An Analysis of the Business and Financial Performance of Homebase between February 28, 2006 and February 29, 2008
Table of Contents
TOC \o "1-3" \h \z \u I. Project Objectives and Research Approach
A. Reasons for Choosing the Topic and the Organization
B. Aims and Objectives
II. Information Gathering and Accounting/Business Techniques
A. Methods of Gathering Data
B. Source of Information
1. Company website
2. Books
3. Journal
4. Online Libraries
5. Online Articles and Forum
C. Limitation of Information Gathering
D. Ethical Issue of Information Gathering
E. Ratio Analysis
III. Current Performance
A. Sales Growth
IV. Financial Analysis
A. Balance Sheet Ratio Analysis
1. Current Ratio
2. Working Capital
3. Leverage Ratio
B. Income Statement Ratio Analysis
1. Gross Margin Ratio
2. Net Profit Margin Ratio
C. Management Ratios
1. Fixed Asset Turnover
2. Return on Investment Ratio
V. Non-Financial Analysis
A. SWOT Analysis
1. Strengths
2. Weaknesses
3. Opportunities
4. Threats
VI. Future of Homebase
References
VII. Appendices
A. Appendix A: Financial Ratio Analysis: HOMEBASE
B. Appendix B Financial Analysis: B&Q
Table of Figures
TOC \h \z \c "Figure" Figure 1 Sales Growth of Homebase and B&Q
Figure 2 Current Ratio (2006 - 2008)
Figure 3 Working Capital (2006 - 2008)
Figure 4 Leverage Ratio (2006 - 2008)
Figure 5 Gross Margin Ratio (2006 - 2008)
Figure 6 Net Margin Ratio (2006 - 2008)
Figure 7 Fixed Asset Turnover (2006 - 2007)
Figure 8 Return on Investment Ratio (2006 - 2008)
Figure 9 SWOT Analysis
Table of Tables
TOC \h \z \c "Table" Table 1 Sales Growth
Table 2 Current Ratio
Table 3 Working Capital
Table 4 Leverage Ratio
Table 5 Gross Margin Ratio
Table 6 Net Margin Ratio
Table 7 Fixed Asset Turnover
Table 8 Return on Investment Ratio
I. Project Objectives and Research Approach A. Reasons for Choosing the Topic and the Organization
The reason why I have chosen the topic about the financial analysis is because it is considered as one of the most important topic which covered in all mainstream corporate finance textbooks. Furthermore, it is also considered as a popular agenda item in different investment club meetings; because it is use in order to summarize the different financial health of a given organization (Hsu n.d.). On the other hand, I am always fascinated regarding the global success of the retail industry, and it is considered as one of the most important industry or sector in the UK. In fact, the UK retail industry is set to increase in size by 15% over the next five years or will show a total value of £312 billion. The entire industry employs over 3 million people or equates to a total of 11% of the entire workforce of the UK. In addition, almost 8% of the total Gross Domestic Product or GDP of the UK is generated by the said industry. In 2008 alone, the total sales of the retail industry were more or less £265 billion that is larger than the combined economies of Denmark and Portugal (Prospects 2009). In addition, Homebase is considered as the second largest home improvement retailer in the UK and it is being recognized for choice, style as well as customer services across the wider home enhancement market. It was founded in October 1979 as a joint venture with the Belgium retailer GB-Inno-BM (GIB). J. Sainsbury Plc held a 75% controlling interest and GIB and other 25% (Retail Concession n.d.). It has more than 300 large, out-of-town stores in the entire UK and Republic of Ireland, and it is planning to add to its store chain with around 15 new stores every year. It sells more than 30,000 products across DIT and decorating, home and garden ranges, and has a growing Internet offering. The company serves more than 70 million customers every year through its stores and offers their customers the convenience of home delivery for bulky, high-value items. Its ideas magazine is considered as the number one home interest magazine in the UK, with a circulation of almost half a million. Homebase won the Britain’s Best Superstore Manager of the Year at Britain’s Best Retailer Awards, while in 2005; it was awarded DIY Retailer of the Year in the National Home Award. Thus, Homebase was the first UK DIY retailer to achieve Forest Stewardship Council Chain of Custody certification (Homebase n.d.). Homebase was also the first in the UK to launch a loyalty card and have over many years build a vital customer data base of more than 5 million and its “10%” days are famous in the retailing industry and offer a vital tool to drive football (Retail Concession n.d.).
