This report aim to evaluate two food retailers under two different account standar GAAP and IFRS and prepare appropriate recommendations to the an investor wishing to invest for maximum capital growth in the longer term. Background Analysis and ratio analysis are employed. 1.Background Analysis 1.1Tesco 1.1.1 Tesco’s History In 1919 Tesco was established in East London by Jack Cohen. The company introduced the brand name Tesco as a tea packets in 1924. 20 years later, Tesco stores was listed on the London Stock Exchange with a share price of 25p(Tesco.plc 2010) Tesco continued its international expansion in the 1990’s till now which including market opening in Poland, Hungary, Slovakia and the Czech Republic. In the same period, Tesco entered Asian market such as China , Thailand and South Korea. Furthermore the company offers the following key products and services represented in table 1. Table 1 Products, Services and Brands Products: Food General merchandise Electrical goods Clothing Household goods Home furnishings Petrol Services: Online sale of products Telecommunication services Financial services Pharmacy services Broadband internet services Brands: Cherokee F&F Healthy Living Value Tesco standard Finest SourceA¼Å¡Datamonitor 1.1.2 Food Retail in the United Kingdom The food retail market includes the retail sales of all food products and beverages. The UK industry generated total revenues of $165,404.1 million in 2008 (Datamonitor 2009). The compound annual growth rate (CAGR) increased 4% for the period 2004-2008. Hypermarket, supermarket, and discounter’s sales generating total revenues of $102,648.2 million, equivalent to 62.1% of the industry’s overall value in 2008. According to Datamonitor(2009) the performance of the industry is forecast to decline which is expected that the industuty reach a value of $194,819.4 million by the end of 2013. Table2:United Kingdom Food Retail Industry Value:$ billion,2004-2008 Year $billion $billion %Growth 2004 141.6 77.1 2005 144.6 78.8 2.2% 2006 149.4 81.4 3.3% 2007 155.8 84.9 4.2% 2008 165.4 90.1 6.2% CAGR,2004-2008 4% SourceA¼Å¡Datamonitor SourceA¼Å¡Datamonitor 1.1.3 Tesco’s position and competitors It is no doubt that Tesco is a leading company in UK market especially in food retailer. According to Datamonitor(2009) the company had 30.7% share of the UK grocery market in the calendar year ended December 2008. It is recorded in 2009 annual report(Tesco.Plc 2009) that the company generated revenues of £54,327 million ($96,210.4 million) in the financial year (FY) ended February 2009, an increase of 14.9% over 2008. And the main competitor Asda Group recorded recenues of $33.4 billion during the financial year (FY) ended January 2009 (Datamonitor 2009). There are other major competitors as following J Sainsbury plc, Wm Morrison Supermarkets PLC,Marks and Spencer Group plc, Wal-Mart Stores, Inc.,and Somerfield. 1.1.4 Evironment and Exceptional Recent Events of Tesco The recessionary climate is a significant factor should be taking into account to evaluate the macro economic evironment, The International Monetary Fund(2009) reported that the UK economy will deflate 4.2% in 2009. As a result, the demand for non-food product will be under such a difficult economic times. At the same time, there is intense conpetition in the UK grocery market. Although the prospect of future economic is not favourable, Tesco has already adjust their short-term promote strategy such as”Discount Brands at Tesco” and further strengthen their long-term strategy including international expending and providing diversified product and service. Tesco opened 622 new stores in financial year 2009 which included 435 outside UK (Tesco.Plc 2009). A representative events is Tesco entry into the Indian market. Furthermore, It is noteworthy that Tesco acquired the remaining 50% of Tesco Personal Finance from Royal Bank of Scotland suggested that Tesco move a furhter step in personal finance service(Tesco.Plc 2009). 