Financial and Strategic Evaluation of Tesco Plc

monetary and St rungic E e paygrade of Tesco Plc pecuniary and strategic evaluation of Tesco PlcExecutive SummaryTo understand how a vocation is performing, understand what might be expected in the proximo and figure whether the fruition line is a risky sitement. An investor, analyst, researcher or accountant ask to understand the strategy of a worry and how they envision to reach this. The working capital structure of a business abide go over whether the association has luxuriant finance in order to achieve targets and enthronizations, de circumstanceining certain risks complex and put on aim of return required. This report looks at the take aim of gearing Tesco has whether financed by debt or equity, going on to look at the weighted norm woo of capital. investing is too important as investors expect, and the confederacy looks to achieve growth. With Tesco this report looks at both future and gone investments, analysing the non fiscal and financial benefits from them. Dividend policy and lets atomic envision 18 tumbled spirit at into supposition behind them.Tesco handles argon analysed apply valuation techniques, looking at what whitethorn be the reason for Tescos victor through the corner, helping them stabilise tract range after the bakshis of recession despite just about contractual and estimcapable thins. Finally looking into how the outside(a) commercialize has benefited Tesco by non financial means.An overview of a few strategic solutions Tesco has administrationd over the long time is provided, looking into just about of the challenges and topicant roles of these issues. Problems such(prenominal) as competition, international intricacy and contract disputes be shown in detail later in the report.1.0 IntroductionTescos overall 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 p asture away from food and to include financial, non financial and telecommunication services/products as well by penetrating new markets spherically. This report evaluates Tesco, analysing their capital structure and the level of debt discussing how this rout out influences the attach to value and investing finiss, looking at how past investments and future investments are beneficial for Tesco. Dividend policies are related to theory and share sets are questioned using diametrical valuation techniques available to any investor. departure on to look at survival through the recession looking at different strategic issues they bring forth faced over the familys.2.0 smashing 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 plunder be a cheaper slight risky option as cost of debt is lower than equity and increasing levels of debt can reduce the weighted second-rate cost of capital. By reducing weighted average cost of capital, ac fellowship value can be increased and in that locationfore shareowner wealth is increased. WACC can be employmentd against currency 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 global financial crisis began to hit the market, Tesco Plc reduced its gearing dimension and kept the ratio level at around 75% until 2007. This was sensible at the meter due to recession risk of lower turnover levels could mean the strength to re hand certain levels of debt much difficult. Having amplyschooler levels at the time would submit meant financial risk, re deportment risk etc, would affect interest rates on loans and increase the cost of equity as share pallbearers are taking a higher(prenominal)(prenominal) risk thitherfore require a higher rate of return. Tesc os main(prenominal) competitors suffer the similar situation ASDA and Sainsbury were also affected by the global financial crisis, they also reduced their gearing ratio level and keep it to relatively low level to nigh 35%. However, with the official profit figure, Tesco changed its current strategy. Tesco pack gear up its business apace from 2008, and reached 149.14% in 2009. As the figures show that Tesco had borrowed in a huge aggregate of debt in 2009. Recently, a joint venture between Tesco and property incorruptible 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 ordain be followed.Years 2005 to 2009, sales and income figures of TESCO drop steadily increased it generated a very positive profit return for investors. With the global finance crisis chronic to affect UKs sparings, the political relation may loosen its restriction toward s TESCO whatever happens, plurality need foods and basic living materials, it is a perfect moment for Tescos expansion. The high level of gearing may support Tesco to expand its business still there is potence risk of default on loans. Can Tesco sustain its level of income, if non 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 profits before recession had an impacted. This shows sales profits in the overseas market amounted to a bewitching percentage of Tescos profit figure. Comparing growth over 5 years in the UK with Asia, UK all generates a 49% increase when the Asian market increased 250%. Tesco has placed increasingly focuses on their international ven ture. Nearly two-thirds of the classifys position is promptly overseas, although these markets still only account for a quarter of group turnover (Rigby, 2009).Tescos Summary Five Year RecordYear terminate February2001 (m)2002 (m)2003 (m)2004 (m)2005 (m)Group Sales22,58525,40128,28033,55737,070Turnover excluding VATUK18,20319,82121,30924,76027,146Rest of Europe1,7372,1812,6643,3853,818Asia8601,3982,0312,6693,01020,80023,40026,00430,81433,974Philip Clarke, promontory of Tescos international operations, singled out south Korea, along with China. Mentioned as Tescos two al almost promising markets, homework 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 inter across the nation rather than nationally may be due to competition policy trying to bounce Tescos growth, also there is little land space to continue make new structures, and Tesco already purchased the most profitable local