B. Aims and ObjectivesThe main objective of this report is to evaluate the past financial performance of Homebase and the different factors that can affect the future of the company. It involves an analysis of the financial statements of the company, together with the flow of funds and financial aspects. It will focus on the current and future levels of its risk, liquidity, activity, debt as well as returns. This is because of the fact that these are the factors which affect the share price of the company. It will compare the past and current performance of B&Q, the major competitors of Homebase with the company. B&Q is considered as the leading DIY and garden centre retailer that offers more than 45,000 inspirational home improvement and garden products for homemaker, occasional to serious DIY’er, and trade professionals (Retail Concessions n.d.). It was founded in 1969 by Richard Block and David Quayle, discover how from small beginnings, B&Q has grown over the years in order to become the leading DIY retailer in the UK (B&Q Stores UK – DIY 2009). It is the number 1 DIY retailer in Europe and the third largest in the world, with more than 60 stores that are opened internationally, including the one in Beijing, which is the largest B&Q store in the world (Retail Concessions n.d.).
II. Information Gathering and Accounting/Business Techniques A. Methods of Gathering DataAll of the information that have been collected during the duration of the study were gathered using secondary resources or those written information found in different ways or approach. This information is old data which has been collected by other researches or organizations. Furthermore, background information about the company and its competitor were also gathered from different resources, which serve as a support to the analysis of the current and past financial performance of both the companies. In addition, all of the information that were used in this study were from secondary resources primarily from different online websites, documents, journals and articles, together with the help of different books and studies, that can be found in online and traditional libraries.
B. Source of Information 1. Company websiteAll of the financial data presented in this paper were gathered from the annual report of the company which has been downloaded from their company website. The company website of Homebase was used in order to study the highlights or the important happenings and events in the company for a given period of time. Furthermore, it also gives different background information regarding the local management and customer relationship of the company in the UK. On the other hand, because Homebase is part of a successful group called the Home Retail Group, its website was used in order to retrieve information about the financial status and performance of the company from the years 2006 to 2008. The website offers information regarding the new development, opportunities and central activities of the company, together with the financial summaries, principal risks and uncertainties as well as corporate responsibilities, which are very important in order to analyze the current financial performance of Homebase.
2. BooksBooks were used in order to focus on the different theories and information that are related to the process of accountancy. Most of the books that were used focus on the process of computing and interpreting the result of the financial ratio analysis and its impact on the overall performance and future of any company. This had also helped me to focus on the different financial ratio that will be needed or appropriate in the case of Homebase and B&Q, and what are the different ratio that can be computed by using the information that are available to be used. Most of the books I’ve used were available from our library. On the other hand, due to some difficulties in searching for appropriate and updated book references, I also used online books, or those books that are available in e-book format. This had helped me to save more time and effort.
3. JournalJournals were very helpful to me because it enables me to have detailed information regarding the different theories that are associated to my topic. Furthermore, it also enables me to focus on a given aspect of the financial analysis, at the same time, learn with example. This enables me to have a sample analysis of any company which help or guide me to the entire process of analyzing the case of Homebase.
4. Online LibrariesOnline libraries have helped me to save more time as well as effort in searching and looking for appropriate and helpful resources from books to journals as well as other magazine and newspaper articles. The main advantage of the online libraries compare with the traditional way is that it helps me to focus on one particular subject, at the same time, retrieve my desired books in easy and fast manner, with just one click of the mouse and within the vicinity of my home or even when I am out. Because of that, I have been able to focus on searching first for the books that I will need, and then go back to it, when I need it, and because it is in my computer, I only have to go online in order to retrieve it, no need to carry extra weight.
5. Online Articles and ForumOnline articles and forum have been very helpful to me, because it enables me to gather data straight from the opinion of those people who are directly and indirectly connected with the operation and the transaction of Homebase. This enables me to have an idea regarding the process and inflow and outflow of data and information as well as other important aspect of the company. Thus, it gives me the idea regarding the perspective of the people which can be considered as stakeholders of the company. Online articles were used in order to gather past information regarding the performance of the company in financial and non-financial way. Above all, it enables me to gather important or vital background information about the companies, from its foundation day, its founders and the different individuals or organizations that are connected to the local and international operations of the companies.
C. Limitation of Information GatheringOne of the important limitations to be considered in the method that have been employed in gathering data and information is the limitations of the resources that are available. First is that, there are limited information that are available regarding the performance of B&Q, because B&Q is not doing its own annual report, because they are part of the group KingFisher. Aside from that, there are no primary data that was used, because of the time and cost constraints.
D. Ethical Issue of Information GatheringBecause of the fact that there were no primary data gathered from any respondents or subjects, there can be no ethical issue involved in the study. Aside from that, all of the information that has been gathered from the different resources were properly referenced and acknowledge after it was used. In addition, annual report of both companies where uploaded in their website because it is important or vital for the different stakeholders of the company, and it is important to take note that academic aspect is one of the important stakeholders of a company.
