Managing financial resources and planning

Assignment

(Tesco Plc)
Presented To:

Mr. shoaib khan

Presented By:

Tahseen Ahmed

LC/EP/L-PAK/1287-TA

Being an assignment presented in part requirement for PGD (BM) at the

Date of Presentation 10-12-2011

Table of Contents INTRODUCTION

1.1 FORMATION AND

PAGE NO.

HISTORY.. 4
1.2 OPERATIONS

FINANCIALS
1.4 BALANCE SHEET

4 5

1.3 STRATEGY

6
1.5 GROUP INCOME

STATEMENT. 8
1.6 GROUP CASH FLOW

STATEMENT. 10 ANALYSIS
1.7 BALANCE SHEET

. 12
1.8 PROFIT AND LOSS

.. 13
1.9 RATIO

..
1.10

14

PESTEL . 17

1.11

SWOT 18 PORTERS FIVE FORCES. 19 19 20 22 23 24

1.12

ECONOMIC VALUE ADDED.... BALANCED SCORECARD.. FUTURE EXPECTATIONS. CONCLUSION BIBLIOGRAPHY..

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 suppliers 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 software. Its 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 Tescos 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 Develop retailing services such as Tesco Personal Finance, Telecoms and Tesco.com Put community at the heart of what they do.

In 1997 Tescos international business generated 1.8% of the Groups 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-Report2009/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 28/02/2010 mil GBP 12 months Cons. Unqualified IFRS Fixed Assets Tangible Assets Land & Buildings 24,203 20,685 Layout |

Freehold Land Leasehold Land Fixtures & Fittings Plant & Vehicles Plant Vehicles Other Fixed Assets Intangible Assets Investments Fixed Assets Current Assets Stock & W.I.P. Stock W.I.P. Finished Goods Trade Debtors Bank & Deposits Other Current Assets Group Loans (asset) Directors Loans (asset) Other Debtors Prepayments Deferred Taxation Investments Current Assets Current Liabilities Trade Creditors Short Term Loans & Overdrafts Bank Overdrafts Group Loans (short t.) Director Loans (short t.) Hire Purch. & Leas. (short t.) 2,819 4,306 2,727 0 1,236 337 6 1,911 11,765 2,729 2,729 3,518 4,177 5,878 34,258 0 0

-5,084 -1,571 -575 -951 0 -45

Hire Purchase (short t.) Leasing (short t.) Other Short Term Loans Total Other Current Liabilities Corporation Tax Dividends Accruals & Def. Inc. (sh. t.) Social Securities & V.A.T. Other Current Liabilities Current Liabilities Net Current Assets (Liab.) Net Tangible Assets (Liab.) Working Capital Total Assets Total Assets less Cur. Liab. Long Term Liabilities Long Term Debt Group Loans (long t.) Director Loans (long t.) Hire Purch. & Leas. (long t.) Hire Purchase (long t.) Leasing (long t.) Other Long Term Loans Total Other Long Term Liab. Accruals & Def. Inc. (l. t.) Other Long Term Liab. Provisions for Other Liab. Deferred Tax Other Provisions Pension Liabilities Balance sheet Minorities Long Term Liabilities -164 -11,580 -776 0 -776 -967 -795 -172 -1,840 -85 -15,412 -11,744 0 0 -164 -45 0 -9,360 -472 0 -1,815 -487 -6,586 -16,015 -4,250 25,831 -4,250 46,023 30,008

Total Assets less Liabilities Shareholders Funds Issued Capital Ordinary Shares Preference Shares Other Shares Total Reserves Share Premium Account Revaluation Reserves Profit (Loss) Account Other Reserves Shareholders Funds

14,596

399

14,197 4,801 0 9,356 40 14,596

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

2.2 GROUP INCOME STATEMENT: PARTICULARS 52 WEEKS 2010 m Continuing operations Revenue (sales excluding VAT) Cost of sales Gross profit Administrative expenses 56,910 (52,303) 4,607 (1,527) 53,898 (49,713) 4,185 (1,252) 10.1 5.6 53 WEEKS 2009 m INCREASE (%)

Profit arising on property-related items Operating profit Share of post-tax profits of JVs & Associates Finance income Finance costs Profit before tax Taxation Profit for the year Attributable to: Owners of the parent Minority interests

377 3,457 33 265 (579) 3,176 (840) 2,336

236 3,169 110 116 (478) 2,917 (779) 2,138 9.3 8.9 9.1

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 Cash flows from operating activities Cash generated from operations Interest paid Corporation tax paid Net cash from operating activities 5,947 (690) (512) 4,745 4,978 (562) (456) 3,960 53 WEEKS 2009 m