1.1.5 Five-year Financial Review of Tesco Figure2:Tesco Revenues, Profitablity and Total assets 0.00 20,000.00 40,000.00 60,000.00 80,000.00 100,000.00 120,000.00 2005 2006 2007 2008 2009 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% Revenues Total Assets Profit Margin SourceA¼Å¡Datamonitor From the graph above, it is unavoidable notice that the tatal assets of Tesco doubled for the last five years indicating that the company experienced a critical period of expansion. The profit margin because the depressed global economy. 1.2 Wal mart 1.2.1 Wal mart’s history Wal-Mart was established in 1969(Wal-Mart Stores, Inc 2009). In the following year, Wal-Mart became a publicly-held company. In 1972, the company got listed on the New York Stock Exchange. During 21st century, Wal mart is one of the most successful retailers in the world. the company operates in Argentina, Brazil, Canada, Chile, China, Costa Rica, El Salvador, Guatemala, Honduras, India,Japan, Mexico, Nicaragua, Puerto Rico and the UK.The table below provide the key products and services Wal mart provided. Table 3: Products, Services and Brands Products: Dry and wet grocery Beverages Frozen foods Flowers Health and beauty products Household products Pet supplies Fabrics and crafts Stationery and books Automotive accessories Hardware and paint Horticulture products Sporting goods Apparel Shoes Jewelry Toys Home furnishings Housewares Major and minor home appliances Cameras Cellular phones Services: Photo processing services Cellular service plan Money order services Wire transfers Brands: Wal-Mart Great Value Equate Ol’ Roy Sam’s Choice SourceA¼Å¡Datamonitor 1.2.2 Food Retail in the United Amercia The food retail industry of US generated total revenues of $824,422.2 million in 2008 (Wal-Mart Stores, Inc 2009). It is reported by Datamonitor(2009) that the compond annual growth rate(CAGR) of 5.8% from 2004 to 2008. Compaired with UK , sales made by hypermarket, supermarket, and discounter produced 80% revenues which is $ 659,808.3 million. As the global economic’s downturn, the performance of the industry is expected to decelerate with a forecaseted CAGR of 2.7% for the period spanning 2008-2013(Datamonitor 2009). Table 4:United States Food Retail Industry Value:$ billion,2004-2008 Year $billion %Growth 2004 657.3 2005 699.2 6.4% 2006 741.5 6.1% 2007 787.6 6.2% 2008 824.4 4.7% CAGR,2004-2008 5.8% SourceA¼Å¡Datamonitor Figure 3:United States Food Retail Industry Value:$ billion,2004-2008 0 100 200 300 400 500 600 700 800 900 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 $billion %Growth SourceA¼Å¡Datamonitor 1.2.3 Wal mart’s position and competitors Wal mart Stores (Wal-mart) is the world’s largest retail company. According to Marketline, Wal mart is on the top of food ratial industry all around the world in terms of revenues. Morover, the major competetor produced $105,823million in financial year 2009, meanwhile Wal mart generated revenue $405,607 million meanwhile provided more than 2,100,000 job opportunity. The other major competitors of Wal-mart Stores, Inc. included Target Corporation Safeway Inc., Sears Holdings Corporation, J. C. Penney Corporation, Inc., Kroger Co., The Tesco PLC, Carrefour S.A and Metro AG 1.2.4 Evironment and Exceptional Recent Events of Wal mart Wal mart is facing fierce competition from a larger number of domestic and foreign companies incluing Carrefour, Tesco, Target and so on. Another risk merit consideration is the foreign currency fluctuation as Wal mart has operations in approximately 15 international countries. According to the annual report (Wal-Mart Stores, Inc 2009), during 2009 there is over 24.6% total net sales generated by international operations. The acquisition of Distribucion y Servicio is another major operation during 2009. Wal mart acquired 75% of the outstanding shares of Distribucion y Servicio. 1.2.5 Five-year Financial Review of Wal mart Figure 4:Wal mart revenues profitability and total assets 0.00 50,000.00 100,000.00 150,000.00 200,000.00 250,000.00 300,000.00 350,000.00 400,000.00 450,000.00 2005 2006 2007 2008 2009 3.15% 3.20% 3.25% 3.30% 3.35% 3.40% 3.45% 3.50% 3.55% 3.60% 3.65% Revenues Total Assets Profit Margin SourceA¼Å¡Datamonitor The figues above provide some key financials of Wal mart. Revenues fllow up from $281,488.million to $401,204. million for the last four years. Nevertheless the profit margin declined to 3.3% in 2009 due to the recession of the global economic.
