AAF044-6 Accounting and Finance

AAF044-6 Accounting and Finance

Introduction

Tesco is a major player in the grocery and general merchandise retail industry. Its purpose is to improve customers’ quality of life by offering them affordable, sustainable, and easily accessible food options. With more than 330,000 workers, the organization is dedicated to providing services to millions of clients in five important markets: the UK, the Republic of Ireland (ROI), Slovakia, Hungary, and the Czech Republic (Lokanan, 2021). Since opening its first store as a market stall, Tesco has grown to operate an astounding 4,859 locations. This is a different account of Tesco, the global British retailer with its headquarters located in Welwyn Garden City, UK (Market Spend, 2019).

Tesco showed impressive financial performance in the 2023 fiscal year, with group revenues of £57.7 billion, a notable 5.3% gain. Operating profit for the business increased by a solid 6.9% to £2,630 million. Tesco further cemented its position in the retail scene with an excellent 27.3% market share based on sales value. The group also achieved a net promoter score of 15, which is indicative of a favourable degree of customer loyalty and satisfaction.

Tesco exhibits a strategic financial approach despite its strong financial success, as demonstrated by its £(10,493) million stated net debt (Benrqyaet. al.2021). The reports that there is positive retail cash flow that improved by 6.3% to £2,133 million.Tesco is a top retailer that is committed to giving customers all over the world high-quality items and sustainable options. Tesco continues to use its broad reach and variety of business areas to support this goal.Tesco’s core resources include a variety of elements that are essential to its business operations:

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Human Resources: Tesco’s 330,000 workers are its greatest asset, and the company is aware of this, increasing hourly wages by 8% for UK-based workers in 2022. With an emphasis on staff development, the organization launched several managerial training initiatives, in which over 7,000 co-workers took part. These courses emphasize the development of flexible thinking, inclusive behaviours, and skilful communication (Hiltonet. al.2020).

Financial Resources: Tesco’s financial performance was excellent, as evidenced by a 5.3% growth in sales to £57.7 billion and a 7.1% increase in adjusted operating profit to £2.6 billion. Metrics that indicate stability and strength in the company’s finances, such as its adjusted diluted EPS of 21.85 and dividend per share of 10.90,

Physical Resources: Tesco’s robust physical infrastructure supports its expanding reach and customer accessibility, thanks to its network of 4,859 stores across five important markets.

Intellectual Resources: Tesco’s goodwill and other intellectual assets have increased, rising from £5,360 million to £5,375 million. The company’s robust intellectual capital is demonstrated by its expansion.

Tesco, however, faces several difficulties that affect its performance and operations:

Reduced Consumer Spending: Rising living expenses affect consumer budgets as a result of macroeconomic and geopolitical factors affecting economies. Tesco’s first-quarter 2022 sales fell 1.5% as a result of people buying fewer items due to this trend (Chen, 2022).

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Fresh Food Shortages: Poor weather in Europe and North Africa, along with lower UK harvests and higher energy prices have resulted in a lack of fresh food. Tesco’s operations could be in jeopardy due to the circumstance that has resulted in price increases.

Economic Uncertainties: Food inflation has been exacerbated by political and geopolitical uncertainties, as evidenced by the 17.2% increase in grocery purchases in May. The 2022–2023 fiscal year saw a 6.9% decrease in adjusted operating profit as a result of these economic swings (Safitriet. al.2020). Tesco’s financial performance continues to be challenged by the changing food price scenario.

Evaluation of Financial Statements and other financial statements

Despite supply chain disruptions and uncertainty in the global economy, Tesco’s financial performance over the last three years shows a constant upward trend in Group Sales and Revenue, rising from £57,887 million in 2021 to £65,762 million in 2023.This increase demonstrates revenue generation’s tenacity in the face of difficult market conditions (Mohapatraet. al.2021).A ratio study has been carried out to obtain a more profound understanding of Tesco’s operational effectiveness and financial situation, providing insightful quantitative viewpoints (Bakeret. al.2020).

Ratios of profitability: These measures indicate how profitable a business may make its activities. Tesco’s cost of goods sold is directly impacted by rising inflation, as evidenced by the Gross Profit Ratio, which varies from 6.84% in 2021 to 7.55% in 2022 and then falls to 5.56% in 2023. Similar to this, the high rate of food inflation caused the Operating Margin to drop from 4.6% in 2022 to 4% in 2023. Tesco’s operating margin was below the optimal range of 60% to 80%, but the industry’s operating ratios were impacted mostly by macroeconomic issues.

Years 2023 2022 2021
Gross Margin 5.56 7.55 6.84
Operating Margin 4% 4.6% 3.1%
Return on Capital Employed (ROCE) 8.6& 7.8% 5.4%

Tesco, on the other hand, showed improvement, increasing its Return on Capital Employed (ROCE) from 5.4% in 2021 to 7.8% in 2022 and then to 8.6% in 2023. Even if Tesco’s ROCE is less than the standard of 20% recommended that it still shows disciplined investment and judicious capital use.

