Market Analysis of Tesco

Market Analysis of TescoTesco is the worlds 3rd largest retailer and the UK retail sector leader. Its old activity is base in the United Kingdom and the political party is expanding into planetary grocerys, which are mainland China, the Czech body politic, Hungary, the Republic of Ireland, India, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, Turkey, and the United States. The companys theme sale in 2010 was 62.5 billion in which the operational profit accounted for 3.5 billion. Currently, the company finally becomes the most profitable online grocery retailer in the world, and much than half of the companys group interchange space is outside the United Kingdom.The most attractive recent intelligence service about Tesco is its new CEO, Philip Clark, ensue Sir Terry as the retail lusus naturaes boss on 2 March 2011. Within the same week, both pieces of news about Tescos further pushing forward in Southeast China and northern calcium were also announced respecti vely, which might lead to raimentors guess about whether this new boss, who was Tescos head of international and IT melodic phrase, depart take a more aggressive st regularizegy for its international merchandise. As we fuck mold from the companys commercialise performance, the future of its international amplification is console full of uncertainty. The core UK food retailing segment let off keeps 30% market share, however, the gross revenue harvesting rate fell to a historically low level. The Christmas gross gross sales, particularly non-food sales, in UK and Europe were negatively impacted by the bad weather last winter. The elaborateness in US market, which is going making, was susp block uped in the former(prenominal) yr and now, as the company announced, is restarted. The companys operation and elaborateness is Asia seems promising, with high sales growth rates and fast new-stores-opening speed.The companys stock underperformed the FTSE 100 Index in the pas t year and keeps going cut out from the beginning of the year. In fact, all the five retailers we choose, most of which are the worlds largest, do not have satisfying stock performance recently. Bad news about the apostrophize gussy up from the suppliers side came this week bringing down the whole sedulousnesss price. The current price of Tesco goes lower than our numbers and hits the bottom of the year. From January 2011, the companys price decreased by a historically 10.58%. Investors worries about the current economic situation would be the of import cause the sectors underperformance. We run an underlying earnings growth and hence a price growth of Tesco in a immense-term perspective based on our forecast. The value of company result go up with the rec all overy of the economy, which is the external factor, and the growing internal operational performance. Therefore, we recommend a short term attain and long term buy.Geographical AnalysisData source Corporate Christ mas sales reportThe latest supermarket giant Tescos 12-week total sales growth was 4.3% with the impressive double-digit growth in food segment. Giant player Tesco procured plus strong performance in every course operation including food, non-food, and Tesco direct even though an tart cold and wet weather especially adverse condition of snow over Christmas made things demanding not only for Tesco, but also its local crucial competitors corresponding Sainsbury, Asda, and Morrison, Tescos operation and management were still well managed. It is undeniably that Tesco enjoyed an increase of like-for-like (LFL) sales compared to previous year however, the rise in sales growth was inevitably suffering from the lift of petrol prices and the rise in VAT implying negative volumes if we assume progressive food inflation, which later may impede the stores growing space in the UK market.Yet, the true story that mass have to eat and the evidence of the top-line growth grants the UK operat ors to provide both defensive and growth characteristics to have more rooms of new spaces, develop product mix, and enhance continuing productivity improvement. Hence, giant supermarket like Tesco cannot on the nose stop expanding business and market share, and as an efficient strong retailer, growing the revenue bell-effectively and profitably is far more important than winning the highest market share,Europe First time showing all commanding LFL salesTesco operates in the Republic of Ireland, Poland, Hungary, the Czech Republic, Slovakia and Turkey, listed in descending revenues according to 2010 Annual reports. Although the customer expenditure suffers heavily from the recession, we have seen a solid sign of recovery in sales and profits in Europe. Shown in the Q3 report, till 27th November 2010, the performance of Tesco improves with sales up by 7.6% compared to 6.4% from Q2 figures (Actual rates Ex. Petrol). Like-for-like sales achieve a growth at 3.6% (Ex. Petrol), which is 0.5% more than the last quarter, probably because of a strong improvement in Hungary and Turkey. Particularly in the third quarter, all European businesses succeed in acquiring positive like-for-like sales for the first time in three years. Thus we expect a continuing increasing foreshorten in this region as the economies are slowly improving.The main approach using by Tesco is to invest in new selling space. The company plans to double the space by 2014/15 to 4.1m sq meters. Part of the overambitious opening programme, Tesco has acquired 128 convenience stores in Czech Republic on 23rd December 2010, making the market share stable at 9%, which is the second position overall. Next we could expect this world pencil lead retailer would push its plan further and expand its online models more in Europe.In the non-food sector, Tesco is leading the garb market. Building on the FF brand, it opened up its own FF Blue and FF Basics in Central Europe. Tesco change 68milions FF items in this area and the clothing sales of the Tesco increased by 12% in 2010. Like-for-like clothing sales are also up by 14%.US When give Fresh well- unflinching be profitable?One of the key decisions for Tescos new CEO, Mr Clarke, will be deciding whether to shroud with the Fresh Easy chain, which made a loss of 165m ($269m) last year. Fresh Easy is designed as a lilliputian and convenient fresh food seller and this is its fourth year in the US. This totally different business format was criticized for would not meet US consumes habits when it was launched. Anyway, we think Tesco was extremely unlucky to enter US market before its economy fell into the worst recession since the 1930s.The sales are growing at a promising rate over 38.5% in the third quarter 2010/11 which were mostly contributed from the Thanksgiving holiday. And during the Christmas and bare-ass Year holiday it grew up by 36.9%. However, Fresh Easy still made a loss of 165m in 2009/2010 and a similar or larger l oss would probably be made in 2010/2011. Tescos management predicts that it will reach profitability in 2012/2013. But this prediction is questionable since we did not see any signs that promise