Kingfisher Plc and the Home Improvement Retail Industry - Research Paper Example

 Kingfisher Plc is the leading European home improvement retailer, based in the UK. It has over 830 stores situated in 8 different countries all over Asia and Europe, ranking it the 3rd largest Home Improvement retailer in the world. With its services and products, it is a leading company in countries such as France, China, Turkey, Poland etc. (Kingfisher, 2010) it is also listed on the London Stock exchange. History It came into being by British Woolworths chain in 1982 under Peternoster Stores Ltd. It subsequently acquired Cornet, Superdrug, B&Q, and Castorama and later became the major sponsor of a famous British Sailor. Its name was later changed to Kingfisher Plc in 1989. Descriptive A description of Kingfisher Plc with regards to its size, market share turnover, industry and sourcing of raw material is given. Size and industry: Kingfisher’s major Industry is retailing and it carries on a business of home improvement retail business where it operates in over 8 countries with over 830 stores. The main retail brands operated by Kingfisher Plc are Brico Depot, Castorama, B&Q, Screwfix Direct etc. (Write Reports, 2010) Its headquarter lies in London, UK where it has employed over 80,000 employees. It has markets in countries such as UK, France, Turkey, Italy, Poland and other Asian and European countries. It is listed in the London Stock exchange. Market share: Kingfisher Plc holds a great share in the market where it is the leading home retail company in the UK while it is the 3rd largest market share holder in the world. It also holds interest in Hornbach, a German warehouse retailer, to an extent of about 21%. (Report Linker, 2007) Turnover: Kingfisher Plc has a preliminary recorded turnover of £10,503 Million. (Kingfisher, 2010) Which has already recorded an increase of about £500 Million from the past years financial analysis. Market Locations: The markets in which Kingfisher operates include a major portion of UK, where it is the leading retailer. In addition to that, Poland, France, China, Turkey, Italy, Spain, India and other major European and Asian Countries contain the markets of Kingfisher Plc. Raw Materials: Kingfisher Plc purchases its raw material from some of the leading suppliers in the market. In 2008, it signed about 18 contracts with suppliers which represented a significant Group Purchase proportion. (Kingfisher, 2010) The major raw material includes wood, steel etc. Financial Summary A description of the financial data of the past 5 years relating to earning per share, dividend, gearing ratio, financing policy is given along with the comments on these policies. Preliminary data of 2010: According to the latest available data of Kingfisher Plc, there recorded a Sales of about £10,503 Million which accounted for a retail and adjusted pre-tax profit amounting to £664 Million and £547 Million respectively. (Kingfisher, 2010) The net debt of the company amounted to £250 Million while the Interim and Final dividend amounted to 1.925p and 3.575p respectively. Therefore the total dividend was of 5.5p for the year 2010. Compared to 2009, an increase in turnover and adjusted pre-tax profit of £477 Million and £179 Million was recorded. The debts were reduced by a substantial £754 Million and the dividend rose by 0.176p. The gross gearing for this year was around 49.675% (E-Kingfisher, 2009) and the Net Gearing at 36.878%. The improvement of 5.1% dividend in the year 2010 was a glimpse of the improvement in the performance of the company and also due to the payment of some of the previous debts. The generated goodwill also had a role to play in it. Earning Per Share: The earning per share of past five years of the company is stated below: YEARS 2009/10 2008/09 2007/08 2006/07 2005/06 EPS (in £) 16.4p 11.0p 11.7p 14.4p 6.0p (Reuters, 2010) The company showed the best performance with respect to the previous five years’ EPS as the earning per share was around 16.5p. In 2006 and 2007, it showed a rising trend where the EPS rose from 6p to 14.4p and since it has maintained the earning per share around 11p to 16.5p. The decrease in prior years in the EPS was due to the below expectations performance of B&Q China and the acquisitions of the company in these years. A rise of 5.4p in the year 2009/10 in the Earning per Share was a sign of good things as the prior two years showed a considerable decrease in the Earning per share. The rise was due to the payment in the debts due on the prior year's acquisitions which led to a great decrease in the liability of the company. The goodwill generated by the company in the acquisition i.e. £4 Million created a good support. Dividend: