Financial Management of Kingfisher - Case Study Example

Full Full Introduction Kingfisher plc is a General Retail Company specialized in home improvement products. Kingfisher plc is the leading hone improvement group in Europe and Asia and the third largest in the world. The company operates 780 stores in nine countries in Europe and Asia with leading market positions in the UK, France Poland Italy and China as well as developing other businesses in another three countries (Kingfisher's annual report 2007/08). Kingfisher plc is a lead player of the global home improvement retail industry. The company has a long history dating back to decades of successful business operations beginning in the United Kingdom, today it has extended its operations through new branches dotted across major European markets as well as China. It prides itself in the following retail brands: B&Q; Castorama; Brico Depot and Screwfix. Progressively, the company has been faring pretty well over the years, consequently scooping a pre-tax profit of three hundred and eighty six million pounds generated from a total sale of over nine billion pounds within the first quarter of the 2008 financial year (kingfisher.com). Kingfisher's main aim is to deliver a step- change in value by focusing on three key priorities. Management A new senior team, working within a new management structure will have collective responsibility for overall delivery of results as well as key existing cross group activities. Capital Investment will be reprioritized, targeting higher hurdle rates and faster payback periods. A key target is to stabilize debt at current levels, prior to reducing it in due course. A target of flat rate debt has been set for the current year. Cash Returns Greater focus will be placed on generating higher cash returns from the retail businesses. Stretching targets for sales growth, margin improvement and cost reduction will be drawn (http://www.ekingfisher.com/managed_content/files/downloads/2008ar.pdf ). With these key priorities it is evidenced that the management of kingfisher are committed to the survival profitability and sustenance of the company which is a very good indication of share prices increasing. By changing how the company as a whole is managed, tightening the use of capital and driving out higher cash returns from our businesses they intend to deliver a change in value for shareholders. The market for the product is very lucrative since home improvement is an attractive segment of retail, benefiting from natural long- term demand. Characteristics coupled with demand for more new housing and more frequent home renewal. The market also benefits from variety of products being common across international market, which gave rise to outsourcing and Economics of Scale; but within this market kingfisher is enjoying a large geographically diversified business. However, delivering these values to shareholders from this strong strategic position ill require the charges which have been talked about. The number of shares opened by the Company in various Countries will enhance the profitability base of kingfisher. This is enhanced by the management by the practice of decentralized management approach which gives power to their retail businesses largely operating independently but participating in group- wide programs for local advantage. This approach will enhance high turnover as local customers will adapt to the products. Operating Review of Kingfisher Plc With Retail profit growing rapidly for the past five years it has put the company in a good position to expand its operations in various sectors of the business. For example in 2007/2008 report of kingfisher retail profit grew 13.2% to 237million pounds with both businesses delivering a good profit growth. Gross margins were up90 basis points due to higher own- brand sales penetration, a 25% increase in direct sourcing and an improved sales and strong cost control. In France for instance kingfisher's total sales grew 7.2% and eight new shares were opened and in the year six were revamped to meet customer needs to increase sales thereby increasing profitability base of the company which will eventually lead to increase in dividend and eventual increase in share price of kingfisher plc. Major Growth Opportunities in Expanding Markets Kingfisher has exposure to fast growing developing economies in Europe and Asia, including Poland, Russia and china as well as having well established businesses in developed markets like the UK and France. In total, the home improvement market in which kingfisher operates is worth over 120 billion pounds (kingfisher's annual report and accounts 2007/08). One major difference between the UK and France is the level of consumer debt, which is significantly higher in the UK in 2005, the UK market declined after many years of growth, reflecting weaker consumer confidence as interest rates started to rise and spending increased in other areas such as travel etc. this declining persisted up to 2006 before returning to some growth in 2007. The reason for the improvement was due to these priorities that the management put in place. This was the reason when kingfisher's profit went down thereby decreasing in dividend and eventual decline in share price. Financial Statements There has been major significant decline in the company's balance sheet over the past five years. As tangible fixed assets decrease from 14.8 to 13.9 in 2006 respectively. Also investment decline from 8116.8 to 5584.0. This was due to low patronage from its customers. Even though the current asset base declined the company was able to increase its cash holding significantly. The company was able to manage the creditors well which is an indication that management is committed toward the