Liquidity Ratio
Current ratio has fallen to 0.91 in 2004 from 1.02 in 2003. This indicates that the liquid resources are slightly insufficient to cover the short-term payments. This is below the industry average of 1.2 and suggests that Kingfisher may have some problems in respect of liquidity. A majority of current assets fell as property debtors in 2003 included proceeds of £692.6m due to the disposal of 15 retail and 5 development sites by B&Q property. Also, £898.1m is made up of items other than trade and other creditors, even though Kingfisher has become more efficient by reducing its bank loans and overdrafts.
Acid test has fallen from 0.52 in 2003 to 0.37 in 2004 which shows that Kingfisher is dependant on inventory. This is also below the industry average of 0.6 which signals possible liquidity problems as Kingfisher won’t be able to pay their short term obligations if creditors requested early payment. However, Kingfisher has unused overdraft facilities that could be drawn on and their stock is readily saleable will allow them to convert it into cash quickly; if they needed to repay its creditors immediately. These two ratios can be affected by ‘window dressing’ which involves manipulating the working capital position by accelerating or delaying transactions close to the accounting year-end to give improved figures. Therefore, it is important to assess the overall borrowing capacity of Kingfisher by evaluating its gearing ratios.
Gearing Ratios
Debt ratio including short-term borrowings was 37.21% in 2004, falling from 49.44% in 2003 and its long-term borrowing debt ratio was 14.19%in 2004, falling from 23.84% in 2003. This is below the industry average of 25.77%, which shows the company’s commitment to reducing long-term borrowings. They have successfully reduced their eurosterling bond debt by demerging with Kesa Electricals and significantly reduced their bank loans through the proceeds of bonds. However, the structure of debt has changed since last year as they only have to pay £2m in 2004 in external funding and finance leases between one and five years whereas it was £1,251.3m in 2003. The level of debt decreased but long-term borrowing increased as there has been a significant increase of medium term maturity notes. Kingfisher has two bonds of £500m and £250m maturing in 2010 and 2014 which will help with future cash flow problems that the company may face in the future.
Debt to equity ratio shows that debt holders provided 16.91% of shareholders funds in 2004 compared to 35.41% in 2003 which indicates that Kingfisher doesn’t rely on borrowed funds. Kingfisher’s interest cover has fallen from 12.34 in 2003 to 4.26 in 2004. Therefore, Kingfisher is easily able to meet its annual interest payments from its earnings. However, the massive fall from 2003 is due to £86.9m of exceptional financing charges including the demerger of Kesa Electronics and its associated foreign exchange contract which included unrecognised losses of £33.1m affected the interest payable and the net cash outflow of the company.
Activity Ratios
Net asset turnover ratio has fallen from 1.81 in 2003 to 1.69 in 2004 and fixed asset turnover also fell from 1.82 in 2003 to 1.63 in 2004 and compared unfavourably with an industry average of 13.3. Kingfisher is becoming less efficient in which it uses its assets and has high profit margins which contradicts their pricing strategy of EDLP. The fall in fixed assets and turnover by 11% and 17.9 last year is part of its strategy aimed at increasing their market share by demerging. This was negatively impacted by unfavourable exchange rates owing to the growing strength of the euro. In the last five years the UK has seen a consumer boom which has been fuelled by consumer spending and rising house prices, backed by falling interest rates which would reflect the increase B&Q’s retail sales by nearly 11% and explains the reasons for past higher ratios. Two new store cards ‘Homeplan’ and ‘You Can Do It’ has increased sales as customers can spread the costs of their purchases as 30% of showroom sales have been made using these cards.
Stock turnover has increased to 8.21 in 2004 from 6.57 in 2003 due to a fall in its stock levels. This is above the industry average of 6.4 which shows Kingfisher’s commitment in ensuring that all customers are supplied within a stated time period.
