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TABLE OF CONTNENT
EXCUTIVE SUMMARY ...................................................................................................................................... 4
1. COMPANY OVERVIEW ................................................................................................................................. 5 1.1. COMPANY PROFILE ................................................................................................................................................... 5 1.2. COMPANY HISTORY .................................................................................................................................................. 5
2. INDUSTRY OVERVIEW ................................................................................................................................ 6 2.1οΌFIVE FORCES ANALYSIS .......................................................................................................................................... 6
2.1.1. Rivalry among existing firms: ........................................................................................................................ 7 2.1.2. Threat of new entrants:..................................................................................................................................... 8 2.1.3. Threat of substitute products ......................................................................................................................... 8 2.1.4. Bargaining power of buyers ............................................................................................................................ 8 2.1.5. Bargaining power of suppliers: ..................................................................................................................... 8
2.2. SUMMARY OF FIVE FORCES ANALYSIS .................................................................................................................... 9
3. STRATEGIC ANALYSIS .............................................................................................................................. 10 3.1. PRODUCT LEVEL...................................................................................................................................................... 10 3.2. BRAND LEVEL .......................................................................................................................................................... 10 3.3. OPERATION LEVEL .................................................................................................................................................. 10 3.4. SUMMARY OF STRATEGY ANALYSIS ...................................................................................................................... 11
4. RATIO ANALYSIS ........................................................................................................................................ 12 4.1. OVERALL PROFITABILITY ...................................................................................................................................... 12 4.2. OPERATING MANAGEMENT ................................................................................................................................... 14
4.2.1. Gross Profit margin & SG&A margin .........................................................................................................14 4.2.2. NOPAT margin & EBITDA margin ..............................................................................................................15 4.2.3. Summary of Operating management .......................................................................................................15
4.3. INVESTMENT MANAGEMENT................................................................................................................................. 15 4.3.1. Working capital management .....................................................................................................................16 4.3.2. Non-current assets management ...............................................................................................................17 4.3.3. Summary of Investment management .....................................................................................................17
4.4. FINANCIAL MANAGEMENT..................................................................................................................................... 17 4.4.1. Current liabilities and short-term liquidity ...........................................................................................18 4.4.2. Debt and long-term solvency ........................................................................................................................19 4.4.3. Summary of Financial Management .........................................................................................................19
4.5. SUMMARY OF RATIO ANALYSIS ............................................................................................................................. 19
5. CASH FLOW ANALYSIS ............................................................................................................................. 20 5.1. CASH FLOW STRUCTURE ........................................................................................................................................ 20 5.2. INTERNAL CASH FLOW GENERATING ABILITY .................................................................................................... 20
5.2.1. Future cash flow generating ability ..........................................................................................................20 5.3. LIQUIDITY ................................................................................................................................................................ 21
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5.4. DIVIDEND PAYOUT ABILITY ................................................................................................................................... 21 5.5. SUMMARY OF CASH FLOW ANALYSIS ................................................................................................................... 21
6. PROSPECTIVE ANALYSIS ......................................................................................................................... 22 6.1. FORECASTING .......................................................................................................................................................... 22 6.2. VALUATION .............................................................................................................................................................. 25
6.2.1. Residual income valuation .............................................................................................................................25 6.2.2. Price multiple valuation..................................................................................................................................27
7. RECOMMENDATION ................................................................................................................................. 28 7.1. INVESTMENT PRINCIPLE OF PENSION FUND ..................................................................................................... 28 7.2. CORPORATE RISK NATURE ..................................................................................................................................... 28 7.3. CORPORATE COMPETENCE ................................................................................................................................... 29 7.4. FUTURE GROWTH POTENTIAL ............................................................................................................................. 29 7.5. DIVIDEND ................................................................................................................................................................. 29 7.6. VALUATION .............................................................................................................................................................. 29 7.7. RECOMMENDATION ................................................................................................................................................ 29
REFERENCE ...................................................................................................................................................... 30
APPENDIX ........................................................................................................................................................ 32 Appendix 1: Standardized Income Statement of Greggs plc. 2008-2012 (Β£β1000) ..........................32 Appendix 2: Vertical Common Sized Income Statement of Greggs plc 2008-2012 ..........................32 Appendix 3: Standardized Balance Sheet of Greggs plc. 2008-2012 ......................................................33 Appendix 4: Standardized Income Statement of Tesco plc. 2008-2012 (Β£βm) ....................................35 Appendix 5: Vertical Common Sized Income Statement of Tesco plc 2008-2012 .............................35 Appendix 5: Standardized Balance Sheet of Tesco plc. 2008-2012 .........................................................36 Appendix 6: Ratio analysis of Greggs plc. and Tesco plc. 2008-2012 .....................................................39 Appendix 7: Ratio calculations .................................................................................................................................41 Appendix 8: 5 Years' forecasted financial statements of Greggs (Β£β000) ..............................................43 Appendix 9: Words reconciliation ...........................................................................................................................45
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LIST OF FIGURES FIGURE 1: FTSE 100 INDEX OF FOOD AND DRUG RETAILER SECTOR ................................................................................................... 6 FIGURE 2: UK RETIAL EXPENDITURE GROWTH YEAR-ON-YEAR 2007-2012 (%) ........................................................................... 7 FIGURE 3: RETURN ON EQUITY (ROE) FOR GREGGS AND TESCO, 2008-2012 .............................................................................. 12 FIGURE 4: ADJUSTED RETURN ON EQUITY (ROE) FOR GREGGS AND TESCO, 2008-2012 ........................................................... 13 FIGURE 5: NET PROFIT MARGIN FOR GREGGS AND TESCO, 2008-2012 .......................................................................................... 14 FIGURE 6: ASSETS TURNOVER OF GREGGS AND TESCO, 2008-2012 ............................................................................................... 16 FIGURE 7: FINANCIAL LEVERAGE OF GREGGS AND TESCO, 2008-2012 .......................................................................................... 18 FIGURE 8: SHARE PRICE OF GREGGS PLC. ................................................................................................................................................ 28 TABLE 1: HISTORY OF GREGGS PLC. ........................................................................................................................................................... 5 TABLE 2: RANK OF UK BAKERY COMPANIES BASED ON THEIR STORE NUMBER .................................................................................. 7 TABLE 3: FASTEST GROWERS IN UK CRAFT BAKERY ............................................................................................................................... 7 TABLE 4: DECOMPOSITION OF ROE FOR GREGGS, 2008-2012 ........................................................................................................ 13 TABLE 5: DECOMPOSITION OF ROE FOR TESCO, 2008-2012 ........................................................................................................... 13 TABLE 6: GROSS PROFIT MARGIN AND SG&A EXPENSES MARGIN FOR GREGGS AND TESCO, 2008-2012 ................................. 14 TABLE 7: EBITDA MARGIN AND NOPAT EXPENSES MARGIN FOR GREGGS AND TESCO, 2008-2012 ....................................... 15 TABLE 8: WORKING CAPITAL MANAGEMENT OF GREGGS, 2008-2012 ............................................................................................ 16 TABLE 9: NON-CURRENT ASSETS MANAGEMENT RATIOS FOR GREGGS, 2008-2012 ..................................................................... 17 TABLE 10: CURRENT LIABILITIES AND SHORT-TERM LIQUIDITY OF GREGGS, 2008-2012 .......................................................... 18 TABLE 11: DEBT AND LONG-TERM SOLVENCY OF GREGGS, 2008-2012 .......................................................................................... 19 TABLE 12: COMPOSITION OF GREGGS'S CASH FLOW, 2010-2012 .................................................................................................... 20 TABLE 13: CHANGES OF OPERATING WORKING CAPITAL OF GREGGS DURING 2012 ....................................................................... 20 TABLE 14: CASH FLOW GENERATING ABILITY, 2010-2012 ............................................................................................................... 21 TABLE 15: OPERATING CASH FLOW RATIO OF GREGGS, 2010-2012 ................................................................................................ 21 TABLE 16: DIVIDEND SUSTAINABILITY OF GREGGS, 2010-2012 ...................................................................................................... 21 TABLE 17: FORECASTED SALES GROWTH FOR GREGGS, 2013-2017 ............................................................................................... 22 TABLE 18: FORECASTED COST OF SALES FOR GREGGS, 2013-2017 ................................................................................................. 22 TABLE 19: FORECASTED DISTRBUTION AND SELLING COST FOR GREGGS, 2013-2017 ................................................................ 22 TABLE 20: FORECASTED ADMINISTRATIVE FOR GREGGS, 2013-2017 ............................................................................................ 23 TABLE 21: FORECASTED OPERATING WORKING CAPITAL MARGIN FOR GREGGS, 2013-2017 ..................................................... 23 TABLE 22: FORECASTED FREE CASH FLOW TO EQUITY FOR GREGGS, 2013-2017 ......................................................................... 24 TABLE 23: GROWTH SUSTAINABILITY OF GREGGS, 2010-2012 ....................................................................................................... 29
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EXCUTIVE SUMMARY
β’ Greggs is competing on a differentiation strategy β’ Integrated supply chain β’ Sound brand image β’ Wide ranged products with high quality β’ Easily accessed stores β’ New wholesaling and franchising market Competence
Finance
Risk
People
β’ β’
Opinion
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1. COMPANY OVERVIEW
1.1. Company Profile
Greggs plc is a UK-based bakery chain company founded and headquartered in Tyneside, Newcastle in the UK in 1939, and has expanded into a dominant player in UKβs bakery industry (Covell, 2005). It produces fresh bakery goods including a variety of sandwiches, savouries and pasties, and distributes these products to the market through take out service, retailing, franchising and wholesales (Greggs, 2013b). The company focuses on building a strong brand image of fresh and high quality food throughout its expansion, and meanwhile improving the overall efficiency of operational activity. Nowadays Greggs has 1671 shops throughout the UK and approximately 20,000 employees supported by ten regional bakeries, one savoury production unit and highly efficient self-owned distribution channels, selling products worth Β£735 million in the year 2012 (ibid.). It also launched a new project named βGreggs Momentβ to explore the market in coffee shop format in 2011 (Chris, 2011).
