SAINSBURY Vs TESCO

SAINSBURYS STRATEGIC RECOVERY PLAN

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

TABLE OF CONTENTS

1. 2. i. ii. iii. iv. 3. i. ii. iii. 4. i. ii. 5. i. ii. 6. i. 7. i.

INTRODUCTION ------------------------------------------------------------------------------------------------------------ 2 COMPETITIVE ANALYSIS OF SAINSBURY & TESCO FINANCIAL POSITIONS ----------------------- 2 Sainsburys Financial and Competitive Position ----------------------------------------------------------------------- 2 Financial Analysis Sainsbury ------------------------------------------------------------------------------------------- 5 Financial Analysis Tesco ------------------------------------------------------------------------------------------------ 7 Sainsbury SWOT Analysis ------------------------------------------------------------------------------------------------- 9 PROPOSED SAINSBURYS RECOVERY PLAN-------------------------------------------------------------------- 10 Investment Strategies for Recovery -------------------------------------------------------------------------------------- 10 Key Financials Underpinning Investment Strategies ------------------------------------------------------------------ 10 Resources Required to Implement Investment Strategies ------------------------------------------------------------- 11 KEY FINANCIAL PROJECTIONS ------------------------------------------------------------------------------------- 11 Summary of Sainsburys Key Financials Post Recovery ----------------------------------------------------------- 11 Impact of Investment Strategies on Sainsburys Key Financials ---------------------------------------------------- 11 INVESTMENT APPRAISAL OF INVESTMENT PROJECTS --------------------------------------------------- 11 Summary of Investment Strategy ----------------------------------------------------------------------------------------- 11 Investment Appraisal ------------------------------------------------------------------------------------------------------ 13 SOURCES OF FINANCE AND THE COST OF CAPITAL -------------------------------------------------------- 14 Sainsburys Investment Funding Plan and Revised Capital Structure ---------------------------------------------- 14 RISK ASSESSMENT ------------------------------------------------------------------------------------------------------- 14 Identified Risks and Impact on Sainsburys Cost of Capital --------------------------------------------------------- 14

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

1. INTRODUCTION

Sainsbury and Tesco are two largest grocery retail chains primarily operating in United Kingdom. Sainsbury, once the market leader, has gradually lost its market share to Tesco over time and Tesco has now emerged the market leader in grocery retail industry. In this assignment, I am required to analyze Sainsbury and Tescos financial and competitive positions by doing strategic and financial statement analysis for the last five years. On the basis of such analysis, I am required to propose a strategic recovery plan for Sainsbury, outlining key investment strategies to be undertaken, evaluating proposed investment strategies to be undertaken and identifying the risks involved therein and also evaluating the impact of such investment strategies on Sainsburys financial and competitive position. In this assignment, I have used various tools and techniques available for such financial and competitive analysis, including but not limited to Value Chain Analysis, Porters Five Forces Model, BCG Growth Matrix and traditional financial statement and ratio analysis. I wouldnt have been able to produce following structured analysis and propose recovery strategies had I not utilized such tools and techniques of financial and competitive analysis.

2. COMPETITIVE ANALYSIS OF SAINSBURY & TESCO FINANCIAL POSITIONS

i.

Sainsburys Financial and Competitive Position

Over the last five years, Sainsbury has been noticeably different and lagging behind Tesco on number of fronts and consequently such factors had contributed towards its downfall. A summary of such differences is outlined below. Low Profitability Relative to Tesco Over the last five years, Sainsbury has been living on relatively low operating profit margins due to number of factors. Major ones are concentration on low margin products, inefficiencies in controlling costs and lack of value added through suppliers chain. As shown by the following graphs, Sainsbury is lagging behind Tesco in EBITDA margin and net profit margin.

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

EBITDA Margin
9.0% 8.0% 7.0% 6.0% 5.0% 2.0% 4.0% 3.0% 2.0% 1 .0% 0.0% 2001 A 2002A 2003A 2004A 2005A 2006A 1 .0% 0.0% -1 .0% -2.0% 2001 A 2002A 6.0% 5.0% 4.0% 3.0%

EBIT Margin

2003A

2004A

2005A

2006A

Tesco

Sainsbury

Tesco

Sainsbury

Such low profitability has also resulted in relatively low return on invested capital and return on equity ratios despite not many differences in the utilization of capital and use of leverage.

