The financial management policies of Sainsburys

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Report to critically evaluate the Financial Management policies and practices of J Sainsbury plc over the last five years. including gearing & dividend decisions, investment & performance appraisal and cost of capital subjects. J. Sainsbury plc was established in 1869 by John James and Mary Ann Sainsbury. It is established as Britain’s oldest food retailer. It comprises two divisions – Retailing, by way of its supermarkets and smaller convenience stores, together with its financial services, Sainsbury’s Bank. It aims to provide high quality products, at good value with an excellent standard of service. It is the third largest grocery chain in the UK behind Tesco and Asda/Wal-Mart. [1] The J. Sainsbury's food retail area serves over 16 million customers a week by way of a total 788 stores and an internet-based home delivery service. The financial services area of Sainsbury's Bank, offers a variety of packages including life insurance, saver accounts, credit cards and travel insurance to name a few. In October 2004 the supermarket giant was suffering the consequences of the increasing success of its competitors and it responded by announcing a dramatic recovery plan which would serve to lead it out of the spiraling losses the company was experiencing. Still reeling from the impact of late 1990’s BSE financial implications where the stores lost out over two million on fresh beef alone.[2] The Making Sainsbury’s Great Again strategy served to increase their overall profits by over 200 million before tax in just over one year.[3] Before floundering again two years later under speculation of an impending takeover. A fiscal breakdown of the procedures between 2003 and 2008 demonstrates the financial narrative of a company experiencing highs and lows in a competitive environment, maintaining its significant profile and diversifying its options. 2003-2005 Following on from 2002 and a year in which sales growth increased profits and encouraged the operational gearing, Sainsbury Shareholders’ funds increased by £155 million to £5,003 million, with net debt increasing by £248million. Public confidence had been gained but severe losses were still being documented. The company also found themselves having to increase their borrowing and extended their loans by an additional three and a half years. The overall Group gearing, or Net debt divided by total equity, rose to 28% with group capital rising from 11.1 % to 11.5%. This will no doubt be a reflection of the number of investments that the Sainsbury’s group made during this year.[4] The company Directors recommended the payment of a final dividend of 11.36 pence per share, at an increase of 0.54 pence from 2002 and a total dividend for the year ending 2003 of 15.58 pence per share, complimenting the increase in the number of shareholders that year. This total also reflected the company’s aim to encourage profit growth in 2004. In terms of the groups investments during these two years the one million pound investment it had made in the Homebase stores was sold. The final disposal of this investment made the company a total profit of around £61 million, after taking into account any liabilities following the sale of the partner business in 2001which boosted the profits for the group noticeably in 2003.[5] The figures below illustrate the differences in terms of the increased investments and total debt that the company experienced over one year.[6] 2003 2002 Cash and current asset investments 659 386 Debt (2,063) (1,542) Fixed asset investments Group Company 2003 2002 2003 2002 Shares in group undertakings (note 16) – – 7,661 6,227 Joint ventures (note 17) 9 44 6 33 Own shares at cost1 86 88 – – Other unlisted investments at cost 17 42 – 25 By the end of 2003 Sainsbury’s were in trouble and fighting to maintain their positioning amongst the other major chains. In July 2003 Asda gained 17% of the market share. Sainsbury’s slipped from a position of 17.1% of the market share to just 16.2%. Following the merger with Wal-Mart, Asda proceeded to overtake Sainsbury’s as the second largest supermarket in the UK. [7] In 2004 it was determined that an increase in profits was needed urgently through sales and it was agreed that in order to meet these targets group managers would be provided with financial incentives. Consequently a share incentive scheme was initiated for all senior managers within Sainsbury’s plc. Performance of these managers would be assessed over a period of four years and only when all targets had been met would the scheme be awarded.[8] Although the scheme encouraged increased and improved working practice it did look to the media like the Sainsbury’s group were floundering, with a public announcement that acknowledged the weaknesses that existed within the company. What followed was a continued drive to invest and increase performance. Their 2005 annual report stresses the importance attached to investment with the creation of a specialist web site designed to provide information on current investors in addition to attracting new ones.