E. Ratio AnalysisRatio analysis helps different entities in a business that are involved in the decision making process to spot the different trends and changes in the performance and status of the business and compare it with the average performance of its competitors in the industry. It can be done by comparing the ratio of one company to others for several successive years, and watching for any unfavorable trends that may be starting. It will show all the important early warning indications that will enable a business to solve any business problems before it become a major problem and destroy the entire business (WebLedger n.d.). Thus it can be said that the ratio analysis can help to workout the profitability, solvency, operating efficiency and short-term financial position, analyze the financial statement, compare the performance of different companies, simplify the accounting information, and it can be used for different helpful forecasting. On the other hand, there are also some limitations in the said accounting techniques, primarily the limited comparability, false results, effect of the changes in the price level, some of the qualitative factors are ignored, the impact of window-dressing, considered as costly technique, can result to misleading results, and absence of standard university accepted terminology (Universal Teacher Publication n.d.).
III. Current Performance A. Sales Growth
Table SEQ Table \* ARABIC 1 Sales Growth
Years
2006
2007
2008
% increase in Homebase in Sales
-2.1%
3.46%
-1.83%
% increase in B&Q in Sales
-
1.07
1.09
Table 1 shows the % increase in sales of Homebase and B&Q. The said ups and downs of sales or turnover returns are affected by different factors such as the preferences of the customers, and the economic condition of the UK as well as the world. Based on that, it can be observed in the table that the UK market had been affected by these factors, both of the major players in retailing industry shows some ups and downs in sales performance. Table shows that in 2006, the sales of Homebase decreased by 2.1%, but the sales had recovered its sales by 3.46%, and received another decrease in its sales by 1.83%. On the other hand, the said event can also be seen on the performance of B&Q. This can be seen on the slow performance or increase in sales of B&Q. In 2007, B&Q recorded an increase in sales of 1.07%, and 1.09% in 2009. Thus, it can be said that B&Q has a better performance compare to Homebase in terms of sales increase, which can be said as a product of the company’s effort to innovation to their stores and relationship with their customers. Figure 1 shows the trend of the sales or turnovers of both companies. It can be observed that although the performance of B&Q is far from the financial performance of Homebase, it can be said that both of the companies are facing the same situation, and that, is the slow moving of sales from 2006 to 2008. This is because of the different factors and aspects.
These factors are the consumer spending, thus the retail market conditions are likely to be more challenging in the short term. The rising costs of essential household bills that are driven and impacted by inflationary pressures, mean that discretionary spending will be squeezed. As a result, the current instability in the credit markets is also likely to constrain consumer spending and confidence which may affect bigger ticket home-related purchases in particular (Home Retail Group 2008). Furthermore, it is also important to consider the market growth because of the following factors:
- Population growth and an increasing number of households;
- Rising overall household disposable income;
- Technology change and new product development (Home Retail Group 2008).
It is also important to consider the market consolidation in the UK, which is driven by the slowdown in the consumer spending but is underpinned by an overall structural shift in favor of more general and large scale retailers such as Home Retail Group (Home Retail Group 2008).
Figure SEQ Figure \* ARABIC 1 Sales Growth of Homebase and B&Q
IV. Financial Analysis A. Balance Sheet Ratio Analysis
The balance sheet ratio analysis helps to measure the liquidity and solvency or the ability of the company to pay its bills as they come due, as well as its leverage or the extent to which a business is dependent on the funding or its creditor. It will include ratios such as: current ratio, working capital and leverage ratio (WebLedger n.d.). It identifies different potential liquidity problems or the inability of a business to meet its financial obligations and aspects that are related to raising of future capital (Ameritrade Financial Services 2006). Liquidity is the ability of a company to quickly turn its assets into cash (Mladjenovic 2005, p. 312).
1. Current RatioCurrent ratio is the most commonly used liquidity ratio (Mladjenovic 2005, p. 312). It analyzes the ability of the firm to pay their current obligations (Ameritrade Financial Services 2006). It compares what a business has with what it owes. It shows the relationship between the value of the current assets and the value of the current liabilities of a business (Bates & Goodman 2005, p. 152).
Table SEQ Table \* ARABIC 2 Current Ratio
Years
2006
2007
2008
Current Ratio Homebase
1.57
1.60
1.48
Current Ratio B&Q
3.71
3.86
3.92
Based on table 2, it shows that both of the companies show a health ratio of assets and liabilities. Thus, both companies enable to maintain a current ratio that is above the generally accepted current ratio which is 1 to 1. This is because a current ratio is that less than 1 is already considered as a red flag (Mladjenovic 2005, p. 312). The current ratio of Homebase had improved in 2007, from 1.57 to 1.60, however decline in 1.48. The said trend is because of the different factors such as the effort of the company to renovate its facilities, together with the decreasing sales and changing buying behaviors of the customers. On the other hand, B&Q shows great development or increase on its current ratio, from 3.71 in 2006, to 3.86 in 2007 and 3.92 in 2008. The said increase in current ratio will also help Homebase regarding their relationship with different investors as well as bank and lending institutions regarding the money that they will be needed for future capital or project. As a result, it will be important for the company to maintain their current strategies in order to maintain the increase in in-flow of money at the same time, lessen or balance the out-flow of money.
