Financial and Strategic Evaluation of Tesco Plc

Financial and Strategic Evaluation of Tesco PlcFinancial and strategic rating of Tesco PlcExecutive SummaryTo understand how a course is performing, understand what might be expected in the future and determine whether the business is a wondering(a) investment. An investor, analyst, researcher or calculateant needs to understand the strategy of a business and how they visualise to achieve this. The capital structure of a business passel determine whether the beau monde has enough finance in order to achieve targets and investments, determining certain risks involved and direct of return required. This report looks at the level of gearing Tesco has whether financed by debt or equity, handout on to look at the weighted average address of capital.Investment is besides important as investors expect, and the comp some(prenominal) looks to achieve ontogenesis. With Tesco this report looks at both future and past investments, analysing the non financial and financial benefits f rom them. Dividend policy and conk outs be analysed looking for into theory behind them.Tesco sh atomic number 18s are analysed apply valuation techniques, looking at what whitethorn be the reason for Tescos success through the corner, helping them stabilise allot bell after the peak of recession despite some contractual and ethical studys. Finally looking into how the international securities industry has benefited Tesco by non financial means.An everyplaceview of a few strategic issues Tesco has faced oer the years is provided, looking into some of the challenges and results of these issues. Problems such as competition, international expansion and contract disputes are shown in detail later in the report.1.0 IntroductionTescos boilersuit strategy is growth, which has helped strengthen their core business inwardly the UK, (Tesco, 2010). Tesco plan to achieve this strategy through diversifying their product range away from food and to include financial, non financial a nd telecommunication services/products also by penetrating newfangled markets orbiculately. This report evaluates Tesco, analysing their capital structure and the level of debt discussing how this can influences the company value and investing decisions, looking at how past investments and future investments are beneficial for Tesco. Dividend policies are related to theory and share prices are questioned using incompatible valuation techniques available to any investor. Going on to look at survival through the recession looking at antithetical strategic issues they start out faced over the years.2.0 upper- reference letter Structure and Finance agreementFigures above referenced from FAME database, show for expansion of its business Tesco Plc increased gearing from 51.58% to 91.38% within years 2000 and 2003. Increasing debt can be a cheaper little risky option as cost of debt is start than equity and change magnitude levels of debt can reduce the weighted average cost of ca pital. By reducing weighted average cost of capital, company value can be increased and therefore shareholder wealth is increased. WACC can be utilise against bullion flows in order to determine the net present value of a project. Tesco probably used this as a means to decide which investments are beneficial.After this period worldwide financial crisis began to hit the market, Tesco Plc reduced its gearing ratio and kept the ratio level at around 75% until 2007. This was sensible at the judgment of conviction due to recession risk of lower turnover levels could mean the ability to re move over certain levels of debt more difficult. Having higher levels at the time would deem meant financial risk, repayment risk and so forth would affect interest rates on loans and increase the cost of equity as shareholders are taking a higher risk therefore require a higher rate of return. Tescos main competitors suffer the similar situation ASDA and Sainsbury were also affected by the plan etary financial crisis, they also reduced their gearing ratio level and keep it to relatively low level to about 35%. only, with the positive profit figure, Tesco changed its circulating(prenominal) strategy. Tesco have accommodate up its business rapidly from 2008, and reached 149.14% in 2009. As the figures show that Tesco had borrowed in a huge amount of debt in 2009. Recently, a occasion venture between Tesco and property firm British Land has refinanced its retail portfolio with a new 315 million pounds five-year term loan. (British Land, 2010) it is to believe that a rapid market expansion and investment impulsive be followed.Years 2005 to 2009, sales and income figures of TESCO have steadily increased it generated a very positive profit return for investors. With the global finance crisis continuing to affect UKs economics, the government whitethorn loosen its restriction towards TESCO whatever happens, people need foods and basic living materials, it is a perfect even t for Tescos expansion. The high level of gearing may support Tesco to expand its business nevertheless there is potential risk of default on loans. Can Tesco stay fresh its level of income, if not how can TESCO to repay the debt it borrowed? This problem could influence investor decisions.3.0 InvestmentUKs largest retailer Tesco expanded into foreign markets attempting to increase future growth in the global retail industry. The company initiated its international expansion strategy by venturing into Central Europe, Asia and the US. Figure 1 shows Tesco PLC sales earnings before recession had an impacted. This shows sales profits in the overseas market amounted to a fair percentage of Tescos profit figure. Comparing growth over 5 years in the UK with Asia, UK except generates a 