1.2. Company History
Greggs plc. started as a local bakery business in Tyneside founded by John Greggs in 1939, and began to expand to neighbour areas after his son, Ian Greggs took over. The company experienced significant growth in 1984, the year of Greggsβ Initial Public Offering, and 1994, the year of acquiring Allied Bakeries Limited. The detailed history can be presented in a timeline table below.
Table 1: History of Greggs plc.
Year Event 1939 The business started as a small local bakery in Tyneside, England. 1964 Ian Greggs became the chairman of the business named Greggs. 1972 Greggs successfully expand its business outside England. 1984 Greggs hired Mike Darrington as a new managing director and launched its initial public offerings. 1994 Greggs acquired Allied Bakeries Limited, adding Bakers Oven to its brand. 2003 Greggs opened two new stores in Belgium. 2008 Share price dropped 25.38% during financial crisis. 2011 Greggs opened βGreggs Momentβ shops. Source: International Directory of Company Histories, 2005.
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2. INDUSTRY OVERVIEW According to FTSE (2012), Greggs is classified into food and drug retailer sector, which includes supermarket, chain stores and drug stores etc. The economic downturn and high unemployment rate has significantly hurt sales revenue and generated fierce price competition. Given the weak economy, the sector has a compound annual growth rate (CAGR) of 3.5% during previous years (Datamonitor, 2010), presenting a slight growth under economy downturn. However, for food industry, the extent of damage is relatively small because the demand of food and general goods is income-inelastic. Further evidence is shown in figure 1. The past performance of index and FTSE 100 of this sector illustrates that this sectorβs share price has a mild fluctuation and highly correlates with whole market index.
Figure 1: FTSE 100 index of food and drug retailer sector
Source: Yahoo Finance As a bakery corporation, Greggs is listed in the London Stock Exchange and categorized as a food & drug retailer. The UK food & drug retailer sector is full of numerous companies with fierce competitions. While some large and lucrative companies expanded rapidly, others underperformed the market or even went to bankrupt. So this section will analyze Greggsβs current market position using Porterβs Five Forces Analysis. To provide a more precise analysis, we narrow the industry analysis to bakery industry.
2.1οΌFive forces analysis
Five Forces Analysis offers an effective way to analyze the competitive condition of an industry in terms of rivalry among existing firms, threat of new entrants, threat of substitutes, bargaining power of buyers and bargaining power of suppliers (Porter, 1979). These factors determine the capacity for a
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firm to earn abnormal profits in its industry.
2.1.1. Rivalry among existing firms: There is a strong competition among existing firms, especially comes from the increasing pressure from craft bakeries and supermarkets. The figure 2 implicitly indicates a slowdown of market growth which might be explained by market saturation. To survive and remain competitive, it is critical for Greggs to attract and retain customers for further development.
Figure 2: UK retial expenditure growth year-on-year 2007-2012 (%)
Source: Verdict Research Within bakery industry, tables blew show that Greggs has expanded rapidly and soon dominated bakery market with the most stores, followed by Costa and Subway. However, competition has increasingly come from supermarkets such as Tesco and Sainsbury. With widely distributed stores and low priced bakery products, they have become major players in bakery industry. Therefore, it suggests higher pressure in traditional bakery firms and severer price competition (Palepu, Healy & Peek 2010).
Table 2: Rank of UK bakery companies based on their store number
Rank Company Store numbers in 2013 1 Greggs 1671 2 Costa 1552 3 Subway 1483
Source: British Baker
Table 3: Fastest growers in UK craft bakery
Rank Company Outlets in 2013 Year-on-year increase 1 Costa 1552 200 2 Greggs 1671 100
3.60% 3.85% 3.85% 3.35% 3.30% 3.30% 3.60%
-0.20%
-4.30%
0.20% -0.80% -0.50%
3.60%
1.60%
-0.40%
1.40% 1.10% 1.20%
-5.00%-4.00%-3.00%-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%5.00%
2007 2008 2009 2010 2011 2012
Food & grocery Non-food Total retail
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3 Subway 1483 59 Source: British Baker
2.1.2. Threat of new entrants: Threat from new entrants is considered to be moderate from the following two aspects. Although the entry barrier of bakery industry is rather low, Greggsβs economy of scale, well established distribution channel, and good relationship with suppliers made it difficult for the new entrants to obtain a certain market share. However, certain threat comes from existing food firms who are attracted by high profitability and likely to enter bakery market. Like McDonaldβs established McCafΓ©, other food firms, such as KFC, Pizza hot, have the potential to be new entrants.
2.1.3. Threat of substitute products Greggs faces high level of threat of substitute products. Affected by the globalization, consumers are willing to try new things and change their daily foods. For example, cheap and tasty Chinese, Japanese and Mexican foods are getting favored. Given the fact of low switching cost in the food industry, it is crucial for Greggs to take corresponding measures.
2.1.4. Bargaining power of buyers As a result of customersβ high price sensitivity and low switching costs, the bargaining power of buyers in bakery market is high. With an increasingly acute perception of price, customers spend less of the disposable income in recent years (Trading Economics, 2013). The situation is worsen by the economic downturn, which made customers more cautious about their shrinking disposable income.
2.1.5. Bargaining power of suppliers: The bargaining power of suppliers is relatively low. The major materials Greggs need are indifferent from individual households, and there are plenty of suppliers in the market. Additionally, the large volume of purchase by Greggs allows it to have a better bargaining position over their suppliers.
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2.2. Summ
ary of five forces analysis
High
Moderate
High
Low
Bargaining power of buyers
High price sensitivity
Low
switching cost
Less expenditure of disposable income
Threat of new entrants Lim
ited market share for new
entrants Low
entry barriers Integration of existing big food firm
s
Threat of substitutes Low
switching costs
Lots of alternatives
Rivalry among existing firm
s High
Low industry grow
th rate (3.3%)
Remain dom
inant bakery market
Increasing pressure from superm
arkets
Bargaining power of suppliers Plenty of raw
material suppliers
Large volume purchase by G
reggs
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3. STRATEGIC ANALYSIS Greggs competes on the basis of differentiation by offering high-quality, fresh food at great value prices, and operating an integrated supply chain from production through distribution to point of sale. From customersβ perspective, they tend to be highly price sensitive and prefer conveniently accessible stores as well as take away and processed food. To assess if the strategy fulfill customersβ needs, the strategy will be analyzed in product level, brand level and operation level.
3.1. Product level
Developing product ranges Greggs is continuously developing their product ranges. In addition to traditional bakeries, Greggs now provides breakfasts and low calories choices to meet the increasing needs for late breakfast and healthy living style (Greggs, 2012).
3.2. Brand level
Building brand images As with promotion, Greggs spread its advertising channel into online website, which drove its promotion success. From service aspect, Greggs managed to build an image of comfortable environment along with good quality of product in Greggs Moment and Bakery Oven, focusing on pleasant customer experience (ibid.). Corporate Social Responsibility (CSR) Greggs has long-standing commitment to CSR and considers it as the core of business operation. Concerned about the safety and quality, Greggs has removed any artificial chemical additives from its products. In addition, Greggs is serving more than two million free breakfasts to disadvantaged primary school children each year (ibid.).