Ratios of liquidity: These measures indicate a company’s capacity to fulfil immediate obligations. Tesco’s current ratio showed a trend of oscillation, rising to 0.75 in 2022 from 0.67 in 2021 and falling to 0.71 in 2023 (Moura, 2021). Tesco’s current ratio is below both the industry average of 1.186 and the ideal of 2:1, which suggests that the company is facing difficulties with liquidity and may not be able to sufficiently cover its immediate liabilities.

Years 2023 2022 2021
Current Ratio 0.71 0.75 0.67

When one considers Tesco’s capacity to make prompt payments, this liquidity problem becomes apparent. Tesco has only £2,465 million in 2023, and creditors are requesting £17,721 million. This suggests that Tesco may face cash flow issues even if it is unlikely that all of the payments will be made at once (Maet. al.2020).

Effectiveness Ratios: Assessing trade payables, trade receivables, and inventory turnover can provide information about how efficiently a business is run. Tesco’s inventory turnover decreased from 26.06 days in 2021 to 24.74 days in 2023, indicating an efficient stock turnover (Guoet. al.2019). However, the amount of time it took to collect from debtors grew over time (from 45.83 days in 2021 to 50 days in 2023), which would have helped Tesco’s liquidity by giving creditors longer terms for payments.

Years 2023 2022 2021
Inventory Turnover Ratio 24.74 24.24 26.06
Asset Turnover Ratio 1.42 1.24 1.26
Receivables Turnover 50.00 48.57 45.83

Though it fell short of the retail sector’s desired benchmark of 2.5, the Asset Turnover Ratio showed a positive trend and was constantly above 1, indicating Tesco’s effective revenue generation from its assets. In brief, Tesco is confronted with liquidity issues as a result of a declining current ratio and a rising turnover ratio of receivables. These patterns support the findings which highlight how shifting customer demands and unstable economic conditions impact market share and business performance (Xiaoet. al.2021). Tesco’s operating profit in 2023 was influenced by economic uncertainty, including the Russia-Ukraine war, indicating the significant impact of world events on the company’s financial performance.

Tesco’s cost structure was straining due to significant inflation, as seen by its profitability statistics, which included gross and operating margins. The difficulties in controlling costs in the face of economic uncertainty are reflected in the operating margin’s drop from 4.6% in 2022 to 4% in 2023. Tesco’s Return on Capital Employed (ROCE) showed an increased tendency even while its margins were below optimal, indicating effective capital usage and possible strategic investments. Nonetheless, the ROCE metrics continued to fall short of the 20% benchmark, suggesting opportunities for enhancement in optimizing capital efficiency and yields.

Tesco’s difficulty in keeping sufficient short-term cash was made clear by the liquidity ratios. The erratic current ratio, which was below both the ideal and industry averages, highlighted the company’s incapacity to quickly pay its short-term debt. Tesco’s minimal cash reserves create concerns about satisfying immediate financial commitments, even if it is unlikely that all creditors will demand payment at the same time. This suggests a potential vulnerability in cash flow management.

Efficiency ratios gave contradictory information. While the inventory turnover was declining, which signalled effective stock management, the lengthier debtor collection durations raised the possibility of difficulties receiving cash inflows, which would affect liquidity. However, it fell short of the benchmark for the retail sector, Tesco’s capacity to produce revenue from its assets, as demonstrated by the asset turnover ratio, demonstrated efficiency in leveraging its asset base to generate income.

When taken as a whole, these financial metrics highlight Tesco’s struggles with macroeconomic issues and their significant effects on the business’s financial and operational environment (Lokanan, 2021). Tesco’s business has been significantly impacted by rising inflation, shifting consumer behaviour brought on by economic uncertainty, and geopolitical disturbances.For Tesco to continue growing and remaining resilient in a turbulent market, they must implement ways to deal with these issues. The negative consequences of economic uncertainties may be lessened by taking steps such as strategic investments that are in line with market dynamics and consumer needs, maximizing working capital efficiency, and judicious cost management.

To strengthen its financial position, Tesco may also think about reviewing its capital allocation plans, concentrating on opportunities that offer larger returns, and enhancing its liquidity management techniques (Benghezal et. al.2022). Tesco’s competitive edge might be further strengthened by utilizing technological improvements to improve operational efficiency and by investigating creative solutions for inventory management and consumer interaction.Tesco has demonstrated tenacity and sales growth, but the business still has issues with profitability, liquidity, and operational effectiveness. To ensure stability and growth in the coming years, Tesco will need to take smart initiatives and adaptable steps to address these difficulties and navigate through the changing economic landscape.

Comparison of Tesco’s performance with Sainsbury

Two of the biggest rivals in the UK retail sector, Tesco and Sainsbury, have quite different market shares and financial results. With a market share of 14.2%, Sainsbury lags behind Tesco, which has a larger stake of 26.9%. Understanding their revenue distribution and profitability patterns over the previous three years may be gained by looking at their financial data using a typical-size income statement (Financial Ratio Analysis, 2023).