Return on Invested Capital

1 2.0% 1 0.0% 1 5.0% 8.0% 6.0% 4.0% 2.0% 0.0% 0.0% -2.0% 2001 A 2002A 2003A 2004A 2005A 2006A -5.0% 2001 A 1 0.0% 20.0%

Return on Equity

5.0%

2002A

2003A

2004A

2005A

2006A

Tesco

Sainsbury

Tesco

Sainsbury

Low Sales Growth Relative to Tesco Another factor that has contributed to the downfall of Sainsbury over the last few years is its low sales growth relative to Tesco as shown by the following graph.

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

Despite high sales growth of Tesco in Asia, the major sales growth contribution of Tesco has come from UK alone. The following charts can better present the Tescos sales growth contribution story.

GEOGRAPHICAL SALES MIX - TESCO

90% 80%
1 2.0%

Tesco's Geographical Weighted Sales Grow th

1 4.0% 1 3.3%

88%

85%

82%

80%

80%

70% 60% 50% 40% 30% 20% 1 0% 0% 2002 UK 2003 2004 Rest o f Euro pe 2005 A sia 2006 8% 4% 9% 6% 1 0% 8% 1% 1 9% 1% 1 9%
1 0.0% 7.8% 8.0% 6.0% 4.0% 2.0% 0.0% 2003 Tesco UK 2004 Tesco Rest o f Euro pe 2005 2006 Tesco A sia 2.1 % 2.6% 2.1 % 2.7% 2.5% 1 .4% 1% .1 6.4% 2.8% 7.7%

A number of factors have contributed to such low sales growth of Sainsbury. The major ones are high payout ratios, non-responsiveness to Tescos convenient stores strategy and complacent / risk averse attitude towards growth strategies.

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

ii.

Financial Analysis Sainsbury

SAINSBURY 2001A Liquidity Current ratio Acid test ratio Profitability EBITDA margin EBIT margin Net profit margin Return on invested capital Return on equity Efficiency Operating capital turnover Invested capital turnover Receivable turnover (days) Inventory turnover (days) Payable turnover (days) Growth Sustainable growth rate Sales growth (YoY) Earnings per share growth (YoY) Dividend per share growth (YoY) Financial Risk Gearing ratio Debt-equity ratio Interest coverage ratio Investment Ratios Dividend payout ratio Dividend per share (Pence) Earnings per share (Pence) Book value per share (Pence) 0.74 0.46 2002A 0.55 0.43 2003A 0.47 0.51 2004A 0.30 0.34 2005A 0.20 0.36 2006A 0.68 0.48

5.9% 3.3% 2.3% 6.5% 7.2%

5.8% 3.7% 2.2% 6.1% 7.3%

6.6% 3.8% 1.9% 4.1% 5.0%

6.6% 3.6% 1.9% 3.8% 5.0%

3.8% -1.1% -1.2% -1.9% -4.5%

4.3% 1.4% 0.4% 2.0% 1.5%

2.55 2.53 13 21 57

2.63 2.59 9 20 57

1.92 1.92 8 26 73

1.81 1.80 10 24 69

2.42 2.43 8 16 60

2.54 2.53 6 16 58

0% 0.0% 0.0% 0.0%

2% 7.5% 3.6% 3.7%

2% -17.8% -29.0% 4.5%

1% 2.4% 2.7% 0.7%

0% 5.3% -178.2% -3.7%

3% 6.5% -130.9% -48.7%

21.3% 0.27 6.91

23.3% 0.30 12.80

28.3% 0.39 8.98

32.4% 0.48 8.70

34.3% 0.52 (1.95)

38.5% 0.62 1.82

94% 14.19 15.02 256.89

77% 14.72 19.16 262.41

65% 15.38 23.64 271.59

76% 15.49 20.28 278.88

92% 14.92 16.16 241.66

-136% 7.66 (5.61) 228.52

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

SAINSBURY FINANCIAL STATEMENTS Income Statement Sales (excldg. VAT) Cost of goods sold Gross profit Selling & general expenses EBITDA Depreciation & Amorization EBIT Interest expense, net Other net income Profit before tax Taxes Net profit Items recognized directly in equity Comprehensive income b4 discont. Ops. Discontinued operations Comprehensive income after discont. Ops. 2001A 15,954 (13,089) 2,865 (1,918) 947 (422) 525 (76) 67 516 (157) 359 10 369 (79) 290 2002A 17,154 (13,982) 3,172 (2,169) 1,003 (376) 627 (49) (5) 573 (200) 373 (1) 372 (1) 371 2003A 14,104 (11,386) 2,718 (1,781) 937 (398) 539 (60) (8) 471 (206) 265 (4) 261 197 458 2004A 14,440 (11,512) 2,928 (1,981) 947 (425) 522 (60) 17 479 (206) 273 (10) 263 131 394 2005A GBP Millions 2006A 16,061 (13,180) 2,881 (2,183) 698 (470) 228 (125) 1 104 (46) 58 (154) (96) (96)

