Financial Performance of Home Retail Group - Example

Analysis of financial performance of Home Retail Group Table of Contents Executive Summary 3 Introduction 4 Vision and strategy of Home Retail Group 4 Projected Balance Scorecard for Home Retail Group 5 Balanced Scorecard of Home Retail Group 6 Balanced Scorecard Strategy Map 18 Financial perspective of the Home Retail Group 20 Customers perspective of the Home Retail Group 21 Internal Business Perspective 21 Innovation and learning perspective 21 Recommendations to the board 21 Evaluation of balanced scorecard for performance management and monitoring with reference to Home Retail Group 22 Reference list 23 Executive Summary The analysis of profitability, liquidity and solvency position of the company reveals the strategies and the performance of the management with respect to the operational methods adopted for customer satisfaction, internal processes of the business, innovation and improvement activities for future financial performance. In this report focus is given on the business performance of the Home Retail Group and it also provides solution for sound financial restructuring and improving the profitability, solvency and liquidity of the organization. The report makes an extensive analysis about the performance of Home Retail Group based on the balanced scorecard approach and balanced scorecard strategy map. In this report the key performance indicators of the Home Retail Group are considered for performance analysis and defining the goals, targets and initiatives taken by the company. The report focuses on the non-financial indicators and proposes a balanced scorecard that can support the company in accomplishing its targets. The study also highlights the use of the balanced scorecard in company’s performance management and monitoring. Introduction Home retail group is one of the leading and most popular merchandise retailers in UK. The company aims to provide exceptional value and expediency to their customers through their different divisions: Argos, financial services and Homebase (Home Retail Group, 2015a). In UK the market for home retail is vibrant, rise in e-commerce and increase in the digital savvy customers have made the retailers struggle to keep pace with the consumers and at the same time pull down the costs (Pwc, 2015). The retailers who have been successful have created a focussed business structure which functions at a lower cost with greater agility. The divisions under Home Retail Group are: Argos, Homebase and financial services which was launched in the year 2006 and the iconic brand ‘Habitat’ which includes transactional website and three stores in London was bought by Home Retail Group in 2011(Home Retail Group, 2015b). A good overall performance was delivered by the Home Retail Group in FY 2015 with a growth of 14% in earning before tax and 25% in Earnings per share respectively and also portrayed a considerable growth in the sales. They have maintained a continuous focus on the liquidity position of the company and maximised the return to the shareholders by enhancing the dividend by 15%. Vision and strategy of Home Retail Group The vision of Home Retail Group is to construct a successful business that brings excellent value and convenience to the customers. The Home Retail Group adopts strategy of creating long-term value for the stakeholders by delivering sustainable growth in the retail brands. A five year ‘Transformation Plan’ was adopted by the company in October 2012 to launch Argos as a leader in digital retail (Home retail group, 2015c). For Homebase, the group developed a strategy named ‘Renewal Plan’ which aimed at positioning the business at multi-channel home enhancement retailer. The ultimate strategy of the group is to produce a wide range of products through expertise and innovation at competitive prices for the extended customer base. The strategies of the group are based on product leadership and providing exclusive brands, achieving leadership in digital retail and accelerating multi-channel growth, support through financial services, cost reduction, cost management programmes and sound financial strength (Home Retail Group, 2015e). Projected Balance Scorecard for Home Retail Group A balanced scorecard is a strategic planning and management system that is used by the top management of Home Retail Group to support business activities according to the vision and strategy of the organization. It helps to improve internal and external communications and monitor performance of the organization against its strategic goals. The balanced scorecard suggests the following four perspectives: Financial perspective Customer perspective Internal business perspective Innovation and learning perspective According to Niven (2006) the balanced scorecard supports the organization in overcoming three problems: measurement of the effective performance of the organisation, the increase in intangible assets and the challenges faced while implementing the strategies. Balanced Scorecard of Home Retail Group Home Retail Group plc Financial perspective All Financial Goals are for the corporation as a whole GOAL From CW1 (referenced) KPI From CW1 (referenced) Target Your own work from this box onwards Initiative or ACTION 1 Cash Flow To increase the cash flow as