49% increase when the Asian market increased 250%. Tesco has placed increasingly focuses on their international venture. Nearly two-thirds of the groups space is direct overseas, although these markets still just account for a quarter of group turnover (Rigby, 2009).Tescos Summary Five Year RecordYear ended February2001 (m)2002 (m)2003 (m)2004 (m)2005 (m)Group Sales22,58525,40128,28033,55737,070Turnover excluding VATUK18,20319,82121,30924,76027,146 counterpoise of Europe1,7372,1812,6643,3853,818Asia8601,3982,0312,6693,01020,80023,40026,00430,81433,974Philip Clarke, head of Tescos international physical processs, singled out South Korea, along with China. Mentioned as Tescos two some promising markets, planning to open 100 new stores in South Korea alone (Rigby, 2009). This is a wise decision due to current economics Britain has been impacted among some of the worst around the world, where China peculiarly was not greatly affected with vast growth. Probable reasons for Tesco expanding internationally rather than nationally may be due to competition policy trying to limit Tescos growth, also there is little land space to continue building new structures, and Tesco already purcha sed the most profitable local convenience stores in the past.3.1 EnvironmentalTesco, now 4th largest retailer in the world, have announced that it allow open the first zero carbon store as division of its bid to be a carbon neutral company by 2050. They stated its corporate commitment towards reducing climate change, for example halving its nil use per square buns by 2010, reuse and recycling advancement where possible (Leahy, 2009). A green example of this is where they use returnable Green trays saving around 132,000 tonnes of cardboard packaging in 2007/08. Tesco plans to invest 100m in sustainable environmental technology which is finding more practical ways to use renewable energy, such as solar and wind power, and to help develop the green technologies of the future (Tesco Media, 2010).Environmental issues are becoming increasingly important over the years. Climate change has become a huge focus for businesses. The Climate deviate displace 2008 makes the UK the first co untry in the world to have a legally binding long-term textile to cut carbon emissions (OPSI, 2008). Government ensures that organisations are adapting and that its policies, programmes and investment decision are made in the context of climate change. By continuously making environmental changes Tesco builds reputation as a more ethical company.3.2 DiversificationOn the former(a) side of expansion, Tesco is looking to take advantage of the current mistrust towards hopes pursual their role in the economic crisis. They had spent 950m for purchasing 50% of Royal Bank of Scotlands share of TPF last year (This Is Money, 2008). It is also planning to expand its telecoms operation industry following the appointment of Tesco marketing director Lance Bachelor as Tesco Telecom chief executive.Tesco are going to attempt penetrate the finance market further by offering current accounts within two years and also offering mortgages for their first time. Offering credit cards, insurance and n est egg deals already Tesco has a huge customer base. They have a huge potential to increase turnover by selling more products to their existing customers. They plan to open branches globally not on in the United Kingdom which could be a huge challenge for the company. They need to time this investment perfectly, especially amidst the recession. They stated that it has to build the IT infrastructure which required supporting the bank system, and this project is described as a huge undertaking. As a Tesco bank customer, you will also be able to accrue loyalty points under its Club card program (Tesco, 2008).4.0 Shareholder InformationAn important factor in the eye of an investor is predicting the future. Shareholders are interested in company performance, both long and short term. They are also interested in the companys investment not only to expect growth but so they are able to assume levels of retained earnings and cash flows. This allows shareholders to make estimations on divid end payout, the only form of cash flows a shareholder receives and predict any growth on share price.4.1 Dividend PolicyTesco pay cash dividends as interim and final examination year. The dividend is steadily increasing even through the Recession. Annual Dividends per share has increased 26.48% from 8.91p in 2007 to 11.27p in 2009 (Tesco, 2007-9). The company pay a fairly low dividend with a yield averaging 2.43% from 2007-09. little yields can lead to possible patterns of high growth conflicting high yields resulting in sharp falls (Arnold, 2008).Steady dividend payments and low dividend yield targets higher earners and those on looking for long term investment. Cash in the business is expected to be invested in projects with positive net present values as investors are looking for capital gains. This suits Tesco as one of the reasons for a lower yield and dividend is due to large investments in expanding and making the company more diverse.4.2 Share footingCapture.PNGShares ar e hard to say what influences price, there are many factors which can all influence share price such as earnings per share and price earnings multiple. News can have affects such as bad press can decrease share price, disputes or contractual issues etc. other(a) areas may be dividends, although according to Modigliani and Miller theory whatever dividend policy is used, firms which pay more dividends offer less price appreciation and pay the same shareholder return, according to cash flows from investments and risk measurements (Arnold, 2008). This theory provides proof given assumptions of no tax, investment