convenience stores in the past.3.1 EnvironmentalTesco, now 4th largest retailer in the world, have proclaimed that it will open the first zero carbon store as part of its bid to be a carbon neutral company by 2050. They stated its corporate commitment towards reducing climate change, for character halving its energy use per square foot by 2010, reuse and cycle packaging 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 top power, and to help develop the green technologies of the future (Tesco Media, 2010).Environmental issues are enough increasingly important over the years. climate change has pop off a huge focus for businesses. The Climate Change Act 2008 makes the UK the first inelegant in the world to have a legally binding long framework 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 forever making environmental changes Tesco builds reputation as a more ethical company.3.2 DiversificationOn the other side of expansion, Tesco is looking to take value of the current mis bank towards asserts following their role in the economic crisis. They had exhausted 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 battle of Tesco marketing director Lance Bachelor as Tesco Telecom top dog executive.Tesco are going to attempt penetrate the finance market merely by offering current accounts within two yea rs and also offering mortgages for their first time. Offering credit cards, insurance and savings deals already Tesco has a huge customer base. They have a huge potential to increase turnover by merchandising more products to their existing customers. They plan to open branches globally not on in the United nation which could be a huge challenge for the company. They need to time this investment perfectly, particularly 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 fall loyalty points under its Club card program (Tesco, 2008).4.0 Shareholder schoolingAn important factor in the eye of an investor is predicting the future. Shareholders are evoke in company performance, both long and short term. They are also interested in the companys investment not only to expect growth notwithstanding so they are able t o assume levels of retained earnings and cash flows. This allows shareholders to make estimations on dividend payout, the only form of cash flows a shareholder receives and predict any growth on share equipment casualty.4.1 Dividend PolicyTesco pay cash dividends as interim and final year. The dividend is steadily increasing correct 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 translate averaging 2.43% from 2007-09. funky yields can lead to possible patterns of high growth un handle 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 determine 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 PriceCapture.PNGShares are hard to say what influences price, there are many another(prenominal) factors which can all influence share price such as earnings per share and price earnings multiple. intelligence activity can have affects such as bad press can decrease share price, disputes or contractual issues etc. Other 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 like shareholder return, according to cash flows from investments and risk measurements (Arnold, 2008). This theory provides proof attached assumptions of no tax, investment decisions are not affected by dividends and there are no transaction costs converting price into cash when copeing stock.In the current economic position this theory would most likely be irrelevant as there are always taxes u pon a business. Transaction costs would almost always apply therefore this theory has its limitations. If dividends were irrelevant, the business may be wasting 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 belief 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 lift collapse of Northern rock, (Telegraph, 2009).The Sector was hit hardest in years and 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 ma y 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 echt value accounts for all affects.klll.PNGThe final method for this report is Price salary 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 even so P/E over the past 3 years has been decreasing, which shows investors are not unforced to pay as much f or a stock than previously.Tesco shares have remained strong, retrieve after a downfall in peak of recession. Share valuation techniques however have shown share value may be overvalued in 2009. There seemed 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 prognosis of expected growth in the future but looking at long term trends there have not been any spectacular 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 education considered for this was not just cost cutting but based upon factors such as branding, cost management, internet potential and customer targeting, (Ruddick, 2008). For instance, Tesco replaced a potbelly of high brand products with Te sco value products, which sell for less however pull cover more customers generating higher turnover, this helped reduce costs related to more dearly-won products. Other cost savings are through better use of IT, and from policies and management of suppliers to ensure the greatest value to the business and customer (Business, 2009).Tesco conjunction 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 support, or when customers have not returned for a while they send vouchers to entice them.6.0 aspiration relentless rivalry within the UK retail market is forcing cost cuts and ways intelligence ways that they can differentiate themselves from competitors. The retail market is mature and oligopolistic in its n ature, with a few major 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 whole 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 active 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 predominate feature. Considering the recession, this will pl aces 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 cock-a-hoop 