Project Work

Abstract

· Kingfisher is a home improvement retail business that has its operations under many names that are operating in Europe. The company has been taken back because of global pandemic like the rest of the industry and is making slow improvements. The overall financial and non-financial performance of the company is slow, but stead and the company is improving in times to come. Therefore, it is advised that the shareholders can invest in the company for better returns in the next few years.

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Introduction

The Directors,

MWF Investments.

Subject: Financial and Operating Analysis of Kingfisher plc.

Dear Sir/ Madam,

I have been advised to prepare a financial and operating analysis for Kingfisher plc in the light of the company performance over the past three years. The performance will cover the financial as well as operational analysis of the group performance.

The report will briefly explain the company details and relevant operational information to the investors. The operating analysis of the group will be performed, and the company performance will be discussed in the shape of SWOT and PESTLE analysis to cover the company micro and macro environmental analysis that can help understand the company non-financial performance to the shareholders in detail. The next section will cover the company financial performance over the past three years along with the performance of its competitor whose comparison will be performed for clarity of the financial performance of the company against the market competition.

If there is any query in this regard, please feel free to contact me.

With Regards,

Financial Analyst.

Dated: 3 November, 2022.

Company Background

Kingfisher plc is a FTSE registered company that operates in eight European countries with a staff of 80,000 colleagues, 1500 stores and online. The company has retail outlets named as including B&Q, Castorama, Brico Dépôt, Screwfix, TradePoint and Koçtaş. The main business of the company is offer home improvement products to the consumers and professionals via instore and online services.(Kingfisher, 2022). The company has gone digital by expanding its business from retail brick and mortar stores to e-commerce offering its services online as well as delivering to the customers. The company revenue for half year sales of the group is £6809 million and the profits reported are £555 million with majority of revenue generated from UK and Ireland businesses where the company operates in majority stores(Kingfisher Corporate, 2022). The company sales comprise of 16% of revenue from online/ e-commerce sales.

Company Details

Kingfisher was founded in 1982 with headquarters in London and operating in retail industry. The company reported its retail profits of $1.2 billion, assets of $16.6 billion and revenues of $18.1 billion and comes at 1160 in the global 2000 Forbes list for 2022 (Forbes, 2022). The products on offer by the company are hand tools, gardening tools, heating and plumbing solutions, power tools and outdoor equipment and a share price of 220.30p on 4 November, 2022 (Global data, 2022).

SWOT Analysis

SWOT analysis of the company will help identify the company potential to the investors where the strengths and weakness will identify the internal company environment and opportunities and threats the macro external environment. These non-financial factors will help identify the company non-financial performance and identify the impact on the company goodwill and market position. The details are given below.

Kingfisher is a known brand in the region with name in quality and prices along with reaching out to customers. The strengths are as follows.

· The company has a strong cashflow and has been giving dividends to the shareholders which shows a strong financial health of the company. The dividends of the company for the financial year 2020/21 were reported to be 8.25 in 2021 from 3.33 in 2019 which shows that the company is performing better in 2021 and the reported profits for the year 2021/22 is also showing healthy returns for the company.

· The like for like sales of the company have been growing back since the pandemic emergency has been lifted where the company recorded 7.1% increase in the like for like sales in 2020 from 2019.

· The company has a strong customer base and trade references which shows that the group has strong market relations and terms with ordinary as well as the trade customers.

· The company has started the e-commerce and online retail as well which has shown that the profits have soared in the company and despite coronavirus restrictions, the company has been able to float in the market.

· The company has expanded over the years and is also in the list of top companies to work for and listed in the stock exchange which is good for the goodwill and also the investor confidence in the operations and management of the company.

· The company has increased its outlets from 1194 in 2016/17 to 1386 in 2020/21 which is a strong sign in the market that they have increasing number of clients in the region and despite the covid 19 factor, the company has been able to expand in the market.

Although the company has been able to perform well in the market, there are some weaknesses that the company needs to address. The weaknesses are as follows.

· The company is investing in technology, but the pace of outcome and investments is not up to the mark and the competitors can overtake the company in the long run unless the issue is resolved in future.

· The company receivables have gone down from 2019 and payables have increase which as well is showing that the company is having tough time with receivable and have to give them long credit terms whereas on the other hand, the payables have gone down means that the cash is used early to pay back to suppliers which could be used elsewhere.

· The company product line is limited to offerings in specific sectors and there are untouched area where they can offer its products in the heavy mechanical industry for instance. There is a market for the products, but they are not done at that time.

· There is also a cost related issue with the production where the company can move to cheaper areas without compromising on production standards and cheap production could be done.

· There is an untapped market in the industry where the company can operate. The number of locations of the company operations are very limited as compared to its offerings and they need to look for new locations to operate their stores.

· The company can expand their online operations on large scale so that they can offer their products on the competitor markets and areas as well.