2 Evaluation of Financial Statements: A Comparative Analysis
2.1 Profitability Analysis 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 2009 2008 2007 2006 Figure 5: ROCE Tesco Wal mart Peer Median Source: Company Filings 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 2009 2008 2007 2006 Figure 5: Return on equity Tesco Wal mart Peer Median Source: Company Filings 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 2009 2008 2007 2006 Figure 6: Net profit margin Tesco Wal mart Peer Median Source: Company Filings The graphs above provide information about the profitability of Tesco, Wal mart and international peer median from 2006 to 2009 financial years. It is notable that the performance of Wal mart maitained continuity and stability for the last 4 years while Tesco’s experenced a more volatile operation. Compared with Tesco, Wal mart’s higer ratios such as ROCE and Return on equity capital employed Indicating that resources being employed by Wal mart are being used more effectively. However, it is interesting to note that the net profit margin of Tesco is slightly higher than Wal mart’s impling that Tesco operated effectively in the market place. Furthermore while compared with their international peers , Wal mart’s performance surpass their counterparts in financial year 2009. In addition it appears that although it was impossible to predict the scale of the global economic slowdown, Wal mart has responded well by adjusting their business to this environment. In 2009 Wal-Mart entered Chile through the acquisition of a controlling interest in Distribución y Servicio (D&S),Chile’s largest food retailer. Moreover ,the net sales increase 7.2% due to decreasing price based on the every day low cost – every day low price (EDLC-EDLP) strategy. Those increases resulted from our global expansion programs, comparable store sales increases and acquisitions. Overall, Wal mart outperform Tesco. 2.2 Liquidity
0 0.2 0.4 0.6 0.8 1 1.2 1.4 2009 2008 2007 2006 Figure 7: Current ratio Tesco Wal mart Peer Median Source: Company Filings 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 2009 2008 2007 2006 Figure 8: Quick ratio Tesco Wal mart Peer Median Source: Company Filings 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 2009 2008 2007 2006 Figure 9: Cash ratio Tesco Wal mart Peer Median Source: Company Filings The bar charts below represent three liquidity ratios indicating that Wal mart stayed constant at a relative high level than Tesco in terms of Current ratio and Cash ratio. However the Acid test implyed a opposite conclusion that Tesco outperformed Wal mart for the possible reason that Wal mart’s inventory occupied a great proportion in current asset. Moreover, even though Tesco and Wal mart are leading food and grocery retailer, the international peer’s generate a impressed operation. Despite that Wal mart’s cash ratio show a decline indicating that Wal mart adjust its component of the current asset leading to a lower level of liquidity in very short term, Wal mart’s cash ratio remained a higher level than Tesco’s. In conclusion, Wal mart remained steady at better level than Tesco especially preferable for short term creditors. 2.3 Efficient use of working capital 0 10 20 30 40 50 2009 2008 2007 2006 Figure 10: Inventory turnover period Tesco Wal mart Peer Median Source: Company Filings 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 2009 2008 2007 2006 Figure 11: Receivables turnover period Tesco Wal mart Peer Median Source: Company Filings The par chart below provide two ratios about how efficient Tesco, Wal mart and global peers operated. In one hand, from 2006 to 2009, the gap between Wal mart’s inventory turnover period and Tesco’s is narrowing. However in fical year 2009, Wal mart’s inventory turnover period is around 10 days per year higher than that of Tesco indicating that Tesco operated their inventory more efficient. On the other hand Tesco’s receibables turnover period grew steadily for the last for years reached around 12 days per year while Wal mart maintained stable approximately 3 days. The variance in Tesco’s Receivables turnover period is due to Tesco has acquired the remaining 50% of Tesco Personal Finance from Royal Bank of Scotland. a move which will enable Tesco to enter personal financial service industry. To sum up although it is clearly stated that Tesco outperform Wal mart in food retailer industry, due to the large propotion in personal financial service of Tesco, Wal mart is more efficient. 2.4 Investment ratio and stock price 0 5 10 15 20 25 2009 2008 2007 2006 2005 Figure 12: P/E ratio Tesco Wal mart Peer Median
Figure13 Stock price
