Financial Analysis for Dixons Retail - Essay Example

?TABLE OF CONTENT INTRODUCTION: 2 1ABOUT DIXONS RETAIL PLC: 3 2 TURNOVER: 4 2. FINANCIAL POSITION: 4 2 CAPITAL STRUCTURE OF THE COMPANY 6 2.2 FINANCIAL ANALYSIS OF DIXONS RETAIL 6 3. DIXONS RETAIL’S STRATEGY OF INTERNATIONAL TRADE 7 3.1 STRENGTHS OF THIS STRATEGY: 7 3.2 WEAKNESS OF THIS STRATEGY: 8 4. RISKS 8 4.1 FOREIGN CURRENCY RISKS 8 4.2 Political Risks 10 5. RISK MANAGEMENT 10 5.1 MANAGING FINANCIAL RISKS: 10 5.2 MANAGING OPERATIONAL RISKS: 10 5.3 STEPS FOR MANAGING MARKET PLACE RISKS: 11 5.4 STEPS FOR MANAGING MACRO-ECONOMIC RISKS: 11 6. RECOMMENDATIONS TO MANAGE RISK: 11 6.1. RECOMMENDATION FOR MANAGING FINANCIAL RISKS: 11 6.2. RECOMMENDATION FOR MANAGING OPERATIONAL RISKS 11 6.3. RECOMMENDATION FOR MANAGING MARKET PLACE RISKS 12 6.4. RECOMMENDATION FOR MANAGING MACRO-ECONOMIC RISKS 12 7. References 13 1. INTRODUCTION: Dixons Retail Plc is the largest electrical and computing retailer in Europe. The company offers wide range of products and services and it operates in 26 countries. The company sells the following products: Consumer electronics, Personal computers, Domestic appliances, Photographic equipment and Communication products. Principal products like Brown goods, white goods, computing products and mobile phones are sold by the company. The company is a multi-channel retailer that sells products over the internet, in stores and by phone and it also provides product support services to the customers. B2B sales and services are also carried out by the company. (Forbes.com LLC , 2011) 1.1ABOUT DIXONS RETAIL PLC: The company offers wide range of products and services and it operates in 26 countries. In 13 countries, the company has approx. 1,200 stores. The company has over 38,000 employees and it holds number 1 position in the UK & Ireland, Greece, Nordics and the Czech Republic. (Dixons Retail Plc, 2011) The company operates four divisions which are as follows: 1. UK & Ireland 2. Nordics 3. Other International 4. E-commerce Important information related to these four divisions is given below in the table: (Dixons Retail Plc, 2011) UK & Ireland Nordics Other International E-commerce SALES ?3.8bn ?2.3bn ?1.2bn ?0.8bn EBIT ?71.3m ?105.6m (?21.6m) ?0.9m MARKET POSITION Number 1 Number 1 Number 1 in Greece, Number 2 in Italy and Czech Leading internet operator across Europe SHARE OF GROUP 47% 28% 15% 10% NO. OF EMPLOYEES 23,091 7,343 6,191 1,398 NO. OF STORES 642 285 308 - 1.2 TURNOVER: In 2006, Dixons Retail’s turnover was ?7,403,400,000 then in 2007 it was ?7,929,700,000 i.e. an increase of 7.108%. In 2008, the turnover was ?8,545,900,000 then in 2009 it was ?8,364,600,000 i.e., a decrease of 2.122%. In 2010, the company’s turnover was ?8,532,500,000 i.e. an increase of 2.007%. (WorkSMART, nd) 2. FINANCIAL POSITION: In 2007, Dixons Retail’s profit was ?114,100,000 then in 2008 it faced a loss of ?192,800,000. In 2009, the company again faced a loss of ?140,400,000 but then in 2010 Dixons Retail achieved a profit of ?112,700,000. In 2011, the company faces a loss of ?224,100,000. (WorkSMART, nd) In 2007, Dixons Retail’s revenue was ?7929.70m then in 2008 it was ?8488.00m i.e. an increase of 7.041%. In 2009, the revenue was ?8317.80m then in 2010 it was ?8532.50m i.e. an increase of 2.581%. In 2011, the company’s revenue is ?8341.80m i.e. a decrease of 2.235%. (London Stock Exchange PLC, 2011) Other important Dixons Retail’s financial indicators are given below in the table: DIXONS RETAIL FINANCIAL INDICATORS (Telegraph Media Group Limited, 2011) MAY 2011 MAY 2010 MAY 2009 MAY 2008 MAY 2007 P/E RATIO -2.18 17.42 -4.04 -4.81 89.45 ROCE -14.86 6.56 -14.74 2.4 OPERATING MARGIN -2.93 0.7 -2.67 -3.05 0.42 RETURN ON ASSETS -5.61 2.48 -4.96 -5.68 1.08 EV/BIT -4.17 9.09 -11.73 -7.70 19.43 GEARING RATIO 44.93 37.49 53.73 31.79 23.54 P/BV RATIO 0.8 1.41 1.31 1.48 2.31 P/CASHFLOW RATIO 2.89 14.16 -46.19 6.13 12.57 QUICK RATIO 0.34 0.34 0.32 0.38 0.5 TURNOVER PER SHARE 2.261 2.441 2.825 3.504 3.186 PEG (HISTORICAL GROWTH) 0.06 -0.46 0.12 0.73 -165.66 EPS GROWTH 7.00% 50.00% -90.00% 635.00% -86.00% EARNING PER SHARE (p) 1.60 1.50 1.00 9.76 1.33 PE 9.00 22.10 30.40 5.20 89.40 2.1 CAPITAL STRUCTURE OF THE COMPANY The capital structure of the company has become riskier with the passage of time as the debt to equity ratio in 2007 was 23.5% however in five years time it has increased up to 44.9% thus showing an increase of more than 90% in five years. The capital structure of the company drastically changed in 2009 from 2008 as the debt ratio changed from 31.8% to 53.7% showing an increase of 68.8% in a year which shows that the firm had raised large amount of capital through debt. The increase in debt would also increase the interest expense of the company thus this would reduce the profitability of the company even further. Also the firm would face greater chances of solvency with higher debt ratio. However, it is important to have some amount of debt in the capital structure to improve the earnings per share of the share holders because of leverage. 