1

M004LON: Finance, Funding & Legislative

Frameworks for Success

TESCO PLC

PRESENTED By

STUDENT

SUBMISSION DATE: 20/12/2010

2

Table of Contents PAGE NO.

INTRODUCTION1.1FORMATION AND

HISTORY……………………………………………………………………….. 4

1.2OPERATIONS……………………………………………………………………………………………… 4

1.3STRATEGY…………………………………………………………………………………………………… 5

FINANCIALS1.4BALANCE SHEET

………………………………………………………………………………………… 6

1.5GROUP INCOME STATEMENT……………………………………………………………………. 8

1.6GROUP CASH FLOW STATEMENT………………………………………………………………. 10

ANALYSIS1.7BALANCE SHEET

…………………………………………………………………………………………. 12

1.8PROFIT AND LOSS ……………………………………………………………………………………….. 13

1.9RATIO………………………………………………………………………………………………………….. 14

1.10 PESTEL …………………………………………………………………………………………………………. 17

3

1.11 SWOT …………………………………………………………………………………………………………… 18

1.12 PORTER’S FIVE FORCES…………………………………………………………………………………. 19

ECONOMIC VALUE ADDED………………………………………….... 19

BALANCED SCORECARD……………………………………………….. 20

FUTURE EXPECTATIONS………………………………………………. 22

CONCLUSION………………………………………………………………… 23

BIBLIOGRAPHY…………………………………………………………….. 24

1.1 FORMATION AND HISTORY

Tesco plc is a global grocery and general merchandising retailer headquartered in Cheshunt, United Kingdom. Jack Cohen founded Tesco in 1919 by selling surplus groceries from a stall at Well Street Market, Hackney, in the East End of London. The brand first appeared in 1924. The name came about after Jack Cohen bought a shipment of tea from T.E. Stockwell. He made new labels using first three letters of supplier’s name (TES) and first two letters of his surname (CO), forming TESCO. First store opened in 1929 in Burnt Oak, Edgware, Middlesex and was floated on the London Stock Exchange in 1947 as Tesco Stores (Holdings) Limited.

1.2 OPERATIONS

Originally specialising in food and drink, it has diversified into areas such as clothing, electronics, financial services, telecom, home, health, car, dental and pet insurance, retailing and renting DVDs, CDs, music downloads, internet services and

4

software. It’s the third-largest retailer in the world measured by revenues (after Wal-Mart and Carrefour) and second-largest measured by profits (after Wal-Mart). It has stores in 14 countries across Asia, Europe and North America and is the grocery market leader in UK (having a market share of 30%) Malaysia and Thailand.

FIGURE 1: Share of Leading Players in UK Food Retail Market

Ref. (http://www.ivoryresearch.com/sample36.php)

1.3 STRATEGY

Tesco has a well-established and consistent strategy for growth. The rationale being to broaden the scope of business to enable it to deliver strong sustainable long-term growth by following customers into large expanding markets at home and new markets abroad. The strategy to diversify the business was laid down in 1997 and has been foundation of Tesco’s success in recent years.

The objectives of the strategy are:

• Be a successful international retailer

• Grow the core UK business

• Be as strong in non food sector as in the food sector

5

• Develop retailing services – such as Tesco Personal Finance, Telecoms and Tesco.com

• Put community at the heart of what they do.

In 1997 Tesco’s international business generated 1.8% of the Group’s profits and at the time Tesco had just entered the Retailing Services markets; today these parts of their business represent 22% and 16% profits respectively. Importantly, the strategy has given the business momentum to grow well through the economic downturn. By continuing to invest through the recession- in the customer offer, in infrastructure and in their own people- Tesco is now well placed to grow faster and improve shareholder returns as the global economic environment improves.

Ref: (http://ar2010.tescoplc.com/business-review/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/Full-Review.pdf)

Figure 2: Strategy

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/our-strategy.aspx)

2. FINANCIALS

2.1 BALANCE SHEET:

Balance sheet Layout |

28/02/2010mil GBP

12 monthsCons.

Unqualified

6

IFRS

Fixed Assets

Tangible Assets 24,203

Land & Buildings 20,685

Freehold Land

Leasehold Land

Fixtures & Fittings 0

Plant & Vehicles 0

Plant

Vehicles

Other Fixed Assets 3,518

Intangible Assets 4,177

Investments 5,878

Fixed Assets 34,258

Current Assets

Stock & W.I.P. 2,729

Stock

W.I.P.