A brief look at the 5 year trend of dividend given to the shareholders of Kingfisher Plc is shown below: YEARS 2008/09 2007/08 2006/07 2005/06 2004/04 DIVIDEND (per share) 5.325p 7.25p 10.65p 10.65p 10.65p (E-Kingfisher, 2009) Considering the profit of the organization and the trends of the earning per share, it can be noticed that the amount of dividend given by the company to its shareholders has significantly fallen. Considering the period of 2007 and early, the dividend allotted by the company was 10.65p which fell to 7.25p in the year 2007/08. The company has shown good progress which can assure the shareholders of an increase in the dividend than prior years. The decrease in the dividend of the company was due to the fact of sale of some of its subsidiaries such as Hornbach and another reason which led to the consistent decrease in the dividend over the few years was due to the poor performance of B&Q China from which a lot of expectations were there. Debt policy: The company has maintained a sound debt policy, with a considerable decrease in the amount of debts for this year. While in the prior years, the debts of the company amounted to 1.0, 1.5, 1.3 and 1.3 Billion Pounds for the years 2009, 2008, 2007 and 2006 respectively. (E-Kingfisher, 2009) The company has to face the risk of exchange rate fluctuations, which is why it has to be fairly cautious in its financing policy as well as maintaining and paying off its debts. The decrease in the debt of the company was also due to the result of the payment of the remaining minority interest in the three subsidiaries of the company namely, B&Q China for a consideration which amounted to 2 Million Pounds. Another 5 million pounds relating to the prior year acquisition were paid by the company in the year 2009/10. A goodwill was also generated in the prior years amounting £4 Million in the prior year due to the china subsidiary acquisition. Corporate Strategy Kingfisher Plc has a stern corporate strategy which it has maintained for the past few years. The strategy of Kingfisher Plc focuses on three key factors i.e. ‘Management, Capital and Returns’. (Kingfisher, 2010) Recently, the management structure has been shuffled and a new senior and more experienced team has taken over. The company has targeted to reduce the cost and expenditure in order to make faster paybacks to the investors. They are targeting for a more cash return and for sales growth in the future years. They are focusing on factors such as Driving UK profit, Growing group sourcing, Rolling out in Eastern Europe and reducing working capital etc. (Kingfisher, 2010) The past company strategy evolved around the acquisition of some of the major world retail stores in order to promote their sales. The made efforts to acquire Castorama and to become the world’s leading home improvement company, only to be beaten by Wal-Mart. New Developments Shown below, are the recent new developments in the group. Delisting of Ordinary shares: In December 2009, Kingfisher Plc announced that the shares of their company would be delisted from the Ney York Stock Exchange. (Reuters, 2010) This decision was taken due to the trading on low level of their stocks. A similar action has also been taken in Stock Exchange of Paris. Appointment of Chairman: Kingfisher Plc appointed a new chairman in March 2009. (Reuters, 2010) Peter Jackson, the chairman at that time, retired and Daniel Bernard was appointed as the new chairman to take affect from 3rd June 2009. Sale of Castorama: Castorama, one of the owned portions of Kingfisher Plc were sold to Leroy Merlin Italy. (Reuters, 2010) This sale was made at a cash inflow of £5591 million which also included an adjustment for profit. This transaction took place in the month of January in 2009. Ownership: The group announced that they possessed an ownership interest in amounting to 79,765,083 shares in Morgan Stanley. This announcement was made in September 2008. (Reuters, 2010) Sale of Hornbach: Kingfisher also had intentions to sell Hornbach, in 2008 incase if a good price was offered to them. Risk Management This is an analysis of the risk management by the company, specifically the exchange rate and political risk. Exchange Rate risk: Some of the risks which are faced by the company include the risk of exchange rate. This is due to the extended operations of the company worldwide. Kingfisher basically deals with currencies such as UK pound, US Dollar, Chinese Renmibi, Polish Zloty, etc because of its dealing in countries such as Poland, France, and China etc. Most of the financial instruments are largely affected by the interest rates which are based on and derived from the exchange rate. These are included in the