2.2 FINANCIAL ANALYSIS OF DIXONS RETAIL The profitability of the company has been fluctuating as the operating profit of the company decrease in 2008 making the company suffer operating loss and since then the company has been suffering losses except for 2010 in which the company was able to cover its operating costs thus as the company has been suffering losses therefore Return on Capital Employed, Return on Assets, operating margin and net profit margin have been showing negative ratios. Therefore company needs to evaluate its overall costs and identify areas where costs can be reduced. The gearing ratio of the company has increased till 2009 and then the ratio of debt to equity decreased in 2011 but then it increased in 2011 and in five years, the capital structure of the company has become riskier as the debt has increased from 23.5% to 44.5%. Price to earnings ratio of the company has also been showing noticeable fluctuations indicating the changes in price of the stock such high reduction in the P/E ratio indicates that share price of the stock would further reduce in future. 3. DIXONS RETAIL’S STRATEGY OF INTERNATIONAL TRADE Strategy adopted by any company is important in defining its success because it lays the foundation and helps in defining the goals and objectives (Bucklin, 1963). Dixons retail strategy is related to Renewal and Transformation Plan which is underpinned to the company’s Customer Plan. Renewal and Transformation Plan focuses on making the company’s business easier, better and cheaper. The company’s Customer Plan is a customer focused plan which involves doing things for the customers that makes life easier for them. (Newark Visit, 2011) The company has ensured that it is able to meet the international requirements and present itself as an important player in the international market so that the products and services of the company. The company’s Renewal and Transformation Plan involves the following important points: (Newark Visit, 2011) Providing customers with innovated and high quality products and services Focus on transforming the business in order to broaden the choices for customers and to improve the customers’ in-store buying experience. Focus on reducing the company’s cost structure Focusing the portfolio on winning positions in order to maximise returns for the company’s shareholders Focus on improving the customers’ shopping trips whether that is through the company’s stores or through the company’s multi-channel retail services. Focus on centralised commercial function 3.1 STRENGTHS OF THIS STRATEGY: One of the strengths of Dixons xL is that it has helped the company in penetrating the market through the development of Dixons xL concept. Company has employed market development through Electro World. This strategy has ensured improvement and consistency that is the number of dissatisfied customers has decreased from 12% to 0% and the company’s delivery & installation process has also shown great improvement (up by 5% in 3 months). Also it is because of this strategy company has been able to achieve number 1 market position in countries where it is operating. This strategy has been helpful in improving sales, customer satisfaction level, improving the quality of the company’s products and services. The other major strength of this strategy has been successful cost reduction, the company has been able to reduce staff costs by ?18 million with improved coverage. Total cost has been reduced by 20%. Also the other strength of this strategy has been that is has helped in introduction of new products like 3D TVs as well as introduction of exclusive services like “mini stores” within main outlets (Newark Visit, 2011). 