Source: Google Finance The graphs above 2.5 Stability Ratio 0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 2009 2008 2007 2006 Figure 14:Debt-to-Equity ratio Tesco Wal mart Peer Median 0 0.2 0.4 0.6 0.8 1 2009 2008 2007 2006 Figure 15:Gearing Tesco Wal mart Peer Median Focus on the par charts we can conclude that Tesco experenced a significantly increase in debt-to-equity ratio and gearing ratio while Wal mart stayed constant from 2006 to 2009 financial year. The immense movment of Tesco is due to its expending strategy which including boost its international market share and entering to personal financial service sector. This new strategy greatly accelerates the demand of debt of Tesco which influenced the ratio enormous, indicating that they didn’t exposed themselves to more risk. Moreover, it is obvious and noteworthory that compared with their peers group, Tesco and Wal mart appear to be more risky. As mentioned before, Wal mart is a more feasible to a risk averse investor. 3 Conclusion 1) Overview of comparision According to the backaround analysis and financial ratios analysis between Tesco and Wal mart, it is easy to concluded that Wal mart is the leading company around the world while Tesco experenced a significant growing period for last five years. Wal mart performance more stable compared with Tesco that have more develop chance and broader develop space. 2) Implications for Potential Investment According to the recent year performance, it is suggested that Tesco is a better choice for an investor wishing to invest for maximum capital growth in the long term. On contrast, the creditor and supplyers of would prefer Wal mart due to its constant perfomance and better liquility not only short-term but also long term. 3) Limitation of the Analysis This analysis mainly depends on the historical public accounting data and financial ratios, however, it ignores accounting policies may differ between different companies. 4 Evaluation the impact of GAAP and IFRS Through the analysis Tesco’s and Wal mart’s financial statement and the ratio analysis, it can clearly be concluded that there are remarkable difference between two different reports under GAAP and IFRS. The format of the financial statement. For example Tesco’s financial statements only publish one year comparative financial information whereas Wal mart’s include three years(banlance sheet two years). Further more different criterion is emploied when determinming a specific entry such as inventory cost. LIFO is prohibited under IFRS, while GAAP permitted which greatly influence the result of ratio analysis. Therefore, such difference significantly reduced the comparability of two company and may mislead the investor to some extend. Section B: Convergence 1 Introduction The growing acceptance of International Financial Report Standards(IFRS) server as an incitant factor for the convergence between US GAAP and IFRS. As recorded in IFRS (2008) there are “approximately 113 countries require or allow the use of IFRS for the preparation of financial statement by publicly held companies.” Furthermore, series of accounting fraud scandals such as Enron, WorldCom and other large companies blow down to the American investor’s confidence in the capital market, It has shaken the American legislature,regulatory institution and the public’s trust in the quality of U.S. accounting standards. Hence, it seems natural to ciritsise current account standard and the US standard setters have recently announced a ‘roadmap’ to convergence. Finally, the issue of whether the harmonisation should be processed and to what extend the exercise will be success was raised. According to Levitt(1998) the former SEC chairman, “the truth is, high standards lower the cost of capital” indicating that higher accounting quality and disclosure under internationally accepted standards such as IAS/IFRS lower the firm’s capital cost. However it is unconsidered to outweigh the benefits of convengence if we taking into account factors affecting acount standard as following plitical, business culture, accounting culture even language. This essay will argue that although the convergence between US GAAP and IFRS is an irreversible trend, it is inevitable exist some concers which interfere the convergence heavily. In order to demonstrate this, the paper will illustrate that from two sections. Firstly, the section of the pressures for convergence will be analysed. Subsequently, it will be discussed in terms of some major concers. 2 Pressure One of the key argument for accelerating convergence is that globalization and mutinational bussines. As reported by KPMG(2008) that even in advance of any enforcement of IFRS for U.S reporting, companies may have to deal with IFRS financial reports in situations such as following: a U.S. company takeover an IFRS-reporting target, a U.S. company selling a business to an IFRS-reporting taget company and so on. Due to these transations these companies will need to understand IFRS-reporting style in order to be more knowledgeable in the ttransations. Take Wal mart as an example, it operation in over 16 conutries including UK which is a member of IFRS-reporting system. Under this situation, it is unavoidable that for Wal mart have to deal with IFRS. In addition, it is noteworth that Wal mart may have to converted its financial statement of its foreign subsidiaries to U.S. GAAP for consolidation purposes. Last but not lest, different reporting standard and style will