Accounting and Financial Analysis of UK Supermarkets

Term Paper , 2017 , 63 Pages , Grade: 1,7

Business economics - Accounting and Taxes

This report analyses the accounting policies and financial statements of the following six companies: Tesco PLC, J Sainsbury PLC, Wm Morrison Supermarkets PLC, Booker Group PLC, Ocado Group PLC, and Greggs PLC.They are all amongst the leading companies in the food industry of the United Kingdom (UK). The latest information is used to evaluate the companies’ performance during the accounting years 2012/13 and 2016/17 (last five years). Some financial information was adjusted in order to ensure a fair comparison between the companies, this will be explained later on.

Table of Contents

1 Introduction
1.1 Outline
1.2 Introduction of companies
1.3 Industry Analysis

2 Chosen Company: Greggs PLC
2.1 Investor Profile
2.2 S.W.O.T. Analysis

3 Accounting Analysis
3.1 Accounting Policies
Going Concern
Change in Accounting Policies
Accounting Terminology
3.2 Adjustments
3.3 Red Flag

4 Financial Analysis
4.1 Profitability
Gross Profit Margin
Operating Margin
Net Profit Margin
Return on Capital Employed (ROCE)
Return on Shareholders’ Funds (ROSF)
4.2 Liquidity
Current Ratio
4.3 Working Capital
Inventory Turnover
Receivables Days
Payables Days
Cash Conversion Cycle
4.4 Financial Structure
Gearing Ratio
Interest Cover
4.5 Investment
Earnings per Share (EPS)
Price/Earnings Ratio (P/E)

5 Conclusion and recommendations

Appendix

Reference List

List of Figures

Figure 1: Greggs PLC - Five-year share price chart

Figure 2: Greggs PLC - Dividend per share

Figure 3: Greggs PLC - Earnings per share

Figure 4: Gross profit margin

Figure 5: Operating margin

Figure 6: Net profit margin

Figure 7: Return on capital employed

Figure 8: Return on shareholders’ funds

Figure 9: Current ratio

Figure 10: Inventory turnover

Figure 11: Receivables days

Figure 12: Payables days

Figure 13: Cash conversion cycle

Figure 14: Gearing ratio

Figure 15: Interest cover

Figure 16: Earnings per share

Figure 17: Price/earnings ratio

List of Tables

Table 1: Greggs PLC - Short overview

Table 2: List of independent auditors

Table 3: Changes in accounting policies

Table 4: Useful economic life

Table 5: Adjustment items

Table 6: Profitability ratios for Greggs

Table 7: Liquidity ratios for Greggs

Table 8: Working capital ratios for Greggs

Table 9: Financial structure ratios for Greggs

Table 10: Investment ratios for Greggs

1 Introduction

1.1 Outline

This report analyses the accounting policies and financial statements of the following six companies: Tesco PLC, J Sainsbury PLC, Wm Morrison Supermarkets PLC, Booker Group PLC, Ocado Group PLC, and Greggs PLC. They are all amongst the leading companies in the food industry of the United Kingdom (UK). The latest information is used to evaluate the companies’ performance during the accounting years 2012/13 and 2016/17 (last five years). Some financial information was adjusted in order to ensure a fair comparison between the companies, this will be explained later on.

1.2 Introduction of companies

Tesco PLC (Source: Tesco PLC, 2017)

Tesco PLC was founded in 1919 at a market stall and opened their first supermarket in 1950. The company now has over 6800 supermarkets and 460,000 employees with headquarters in Welwyn Garden City, Hertfordshire, UK. Tesco is a multinational grocery retailer serving millions of customers every week in their stores and online. It is the third largest retailer in the world measured by profits and the ninth largest retailer in the world measured by revenues (History, 2017).

J Sainsbury PLC (Source: J Sainsbury PLC, 2017)

J Sainsbury PLC is the second largest chain of supermarkets in the UK. Offered products include food, clothing, general merchandise and financial services. The firm’s vision is to improve convenience, speed and flexibility via multiple channels and to make shopping easier for customers. With the acquisition of Argos and Habitat, Sainsbury’s also offers a wide selection of products across home, electrical, technology, toys, clothing and leisure products. Sainsbury’s Bank complements the business segments, offering accessible financial services products for its customers (Our vision, 2017).

WM Morrison Supermarkets PLC (Source: WM Morrison Supermarket PLC, 2016)

WM Morrison Supermarkets PLC is headquartered in Bradford, the United Kingdom, and listed on the LSE. Under the brand name of Morrisons, the company operates approximately 500 supermarket stores in Britain, complemented by an online store. Products are offered in the areas of meat, seafood, dairy, fruit and vegetables, deli, and bakery, among others. Morrison Supermarkets PLC is also involved in offering services such as investment, leasing and property management (Company History, 2017).