3.2 WEAKNESS OF THIS STRATEGY: This strategy focuses on centralised commercial functioning which is advantageous for the company but there should be some autonomy within a framework to ensure employee motivation, retention and enhancement. When employees are motivated and satisfied they work with dedication and loyalty which increases the productivity of the company. Increased productivity helps the company to deal with increased competition. (Newark Visit, 2011) 4. RISKS Dixons retail is facing different types of risks and Dixons’ risk management division has taken necessary steps to manage these risks. Different types of risks Dixon is facing are as follows: (Dixons Retail Plc, 2011) 4.1 FOREIGN CURRENCY RISKS Risk that the company faces because of changes in the exchange rate, such risk is referring to as foreign currency risk. There are different types of risk faced by the company related to capital and finance and they are as under: 4.1.1 FINANCIAL RISKS: Financial risk mainly includes risk related to capital and finances that a company faces (Leland, 2002). it includes the following risks: (Dixons Retail Plc, 2011) Finance & treasury risk: It is the risk related to interest rate, exchange rate, credit and liquidity risks. These risks can have an adverse impact on the company’s results, funding requirements or purchasing ability. Therefore company needs to improve its liquidity position so that such risks can be reduced. In order to mitigate fluctuations in the exchange rate risk the company can hedge its position so that the risk can be minimized. Risk related to changes in supplier credit: it is the risk that the company faces when credit insurance is no longer available to the company’s suppliers of electrical and computing goods. To reduce this kind of risk, the company can form long term agreements and venture with these firms. Pension risk: It is the risk related to the company’s pension funding policy that fails to react to or address deficits, which may arise on the pension schemes. Therefore company needs to keep sufficient funds in advance to mitigate such risks. 4.1.2 OPERATIONAL RISKS: It includes the following risks: (Dixons Retail Plc, 2011) Risk related to systems failure: When a key system fails, the company’s ability to distribute goods to its stores and to sell and distribute goods to its customers reliant on its system, also fails resulting in huge losses. So it is a major risk to the company. Therefore it is important for the company to keep backup plans so that they can operate even if any system fails. Risk related to project delivery: Project delivery is an important part of the company’s Renewal and Transformation Plan. It is the risk that the company faces when a project delivering does not deliver its anticipated benefits therefore it is important that the management evaluates the delivery and time duration of the project at a time before the project is accepted. Risk related to employees: Risk that the company faces when it fails to attract, develop and retain the necessary talent for its business and the management needs to take steps to retain employees like motivating them, rewarding them and recognising their efforts. Risk related to internet: Risk that the company faces when it fails to build a successful internet business both in its own right and as a part of its multi-channel retailing model. 4.1.3 MARKET PLACE RISKS: It includes the following risks: (Dixons Retail Plc, 2011) Risk related to competitors: It is the risk related to extensive competition. Extensive competition reduces the company’s market share or drive down its margins in specific markets. Company needs to keep on evaluating the offerings of the company against competitors and work on improving its offerings so that it can differentiate against competitors . Risk related to changing technology and consumer preferences: Risk that the company faces when it fails to capitalise on new technology and fails to meet the expectations of its customers to maximise revenues. It is important to know the feedback of the client and conduct market research to predict the changes in consumer preferences in advance. 4.1.4 MACRO-ECONOMIC RISKS: It includes the following risks: (Dixons Retail Plc, 2011) Risk related to market specific characteristics: It includes seasonality and price deflation. Huge profits are generated during seasons like Christmas and New Year. During these seasons, adverse trading causes significant impact on the full year’s results. This refers to the risk related to seasonality. Over the past few years, price deflation has become a common feature across most electrical goods categories because of the enhanced production efficiencies and technological advancement. So it is a major risk to the company and for this company needs to analyse the changes in the market continuously to predict such changes and then take actions accordingly. 