15,202 (12,765) 2,437 (1,861) 576 (748) (172) (88) 22 (238) 51 (187) 87 (100) 375 275

Balance Sheet Cash Accounts receivable Inventories Other net current assets Total current assets Accounts payable Accrued liabilities Non-interest bearing current liabilities Operating working capital Gross property, plant and equipment Accumulated depreciation Net property, plant and equipment Intangible assets Investment properties Other net operating assets Operating invested capital Other net assets Total Invested Capital Liabilities and equity Interest bearing debt Derivatives Interest bearing debt, adjusted Total shareholders' equity (incldg. Minority Int.) Deferred tax, net Adjusted equity

2001A 998 563 763 (713) 1,611 (2,058) (127) (2,185) (574) 8,979 (2,764) 6,215 278 329 6,248 58 6,306

2002A 999 417 751 (878) 1,289 (2,200) (140) (2,340) (1,051) 9,882 (2,976) 6,906 263 412 6,530 93 6,623

2003A 1,209 310 800 (1,211) 1,108 (2,274) (98) (2,372) (1,264) 10,648 (3,108) 7,540 226 860 7,362 (26) 7,336

2004A 771 394 753 (1,233) 685 (2,191) (85) (2,276) (1,591) 11,314 (3,100) 8,214 208 1,163 7,994 24 8,018

2005A

GBP Millions 2006A 1,080 276 576 (411) 1,521 (2,094) (154) (2,248) (727) 10,741 (3,681) 7,060 191 (194) 6,330 23 6,353

796 319 559 (1,237) 437 (2,093) (125) (2,218) (1,781) 10,469 (3,393) 7,076 203 773 6,271 (11) 6,260

1,346 1,346 4,804 156 4,960 6,306

1,542 1,542 4,909 172 5,081 6,623

2,074 2,074 5,072 190 5,262 7,336

2,599 2,599 5,185 234 5,419 8,018

2,147 2,147 4,112 1 4,113 6,260

2,431 12 2,443 3,965 (55) 3,910 6,353

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

iii.

Financial Analysis Tesco

TESCO 2001A Liquidity Current ratio Acid test ratio Profitability EBITDA margin EBIT margin Net profit margin Return on invested capital Return on equity Efficiency Operating capital turnover Invested capital turnover Receivable turnover (days) Inventory turnover (days) Payable turnover (days) Growth Sustainable growth rate Sales growth (YoY) Earnings per share growth (YoY) Dividend per share growth (YoY) Financial Risk Gearing ratio Debt-equity ratio Interest coverage ratio Investment Ratios Dividend payout ratio Dividend per share (Pence) Earnings per share (Pence) Book value per share (Pence) 0.57 0.18 2002A 0.62 0.20 2003A 0.61 0.16 2004A 0.66 0.23 2005A 0.62 0.22 2006A 0.66 0.24

7.8% 5.6% 3.4% 9.2% 13.3%

7.8% 5.6% 3.5% 9.2% 13.8%

8.0% 5.7% 3.6% 8.6% 13.4%

8.1% 5.6% 3.6% 9.1% 12.9%

7.8% 5.6% 4.0% 10.2% 14.8%

7.7% 5.6% 4.0% 10.7% 16.3%

2.48 2.40 6 18 58

2.38 2.31 7 18 59

2.14 2.09 9 20 67

2.29 2.24 10 18 66

2.46 2.39 8 19 72

2.62 2.53 8 18 62

8% 0.0% 0.0% 0.0%

7.9% 12.7% 14.1% 13.7%

7.7% 9.9% 10.1% 9.8%

7.3% 18.5% 9.8% 9.8%

9.4% 9.9% 21.2% 3.6%

10.3% 6.5% 15.6% 10.8%

38.1% 0.62 9.33

41.3% 0.70 8.64

43.2% 0.76 8.24

37.8% 0.61 7.78

35.6% 0.55 14.40

37.5% 0.60 17.31

47% 4.90 10.40 78.13

47% 5.58 11.87 85.87

47% 47% 40% 38% 6.12 6.72 6.96 7.71 13.37 12.30 15.67 16.89 97.60 111.48 117.38 123.53