Booker Group PLC (Source: Booker Group PLC, 2017)

Booker Group PLC is the UK’s leading food wholesaler. The group comprises of Booker Wholesale, Makro, Booker Direct, and others. The company sells an extensive range of grocery, tobacco and alcoholic products as well as many other products. In September 2009, Booker Group opened their first business centre in Mumbai. Since then, the company continues to review growth options in India and looks forward to developing the Booker offer to become the best choice, price and service supplier (Business overview, 2017).

Ocado Group PLC (Source: Ocado Group PLC, 2016)

Jonathan Faiman, a former banker, founded Ocado Group in April 2000. Ocado had already been launched in January 2000 as a concept and started trading as a business in partnership with Waitrose in January 2002. Ocado's products include own brand groceries from the Waitrose supermarket chain as well as a selection of name brand groceries and other items, including flowers, toys and magazines (Ocado at a glance, 2017).

1.3 Industry Analysis

Tesco

When comparing the industry’s quick ratios, Tesco’ abilitiy of repaying their debt on time is quite decent. However, its figures are very high in the PE ratio and the gearing ratio, which means that it is mainly funded by long-term debt.

Sainsbury’s

Sainsbury’s operating margin as well as gross profit margin are below the industry average and Sainsbury's financial returns have not stabilized for the past five years. Further, in the case of the company's EPS, Sainsbury is not the best choice either as this figure fluctuates very strongly.

Morrisons

Morrisons’ inventory turnover is outstanding in the industry. This ensures the continuity of production and operation. It also shows the efficiency of the firm’s capital utilisation and its solvency. However, Morrisons’ dividend yield is below the industry average. This means that the investor receive low return in relation to their investment.

Booker

Booker has a high return on capital employed, which is favourable for investors. However, Booker has a very short cash conversion cycle, which may increase the risk of capital turnover, so Booker is not the best choice.

Ocado

Ocado’s PE ratio is the lowest of all companies in the industry in 2017. In the past five years, Ocado’s current ratio curve and quick ratio curve showed a significant downward trend. Moreover, the profitability is low and Ocado lacks the ability to repay short-term debt. Thus, the company is not suitable for investment.

2 Chosen Company: Greggs PLC

2.1 Investor Profile

Greggs PLC (Source: Greggs PLC, 2016)

Greggs PLC is the UK’s leading bakery food-on-the-go retailer. The business is mainly focused on serving fresh bakery products at accessible prices. With its own logistics operation, the company can deliver what their shops and customers need. Greggs’ shops are located all over the UK and in various locations such as retail parks, shopping centres, industrial buildings, and office parks. As of 2017, there are over 1,800 shops in the UK (Business model, 2017).

Figure 1: Greggs PLC - Five-year share price chart

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(Source: Greggs PLC - GRG, 2017)

Table 1: Greggs PLC - Short overview

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(Source: Greggs PLC - GRG, 2017)

Figure 2: Figure 3:

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Greggs PLC - Dividend per share Greggs PLC - Earnings per share

(Sources: Greggs PLC, 2013 - 2017)

2.2 S.W.O.T. Analysis

Strengths

Being the UK's leading bakery store with over 1,800 shops, Greggs serves millions of customers each week (Greggs SWOT Analysis, 2017). It can be found in various locations. This year, Greggs expanded its business to include drive-thru options. Thus, Greggs’ existing distribution and sales network is one of its major strengths. Besides that, Greggs is a brand with universal appeal and a solid market strategy. The company has been working very hard to make sure that shops are open when customers need them and that they are modern with attractive shopping environments. A third strength is the taste and quality of Greggs’ products. The company aims to improve the nutritional value of their products, using no artificial colours or trans-fats. The firm’s Balanced Choice range was recognized by the Institute of Grocery Distribution as having a positive impact on the health and wellness of customers (Greggs PLC, 2013).

Weaknesses

One of the weaknesses Greggs is facing is its future cost structure. Greggs is in a weak position because of growing assets and its value suggestion. It means that the requirement for change is increasing quickly. Besides that, due to the weak pound, Greggs’ ingredient prices are likely to rise which may result in increased cost pressure. Another weakness is the competitive market environment with many similar sales models. This means that Greggs does not have a unique product style and its trading method is easy to copy by competitors.

Opportunities

Today, people tend to be more concerned about their health than in the past, which is a huge opportunity for Greggs. To use this opportunity, they have recently launched a new gluten-free menu and continuously strive to develop their food offer to include a greater variety (Five Insights into the Greggs’ shopper, 2017). Additionally, they are currently expanding their business to cover more customer needs, with a target of more than 200 shops within the next fiscal year. Besides that, they are focusing on opening a drive-through shop to serve more customers on the road and to be able to make more profits. Moreover, to catch the trend of globalisation, they plan to provide more facilities by creating click-and-collect platform on the internet (Hobbs, 2017). To summarise all of the above, they have a large opportunity to keep growing in the future.