Debtor turnover has nearly tripled from 42.15 in 2003 to 116.08 in 2004 due to a fall in both debtors and turnover. This is well above the average 5 years of 49.25 which suggests they have become more efficient in recovering their debts which will make them more profitable. Their debtor days figure has also improved as it has fallen from 8.66 days in 2003 to 3.14 days in 2004. This demonstrates their efficiency as credit terms differ in the different countries that Kingfisher operates in due to local customs and practices.
Creditor days fell from 37.05 days in 2003 to 33.69 days in 2004. This is below the industry average of 27.4 days which suggests that they take more time paying their creditors than their competitors, which is due to their CPR programme which has allowed them to maintain an excellent relationship with their suppliers. However, its creditor turnover increased and improved from 9.85 in 2003 to 10.83 in 2004 which indicates that they are becoming more efficient in paying their suppliers and still taking advantage of their credit periods. The reduction in creditors is due to its disposals of other sectors of the business which has reduced the number of their suppliers.
Profitability Ratios
The demergers has improved the profitability of Kingfisher due to the consistent fall in the interest paid and number of employees which fell by 15.49% and 18.09% in 2004 which was in line with the fall in turnover.
Kingfisher’s ROCE figure has increased from 9.07% in 2003 to 10.69% in 2004 due to the increase in retail sales. The increase in a revaluation surplus of £295.7m in 2004 from £39.3m in 2003 and indefinite life of Screwfix Direct and acquisitions abroad has increased the capital employed figure and depreciation charge which prevented profits rising significantly. This helped reduce their debt levels due to the increased borrowing power which increased from £120m in 2003 to £150m in 2004. ROCE rose from 2.43% in 2002 to 9.07% in 2003 due to FRS 10 which didn’t require purchased goodwill that was written off direct to reserves to be added back in calculating the ROCE and suggested warning signals of overtrading. ROCE has improved in previous years due to calculation of the capital employed figure. By using the balance sheet total instead of the average capital employed throughout the year can be deceptive as bank overdrafts and loans repayable in 12 months are netted out against current assets, giving Kingfisher who has a large short-term debt a better ROCE figure than competitor’s whose debt is funded long-term. This improvement is well below the industry average of 17.4% but this ratio should only be compared with firms whose operation and products are similar to Kingfisher. At times of rising prices, the historical cost of the asset will usually be lower than their current values which can make comparisons extremely difficult between firms with different asset age structures. The ROCE figure can also be seriously distorted by intangible fixed assets and by purchased goodwill that has been written off directly to reserves.
Return on equity has decreased to 5.20% in 2004 from 6.29% in 2004. This figure had fallen dramatically from 19.45% in 2000 to -5.18% in 2002 which supports the reason for the demerger and compares unfavourably with the industry average of 25.3%. Profit after taxation has increased due to a decrease in taxation paid from £221.7m in 2003 to £197.4m in 2004 due to the demerger, which has lowered the corporation tax charge. Therefore, Kingfisher offered a lower return to its shareholders than its competitors and in previous years. Shareholders fund has consistently increased to an average of 49.5 since 2001 which is part of there strategy of producing higher returns for shareholders.
Net profit margins have increased from 5.01% in 2003 to 6.34% in 2004 and compares favourably with the industry average of 3.6%. This demonstrates good management at Kingfisher who have successfully anticipated the changes in the market place due to adverse weather conditions, fragile consumer confidence in Europe and the SARS epidemic in Asia. It indicates the success of their advertising campaigns of older experienced employees, strategies of EDLP and CPR and Screwfix Direct which boosted profits due to next day delivery guaranteed service.
Table 7
Table 7 is a geographical analysis of Kingfisher’s turnover which clearly shows its business has consistently increased in the UK with 58% of its total sales in 2004 and there strategic commitment of becoming the world’s best home improvement firm by entering into new markets.
Table 8
Table 8 shows a consistent decrease in the net asset turnover ratio in all of the countries which means that they aren’t efficiently using their assets and contradicts its pricing strategy in France where it has implemented CPR which has allowed it to make higher profit margins.