· There is a normalization going on around the world after coronavirus pandemic in which the company can expand its business and attract more customers as the revenues are increasing and people have started business as usual.

· There are products and services the company is not offering at the moment which could be added to increase the product line. The company can invest in those markets and technology to gain an upper edge.

· New customer trends like digitalization are also helpful for the company if they invest in facilities that help customers to easily order for the company with more variety and quick reliable delivery system can help the company gain more market share.

· The biggest threat the company is facing is the threat from the competition and the competitors increasing products which can attract customers that are loyal to the company.

· There could be an economic meltdown again like the global recession or a global pandemic which can cool down the markets again, so the company needs to ensure that they have the amount of cash and technology to survive the similar situation.

· Increasing fuel prices and cost of delivery is another threat to the company which is beyond its control. The company needs to look at alternatives that can reduce the cost of delivery and production so that the overall cost of business remains in control and is better than the competition and also affordable for the customers.

· Changing laws as a result of border controls in Europe have changed the ways businesses operated in the region. This could be a threat for the company in terms of legality changing in different regions, new rules and regulations for trade in the upcoming times or political unrest that could affect the company operations.

PESTLE analysis are used to perform the company analysis for its performance against the external factors and understand the factors that influence the business which are outside the scope of business control. The factors affecting kingfisher group in terms of external forces are as follows;

Political factors are external factors that influence the business operations to a great extent. In case of Kingfisher group, the political factors affecting the business operations are as follows;

· Policies developed by the country where the group operates can affect the way the company operates. In case of its European operations, political policies are in regard to Brexit and EU political policies that have affected the business and increased the cost of doing business. The company needs to make sure that the company policies are in line with the political factors and made in such a way that they are not largely affected by change in governments or policies.

· Policies pertaining import/ export, technology adaption, piracy laws and retailer operating policies with restrictions in pandemics are some of the policies the group needs to study and make their business compatible with the system so that they are adapting to these procedures.

· There is a war in European borders which has had an impact on the businesses around the world. The company needs to ensure that they are sustainable against the developing crisis and have a minimum impact in term of unrest and energy situation that is there.

· The company has pulled out of Russia and has ceased major operations in the region which comes at a cost. The company now needs to make sure that they are not affected by the decision in the long term and is looking into new avenues.

· Cost of doing business due to EU separation from UK have gone up which means there is more cost of sales involved in deliveries and overall cost of business has increased. The company needs to develop sustainable sources and make sure that the prices are in control.

· The war in Ukraine and fuel crisis as a result have also affected the cost of doing business throughout the world and specially in Europe. Sustainable economy and economic sources need to be planned in times of crisis.

· Coronavirus has hit the economic conditions of the countries as well as the customers and businesses which got severely affected.

· Rise in inflation, rate of interest, rising prices, increasing poverty and less consumer spending are affecting businesses and online businesses. As people have less to spend than before, they are spending less on takeaways because of cost associated with it. Just eat can tackle these issues by introducing offers and loyalty programs for customers.

· Cheap production and ease of delivery systems are in the market which the company can adapt so that there are economies of scale that the company can avail and technological advantage that the company can adapt so that they stay ahead of the competition and stay in the market.

Social factors including demographics, trends, norms and values are important for policy making. The social factors include the following;

· Factors like change in demographic trends, population shifts, change in online spending pattern are some of the factors that are important factors in policy making for the company. The company needs to closely study these trends so that any shift in demographics and population can be planned in policies. As people shift, so is the construction and DIY business that could help the company boost their sales and reach the untapped market.

· Changes in social trends and factors can help in marketing and advertising policies of the company. As the trends are shifting to more digital and online community-based marketing, the company can devise policies that can cater the social and demographic needs.

· The changing trends in terms of designs, indoor and outdoor facilities layouts and change in the tastes of people are the factors that the company should anticipate so that they can make designs and products that can attract the clients and trade personnel.

· As more and more people shift towards digitalization and digital platforms, the company needs to make sure that they have a digital presence on all the platforms. Also, the digital access is compatible with the user needs and demands. Changes in apps and website with change in time is important so that the access to the customers is easy and fast. Also, technological designs can be updated to attract and retain customers.

· The company needs to stay on top of the competition technology and make sure that the company products and services are above competition.

· The company needs to invest in renewable technologies and sources so that they can adapt to global trends and be sustainable with the market. Also, the renewable resources can help company save cost. Environmental friendly designs, cost saving themes for indoor and outdoor designs, DIY products that are used with recycled production etc. can help increase company goodwill.

· Recycling and green energy projects are also latest customer trends as they are become more aware of the environmental damage. The company needs to ensure that they comply with the waste laws, energy preservation and other environmental concerns.

