Key Competitors of Kingfisher PLC - Coursework Example

Kingfisher PLC: Global running and risk management Introduction Kingfisher PLC is a UK based company that is engaged in the business of improving home and living. Over the years, since it was founded in 1982, the company has spread out to about 1100 locations all across 9 countries in Europe and Asia (Global Business Browser, 2014). Since its incorporation, the company followed a strategic growth process of acquisitions and mergers of firms like, Comet, Superdrug, B&Q and Castorama. The company had acquired about 15 companies over 2013, which also included 15 stores of Bresson Group in Romania. Kingfisher PLC has also opened up in Turkey as a 50-50 joint venture with Koc Group (London Stock Exchange, 2014). The company is listed in the London stock exchange as well as the FTSE 100 and recorded the gross customer count of 6 million people each week (Kingfisher, 2014a). Apart from this, Kingfisher PLC is also listed on two important investment indices, namely Dow Jones Sustainability Index and FTSE4Good. The company presently employs about 79000 people who handle its various product ranges, including hardware, garden supplies, household appliances and tools (Global Business Browser, 2014). Key competitors of Kingfisher PLC include Homebase limited, Leroy Merlin and Woleseley PLC. In terms of company size, Kingfisher PLC stands third in the global rankings for company engaged in providing home improvement solutions. The gross market capitalization of the company, as on February 2014, was about £ 9100.92 million; while revenues or turnover fetched in the same year amounted to £ 11.1 billion (Global Business Browser, 2014) (Kingfisher, 2014a). It primarily offers home improvement products with a product range of over 40000 varieties. The company caters primarily to the European market, where it is a leader. It also has wide presence in Asia and America. The key input for the company is timber, which is sourced majorly from Asia. Other raw materials are sourced from Asian nations as well as countries in Middle East, Turkey, Eastern Europe and South America (Expecting Value, 2011). This study aims to explore the financial trends of Kingfisher, the exchange risks and political risks the company facing within different countries and how the company manages these risks. Financial Trends for Kingfisher Plc The paper puts forth an analysis of a five year trend for the financial analysis of Kingfisher PLC. The ration analysis is the tool that shall be used for the purpose of judging past trends and laying down company’s strengths and weaknesses in management of its financial resources. 　 2014 2013 2012 2011 2010 Liquidity Ratio Current ratio Current ratio 1.22 1.07 0.98 0.99 0.99 Profitability Ratio Gross Profit margin 37.03% 37.41% 37.70% 37.37% 36.15% Net Profit margin 6.37% 5.33% 5.91% 4.73% 3.69% Efficiency Ratio Inventory turnover ratio 3.39 3.37 3.71 3.92 4.02 Settlement period of payables 128.76 140.31 127.28 133.58 129.69 Settlement period of receivables 18.86 19.40 20.40 20.37 21.26 Financial Gearing Gearing ratio 14.60% 20.92% 22.23% 42.54% 57.48% Debt/equity ratio 0.05 0.07 0.13 0.14 0.31 (Source: Global Business Browser, 2014) Liquidity Ratio The liquidity ratios are used to measures the ability of a company to meet its short-term liabilities (Atrill and McLaney, 2011). These pertain to operational needs of the company and to a time period that is within a year. For the purpose of this study, the paper uses current ratio, which measures the company’s ability to pay off its short-term liabilities with short-term assets. Generally, some experts think that the ideal current ratio for all businesses is 2, but others argue that different business requires different current ratio (Atrill and McLaney, 2011). In this case, Kingfisher has been successful in maintaining the acceptable level of current ratio, meaning that it has sufficient cash to meet the short-term liabilities and is neither owning idle cash nor facing a situation of cash constraints in the short run. There has been a slight rise in current ratio in 2014, which means that the company has more than sufficient cash. However, this can be safely ignored as it is still within acceptable limits. There is an improvement observed from a negative working capital in 2010 through 2012 and Kingfisher now has a positive working capital. One can say that the company has a good cash management policy. Profitability Ratio The profitability ratio measures the ability of a firm to generate positive profits and is calculated through two main ratios, which are gross profit margin and net profit margin (Brealey, Myers and Allen, 2008). The gross profit margin is a measure of the percentage of sales generated, which is available for company use, after the payments for cost of sales have been made. These costs of sales include raw material expenses, production costs and marketing and advertisement expenses as well as promotion and sales costs. Kingfisher PLC has seen a fluctuating trend in gross profit margin, which rose from 36% in 2020 to 37.7% in 2012. After 2012, the company sees a fall in gross profits to about 37% in 2014. Further analysis of the figures showed that these fluctuations are small and primarily due to rise in costs of goods sold. Nonetheless, rise in sales revenue has been constant. The net profit margin provides further insights into the company’s profitability and it was observed that the net profit has been on a rise over the five year period with a slight fall in 2013, which again revived to 6.38% in 2014. This shows that despite rise in cost, the company has been able to reduce its interest expenses and tax obligations, which have resulted in higher net profit margin. Efficiency Ratio Efficiency ratios are a measure of firm’s effectiveness in measuring and managing operational tasks that include management of inventory, debtors and creditors. This is an important