3.3. Operation level
Expanding stores location Not only Greggs but also Subway and Costa are moving away from high streets. One reason is that costs for opening new stores in high streets are soaring. While another prior concern is that customersβ preferences have changed from city center to nearby stores. Hence, Greggs is making their shops more accessible and comfortable. Exploring new markets Greggs is now successfully working together with Iceland and Moto which succeeds in expanding its profits sources. A range of frozen products in Greggs branded cabinets are traded in Iceland stores (ibid.). Furthermore, Greggs Moment is aimed to derive shares from increasing coffee market and exploring the benefits from Greggsβ brand image.
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Integrating supply chain Greggsβ supply chain is vertical integrated as both a baker and a retailer, from production through distribution to point of sale. Setting distribution center in certain areas is one of the core expansion strategies. This ensures the efficiency of Greggsβ operation and an effective cost-saving scheme.
3.4. Summary of Strategy analysis
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4. RATIO ANALYSIS Why Tesco Greggs mainly has two types of major competitors: bakery and coffee (Costa, Subway, Starbucks) and chain stores (Tesco, Sainsburyβs). It is complicated to choose an ideally comparable firm as a benchmark for financial analysis purpose. Costa and Subway, same as other craft bakeries, are essentially comparable to Greggs in a number of ways. However, they are all private companies which renders the detailed financial analysis impossible because of insufficient information disclosures. As with Starbucks, they are US-based public companies with international operations while Greggs are solely operating in UK, which makes ratio comparison irrelevant because Starbucksβ statistics indicates its global performance while Greggsβ only represents UKβs performance. Therefore, we choose a UK-based retailer Tesco as our benchmark for financial analysis which can be justified on the ground that Tesco is a market leader in food & drug retailers sector in UK and its bakery and other food products present major pressure on Greggsβ products, especially easily accessed Tesco Express. Nonetheless, to achieve an objective comparison, variations in specific business models are taken into considerations in the analysis below. As a fundamental work for further probing, forecasting and evaluating, ratio analysis will be conducted in four main aspects: overall profitability, operating management, investment management and financial management (Palepu et al, 2010). In each of these dimensions, ratios of previous years and among peer groups will be compared. Although ratio analysis may not reach a final decision, it does give us a brief understanding of Greggs in numerical form and may assist the final investment choice.
4.1. Overall profitability
Widely used by investors, return on equity (ROE) ratio indicates a firmβs profitability by measuring how much profit a firm can generate with the funds invested by the firmβs shareholders. The higher ratio means more efficient the firmβs management is and the better profit generating ability. In general, ROE between 15% and 20% are considered desirable for most industries. As Figure 3 shows it is reasonable to state that Greggs in general maintains an acceptable level of ROE through the five years with an average of 21.17%, which above the benchmark company Tesco.
Figure 3: Return on equity (ROE) for Greggs and Tesco, 2008-2012
23.05% 20.93% 21.53% 22.43% 17.89%
17.94% 16.57% 15.91% 16.07% 15.81%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2008 2009 2010 2011 2012
Greggs
Tesco
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Both of the two firmsβ ROE declined in 2008. This might be the result of the financial crisis in 2008. Greggs seemed to be better than Tesco in dealing with the economic downturn and its ROE recovered soon in 2010. However, an abnormal drop occurred in 2012 with sharp decrease from 22.43% to 17.89%. Further analysis from the annual report of Greggs shows that the ROE in 2011 was not fully contributed by operating activities, it contained the income and expenses come from the revaluation of pension. If excluded, the adjusted ROE in 2011 would be 19.66%. As Figure 4 displays, adjusted ROE of Greggs showed a steady down turn since 2010 while that of Tesco remained at a stable level with mild fluctuations.
Figure 4: Adjusted return on equity (ROE) for Greggs and Tesco, 2008-2012
While Tesco was appreciated with stable performance and profitability, Greggs gained advantage over the magnitude of ROE throughout the five years. By decomposing the ROE into net profit margin, asset turnover and financial leverage as displayed in table 4 and 5, we find that the higher ROE of Greggs was mainly driven by the superior net profit margin and asset turnover, which meant Greggs was more capable to retain profit from sales and more efficient in utilizing asset base. Although Tesco benefited from aggressive financial management, a strong ROE is certainly a solid signal that Greggs has better profitability.
Table 4: Decomposition of ROE for Greggs, 2008-2012
2011 is after adjustment 2012 2011* 2010 2009 2008 Net profit margin 5.52% 5.56% 5.73% 5.22% 5.43% *Asset turnover 2.24 2.27 2.33 2.36 2.51 =ROA 12.35% 12.63% 13.33% 12.30% 13.61% *Financial leverage 1.45 1.56 1.61 1.70 1.69 =ROE 17.89% 19.66% 21.53% 20.93% 23.05%
Table 5: Decomposition of ROE for Tesco, 2008-2012
2012 2011 2010 2009 2008 Net profit margin 4.33% 4.38% 4.10% 3.97% 4.50% *Asset turnover 1.28 1.29 1.24 1.18 1.57 =ROA 5.54% 5.66% 5.08% 4.69% 7.06% *Financial leverage 2.85 2.84 3.13 3.53 2.54 ROE 15.81% 16.07% 15.91% 16.57% 17.94%
23.05% 20.93% 21.53% 19.66% 17.89%
17.94% 16.57% 15.91% 16.07% 15.81%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2008 2009 2010 2011 2012
Greggs
Tesco
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The following sections will mainly focus on the decomposition of ROE in terms of operating management, investment management and financial management.
4.2. Operating management
Given the net operating profit margin (Figure 5), further decomposition allows analyst to assess operating management effectiveness of firms (Palepu et al, 2010). Widely used as an analytical tool, the common sized income statement (Appendix 2) displays all items as a percentage of sales revenue, which makes it possible to compare those margins of a firm over time and with peer firms. Several ratios allow us to investigate why these two firms have distinct net profit margin related to operating management.
Figure 5: Net profit margin for Greggs and Tesco, 2008-2012
4.2.1. Gross Profit margin & SG&A margin The gross profit margin is an indication of a firmβs financial health by revealing the proportion of money left after accounting for the cost of goods sold (ibid.). Table 6 shows that both the gross profit margin and SG&A margin of Greggs were much higher than that of Tesco. Greggs, a baking firm, has relatively low cost of goods mainly generated by raw materials, while Tesco, a supermarket, directly purchases and sells finished products to customers. As with SG&A margin, Greggs has been undertaking expansion strategy in recent several years, which certainly generated a large amount of SG&A expenses. For instance, it opened increase 100 new bakeries in 2012 and established βGreggs The Momentβ (Greggs, 2012). Despite this, Greggs continuously reduced its SG&A expenses by a total of Β£10 million over last three years and targeted to cut another Β£5 million down in next 2 years (ibid.) Tesco usually shared SG&A expenses with suppliers. Therefore, the big gap of two margins should not be surprising and problematic.
Table 6: Gross profit margin and SG&A expenses margin for Greggs and Tesco, 2008-2012
2012 2011 2010 2009 2008
Gross profit margin Greggs 61.10% 61.09% 61.85% 61.67% 61.76% Tesco 7.94% 8.30% 8.10% 7.76% 7.67%
SG&A expenses margin Greggs 53.84% 53.85% 53.95% 54.31% 55.30% Tesco 2.58% 2.75% 2.68% 2.32% 2.17%
5.43% 5.22% 5.73% 5.56% 5.52%
4.50% 3.97% 4.10% 4.38% 4.33%
0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%
2008 2009 2010 2011 2012
Greggs
Tesco
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4.2.2. NOPAT margin & EBITDA margin By netting out cost effects, NOPAT margin and EBITDA margin can reflect a firmβs operating performance. From Table7 we see that Greggsβs NOPAT margin and EBITDA margin worsened between 2011 and 2012 in the presence of declined customer footfalls and like-for-like sales mentioned previously, but still higher than TESCO. The bigger difference between EBITDA margins compared with NOPAT margins indicates that the noncash operating expense of Greggs has more significant impact on operating income, which may also reflects to some extent the expansion strategy that requires more non-current assets. Given the similar NOPAT margins, Greggs has advantage over the net profit margin. Therefore, although Greggs has suffered declining profit in recent years, we still have strong ground to expect its operating performance will be improved in the foreseeable future.