decisions are not affected by dividends and there are no transaction costs converting price into cash when selling stock.In the current economic position this theory would most likely be irrelevant as there are always taxes upon a business. Transaction costs would almost always apply therefore this theory has its limitations. If dividends were irrelevant, the business may be wa sting time analysing which shareholder are indifferent (MM Theory, 1961).As market leader for United Kingdom Tesco has shown stability during the crisis. Share price over the peak of the recession until recently has remained more stable for Tesco than competitor Sainsbury. Sainsbury had been affected severely between August and November 2007 as Delta Two pulled out in judgement Sainsburys did not have enough capital to maintain competitiveness (Birmingham Post, 2007). This was a high in the recession. Financial markets began to stop trading between each other and there was the near collapse of Northern rock, (Telegraph, 2009).The Sector was hit hardest in years however Tesco has begun to make its recovery with share price increasing unlike Sainsbury who only managed to stabilise over the last year.4.3 ValuationCapture7.PNGInvestors may use share valuation techniques to determine whether shares are over or under value. Dividend yield valuation shows share price was fairly valued in 2007 but undervalued in 2008 and overvalued for 2009. This is calculated by dividing share price by the yield seen in Figure 3. Dividend yield was based upon Annual Dividend/ Share price. This valuation method can be affected by the level of dividend especially if the company is going to invest, which Tesco has made some huge investments purchasing 50% of RBS. This could be the reason why value is currently low here, whereas real value accounts for all affects.klll.PNGThe final method for this report is Price Earnings Valuation. Multiplying earnings per share by the P/E multiple. A higher P/E multiple indicates the price of stock is more than a lower P/E. In Figure 4 P/E*EPS shows similar results as using the dividend yield however P/E over the past 3 years has been decreasing, which shows investors are not free to pay as much for a stock than previously.Tesco shares have remained strong, recovering after a downfall in peak of recession. Share valuation techniques however have show n share value may be overvalued in 2009. There looked to be a recovery but using P/E and Dividend yield valuation, which provided a comparable result share value should be lower. This may mean it is safe to sell shares in Tesco now as price may fall. Dividend payment however suggest chance of expected growth in the future but looking at long term trends there have not been any dramatic changes in dividend payment or yields.5.0 Surviving the RecessionResearchers and Accountants believe Tesco was the number one company to survive the recession in the research survivability index. The information considered for this was not just cost cold shoulder but based upon factors such as branding, cost management, internet potential and customer targeting, (Ruddick, 2008). For instance, Tesco replaced a lot of high brand products with Tesco value products, which sell for less however attract more customers generating higher turnover, this helped reduce costs related to more expensive products. Other cost savings are through give out use of IT, and from policies and management of suppliers to ensure the greatest value to the business and customer (Business, 2009).Tesco club card points and vouchers have been a huge impact for customer targeting, by offering double club card points many customers who arent regular shoppers become regulars. Tesco also monitor their customers far more intensely than other supermarkets. They analyse buying patterns and send vouchers in the post to attract customers back, or when customers have not returned for a while they send vouchers to entice them.6.0 CompetitionSevere rivalry within the UK retail market is forcing cost cuts and ways news ways that they can differentiate themselves from competitors. The retail market is mature and oligopolistic in its nature, with a few study multiple retailers dominating the market (Business, 2009). Competition between the large retailers resulted in price wars with the big two, Asda and Tesco reducing price margins for the industry as a intact as other competitors have to react according to the market.The market is well regulated. The monopolies and mergers commission constantly examines the market to ensure fair competition. The government has also been combat-ready in planning restrictions for new store openings (BBC, 2004). Growth appears to come from gaining new customers, improving product offerings, and from non food products, such as financial services. In Tescos case they have expanded overseas as well as diversifying their product range.Customers are still number one in the eye of the retailers. Success in the industry is still dependent on how well the retailer can meet the customer needs. Price, particularly in the UK has become a dominant feature. Considering the recession, this will places stress on retailers to set low prices and maintain that level. The main reason being consumers are tightening their spending level and are not willing purchase luxury items and are purchasing the necessities.7.0 Bad CredibilityTesco were faced with a big contractual issue back in 2007. Tesco delivery drivers were offered new contracts, which had worse conditions and around 3000 to 6000 pounds less pay. This resulted in drivers going on a 3day strike, causing problems for Tesco when shoppers refused to shop in their stores and many drivers rejected the new contracts which resulted in Tesco