Tesco PLC is one of the largest retailers located in the U.K. Over the years, the company has been through challenges, ups, and downs. This case study analysis focuses on Tesco’s past performance, future strategy, and its implications. It seeks to look into the areas the company should focus on in order to bolster the company's future financial performance.
Anupam Mehta; Utkarsh Goyal; Sanchit Taneja
Harvard Business Review (W17163-PDF-ENG)
March 13, 2017
Case questions answered:
What course of action would enable Lewis to improve Tesco’s value for shareholders? What area(s) should be focused on in order to bolster the company’s financial performance?
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Tesco: From Troubles to Turnaround Case Answers
This case solution includes an Excel file with calculations.
Tesco: From Troubles to Turnaround
Tesco, one of the largest U.K.-based retailers, has been through its ups and downs during the last six years. This memo aims to analyze the company’s past performance, future strategy, and its implications.
Over the last six years, Tesco has improved its liquidity position. The current ratio increased from 0.68 in 2011 to 0.75 in 2016. This increase can be attributed to an increase in cash and cash equivalent, and a simultaneous decrease in accounts payable over the last six years. However, the current ratio and quick ratio are below the standard, i.e., 01.
Moving on, the company also improved its collection cycle. Inventory turnover and accounts receivable turnover increased while, on the other hand, average days of payables outstanding decreased. If one looks at the debt ratio, it increased from 0.65 in 2011 to 0.80 in 2016. This can be attributed to the company’s expansion in the U.K. and internationally.
On the other hand, the interest coverage ratio declined from 11.44% to 1.21%, which can be the result of declining operating profit over the years.
Furthermore, Tesco’s profitability ratios declined over the past six years. The profitability ratios exhibited an upward trend in 2012 as compared to 2011, but since 2013, the profitability has declined until 2015.
One of the main reasons behind this decline could be the slowdown of the U.K. economy, projecting a decline in retail sales by 0.2% every year until 2020. Although the company experienced a decline in profit from 2011-2014, it never experienced a loss.
Shockingly, in 2015, Tesco posted a loss of ￡6.38 billion, which could be largely attributed to the loss of customer trust due to financial scandals in 2014.
In 2015-16, the company’s CEO focused on cost management, thus reducing the cost of goods sold and operating costs, enabling the company to achieve an operating profit of ￡1.05 billion in 2015-16.
As per DuPont’s system of analysis, total asset turnover decreased slightly from 2011 to 2016, and the financial leverage ratio increased from 2.85 in 2011 to 5.09 in 2016, but the net profit margin decreased considerably from 4.38% to 0.4% in 2016. In other words, a decrease in net profit margin is the main reason behind Tesco’s declining financial health.
Tesco’s revenue decreased by 2.2% from ￡60,931 million in 2011 to ￡54,433 million in 2016. In order to increase the company’s revenue, the company should improve its sales in international stores because of two reasons.
Firstly, in 2016, the company earned about 19.1% of its total revenue from international sales, which means that there is potential to grow internationally.
Secondly, due to the slowdown of the U.K.’s economy, Tesco’s retail sales are projected to decrease each year by about 0.2%, acting as a natural barrier to sales growth in the U.K. One way of improving sales in international stores is by…
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