Nonetheless, it indicates that France has the highest ratio which is due to its emphasis on entry level prices in the last three years to increase the long-term profitability of the firm.
Table 9
Table 9 shows Kingfisher’s move towards becoming a home improvement firm as it now accounts for 84% in 2004 of its business from 41.6% in 2000.
This is due to Kingfisher outperforming the competition and market which is a direct result of ongoing sales space expansion, extensive range innovation through its ‘hydrotherapy’ range and EDLP offered to customers.
Table 10
Table 10 shows the NPM of the different sectors of Kingfisher and highlights the success of the management team and how the EDLP and CPR strategies has consistently enabled them to achieve impressive NPMs within the home improvement and property sectors of the business.
Share Market Analysis
Kingfisher share prices have changed during the last five years due to its restructuring strategies of demerging from Woolworths and Superdrug into a DIY firm. Figure 12 in the appendix explains the details of the changing share price movements shown in figure 3.
Investment Ratios
Earning per share (EPS) has decreased to 8.3 in 2004 from 9.2 in 2003, due to the rights issue in February 2003 which increased the number of shares but didn’t provide any capital. This affected the retained earning because it makes the EPS difficult to interpret as it will increase even though there hasn’t been a corresponding increase in the underlying performance. However, the profit figure has been influenced due to a loss on disposals of certain home improvement businesses of £53.8m in 2004. EPS had fallen in 2002 from 32.9% to -9.8% due to a dramatic fall in its profits due to the loss on disposal of Superdrug of £284.8m and creative accounting. Looking at the trend of EPS over the five years, the significant dips are caused by losses on disposals which have led to considerably lower returns for shareholders.
Dividend per share fell from 13.14 in 2003 to 7.97 in 2004 shows a fall in confidence for Kingfisher’s future prospects. Price earning ratio (PER) has increased to 31.45 in 2004 from 25.45 in 2003 which is well above the industry average of 14.22. This shows that the market expects Kingfisher to have a stronger growth in future earnings and dividends than previous years and its competitors. This may indicate an over-valued share price as the market expects a future take-over bid for Kingfisher by an American firm. It’s PER relative remained constant but rose from -1.02 in 2002 to 2.21 in 2003 which clearly shows its strategic success of being a leader in the general retailing sector although differences in the treatment of tax by companies can cause distortion to the ratio. Dividend cover has risen from 0.7 in 2003 to 1.04 in 2004 due to increased in profits which show that investor’s dividend is more secure. However, Kingfisher’s dividend payout ratio has fallen from 143.02% in 2003 to 96.51% in 2004 which shows Kingfisher has reinvested more money and given less to shareholders. The dividend yield has also fallen from 4.5 in 2003 to 3.05 in 2005 which is below the industry average of 3.5. This indicates that the market believes Kingfisher to have higher future growth prospects as the investment is less risky. Therefore, Kingfisher’s investment ratios indicate that they are on the expectation of high future growth.
Kingfisher has made some major changes to its management as Geoffrey Mulchay retired in 2003. Francis Mackay and Gerry Murphy, who have an excellent past record, were brought into Kingfisher. Kingfisher’s share prices consistently rose since there arrival which demonstrates there ability in helping Kingfisher achieve its strategic goals. However, there is the possibility of Kingfisher manipulating the accounts through clever application of accounting policies as described above. I believe that Kingfisher has higher growth potential as there demergers and acquisitions have helped them in meeting their strategic goals and gain market share in the industry. Kingfisher has made significant changes to ensure the impact of the UK joining the euro would have a minimal effect on its business. Its high dividend payments in the future, strong market position and lack of strong competitors should improve Kingfishers future strategic and financial performance in the future.