[9] This 2005 report also outlines the Performance indicators for 2004 and 2005 for Sainsbury’s initiatives nationwide. In terms of offering new provision to its customers as part of the ongoing attempts to raise their profile the group launched its Wheel of Health campaign to encourage shoppers to think about the healthier options where eating is concerned and an astonishing 250,000 children took part in their Taste of Success initiative. This programme had the aim of assisting young people in a bid to encourage learning about food and nutrition. Running in partnership with the British Nutrition Foundation and the Design & Technology Association, curriculum courses around food technology were built into the scheme which hosted food awards and awareness training for teachers across the UK. Efforts were made to engage more with the community and align the company to the needs of assisting with regeneration across the country. It was an excellent attempt at active inclusivity and would have served to improve their image at the time significantly. Local Heroes awards were given to colleagues who demonstrated acts of courage, assistance or excellence within their communities, participating once again in the Investors in People scheme and reaching out to their own staff for their knowledge input and consultation around the way in which the business operates overall. Sainsbury’s also became heavily involved with Comic Relief activities, raising seven million pounds throughout its stores for the charity and developing a vouchers for school campaign to support schools buying sports equipment. It seems that Sainsbury’s had a stake in everything in 2005 and was actively playing its part for the environment by reducing packaging significantly, reducing its CO2 emissions and introducing biodegradable methods for its waste produce. During this year the company headed up the Dow Jones Sustainability Indices and proved themselves to be the only retailer in the UK to appear in the Global 100 list of sustainable corporations. In 2005 they also took the award for Organic Supermarket of the Year.[10] Looking at the overall Capital between 2003 and 2005 the company argued that capital was in decline in 2003 due to the fact that the Easter holidays were much earlier than usual and a significant amount of new lines were being introduced. [11] Group capital expenditure for the year amounted to 1,197 million, compared to 1,159 million the previous year. This increase can also be attributed to the variety of new business transformation concepts. Essentially higher levels of spending had been necessary to adopt innovative activities for all stores to participate in across the UK. During this year Sainsbury’s bought up a number of additional retail units acquired from the newly liquidated Ames Department stores. These needed financial support over the next couple of years in terms of refurbishment and conversion into new Sainsbury’s supermarket stores. By 2004 capital expenditure was reducing and the company was seeing the signs of improved cash flow, additionally supported by lower dividend payments.[12]. In 2004/05 Capital expenditure dropped to around £500 million. Throughout 2004/05 Sainsbury’s integrated an energy savings programme across all of its stores and offices with a spend of over £14million working in partnership with npower[13] 2006 to 2008 By 2006 Sainsbury’s recovery plan was beginning to demonstrate a real difference. In 2005 it had set itself a target of £2.5 billion in sales over a three year period. There were vast improvements in the retail operating profit margins, demonstrable by a 14.3% operating profit growth recorded for 2005/06. By 2006 they were over half way to achieving their £2.5 billion sales target. Their operational gearing had improved and risen considerably. During November 2006 Citigroup were predicting an increase of 64% in their overall profits before tax to reach £193 million. Shares in Sainsbury’s also rose to all time high in eight years, to a staggering 420p.[14] This overwhelming continued improvement in operational gearing can be attributed to greater sales and a reduction in costs. For example the group managed to make significant savings in labour and IT during this period.[15] This resulted in their ability to demonstrate higher investment in the overall quality of price and product. Between 2005 and 2006 a final dividend of 5.85p per share was announced. By 2007 a final dividend of 7.35 pence per share was proposed. [16]Once again illustrating the continued economic strength of the company over a comparative short space of time. The table below illustrates the comparative performance indicators for Sainsbury’s between 2005 and 2006[17]
Continuing operations 2006 2005
Sales (inc VAT) £17,317m £16,364m
Sales (ex VAT) £16,061m £15,202m
Underlying operating profit £342m £325m
Underlying profit before tax £267m £238m
Profit/(loss) before tax £104m £(238)m
Profit/(loss) after tax £58m £(187)m
Underlying earnings per share 10.50p 8.30p
Basic earnings/(losses) per share 3.80p (17.40p)
