The Financial Management of J Sainsbury

The Financial Management of J Sainsbury

Introduction

Studying the financial management of the J Sainsbury which is a UK company based in UK and engaged in grocery business and relates to the business of financial services is significant both for the management, to the stakeholders, and to the customers. This research paper is commonly available in doing assessment in the company’s financials as well as its performance that are relatively correlated to the industry and to the peers. The financial management is simple optimizing the logic that appears in the wisdom which received by most of the financial officers. Thus, the financial managers of J Sainsbury doing its job and focus on the three issues as optimizing for the supermarket in its money availability, the productivity of the money, and cost of the money. Relatively, the efficiency of the financial management is can also be considered to its emphasis and not to the economic. This implies that the term imply signifies the pursuing of maximizing the output to minimize the cost or minimum output. This can also readily available in by the aide of the techniques and process of management science in resolving the problems (Khan and Hildreth, 2004,            p. 90).

In order to see the financial changes and management of the company, it is important to determine its financial report to show its financial growth, the changes of the board and management, the expansion, renovation, and re-engineering of its supply chains as well as the improvement in its IT system are all factors which can affect the company financial management. These can also be seen in the paper and how the company allocates sources and deals with the competitors.

Company Profile

            One of the leading food retailers in UK is the J Sainsbury plc as well as having its interest in financial services. The company’s services include the Sainsbury’s Local, Sainsbury’s Supermarket, Jackson Stores, the Bells Stores, and the JB Beaumont as well as the Sainsbury’s Bank and Sainsbury Online. The company’s objective is simple which is to serve the customers and provide its shareholders the sustainable and financial returns. The company has also the goal of ensuring its colleagues in developing the abilities and opportunities as well as it rewards in contribution of the success of the company (J Sainsbury Corporate Website, 2008).

Today, J Sainsbury is considered to be the leading the company for the distribution for the consumer goods. This group is running for about 350 supermarkets of Sainsbury and has the 300 shops branded that are branded in Belles Stores and Sainsbury Local. In connection to the high updated use of technology, the company also goes to this flow by accepting orders thru internet. The company is also catering the 14 millions of customers every week and offers a wide range of articles from the healthcare products and to the food products and the half are sold under the own brand of the company. The company also owns the huge amount of real estate as manage by the division of Property of Sainsbury which is the outcome of its continuous growth of sales. J Sainsbury is also connected to the HBOS and offers its single client the wide range of the banking services including loans, fund management, insurance, and the credit cards. For the financial year of March 2008, there are 147 stores that provide the Internet-based delivery of home shopping service (Yahoo Finance, 2008).

Today, the company is playing to catch up in order to regain the market share at time. The company was on the stage of the renewal trail as it attempts in regaining to lead the position in the retail industry in UK. With the aid of the association of the tools in common management to the broad rang of the areas in the stocks of shelves that full items that the customers needs to buy in company services in system of supply chain management and the information technology which was analyzed by the new management team. Pat of the changes of the group was the selling of the 5% of the shareholding for the Sainsbury bank to the Bank of Scotland which became the 50:50 joint ventures amidst the HBOS and the company. There are also re-launching of the Taste Difference and the introduction of Dairy Development Group for supplying the 420 million liter of the conventional milk as bought by the customers (Ibid).

 

The Financial Risks of the J Sainsbury

            The treasury policies of the company with regards to the treasuring its management are being approved by the board. There are joint delegate between the chief executive and the financial officer in approving the financial transaction which costs £ 300 million. The function of the central treasury is to manage its liquidity resources, the interest rate, and the funding requirements as well as the currency exposures. The company has the permission to use the derivatives though for the purpose of reducing exposures that arises in the activity underlying business and not the speculative purposes.

            There are main risks that the company is experiencing in using its current financial instruments as risk in foreign exchange rate and interest as well as the credit risk and liquidity risk. In the interest rate risk, the fluctuations of the group in exposing its business to the fluctuation of interest rate can be managed with the used of options and interest rate. The objective then of the group are matching the profile of interest rate and the borrowings into its revenues, the reduction of its interest expense as well as minimizing the volatility through holding the sufficient mix of fixed and borrowings, the inflation and floating-linked interest rates. The policy of the group which can provide the significant proportion for the inflation and floating-linked borrowings can be varied in defining the markets into the neutral benchmarks which was ranges from 20% to 80% of the net debt in contrast to the performance benchmark. In the year 2004, after the swap took place, there is proportionality between fixed rate of the interest rate and the net debt for about 33 percent with the average period of 6.1 years.