Table 7: EBITDA margin and NOPAT expenses margin for Greggs and Tesco, 2008-2012
2012 2011 2010 2009 2008
EBITDA margin Greggs 11.75% 13.02% 12.30% 11.51% 11.88% Tesco 8.24% 8.59% 8.51% 8.09% 8.00%
NOPAT margin Greggs 5.52% 6.34% 5.71% 5.19% 5.33% Tesco 4.61% 4.80% 4.51% 4.46% 4.60%
4.2.3. Summary of Operating management 4.2. Operating management: 4.2.1. Gross Profit margin & SG&A margin 4.2.2. NOPAT margin & EBITDA margin
4.3. Investment management
Asset turnover is a fundamental factor composing a company return equity. It is of great importance in assessing Greggsβ performance since Greggs is a retail chain giant that requires huge amount of operating capital and non-current asset investment. As Figure 6 indicates, asset turnover of Greggs was almost doubling to that of Tesco, which contributes a sound profit generating ability of Greggs. Yet, following an obvious drop in 2009 because of the effect of financial crisis, the asset turnover of Greggs fell slightly every year. By contrast, Tescoβs asset turnover rebounded in 2010 and remained on a constant level ever since. Unfavorable sales data due to intense consumer spending budget and declining footfalls may explain the upsetting trend of asset turnover in Greggs to some extent. However, the fact that its major competitor Tesco has a steady asset turnover could not be ignored. This brings up the necessity to dig more of Greggsβs investment management performance by analyzing working capital management and non-current assets management separately.
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Figure 6: Assets turnover of Greggs and Tesco, 2008-2012
4.3.1. Working capital management
Effective working capital management ability is essential for a firm to maintain sufficient amount of cash meeting its short-term debt obligations and operating expense. Operating working capital turnover is an effective indicator of a firmβs ability in such area. As a leading firm in food retail industry, Greggs holds a negative operating working capital since its products can be sold quickly even before the cost of materials are paid (Table 8). Low level of operating working capital turnover shows Greggsβs managerial efficiency. The turnover is lowed on a yearly base and reached an abnormal low level of -21.08 in 2012. Detailed analysis of such phenomenon will be given by assessing the trade receivables, inventories and trade payables separately.
Table 8: Working capital management of Greggs, 2008-2012
2012 2011 2010 2009 2008 Operating working capital turnover -21.08 -15.42 -15.28 -13.61 -16.07 Trade receivables turnover 27.29 33.12 29.69 31.04 27.68 Inventories turnover 16.18 19.11 21.26 21.23 19.77 Trade payables turnover 3.97 3.67 3.6 3.52 3.83
4.3.1.1. Trade receivables turnover
Trade receivables turnover is calculated by dividing sales by trade receivables. The higher the rate, the better it shows a firmβs ability to generate liquid revenue. Greggs enjoyed a decline in 2012 but it was not crucial since the turnover rate of the firm fluctuated every year on a regular base, which might be a result of different liability due date.
4.3.1.2. Inventories turnover
Inventories turnover derived from cost of sales over inventories. Low turnover rate indicates bad performance because of excess inventory reserve. The rate of Greggs declined steadily in the past years and enjoyed a sharp downturn in 2012. This may partly be blamed to the bad weather as Greggs
2.51 2.36 2.33 2.27 2.24
1.57
1.18 1.24 1.29 1.28
0
0.5
1
1.5
2
2.5
3
2008 2009 2010 2011 2012
Greggs
Tesco
17
claims (Greggs, 2012), but it also indicates Greggsβs weakness in optimizing its supply chain management.
4.3.1.3. Trade payables turnover
Trade payables turnover is calculated by dividing cost of sales by trade payables. The higher the rate, the better it indicates a companyβs ability to finance itself by purchasing on credit. The turnover of Greggs reached the peak of 3.97 representing a positive sign. This may partly due to the increased purchasing base as a result of its expansion plan. Yet, potential risks exist if the company continues to rely on huge amount of trade credits.
4.3.2. Non-current assets management
The ability to utilize non-current assets is of major concern when assessing a firmβs investment management performance. Though the Net non-current asset turnover of Greggs is generally higher than that of Tesco, the rate of Greggs fell since 2009 and remained at a low level. Property, plant, and equipment (PP&E) are major components of non-current assets. Further analysis of PP&E turnover indicates a similar trend. This could be roughly explained by Greggsβs bold expansion plan, with 100 new shops opened in 2012 and huge amount of capital investment in savory manufacturing plant. Therefore, although the ratios indicate an unfavorable performance of Greggs, the situation may be improved if the investment in non-current asset ceases and begins to generate profit in the future.
Table 9: Non-current assets management ratios for Greggs, 2008-2012
2012 2011 2010 2009 2008 Net non-current assets turnover 2.92 3 3.2 3.51 3.23 PP&E turnover 2.78 2.77 2.93 3.12 2.98
4.3.3. Summary of Investment management
4.3. Investment management: Asset turnover
4.3.1 Working capital management: Operating working capital turnover
4.3.1.1 Trade receivables turnover 4.3.1.2 Inventories turnover 4.3.1.3 Trade payables turnover
4.3.2 Non-current assets management: Non-current asset turnover PP&E turnover
4.4. Financial management
Financial leverage measures a firmβs total debt to equity ratio. High financial leverage can benefit firm by increasing its profit-generating base apart from equity. However, high leverage may also imply
18
high risk. Although not held as a general concept, the optimal level of financing structure can be achieved when cost of liabilities equals cost of equity. In Greggsβs case, the financial leverage is almost 50% lower than that of Tescoβs and reduced gradually (Figure 7). This reflects Greggs has a rather lowly leveraged structure and a potential to an even lower level.
Figure 7: Financial leverage of Greggs and Tesco, 2008-2012
4.4.1. Current liabilities and short-term liquidity As retail firms, both Greggs and Tesco capture the industryβs characteristic of high turnover rates and thus have high short term liabilities. Greggs has overall smaller percentage of short-term liabilities as compared to Tesco, but its liquidity risk tends to increase as explained in the following sections.
Table 10: Current liabilities and short-term liquidity of Greggs, 2008-2012
2012 2011 2010 2009 2008 Current ratio 80.53% 68.54% 74.77% 83.13% 53.13% Quick ratio 58.30% 50.90% 59.45% 68.54% 36.69% Cash ratio 24.40% 24.73% 30.68% 42.50% 6.00%
4.4.1.1. Current ratio
The current ratio of Greggs is in general below one, which may indicate high risk, but as explained above, Greggs as a food retailed can afford such kind of risk. In fact, its upward rising trend may further its liquid credit.
4.4.1.2. Quick ratio
By excluding inventory in calculation, rising quick ratio of Greggs further proves its effort in improving the ability to afford short-term debt.
4.4.1.3. Cash ratio
Cash ratio uses only cash and marketable securities as numerator. Decreasing level of cash ratio compared to quick ratio used above implies Greggs has increasing amount of trade receivables and
1.69 1.7 1.61 1.56 1.45
2.54
3.53 3.13
2.84 2.85
0
0.5
1
1.5
2
2.5
3
3.5
4
2008 2009 2010 2011 2012
Greggs
Tesco
19
potential risk if the trade receivables cannot be cashed.
4.4.2. Debt and long-term solvency
The choice of debt financing also influences a firmβs financial leverage. Low and decreasing liabilities to equity ratio indicates Greggs is not favoring liabilities and thereby has low long-term solvency problem. It is critical to mention that Greggs carries a distinct feature, as compared to Tesco, that it has no debt. And thereby its debt to equity ratio is amounted to zero. Although it is firmβs own choice to raise debt or not, and firmβs without debt such as Apple can also perform well, it is held that generally certain amount of debt is beneficial. Additionally, given the fact that Greggs is in a growing phase requiring huge amount of investment, certain cheaper debt financing can ease the companyβs cash flow problem.
Table 11: Debt and long-term solvency of Greggs, 2008-2012
2012 2011 2010 2009 2008 Liabilities to equity ratio 44.78% 55.76% 61.48% 70.15% 69.27% Debt to equity ratio 0 0 0 0 0
4.4.3. Summary of Financial Management
4.4. Financial management 4.4.1 current liabilities and short-term liquidity
4.4.1.1 Current ratio 4.4.1.2 Quick ratio 4.4.1.3 Cash ratio
4.4.2 Debt and long-term solvency Liabilities to equity ratio Debt to equity ratio
4.5. Summary of Ratio Analysis
4.2. Operating management:
4.3. Investment management:
4.4. Financial management
Overall performance
20
5. CASH FLOW ANALYSIS While ratio analysis emphases on income statement and balance sheet of Greggs, cash flow analysis gives investors better understandings of Greggsβs investing, operating and financing performance and policies.
5.1. Cash flow structure
Table 12 illustrates the composition of Greggsβ cash inflow and outflow. During past 3 years, its operating activity provided dominant cash inflow while most cash outflow was related to investment activities, indicating that Greggs is undertaking vast long-term investment through internal financing.