Proposed dividend per share 8.00p 7.80p
What is immediately obvious here are the increased levels of profit and the tremendous rise in value against Sainsbury’s shares. As mentioned previously the new stores made a tremendous contribution to the noticeable growth in sales, including the introduction of 14 new supermarkets and 20 new metro convenience stores. In 2006 The Sainsbury’s Group made other investments by way of completing nine extensions, 28 refurbishments, with a total 94 refurbishments and conversions of its convenience stores overall[18]. By 2005/06 the effects of their Making Sainsbury’s Great strategy were becoming very apparent. Around this time the retail industry were however experiencing the negative effects of financial increases across the UK placed upon rent, rates and wages. In addition many energy supply companies were gradually introducing their higher costs and Sainsbury’s estimated their energy expenses to total around £55 million by the end of 2007.[19] In 2005 Sainsbury’s owned 455 supermarkets. In 2006 they had targeted and additional 131 stores to invest in and refurbished 37 of these by March. They extended ten stores and acquired nine disbanded Safeway stores from Morrison’s in this same year. These ex-Morrison’s stores provided Sainsbury’s with around a 20% increase in overall sales. This demonstrates their ability to penetrate new locations successfully. During 2006 the group also embarked on an enhancement programme for their online home delivery service. As a consequence they received a sales increase of over 25% from this market.[20] 2005 witnessed another significant move by Sainsbury’s to assist with their recovery programme, when they decided to terminate their IT outsourced contract with company Accenture. In 2000 Sainsbury’s had signed a contract worth over £1.7 billion, scheduled to continue for seven years. In 2003 this was reviewed and extended to 2010. In the meantime Sainsbury’s decided to invest in its own IT systems and made the move towards developing their own in-house systems. This decision also followed in the wake of the Accenture infrastructures failing to adequately support the needs of the company and costing Sainsbury’s at one point £500 million in supply chain and IT assets. At the time Chief Executive Justin King responded publically that ‘The IT cost is a greater proportion of sales than they were three years ago’. [21] Dropping the contract and focusing on an in-house infrastructure in 2005 enabled Sainsbury’s to recoup some of it’s losses and the drain in spend that Accenture were taking from the company each year Capital expenditure reduced in 2006 to £525 million, a sharp decrease from the previous financial year where capital expenditure had reached a staggering £901 million. This can however largely be accounted for as the increase had included Sainsbury’s new investments in the ex-Morrison’s stores and the balance of this was significantly outweighed by the resulting increase in sales.[22] 2007 witnessed another sharp increase in capital by £212 million on the previous year and can mostly be attributed to the cost of refurbishment and extensions to existing stores.[23] Throughout 2006 and 2007 Sainsbury’s had begun talks with the Qatari based investment fund, Delta Two, with regard to a possible takeover and a proposed bid amounting to £10.6 billion. The bid was quashed finally at the end of 2007; as a result of the effects of the global credit crunch, but not without its consequences. The public and investors had panicked and lost confidence in the Sainsbury group and share prices plummeted by 20%, impacting on the company’s overall market value which reduced by £1.8 billion.[24] Delta Two remain in possession of 25% ownership of the group (the Sainsbury family hold 18%) and would be at liberty to present a new offer in light of the fact that six months have elapsed since their last bid failed. It is unlikely to consider a new takeover bid, in terms of the Sainsbury group refusing to back down against their offer and the Qatari’s inability to negotiate, but the likelihood of some future takeover is not completely improbable, considering this particular deal became so near to closure and received such immense media attention. Brian Revell of Unite, which is Britain's largest union consisting of 20,000 members at Sainsbury's declared the failed takeover bid to be a positive move for the supermarket and looks forward to "a period of stability and business as usual". In contrast Revell has stated that there remain issues across the group which are still not resolved. "We are aware that significant Sainsbury's shareholders have designs on splitting the company's retail and property interests. Such a split would not be good news in our judgment and we would urge the board to resist the temptation." And other investors such as Robert Tchenguiz whose property empire owns a 10% stake in Sainsbury's is continually lobbying the board to release the £8 billion value of Sainsbury’s, in order to re-invest in a significant property enterprise. [25]The company’s