terminating their positions (BBC, 2007). This issue meant Tesco had to spend a lot of time and money with unions, whilst losing sales from shoppers refusing to shop with them and deliveries not being made. Although this issue was only in one area, the businesses image would have been damaged by news and publicity on the matter.The competition commission has started to realise that the bigger the retailer they have a stronger capability to force prices lower from suppliers. Described as a master servant relationship farmers complain about Tescos cancelling orders at last m inute and forcing cost lower than production cost (Hird, 2005). In extreme cases farmers have protested especially over milk prices (Mullin 2009). This shows Tesco has done little to improve their relationship with farmers over the years. It could be assumed that government may begin to intervene soon as Tesco becomes more unethical.Issues like this make people lose trust, they are unsure if in the future more problems will arise. When looking at investing you must trust a company making sure they are reliable and able to give you what you want from them. Other investors who catch news of problems tend to back out and sell stock. If enough people sell share price will begin to fall, this may be an opportunity to purchase shares at a lower price as long as you accept the risks.8.0 Environmental IssuesOne big issue that Tesco is veneer is the environment element as the increasing global concern of environmental problem, how Tesco react to this issue will have huge impact to its future business performance. The public demands more than ever that films should take their responsibility as a member of the society. Tesco has taken a lot of effort to respond the challenge in 2007, Tesco unveiled its green pledges If we fail to mitigate climate change, the environmental, social and economic consequences will be stark and severe Sir Terry Leahy, Tesco chief executive. (BBC news, 2007) In the statement, he promised that Tesco would cut emissions from existing stores worldwide by at least 50% by 2020, and would seek to restrict air transport to less than 1% of the firms products. Moreover, for strip CO2 and energy saving, Tesco also introduce a series of strategy by encourage customers to use reusable carry bag and reward obtain points to club members to reduce the usage of plastic bags Tesco also introduce new energy saving store to the public in January 2009, Tesco opened UKs most energy efficient store in Cheetham Hill. As part of the climate change program, the stor es carbon footprint is 70% less than an equivalent store built in 2006. (Tesco, 2009) So far, Tesco has already made a lot of progress, yet there are much more problems waiting.9.0 OverseasTescos expansion internationally has not only benefited the company financial. They would develop new understandings and learn new techniques have diverse teams within the organisation. Tesco successfully penetrated the overseas market, being able to adapt to new cultures. To do this they would need incredible management with a perfect strategy. On the Tesco website they take a different approach internationally, strategy changes and their main focus is more of a cultural issue. For instance being Flexible as in Japan they shop in small amounts but prefer fresh items, also Act local such as in India, who prefer less or no packaging so they can go through piles of produce. With 10 years of experience Tesco has wide experience of cultures (Tesco, 2009).Culture isnt only going to affect Tesco through the market i.e. selling, but will be a part of the business. Tesco employees local staff this affects the organisations culture, especially within head offices and management. Teams will include people from all different ethnic backgrounds growing up to have different culture, educated with a diverse range of skills. Having this within a business can be very successful and can create more impelling team working (Brooks, 2006).10.0 ConclusionTesco on a financial level has a lot of risk involved. They are currently very highly geared and have a huge financial risk which can and most likely will affect the company value and share holder wealth. However over the next 2 years could be a crucial time for Tesco as their investments go under way which could result in a very prosperous future for shareholders through diversification and international expansion. A lot of risk relies on customer targeting, which in the past Tesco has been very successful. Dividend yields and dividend payment s seem to be targeting high earners who can face risk and are looking for long term capital gains however share price for 2009 seems to be overvalued and may decrease. It may be safer to sell shares now and buy again after share price falls.Tesco has had a lot of success and faced many different strategic issues, some which could result in a stronger business such as cultural diversification within the company. A lot of issues have occurred though, change the image as a result. Little seems to have been done to improve some of these problems especially with farmers. Tesco only seems to care if regulation intervenes, then they will do something about it which could be seen with some of the environmental problems.As a result of the analysis provided throughout the report Tesco seem like an opportunity for those who are willing to take high risks.ReferencesArnold, G. (2008) Corporate Financial Management. 4th edition. London, Pitman Publishing.BBC. 2004. Tesco sees profits jump to 822 m New stores. Online BBC News. forthcoming at http//news.bbc.co.uk/1/hi/business/3675164.stm Accessed 20/3/2010.BBC News, 2007. Tesco boss unveils green pledges Online. 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