Table 12: Composition of Greggs's cash flow, 2010-2012
Cash inflow 2012 2011 2010 Operating activity 70,013,000 88,112,000 77,826,000 Investing activity 5,112,000 3,339,000 973,000 Financing activity 3,624,000 3,266,000 783,000
Cash outflow Operating activity -13,435,000 -14,334,000 -15,814,000 Investing activity -46,035,000 -62,882,000 -47,672,000 Financing activity -19,406,000 -18,843,000 -29,925,000
5.2. Internal cash flow generating ability
Benefited from its growing revenue and industry-leading turnover, Greggs keeps a strong cash flow from operating activity. However, compared to 2011, cash flow from operation declined shapely from Β£73,778,000 to Β£56,578,000 during 2012, which is mainly attributed to undervaluation of pension amounted to Β£9,665,000 (Greggs, 2011) and an increase of operating working capital by Β£10,614,000. The significant increase of operating working capital was mainly resulted from the unexpected bad weather and the economy depression, which was reflected in below table.
Table 13: Changes of operating working capital of Greggs during 2012
2012 2011 Changes Trade Receivables 26,917,000 21,165,000 5,752,000 Inventories 17,658,000 14,274,000 3,384,000 Trade Payables 71,955,000 74,304,000 2,349,000
5.2.1. Future cash flow generating ability The steady trade payable/ sales ratio and close cooperation with business partners allow Greggs to realize sales in cash while credit its purchase of raw material. Besides, the industry-leading asset turnover and newly opened stores ensure Greggs to continue operation activities and pay off accounts payable. Hence, it is reasonable to believe that Greggs would have strong cash position in future.
21
Table 14: Cash flow generating ability, 2010-2012
2012 2011 2010 Net non-current assets turnover 2.92 3.00 3.20 Trade payable/sales ratio 9.80% 10.60% 10.61%
5.3. Liquidity
Since Greggs has no debt or any interest bearing liability, there is no long-term liquidity risk or financial distress. In short-term, given that the operating cash flow ratios in table 14 are all less than 1, Greggsβs operating cash flow is insufficient to cover short-term payment, which suggests a potential short-term liquidity risk if the sales and turnover stagnates.
Table 15: Operating cash flow ratio of Greggs, 2010-2012
2012 2011 2010 Operating cash flow ratio 0.71 0.91 0.80
5.4. Dividend payout ability
As an important indicator for pension fund, the dividend coverage ratio measures whether a company's operating cash flows are sufficient to meet dividends. In practice, investors usually can enjoy a solid dividend income to support post-employment life if the dividend coverage ratio is above 2 or 3. From table 16, Greggs has sound dividend payments during past years with dividend coverage ratios all above 3. Additionally, the growing dividend per share also indicates a progressive dividend policy of Greggs, which exactly meets our investment requirement.
Table 16: Dividend sustainability of Greggs, 2010-2012
2012 2011 2010 Dividend coverage ratio 2.92 4.03 3.63 Dividend per share 19.5pence 19.3pence 18.2pence
5.5. Summary of Cash Flow Analysis
5.1. Cash flow structure
5.2. Internal cash flow generating ability
5.3. Liquidity
5.4. Dividend payout ability
22
6. PROSPECTIVE ANALYSIS Prospective analysis is forward-looking process consisting of forecasting and valuation (Plepu, Healy & Peek, 2010). Below we summarize the steps to forecast important items related with income statementοΌbalance sheet, and cash flows, following by detailed valuation.
6.1. Forecasting
Sales growth While like-for-like sale was 4% lower in the first 11 weeks of 2013, total sales grew by 4.2%, primarily due to the good performance of newly opened wholesale business. Considering the emerging business and challenging background, sales in 2013 is assumed to increase by 4.5%. Overall, the projection in table 17 shows a moderate improvement in growth of sales revenue during 2013 to 2015, when economy recovers. Thereafter, it is reasonable to assume that growth rate of sales will keep constant at 6% which is the average growth rate in Europe.
Table 17: Forecasted sales growth for Greggs, 2013-2017
F2013 F2014 F2015 F2016 F2017 Sales growth rate 4.50% 5.00% 6.00% 6.00% 6.00% Cost of sales The percentage of cost of sales to revenue was stable in a range from 38.15% to 38.91% in the common size income statement. However, the latest financial report of Greggs indicates that the gross margin will decline owing to the high commodity inflation and low margin of wholesaling business. Thus, table 18 predicts that the cost of sales will increase to 39% and keep constant in the following years.
Table 18: Forecasted cost of sales for Greggs, 2013-2017
F2013 F2014 F2015 F2016 F2017 Cost of sales -39.00% -39.00% -39.00% -39.00% -39.00% Distribution and selling cost The historical percentage of distribution and selling cost to revenue was stable in a range from 48.50% to 49.29% in the common-sized income statement. However, because Greggs regards quality logistics as its competitive advantage to provide fresh products, distribution and selling cost is believed to slightly increase to 49% of revenue and remain constant (Table 19).
Table 19: Forecasted distribution and selling cost for Greggs, 2013-2017
F2013 F2014 F2015 F2016 F2017 Distribution and selling costs -48.87% -49.00% -49.00% -49.00% -49.00%
23
Administrative expenses Benefited from efficiency of supply chain, Greggs continuously reduced its administrative expenses during the past 5 years. Administrative cost is estimated in table 20 as percentage of administrative cost to revenue using three years moving average.
Table 20: Forecasted administrative for Greggs, 2013-2017
F2013 F2014 F2015 F2016 F2017 Administration cost -4.99% -4.84% -4.79% -4.87% -4.83% Other income Other income is caused by closure of bakery. It is assumed that there will be no closure of bakery in the future 5 years. So other income will be 0. Finance income Finance income is caused by bank balance and foreign exchange gains. This small figure is negligible, so it is assumed to be constant at Β£49,000 after 2012. Tax rate The corporate effective tax rate was 24% in 2012 and is assumed to remain unchanged. Working capital margin While working capital margin is stable before 2012, it increased significantly to 4.7% in 2012, leading to a sharp decline of operating cash flow. Despite this, Greggs is capable to increase trade payables and reduce trade receivables because of the admired reputation and strong bargaining power. Therefore, Greggsβs working capital margin is considered to gradually revert to the mean ratio of 6.5%, which is shown in table 21.
Table 21: Forecasted operating working capital margin for Greggs, 2013-2017
F2013 F2014 F2015 F2016 F2017 Operating working capital margin -5.00% -5.50% -6.00% -6.50% -6.50% Property, plant and equipment (PPE) PPE of Greggs is directly related to number of stores. The PPE per store of past five years is averaged atοΏ‘157,000/store which will be used for future PPE forecasting. The latest financial report suggests that Greggs will open about 60 stores annually. Hence, the PPE of Greggs is forecasted as the product of the averaged PPE per store and number of stores (see details in Appendix 8). Debt As Greggs is an all equity-financed company, Greggs will not raise debt as before.
24
Cash flow forecasts Once income statement and balance sheet are forecasted, we can derive free cash flow to equity by adjusting from operating activity and investing activity. Details are shown in Table 22.
Table 22: Forecasted free cash flow to equity for Greggs, 2013-2017
F2013 F2014 F2015 F2016 F2017 Net profit 41,688 43,893 46,827 49,076 52,300 Less Change in Working Capital (cash excluded)
3,538 5,949 6,931 7,603 3,532
Add Depreciation 33 33 33 33 33 Less Change in non-current assets (investment activity)
(7,510) (9,420) (9,420) (9,420) (9,420)
Cash flow to Equity 37,749 40,454 44,371 47,293 46,444
25
6.2. Valuation
6.2.1. Residual incom
e valuation Input
Forecasted RI grow
th rate (notes 4) -15%
Dividend paid in 2012
19,406
Cost of equity (N
ote 1) 4.692%
No. of shares
101,160,000
Net equity (Β£β000)
226,790
2012 (Β£β000)
2013 (Β£β000)
2014 (Β£β000)
2015 (Β£β000)
2016 (Β£β000)
2017 (Β£β000)
Onwards (Β£β000)
Opening book value
226,790
247,616 269,083
291,802 314,963
339,402
Earnings (N
ote 2)
41,688 43,893
46,827 49,076
52,300
C
apital charge (Note 3)
10,641
11,618 12,625
13,691 14,778
Residual incom
e (Note 4)
31,047
32,275 34,202
35,385 37,522
161,961 D
ividend (Note 5)
19,406 20,861
22,426 24,108
25,916 27,860
Closing book value (N
ote 6)
247,616 269,083
291,802 314,963
339,402
D
iscount factor (@4.692%
)
0.9552 0.9124
0.8715 0.8324
0.7951
PV
RI
29,655
29,447 29,806
29,455 29,834
128,779
26
NPV
RI
276,977
NET equity
226,790
Value
503,767
No. of shares outstanding
101,160,000
Share Price (pence) 497.99
C
urrent share price (pence) 464.50
Liquidating dividend
501,364 PV
Div.