most recent announcements to begin moving more resources into non-food initiatives, may see a more gradual shift into different, more varied opportunistic markets such as this. Similarly only six months ago Sainsbury’s announced their new investments of £273 million into the joint venture property enterprise British Land. 2008 has marked the end of the company’s Making Sainsbury’s Great Again strategy, launched in 2004 at the height of their financial difficulties and struggle to maintain their profile. This recovery plan had revolved around improving customer incentives and operational efficiency in order to increase sales and profit enhancement. The original sales target set by the group in 2004 had been an agreed £2.5 billion. With sales of £2.7 billion announced in March of this year the supermarket giant has managed to exceed their target, with profits also significantly increasing by 28.4% before tax. A final dividend of 9.00 pence per share agreed in 2008 raises the year end dividend to 12.00 pence. This demonstrates an increase of 23.1 per cent compared to 2007.[26] However the Financial Times income statement for Sainsbury’s confirms that Year on year since 2004 little progress has been made in their total net income which has risen from 325.00m to just 329.00m. What is apparent is the growth in revenue by 4.00% during this period which can be attributed to the increase in the cost of goods sold as a percentage of their sales. Cash flow margins from these figures also illustrate considerable losses in cash reserves for 2008. This is probably accountable by way of the 791million the company spent on investments.[27] It was announced at a Food and Grocery conference earlier this year that Sainsbury’s will now take forward a new strategy, following on from the success of Making Sainsbury’s Great Again. The new From Recovery to Growth plan heralds s the start of another three year initiative that will anticipate a sales growth of £3.5 billion. Around £15 million will be invested in the project.This latest strategy will see Sainsbury’s focusing on new business opportunities, improving their online home delivery service and diversifying its products to expand further into the non-foods market.[28] Conclusion Sainsbury’s has responded to a variety of financial challenges over the past five years, dealing with the threat of stronger competition, a fluctuating economy which has influenced UK shopping trends and beaten back the threat of takeover and possible insolvency. In 2005 the sales figures, profit losses and ever decreasing share prices were presenting a bleak picture for the company. A massive recovery plan, expansion of its stores and nationwide initiatives and new partnerships enabled the company to recuperate its losses and generate a huge increase in sales. Early measures taken to dramatically cut the costs of it’s IT outsourcing in 2005 also contributed to the decrease in unnecessary investments. Together with their shrewd publicity campaigns led by the popular celebrity chef Jamie Oliver, Sainsbury’s used a number of combined profile raising and financial initiatives in order to deliver a complete economic turnaround. In 2008 Sainsbury’s total retail sales including VAT currently stand at 19,287 million, an increase on their previous year from 18,227 million. And a considerable improvement on their sales figures recorded for 2005 at 16,354 million. Since 2005 a steady year on year rise has amounted to a total increase in sales of just under £300 million. Similarly their profits have soared. Profit before tax in 2008 confirms a 28.4% rise at £488 million. Precisely £108 million compared to 2007. Profits in 2006 were recorded at £108 million. This illustrates an overwhelming profit increase of £380 million for Sainsbury’s over just two years. Like-for-like sales, excluding fuel, has risen 3.9 per cent. The group has recorded 13 consecutive quarters of like-for-like growth. Sales, cost cutting and profit targets under this programme have all been exceeded in accordance with the Making Sainsbury’s Great Again strategy. In the face of continued speculation regarding the global economy and less disposable income, Sainsbury’s Chief Executive, Justin King has acknowledged the ongoing worries regarding consumer spend across all economies, declaring Sainsbury’s to be ‘clearly under pressure’, expecting the market to continue to be ‘intensely competitive’. He has also positively indicated that ‘people eat at home more rather than spending money on visiting restaurants.’ [29] Which will obviously falls in favour of the retail food market. Sainsbury's has lost some of its share in the market recently and customers have been turning to cheaper supermarkets. In response the company launched their ‘Feed your family for a fiver' campaign earlier in the year, championed once again by Jamie Oliver. The scheme seeks to provide customers with a range of healthy, fresh and tasty meal options for four people at a budget of £5 or under. Another interesting point to note is that Justin King as declared food price inflation to exist at 2% with regard to Sainsbury’s supermarkets, whereas the Office for National Statistics quotes the figure to be 6.6%. Time will only tell how Sainsbury’s fair the recent storm involving the impact of the credit crunch. Sainsbury shares have also dramatically recovered after decreasing to 320p in March this year. But overall the company’s high volume of sales and their cost efficiencies will help to ease any impact of investment in price and new salary increases. Primarily Sainsbury’s has fought to focus on providing for the specific needs of the customer over the past few years and has succeeded in benefiting from those objectives. 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S.: Island Press Walsh, F (2007), ‘Sainsbury’s: a history in Pictures’, The Guardian newspaper Ibaraki, T, Nonobe, K, Yagiura, M (2005) Metaheuristics: Progress as Real Problem Solvers: Springer Wildman, M (1998) The BSE Inquiry / Statement No 166, J Sainsbury plc (2008), Flex News J Sainsbury plc: Three-Year Targets Exceeded http://www.flex-news-food.com/pages/16427/Sainsbury/j-sainsbury-plc-three-year-targets-exceeded.html J.Sainsbury plc (2003), Annual Report and Financial Statements http://www.jsainsburys.co.uk/files/reports/ar2003/pdf/annual_report.pdf, Date accessed, 11/09/08 J.Sainsbury plc: Investors Report: Company News (2004) http://www.jsainsburys.co.uk/index.asp?PageID=418&news_filter=all&Year=2004&NewsID=489, Date accessed 11, 09, 08 J.Sainsbury plc, Company news (2005), http://www.jsainsbury.com/index.asp?PageID=322&subsection=news_releases&Year=2005&NewsID=531, Date accessed 10/09/08 J.Sainsbury plc, Corporate Responsibility Report (2005) http://www.j-sainsbury.com/files/reports/cr2005/index.asp?pageid=22, Date accessed 10/09/08 J.Sainsbury plc: Annual Report (2005) http://www.jsainsburys.co.uk/files/reports/cr2005/files/pdf/report.pdf Date accessed 08/09/08 J.Sainsbury plc: Annual Report (2006) http://www.j-sainsbury.com/ar06/overview/groupperformance.shtml, Date accessed 09/09/08 J.Sainsbury plc: Chief Executive’s Operating Review, Annual Report (2006) http://www.j-sainsbury.com/ar06/ceor/ceor10.shtml, Date accessed 09/09/08 J.Sainsbury plc: Full Financials, Annual Report (2006) http://www.j-sainsbury.com/ar06/fullfinancials/summary9.shtml, Date accessed 10/09/08 J.Sainsbury plc-Financial Review Annual Report (2007) http://www.j-sainsbury.com/ar07/businessreview/financialreview4.shtml Date accessed 08/09/08 J.Sainsbury plc Governance Director’s Report, Annual Report (2007) http://www.j-sainsbury.com/ar07/governance/ Date accessed 09/09/08 J.Sainsbury plc: Chairman’s statement (2008) http://www.j-sainsbury.com/ar08/chairman/index.shtml, Date accessed 10/09/08 1

Footnotes

[1] Boyer et al (2004) ‘Extending the Supply Chain: How Cutting-edge Companies Bridge the Critical Last Mile Into Customers' Homes’, AMACOM Div Mgmt Assn [2] Wildman,M (1998) The BSE Inquiry / Statement No 166, J Sainsbury plc [3] (2008), Flex News J Sainsbury plc: Three-Year Targets Exceeded [4] http://www.jsainsburys.co.uk/files/reports/ar2003/pdf/annual_report.pdf [5] http://www.jsainsburys.co.uk/files/reports/ar2003/pdf/annual_report.pdf [6] http://www.jsainsburys.co.uk/files/reports/ar2003/pdf/annual_report.pdf [7] Ibaraki,T, Nonobe,K, Yagiura,M (2005) Metaheuristics: Progress as Real Problem Solvers: Springer [8] http://www.j-sainsbury.com/index.asp?PageID=322&subsection=news_releases&Year=2005&NewsID=531 [9] http://www.j-sainsbury.com/files/reports/cr2005/index.asp?pageid=22 [10] http://www.j-sainsbury.co.uk/files/reports/cr2005/index.asp?pageid=90 [11] http://www.jsainsburys.co.uk/files/reports/ar2003/pdf/annual_report.pdf [12] http://www.jsainsburys.co.uk/index.asp?PageID=418&news_filter=all&Year=2004&NewsID=489 [13] http://www.jsainsburys.co.uk/files/reports/cr2005/files/pdf/report.pdf [14] Jivkov,M (2006) ‘The Week Ahead: Huge profits leap in store for J Sainsbury’ Independent Newspaper [15] http://www.j-sainsbury.com/ar07/businessreview/financialreview4.shtml [16] http://www.j-sainsbury.com/ar07/governance/ [17] http://www.j-sainsbury.com/ar06/overview/groupperformance.shtml [18] http://www.j-sainsbury.com/ar06/fullfinancials/retailing.shtm [19] http://www.j-sainsbury.com/ar06/fullfinancials/retailing.shtm [20] http://www.j-sainsbury.com/ar06/ceor/ceor10.shtml [21] Miya Knights (2005) ‘Sainsbury's calls time on IT outsourcing contract’, Computing magazine [22] http://www.j-sainsbury.com/ar06/fullfinancials/summary9.shtml [23] http://www.j-sainsbury.com/ar07/businessreview/financialreview7.shtml [24] Fiona Walsh (2007), ‘Sainsbury’s: a history in Pictures’ , The Guardian newspaper [25] Fiona Walsh (2007), ‘Sainsbury’s: a history in Pictures’ , The Guardian newspaper [26] Chairman’s statement (2008) http://www.j-sainsbury.com/ar08/chairman/index.shtml, Date accessed 10/09/08 [27] http://markets.ft.com/tearsheets/performance.asp?s=uk:SBRY [28] Food and Grocery conference (2008) http://www.igd.com/cir.asp?menuid=22&cirid=2563 [29] http://www.fool.co.uk/news/investing/company-comment/2008/05/14/dont-sell-sainsbury.aspx
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