Tesco Plc.: Company Overview

Introduction

This assessment is for the analysis of the financial statements of Tesco PLC, the British multinational company specialising in the sale of groceries and general merchandise. It is currently the third largest retailer in the world and has spread its shops to eleven different countries. The company has been running for 101 years (since 1919) and was founded by Jack Cohen, beginning as a market stall.

One of Tesco´s main priorities is maintaining and reinforcing a sustainable value, and therefore to grow sustainably.

Tesco has implemented a 5-year plan after accumulating debt, after failing to reach payments to their suppliers in 2014. In their 2019 Annual report they claim to have achieved its goals for a turnaround, having paid dividends for a second year in a row and increase their profit by 34% from the previous year (2017-18). Throughout this process, they have bought Booker, the cash-and-carry chain in 2017. This has allowed the company to provide groceries to trade buyers, and has helped increase its earnings. Their balance sheet has shifted from their total debt of 22bn (pounds) in 2015 reduced to 12bn (pounds) at the end of 2019.

Tesco has so far succeeded with their turnaround and has been steady with rebuilding the company, making specific changes to adapt to the different markets they work in.

Recommendation

Upon reading through Tesco´s PLC 2019 annual report, it has been stated that the company has taken appropriate measures to plan in advance for their company to keep reaching their goals and are preparing for potential disturbances, such as Brexit. Their group sales show an increase of 11.5% from 2018 to 2019, showing that as an overall they are succeeding throughout their different places in keeping sales up against competition.

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As mentioned in the introduction, now that the company has succeeded in turnaround, they have placed focus in improving their long term relationship with their closest supplier partners (as well as investing in order to improve the quality of the products), paying off their debts and paying off dividends. Their dividends per share have increased by 92.3% in 2018-2019, from 3.00 to 5.77. A pay-out ratio over 75% is considered very high and that can become a risk to the company if they have to cut their dividends in the future, as that would have an impact of their share price. The company should consider maintaining a distribution of money that is sustainable on the long term, and pay off their debts with caution. Currently the company is aiming to pay off its debt and improve its reputation after their massive debts scandal in 2014. We can see this in the Current Ratio, which when below 1 is considered low, and shows us cash problems. We can see the company is working on improving this, as they are paying off current liabilities and rising the shareholders fund in order to increase the current assets. “This strong financial performance is driven by a strategic decision to manage our business with a long-term focus on four key metrics: customer satisfaction, cash profitability, free cash flow and earnings growth. It also reflects the plans we have delivered this year to create value for each of our key stakeholders – our customers, colleagues, suppliers and shareholders.” (Page 3).

Another example we can look at to reassure the successful forward movement of the company is the operating profit, which has increased by 17.1%. This shows us that there is an increase in the remaining income of the company after paying off the operating expense. If we look at the gross profit margin this can also confirm that, as it shows us the production costs are being covered and an increase in profit from the previous year is still occurring.

The return on the capital employed, from 6.4% to 10.7% in 2019 shows that the investments the company has made are still working to their advantage. These numbers can reassure the company that they are in a good position to expand their investments into their competitiveness, and challenges such as the uneven business rates systems within the UKs market.

If we look into the corporate strategy of Tesco PLC, they have been innovative within their approaches. From making its own-brand products, providing different value and priced products, and expanding their product range into different categories. The chain was one of the first to bring in self-service tills and provide contactless payment to the customers. They have aimed to facilitate the purchases, provide products in high demand, including a variety for different dietary needs, and ease the process of purchase. They have shown the success of this in their Group Sales, which do not include their sales of petrol. They have grown by 11.3%, giving the company a third consecutive year of sales growth. The purchase of Booker has provided 11.4% to the Group sales growth.

An area we cannot dismiss within the company performance is the cuts the company has made in order to increase their revenue. Tesco has promised cost cuts of 1.5bn pounds by 2020, which they have so far succeeded at. The company has cut more than 10,000 jobs and closed a number of stores to keep up to these numbers. They have sold Harris + Hoole coffee shops and its Turkish grocery business, as well as exiting other markets it was previously involved in. The company has made its shareholders and suppliers its priority but it has come to impact the relationship with its staff and the reputation upon the customers who relied on the jobs which were cut, such as the butcher, cheese counter and fish sections which were previously included. The -3% movement in their staff numbers could impact its reputation as a reliable company to work for.

Conclusion

To conclude the Analysis performance and include the recommendations based on it, Tesco Plc has implemented a 5-year plan to which they have succeeded in following and continue to show an increase in their success. As they have included their plans for future complications, such as the Economic impact Brexit will have on their sources and work structures, the company has continued to show a confident approach to their Financial performance. Aside from the cuts they have had to make to staff in order to reach their goals, we can expect that with their continuous success future expansions can be expected and compensation to their losses will be made. They are focused on sustainable value and long term strategic relationships with their shareholders and suppliers, and therefore seem like a valuable company to work for. Upon comparing the numbers in their financial Reports, if they continue to increase the rate of Their operating profit, their revenue and soon to follow, and increase to their assets in order to cover their liabilities, I believe the company has good potential and would be confident to confirm a job in Tesco Plc would be a good opportunity.

References

1. 2019. Tesco Plc Annual Report And Accounts 2019. [ebook] Available at: [Accessed 19 July 2020].
2. Has Dave Lewis accomplished all the goals of his Tesco turnaround plan?. 2020. Has Dave Lewis accomplished all the goals of his Tesco turnaround plan? . [ONLINE] Available at: https://twnews.co.uk/uk-news/has-dave-lewis-accomplished-all-the-goals-of-his-tesco-turnaround-plan.
3. Tesco PLC Preliminary Results 2018/19 . 2020. Tesco PLC Preliminary Results 2018/19 . [ONLINE] Available at: https://otp.tools.investis.com/clients/uk/tesco/rns/regulatory-story.aspx?cid=55&newsid=1246774
4. U.S.. 2020. Tesco to outpace growth at global rivals - study - Reuters. [ONLINE] Available at: https://www.reuters.com/article/tesco-igd/tesco-to-outpace-growth-at-global-rivals-study-idUSLDE71F1LR20110217.