is not in decline. Which can also mean that there is a certain stability in this company.

The Gross Profit Margin (GPM) is a financial Measure that shows how much of the revenues are left after we account for and take out the Cost of Goods Sold (COGS). There is no specific threshold for the Gross Profit Margin after which a company becomes more attractive more interesting. The