19,926
20,461 21,010
21,573 22,152
398,644 N
PV D
iv. 503,767
N
otes
N
ote1: Rate of 10-year governm
ent bond is used as risk free rate
Risk free rate
1.83%
(Source: CountryEconom
y, 2013)
M
arket risk premium
5.40%
(Source: C
ountryEconomy, 2013)
Beta
0.53 (Source: Financial Tim
es, 2013)
C
ost of equity=risk free rate + beta* market risk prem
ium=1.83%
+0.53*5.40%=4.692%
N
ote 2: earnings are taken from the forecasted cash flow
statement
N
ote 3: Capital charge=opening book value * cost of equity
Note 4: assum
e residual income decrease by 15%
from 2018 onw
ards
Note 5: assum
e annual dividend growth is 7.5%
from 13-17
Note 6: C
losing book value=opening book value + earnings - dividend
27
6.2.2. Price multiple valuation P/E ratio is a simplified indicator of a companyβs value. It is defined as market price per share divided by annual earnings per share. Generally speaking, companies with P/E higher than 17 are overvalued and those with P/E lower than 10 are undervalued. However, P/E of different industries may vary due to different natures. Companies within the same industry generally hold similar P/E unless abnormal operating failure occurs or high future growth is expected. The average P/E of Food and Drug retailer sector is 11.17. Greggs has a close ratio amounted to 11.91. This indicates that Greggsβs stock price is fairly valued compared to its peers. However, as Greggs has been expanding and investing substantially, it is reasonable to expect that the P/E ratio of Greggs has a high possibility to grow in the future. In other words, Greggs is to some extent undervalued, which confirms the forecast by residual income model.
28
7. RECOMMENDATION In the last part, we would give investment recommendation for pension fund managers according to previous analysis.
7.1. Investment Principle of Pension Fund
Pension fund is an assets pool which aims to generate stable growth over the long term, and provide pensions for investors to support their post-employment life. Because investors would lose their major income from working after retirement, they cannot bear much loss from investment. Hence, fund managers must be prudential when making investment decisions, here, we recommend to invest in firms with low risk and relatively stable returns, especially firms with stable value and large capitalization.
7.2. Corporate risk nature
With respect to business nature, compared with other industry, demand of food is relatively income-inelastic, thus, the continuing economic depression would not greatly harm Greggsβ ongoing operation. As with share price performance, Greggsβ share price was very stable during these years compared with the market index, with Ξ²=0.53, its share price has ranged from 400 pence to 550 pence since 2010 and kept a growing trend. The trend line also reconciles with the previous valuation result, indicating the undervalued share price. Furthermore, the no-debt capital structure results in no bankruptcy risk of Greggs.
Figure 8: Share price of Greggs plc.
Source: Yahoo finance
29
7.3. Corporate Competence
Though the five forces analysis indicates that Greggs is facing fierce competition in bakery market, it adopts differentiation strategy to be specialized in bakery making, offering high quality fresh products. From the previous financial analysis, it can be concluded that Greggs has competitive advantage in its differentiation strategy. Greggs has sound brand, profitable products, industry leading turnover and excellent working capital management (negative operating working capital), contributing to its growing revenue and strong cash flow generation when competing with competitors.
7.4. Future Growth Potential
Firstly, the expanding wholesaling and franchising business strongly supported Greggs revenue growth during past years, and will account for more and more weight of Greggsβ income in future years. Secondly, Greggs plans to open about 60 new stores and refurbish over 100 stores in future, presenting potential growth opportunity in bakery retail business.
7.5. Dividend
Pension fund values dividend income more than short-term capital gain and Greggs claims a progressive dividend policy, with an average 7.5% increase per year. As table 23 shows, sufficient dividend coverage ratio and increasing dividend payment guarantees the dividend payout will continue in future.
Table 23: Growth sustainability of Greggs, 2010-2012
2012 2011 2010 Dividend payout ratio 0.48 0.41 0.45 Dividend per share 19.5pence 19.3pence 18.2pence Divided coverage ratio 2.90 4.00 3.60
7.6. Valuation
The result of valuation part illustrates that Greggsβ share price is underpriced in market and the share price may eventually increase to reflect its true value.
7.7. Recommendation
Though the fact that Greggs is small cap company which may not fit our investment purpose, with low risk, stable growth and progressive dividend payout, combined with the undervalued share price, Greggs shows upward growth prospective. Thus, we recommend to BUY and HOLD Greggs shares.
30
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http://countryeconomy.com/bonds/uk?dr=2013-01> [12th April 2013] Covell, J. (2005) βGreggs PLCβ International Directory of Company Histories 2005 [Online]
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Greggs plc (2013a) Annual Reports and Accounts 2012 [Online] Available at
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March, 2013] Greggs plc (2013b) Company Overview [Online] Available at
<http://corporate.greggs.co.uk/company-overview> [28th March, 2013] Palepu, K. G., Healy, P.M. & Peek, E. (2010) Business Analysis and Valuation IFRS edition:
Second edition. Hampshire: South-Western, Cengage Learning Inc. Porter M.E. (1979), The Five Competitive Forces that Shape Strategy, [online] Available at:
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http://www.tescoplc.com/files/pdf/reports/annual_report_2009.pdf > [25th March, 2013] TESCO plc (2010) Annual Report and Financial Statements 2009 [Online] Available at <
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32
APPENDIX
Appendix 1: Standardized Income Statement of Greggs plc. 2008-2012 (Β£β1000)
2012 2011 2010 2009 2008
Sales 734,502 701,088 662,326 658,186 628,198 Cost of Sales -285,748 -272,778 -252,651 -252,284 -240,200 Gross Profit 448,754 428,310 409,675 405,902 387,998 SG&A