aspect as it helps in determination of operation cash positions and maintenance of company liquidity (Arnold, 2007). The paper looks into the debtor’s turnover ratio in order to see how well debtors pay off to the company and clear their debts. The creditor’s turnover ratio that is included measures how well creditors are paid off by the company. The settlement period of receivable ratio for the company has shown an impressive fall from 21 days to 18 days, which reflects that the debtors have improved in the payment mechanism, allowing quick cash availability to the company. In a similar analysis, except in 2013, the settlement period of payables ratio has remained almost the same with slight fluctuations over the last five years. This implies that as a part of company policy, the creditor’s payment has not been hastened and has remained at about 130 days. The settlement period of payables ratio is higher than the settlement period of receivable ratio. The combined results of rise in settlement period of receivables rise and settlement period of payables maintenance has allowed for larger cash availability for business. The inventory turnover ratio is a representation of efficiency reflected by the company in managing its inventory. So, lower inventory turnover implies better management of company inventory. Kingfisher PLC has been showing a falling trend in inventory turnover, implying that inventories maintained get converted into sales faster than that done before. Financial Gearing Financial gearing ratios determine the effectiveness with which the company uses long-term funds available. The Debt/Equity ratio is a measure of the amount of borrowed funds taken by the company in order to serve business needs (Needled, Powers and Crosson, 2008). The above trend shows that the company has been gradually going down on the debt and maintaining high levels of equity (Kingfisher, 2014b). This implies that Kingfisher PLC has huge scope for growth and business expansion, which can be met by use of borrowed funds since the ideal debt equity ratio is 1:1 (Mint, 2011). At the same time, the gearing ratio of the company has been gradually decreasing as well. The decreasing of financial gearing of the company means that the company has effectively managed its long-term liabilities and reduced its financial risks. However, the decrease of financial gearing also reduces the returns from gearing to the owners (Atrill and McLaney, 2011). Foreign currency risk management The company is put into the exposure of foreign currencies and primarily hard currencies pertaining to US dollar, Euro and other important currencies such as, Renminbi, China and Zloty of Poland. These are also the major countries with which Kingfisher has trade relations. The exposures towards Euros and Zloty have come through the retail business ownership of the group in France, Poland, Spain and Ireland. The company manages funds by way of issuing Medium Term Notes (MTN) worth €2500 as US Private Placements (Kingfisher, 2014d). These loans have to be paid off with interest at EURIBOR and an additional margin for the cross-country interest rate swap yet has been affected by fair value gains and exchange rate movements. The total interest rate amount at the end of January 2014 was estimated to have risen by £25 million after making adjustments for fair value. This increased the Group’s liability further by raising the payments for interest rate and therefore enhanced interest rate risk (Kingfisher, 2014d). Such issue of short-term and long-term currency exchange notes help in hedging currency fluctuation risk and fair and effective management of business relationships (Merchant and Stede, 2012). The Chinese Renminbi is hedged by taking a local debt in the country. Such debt is hedged by having business transactions in China through foreign exchange contracts within the forwards market. The transactions presented in the balance sheet of the company that pertain to Euros are not hedged against the Sterling as a part of company policy (Clare and Gang, 2010). The US dollars are transacted in exchange of purchase of inventories from different nations who prefer to transact in US dollars. These again are also hedged in the foreign exchange forward contracts. The group hedges not only the current year purchases of the inventory, but also a part of forthcoming inventory purchases of the following year. Such hedge transactions are monitored well in an ongoing basis. The financial instruments that impact significantly over the currency and exchange rate risks include company borrowings, derivative instruments and deposits. These instruments are influenced by fluctuations in interest rates and exchange rates. Kingfisher derives its major profit from the Euro Zone and to manage such currency risk, it has deposited the surplus foreign exchange with a number of AAA rated money market instruments. The representation of such interest received is fixed at LIBOR plus a certain amount of fixed interest rate for the currency swap. All round the year, the company had about USD 300 million deposited within the banks as cash deposits with one single highest amount of about USD 63 million going towards money market instruments. This limit of banks and also of the distribution between cash maintenance and use of derivative contracts for the purpose of risk management is decided by the board of directors for Kingfisher PLC. On the other hand sales data for the country is represented in some fixed exchange rate decided at the time of purchase. This real exchange rate, in terms of constant exchange rate maintenance, shall provide with a rise in actual sales data for the company, but can become a very cumbersome and tedious process while making accounting calculations. Also, it is not a correct accounting reflection of company data in accounting terms for the purpose of investor use as it provides real rises and not actual revenue rises. It might so