· EU import and export laws are important for the company policy making. These laws are making cost of doing business and delivery prices hike and as a result customers are reluctant to spend more. Policies pertaining to fuel prices and cost of doing business should be studied closely to adjust accordingly.

· Consumer protection laws, intellectual property laws and food health and safety laws are some of the important factors that the company should keep in mind. Training the staff is also important so that the company avoids any cases and defamation as a result.

The profitability ratio of the company defines the way in which the company operations are conducted and also how profitable the company is. The profitability ratios are given under.

ROCE - Return on Capital Employed

· Return on capital employed is the ratio that defines the profit taken against the capital invested in the company. The group operates with series of companies, the individual return on capital employed of these companies may differ.

· The return on Capital employed in the company is gradually increasing from 2019 to 2021 which shows that the economy is improving after the pandemic which is a good sign and it could be anticipated that the company returns will improve in future.

· The ROCE is however very low compared to the competitor Home Depot which operates in the same industry. The company needs to make sure that they find ways to increase their sales and draw more customers along with the existing ones as the shareholders are interested in what they are getting back on dividends.

Return on Equity

· Return on equity is declining year on year. This could be the reason that the company could be going through a major overhaul and the operations are expanding. Therefore, the company is investing on non-revenue generating costs which could be profitable in terms of increasing business revenues in the future.

· The return on equity is better than the competitors in the years 2019 and 2020 but home dept has dramatically improved in the last year. The company has return on equity lower than the industry average where they need to get serious.

Capital Turnover

· The capital turnover ratio of kingfisher is 1.38, 1.43 and 1.42 in the last three years. This indicates that the company is slowly turning the capital invested into revenue, but the stream is not as good as the overall equity and capital turnover are slow. The company needs to improve their operations and invest their capital in fast moving inventory.

· The capital turnover of the competitor is above the industry average which is good sign for them as they have more revenues. Kingfisher should find ways to adapt more capital generated into cash.

Gross Margin

· The gross margin ratio of the company is constant for the last three years saying that the company is stagnant for the last three years. Although the company operations have expanded but so is the cost of sales of the company.

· Gross margin ratio of the competitor is lower than the group but is compatible with the industry average.

· The company is in healthy position in terms of gross profit earned.

Net Margin

· The net profit margin of the company has declined from 2019 to 2020 because of global pandemic as the fixed cost of operations was there but the operations were almost dead which is why there is a dip. Net profit margin of the company has increased in the year 2021 which is an indication that the company operations are back to the normal but are still low returns than average.

· The net profit margin of the competitor is showing a slow downward trend although it is still better than the group. The slow decline shows that the overall industry is declining in terms of sales.

Cost of Sales to Sales

· The cost of sales of the company is decreasing year on year which means that the company has taken control of the supplies. The company could have been in better terms with the suppliers or has adapted new inventory methods.

· The cost of sales ratio of competitor is on the rise which could be beneficial for the company as they can attract more customers if their costs of sales have decreased, they can attract discounts.

Figure 11: Asset Turnover

Figure 13: Quick Ratio

The decline in the dividend yield ratio for kingfisher is an indication that the overall share price of the company is higher in the market as compared to the returns they are getting. The company should ear n more revenue and cut costs so that they can pay better dividends back.

Dividend yield of the competitor is better than the company means that they are producing better revenues.

How to increase profitability

There are certain ways in which the company can increase profitability

· By turning to just in time delivery systems

· By decreasing the operational costs

· By improving the debt-to-equity ratio

· By increasing their operations in the areas where there are more sales

· By going digital and investing in e-commerce as this is the future industry growth.

· By investing in products and technology that can improve the consumer lifestyle which will attract sales.

Company valuation and advice to investor

Figure21: Company Valuation

The company market value of the shares is 1.18 times the book value which is favorable for the investors to invest into the company. The market value is increasing since 2019 after the pandemic which is a good time for investors to invest into.

Kingfisher is a home improvement company that is offering its services to trade and normal customers. The company has been taken back because of the global pandemic as the rest of the industry. It is coming back with a slow pace but there are overall improvements in the company operations, its sustainability and its expansion. Overall, the company performance of the company is improving after the pandemic but is slower than the competition for instance Home Depot in this instance. The investors are advised to look into the company operations for a few more months before investing into the company shares.

Forbes, 2022. Kingfisher | Company Overview & News [WWW Document]. Forbes. URL https://www.forbes.com/companies/kingfisher/ (accessed 11.4.22).

Globaldata, 2022. Kingfisher Plc Company Profile - Kingfisher Plc Overview [WWW Document]. globaldata.com. URL https://www.linkedin.com/company/globaldataplc/ (accessed 11.4.22).

Kingfisher, 2022. Our retail banners [WWW Document]. Kingfisher Corp. URL https://www.kingfisher.com/en/about-us/what-we-do/brands.html (accessed 11.4.22).