Figure 2 shows the trends or movement of the current ratio of Homebase and B&Q. It can be observed that there is a huge difference between the performance of the two companies, where in B&Q is leading. The current ratio of both companies is stable, because there is no huge decline, but there is no huge increase either. However, B&Q had been able to sustain it growth in terms of current ratio.
Figure SEQ Figure \* ARABIC 2 Current Ratio (2006 - 2008)
2. Working Capital
Working capital is the measurements of the capability of a company to pay its current obligations (Gorman 2003, p. 168). Thus, it can help to determine the working capitals that are needed in relations to projected sales or receipts (Troy 2009, p.xix). Thus, it can also be viewed as a security blanket.
Because it had been explained before that both of the companies have a good current ratio, it can also be said that both have better working capital. It can be seen that the working capital of Homebase increases every year from 2006, with £263,125, to £287, 498 in 2007. The said development can be attributed to the growing number of sales due to the increasing demands for home furnishing products and equipment. However, due to the same reason, the buying behavior of the customers, in 2008, the working capital decreases to £271,399. The said factor is important because bankers look at the net working capital over time in order to determine the ability of a company to weather financial crisis (WebLedger n.d.). Thus, the greater the amount of working capital, the more security an investor can have that they will be able to meet their financial obligations (Ameritrade Financial Services 2006). The said explanation can also be applied to the performance of the B&Q in terms of working capital. It shows that the company had been able to maintain their working capital, in a manner that there is a reasonable gap between the assets and liabilities. However, it can be observed that the performance of B&Q in the UK is being affected by the changing behavior of the customers, at the same time, the different economic factors.
Figure 3 shows the trends and changes in the working capital of Homebase and B&Q from 2006 to 2008. It can be observed that the company had been able to maintain the consistency of managing and controlling the different resources that are important for the company.
Table SEQ Table \* ARABIC 3 Working Capital
Years
2006
2007
2008
Working Capital Homebase (£ million)
263.1
287.4
271.4
Working Capital B&Q (£ million)
3,053.5
3,055.1
3,284
Figure SEQ Figure \* ARABIC 3 Working Capital (2006 - 2008)
3. Leverage Ratio
Leverage is a second vital ratio that is used in the finance company analysis. By the nature of the business, finance companies are typically and acceptably more highly leveraged than industrial companies. The leverage is necessary to earn a sufficient return on capital (Fabozzi 2001, p. 453).
Table SEQ Table \* ARABIC 4 Leverage Ratio
Years
2006
2007
2008
Leverage Ratio Homebase
0.93
0.98
1.09
Leverage Ratio B&Q
0.37
0.35
0.34
Figure SEQ Figure \* ARABIC 4 Leverage Ratio (2006 - 2008)
Table 4 shows the leverage ratio of Homebase and B&Q. Leverage is vital in order to earn an adequate return on capital. The development or trends in the leverage ratio of both the company is affected by different factors such as the parental support, portfolio quality as well as the type of the business. It is important to consider that in a diversified company with high portfolio quality, a leverage ratio of 5 to 1 is acceptable. While a ratio of 10 to 1 is also acceptable for a captive with a strong support from the parent company and agreements regarding maintenance (Fabozzi 2001, p. 454). It can be observed that the company had been able to maintain the level of its leverage ratio from 0.93 in 2006, to 0.98 in 2007, and 1.09 in 2008. Thus, it shows to which Homebase is reliant on debt financing or creditor money versus the owner’s equity.
In three years performance of the company, it can be said that 2006 is considered as the year, where in the creditor are not that at ease with the business. This is because of the fact that the higher the ratio, the more risky a creditor will perceive its exposure in the business, thus making it correspondingly harder to obtain credit (ZeroMillion 2008). As a result, it can be said that the company had been able to focus on the different strategic movements and plans which focus on the process of balancing the total capital provided by the owner’s equity with the current total assets. On the other hand, regarding the performance of its competitor, B&Q, the company had been able maintain a lower level or rate of Leverage, from 0.37 in 2006, to 0.35 in 2007, and 0.34 in 2008. It shows the company had been able to maintain a consistent decrease in its leverage ratio.
Figure 4 shows the trends and changes in the leverage ratio of Homebase and B&Q. Just like the first financial ratios that have been analyzed, it can be observed that there is no massive change in terms of the leverage ratio or level of the company.