happen that constant exchange rates might provide for a rise in sales in terms of revenues generated, but in reality, the revenues might actually fall due to weakening of the domestic currency. Therefore, constant exchange rate maintenance misleads investors and appears as a pegging of exchange rate. During the year 2013-14, there was no amount that was drawn under Chinese Renminbi and therefore there was a zero effect on the borrowing rate. The total Renminbi asset in Chinese banks amounts to RMB 1.6 billion (Kingfisher, 2014d). Country and Political Risk The company is a multinational corporation that operates in different nations as well as does business dealings in a wide variety of ways with them. Such businesses expose the company to wide range of cultural, political and geographic risks and thus, expose the market to a variety of regulatory frameworks and legal compliances. These exposures entail a risk that is in relation to any legislative or legal changes in the country’s regimes and jurisdiction (Harrison, 2013). Companies that operate individually are exposed more towards such legal and regulatory compliances. This is because these companies that are managed and supported by a corporate affairs division carry out transactions that involve significant foreign as well as domestic currency inflows and outflows. These companies have to make sure that they have significant access to the governance resources and legal affiliations (Hilson, 2009). Kingfisher PLC’s operational management helps them to make deals and corporate liaisons with a lot of local dealers and manufacturers through which they make use of the local resources and such local sourcing is more prominent in business dealings in China. The corporate affairs department of the company helps in complying with legal requirements and also resolving any conflicts that might arise out of these liaisons with the local parties (Moffett, Stonehill, and Eiteman, 2012). Any suspected breach of contract or alteration of regulation seeks resolution as a part of political and country risk management. Kingfisher PLC’s Chinese operations, for example, required them to have a series of clearances from the local government. As a part of doing business in China, Kingfisher had to comply with a number of legal regulations that have been mandated by the Chinese government for foreign companies and hence, manage their political risks efficiently (Kynge, 2003). For risk diversification, it should diversify its risk by having multiple sources for raw materials. The newer operations of the company are created or acquired and are set out in a structured format for Kingfisher group. Before any operation or country entry, the company prepares itself well with a formalized governance structure and a procedure for legal and regulatory compliance management and arranges for political risk management. Such documented procedures help in guiding company board in the nation and also assist the audit committee in processing and to procedure the implementations that have been subjected to review as a part of the audit activity under the internal audit department as well as the Director of Company Affairs (Marsh and Furlong, 2002). Recommendations for Risk Management The above analysis of financial performance of Kingfisher PLC represents that the company is maintaining a sound operational position, but need to focus more on reducing its cost of goods sold. The analysis suggested that a rise in sale is also accompanied by the same in costs of goods being sold, which then deters company profitability. Additionally, the liquidity for Kingfisher PLC has improved; however, they need to put a check on the rise in current ratio in order to prevent maintenance of idle short-term cash within business. For risk based recommendations, it is suggested that Kingfisher PLC moves away from constant exchange rate system maintenance, which acts against interests of the investors and brings in the real time exchange rate representation for interest of the shareholders. Furthermore, it is recommended that short-term papers like, MTN and private placements, are issued again, once they get matured in 2014 as they are good means of managing foreign exchange (Kingfisher, 2014e) As the company grows, it is expected to face a rise in foreign exchange exposures and this shall invite the need to use numerous exchange rate management products. Kingfisher PLC should look into use of non-hedge techniques like, transferring exposures and netting the total exposures. Huge transactions with foreign companies shall benefit from netting exposures (Hitt, Ireland and Hoskisson, 2008). Kingfisher PLC can also experiment with other methods like, options in the futures market, cross-hedge products and futures and forwards contracts in the investment markets. Parallel lending and use of currency swaps need to be used in order to mitigate long run risks (Accenture, 2012). In terms of political risk management, Kingfisher has to comply more with the global risk management objectives for efficient management of legal and regulatory compliances in new nations (Hay, 2002). Reference List Accenture, 2012. Managing political risk. [pdf]. Accenture. Available at: [Accessed 17 June 2014]. Arnold, G., 2007. Essentials of Corporate Financial Management. Harlow: FT prentice Hall. Brealey, R., Myers, S. and Allen, F., 2008. Principles of Corporate Finance. New York: McGraw Hill. Clare, G. and Gang, I. N., 2010. Exchange rate and political risks, again. Emerging Markets Finance and Trade, 46(3), pp. 46-58. Expecting Value, 2011. UK Supermarkets: Premium Product or Own Brand Value? [online] Available at: [Accessed 17 June 2014]. Harrison, A., 2013. Business environment in a global context. Oxford: Oxford University Press. Hay, C., 2002. Political analysis: a critical introduction. Basingstoke: Palgrave. Hilson, D., 2009. Managing Risk in Projects. 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