In 2004, Kingfisher will faces pressures from falling house prices, rising interest rates, pension contributions, tax rises and due to the fact that households have more debt than ever before. House prices could fall due to house prices being expensive, increases in mortgage rates and falling households’ cash holdings. There are a number of reasons why Kingfisher could be a successful investment for potential investors. Firstly, real incomes will continue to grow as corporate profits have recently risen, which normally leads to rises in employment and real wages. The recovery in the world trade growth and rising government spending should boost exports which should create jobs. The Bank Of England recently claimed that low unemployment should raise real wages and a recent survey of economic forecasters by the Treasury found that these expect households’ real disposable incomes to rise by 2.5% in 2004. Secondly, falling inflation will raise consumer spending and real wealth won’t be eroded rapidly by rising prices. Thirdly, the stock market has recovered as rising house prices didn’t only raise spending but also have a wealth effect which depressed spending in 2003 which led to a fall in share prices. This depressing influence on the DIY market should fade away next year.
Sales aren’t very sensitive to interest rates as a big impact of higher interest rates on sales requires a big substitution effect from spending to saving. The debt threat is impossible to quantify as the claim that household debt is at an all time high was also true in 1998 (since spending has consistently boomed). There will be an increased interest in home improvement due to the increase in DIY programmes and expanding warehouse store networks. Consumers spending priorities on small home projects and improvements to gardens have increased yearly. Even though there is a greater uncertainty over the outlook of home improvement this year, I believe that there would have to be a severe downturn for Kingfisher to underperform. Kingfisher is in a position to achieve significant sourcing gains by making the most of its strong market position, increasing direct sourcing and by selling more own-branded goods. They have expansion opportunities in Asia which is not reflected in the current share price. Also, there are rumours in the industry that Home Depot is keen to expand into Europe as it has limited expansion possibilities in America. It could be a potential take-over bid for Kingfisher which will boost its share price.
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Porter’s Five Focus Model Of Industry Competitiveness
Michael Porter has provided a framework that models an industry as being influenced by five forces which are supplier power, barriers to entry, threat of substitutes, buyer power and degree of rivalry.
Rivalry
Rivalry in the home improvement industry is quite high. Even large chain stores, such as B&Q, have grown tremendously during the last five years; these companies are still tending to be regional rather than national. The intense competition in the industry can also be seen from the low profitability ratio: the five year average of profit and gross margin is only 5.6% and 33%, respectively. Even B&Q, who has the best financial performance in the industry, is only 1% higher than the retailing industry average on gross margin. There is little product differentiation among the competitors, so they have to compete in other area such as customer service, price, brand loyalty and use of technology. Also, the more successful companies have exhibited such characteristics as rapidly entering new distribution channel (for example the Internet) and developing creative advertising campaign.
Barriers To Entry
Barrier for entry for smaller regional companies is pretty low considering the fragmented market, especially in the area where the presence of large chain store is not existent. It is, however, very hard to enter the market where industry giants, such as B&Q, have strong foothold. There is a very high start up cost to open a store and buy inventory and the big players in the industry can take advantages of economies of scale. Therefore, they can afford to lower prices in hope to force competitors out of the market. Another barrier is the issue of the environmental impact that adds to the operating cost as the industry is facing a number of challenges on the environmental front. Many of the products they sell have a feature that can be harmful to the environment, even it if used properly. Some example will includes glue, paint, cleaners and also certain type of lumber. There is also possibility that the government may come up with a new regulation to address these environmental issues that can act as barrier of entry for new competitors. New entrants will also need to establish brand identity and overcome the major player’s reputation
Threat Of Substitutes
The main product used in the industry is timber which doesn’t have any perfect substitutes for it and due to B&Q’s ladder system they have started to reformulate paint to reduce its dependency on the solvents and volatile organic compounds which causes air pollution. Therefore, B&Q has moved towards using environmentally friendly materials to produce its products. At the present time there doesn’t seem to be a perfect substitution that is also environmentally friendly in the market.