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

TESCO FINANCIAL STATEMENTS Income Statement Sales (excldg. VAT) Cost of goods sold Gross profit Selling & general expenses EBITDA Depreciation & Amorization EBIT Interest expense, net Other net income PBT Taxes Net profit Items recognized directly in equity Comprehensive income b4 discont. Ops. Discontinued operations Comprehensive income after discont. Ops. 2001A 20,988 (16,877) 4,111 (2,469) 1,642 (476) 1,166 (125) 7 1,048 (327) 721 721 721 2002A 23,653 (19,006) 4,647 (2,791) 1,856 (534) 1,322 (153) 19 1,188 (358) 830 830 830 2003A 26,004 (20,773) 5,231 (3,143) 2,088 (604) 1,484 (180) 36 1,340 (394) 946 22 968 968 2004A 30,814 (24,471) 6,343 (3,854) 2,489 (754) 1,735 (223) 59 1,571 (469) 1,102 (157) 945 945 2005A GBP Millions 2006A 39,454 (29,686) 9,768 (6,740) 3,028 (829) 2,199 (127) 159 2,231 (645) 1,586 (243) 1,343 (10) 1,333

33,866 (25,296) 8,570 (5,935) 2,635 (734) 1,901 (132) 123 1,892 (539) 1,353 (127) 1,226 (6) 1,220

Balance Sheet Cash Accounts receivable Inventories Other current assets Total current assets Accounts payable Accrued liabilities Non-interest bearing current liabilities Operating working capital Gross property, plant and equipment Accumulated depreciation Net property, plant and equipment Intangible assets Investment properties Other net operating assets Operating invested capital Other net assets Total Invested Capital Liabilities and equity Interest bearing debt Derivatives Interest bearing debt, adjusted Total shareholders' equity (incldg. Minority Int.) Deferred tax, net Adjusted equity

2001A 534 322 838 1,694 (2,684) (292) (2,976) (1,282) 12,683 (3,103) 9,580 154 8,452 304 8,756

2002A 670 454 929 2,053 (3,061) (259) (3,320) (1,267) 14,510 (3,478) 11,032 154 9,919 317 10,236

2003A 638 662 1,140 2,440 (3,799) (230) (4,029) (1,589) 16,625 (3,797) 12,828 890 12,129 312 12,441

2004A 1,100 840 1,199 3,139 (4,456) (308) (4,764) (1,625) 18,197 (4,103) 14,094 965 13,434 328 13,762

2005A 1,146 769 1,309 3,224 (4,974) (224) (5,198) (1,974) 18,545 (4,024) 14,521 1,408 565 (735) 13,785 396 14,181

2006A 1,325 892 1,464 3,681 (5,083) (464) (5,547) (1,866) 20,270 (4,388) 15,882 1,525 745 (1,211) 15,075 528 15,603

3,340 3,340 5,014 402 5,416 8,756

4,230 4,230 5,566 440 6,006 10,236

5,377 5,377 6,559 505 7,064 12,441

5,200 5,200 7,990 572 8,562 13,762

5,045 5,045 8,654 482 9,136 14,181

5,388 463 5,851 9,444 308 9,752 15,603

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

iv.

Sainsbury SWOT Analysis

Strengths

Weaknesses

Brand recognition Quality products Presence in USA Presence in banking sector

Non availability of non-food products Product range attracting few communities Few stores at convenient locations Relatively high prices of various products Limited presence out of UK Lack of strategic alliance with suppliers Substandard sales growth Inefficiencies in expense control Concentration on low margin products Non-responsiveness to competitors strategies

Opportunities

Threats

Roll out new products Enter into new markets Cater to needs of all communities Invest in technology to reduce operational cost

Losing sales to competitors Flight of key personnel due to low growth Entrance of foreign retail chains in UK

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

3. PROPOSED SAINSBURYS RECOVERY PLAN

i.

Investment Strategies for Recovery

On the basis of above mentioned financial and competitive analysis, I suggest the following strategies for the recovery of Sainsbury. Plan A: Plan B: Opening of new small (convenient) stores at various locations throughout UK Entering into new markets like Pakistan, China, India, Brazil and Russia where population growth along with economic growth is high and one can capture the first mover advantage. Rolling out new product stream of big ticket and high margin items and launching products that catered to the needs of various communities in UK to attract new customers.

Plan C:

ii.