Kingfisher Corporate, 2022. Kingfisher at a glance [WWW Document]. Kingfisher Corp. URL https://www.kingfisher.com/content/dam/kingfisher/Corporate/Documents/Other/2022/KF062_Kingfisher_Factsheet_2020.pdf (accessed 11.11.22).

KPMG, 2022. The Economic Impact of the Russia-Ukraine War - KPMG Germany [WWW Document]. KPMG Glob. Insights. URL https://home.kpmg/de/en/home/insights/2022/05/the-economic-impact-of-the-russia-ukraine-war.html (accessed 11.6.22).

Renewable Enery magazine, 2018. Energy saving - Kingfisher Plans Large Energy Storage Project at B&Q Site - Renewable Energy Magazine, at the heart of clean energy journalism [WWW Document]. Renew. Energy Mag. URL https://www.renewableenergymagazine.com/energy_saving/kingfisher-plans-large-energy-storage-project-at-20180731 (accessed 11.6.22).

Yahoo Finance, 2022. Kingfisher plc (KGF.L) Income Statement - Yahoo Finance [WWW Document]. Yahoo Finance. URL https://finance.yahoo.com/quote/KGF.L/financials/ (accessed 11.6.22).

Return on Capital Employed

Kingfisher

2021 2020 2019 0.11 0.04 0.06 Home Depot

2021 2020 2019 0.47 0.62 0.62

Return on Equity

2021

Kingfisher Home Depot 0.09 3.9 2020

Kingfisher Home Depot 1E-3 -3.61 2019

Kingfisher Home Depot 3.1E-2 -5.92

Capital Turnover

kingfisher

2021 2020 2019 1.42 1.43 1.38 home depot

2021 2020 2019 3.38 4.3099999999999996 4.38

Gross Margin

2021

kingfisher homedepot 0.37 0.34 2020

kingfisher homedepot 0.37 0.34100000000000003 2019

kingfisher homedepot 0.37 0.34300000000000003

Net Margin

kingfisher

2021 2020 2019 4.8000000000000001E-2 1E-3 1.7000000000000001E-2 home depot

2021 2020 2019 9.7000000000000003E-2 0.10199999999999999 0.10299999999999999

Cost of Sales to sales

kingfisher

2021 2020 2019 0.62949999999999995 0.63039999999999996 0.63049999999999995 home depot

2021 2020 2019 0.66049999999999998 0.65910000000000002 0.65659999999999996

Inventory Days

2021

kingfisher home depot 117 70 2020

kingfisher home depot 125 73 2019

kingfisher home depot 128 72

Trade Receivable Days

2021

kingfisher home depot 9 8 2020

kingfisher home depot 9 8 2019

kingfisher home depot 13 7

Trade Payable Days

kingfisher

2021 2020 2019 118 111 120 home depot

2021 2020 2019 49 39 40

Asset Turnover

kingfisher

2021 2020 2019 1.01 0.97 0.94 home depot

2021 2020 2019 1.87 2.15 2.46

Current Ratio

2021

Kingfisher Home depot 1.24 1.23 2020

Kingfisher Home depot 1.1000000000000001 1.08 2019

Kingfisher Home depot 1.1200000000000001 1.1100000000000001

Quick Ratio

2021

kingfisher Home depot 0.46 0.51 2020

kingfisher Home depot 0.38 0.28999999999999998 2019

kingfisher Home depot 0.39 0.28000000000000003

Debt to Equity Ratio

2021

Kingfisher Home depot 0.32 10.86 2020

Kingfisher Home depot 0.38 -9.1999999999999993 2019

Kingfisher Home depot 0.38 -14.27

Gearing Ratio

Kingfisher

2021 2020 2019 0.24 0.2800000000000 0003 0.27 Home Depot

2021 2020 2019 0.92 1.1200000000000001 1.08

Interest Coverage

2021

Kingfisher Pepsi 5.2 8.5399999999999991 2020

Kingfisher Pepsi 1.52 10.96 2019

Kingfisher Pepsi 2.5299999999999998 9.0399999999999991

EPS

Kingfis her

2021 2020 2019 0.72 0.01 0.27 Home Depot

2021 2020 2019 4.5199999999999996 4.03 2.29

Price Earning Ratio

Kingfisher

2021 2020 2019 8.42 465 19.100000000000001 Home Depot

2021 2020 2019 18.66 20.89 17.239999999999998

Dividend Cover

Kingfisher

2021 2020 2019 2.19 0.8 1.7 Home Depot

2021 2020 2019 1.1200000000000001 1.06 0.64

Dividend Yield

Kingfisher

2021 2020 2019 5.4800000000000001E-2 3.2000000000000001E-2 3.3099999999999997E-2 Home Depot

2021 2020 2019 2.7099999999999999E-2 2.7555620183219429E-2 3.2500000000000001E-2

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