Buyer Power
Consumers do have a small amount of power in the home improvement industry as they can purchase smaller items such as glue, at any local hardware store. However, due to economies of scale it will be cheaper for consumers to purchase larger items from larger stores such as B&Q. My research on B&Q shows that in 2002 they had a 49% market share (figure 5) in the DIY industry which gives them an advantage in negotiation with suppliers and channel members. Therefore, this has allowed them to implement the Cost Price Reduction Programme to reduce their supplier costs for raw materials.
Kingfisher has also been able to take advantage of backward integration by controlling 100% of firms such as Flogistics Ltd and Halcyon Ltd. These are a real estate and finance firm which allows Kingfisher to build warehouse stores on the land that is owned by it controlling firms.
Supplier Power
The supplier power in the home improvement industry is weak due to a lack of product differentiation. There are many competitive suppliers in the industry which makes there bargaining power to large firms such as B&Q non existent. Therefore, B&Q has an advantage over its suppliers who are dependent on big warehouse stores as their mean of survival. However, in the past the home improvement industry wasn’t an oligopoly as it used to be dominated by local hardware stores that had perfect knowledge. However, B&Q has revolutionised the industry since its entry into the market and continues to gain market share and drives small companies out of business. This has resulted in weak supplier bargaining powers. B&Q also holds their suppliers accountable to ensuring that all of its wood products are sustainable forestry certified sources. Their policy is to ‘continue to build our customers’ trust that all their wood ands paper products come either from proven, well managed forests or recycled material. Thereby, continuing to grow sales and build pride from their entire supply chain.
PEST Analysis
Political
- May use different accounting policies
Kingfisher will be able to manipulate the accounts in an attempt to mislead shareholders (encouraging) investment in the firm) by increasing profits and decreasing liabilities. This may also encourage banks to give Kingfisher a loan.
If Kingfisher invested in more firms and created a monopoly in the DIY sector, they will have a competitive advantage in research and development and economies of scale which will increase the profitability of the firm. However, they may also charge higher prices to consumers and produce poorer quality goods due to a lack of competition. This may lead to government intervention to reduce the Kingfisher’s profits
Kingfisher may increase its prices if the UK joins the euro as it is a major catalyst for cross border transparency prices which will result in greater profits.
- Corporation and Higher Sales Tax
Different political parties may inflict different tax policies on the amount of
corporation and sales tax a firm has to pay which will affect the profitability of
Kingfisher.
- Restrictive Planning Permission
Local authorities may not give Kingfisher planning permissions for its huge retail
stores. Therefore, Kingfisher will need to persuade authorities by investing money
into the infrastructure and environment of the city. This will result in extra costs
for company which may result in higher prices for consumers.
- Regulation On Hours Worked
If the government restrict the amount of hours employees work, this will result in
Kingfisher becoming less productive in the workplace. This may lead to more
staff being employed which will once again reduce the profitability of the firm as
it increases it liabilities.
Kingfisher’s profits will also be reduced if the government increases the
minimum wage. The may result in higher prices for the consumers to compensate
for the higher staff costs.
- Deforestation and Globalisation
One of the main products used by the home improvement industry is wood. Therefore, B&Q is forced to address to deforestation and globalisation issues as protests by environmental activist groups such as Rainforest Action Network will have an impact on B&Q’s profitability in the future. The issue of deforestation and globalisation and the protests has caused the major players within the home improvement industry to be ‘green’ and change their business practices in order to gain acceptance with the publics opinion. Kingfisher has made its factories greener, managed store waste and increased the proportion of products they recycle, increased the efficiency of their distribution and reduced congestion and pollution.
B&Q also has to face traffic congestion issues at the local level when building its warehouse stores. Many consumers wouldn’t want a large warehouse store in their neighbourhood as they cause traffic and congestion problems by attracting both customers and large delivery trucks. This ‘Not In My Back Yard’ attitude from consumers has increased over recent years.