4.2 Political Risks Political risk is the risk that the company faces because of changes in the political situation of a specific country therefore such types of risks would vary from one country to another and therefore the firm would face different types of political risks that are related to that particular country. There are few more types of risk faced by the company which are specific for a particular country and they are: Risk related to economic environment: It is the risk that the company faces when economic downturn occurs. Now-a-days UK is facing an economic downturn. So it is another major risk to the company therefore company needs to keep its liquidity position strong so it can have sufficient working capital for such crisis situations. Legislative and regulatory risks: Due to change in legislation, exposure in the company’s compliance activities or a decision by a regulatory authority, the company’s business is impacted by financial or reputational damage or a need to adapt the company’s business and processes (for example, contractual obligations, consumer rights, intellectual property etc). Therefore management needs to evaluate whether the way they are operating is in accordance with the laws and regulations. 5. RISK MANAGEMENT Risk management is an important or integral part of any business. Risk management division identifies and manages important risks that a company faces (Ratnasingam, 2007). Proper risk management techniques can help in achieving success in the long run (Stulz, 1996). Dixons retail’s risk management division has taken necessary steps in order to manage different types of risks, it is facing. (Dixons Retail Plc, 2011) 5.1 MANAGING FINANCIAL RISKS: Financial risks can make the company solvent and managing financial risks is very critical for a company. 5.2 MANAGING OPERATIONAL RISKS: Managing operational risks is of high importance to the management of the organization because operational risks are the risks faced by the organization from day to day activities which mainly includes risks faced from employees, operations and processes of the company, project delivery etc. These risks should be managed properly in order to ensure that the operations are in flow and the work is not halted. 5.3 STEPS FOR MANAGING MARKET PLACE RISKS: Market causes risks to the company as well and businesses need to manage these risks. Risks caused by the market are external factors as they are outside the organization. These kinds of risks include risks from competitors, risk from government agencies, risk faced from changes in technology, risk faced from changes in buying behaviour of customers. these risks are important for the organization as they can 5.4 STEPS FOR MANAGING MACRO-ECONOMIC RISKS: Economic condition can also cause risk to the company and these risks should be managed properly to ensure that the flow of operations is not hurt. Such risks include changes in the macroeconomic condition, changes in market condition etc. 6. RECOMMENDATIONS TO MANAGE RISK: Managing risk is an important aspect for any business and every business has to mitigate the risks faced in order to improve its probability of success. 6.1. RECOMMENDATION FOR MANAGING FINANCIAL RISKS: In order to manage financial risk, the company should keep strong cash management, and they should regularly monitor receivables balances, balance sheet management and reviews, and detailed group hedging policies reviewed through a separate Tax and Treasury Committee. The company should take several steps like strong pre and post investment appraisal processes and central control of treasury activity. Also the company needs to evaluate changes and fluctuations in the exchange rate. In addition to this, it needs to have sufficient amount of working capital to meet the needs and to pay its debtors. 6.2. RECOMMENDATION FOR MANAGING OPERATIONAL RISKS In order to reduce system failure and business interruption, the company should go for preventative measures that are constantly being updated. In order to manage the risk of project delivery, the company has taken the following necessary steps like projects under the company’s Customer Plan are aligned to its UK budget, and the company’s portfolio plan is clearly defined and is governed through clear processes and regular meetings. The company should also go for excessive marketing campaigns in order to raise the profile of its online brands. Also to manage the risk faced from employees, the company can take steps like improving quality of training and development programs, career development for all employees, group performance management, and reward systems related to individual performance. In order to manage the risk faced from internet, the company can take actions like execution of its online strategy, investment in user friendliness and site functionality, and roll-out of its e-merchant platform across its businesses. 