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 troop 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 customaryity on the matter.The competition commission has started to realise t hat the larger the retailer they have a stronger capability to force prices lower from suppliers. describe as a master servant relationship farmers complain about Tescos cancelling orders at last minute 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 make 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 sham the risks.8.0 Environm ental IssuesOne big issue that Tesco is facing is the environment grammatical constituent as the increasing global concern of environmental problem, how Tesco react to this issue will have huge impact to its future business performance. The reality demands more than ever that films should take their responsibility as a component 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 to the lowest degree 50% by 2020, and would seek to restrict air transport to less than 1% of the firms products. Moreover, for cutting CO2 and energy saving, Tesco also introduce a series of strategy by encourage customers to use reusable add bag and reward shopping points t o club members to reduce the usage of malleable 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 stores 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 police squads 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 ethnic issue. For instance being Flexible as in Japan they shop in small amounts but priv ilege light 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 subsist 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 effective 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 w ay 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 payments 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, damaging 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 anal ysis 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 822m New stores. Online BBC News. unattached at http//news.bbc.co.uk/1/hi/business/3675164.stm Accessed 20/3/2010.BBC News, 2007. Tesco boss unveils green pledges Online. BBC News. functional at http//news.bbc.co.uk/1/hi/6276351.stm Assessed 24/3/2010.BBC News. 2007. Tesco dispute enters second day. Online visible(prenominal) at http//news.bbc.co.uk/1/hi/scotland/edinburgh_and_east/6690475.stm Accessed 20/3/2010.BIRMINGHAM POST. 2007. Sainsbury shares plummet as Delta Two pulls out. Online addressable at http//www.highbeam.com/doc/1G1-170795697.html Accessed 18/3/2010.British LAND. 2010. Press release. Online British land. Available at http//www.britishland.com/media/pressreleases/pressrelease130110 Accessed 15/3/2010.BROOKS, I. 2006 . Organisational doings Individuals, groups and organisations. 3rd edition. Pearson Education.BUSINESS, T. 2009. Challenges and outlook for the Tesco Stores Ltd. Online Available at http//www.businessteacher.org.uk/business-resources/case-study-database/tesco-case-study/ Accessed 20/3/2010.FAME, database. 2010. enlarge information on Tesco Plc. Online Available at https//fame.bvdep.com/version2010226/cgi/template.dll?checkathens=1kick=1product=1user=n0242395%40ntu.ac.ukpw=nK9CXV0V3ZRxfmNkkx9ZjA%3d%3d Accessed 23/3/2010.HIRD, H and BURLEY, H. 2005. The Tesco Takeover. Online Available at http//www.foe.co.uk/resource/marketing_material/tesco_takeover_leaflet.pdf Accessed 20/3/2010.LANGFELD, M, 2009. Tesco Consistent Earnings Growth at Attractive Price, online. Available at http//seekingalpha.com/article/159992-tesco-consistent-earnings-growth-at-attractive-price Accessed 18/3/2010.LEAHY, T. 2009. Press releases SCI Conference. Online Available at http//www.tescoplc.com/plc/media/pr/ pr2009/2009-10-16/ Accessed 18/3/2010.MM Theory, 1961. When Are Dividends Irrelevant? (The Miller Modigliani Proposition). Online Available at http//pages.stern.nyu.edu/adamodar/New_Home_Page/invfables/dividirrelevance.htm Accessed 19/3/2010.MULLIN, D. 2009. Farmers protest at Tesco over milk price. Online Available at http//www.farmersjournal.ie/myJournal/forum/content/farmers-protest-tesco-over-milk-price Accessed 20/3/2010.OPSI. 2008. Climate Change Act 2008. Online Available at http//opsi.gov.uk/acts/acts2008/ukpga_20080027_en_1 Accessed 16/3/2010.RIGBY, E. 2009. Tesco huntsmans horn strategic success overseas. Online Available at http//www.ft.com/cms/s/0/7b824f06-2b88-11de-b806-00144feabdc0.html Accessed 20/3/2010.RUDDICK, G. 2008. Tesco most likely retailer to survive recession. Online Available at http//www.telegraph.co.uk/finance/newsbysector/retailandconsumer/3368164/Tesco-most-likely-retailer-to-survive-recession.html Accessed 18/3/2010.TELEGRAPH. 2009. UK Recession Timeli ne of how the British economy has been hit. Online Available at http//www.telegraph.co.uk/finance/financetopics/recession/4320827/UK-Recession-Timeline-of-how-the-British-economy-has-been-hit.html Accessed 19/3/2010.TESCO. 2007. Press release. Online TESCO plc. Available at http//www.tescoplc.com/plc/media/pr/pr2009/2009-01-13b/ Assessed 24/3/2010.TESCO. 2007-9. Tesco Annual Report 2007/8 2008/9. Online Available at http//www.tescoplc.com/annualreport09/downloads/ Accessed 17/3/2010.TESCO. 2008. Tesco takes full ownership of Tesco personalized finance and targets 1 billion from retailing services. Online Available at http//www.tescoplc.com/plc/ retentivity/intannounce.pdf Accessed 18/3/2010.TESCO plc. 2009. International Strategy. Online Available at http//www.tescoplc.com/plc/about_us/strategy/international/ Accessed 19/3/2010.TESCO. 2010. Our Strategy. Online Available at http//www.tescoplc.com/plc/about_us/strategy/ Accessed 19/3/2009.TESCO, Media. 2010. Press releases Tesco in 100m to boost UK green economy. Online Available at http//www.tescoplc.com/plc/media/pr/pr2010/2010-02-03/ Accessed 18/3/2010.THIS IS MONEY. 2008. Tesco takes on banks after RBS buyout. Online Available at http//www.thisismoney.co.uk/markets/article.html?in_article_id=448364in_page_id=3 Accessed 18/3/2010.