Finished Goods 2,729

Trade Debtors

Bank & Deposits 2,819

Other Current Assets 4,306

Group Loans (asset) 2,727

Directors Loans (asset) 0

Other Debtors 1,236

Prepayments 337

Deferred Taxation 6

Investments 1,911

Current Assets 11,765

Current Liabilities

Trade Creditors -5,084

Short Term Loans & Overdrafts -1,571

Bank Overdrafts -575

Group Loans (short t.) -951

Director Loans (short t.) 0

Hire Purch. & Leas. (short t.) -45

Hire Purchase (short t.)

Leasing (short t.) -45

Other Short Term Loans 0

7

Total Other Current Liabilities -9,360

Corporation Tax -472

Dividends 0

Accruals & Def. Inc. (sh. t.) -1,815

Social Securities & V.A.T. -487

Other Current Liabilities -6,586

Current Liabilities -16,015

Net Current Assets (Liab.) -4,250

Net Tangible Assets (Liab.) 25,831

Working Capital -4,250

Total Assets 46,023

Total Assets less Cur. Liab. 30,008

Long Term Liabilities

Long Term Debt -11,744

Group Loans (long t.) 0

Director Loans (long t.) 0

Hire Purch. & Leas. (long t.) -164

Hire Purchase (long t.)

Leasing (long t.) -164

Other Long Term Loans -11,580

Total Other Long Term Liab. -776

Accruals & Def. Inc. (l. t.) 0

Other Long Term Liab. -776

Provisions for Other Liab. -967

Deferred Tax -795

Other Provisions -172

Pension Liabilities -1,840

Balance sheet Minorities -85

Long Term Liabilities -15,412

Total Assets less Liabilities 14,596

Shareholders’ Funds

Issued Capital 399

Ordinary Shares

Preference Shares

Other Shares

Total Reserves 14,197

Share Premium Account 4,801

Revaluation Reserves 0

8

Profit (Loss) Account 9,356

Other Reserves 40

Shareholders’ Funds 14,596

Ref: (https://fame2.bvdep.com/version-2010121/Report.ColumnsEdition.serv?editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64958&recordinternalid=64958&editedelements=nc&editedelementid=BALANCESHEET&returnservice=4&VolatileResolution=1366x680&display=ContentOnly&context=2Y2O600O5JB78YE&_cid=491#BALANCESHEET)

2.2 GROUP INCOME STATEMENT:

PARTICULARS 52 WEEKS 2010

£m

53 WEEKS 2009

£m

INCREASE (%)

Continuing operations

Revenue (sales excluding VAT)

Cost of sales

56,910

(52,303)

53,898

(49,713)

5.6

Gross profit

Administrative expenses

Profit arising on property-related items

4,607

(1,527)

377

4,185

(1,252)

236

10.1

Operating profit

Share of post-tax profits of JV’s & Associates

Finance income

Finance costs

3,457

33

265

(579)

3,169

110

116

(478)

9.1

Profit before tax

Taxation

3,176

(840)

2,917

(779)

8.9

Profit for the year 2,336 2,138 9.3

Attributable to:

9

Owners of the parent

Minority interests

2,327

9

2,133

5

Ref: (http://www.tescoplc.com/plc/ir/pres_results/results/r2010/2010-04-20/2010-04-20a.pdf)

Figure 3: Operating Profit

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-business.aspx)

2.3 GROUP CASH FLOW STATEMENT:

52 WEEKS 2010

£m

53 WEEKS 2009

£m

Cash flows from operating activities

Cash generated from operations

Interest paid

Corporation tax paid

5,947

(690)

(512)

4,978

(562)

(456)

Net cash from operating activities 4,745 3,960

10

Cash flows from investing activities

Acquisition of subsidiaries, net of cash acquired

Proceeds from sale of property, plant and equipment

Purchase of property, plant and equipment and investment property

Proceeds from sale of intangible assets

Purchase of intangible assets

Increase in loans to joint ventures

Investments in joint ventures and associates

Investments in short-term and other investments

Proceeds from sale of short-term investments

Dividends received

Interest received

(65)

1,820

(2,855)

4

(163)

(45)

(4)

(1,918)

1,233

35

81

(1,275)

994

(4,487)

-

(220)

(242)

(30)

(1,233)

