Tesco PLC
Tesco is the largest retailer in the UK. The company projects itself as a one-stop-shop. They sell everything from a paper clip to home insurance. Tesco even has a bank – Tesco Bank.
Tesco was founded by John Cohen in 1919 when he started selling surplus groceries from a stall in London. His first day’s profit was £1 and sale £4. By the end of February 2010 Tesco’s sales had grown to over £62 billion and profit before tax to £3.1 billion (Refer Appendix 1). This simple piece of stat speaks volumes about Tesco.
Tesco is present in more than 10 countries worldwide including UK, Ireland, USA, Czech Republic, Poland, Hungary, Slovakia, Turkey, India, China, Thailand, Malaysia, South Korea and Japan.
Interestingly Tesco generates about £18 billion in sales, employ about 180,000 employees and earn £700 million in profit from outside the UK. They currently have 2,026 stores operational outside the UK. Within the UK, Tesco operates 2,200 stores and employs 285,000 employees.
Tesco was the first retailer to launch a Clubcard in 1995 with the objective to understand their customers. The world leading loyalty card scheme has around 15 million active cardholders.
Wal-Mart Stores, Inc.
Wal-Mart is the largest retailer in the world with sales revenue of more than $400 billion from over 8,000 retail stores serving 176 million customers a year. Wal-Mart employs about 2.1 million employees all over the world.
Wal-Mart has operations in more than 10 countries including Argentina, China, Honduras, Nicaragua, Brazil, Costa Rica, India, UK, Canada, El Salvador, Japan, Chile, Guatemala and Mexico.
Wal-Mart earns $100 billion from stores outside the USA, about 25% of their total sales. They operate more than 8,400 stores all over the world.
Wal-Mart operates on the price leadership model. Customers know that Wal-Mart can give them the lowest prices for the products that they need.
| Ratios | Wal-Mart ($ million) (Refer Wal-Mart Annual Report pages 30-33 for data used below) | Tesco (£ million) (Refer Tesco Annual Report pages 70-74 for data used below) | ||
|
| 2009-2010 | 2008-2009 | 2009-2010 | 2008-2009 |
| Sales Growth% ((Current year sales/Previous year sales) – 1) | SG = (405,046 / 401,087) -1 = 0.99%
| SG = (401,087 / 373,821) – 1 = 7.3% | SG = (56,910 / 53,898) – 1 = 5.59%
| 2008’s data unavailable |
| Gross Profit Margin (Gross Profit / Sales) | GPM = (405,046–304,657)/405,046 = 24.79% | GPM = (401,087-304,056)/401,087 = 24.19% | GPM = 4,607 / 56,910 = 8.09% | GPM = 4,185 / 53,898 = 7.76% |
| Operating Profit Margin (Operating profit / sales) | OPM = 23,950/405,046 = 5.91% | OPM = 22,798/401,087 = 5.68% | OPM = 3,457/56,910 = 6.07% | 2008’s data unavailable |
| Net Profit Margin (Net profit after tax / sales) | NPM = 14,335/405,046 = 3.54% | NPM = 13,400/401,087 = 3.34% | NPM = 2,336/56,910 = 4.1% | 2008’s data unavailable |
| Return on Capital Employed ((Operating profit / Capital Employed) Capital Employed = (Total Assets – Current Liabilities)) Page 31 Page 70, 72 | CE = 170,706-55,561 = 115,145 ROCE = 23,950/115,145 = 20.8% | CE = 163,429-55,390 = 108,039 ROCE = 22,798/108,039 = 21.1% | CE = (34,258+11,765) – (16,015) = 30,008 ROCE = 3,457/30,008 = 11.52% | 2008’s data unavailable |
| Return on Equity (Net profit after tax / Shareholder’s equity) Page 30, 31 Page 70, 72 | ROE = 14,335 / 70,749 = 20.26% | ROE = 13,400 / 65,285 = 20.53% | ROE = 2,336 / 14,681 = 15.91% | 2008’s data unavailable |
| Revenue/Profit per employee (Operating profit / Number of employees) | 23,950 / 2.1 = $11,404.76 | Data regarding number of employees in 2009 not available | 3,457 / 0.472 = £7324.15 | 2008’s data unavailable |
Profitability from the company perspective
Return on Capital Employed (ROCE) compares the earnings with the money invested in the organization and helps to measure the company’s performance, let’s compare the ROCE of Wal-Mart and Tesco.
The ROCE of Wal-Mart in 2010 and 2009 is 20.8% and 21.1% while that of Tesco in 2010 is 11.52%.
The higher ROCE of Wal-Mart suggests that the company is gaining by having high number of assets when compared to Tesco. The lower ROCE of Tesco shows that Tesco too is gaining from its assets but is losing out because of its high liabilities.