            The currency risks of the company also occur when it exposed its currency to the overseas trade purchase which is made the currencies that are not sterling. The company is also using the program of contract which known as the rolling forward in order to reduce the risk of exchange rate which is connected to the said purchases as can be contracted or not. In accordance to the International Accounting Standard (IAS 39), or the financial instruments: Recognition and Measurements, the company’s gains and losses are deferred on the contracts under the equity if it qualifies in hedging accounting. The company also experienced the currency exposure in the year 2004 on the domination of the US dollar net assets and income for its subsidiaries in US. The company has the objective of reducing the least long-term in the US dollar and the reduction of leverage volatility. The movements of exchange rate on the liabilities of US as created by UK have the aim of hedging the investment of US and known as reserves. Thus, the company had experienced the currency exposure to the purchases of overseas trade that made in the currencies and not the relevant currency functionality. Thus, it employs program of hedging in moving forward and in reducing the risk for the exchange rate as connected to the purchases made.

The company had also experienced the liquidity risk in managing the requirements of pre funding cash flow, maintains the diversity of the funding which can take the forms of the term loans which are secured for over the property assets and maturing obligation of the debt as well as the spreads of debt for the repayment of range maturities. The core funding of the group will take on the form of term of losses that are being secured for over the property assets. The funds which are considered as short terms are raised on the markets of wholesale money. Thus, the contingent liquidity can be maintained with the new £ 400 million for the revolving of credit facility of five years. The facilities are also acting as the commercial paper for the company for the year 2000 where it has the policy of requiring of not greater than 25% of the borrowings needs to be matured for any of the financial year. The liquidity of the company for the past 5 year is given below:

 

2004

2005

2006

2007

2008

Current Assets

4,055

2,901

3,820

1,915

1,610

Current Liabilities

4,906

5,036

4,810

2,721

2,605

Current Ratio

0.83

0.58

0.79

0.70

0.62

            Source: Reuters.com

Based on the table above figures, the year 2005 has the least current ratio which means that this year was the year wherein the company has the least liquidity measures and least ability in meeting it short term obligation and the result of the major changes happened to which was contrary to the previous year 2004 which has the best year in meeting it short term debts. In general, though the ratios were all less than which is an ideal for the retail sector. Then it only shows that the company has the better position than its competitors in the same industry.

There are also operation risks for the company in adapting IT for its business. This means that the company needs to improve in looking its balance sheet which can go to leverage the aide of IT. This will result to underline its recovery in the market share as compared to its rivals Safeway and Tesco. This also resulted to the conversion of the ownership for leasing of the real estate and the outsourced of the IT in wholesale for the consulting firm. Most of the investors are not convinced regarding its recovery despite its sales figures improvement. Thus, it only shows that that it was risky for the company in losing control over the IT (Chorafas, 2004, p. 21).

Since the company has almost 1,400 direct suppliers which are mostly packers, manufacturers, and importers as well as agents have the supply chains to the thousands of suppliers, then the company made the assessment regarding the risk for every product which can have five tier or more. The company had carried out the assessment in monitoring the compliance with respect to the code. In this way, it can help the company in assess the level of the risk which it experiencing. The third party had been audited the risk suppliers whether they are high or medium. The repeated audit had been carried out by the various frequencies which was high depends on the level of risk and to the past findings of profits. The assessment for the risk had also been done by the company in the year 2005 to 2006 though the proper evaluation is needed so that ethical standard can be recognized. The company also made relation to Sedex or the Supplier Ethical Data Exchange as well as working with the other member companies in resolving the other issues (Sainsbury Corporate Responsibility, 2006).

In the year 2007, the company has the risks that took regarding the family discount while the investors need to face the block dominance. There is also vulnerability in criticism if it agreed on the private equity partners into fairly priced. Therefore, the shareholders will vote for the subsequently emerges which can kill the options for the shareholders. Then, the minority shareholders that dominate the family members of Sainsbury will be resistant on the price offer which can possibly fail for any offerings. Thus, the company lacks the persuasion power that convince the shareholders for the merits which can be risky for having no bid as well as share drift which cause the wrong kind of the family discount (Hughes, 2007). 

 

The Financial Sources of J Sainsbury

Regarding the financial instruments of the company, the groups is using the issues and hold its financial instruments in financing to manage and operate the currency risk and interest rate that associated to the sources of finance. The company’s other financial instruments includes the payables, and trade receivables that arise to the commercial operations of the group. The company also finances its operations by the combination of the securing the loans taken from the financial companies, share capital, unsecured bank loans, and the cash which has been generated by the operation of its subsidies. The company also borrows some sterling at floating, fixed, and inflation-linked rates of interest with the aid of swaps and options that are appropriate in generating the desired profile of interest rate. The management of the group when it comes to the credit risk was managed by the limiting positions of credit to the financial institutions that carries A1/P1 ratings of credits. The exposures of the counterpart can be monitored on the regular and single basis as well as the dealing the activity which are controlled through with aid of the dealing mandates as well as the operations and the instructions settlements.