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 Net cash used in investing activities (65) 1,820 (2,855) 4 (163) (45) (4) (1,918) 1,233 35 81 (1,877) (1,275) 994 (4,487) (220) (242) (30) (1,233) 360 69 90 (5,974)

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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 Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of foreign exchange rate changes Cash and cash equivalents at the end of year 167 862 (3,601) (41) (968) (2) (24) (3,607) (739) 3,509 49 2,819 130 7,387 (2,733) (18) (883) (3) (265) 3,615 1,601 1,788 120 3,509

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

Figure 4: Cash Flows

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Ref: (https://fame2.bvdep.com/version-2010126/CHART_EVOL.Edition.serv? editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&edited elementid=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.

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Figure 5: Assets & Liabilities Ref: (https://fame2.bvdep.com/version-2010126/EVOLINDICESCHART.Edition.serv? editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&edited elementid=EVOLINDICESCHARTINSECTION&returnservice=6&context=2TJQ600O5I78W N2&_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 188m.

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 years figure.

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5. Profit before and after taxes increased by around 9% each showing Tescos 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&edited elementid=EVOLINDICESCHARTINSECTION&returnservice=6&context=2TJQ600O5I78W N2&_cid=870#EVOLINDICESCHARTINSECTION) 3.3 RATIO ANALYSIS

Current Ratio: It is a liquidity ratio measuring companys 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.

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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 companys 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&subje ctrecordinternalid=64957)

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

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downturn during the period. 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&subje ctrecordinternalid=64957)

Figure 10: Graph showing ROSF Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-business.aspx)

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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 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&subje ctrecordinternalid=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 years cash and cash equivalents had showed an increasing trend though.

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3.4 PESTEL ANALYSIS 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 2 Involvement of various Governments Economic Factors Stock Market 5 + + Very High High Very High B/S P/L C/F, P/L, B/S High C/F, P/L, B/S

Consumer Behaviour 2 Inflation Social Factors Immigration Change in Fashion Technological Factors A. Online Shopping Environmental Factors
B. Environmentally

1 4

Low High

P/L P/L

High

P/L

Medium

P/L

friendly products C. Transport network Legal Factors D. Taxes 2 High C/F, P/L 3 Medium P/L

Ref: (http://www.321books.co.uk/catalog/tesco/pestle-analysis.htm) 3.5 SWOT ANALYSIS

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STRENGTH A. Third largest grocery Retail Company in the world. B. Quality products at low prices. C. Customer retention strategy.

WEAKNESS A. Lack of geographic diversification. B. High dependence on UK retail sector. C. Product recalls.

OPPORTUNITIES A. Commercial network portfolio. B. Popularity of Tesco.com. C. Global expansion and diversification. D. Food retail market segment.

THREATS 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)

Figure 12: SWOT Analysis Ref: (http://www.ivoryresearch.com/sample36.php)

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3.6 PORTERS FIVE FORCES ANANLYSIS Threat of New Entrants R Threat of new competitors in + the food industry is relatively low. + Huge capital investments required. Power of Buyers R Bargaining power fairly high. Competitive Rivalries R Competition in grocery retail sector very high. Slow market growth threatening leadership position. Power of Suppliers R + Bargaining power fairly low. Threat of Substitutes R + For food itemslow.

Switching cost very low.

+ 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 firms economic profit- being value created in excess of the required return of the companys shareholders- where EVA is profit earned by the firm less cost of financing the firms capital. 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/accountingarticles/cost-capital-uk-companies-183857.html)

5. BALANCED SCORECARD

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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.

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.

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Tescos values and priorities are embedded in this wheel through appropriate KPIs. 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 Converts strategy into an effective governance mechanism Ensures alignment of employees to companys 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-businesstransformation/)

6. FUTURE EXPECTATIONS

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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) (http://www.just-food.com/news/tesco-aims-to-quadruple-china-sales_id113305.aspx) (http://www.just-food.com/news/analysts-focus-on-tescos-internationalpotential_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.

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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

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

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List of References: (http://www.bme.eu.com/news/tesco-recovery/) (http://www.mbaknol.com/management-case-studies/tesco%E2%80%99s-%E2%80%98steeringwheel%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) (https://fame2.bvdep.com/version-2010126/Report.serv? seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subje ctrecordinternalid=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&subje ctrecordinternalid=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&subje ctrecordinternalid=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&subje ctrecordinternalid=64957) Information on Profit Margin available at: http://www.investopedia.com/terms/p/profitmargin.asp and

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

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