generate misleading and greatly reduce the comparability especially for an cross-border investor comparing two companies report under two different accounting system. Therefore , the shift from GAAP to IFRS not only is an umavoidable trend but also promoted the accounting conpareability and consistency especially on a global scope. In addition, according to Benston et.al(2006), IFRS accounting standards are more principles-based than rule-based which used in U.S.. Based on the above concept if the rule-based standard is better there is no need to shift current GAAP to IFRS. However, implement of principles-based approach in accounting standard can generate a more reliable account stander (Schipper, 2003). Generally, there are two major explanation. Firstly, “the rules-based one is criticised for doing nothing when economic environment changes, especially some inventions of financial instruments emerge” such as derivertive instrument (Kershaw, 2005). This position goes further that according to the existence of rules-based standards in the U.S., although SEC are trying to perfect current accounting standards, the development of the financial market is so rapid and the enterprises’ financial activities are so wide-ranging that the accounting standard can not cover all the situations. Another issue that merits condideration is the ruls-based standard misleads the public to ignore the risk of investment. In another word, the rules-based standard only require companies to disclose the risks of assets, liabilities, earnings and cash flows. Unfortunitely it fails to reflect the increasingly risks which due to financial instruments. Hence, the investors might fail to access the company’s overall risk (Arjoon, 2006). Overall, it is can be infered that convergence are part of a process of improve the U.S current account standard. Nevertheless, convergence is not necessary to improve the account quality because priciples-based standard is not perfect. FASB(2002) publish the explanation of principles-based standard which offer more freedom to report financial statements. In other words, accounts play a significant role in the process of making financial report. Thus there are some disadvantages merit consideration. Admittedly, there are some potential flaws caused by priciples-based standard. It is avoidable if there is good auditing and regulation. Comparing with rules-based standard, principles-based standard is more adapable, and more effective in the current accounting circumstances. Consequently, it is easy to conclude that convergence between GAAP and IFRS is an unavoidable trend, furthermore, this will also greatly improve the current U.S. account standard. 3 Obstacles Various difficulties emerge when dream come to reailty. First of all, the term accounting convergence should be taking into considers. This term has been defined as: “The process pursued by the International Accounting Standards Board (IASB) of eliminating the present differences between National Accounting Standards and the avoidance of future differences to achieve international accounting harmonization (Hussey & Ong, 2005, p.229). It can be draw from the concept above that convergence aim to increase the comparability of accounting practices. According to Haverty, J. L.(2006) it is important to note that convergence not equal to comparability. Zeff,S.A.(2007) stated that there are some obstacles to global financial reporting such as culture in terms of business, financial, accounting, auditing and regulatory. Additionally, it is equally important to consider the problems of interpretation. In order to interpret some major obstacles to convergence, the following pargraph try to inverstgate business culture and language. On one hand, in the USA, it is common for certain industries to raise capital through long-term libilityss. For example, it is not surprised that the airline company would not owned the airline which would be owned by financial institutions. Furthermore, this practice would undervalue the assets hold by the company. However, such biased valuation would not be eliminated even after convegence. Hence, this is one of obstacles for a lack of comparability. On the other hand, language is a another factor should be considerd. U.S. and U.K. are both english countries, however it is noteable that the “Brithsh and the Americans are unable even to harmonize the spelling of word hramonis”(Alexander 2006). Consequently it is easy to draw a conclusion that diversity in culture, eonomic, legal, and political resons reduced the comparablity and the extent of convergence. 4 Conclusion To sum up, due to the aforementioned reasons we can safely arrive at the conclusion that the convergence between GAAP and IFRS is a irreversible trend even though there are some obstacles. According to Zeff, S.A.(2007),”some obstacles are deeply cultural, while others aremore susceptible to modulation by the principal parties.” Admittly harmonisation would not solute all the problem, but still can be a incitant factor to improve the current U.S. account sandard.