360

69

90

Net cash used in investing activities (1,877) (5,974)

Cash flows from financing activities

Proceeds from issue of ordinary share capital

Increase in borrowings

Repayment of borrowings

Repayments of obligations under finance leases

Dividends paid

Dividends paid to minority interests

Own shares purchased

167

862

(3,601)

(41)

(968)

(2)

(24)

130

7,387

(2,733)

(18)

(883)

(3)

(265)

Net cash from financing activities (3,607) 3,615

Net (decrease)/increase in cash and cash equivalents (739) 1,601

11

Cash and cash equivalents at beginning of the year

Effect of foreign exchange rate changes

3,509

49

1,788

120

Cash and cash equivalents at the end of year 2,819 3,509

Ref: (http://www.tescoplc.com/plc/ir/pres_results/results/r2010/2010-04-20/2010-04-20a.pdf)

Figure 4: Cash Flows

Ref: (https://fame2.bvdep.com/version-2010126/CHART_EVOL.Edition.serv?editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&editedelementid=CHART_EVOLINSECTION&returnservice=2&context=35YQ600O5Q0FP8C&_cid=610#CHART_EVOLINSECTION)

3.1 BALANCE SHEET ANALYSIS

1. Tesco purchased Land & Buildings worth 876 million GBP and made investments worth 1049 million GBP in the last financial year, hence increasing its Fixed Assets by around 7% during the period and a whopping 70% from 28/02/2007. This rise shows that Tesco is willing to make huge capital expenses and seeing it from a going concern concept it is of immense importance that it continues to do so.

2. Current Assets dipped during the period by about 16%, still substantially higher than what they were before last financial year.

3. Current Liabilities decreased during the period by over 2000 million GBP which shows that Tesco is repaying its debts regularly. Tesco repaid 3601 million GBP borrowings in the current financial year.

4. Reserves increased by about 1654 million GBP.

12

Figure 5: Assets & Liabilities

Ref: (https://fame2.bvdep.com/version-2010126/EVOLINDICESCHART.Edition.serv?editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&editedelementid=EVOLINDICESCHARTINSECTION&returnservice=6&context=2TJQ600O5I78WN2&_cid=870#)

3.2 PROFIT AND LOSS ANALYSIS

1. Cost of Sales reduced during the current year relatively in comparison to the last year which boosted the profits by about 188£m.

2. Gross profit increased by over 10% which is a very healthy sign for Tesco.

3. The administration expenses during the period increased relatively when comparing to the last year mainly due to inflation i.e., rise in the overall price structure of the economy.

4. Finance income and Finance costs also increased in comparison to last year, finance income became more than twice of what it was in the previous year and finance costs increased by 21% approximately of last year’s figure.

13

5. Profit before and after taxes increased by around 9% each showing Tesco’s profit making ability.

6. Basic and Diluted Earnings Per Share increased from 27.14p to 29.33p and 26.96p to 29.19p respectively when almost every other firm was struggling to make profits.

Figure 6: Profit Chart

Ref: (https://fame2.bvdep.com/version-2010126/EVOLINDICESCHART.Edition.serv?editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&editedelementid=EVOLINDICESCHARTINSECTION&returnservice=6&context=2TJQ600O5I78WN2&_cid=870#EVOLINDICESCHARTINSECTION)

3.3 RATIO ANALYSIS

• Current Ratio: It is a liquidity ratio measuring company’s ability to pay short-term obligations. At present Tesco has a Current Ratio of 0.73 (<1) which is not a good sign for the company as it suggests that it would be unable to pay off its obligations if they came due at that point. Current Ratio = Current Assets / Current Liabilities.

14

Figure 7: Current ratio

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

• Return on Capital Employed: A ratio that indicates the efficiency and profitability of a company’s capital investments. Return on capital employed has shown a downward trend in the last four years, mainly because of the global recession. It has dropped down from 15.93% as on 28/02/2007 to 10.58% as on 28/02/2010.

ROCE = Earnings before interest and taxes / (Total Assets – Current Liabilities)

Figure 8: ROCE

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

• Return on shareholder’s fund: It is a measure of profit for the period which is available to the owner’s stake in a business. Return on shareholder’s fund dropped down from 25.25% as on 28/02/2007 to 21.76% as on 28/02/2010, reason being the economic downturn during the period.

15

However, it is expected to grow in the near future as the global economic conditions are on an upswing.