6.3. RECOMMENDATION FOR MANAGING MARKET PLACE RISKS One of the main market risks faced by the company is because of competition. In order to compete successfully the company should ensure that its prices offer good value including a consumer price index. In order to manage the risk of changes in consumer buying behaviour and preferences, the company has to take following steps: To reduce the risk, it is important for the firm to build strong relationships with suppliers. Also delivery of the company’s Customer Plan in order to respond to changes in technology and other external changes. Company’s Renewal and Transformation Plan would help in improving the quality and optimising the location of its stores across the company. Also it is important for the company to understand the consumers changing preferences through surveys and feedback. Company should look to launch new product like 3D TVs to improve its profitability. Innovations in services would also help the firm to improve its profits. Customer service training for all employees to improve customer services as it will be helpful in increasing customer satisfaction level. In addition to this, it is important that the company should also focus on ensuring that is has an excellent range across all price points including its own brands. Legislative risks are also included in market place risks and in order to manage this type of risk, the company has to monitor changes in legislation, contact with regulatory authorities, regular analysis of reputational and regulatory risks, quality checks and factory audits for the company’s own-branded product assembly, and the company’s legal teams communicate on a regular basis and legal reports are submitted to the board. 6.4. RECOMMENDATION FOR MANAGING MACRO-ECONOMIC RISKS In order to manage this risk, the company has to take consider varying economic scenarios, and Renewal and Transformation plan to improve business performance. In order to manage specific market risk, the company has to do financial planning by taking into account expected peaks and troughs during the year, effective launches of new technology, growth of services related business and increasing the proportion of services related business. 7. References Bucklin, P 1963, ‘Retail Strategy and the Classification of Consumer Goods’, The Journal of Marketing, vol. 27, no. 1, pp. 50-55. Dixons Retail Plc 2011, About Dixons Retail. Available at: http://www.dixonsretail.com/dixons/en/investors/aboutdixons [Assessed 25 November 2011] Dixons Retail Plc 2011, Dixons Retail Plc Annual Report and Accounts 2010/11 Bringing life to technology. Available at http://www.dixonsretail.com/dixons/uploads/finresrepo/Dixons_AnnualReport2011.pdf [Assessed 25 November 2011] Dixons Retail Plc 2011, Strategy. Available at: http://www.dixonsretail.com/dixons/en/investors/aboutdixons/strategy_investors [Assessed 24 November 2011] Forbes.com LLC 2011, Dixons Retail. Available at: [Assessed 25 November 2011] Leland, E 2002, ‘Agency Costs, Risk Management, and Capital Structure’, The Journal of Finance, vol. 53, no. 4, pp. 1213-1243. London Stock Exchange PLC 2011, DIXONS RETAIL PLC ORD 2.5P. Available at: http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0000472455GBGBXSTMM [Assessed 25 November 2011] Newark Visit 2011, Dixons Business Update. Available at: http://www.dsgiplc.com/dixons/uploads/finresrepo/DixonsBusinessUppresnNewark18May11.pdf [Assessed 25 November 2011] Ratnasingam, P 2007,’A risk-control framework for e-marketplace participation: the findings of seven cases’, Information Management & Computer Security, vol. 15, no. 2, pp. 149 – 166. Stulz, M 1996, ‘Rethinking Risk Management’, Journal of Applied Corporate Finance, vol. 9, no. 3, pp. 8-25. Telegraph Media Group Limited 2011, Fundamentals for Dixons Retail PLC. Available at: http://shares.telegraph.co.uk/fundamentals/?section=profile&epic=DXNS [Assessed 25 November 2011] WorkSMART, Dixons Retail Plc. Available at: http://tiscali.worksmart.org.uk/company/company.php?id=03847921 [Assessed 25 November 2011] Read More