significant market risks in Kingfisher Plc such as the deposits, borrowing and derivatives. The group has maintained a policy to forbid the translation into sterling of overseas earnings, especially Euro. (E-Kingfisher, 2009) For purchase of inventory, Kingfisher plc has a great deal of exposure in currencies such as US Dollars which are circumvented by forward foreign exchange contracts. In the 2009/10 close of the year, the company had to present a net effect of 1% rise in the interest rate and 10% appreciation in exchange rate (into Sterling), for which the analysis is given which is based on the impact of Euro: Currency Exchange Rate Interest rate Euro (35) - Sterling - (7) US Dollar 11 1 Chinese (14) (1) Polish Zloty 15 (1) The group has also maintained a policy that incase of any inventory purchase, they are asked to hedge the current and proportion of forecasted purchase requirements which are monitored and observed on a continuous basis. They also have a policy not to hedge the overseas translation of earnings (mainly Euro) into Sterling. In addition, the debts of the companies are also monitored on a regular basis along with the fact that the impact of exchange rate on purchase of inventory and debts are hedged on a regular basis. Political Risk: Kingfisher Plc, just as other companies is also exposed to political risks. As a result of this kind of risk Kingfisher Plc has taken certain steps to mitigate these risks. It has also made some political contributions in the past and has also authorized some of its group members to make political contributions such as B&Q. It has used a cautions approach when dealing with the political risks and it is the responsibility of the board to approve and look into the matter of politics. Strengths and Weaknesses Being one of the major concerns in the world, Kingfisher Plc has some strengths and weaknesses of its own. The major strength of the company is that it holds the most share in some of the big names in Home Improvement Companies such as B&Q, Castorama etc. its operationsa re extended to the most of Europe and Asia which provides it one of the largest markets. The UK and France earn Kingfisher about two-third of their revenue. China is another major market of Kingfisher Plc. It has a strong brand portfolio which enables it to serve in multiple segments of customers and to bring improvements in its margins. Even though, they have managed to secure high sales and turnover, still the margins are low compared to the industry. They have also recorded weak returns in the past few years which have made much of the flight of the investors. It has not been able to provide a valuable return to the investors in form of dividend. Most of the weak position occurred due to deteriorating performance in UK and France sector which earns most of their revenue and thus affected the whole market. Conclusion Kingfisher Plc is one of the biggest names in the Home Improvement Retail industry having the 3rd largest share in this market. They have acquired some of the big names in this industry and have made great success in little time. Recently, even though the turnover has been good but the company has been unable to provide a good return to the investors. Since they have expanded into the region of China lately, they need to exploit this market with the fullest of their resources. Russia and Hong Kong are other potential markets where Kingfisher Plc can increase its sales and earn revenue. They can also utilize the online resources as over 18 Million consumers in the UK have purchases goods online. As Kingfisher possesses an E-Commerce site, it can use it to its advantage and can secure a great market and competition. References E-Kingfisher. (2009). Retrieved from http://www.e-kingfisher.com/files/reports/annual_report_2009/files/2009ar.pdf E-Kingfisher. (2009). Retrieved from http://www.e-kingfisher.com/files/reports/annual_report_2009/index.asp?pageid=74 Kingfisher. (2010). Retrieved from http://www.kingfisher.com/ Kingfisher. (2010). Retrieved from http://www.kingfisher.co.uk/files/results/2010/prelim10/2010_prelim_results.pdf Kingfisher. (2010). Retrieved from http://www.kingfisher.com/index.asp?pageid=133 Kingfisher. (2010). Retrieved from http://www.kingfisher.co.uk/index.asp?pageid=21 Report Linker. (2007). Retrieved from http://www.reportlinker.com/p054358/Kingfisher-Plc-SWOT-Analysis.html Reuters. (2010). Retrieved from http://uk.reuters.com/business/quotes/incomeStatement?stmtType=INC&perType=ANN&symbol=KGF.L Reuters. (2010). Retrieved from http://www.reuters.com/finance/stocks/keyDevelopments?symbol=KGF.L Write Reports. (2010). Retrieved from http://wrightreports.ecnext.com/coms2/reportdesc_COMPANY_C826C0370 Read More