The company’s book values are its fair values of short-term deposits, the overdrafts, deposits, loans, and payables for the maturity for less than a year. This is based on the comparable instruments of market price to the date of balance sheet date is traded publicly. For the bank loans of the company, its fair values and financial liabilities for the purpose for the disclosure purpose can be estimated through the discount of the cash flows and the current interest rate of the market. The other financial asset can also be based on its fair values and based on the market values for the portfolio of underlying property.

            The company also has borrowing in financing its operations which includes the bank loans and bank overdrafts that are repayable for the bank loans and demand which are unpaid in the existing financial year. It has also the long-term financing that are secured for the 127 of its properties of supermarket that primarily comprises of the loans of the two financial companies which includes the outstanding principal of £1,186 million for the year 2006 which has the weighted average of 4.97%. The group had also entered the three year swaps of interest rate in converting the £ 782 million for the £ 1,186 million in the year 2006 loans for the floating and fixed interest rate which only implies that it was accounted as the hedge in fair value of the company.

            In general, the company holds and made the financial instruments in order to finance its management and operation as well as the currency risk and the interest rate from the sources of its finances. The other financial instruments that the company is using is the trade creditors, the trade debtors, prepayment and the accruals which can be occurred as direct results in the commercial operations of the group. Thus, its financial can get to the combinations of the issuance of the commercial paper, bank loans, bonds, notes, leases, capital markets, cash generated and share capital that operation of its subsidiaries. The borrowings of the group are all primarily raised by its parent company as well as the on-lent in the operations of its subsidiaries for the commercial terms. The borrowings of the group are all the currencies which are both the floating and fixed rates of interest with the aide of the derivatives as it is properly generate the desired profile of interest rate and currency. The objective of using the derivatives for the company is the interest rate options and swaps, the forward contracts, and the cross currency swaps. Thus, the major risks that the company is experiencing in the financial instruments of the group are the risks in exchange rate, liquidity, interest rate, and in credit risk. 

            The company also has the financial leases that have will finance the cost of the stores for the groups operation in US which are considered as book value. The company’s financial liability floating rate was comprises of the commercial paper and the bank borrowings as in the bank base rate and the fixed rate of LIBOR. Its properties and assets of the company are also its financial sources which include its net book value and recorded of having the properties of freehold and long leasehold of £ 5.2 billion. This implies that it has the market value of 65 percent higher and based on the investment for the valuation basis which carries the independent surveyors with the total value of £ 8.6 billion. It has the 292 long and leasehold and freehold properties which comprises of about 286 supermarkets and accounting for about 62 percent of the total supermarket.

 

Market Efficiency and Financial Performance of J Sainsbury Plc

            The J Sainsbury is offering variety of the foods that ranges to all kinds of budgets and half of the customers are the ends of food range as the Taste the difference and Basics. This can also provides its own brand for its organic products together with its branded products. The performance of the company can be seen in the figure below which can also reflects its market efficiency. To show the market efficiency of the company, its ratios of profitability needs to be analyzing as:

 

 

2007

2006

2005

2004

2003

Return on Capital

6.96%

1.31%

0.23%

7.94%

9.19%

Return on Assets

4.98%

0.82%

0.13%

4.84%

5.54%

Profit Margin

2.78%

0.65%

0.10%

3.56%

3.83%

Return on Shareholders Funds

10.97%

2.68%

0.34%

11.95%

13.33%

Source: Reuters.com

            Seeing the continuous growth of the company, the year 2005 is bad year for the company when it comes to profitability and cash flow due to the changes made. Despite the year 2005’s dilemma, the four parameters were still upward which are in the conservative side. But, the profit margin and the ROC are all below to the sector average. The plan of recovery for the overlapping of the growth is expected to have 3.5b pounds of revenue in the year 2010. The company’s profit margin was still considered to competitive due to the improvement of the supply chain which got the support from the suppliers in better prices while building and supporting the strong network for the cheaper rate with quality of goods. This measure can lead to the better future profit margin (Atrill and McLaney, 2004, p.58).