ROSF = [Net Profit after Tax and Preference Dividend / (Ordinary Share capital + Reserves)]*100

Figure 9: ROSF

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

Figure 10: Graph showing ROSF

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-business.aspx)

• Profit Margin: It is a profitability ratio which is calculated as net profits divided by sales. Tesco has maintained a steady profit ratio over the last few

16

years which is a healthy sign considering the economic conditions around the globe. Tesco had a Profit Margin of 5.58% during the previous year.

Profit Margin = [Net Profit / Sales] * 100 Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=PBRE600O5JB78SN&_cid=57)

Figure 11: Profit Margin

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

• Cash Flow Statement shows that Tesco invested heavily in short term and other investments and made huge purchases of properties and plants, hence the decrease in cash and cash equivalents during the year. During the previous two financial year’s cash and cash equivalents had showed an increasing trend though.

3.4 PESTEL ANALYSIS

17

PESTEL ‘Thing’ which may change

Frequency in how this will change (1-5)

Impact Positive or Negative (- or +)

Impact by dynamics (i.e., The significance/ importance of implication)

Importance or Impact/ Relevance – very high, high, medium, low, very low

Which area of an organizations finance is it likely to affect (B/S, P/L, C/F)

Political Factors

Involvement of various Governments

2 - High C/F, P/L, B/S

Economic Factors

Stock Market

Consumer Behaviour

Inflation

5

2

5

+

+

-

Very High

High

Very High

B/S

P/L

C/F, P/L, B/S

Social Factors

Immigration

Change in Fashion

1

4

-

+

Low

High

P/L

P/L

Technological Factors

A. Online Shopping

4 + High P/L

Environmental Factors

B. Environmentally friendly products

C. Transport network

3

3

+

-

Medium

Medium

P/L

P/L

18

Legal Factors

D. Taxes 2 - High C/F, P/L

Ref: (http://www.321books.co.uk/catalog/tesco/pestle-analysis.htm)

3.5 SWOT ANALYSIS

STRENGTH WEAKNESS OPPORTUNITIES THREATS

A. Third largest grocery Retail Company in the world.

B. Quality products at low prices.

C. Customer retention strategy.

A. Lack of geographic diversification.

B. High dependence on UK retail sector.

C. Product recalls.

A. Commercial network portfolio.

B. Popularity of Tesco.com.

C. Global expansion and diversification.

D. Food retail market segment.

A. Global financial crisis in UK.

B. Fierce competition in UK grocery market.

C. Decreasing income of people.

Ref: (http://www.ivoryresearch.com/sample36.php)

19

Figure 12: SWOT Analysis

Ref: (http://www.ivoryresearch.com/sample36.php)

3.6 PORTER’S FIVE FORCES ANANLYSIS

Threat of New Entrants

Power of Buyers Competitive Rivalries

Power of Suppliers

Threat of Substitutes

R R R R R

+

Threat of new competitors in the food industry is relatively low.

- Bargaining power fairly high.

-

Competition in grocery retail sector very high.

+ Bargaining power fairly low.

+ For food items- low.

+ Huge capital investments required.

- Switching cost very low. - Slow market

growth threatening leadership position.

+ Negotiations at low prices possible.

- For non food items- high.

+

Authorization from government, considerable amount of time and resources.

Ref: (http://www.ivoryresearch.com/sample36.php)

4. ECONOMIC VALUE ADDED

In corporate finance, EVA is an estimate of a firm’s economic profit- being value created in excess of the required return of the company’s shareholders- where EVA is profit earned by the firm less cost of financing the firm’s capital.

20

EVA = Net Operating Profit after tax – (Weighted Average Cost of Capital * Capital Employed)

During the financial year 2008-09 EVA by Tesco was approximately 1045 million GBP which proves that Tesco is a value driven company as it is providing its shareholders more than their expectations. Ref: (http://www.sooperarticles.com/finance-articles/accounting-articles/cost-capital-uk-companies-183857.html)

5. BALANCED SCORECARD

A strategic planning and management system used widely in businesses to align business activities to the vision and strategy of the organization and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan and David Norton as a performance measurement framework.

Ref: (http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx)

Tesco operates a Balanced Scorecard Approach to manage its business which is known internally within the group as “Steering Wheel”.