the profit. Even the US market leader, Wal-mart, had a historically rapid decrease in its sales growth rate in 2009/2010.The company mothballed 13 stores last year, primarily in genus Arizona and Nevada, hit by the US housing market downturn. The expansion of Fresh Easy was slow down in the last year, and under-utilised capacity still charged large amount of expenditure of the business. The latest news on Fresh Easys website said 10 new stores will be open before the end of April in northern California, which indicates the company starts to push ahead the expansion again.Asia Key focus for the international expansionTesco has its Asiatic business mainly in South Korea, Thailand, China, Malaysia, Japan and India with 1300 stores. Remarkable performance has been shown in the Asian markets d riven by opening new stores and repayable to its constant progress for the growth of powerful brands in Asian markets. The profits in 2010/2011 have drastically increased by 24% with margin alter of 6.1%. The sales growth in the Asian Markets in the year 2010/2011 was 23.4%. This substantial growth was mainly due to the investments that were made during the recession period and are paying off as the economies of these nations are improving. Due to the unseasonably warm temperature in the Northern Asia, the LFL sales of Tesco have been 4.3% which is a little lower than 5% in second quarter. It has been able to grow its business by expanding its club card and other retail business in these nations. Amongst these countries, South Korea has turned out to be the most productive, with an organic sales growth of 23.3%, like for like sales of 3.2% and profits up 50.9%. China is considered as epoch-making opportunity for future. The performance of Tesco in other countries like Thailand, Ma laysia and India has also been fairly good as the sales have increased in these countries in spite of the political uncertainty and sharp recession in 2009.Asian markets will continue to be key focus for the international expansion of Tesco as they offer a significant long term opportunity. Tesco plans to open new space of 4.9 m sq ft (excluding shopping malls) by next year and build 80 shopping malls by the end of 2015. While theJapan quake might suspend the companys expansion in Japan market which Tesco just entered 4 years ago and counts 5% of its Asian sales in 2010.Porters Five ForcesIndustry Competition PositionAverage Score 3+Threat of recent Entrants3+High level of entry in retailing industry although easy for independent retailers, quite difficult for big chain stores. Abundant capital needed for human resources and storage costs long time devoted to establishing brand and relationship with suppliers.Power of Suppliers2-Little power for retailing industry nominal head of rich substitutes and suppliers but suppliers may gain powers during special periods due to unexpected bad weather or new launching government policies.Power of buyers2+Although customers bargain power in the store is low, they can easily change among retailers to without any switch costs. The customer loyalty is low. The high price sensitive drives customers to assay for promotions and price reductions.Availability of Substitutes4+What one store offers you will likely find at some other store. Retailers offering products that are unique have a distinct or absolute advantage over their competitors.Competitive of Rivalry4+Competition among the main players in retail industry is aggressive and rational. promotional activity and new space expansion are growing at a historical rate to gain more market share. But the possibility of an irrational price war is low.*Scoring regurgitate 1-5 (high score is good) Plus = getting better Minus = getting worse*SWOT AWe expect the sales growth rate to go up based on the assumption that the worlds economy will recover in the near future, and the VAT and food price inflation will keep virtually current level.Cost of goods sold as a % of sales is decreasing during the last five years, so we estimate that the trend will continue in the future. On the other hand, Tesco provides more price reduction and promotion now, especially when the competition with Asda in terms of price is going on, so the decrease of cost of good sold rate will not be too large.Depreciation to sales is just about 2% in past years. Since the expansion of the company is pushed forward in the US and Asian market, the fixed assets will grow up as well. We forecast the depreciation will go up with the expansion, too. And in 2010 year, some properties bought in the US were idle since the company hang up its expansion in the US market, so the depreciation to sales in 2010 will be higher than usual.Because selling is essential to retail industry and promotio n reached in a historical high level as Wall Street diary reported, we estimate SGA expense will increase as a function of sales.We forecast that the EBIT to sales will increase very slowly because of the growing depreciation cost and SGA expense. Therefore, the Net Margin may detain steady or go down marginally based on the increased interest orbit from the higher leverage level and the higher tax.The company expanded its assets significantly in 2008/09 and then suspended the expansion in 2009/10, especially in terms of current assets. According to the recent news, Tesco pushes further into China and US market this year, therefore, we expect the amount of assets will be enlarged. And non-current assets grow as a percentage of total assets.Working capital is calculated by current assets minus current liabilities. The change of on the job(p) capital in future is at the historical average rate of 6.48%.Standard RatiosResidual Income rideWe employ residual income model (RI) to va lue Tesco. With residual income model, the value of equity is forecasted to be approximately GBP 46 billion with the price target of GBP 5.77. The cost of equity is used in the model rather than the group WACC since we base on the net income. The cost of equity is derived from assessing the groups exposure by running the regression to get down the groups beta. FTSE all share is used as a market proxy and US 3-month T-Bill yield is taken as risk-free rate in the regression. Our estimation of the groups cost of equity currently is 11.64%. The growth of income is fictitious to be constant over the long period at 9.5%. However, the sensitivity analysis is provided for different percentages of cost of equity and growth rates.Discounted Cash Flow ModelUsing DCF model, we assume a terminal growth rate at 8% and cost of equity at 11.64%. Net debt will decrease based on Tescos current strategy to adjust its leverage, while net non-current assets will rapidly grow because of the internatio nal expansion strategy.Multiples Valuation ModelThere we use P/E as the multiple to estimate the prices of Tesco and its four peers. The expected earnings are obtained from Thomson One Banker. Expected earnings, expected value and number of shares slap-up are presented in millions. The expected value is calculated by timing peer average P/E with expected earnings