TESCO vs. M&S

1.      About the Companies
1.2  Marks and Spencer (M&S)
Marks and Spencer (M&S) is one of the leading retailers in the United Kingdom dealing mainly in clothing, home products and food items. M&S employs around 75,000 people in 895 stores around the world.  Over 21 million people in aggregate from across the world visit M&S stores each week.

M&S is the number one provider of women wear in the UK and does witnessing an increasing demand for its menswear, kids wear and home ware products owe mainly to the company’s online business. As far as its food business is concerned, M&S sells everything from fresh produce and groceries to partly prepared and ready meals. On an overall basis, 49% of the business of M&A is accounted for through clothing and home ware sales whereas rest of the 51% of the business is in food.
Founded by Michael Marks and Thomas Spencer in 1903, M&S has evolved from a penny store to one of the largest retail stores in the world, with its largest store on London’s Oxford Street which has around 170,000 sq. ft. of selling space.
The other renowned names in the retail industry include TESCO, ASDA, Sainsbury’s and Morrisons (Marks & Spencers, n.d.).
1.3  TESCO
Tesco is a multinational grocery and general merchandising company. It’s basically a British company with its head office located in Chestnut, Hertfordshire. The company was founded by Jack Cohen in 1919. When the company first started its main line of business were food and drinks but with the passage of time it has diversified its portfolio and is now dealing in clothing, electronics, financial services, telecom, home appliances and renting. By virtue of its Global sales and domestic market share it is ranked as the Britain’s largest retailer. Moreover, it is the third largest global retailer in terms of its revenue and second largest global retailer in terms of its profit.
As the sales and revenue of the company witness, the company has taken over the international market. The company has followed the acquisition approach for entering into the foreign markets. It has entered into joint ventures with the local companies so as to strengthen its position in those countries. It joined hands with the Samsung group in South Korea and in Thailand entered into partnership with Charoen Pokphand.
The company does not only operate worldwide but it is listed in more than one countries. It is listed on the London Stock Exchange as well as the Irish Stock exchange. Moreover, it trades on NASDAQ under the name of TESO (Tesco,n.d.).
2.      Evaluation of M&S Performance and Comparison to TESCO for Period from 2005 to 2009
Based on the financial information available and extracted in Appendix 1 and 2, the above-mentioned ratios for M&S and TESCO have been computed as follows;
Marks and Spencer
2005
2006
2007
2008
2009
Profitability ratios
Operating profit margin
8.66%
10.90%
12.18%
13.43%
9.61%
Return on assets
12.04%
10.04%
12.27%
11.46%
6.99%
Return on equity
64.47%
45.28%
40.05%
41.80%
24.13%
Efficiency ratios
Stock turnover (In days)
25.24
28.37
28.94
32.25
34.38
Debtor Collection period
1.41
2.11
2.93
3.56
3.54
Creditor payment period
14.56
18.43
18.09
14.97
50.29
Risk ratios
Debt to Equity
2.67
1.89
1.03
1.43
1.46
EBIT / Interest
7.08
6.54
7.56
8.68
4.28
Cash flow to current maturity of long-term debt
1.76
0.76
2.05
1.30
0.97
TESCO
2005
2006
2007
2008
2009
Profitability ratios
Operating profit margin
5.76%
5.78%
6.21%
5.88%
5.88%
Return on assets
41.78%
40.21%
41.50%
33.81%
15.86%
Return on equity
15.57%
16.69%
17.96%
17.94%
16.57%
Efficiency ratios
Stock turnover
15.30
14.67
17.89
20.31
19.60
Debtor Collection period
8.29
8.25
9.24
10.09
12.33
Creditor Collection period
58.13
50.93
56.01
61.51
63.62
Risk ratios
Debt to Equity
0.58
0.63
0.59
0.74
1.34
EBIT / Interest
9.03
10.23
13.37
12.21
7.10
Cash flow to current maturity of long-term debt
4.34
1.28
1.69
1.24
0.73
2.1.   Comparison of the Performances of Marks & Spencer and TESCO
As is evident from the financial performance of the company in figures above, 2009 has proven to be a difficult year for M&S with a decrease of 28.44% in the company’s operating profit margin. The operating profit of the company grew at an average rate of 15% over the period from 2005 to 2008. Year 2009 has seen the effects of global recession hit different sectors of the global economy including retail industry. As an effect of this recession demand for the company’s products has not followed the growth trend witnessed in the years 2005 to 2008 of approximately 6.4% with sales growth of less than 1% in the year 2009. This is the principal contributor to the company’s dwindling profit margins.
Another problem appears to be the company’s investment in stock in particular and debtors. Stock turnover days have increased by 2.09 days indicating inefficiency in the company’s stock management and a possible slowdown in the demand for the products that company offer. Overall, the company’s stock turnover days have increased steadily from approximately 25 days to Approximately 34 days during the period under observation. Read Marks & Spencer market structure
As a result, the company has to delay payments to its suppliers as indicated by the creditor’s payment period of approximately 50 days which has increased from 14.5 days in the year 2005. An increase of 345% from the level in 2005 cannot be justified particularly when the cost of sales has only increased by 16% during the same period. This leads us to believe that the company might be encountering serious cash flow crisis. This observation is also confirmed by the cash flow to current maturity of long-term debt ratio. The company has also seen this ratio fall by 45% during the five year period. The company’s EBIT/ Interest ratio has also fallen by 40% during the five year period resulting in debt holders accepting higher risk than before.
TESCO on the other hand has had fairly steady returns during the period under observation. The company’s operating profit is a steady 5.7 – 5.9% over the five year period. But as is evident from the information contained in Appendix – 2, the company appears to have increased its asset base with funds generated from borrowings as is indicated by the company’s Debt to equity ratio. That is why despite a steady operating profit margin, the company’s return on assets has dropped significantly in the year 2009. As a result of this increase, the company might be viewed as a more risky prospect to the shareholders as compared to M&S who’s Debt to equity ratio has dropped during the period under observation.
The company’s working capital management seems efficient as compared to M&S. The average length of the company’s working capital cycle over the five year period has ranged from negative 28 days to negative 35 days. This shows an efficient use of supplier credit during the period as compared to M&S whose working capital cycle ranges from positive 12 days to negative 12 days.
As a result of this comparison, we can see that TESCO has clearly outperformed M&S as regards its financial performance during the five year period. But TESCO is viewed by the market as a riskier investment as compared to investment in the stock of M&S.
3.      Conclusion
As is evident from the above research paper, M&S is struggling due to the current economic recession therefore he company should adopt some strategies to avoid the effects of this recession. On the other hand we can see that TESCO has been showing better financial position during the period under study. Moreover, TESCO is not as much affected by the economic recession as much is M&S. Hence the company should carry on with its current strategies and try to go in the same direction. It can be said that TESCO is a better company from investors’ as well as shareholders’ point of view.
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TESCO (n.d.). About us. Retrieved JUly 24, 2010, from TESCO: www.tesco.com/aboutus