21

Figure 13: Steering Wheel

It provides a perfect base to the company for designing future strategies. It communicates strategy-aligned goals, manages strategic performance, monitors progress and measures success. Tesco’s values and priorities are embedded in this wheel through appropriate KPI’s. The picture above clearly shows that the main areas of focus are:

• Operations

• People

• Finance

• Customer

• Community

Benefits of using the Balanced Scorecard are:

• Reflects core aims and values

22

• Converts strategy into an effective governance mechanism

• Ensures alignment of employees to company’s strategic vision

• Increased transparency and better communication

• Simplifies strategic aim by creating a visual summary

Challenges that Tesco faces when using them are:

• Co-ordination across multiple functions

• Some indicators are not measurable e.g. innovative quotient of the organization.

Ref: (http://www.mbaknol.com/management-case-studies/tesco%E2%80%99s-%E2%80%98steering-wheel%E2%80%99-a-tool-for-strategic-value-creation-and-business-transformation/)

6. FUTURE EXPECTATIONS

Tesco is planning to nearly double its selling space in Central and Eastern parts of Europe in the next 5 years. It is also planning to quadruple its sales in China to 4 billion GBP a year in the next 5 years. Meanwhile, Charles Stanley analyst Sam Hart said he expects trading conditions in the UK food retail industry to remain "relatively benign" but that consumer demand should be "resilient in the face of austerity measures". He expects Tesco's international and retailing services divisions to be growth drivers, with the core UK business "acting as the 'cash cow' to fund growth in these areas".

Ref: (http://www.just-food.com/news/tesco-plans-to-double-selling-space_id113326.aspx)

23

(http://www.just-food.com/news/tesco-aims-to-quadruple-china-sales_id113305.aspx)

(http://www.just-food.com/news/analysts-focus-on-tescos-international-potential_id113497.aspx)

Figures 14 & 15

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-business.aspx)

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/for-a-new-decade.aspx)

Tesco improved its liquidity significantly during the year through strong cash generation, tight control of capex and working capital improvements due to better inventory management. Tesco plans to invest 3.5 billion GBP in capital expenditure this year which would make Tesco bigger than what it is at present.

24

7. CONCLUSION

We can say that over the past decade Tesco has transformed itself into a diverse international business and by following the consistent strategy laid down by the management it is well positioned for long term growth. Through diversification into new geographies, new product areas and new services, Tesco has developed a business for the future. Tesco is amongst the top five retailers in the world today both in terms of profit and in terms of revenue and is all set to become the leader in the retail market segment in the near future. Tesco needs to improve its Current Ratio. Ideally the Current Ratio should be 2 whereas Tesco presently has a Current Ratio of less than 1 which means that it cannot pay off its obligations if called upon to do the same at present. It is paying debts continuously and needs to continue doing the same to save the huge interest cost it expends. By making heavy capital expenditures it is showing to the world that Tesco is an ever expanding company and has set its goals higher than one anticipates.

Risk is an accepted part of doing business and the real challenge for any entity is to identify the principal risks it faces and to develop and monitor appropriate controls to counter the same. Tesco, being as huge as it is also faces such risks and is doing pretty well at present by identifying the risk management process in detail in the Corporate Governance section. To conclude it can be said that Tesco is an ever growing, ever expanding company and it should continue to serve the community and its people economically and in an environment friendly way in the future i.e., THE TESCO WAY.

8. BIBLIOGRAPHY

25

Ref: (http://www.bme.eu.com/news/tesco-recovery/)

List of References:

(http://www.bme.eu.com/news/tesco-recovery/)

(http://www.mbaknol.com/management-case-studies/tesco%E2%80%99s-%E2%80%98steering-wheel%E2%80%99-a-tool-for-strategic-value-creation-and-business-transformation/)

(http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-business.aspx)

26

(https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

http://en.wikipedia.org/wiki/Tesco

Information on Return on Capital Employed available at: http://www.investopedia.com/terms/r/roce.asp and

(https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

Information on Return on Shareholders Fund available at:

http://www.thefinanceowl.com/financial-ratios/rosf-ratio/ and

(https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

Information on Current Ratio available at:

http://www.investopedia.com/terms/c/currentratio.asp and

(https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=64957)

Information on Profit Margin available at:

http://www.investopedia.com/terms/p/profitmargin.asp and

(https://fame2.bvdep.com/version-2010126/Report.serv?seqnr=0&context=PBRE600O5JB78SN&_cid=57)

27

28

29