B. Income Statement Ratio Analysis
The income statement ratio helps to measure the profitability of a business (WebLedger n.d.). Unlike the balance sheet ratio analysis, statement of income ration analysis focuses on the different in-flow of money or other financial factors inside the organization.
1. Gross Margin RatioGross margin ratio or also known as the gross profit margin ratio shows how much a firm has left over after paying its cost of goods sold. Thus, the gross margin is what pays the operating expenses, financing expenses or interest, and the profits (Nelson 2005). The said ratio is very important because it has a great impact on the continuation of services, performance or production of any business. Based on table 5, it can be seen that the gross margin ratio of Homebase are almost half of the entire sales dollars. Meaning there are huge amount of money that can be used by the company in other important activities that will be important for the operations of the company, as well as the different stores that are connected with them. However, the performance of B&Q is a lot better because the gross margin ratio is above 50% or half of the entire sales or revenue. Thus, it means that both of the companies have the ability to pay all of its operating and other important expenses that can be encountered in the future. In addition to that, the gross margin ratio of Homebase is stable and not fluctuates much from one period to another (Investopedia 2009). It can be observed that the gross margin of Homebase did not go to a drastic change with just 5.71% change from 2006 to 2008. This can also be attributed to the slow movement or development in the prices of the different products that are being offered by the industry, this is even the said industry is facing different problems that are related to the perception of the customers, population as well as economic aspects.
Table SEQ Table \* ARABIC 5 Gross Margin Ratio
Years
2006
2007
2008
Gross Margin Ratio Homebase (%)
43.19
46.52
48.90
Gross Margin Ratio B&Q (%)
68
72.4
76.7
Figure SEQ Figure \* ARABIC 5 Gross Margin Ratio (2006 - 2008)
2. Net Profit Margin Ratio
The net profit margin ratio measures how much profit out of each sales dollar is left after all of the expenses are subtracted, that is, after all of the operating expenses, interests and income tax expenses are subtracted (Gallagher & Andres n.d., p. 92). Thus, it relates the net profit for the period to the sales revenue during a given period of time (Atrill & McLaney 2006, p. 177). The better managed companies record higher relative net profit margins, due to the fact that they can manage their resources in more efficient and effective manner (Groppelli & Nikbatkth 2000, p. 444).
Because of the fact that both of the companies are from strong, huge and important industry, which is the retailing industry, Homebase and B&Q showed a high net profit margin ratio. Table
Table SEQ Table \* ARABIC 6 Net Margin Ratio
Years
2006
2007
2008
Net Margin Ratio Homebase (%)
14.9
26.2
22.4
Net Margin Ratio B&Q (%)
50.9
40.7
61.0
Figure SEQ Figure \* ARABIC 6 Net Margin Ratio (2006 - 2008)
It can be seen in figure 6, that both Homebase and B&Q faced a huge change in their net margin ratio. From 2006 to 2007, there is a great decline for the net margin ratio of B&Q, while the situation is the other way around. However, from 2007 – 2008, B&Q had been able to focus on the different important aspects of the company that are related in managing the important resources of the company, primarily those that are directly needed in terms of inventory and delivery. As a result, the net margin ratio of B&Q increased and even surpassed their record in 2006. On the other hand, the said situation is different with the Homebase, after a huge increase from 2006 to 2007, the company faced different problems that are related to value chain and supply chain, together with customer relationship, which resulted to the slight decline of the net profit margin.
C. Management RatiosManagement ratios are group of ratios is designed in order to measure how effectively management is making use of the assets of the company. It seeks to determine and discover whether the investment in assets is justified in connection to the different activities as measured by turnover (Correia & Flynn n.d., 5 – 13).
1. Fixed Asset TurnoverThe fixed asset turnover ratio indicates the utilization of plant, machinery and equipment that is connected to operating levels as reflected by turnover (Correia & Flynn n.d., p. 5 15). It measures how effectively sales are generated by fixed asset investments and ignores the current assets and it is useful in a capital intensive industry (Pietersz 2009).
Table 7 shows the fixed asset turnover of Homebase and B&Q. It can be seen that both of the companies have the same trend of development in terms of fixed asset turnover. It can be observed that in 2007, both of the companies experience minor increase in their fixed asset turnover, but, in 2008, both of the companies had showed a huge down fall. In 2006, the fixed asset turnover of Homebase is 4.48, and then increase to 4.57. This means that the company is generating a higher level of sales from its fixed assets than it had done in the past (Correia & Flynn n.d., p. 5 – 15). However, in 2003, major decline had been encountered by the company, which means that the number of sales that the company is generating from its fixed asset had decrease to a huge number or 3.73. The said situation can also be observed in the situation of B&Q, from 22.99 in 2006 to 24.72 in 2007 and to 16.08 in 2008. It is important to consider that the higher the fixed asset ratio, the better (USBusiness n.d.).