This inference can be supported by the fact that the Total Assets to Sales ratio of Wal-Mart is = (170.706 / 405.046) = 0.42. But the Total Liabilities to Sales ratio of Tesco is very high = (16.015 + 15.327) / 56.910 = 0.56.
Profitability from shareholder’s perspective
Return on Equity (ROE) measures the rate of return on the shareholder’s equity of the common stock holders. ROE shows how well a company uses investment funds to generate earnings growth. A ROE between 15 – 20% is considered desirable. So, let’s compare the ROE of both Wal-Mart and Tesco to see the profitability from the shareholder’s perspective.
ROE of Wal-Mart in 2010 and 2009 is 20.26% and 20.53% while that of Tesco in 2010 is 15.91%. These figures show that both Wal-Mart and Tesco use the investor’s equity to generate earnings quite well.
Another thing to note here is that a very high ROE yields no immediate benefit for the investor. Earnings-per-share most strongly affects the stock prices of a company. So Wal-Mart’s share will roughly cost 1.25 times higher than that of Tesco even though it may fetch a higher ROE.
| Ratio | Wal-Mart ($ million) (Refer Wal-Mart Annual Report pages 30-33 for data used below) | Tesco (£ million) (Refer Tesco Annual Report pages 70-74 for data used below) | ||
|
| 2009-2010 | 2008-2009 | 2009-2010 | 2008-2009 |
| Current Ratio (Current Assets / Current Liabilities) | CR = 48,331/55,561 = 0.87 | CR = 48,949/55,390 = 0.88 | CR = 11,392/16,015 = 0.71 | CR = 13,081/17,595 = 0.74 |
| Quick Ratio (Current Assets – Inventory) / Current Liabilities) | QR = (48,331-33,160)/55,561 = 0.27 | QR = (48,949-34,511)/55,390 = 0.26 | QR = (11,392-2,729)/16,015 = 0.54 | QR = (13,081-2,669)/17,595 = 0.59 |
Current Ratio (CR) represents the organization’s ability to fulfil creditor’s demands by paying off its debts. The 0.87 value of Wal-Mart’s CR in 2010 against 0.71 of Tesco shows that for every $1 that Wal-Mart owes its creditors, it has $0.87 to repay while Tesco has $0.71.
Quick Ratio (QR) is the ability of the organization to pay off its current liabilities immediately. The QR of Wal-Mart for 2010 is 0.27 while that of Tesco in 2010 is 0.54. This shows that Tesco can pay off its 54% of its current liabilities immediately where as Wal-Mart can only pay off 27%.
| Ratio | Wal-Mart ($ million) (Refer Wal-Mart Annual Report pages 30-33 for data used below) | Tesco (£ million) (Refer Tesco Annual Report pages 70-74 for data used below) | ||
|
| 2009-2010 | 2008-2009 | 2009-2010 | 2008-2009 |
| Net Asset Turnover (Sales/Net Assets) | NAT = 405,046/(170,706-72,929) = 4.14 | NAT = 401,087/(163,429-67,079) = 4.16 | NAT = 56,910/14,681 = 3.88 | NAT = 53,898/12,906 = 4.18 |
| Net Operating Asset Turnover (Sales/Capital Employed) | CE = (170,706-55,561) = 115,145 NOAT = 405,046/115,145 = 3.52 | CE = 163,429-55,390 = 108,039 NOAT = 401,087/108,039 = 3.71 | CE = (34,258+11,765) – (16,015) = 30,008 NOAT = 56,910/30,008 = 1.90 | CE = (32,085+13,479) – (17,595) = 27,969 NOAT = 53,898/27,969 = 1.93 |
| Receivables collection period (Receivables / Sales) * 365 | RCP = (4,144/405,046) * 365 = 3.73 days | RCP = (3,905/401,087) * 365 = 3.55 days | RCP = (1,888/56,910) * 365 = 12.11 days | RCP = (1,820/53,898) * 365 = 12.33 days |
| Payables Payment period (Payables / Cost of sales) * 365 | PPP = (30,451/304,657) * 365 = 36.48 days | PPP = (28,849/304,056) * 365 = 34.63 days | PPP = (9,442/52,303) * 365 = 65.9 days | PPP = (8665/49,713) * 365 = 63.62 days |
| Inventory Holding period (Inventory / Cost of sales) * 365 | IHP = (33,160/304,657) * 365 = 39.73 days | IHP = (34,511/304,056) * 365 = 41.43 days | IHP = (2,729/52,303) * 365 = 19.05 days | IHP = (2,669/49,713) * 365 = 19.6 days |
Comparison of working capital efficiency
There’s very little difference between the Net Asset Turnover and Net Operating Asset Turnover of both Wal-Mart and Tesco. So lets focus on the other three to see if we can choose between the two retailing giants.