Key Financials Underpinning Investment Strategies

Plan A:

No. of stores to be opened Sales per store per annum .. Operating profit margin. Fixed Capital Investment per store

1,500 GBP 7.5 million 3.5% GBP 1.5 million

Plan B:

Total no. of stores to be opened Sales per store per annum... Operating profit margin. Fixed Capital Investment per store

100 (20 stores in each country) GBP 20 million 4.5% GBP 4 million GBP 2 million 10.5% GBP 0.5 million

Plan C:

Increase in sales per annum... Operating profit margin Fixed Capital Investment
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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

iii.

Resources Required to Implement Investment Strategies

Total financial resources required to implement Plan A, Plan B and Plan C is GBP 2,650.5 million. Plan A requires an initial investment of GBP 2,250 million, Plan B requires an initial investment of GBP 400 million, whereas Plan C requires an investment of GBP 0.5 million. Since the target debt ratio (gearing) is set at 40pc keeping in perspective financial flexibility and risk appetite, all incremental resources are financed in the ratio of 40% debt and 60% equity.

4. KEY FINANCIAL PROJECTIONS

i.

Summary of Sainsburys Key Financials Post Recovery

After implementing the plans A, B and C, Sainsbury key financial would be as follows: Sales growth... EBIT Margin.......... Net Profit Margin... 82.5% 2.4% 1.1%

ii.

Impact of Investment Strategies on Sainsburys Key Financials

By implementing investment plans A, B and C, Sainsburys profitability has improved a lot and sales growth has achieved a significant mark of 82%. Such phenomenal growth, though not sustainable over the long run, yet, such growth would put Sainsbury on the route of recovery.

5. INVESTMENT APPRAISAL OF INVESTMENT PROJECTS

i.

Summary of Investment Strategy

Plan A: Since Sainsbury started to struggle and losing its market share when Tesco adopted the aggressive growth strategy of building convenient stores throughout UK, it is vital for Sainsbury to become more competitive and follow the same strategy of convenient stores to get advantage of economies of scale that Tesco is enjoying currently.
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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

I suggest that Sainsbury establish 1,500 new convenient stores to attract new customers and to put its sales on a growth trajectory. Further details of the plan are as follows: Sales per store per annum .. Operating profit margin. Fixed Investment per store GBP 7.5 million 3.5% GBP 1.5 million

Plan B: It is vital for Sainsbury to try new markets and capture the benefits of first mover advantage. I suggest that Sainsbury invest in markets like Pakistan, India, China, Brazil and Russia where population and economic growth shows an uptrend. Further details of the plan are as follows: Total no. of stores to be opened Sales per store per annum... Operating profit margin. Fixed Capital Investment per store 100 (20 stores in each country) GBP 20 million 4.5% GBP 4 million

Plan C: Another major factor that is affecting Sainsbury is its low profitability that results in relatively low profit margins and low return on investments. I suggest Sainsbury launch new products that are big ticket and high margin items and bring in products that cater to the needs of other communities in UK. Further details of the plan are as follows: Increase in sales per annum... Operating profit margin Fixed Capital Investment GBP 2 million 10.5% GBP 0.5 million

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

ii.

Investment Appraisal

Plan A:
NPV @ 10.0% p.a. APPRAISAL DATE: 31-Dec-06 OPTION NUMBER & TITLE: Plan A - Opening 1,500 Convenient Stores in UK GBP Millions CAPITAL COSTS Plan A -

Year 0
2,250

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10
-

TOTAL
2,250 2,250

A. Total Capital Costs (Annual)

2,250

CURRENT COSTS Plan A

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7
10,856 -

Year 8
10,856 -

Year 9
10,856 -

Year 10
10,856 -

TOTAL

- 10,856 - 10,856 - 10,856 - 10,856 - 10,856 - 10,856 -

C. Total Revenue Costs (Annual)

- 10,856 - 10,856 - 10,856 - 10,856 - 10,856 - 10,856 -

10,856 -

10,856 -

10,856 -

54,281 10,856 - 108,563

INCOME Plan A

Year 0

Year 1
11,250

Year 2
11,250

Year 3
11,250

Year 4
11,250

Year 5
11,250

Year 6
11,250

Year 7
11,250

Year 8
11,250

Year 9
11,250

Year 10
11,250

TOTAL
56,250 112,500

G. Total Income

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

NPV CALCULATION Net Undiscounted Cash Flow DISCOUNT FACTOR @ 10% p.a. ANNUAL NET PRESENT VALUE TOTAL NET PRESENT VALUE =