Distribution and selling costs -362,067 -342,641 -321,261 -321,686 -306,573 Administrative expenses -33,394 -34,903 -36,049 -35,783 -40,845 -395,461 -377,544 -357,310 -357,469 -347,418 Other income 0 9,665 0 0 8,033 Operating profit 53,293 60,431 52,365 48,433 48,613 Net interest 49 69 158 346 857 Profit before tax 53,342 60,500 52,523 48,779 49,470 Income tax -12,775 -15,997 -14,589 -14,405 -15,375 Net Profit 40,567 44,503 37,934 34,374 34,095
Appendix 2: Vertical Common Sized Income Statement of Greggs plc 2008-2012
2012 2011 2010 2009 2008
Sales 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Sales -38.90% -38.91% -38.15% -38.33% -38.24% Gross Profit 61.10% 61.09% 61.85% 61.67% 61.76% SG&A
Distribution and selling costs -49.29% -48.87% -48.50% -48.87% -48.80% Administrative expenses -4.55% -4.98% -5.44% -5.44% -6.50% -53.84% -53.85% -53.95% -54.31% -55.30% Other income 0.00% 1.38% 0.00% 0.00% 1.28% Operating profit 7.26% 8.62% 7.91% 7.36% 7.74% Net interest 0.01% 0.01% 0.02% 0.05% 0.14% Profit before tax 7.26% 8.63% 7.93% 7.41% 7.87% Income tax -1.74% -2.28% -2.20% -2.19% -2.45% Net Profit 5.52% 6.35% 5.73% 5.22% 5.43%
33
Appendix 3: Standardized Balance Sheet of G
reggs plc. 2008-2012
2012
2011 2010
2009 2008
ASSETS
C
ash and Marketable Securities
-Cash and cash equivalents
19,381
19,508
20,790
34619
4433
-Short-term investm
ent 0
500
3,000
0
0
19,381
20,008
23,790
34619
4433
Trade Receivables
26,917
21,165
22,309
21206
22698
Inventories
17,658
14,274
11,883
11886
12152 O
ther Current A
ssets
0
0
0
0
0 Total Current Assets
63,956
55,447
57,982
67711
39283
N
on-Current Tangible A
ssets
-Property, plant and equipm
ent
264,257
253,264
226,150
211155
210455 N
on-Current Intangible A
ssets
144
289
433
579
686 D
eferred Tax Asset
0
0
0
0
0
Other N
on-Current A
ssets
0
0
0
0
0 Total N
on-Current Assets
264,401
253,553
226,583
211734
211141 Total A
ssets
328,357
309,000
284,565
279445
250424
LIABILITIES
C
urrent Debt
0
0
0
0
0
Trade Payables
71,955
74,304
70,246
71738
62761 O
ther Current Liabilities
-Current tax liability
7101
5,969
6,282
8857
8337
34
-Provisions 359
620
1,018
857
2843
7460
6,589
7,300
9714
11180
Total Current Liabilities
79,415
80,893
77,546
81452
73941
N
on-Current D
ebt
D
eferred Tax Liability
9,199
10,010
10,924
9298
12154 O
ther Non-C
urrent Liabilities(non-interest bearing)
-Deferred governm
ent grants 7,502
7,969
8,439
8830
8221
-D
efined benefit pension liability 4,056
8,866
8,764
12332
5733
-Long term
provisions 1,395
2,879
2,665
3296
2428
12,953
19,714
19,868
24458
16382
Total Non-current liabilities
22,152
29,724
30,792
33756
28536
Total Liability
101,567
110,617
108,338
115208
102477
EQ
UITIES
Preference Shares
0
0
0
0
0 O
rdinary Shareholder's Equity
-Share C
apital 2,023
2,023
2,023
2080
2080
-Share Prem
ium A
ccount 13,533
13,533
13,533
13533
13533
-C
apital redemption reserve
416
416
416
359
359
-Retained earnings
210,818
182,411
160,255
148265
131975
Total Equity
226,790
198,383
176,227
164237
147947 Total Equity and Liabilities
328,357
309,000
284,565
279445
250424
35
Appendix 4: Standardized Income Statement of Tesco plc. 2008-2012 (Β£βm) 2012 2011 2010 2009 2008 Sales 64,975 60,931 56,910 53,898 47,298 Cost of Sales -59,817 -55,871 -52,303 -49,713 -43,668 Gross Profit 5,158 5,060 4,607 4,185 3,630 SG&A
Administrative expense -1,675 -1,676 -1,527 -1,252 -1,027 Other operating income 375 427 377 236 188 Operating Profit 3,858 3,811 3,457 3,169 2,791 Investment income 91 57 33 110 75 Net interest -242 -333 -314 -362 -63 Profit before tax 3,707 3,535 3,176 2,917 2,803 Income tax -893 -864 -840 -779 -673 Net Profit 2,814 2,671 2,336 2,138 2,130
Appendix 5: Vertical Common Sized Income Statement of Tesco plc 2008-2012 2012 2011 2010 2009 2008 Sales 100% 100% 100% 100% 100% Cost of Sales -92.06% -85.99% -80.50% -76.51% -67.21% Gross Profit 7.94% 7.79% 7.09% 6.44% 5.59% SG&A
Administrative expense -2.58% -2.58% -2.35% -1.93% -1.58% Other operating income 0.58% 0.66% 0.58% 0.36% 0.29% Operating Profit 5.94% 5.87% 5.32% 4.88% 4.30% Investment income 0.14% 0.09% 0.05% 0.17% 0.12% Net interest -0.37% -0.51% -0.48% -0.56% -0.10% Profit before tax 5.71% 5.44% 4.89% 4.49% 4.31% Income tax -1.37% -1.33% -1.29% -1.20% -1.04% Net Profit 4.33% 4.11% 3.60% 3.29% 3.28%
36
Appendix 5: Standardized Balance Sheet of Tesco plc. 2008-2012
2012 2011
2010 2009
2008 ASSETS
Cash and M
arketable Securities
-C
ash and cash equivalents 2,305
2,428
2,819
3,509
1,788
-Short-term
investment
1,243
1,022
1,314
1,233
360
3,548
3,450
4,133
4,742
2,148 Trade R
eceivables
2,657
2,330
1,888
1,820
1,311 Inventories
3,598
3,162
2,729
2,669
2,430
Other C
urrent Assets
2,550
2,666
2,642
3,850
103
Total Current Assets
12,353
11,608
11,392
13,081
5,992
N
on-Current Tangible A
ssets
-Property, plant and equipm
ent 25,710
24,398
24,203
23,152
19,787
-N
on-current tangible assets classified as held for sale 510
431
373
398
308
26,220
24,829
24,576
23,550
20,095 N
on-Current Intangible A
ssets
4,618
4,338
4,177
4,076
2,336 D
eferred Tax Asset
23
48
38
49
104
Other N
on-Current A
ssets
-Investm
ent in associates 423
316
152
62
305
-Investm
ent property 1,991
1,863
1,731
1,539
1,112
-O
ther investments
1,526
938
863
259
4
-Non-current derivative financial instrum
ents 1,726
1,139
1,250
1,478
216
-Loans and advances to custom
ers 1,901
2,127
1,844
1,470
0
37
7,567
6,383
5,840
4,808
1,637 Total N
on-Current Assets
38,428
35,598
34,631
32,483
24,172 Total A
ssets
50,781
47,206
46,023
45,564
30,164
LIABILITIES
C
urrent Debt
1,838
1,386
1,529
3,471
2,084
Trade Payables
11,234
10,484
9,442
8,665
7,359 O
ther Current Liabilities
-Current tax liability
416
432
472
362
455
-Provisions 99
64
39
10
4
-O
thers 5,662
5,365
4,533
5,087
443
6,177
5,861
5,044
5,459
902
Total Current Liabilities
19,249
17,731
16,015
17,595
10,345
N
on-Current D
ebt
-Financial liabilities
10,599
10,289
12,520
12,693
6,294
Deferred Tax Liabiliy
1,160
1,094
795
676
791
Other N
on-Current Liabilities(non-interest bearing)
-Provision for post-em
ployee benefits 1,872
1,356
1,840
1,494
838
-O
ther provisions 100
113
172
200
23
1,972
1,469
2,012
1,694
861
Total Non-current liabilities
13,731
12,852
15,327
15,063
7,946
Total Liability
32,980
30,583
31,342
32,658
18,291
38
EQU
ITIES
Preference Shares
0
0
0
0
0
Ordinary Shareholder's Equity
-Share Capital
402
402
399
395
393
-Share Premium
4,964
4,896
4,801
4,638
4,511
-R
etained earnings 12,369
11,197
9,356
7,776
6,842
-O
ther reserves 40
40
40
40
40
17,775
16,535
14,596
12,849
11,786
Non-controlling interests
26
88
85
57
87
Total Equity
17,801