The Receivables Collection Period (RCP) of Wal-Mart in 2010 was 3.73 days while that of Tesco was 12.11 days. This shows that the time Tesco’s customers take to pay is higher than that of Wal-Mart, although it’s only about 8.5 days more than Wal-Mart’s 3.73 days.
The Payables Payment Period (PPP) of Tesco I about 66 days in 2010 while that of Wal-Mart is 36.5 days. A high PPP is desirable by a company but the company also has to make sure that they don’t spoil their relationships with the suppliers. In the case of Tesco, this may be a possibility as Tesco takes more than 2 months to pay.
The Inventory Holding Period of Wal-Mart is astonishingly high at about 40 days compared to Tesco’s efficient 19 days. This means Wal-Mart holds on to the inventory for longer and probably has to shell out more money to store the inventory. On the contrary, Tesco keeps stock for about 19 days and rotates its inventory very efficiently.
Wal-Mart’s Operating Profit and Net cash balance
(Refer Wal-Mart Annual Report pages 30-33 for data used below)
|
| $ million | $ million |
| Operating Profit |
| 23,950 |
| Interest | (1,884) |
|
| Income from continuing operations before taxes |
| 22,066 |
| Net provision for Income Tax | 7,643 |
|
| Income from continuing operations after tax |
| 14,423 |
| Depreciation & Amortisation | 7,157 |
|
| Other operating activity | 301 |
|
| Net effect of acquisition | 4,368 |
|
| Net cash by operating activities |
| 26,249 |
| Net cash used in financial activities | (14,191) |
|
| Net cash used in investing activities | (11,620) |
|
| Effect of exchange rates on cash and equivalents | 194 |
|
| Net increase in cash and equivalents |
| 26,249 – 14,191 – 11,620 + 194 = 632 |
| Cash and equivalents at beginning of year | 7,275 |
|
| Cash and equivalents at end of year |
| 7,907 |
The operating profit of Wal-Mart in 2010 is $23.95 billion, about $1.15 billion more than 2009’s. This is mainly attributed to the fact that Wal-Mart was able to control its cost of sales. This can be shown from the fact that Wal-Mart’s sales increased about 1% but the cost of sales only increased by 0.20%. The operating profit could have crossed the $24 billion mark had the ‘Memberships and other income’ been as much as last year (Calculations derived from date on page 30 of Wal-Mart’s annual report).
Wal-Mart was able to add only $632 million to its already huge cash reserve of $7.27 billion. This is primarily because Wal-Mart paid $685 million more than last year for property and equipment. Wal-Mart also bought about $7.2 billion of company stock in 2010 where as in 2009 it had bought only $3.5 billion worth of company stock (Data present on page 33 of Wal-Mart’s annual report).
Tesco’s Operating Profit and Net cash balance
(Refer Tesco Annual Report pages 70-74 for data used below)
|
| £ million | £ million |
| Operating Profit |
| 3,457 |
| Net effect of Others including decrease in loans, increase in working capital | 1,106 |
|
| Depreciation and amortisation | 1,384 |
|
| Income from continuing operations after tax |
| 5,947 |
| Interest Paid | (690) |
|
| Corporation Tax | (512) |
|
| Net cash from operating activities |
| 4,745 |
| Net cash used in financial activities | (3,607) |
|
| Net cash used in investing activities | (1,877) |
|
| Effect of exchange rates on cash and equivalents | 49 |
|
| Net increase (decrease) in cash and equivalents |
| 4,745 – 3,607 – 1,877 + 49 = (690) |
| Cash and equivalents at beginning of year | 3,509 |
|
| Cash and equivalents at end of year |
| 2,819 |
The operating profit of Tesco in 2010 is £3.457 billion, about £300 million more than 2009’s. Tesco’s operating profit could have been higher if Tesco was able to minimize their cost of sales. Tesco’s cost of sales increased by £2.26 billion when their sales revenue increased by £3.01 billion (Calculations derived from date on page 70 of Tesco’s annual report).
Tesco’s cash reserve took a hit and reduced by £690 million (after adjusting for effects of exchange rates). Tesco paid about £900 million more than last year towards repayment of borrowings. Tesco also invested about £700 million more in short-term investments than in 2009. They were also able to sell about £1.820 billion worth of property, plant and equipment in 2010, a substantial increase from 2009 (Data taken from page 74 of Tesco’s annual report).
Effect on comparability due to differences in IFRS and US GAAP
Differences in the accounting standards being followed in the UK and US can affect the comparability of the two companies. Some d