Table SEQ Table \* ARABIC 7 Fixed Asset Turnover
Years
2006
2007
2008
Homebase Fixed Asset Turnover
4.48
4.57
3.73
B&Q Fixed Asset Turnover
22.99
24.72
16.08
Figure SEQ Figure \* ARABIC 7 Fixed Asset Turnover (2006 - 2007)
2. Return on Investment Ratio
Return on Investment Ratio is considered as the most important ratio of all because it shows the percentage of return on funds invested in the business by its owners and other important shareholders and investors. It shows the owner whether or not all of the effort put up into the business has been worthwhile (ZeroMillion 2008). It is a performance measure that is used in order to assess the number of different investments. Return on investment is considered as a very popular metric due to its versatility and simplicity (Investopedia 2009). The return on investment ratio is also sometimes called as the total asset ratio (Gaughan 2002, p. 481).
Table 8 and figure 8 shows the return on investment ratio of Homebase and B&Q from 2006 to 2008. It can be observed that the trends of the two companies in terms of return on investment ratio is the same in the trends in the net profit margin ratio, where in Homebase experienced an increase in from 2006 – 2007, but experience down fall in 2007 to 2008. On the other hand, B&Q experience the other way around, where in it experienced down fall in 2006 – 2007, but enable to cope with it and experienced increase in 2007 – 2008.
In 2006, the return on investment ratio was 0.17; the said number is somewhat small, because it only signifies less than 20% of the entire investment of the company. However the said number had increase to almost half in 2007 or .33, which means that the company had been able to manage their investments in different strategies for growth and expansion. However, due to the different factors such as economic and customer behavior, the return on investment ratio of Homebase had decreased and resulted to 0.27 in 2008. The said explanation can also be relate to the situation of B&Q, where in from 2006 to 2007, the company faced a massive decrease in the return on investment ration, from 0.70 to 0.56. However, it can be said that the company had been able to learn from their past experience and enable to manage their investment activities, that’s why it had been able to survive from the huge fall down in 2007, from 0.70 of the prior year to 0.56, up to a major recovery of 0.79 in 2008.
Table SEQ Table \* ARABIC 8 Return on Investment Ratio
Years
2006
2007
2008
Return on Investment Ratio Homebase
0.17
0.33
0.27
Return on Investment Ratio B&Q
0.70
0.56
0.79
Figure SEQ Figure \* ARABIC 8 Return on Investment Ratio (2006 - 2008)
V. Non-Financial Analysis A. SWOT Analysis
SWOT analysis is a tool that is used for auditing an organization and the different important factors that are related to the internal and external environment. It is considered as the initial and vital stage in planning which helps decision-makers to focus on the important issues. SWOT analysis stands for Strengths, Weaknesses, Opportunities and Threats (Marketing Teacher 2000). This can help to focus on the internal characteristics of an organization or business, at the same time focus on the different external factors which can be encountered in the external environment, where in a specific organization or business operates.
Figure SEQ Figure \* ARABIC 9 SWOT Analysis
1. Strengths
One of the most important strengths of Homebase is its powerful retail brand or the strong position and image of the brand in the market. This can be seen on the position of the company as the second largest and leading brand in terms of DIY and appliance retailer in the UK. A brand image is a vital aspect of the bundle of products attributes. Thus, a strong brand image can sometimes overshadow the physical product shortcomings and temporarily support market share, while a weak brand image may keep an otherwise competitive product from ever getting its foot in the door with the customers (Barabba & Zaltman 1990, p. 90). Furthermore, the company also has a high reputation for value for money, convenience and wide range of products that are available. Homebase has opened 17 new stores and closed 4, which brings the total number of stores to 310 and most of the new stores were of a smaller store format and in new catchments. Currently, Homebase has 10% of its portfolio in a smaller store format or around 20,000 sq feet internal ground floor sales area, typically with an 8,000 square foot mezzanine and an 8,000 square foot garden centre. These smaller stores are able to provide an authoritative range across the broader home enhancement categories, and are often the only national retailer in smaller catchments such as market towns for categories including core DIY, garden and showroom (Home Retail Group 2008). 50 range reviews have been completed in 2008 which include homewares and furnishing, horticulture and core DIY and decorating categories (Home Retail Group 2008). Furthermore, the company is considered as a very profitable organization with a gross profit of £724,105 in 2008 or 2.20% profit margin in 2008. Another thing is the issue regarding the price competitiveness, this is because of the fact that both of the major players in the industry, B&Q and Homebase focuses on the pricing strategies in order to maintain their competitiveness or customer relationship. In addition, because of the fact, the Homebase had been in the industry for a long time, it had already acquired retail knowledge and experiences and it holds an advantage of an existing infrastructure, at the same time, enables the company to focus on the process of brand development and innovation. In connection to that, because of the different issues and factors that are affecting the external environment of the company, primarily the issue of globalization, the company had been able to apply different Information Technology in their system, at the same time, offer new medium of marketing, which is the Internet or e-Business, where in their customers, anywhere, can order and avail of their products and services anytime they want it at the comfort of their homes. Above all, the company had been able to have their loyal customers.