survival and growth of the company. This was evidenced improvement in the company's total assets less current liabilities in 2006-2007 which was 7325.4- 8009.4. The improvement in the called up share capital and share premium account and non distributable reserve and indication of a very good prospect of investment in the face of all these difficulties in the market coupled with the decrease in the company's fixed assets. The improvement in the profit and loss account puts the shareholders in good position since a good profit will increase dividend. With the dividend policy of the company, share holders can elect for dividends to be paid by mandate directly to a UK bank or building society account through the BACSTEL-IP (Bankers automated clearing services system). For the benefit of shareholders resident in any of the euro zone countries, the company offers the option to receive dividend in euro. The company also offers shareholders a dividend reinvestment plan for further details or any queries about the administration of your shareholders. Financial Challenges The company has faced a challenge in the price of shares. The share price has decreased significantly as a result of stock market volatility, which was caused by uncertainty in the global financial markets. This was due to the fact that investor sentiments moved against UK- bases retailers, particularly those selling "bigger fidet". Items such as home improvement as concerned about consumer credit availability grew. With the improvement in the operation of kingfisher plc and the strategies put in place the share prices are not increasing thereby making investing in shares of kingfisher lucrative. Analysis Kingfisher have been experiencing difficulties in recent past which is as a result of stock market volatility, which was caused by uncertainly in the Global financial markets which was trigged by investor sentiment moved against UK-based retailer particularly those selling bigger ticket items such as home improvement as concerns about consumer Credit availability grew. This difficulty has impacted negatively on the performance of Kingfisher p/c which made them record a lower profile there by facing the share price to fall considerably hence low dividend. But through the efficient and effective management system put in place the company has started doing well on the London stock exchange market. Whilst stock market sentiment will always affect the performance of kingfisher p/c they keep focus and try to move the business forward aggressively but responsibly in order to optimize shareholders' interest in the medium and long-term, as well as the short term. The model adopted by kingfisher p/c gives them an advantage to exposure to opportunities in a range of markets in fast growing economies should enable them to grow at rates which are significantly higher than companies that are solely based in a single developed market. This is an indication that, the company will reap more profit and eventual increase in the share price. Share Price Performance At the moment the share price of kingfisher a 'fair" value because upon critical evaluation of the share price in London stock exchange you could see a significant decrease of 4.59% in the share price of kingfisher. It does not represent a fair value because the share price keep on fluctuating day in day out. This is evidence in the table below which was provided by kingfisher p/c on the performance of the share price in London stock exchange Exchange Last sale Change % Day high Day low Currency London 101.80 -4.59 106.50 96.10 Source: Kingfishers' website As at 02/07/08 current position of the sharre price stood as shown in the table below Mid Price Day Change P % Best Bid Best Offer P/E Net div yeild % 101.65 - - 101.50 101.80 8.38* 10.46** 4.90 4.59 * based on number of share issue: 2,347,989.408 and the post-tax profit of 285.1 million. ** based on the Dividend per share price for 2005/06 10.65p. Record Last sales Day high Day low 52 week high 52 weeklow Day volume 101.80 106.50 96.10 160.90 104.00 Share % 6.545m 0.28 Source: Kingfishers' website The table provided revels clearly that the share price is not stable, it keeps on fluctuating and the current price of 101.80 do not represent fair value but the measures that the management of Kingfisher p/c put in place which will eventually impact positively on the profit position coupled with the good dividend policy pursued by the Company will enable the Share to trade fairly well in the stock exchange there by increasing the share price in the near future. In conclusion, there is strong indication that the share price will increase in the stock market there for an investor should take advantage of the future prospect and invest in the shares of Kingfisher p/c Works cited: Brealey, A. R, Myers, C. S & Marcus, A.J. Fundamentals of Corporate Finance. Irwin McGraw-Hill: Boston. 1998. Butters, Keith. Case Problems in Finance. Richard D. Irwin, Inc: Illinois. 1979. Han Kang Hong. "Finance mix & Capital Structure." Journal of Business Finance & Accounting 8 .4 (1981): 485-491 Kingfisher plc Inc. Corporate Governance report. June 17, 2008 http://www.kingfisher.co.uk/managed_content/files/reports/annual_report_2007/index.asppageid=30 Kingfisher plc Inc. Annual Reports and Accounts 2007/2008. June 14, 2008 http://www.ekingfisher.com/managed_content/files/downloads/2008ar.pdf London Stock Exchange. http://www.londonstockexchange.com/en-gb/pricesnews/prices/system/detailedprices.htmsym=GB0033195214GBGBXSET13319521KGF. June 24, 2008. Melicher, Ronald & Welshans, Merle. Introduction to Markets, Institutions & Management. South-Western Publishing Co: Cincinnati. 1992. Orsino, Philip. Successful Business Expansion. John Wiley & Sons, Inc: New York. 1994. Read More