            In dealing the company to its finances, the working capital management can also be analyzing as:

 

2007

2006

2005

2004

2003

Stock Turnover

29.07

27.88

23.85

22.76

21.79

Credit Period (Days)

0.64

0.75

61.45

1.51

2.43

Working Capital by Sales

-4.55%

-6.01%

-5.05%

-4.96%

-3.56%

Trade Credit by Debtors

56.87

43

0.54

17.31

10.66

 

            The company seemingly wants to compensate to the higher dividend when it compared to the previous years. Looking to the company’s bad performance for the past three years will only shows that most of the investors will be conscious in investing in up beating the stock. Nevertheless, if the performance of the company will continue, then it will outperform and gives great competition in the market. There are also the trends of increase for the stock turnover from 21.79 for the year 2003 and 29 for last year which only shows the improvement of the supply chain and further will result to efficiency which also includes the reconfiguration and extension of the depots. With regards to the ratio of the working capital, the sale seems weak yet it is considered to be competitive in the retail sectors and it is better than Tesco which has the same ratio of 8.4%. The credit position for the day is also good and take the suppliers while there are better negotiated for the suppliers. The company had also experienced the growth in profit, revenue and EPS. There is a significant effect in the last two years for the year in the company which only the outcome of the recovery for the original plan. The company had 1.8b of pound revenue in the last two years and saw the improvement starting 2004 which has the projected expansions of projects that needs to improve. The graph below shows the company’s Price, Earnings, and Dividends for the past 5 years.

 

            Regarding the competitiveness of the company, it is important to compare it to its competitors who is the Morrison and is smaller business compared to Sainsbury but have the better business, utilization of assets and margin. But, the Sainsbury has the possible funds for leveraging with the aide of the additional borrow in doing expansion and acquisition.

            The Chairman of the company Sir George Bull was optimistic that the statement for the 2003 report says that the company was on the right track and has the bright future. Nevertheless, it cannot be denied that the things are going wrong which was the thin percentage of the revenue growth amidst the increase of the stores, workers, and the selling spaces. When the change of management was made and Justin King was the new CEO, there is a slow growth of sales, earnings and profit due to the detraction of major changes in improving the activities. Under the management of the new chairman Phillip Hampton, there was a moving sale in the strategy which also talks in their stakeholders as the employees, the customers, and the suppliers. The generation of the cost efficiencies can be a better idea but cannot be as like the Asda and Tesco which are its competitors and are masters of the cost cutting without neglecting their customers and the Sainsbury weakness.

            Including the efficiency of the company in the market is its dealing to its stakeholders, employees, and suppliers as well as the customers. The company also adopted the long term strategy which can hit the parents and the kids in developing the future customers. 

Conclusion

            From the year 2004, there has been a major change happening in the J Sainsbury which includes the management change which took to aggressive and large approach. This had resulted to the good number with regards to its profit margin as well as its sales. Seeing the perspective every year, the company sees its growth in term of the cash flow and to the net profit margin in the industry. In dealing with the company’s growth and success, it is only important that it must have the cost saving to the labour, IT and supply chain but there must be reliance on the infrastructures of IT in order to trade. In this regard, the failure for any of these businesses will have the impact to the company. Thus, the online business and the bank must focus on by the management because it can give the additional revenue to the company, encourage great results, and can leverage the current customers of HBOS.

            Since, the Groceries in UK has the mature market, the rate of growth below are dealing with the spelling and GDP which can strive for retaining its customers. But, regarding the evaluation of the company’s financial statement, it is only clear to see that the company was and very good options for investment. The company’s changes can provide investment story as in the new computers, the new supply chains, and the new investment story and can cost in producing the cost savings for £ 250m for this year and can give boost earnings. Thus, the company is still profitable which can offer to its shareholders greater than Tesco in the dividend and profit. Looking at the company’s 5 years report, it only signifies that it has the bad shares in the past 3 years but trying its best to recover in this year and to the following years.

Bibliography

J Sainsbury Company Profile 2008, Yahoo Finance, viewed 06 October, 2008, http://uk.finance.yahoo.com/q/pr?s=SBRY.L.

J Sainsbury Plc Profile 2008, J Sainsbury Corporate Website, viewed 06 October, 2008, http://www.jsainsburys.co.uk/index.asp?pageid=12

  Khan A and Hildreth B 2004, Financial Management Theory in the Public Sector, Greenwood Publishing Group, United Kingdom.

   J Sainsbury PLC Financials, Reuters, viewed 07 October, 2008, http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=ANN&symbol=SBRY.L

Atrill, P. and McLaney, E.2004, Accounting and Finance for non-specialists, 4th edition, FT Printice Hall

Chorafas, D 2004, Operational Risk Control with Basel II: Basic Principles and Capital Requirements, Butterworth-Heinemann, United Kingdom.

Sainsbury Responsibility Report 2006, Sainsbury Corporate Website, viewed 07 October, 2008, http://www.j-sainsbury.co.uk/files/reports/cr2006/index.asp?pageid=93

J Sainsbury taking on a family discount investors must face up to a dominant block 2007, Financial Times, Hughes, C. viewed 07 October, 2008, http://www.ft.com/cms/s/0/0cc9335a-e700-11db-9034 000b5df10621.html?nclick_check=1

 

 

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