the liquidity position of the company has deteriorated in 2014 compared to 2013. This is evident from the liquidity ratios of the company. The cash operating cycle has also increased in 2014 when compared with 2013 which indicates delay in liquid asset turnover. To improve the cash position by decreasing the capital expenditure as it has declined by 16% in 2014. The overall target of the company is to maintain the growth achieved in sales, benchmark profit before tax and EPS in FY 2015. The company also plans to maintain a lean and flexible cost base. The company plans to finance its growth strategy with its strong cash position of £331m. Both Argos and Homebase are supported by an in-house financial services offer, which provides a range of credit products for our customers (Home retail group, 2015c). 2 Shareholders To reduce the operating expenses and maximise shareholders’ wealth as there has been a drop in the return on shareholders’ fund by 1.2% in the current year. To maintain the current EPS as it has improved by 35% in 2014. 3 Profitability To control the cost of operations of the company and increase the net sales as the profit before tax and interest has reduced in 2014 compared to 2013. To maintain the healthy progress in terms of sales so that the operating profit is maintained. Home Retail Group plc Customer perspective GOAL KPI Target Initiatives or ACTIONS 1 Customer Satisfaction To create long-term value for business and convenience to the customers By performing surveys on customer satisfaction on different parameters like: quality, timely delivery, price and other services. The company has planned to raise the standard of store operations and customer service standards and employ competitive product pricing strategy. Focus should be given by the top management on those operations directed towards the fulfilment of customer needs (Home Retail Group, 2015d). The top management should design their business processes and allot weightage accordingly. The growth in market share shows that the company has been successful in achieving customer satisfaction. Several initiatives have been taken by the company like offering credit facilities to the customers for buying the products, expanding customer reach and ‘check and reserve’ services to increase customer satisfaction and retention. 2 Customer Retention To retain the existing customer base through value creation, responsible marketing, product quality and safety. Sales per square-foot is an important indicator of the percentage of customer retained and created. 3 Customer acquisition To acquire new customers through multi-channel sales penetration, brand repositioning and enhancing product quality and design to meet the needs of customer segments. Multi-channel sales growth and sales per square foot are important indicators of the new customers acquired. 4 Market share To increase its market share the company aims to reduce its overall operating costs and enable prompt development of profitable course to growth The current trend in sales, the number of stores opened or closed in a financial year, the performance of the EPS are the key indicators of the market share. Home Retail Group plc Internal Business perspective GOAL KPI Target Initiatives or ACTIONS 1 Product strategy To develop new products and innovate existing products, ensure value and competitive pricing, extend the product range Measurement of the product-lines offered in the main spring/summer catalogue and online. The overall business target is to gain flexibility, reduce costs, maintain or improve the operational standards through the ongoing cost reduction programmes and re-constructing the store structure. The group has taken several initiatives like improvement in the standards of operation through the ongoing cost reduction programmes and re-shaping the structure of the stores. 2 Customer strategy To provide high levels of availability to the customers, provide customer support service, implement customer relationship management systems and to meet the needs of customer segment enhance the product quality and design. To control decision, strategies and customer scoring, the Home Retail Group implemented customer management decision system (Home Retail Group, 2015g). 3 Operational strategy To optimize the supply chain operations and provide facilities for easy purchase options. Sales, benchmark operating profit, benchmark operating profit margin and benchmark EPS are the key performance measures adopted by Home Retail Group. 4 Systems strategy To be a leader in digital retail and enhance the multi-channel capabilities. Introduction of the real-time stock visibility system. Home Retail Group plc Innovation and learning perspective GOAL KPI Target Initiatives or ACTIONS 1 Capabilities of the employees and information systems To provide on-the job and off-the job training, inductions to build an efficient workforce (Home Retail Group, 2015f) and internal customer relationship management Employee engagement programmes, average training cost per employee. The company plans to create world-class digital customer experiences to drive online sales growth. Promoting an approach named ‘shopping for tomorrow (Home Retail Group, 2015h). Innovation in store experience through web-based browsers and fast-track collection. 