2. WeaknessesThere is no doubt that the company had been able to hold different advantages or strengths, which can help them to maintain their position in the market, however, it is also important to focus on the different weaknesses which must be given priority by the company in order to come up with the different preventive measures that will help them to use it in their advantage. Although, the company had already exerted all their effort in order to come up with different strategies and plan, still due to the different factors, primarily competition, the company maintains its position as the second best DIY dealers in the UK. This will somewhat affect the image of the company. Thus, it can be attributed to the inefficiency of the company and its lack of vision, primarily on the top management. Another important aspect is the huge size of the company, although there are different technologies and strategies that are being applied by the company, there are still chances that some minor aspects of the company will be taken for granted. Above all, the lack of aggressiveness is considered as the opposite of the characteristics of its major competitor which is the B&Q, that enables the company to come up with the different ideas and product that will be loved by the customers.
3. OpportunitiesThe growth of the market and industry will be the primarily opportunity for the company. The bigger the number of the possible markets or customers, the greater the chance to expand and grow. Thus, it will help the company to focus on the different areas of the UK, and other important parts of the world, in order to build their stores and introduce their brand and products to the selected market. Furthermore, it will also be important to focus on the development of a product which will be unique or differentiated products will help the company to ensure that their products are different from other competitors, thus it can help to drive up the sales and popularity of the brand. Above all, it will be important to consider the growing popularity of mobile Internet in the world. Thus, it will be important for the company to focus on building a website that can be accessed via mobile phone.
4. ThreatsThe economy has a major impact on the consumer spending and it focuses on the different aspect of employment, inflation, taxation, consumer debt levels and interests rates (B&Q 2008). However, it is important to consider that the global financial crisis or recession is considered as one of the most important factors that may affect the overall performance of all the players in any business and industry. Primarily, because Europe is one of the major region in the world that is being affected by the said event. Above all, the current growing number and intensity of competition is also another threat, this is because of the fact that the companies have to focus on the different preventive and maintaining strategies which will help them to ensure their position in the industry and in the market.
VI. Future of HomebaseDue to the different economic and financial factors that are going on in the world, primarily the issue of recession, it can lead to more serious problems and trends such as the changes in the buying behavior of the customers. Thus, it will be important for the company to focus on the different strategies which will help them to maintain their good reputations and good relationship with the customers. Thus, it will be important, to first focus on training and educating their staffs and crews regarding proper connection and relationship with the customers. Thus, it will be important for each and every employee to have a complete knowledge regarding the company as well as the different products and services that they are offering, in order to ensure customer relationship. Furthermore, it will be important to focus on the aspect of applying Information Technology in the different aspects of the company, primarily supply chain, which is considered as one of the most important aspects of any company. Thus, it will be important to focus on applying some centralized processing of the financial and other company data, that can help to ensure that all of the in-flow and out-flow will be connected, and at the same time, data will be easily retrieved which can help in the process of decision-making.
In connection, it will be very important for the company to focus on the different aspects that are related to the Internet, due to the growing demand of the customers in online shopping. This can be done by expanding their website, enabling different types and means of payment and delivery. Thus, it will be important to consider the growing demand of the mobile Internet, where in customers can browse the Internet, at the same time transact online anywhere and anytime, without the hassle of wired connection. This can be done by focusing on redesigning a website which can be browse via mobile phones.