Economic
This will affect the amount of money Kingfisher can borrow and the its repayments for the loans it’s received from banks which may lead to a slowdown
in spending growth.
This will affect the amount of money Kingfisher borrows and the costs of materials from abroad. If the £ becomes stronger then Kingfisher will be able to buy cheaper materials from abroad.
If the economy is in a recession then confidence in the economy will be low and
consumers will spend less on DIY products as house prices will be high.
If the inflation rate is unpredictable then Kingfisher won’t be able to plan and invest in the future as the economy isn’t stable and confidence is low.
If there is low employment in an area then local authorities will encourage firms like Kingfisher to built retail stores which will help increase the employment levels.
- More Environmental Controls
This will reduce the profitability of Kingfisher as they will have to spend more money investing in environmental issues such as environmental friendly packaging. This may also result in higher prices for its consumers.
- Higher Land And Fuel Costs
In the UK land is scare and high priced. Therefore, Kingfisher will be discouraged to expand and increase their profit margins as it will be expensive to buy land to build retail stores. Also, increases in petrol will increases Kingfisher’s expenses and result in higher travelling costs. This may also lead to less disposable income for consumers which will in turn reduce demand for DIY products.
- Lower Investment In Roads
In the UK roads are busy and a lack of investment in roads will make shopping at B&Q less accessible. This will affect the demand and profits of Kingfisher as one of its key factors to success is convenient access.
Sociological
Kingfisher’s consumers are mainly men aged between 35-54 year olds. They need to focus on a slightly younger age group to create loyalty for the future for when they reach 40-50 years old. The number of women shopping in DIY stores is increasing. Therefore, Kingfisher will need to implement a new strategy in the future to acknowledge their needs.
ABC1 third age consumers and households with two full time earners are above average purchases of B&Q’s DIY products. This is good for Kingfisher as they have high levels of disposable income and the group is increasing within the population of the UK.
Married home owners or in the process of buying a home and who are full time workers with families with two or more occupants are B&Q’s likely consumers. However, the number of divorces is increasing in the UK and people are marrying at a later age.
Retired people are also less likely to buy from B&Q’s stores as they find performing DIY tasks too difficult and want to improve the appearance of their homes quickly and without any hassle.
B&Q attracts more people in the settling and expanding ACORN categories rather than its competitors Homebase who appeal to rising and thriving groups. Therefore, Kingfisher needs to try to break into the rising and thriving groups to increase its profitability.
B&Q and many of its competitors attract considerable less people in the London area compared to other regions in the UK. However, its most successfully area is in the South where B&Q gains a high percentage of its sales. Therefore, Kingfisher needs to implement a strategy into gain more sales in the London area to improve profits.
Broadsheet and mid-market tabloid readers are most likely to shop at B&Q. Therefore, they should consider these facts when they develop a marketing strategy when advertising in newspapers to increase profits.
Consumers who watch medium amounts of commercial Television also have a higher likelihood to shop at B&Q. Therefore, they should consider these facts when they develop a marketing strategy when advertising on the television to increase profits
Technological
Consumers can now access a huge choice of suppliers from across the world. This has allowed ‘shopping around’ which has made the industry more competitive.
Screwfix direct is an internet company which is growing out of the catalogue business and has increased Kingfisher’s revenues and customers. The product offer concentrates on the smaller elements of ironmongery, and e-commerce is thought to account for about 10% of sales. This has helped Kingfisher become a market leader in the DIY sector.
B&Q also has a website www.diy.com which works with the stores to allow customers to plan purchases as they wish
It has allowed advanced products to be created for consumers which have increased the market share and given Kingfisher a competitive advantage over its competitors.
New processes have been implemented to create cheaper products. This has resulted in reduced costs and allowed B&Q and Screwfix Direct to reduce its prices, which affects its profit margins. Therefore, giving the company a competitive advantage over its competitors.
SWOT Analysis