2 Innovation in products To capture new markets, innovation in product and services. Expenses on research and innovation, resources allocated for research and innovation, number of registered patents and rights, employee satisfaction index. 3 Motivation To motivate the employees and help them acquire necessary skills and enhance employee productivity. Employee satisfaction index, employee engagement programmes. 4 Awareness of strategies To make the employees aware of the new strategies adopted by the company. Well developed and structured information dissemination system. Balanced Scorecard Strategy Map Financial perspective of the Home Retail Group Company’s cash position, shareholders wealth and profitability reflect the financial position of the company. The cash position of the company has declined by 16% to £331m in the year 2014 due to the increase in the capital expenditure of both Argos and Homebase. The dividend declared to the shareholders of the company has increased by 10% as the board recommended a final dividend of 2.3p and a full dividend of 3.3p (Group Annual Report, 2014d). The profitability position of the company declined and is depicted in the following table: The profitability position of Home Retail Group decreased to £0.013 in 2014 which was £0.022 in the previous year. Customers perspective of the Home Retail Group The goals of the Home Retail Group are customer centric. To measure customer satisfaction the company uses occupancy ratio analysis and market share analysis. The company has planned to raise store operating services and develop a customer offer that has a universal appeal (Home Retail Group, 2015d). Internal Business Perspective The internal business perspective is directed at establishing product leadership strategy, excellence in operational strategies and customer strategy. The internal business perspective of Home Retail Group aims at cost reduction and re-shaping the store structure (Home Retail Group, 2015d). Innovation and learning perspective The company’s target is to extend the use of new and advanced technological platforms and other product and service innovations to offer customers choice in how they shop with Home Retail Group (Home Retail Group, 2015i). Recommendations to the board The company is advised to adopt the balanced scorecard approach for successful implementation and evaluation of the performance of the business. The balanced scorecard approach combines financial measures which describe the results already taken with operational methods on customers’ satisfaction, internal processes, improvement activities and company’s innovation for future financial performance. The management is advised to develop goals or objectives in financial; customer; internal business perspective and innovation and learning areas. Evaluation of balanced scorecard for performance management and monitoring with reference to Home Retail Group The balanced scorecard provides assistance in developing a conceptual framework model which assigns the strategic mission of the organisation with achievable goals and actions measured against pre-determined metrics. It is inferred from the annual report of Home Retail Group that the company has set key performance indicators with respect to the financial performance but it has not adopted any specific performance indicator regarding customers, internal business perspective and in learning and innovation areas. The balanced scorecard approach will help to measure the performance of the Home Retail Group with respect to the following perspectives: How should Home Retail Group appear to the shareholders? How should Home Retail Group appear to the customers? What business processes the Home Retail Group excel at? How will the Home Retail Group sustain their ability to change and improve? The performance of the Home Retail Group will definitely enhance if the company focuses and improves depending on these factors. Reference list Home Retail Group, 2015a. Our story. [online] Available at: [Accessed 15 June 2015] Home retail group, 2015b. Our strategy. [online] Available at: [Accessed 15 June 2015] Home Retail Group, 2015c. About Us. [online] Available at: [Accessed 15 June 2015] Home Retail Group, 2015d. Group Annual Report. [online] Available at: [Accessed 15 June 2015] Home Retail Group, 2015e. Our businesses. [online] Available at: [Accessed 15 June 2015] Home Retail Group, 2015f. Induction, training and developing management talent. [online] Available at: [Accessed 15 June 2015] Home Retail Group, 2015g. Decision Analytics Answer. [online] Available at: [Accessed 15 June 2015] Home Retail Group, 2015h. Analyst Presentation. [online] Available at: [Accessed 15 June 2015] Home Retail Group, 2015i. Corporate Responsibility. [Accessed 15 June 2015] Niven, P., 2006. Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. New Jersey: John Wiley and sons. Pwc, 2015. An introduction to total retail. [online] Accessed at: [Accessed 15 June 2015] Bibliography Kaplan, R. S., & Norton, D. P. 1995. Putting the balanced scorecard to work.Performance measurement, management, and appraisal sourcebook, pp. 66. Kaplan, R. S., & Norton, D. P. 2001. Transforming the balanced scorecard from performance measurement to strategic management: Part II. Accounting Horizons, 15(2), pp. 147-160. Read More