Threats

Greggs is the largest baked goods company in UK. However, the number of its branches is lower than competitors like Subway or Costa (Leading 25 retailers of baked products in the United Kingdom, 2016). Both of Greggs’ competitors also have plans to enlarge the outlets, which means revenue could be taken away from Greggs. Secondly, it may also face increased competition from larger super markets starting to run bakery shops. Lastly, the pound sterling has been weak for the past three years (XE Money Transfer, 2017). The raw material prices will therefore increase after the current contract terminates (Tighe, 2016).

3 Accounting Analysis

3.1 Accounting Policies

All companies adopt European rules and IAS regulation. Financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS), and the UK company law. Accounting policies have been applied to all evaluation periods, 2012-2017. According to auditor’s opinions, all companies have received clean audit reports. The independent auditors of each company are listed below.

Table 2: List of independent auditors

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(Source: All annual reports, 2013 - 2017)

Going Concern

Tesco: Deloitte queries about high liability issues to the director. Tesco’s management answers that the company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. The auditors confirm that Tesco have no material to add or draw attention to in respect of these matters.

They agreed with the directors’ adoption of the going concern basis of accounting and they did not identify any such material uncertainties.

Sainsbury’s: There is the risk of manipulation of revenue recognition’s records. The auditors worked on the manual adjustment that is made to revenue and used computer aided analytics. Another concern was that Sainsbury Bank uses a different auditor, so the audit strategy could not cover this specific area and Ernst and Young were only able to check the results of other work.

Morrisons: The Directors have considered the suitability of the going concern basis of preparation of the financial statements taking into account the firm’s current and projected performance.

Booker: The going concern at Booker is adequate accounting records have not been kept properly by the parent company or returns adequate for their audit have not been acknowledged from the branches.

Ocado: The going concern basis believes that the group has adequate resources to remain in operation.

Greggs: The operational and investment plans for the next twelve months could affect Gregg’s liquidity. The going concern could possibly impact its future performance. The accounts continue to be prepared on a going concern basis.

Change in Accounting Policies

Since 2016, the following changes in accounting standards have been distributed and applied by the group’s financial statements for the first time. However, they have no effect on the financial information and preparation process.

Table 3: Changes in accounting policies

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(Source: Tesco PLC and Booker Group PLC, 2017)

Accounting Terminology

Revenue and Revenue Recognition

Revenue consists of sales through retail outlets, online sales, interest receivable, fees and commissions. It comprises the fair value of the consideration received or receivable for the sales of goods and services. The recognition is made when goods are transferred to the buyer and it can be measured reliably. For financial services, it will be recognised on completion of service provided (amortisation is applied during the period).

Cost of Sales

Cost of sales consists of all cost that are directly attributable to the sales, including operating expenses such as transportation costs and all the costs of the trading outlets.

Inventories

Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price. Cost is built on either the weighted average principle or the first-in first-out (FIFO) basis and includes distribution as well as certain warehousing costs. The cost of inventories involves expenditures incurred in acquiring the inventories and direct production labour costs.

Exceptional items

Exceptional items are described as items of income and expenditure, which are unusual in normal operations and have a high significance, which requires separate disclosure on the face of the income statement. This includes gain on disposal of subsidiaries, as revealed on the face of the income statement to show the underlying profits.

Property, plant and equipment

Property, plant and equipment of all companies are stated at historical cost less accumulated depreciation and any impairment losses. Any increase is recognised on the statement of comprehensive income. Depreciations of all companies are charged on the straight-line basis to its residual value over its anticipated useful economic life. Companies recognise property, plant and equipment in the profit and loss account and cash flow statement once the properties have been sold. The depreciation rates are applied as depicted in Table 4.

Table 4: Useful economic life

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(Source: All annual reports, 2013 - 2017)

Leases

Payments under operating leases are recognised in the income statement on a straight-line basis over the lease term. Where a lease has a minimum fixed increase, the total minimum lease payments are spread over the lease term. The total amount payable over the life of the lease remains unchanged but the timing of the income statement charge relative to the lease payments changes.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, cash at bank, call deposits with maturity of three months or less, and bank overdrafts repayable on demand. The carrying amount of these assets approximates to their fair value.

Impairment

Assets with unlimited useful economic life are not subject to repayment but subject to test for impairment annually. The key judgements in assessing the recoverable amount for assets are determining remaining useful economic live or how market participants would price them. Assets subject to amortisation are reviewed for impairment when there is an indication that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.

Trade and Other Receivables

Trade and other receivables are originally recorded at fair value and subsequently at amortised cost using the effective interest method, less provision for impairment.

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• College: University of Strathclyde (Business School)
• Course: Accounting for Financial Analysis
• Grade: 1,7
• Author: Sabrina Schleimer (Author)
• Publication Year: 2017
• Pages: 63
• Catalog Number: V437644
• ISBN (eBook): 9783668779037
• ISBN (Book): 9783668779044
• Language: English
• Tags: Financial Analysis, Accounting Analysis, Ratio Analysis, Ratio Analyse, Financial Report, Annual Report Analysis, Annual Report, Interpreting Financial Reports, Accounting Analyse, Supermarkets, Supermärkte, Grocery industry