The analysis of the common size income statement attached in appendix shows variations in the gross profit margins of the two businesses (Naveenet. al.2022). Tesco and Sainsbury had a rise in gross profits in 2022, which was ascribed to the relaxation of lockdowns due to the pandemic. Nevertheless, the following drop in gross profits for both retailers in 2023 (Tesco from 7.55% to 5.57% and Sainsbury from 7.91% to 6.36%) is indicative of the impact of economic uncertainty, especially in light of the crisis between Russia and Ukraine and interruptions to global supply chains. This drop in profitability may also be related to the liquidity issues that were previously noted, as demonstrated by the correlation between profitability and liquidity ratios found. Both firms’ net profit margins showed a similar pattern, with Tesco’s declining from 2.42% in 2022 to 1.13% in 2023, signifying a slowing in growth. In a similar vein, Sainsbury’s net profit fell from 2.26% in 2022 to 0.66% in 2023, as reported by underscoring the serious difficulties both retailers faced, including inflationary pressures that affected underlying profits (Chen,2022).

Over the last three years, Sainsbury’s operating expenses—especially those related to administration—have continuously outpaced Tesco’s. This increased expense ratio indicates that Sainsbury may need to reconsider its pricing policies or look for ways to increase sales to maintain profitability. Net earnings for Sainsbury’s dropped significantly in 2023 as a result of increased operational expenses, which came to 4.81%. Sainsbury’s lower underlying profitability was also impacted by the UK’s high cost of living crisis, which was reflected in Tesco’s performance and related to wider issues facing the UK retail sector.

The two businesses displayed variations in their financing costs, which suggested different degrees of financial leverage (Ausloos, 2020). Sainsbury’s costs remained reasonably stable but still high in 2023, whereas Tesco’s lower borrowing costs from 2022 marginally increased. The drop in taxes for both stores in 2023 may be a sign that their debt loads have increased as a result of tax-exempt loans.

Tesco’s stronger revenue increase, which is attributable to its larger market share, is confirmed by comparing the company’s revenue over the last three years with Sainsbury’s. This increased revenue generation is consistent with Tesco outperforming Sainsbury in terms of financial success. Both businesses are strategically managing the difficult retail environment, which is shaped by changing consumer habits and unstable economic conditions (De Simoneet. al.2022). Tesco has been aggressive in responding to customer wants, investing in online platforms, making sustainability efforts, and diversifying its product choices by utilizing its market position. On the other hand, Tesco’s sales growth and operational efficiency are easier for Sainsbury to match, despite its efforts to innovate and increase its digital presence (Tesco Supermarket, 2023).

Tesco has been able to hold onto its position in the market despite these obstacles thanks to its substantial capital employed and comparatively bigger market share. But Tesco’s and Sainsbury’s ongoing struggle with diminishing profit margins is also a cause for concern, especially in light of upcoming economic uncertainty that could further affect consumer purchasing habits. Even though Tesco has demonstrated resiliency because of its market share and solid financial position, the general problem of diminishing profit margins still exists, requiring strategy adjustment to deal with the upcoming uncertainties (Tesco, 2021). It will be imperative that Tesco and Sainsbury tackle these issues if they want to maintain resilience and profitability in a market that is constantly changing.

Interpretation: It can be stated that Tesco is having sales of £54.8bn group sales while Sainsbury of £730m underlying profit this means the performance of Sainsbury is quite good as compared to Tesco in 2021-2022. Net debt of the Tesco is 12% while of Sainsbury is 9.9 % which means (6,618) this specify that the Tesco has taken more debt as compared to Sainsbury. Tesco is having major market share as +30bps which is 27.7% while Sainsbury is having limited market share only (Sainsbury plc, 2022).

Conclusion

From the above study, it has been concluded that, Analyzing Tesco Plc’s financial performance undoubtedly paints a mixed picture, showing the company’s strengths and weaknesses in several sectors. Even with its respectable financial standing, the company’s key challenges are related to liquidity and operational effectiveness.Tesco has seen variations in its profitability over the last three years. A major decline in 2023 as a result of political and economic unrest around the world was witnessed after a peak in 2022 that was ascribed to the post-pandemic rebound in consumer activity. As a result, the operating margin dropped from 4.6% to 4%, illustrating the effect of lower consumer spending on Tesco’s business operations. Furthermore, a deficiency in short-term liquidity is indicated by the current ratio of 0.71, which may have an impact on the company’s capacity to satisfy its immediate financial obligations. But Tesco’s rising Return on Capital Employed trend—which now stands at 8.6%—indicates that the company can earn a profit on its capital expenditures, indicating a certain level of profitability.

When comparing Tesco with Sainsbury, the latter has a unique problem because of its significantly higher operational costs despite its smaller sales volume. This difference can be seen in Sainsbury’s net profit margin, which is only 0.66% of overall sales. This suggests that Sainsbury faces greater difficulties than Tesco in controlling costs and preserving profitability.In 2022, Tesco and Sainsbury faced similar challenges, including declining consumer spending and food shortages, which affected their bottom lines. Due to these difficulties, both businesses saw a decline in underlying earnings, which was a reflection of broader market difficulties that had an impact on their operational effectiveness and financial line.

 

References

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