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VII. Appendices A. Appendix A: Financial Ratio Analysis: HOMEBASE
Homebase Ratio Analysis (2006 – 2007)
Years
2006 (2005 = 1,488,665)
2007
2008
Sales (£ million)
1,458.1
1,508.5
1,480.9
% Increase (Current Year Sales – Last Year Sales/Last Year Sales)
-2.1%
3.46%
-1.83%
Liquidity Ratio
Current Assets (£ million)
727.5
766.0
835.9
Current Liabilities (£ million)
464.4
478.5
564.5
Current Ratios = CA/CL
1.57
1.60
1.48
Current Assets
727.5
766.0
835.9
Current Liabilities
464.4
478.5
564,5
Working Capital = CA - CL
263.1
287.4
271.4
Fixed Asset
325.8
330.2
397.3
Current Assets
727.5
766.0
835.9
Total Assets
1,053.5
1,096.2
1,233.2
Current Liabilities
464,405
478,549
564,530
Long Term Liabilities
43,281
64,734
78,564
Total Liabilities
507.7
543.3
643.1
Net Worth = Total Assets – Total Liabilities
545.8
552.9
590.1
Leverage Ratio = Total Liabilities / Net Worth
0.93
0.98
1.09
Gross Profit
629.8
701.8
724.1
Sales
1,458.1
1,508.5
1,480.9
Gross Profit Margin (%) = GP/Sales * 100
43.19
46.52
48.90
Revenue
Turnover
1,458.1
1,508.5
1.480.9
Gross Profit
629.8
701.8
724.1
Operating Profit
12.1
33.5
31.7
Other Income
5.2
.525
8.8
Total Revenues
2,105.2
2,244.3
2,245.5
Expenses
Cost of Sales
829.2
806.8
756.8
Administration Expenses
617.6
668.3
724.1
Exceptional Items
5.9
.753
5.9
Profit Loss before Interest
16.1
33.2
34.7
Interest Paid
1.2
2.6
2.1
Taxation
3.1
24.0
4.6
Profit Loss after Tax
21.3
6.6
37.2
Depreciation
58.9
64.9
58.6
Audit Fee
.162
.216
.197
Non Audit Fee
.001
.001
.008
Total Amortization and Impairment
.463
Remuneration
228.2
225.5
228.3
Wages and Salaries
207.4
205.4
206.5
Social Security Costs
15.9
14.8
15.4
Pension Costs
5.2
5.4
6.4
Director’s Remuneration
.819
1.2
1.2
Highest Paid Director
.641
.968
1.0
Total Expenses
2,011.6
2,060.6
2,083.5
Net Profit = (TR – TE)
93.6
183.7
162
Sales
1,458.1
1,508.5
1.480.9
Cost of Sales
829.2
806.8
756.8
Net Sales (S - CoS)
628.9
701.7
724.1
Net Profit Margin = NP/NS (%)
14.9
26.2
22.4
Sales (£ million)
1,458.1
1,508.5
1,480.9
Fixed Asset
325.8
330.2
397.3
Fixed Asset Turnover = S/FA
4.48
4.57
3.73
Net Profit
93.6
183.7
162
Net Worth
545.8
552.9
590.1
Return on Investment = NP/NW
0.17
0.33
0.27
B. Appendix B Financial Analysis: B&Q
B&Q Ratio Analysis (2006 – 2007)
Years
2006
2007
2008
Sales
4,172.0
4,216.5
4,262.0
% Increase (Current Year Sales – Last Year Sales/Last Year Sales)
1.07
1.09
Liquidity Ratio
Current Assets (£ million)
4,182.6
4,123.7
4,409
Current Liabilities (£ million)
1,129.1
1,068.6
1,125
Current Ratios = CA/CL
3.71
3.86
3.92
Current Assets (£ million)
4,182.6
4,123.7
4,409
Current Liabilities (£ million)
1,129.1
1,068.6
1,125
Current Ratios = CA/CL
3,053.5
3,055.1
3,284
Total Assets
4,182.6
4,123.7
4,409
Total Liabilities (£ million)
1,129.1
1,068.6
1,125
Net Worth = Total Assets – Total Liabilities
3,053.5
3,055.1
3,284
Leverage Ratio = Total Liabilities / Net Worth
0.37
0.35
0.34
Gross Profit (million)
2,845.0
3,052.2
3,271.0
Sales
4,172.0
4,216.5
4,262.0
Gross Profit Margin (%) = GP/Sales * 100
68
72.4
76.7
Revenue
External Revenue
4,172.0
4,216.5
4,262.0
Profit
139.0
338.4
272
Total Revenue
4,311.0
4,554.9
4,534
Expenses
Depreciation
90.8
98.8
111
Amortization
22.8
20.7
14
Impairment Losses
41.8
-
-
Reorganization Costs
205.3
-
-
Financial Services Termination Fee
19.0
-
-
Remuneration
2.7
3.6
3.0
Corporation Tax
9.0
29.9
9
Impairment Tests for Goodwill
1,796.1
1,796.1
1,796
Total Expenses
2,187.5
2,838.3
1,933
Net Profit
2,123.5
1,716.6
2,601
Sales
4,172.0
4,216.5
4,262.0
Net Profit Margin = NP/NS (%)
50.9
40.7
61.0
Sales
4,172.0
4,216.5
4,262.0
Fixed Assets
181.5
170.6
265
Fixed Asset Turnover = S/FA
22.99
24.72
16.08
Net Profit
2,123.5
1,716.6
2,601
Net Worth
3,053.5
3,055.1
3,284
Return on Investment = NP/NW
0.70
0.56
0.79
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