Year 0
2,250 1.000 2,250 169

Year 1
394 0.909 358

Year 2
394 0.826 325

Year 3
394 0.751 296

Year 4
394 0.683 269

Year 5
394 0.621 244

Year 6
394 0.564 222

Year 7
394 0.513 202

Year 8
394 0.467 184

Year 9
394 0.424 167

Year 10
394 0.386 152 -

TOTAL
281 757

Plan B:
NPV @ 10.0% p.a. APPRAISAL DATE: 31-Dec-06 OPTION NUMBER & TITLE: Plan B - Opening 100 New Stores in China, India, Pakistan, Brazil and Russia GBP Millions CAPITAL COSTS Plan B -

Year 0
400

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10
-

TOTAL
400 400

A. Total Capital Costs (Annual)

400

CURRENT COSTS Plan B

Year 0
-

Year 1
1,910 -

Year 2
1,910 -

Year 3
1,910 -

Year 4
1,910 -

Year 5
1,910 -

Year 6
1,910 -

Year 7
1,910 -

Year 8
1,910 -

Year 9
1,910 -

Year 10
1,910 -

TOTAL
9,550 19,100

C. Total Revenue Costs (Annual)

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

INCOME Plan B

Year 0

Year 1
2,000

Year 2
2,000

Year 3
2,000

Year 4
2,000

Year 5
2,000

Year 6
2,000

Year 7
2,000

Year 8
2,000

Year 9
2,000

Year 10
2,000

TOTAL
10,000 20,000

G. Total Income

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

NPV CALCULATION Net Undiscounted Cash Flow DISCOUNT FACTOR @ 10% p.a. ANNUAL NET PRESENT VALUE TOTAL NET PRESENT VALUE =

Year 0
400 1.000 400 153

Year 1
90 0.909 82

Year 2
90 0.826 74

Year 3
90 0.751 68

Year 4
90 0.683 61

Year 5
90 0.621 56

Year 6
90 0.564 51

Year 7
90 0.513 46

Year 8
90 0.467 42

Year 9
90 0.424 38

Year 10
90 0.386 35 -

TOTAL
50 59

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SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

Plan C:
NPV @ 10.0% p.a. APPRAISAL DATE: 31-Dec-06 OPTION NUMBER & TITLE: Plan C - Launching Big Ticket and High Margin Items GBP Millions CAPITAL COSTS Plan C -

Year 0
1

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10
-

TOTAL
1 -

A. Total Capital Costs (Annual)

CURRENT COSTS Plan C

Year 0
-

Year 1
2 -

Year 2
2 -

Year 3
2 -

Year 4
2 -

Year 5
2 -

Year 6
2 -

Year 7
2 -

Year 8
2 -

Year 9
2 -

Year 10
2 -

TOTAL
9 -

C. Total Revenue Costs (Annual)

2 -

2 -

2 -

2 -

2 -

2 -

2 -

2 -

2 -

2 -

18

INCOME Plan C

Year 0

Year 1
2

Year 2
2

Year 3
2

Year 4
2

Year 5
2

Year 6
2

Year 7
2

Year 8
2

Year 9
2

Year 10
2

TOTAL
10 -

G. Total Income

20

NPV CALCULATION Net Undiscounted Cash Flow DISCOUNT FACTOR @ 10% p.a. ANNUAL NET PRESENT VALUE TOTAL NET PRESENT VALUE =

Year 0
1 1.000 1 1

Year 1
0 0.909 0

Year 2
0 0.826 0

Year 3
0 0.751 0

Year 4
0 0.683 0

Year 5
0 0.621 0

Year 6
0 0.564 0

Year 7
0 0.513 0

Year 8
0 0.467 0

Year 9
0 0.424 0

Year 10
0 0.386 0

TOTAL
1 0

6. SOURCES OF FINANCE AND THE COST OF CAPITAL

i.

Sainsburys Investment Funding Plan and Revised Capital Structure

Total investment required to implement Plans A, B and C is GBP 2,650.5 million. Since 40% is to be financed with debt and rest with equity, I dont suggest change in capital structure of Sainsbury as I believe target debt ratio of 40% is in line with financial flexibility and risk appetite of Sainsbury.
7. RISK ASSESSMENT

i.

Identified Risks and Impact on Sainsburys Cost of Capital

With high growth comes risk. Since Sainsbury is investing in emerging markets, it is exposed to more risks than previously. Specifically, it will be exposed to political risk, credit risk, event risk, exchange rate risk and legal risk. The impact of such risks on Sainsbury would be an increase of its equity beta among investors and consequently a rise in cost of capital to compensate for additional risks.

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