16,623
14,681
12,906
11,873 Total Equity and Liabilities
50,781
47,206
46,023
45,564
30,164
39
Appendix 6: Ratio analysis of Greggs plc. and Tesco plc. 2008-2012 2012 2011 2010 2009 2008
Greggs Tesco Greggs Tesco Greggs Tesco Greggs Tesco Greggs Tesco ROE 17.89% 15.81% 22.43% 16.07% 21.53% 15.91% 20.93% 16.57% 23.05% 17.94% Financial leverage 1.45 2.85 1.56 2.84 1.61 3.13 1.70 3.53 1.69 2.54 ROA 12.35% 5.54% 14.40% 5.66% 13.33% 5.08% 12.30% 4.69% 13.61% 7.06%
Net Profit margin 5.52% 4.33% 6.35% 4.38% 5.73% 4.10% 5.22% 3.97% 5.43% 4.50% Operating management
Gross profit margin 61.10% 7.94% 61.09% 8.30% 61.85% 8.10% 61.67% 7.76% 61.76% 7.67% SG&A expenses margin 53.84% 2.58% 53.85% 2.75% 53.95% 2.68% 54.31% 2.32% 55.30% 2.17% EBITDA margin 11.75% 8.24% 13.02% 8.59% 12.30% 8.51% 11.51% 8.09% 11.88% 8.00% NOPAT margin 5.52% 4.61% 6.34% 4.80% 5.71% 4.51% 5.19% 4.46% 5.33% 4.60%
Asset turnover 2.24 1.28 2.27 1.29 2.33 1.24 2.36 1.18 2.51 1.57 Working capital management Operating working capital turnover -21.08 -7.55 -15.42 -7.44 -15.28 -7.87 -13.61 -9.32 -16.07 -10.71 Trade receivables turnover 27.29 24.45 33.12 26.15 29.69 30.14 31.04 29.61 27.68 36.08 Inventories turnover 16.18 18.06 19.11 19.27 21.26 20.85 21.23 20.19 19.77 19.46 Trade payables turnover 3.97 5.78 3.67 5.81 3.6 6.03 3.52 6.22 3.83 6.43 Non current assets management Net non-current assets turnover 2.92 1.78 3 1.79 3.2 1.74 3.51 1.75 3.23 2.03 PP&E turnover 2.78 2.53 2.77 2.5 2.93 2.35 3.12 2.33 2.98 2.39 Financial leverage 1.45 2.85 1.56 2.84 1.61 3.13 1.7 3.53 1.69 2.54 Current liabilities and short term
40
liquidity Current ratio 80.53% 64.17% 68.54% 65.47% 74.77% 71.13% 83.13% 74.34% 53.13% 57.92% Quick ratio 58.30% 32.24% 50.90% 32.60% 59.45% 37.60% 68.54% 37.29% 36.69% 33.44% Cash ratio 24.40% 18.43% 24.73% 19.46% 30.68% 25.81% 42.50% 26.95% 6.00% 20.76% Debt and long term solvency Liabilities to equity ratio 44.78% 185.27% 55.76% 183.98% 61.48% 213.49% 70.15% 253.05% 69.27% 154.06% Debt to equity ratio 0 69.87% 0 70.23% 0 95.70% 0 125.24% 0 70.56%
41
Appendix 7: Ratio calculations Profitability Ratios π ππΈ = π ππ΄ Γ πΉππππππππ πΏπ£πππππ
π ππ΄ = πππ‘ ππππππ‘π΄π π ππ‘π = πππ‘ ππππππ‘ ππππππ Γ π΄π π ππ‘π ππ’ππππ£ππ
πππ‘ ππππππ‘ ππππππ = πππ‘ ππππππ‘πππππ
π΄π π ππ‘π ππ’ππππ£ππ = πππππ π΄π π ππ‘π
πΉππππππππ πΏππ£πππππ = π΄π π ππ‘π πβπππβπππππ β² πππ’ππ‘π¦
Operating Ratios
πΊπππ π ππππππ‘ ππππππ = πππππ β πΆππ π‘ ππ πππππ πππππ
ππΊ&π΄ ππ₯ππππ π ππππππ = ππΊ&π΄ ππ₯ππππ ππππππ
ππππ΄π ππππππ = ππππ΄ππππππ
πΈπ΅πΌππ·π΄ ππππππ = πΈπππππππ ππππππ πππ‘ππππ π‘π , π‘ππ₯ππ , πππππππππ‘πππ πππ πππππ‘ππ§ππ‘ππππππππ
Investment Ratios ππππππ‘πππ π€ππππππ πππππ‘ππ
= (πΆπ’πππππ‘ ππ π ππ‘π β πΆππ β πππ ππππππ‘ππππ π πππ’πππ‘πππ ) β (πΆπ’πππππ‘ ππππππππ‘πππ β πΆπ’πππππ‘ ππππ‘ πππ ππ’πππππ‘ ππππ‘πππ ππ πππ β ππ’πππππ‘ ππππ‘)
ππππππ‘πππ π€ππππππ πππππ‘ππ π‘π π πππ ππ π‘π’ππππ£ππ = πππππ ππππππ‘πππ π€ππππππ πππππ‘ππ
πππππ ππππππ£πππππ π‘π’ππππ£ππ = πππππ πππππ ππππππ£πππππ
πΌππ£πππ‘πππ¦ π‘π’ππππ£ππ = πΆππ π‘ ππ π ππππ πΌππ£πππ‘πππ¦
πππππ πππ¦πππππ π‘π’ππππ£ππ = πΆππ π‘ ππ π ππππ πππππ πππ¦πππππ
π·ππ¦π πππ£πππ‘πππππ = πΌππ£πππ‘πππππ π΄π£πππππ πππ π‘ ππ π ππππ πππ πππ¦
π·ππ¦π πππ¦ππππ = πππππ πππ¦πππππ π΄π£πππππ πππ π‘ ππ π ππππ πππ πππ¦
πππ‘ πππ β ππ’πππππ‘ ππ π ππ‘ π‘π’ππππ£ππ = πππππ πππ‘ πππ β ππ’πππππ‘ ππ π ππ‘π
42
ππ&πΈ π‘π’ππππ£ππ = πππππ πππ‘ πππππππ‘π¦, πππππ‘ πππ πππ’ππππππ‘
Financing Ratios
πΆπ’πππππ‘ πππ‘ππ = πΆπ’πππππ‘ ππ π ππ‘π πΆπ’πππππ‘ ππππππππ‘πππ
ππ’πππ πππ‘ππ = πΆππ β πππ ππππππ‘ π πππ’πππ‘πππ + πππππ ππππππ£πππππ (πππ‘)πΆπ’πππππ‘ ππππππππ‘πππ
πΆππ β πππ‘ππ = πΆππ β πππ ππππππ‘ππππ π πππ’πππ‘πππ πΆπ’πππππ‘ πππππππ‘πππ
ππππππ‘πππ πππ β ππππ€ πππ‘ππ = πΆππ β ππππ€ ππππ ππππππ‘ππππΆπ’πππππ‘ ππππππππ‘πππ
πΏππππππ‘πππ π‘π πππ’ππ‘π¦ πππ‘ππ = πππ‘ππ ππππππππ‘πππ πβπππβππππππ πππ’ππ‘π¦
π·πππ‘ π‘π πππ’ππ‘π¦ πππ‘ππ = πΆπ’πππππ‘ ππππ‘ + πππβ ππ’πππππ‘ ππππ‘πβπππβππππππ πππ’ππ‘π¦
Sustainable growth ratios
π·ππ£πππππ πππ¦ππ’π‘ πππ‘ππ = πΆππ β πππ£ππππππ πππππππ‘ ππππππ‘
ππ’π π‘πππππππ ππππ€π‘β πππ‘ππ = π ππΈ Γ (1 β π·ππ£πππππ πππ¦ππ’π‘ πππ‘ππ)
π·ππ£πππππ πππ£πππππ = πΈππππππ πππ π βππππ·ππ£πππππ πππ π βπππ
43
Appendix 8: 5 Years' forecasted financial statements of Greggs (Β£β000) 5 Years' Forecasting Income Statement of Greggs (Β£β000) Notes F2013 F2014 F2015 F2016 F2017 Revenue *1 767,555 805,932 854,288 905,546 959,878 Cost of sales *2 (299,346) (314,314) (333,172) (353,163) (374,353) Gross Profit
468,208 491,619 521,116 552,383 585,526
Distribution and selling costs *3 (375,104) (394,907) (418,601) (443,717) (470,340) Administrative expenses *4 (38,301) (39,007) (40,949) (44,140) (46,419) Other income *5 0 0 0 0 0 Operating profit
54,803 57,705 61,566 64,525 68,766
Finance income *6 49 49 49 49 49 Profit before tax
54,852 57,754 61,615 64,574 68,815
Income tax *7 (13,165) (13,861) (14,788) (15,498) (16,516) Net profit
41,688 43,893 46,827 49,076 52,300
Dividend *8 20861 22426 24108 25916 27860
Forecasted assumptions
Sales growth rate *1 4.50% 5.00% 6.00% 6.00% 6.00% Cost of sales *2 -39.00% -39.00% -39.00% -39.00% -39.00% Distribution and selling costs *3 -48.87% -49.00% -49.00% -49.00% -49.00% Administration cost *4 -4.99% -4.84% -4.79% -4.87% -4.83% Income tax *7 -24% -24% -24% -24% -24% Dividend payout growth rate *8 7.50% 7.50% 7.50% 7.50% 7.50%
44
5 Years' Partially Forecasted Balance Sheet of Greggs (Β£β000) Inputs 2010 2011 2012 F2013 F2014 F2015 F2016 F2017 Sales 662,326 701,088 734,502 767,555 805,932 854,288 905,546 959,878 Operating working capital/sales ratio -6.55% -6.48% -4.74% -5.00% -5.50% -6.00% -6.50% -6.50% PPE/store number 152 161 158 157 157 157 157 157 Store number 1487 1571 1671 1731 1791 1851 1911 1971 Outputs
Operating working capital -43,354 -45,454 -34,840 -38,378 -44,326 -51,257 -58,860 -62,392 PP&E 226,150 253,264 264,257 271,767 281,187 290,607 300,027 309,447
5 Years' Partially Forcasted cash flow statement of Greggs (Β£β000) F2013 F2014 F2015 F2016 F2017 Net profit 41,688 43,893 46,827 49,076 52,300 Less Finance income 49 49 49 49 49 NOPAT 41,639 43,844 46,778 49,027 52,251 Change in Working Capital (cash excluded) (3,538) (5,949) (6,931) (7,603) (3,532) Change in non current assets (Depreciation adjusted) 7,510 9,420 9,420 9,420 9,420 Cash flow to Equity 37,716 40,421 44,338 47,260 46,411
45
Appendix 9: Words reconciliation Total word count 9359 Less form reference list to end 2212 Less cover and contents 685 Less tables and figures 1514 Main body of text 4948
