Kesa Electricals Plc

SWOT Analysis

SWOT ANALYSIS

Kesa Electricals (Kesa) is Europe’s third largest electrical retailing company. It is a specialist electrical
and furniture retailer. It operates a portfolio of around 700 stores. The company mainly operates in
France, the UK, Netherlands, Belgium, Czech Republic, Italy, Switzerland and Turkey. Strong
operating cash flows indicate high operating efficiency levels of the company but an increase in labor
costs would adversely impact the company's margins.

Strengths Weaknesses

High inventory turnover Weak revenues and margins

Strong operating cash flows Weak revenues and margins
Reduced long term debt Low receivables turnover ratio
Growth in same store sales

Opportunities Threats

Expanding global LCD display market Rising labor wages in UK

Growth in online retail spending High interest rates in UK
New format stores Intense competition

Strengths

High inventory turnover

Kesa has a high inventory turnover. It recorded an inventory turnover ratio of 7.3 for the fiscal year
2007 against an industry average of 5.2 for the same period. High inventory turnover ratio indicates
that the company is able to rotate its inventory faster and has an effective inventory management
system in place. Better inventory management allows the company to stock goods which are in sync
with the current technology and demand. This could result into higher growth in revenues in the
coming years.

Strong operating cash flows

Cash flows from Kesa’s operations have increased in recent years. Cash flow from operations has
increased by 33.3% to £261.2 million in fiscal year 2007 over 2006. This indicates high operating
efficiency levels of the company and could help company in successfully executing its expansion
plans.

Reduced long term debt

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SWOT Analysis

The company has reduced its long term debt in recent years. The company’s long term debt has
been reduced from £347 million in fiscal year 2006 to £202.4 million in fiscal year 2007. The company
also has an interest coverage ratio of 9.2 in 2007 against the industry average of 3 for the same
period. Decreasing debt burden and strong interest coverage ratio suggest strong debt servicing
capability. Lower debt burden would also free the reserves of the company for investments in other
opportunities.

Growth in same store sales

Kesa recorded a growth in the like for like sales growth in fiscal 2007. Kesa measures its like for like
sales through comparable store sales. Like-for-like sales are calculated based on stores that have
been open for a full year and the first full four weeks of trading have passed. Year-on-year growth
in the company’s comparable store sales increased from negative 0.6% in 2006 to 7.8% in 2007.
An increase in same store sales growth could be indicative of growth in market penetration as
compared to its competitors which could give Kesa a competitive advantage.

Weaknesses

Weak revenues and margins

Kesa recorded a decline in revenues in 2007. The company’s revenues grew by 9.8% to £4,500.9
million in 2007 over 2006, which is lower than the industry average of 26.5%.The company’s revenues
grew at a CAGR of 7% during 2003-2007. Low revenue growth could affect the financial stability of
the company and can limit its growth opportunities Kesa recorded weak margins in recent years.
The company recorded an operating profit margin of 4% for the fiscal year 2007, as against an
industry average of 4.8%. Kesa’ net profit margin at 2.4% in 2007 was lower than the industry average
of 3.1% for the same period. Weak margins are indicative of poor cost management in the company.

Low revenue per employee

Kesa’s revenue per employee, at £169,890.2 is well below the industry average of £280,785 in fiscal
2007. Its net income per employee in the fiscal year 2006 is £4,129.4, which is also below than the
industry average of £8,801 for the same period. Low revenue per employee indicates low productivity
of Kesa’s employees.

Low receivables turnover ratio

Receivables turnover ratio indicates how efficiently the company is using its assets. Kesa recorded
a receivable turnover ratio of 17.1 in 2007 in comparison to 33.6 in 2006. This is also lower than the
industry average of 46.4 for the same period. Low ratio indicates that the company is not collecting
its dues on time and its cash resources are tied up with its customers which could be put to other
uses. The company might find it difficult to service its short term obligations which rose by 87.1% in
2007 over 2006.

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SWOT Analysis

Opportunities

Expanding global LCD display market

Demand for liquid crystal display (LCD) TV screens for is forecast to increase to $42 billion by 2007,
twice the corresponding figure in 2005 and reach $65 billion by 2009 The LCD industry is likely to
boom, with prices of LCD TVs set to fall after major production capacity in South Korea and Taiwan
comes on stream in the near future. Kesa retails LCD screens and projection equipment. The growth
in demand for LCD screens and LCD projection equipment would provide Kesa with a significant
opportunity to increase its revenues.

Growth in online retail spending

Online shopping has steadily grown in popularity in the UK. Online selling, as a proportion of total
retail sales in 2005 were about 7% in the UK. Between 2002 and 2005, the value of online sales per
month increased from £82 million to £1,373 million. It has been estimated that by 2012 online sales
will increase by 320%, to £60 billion per annum and would account for approximately 20% of all
retail sales in the UK. The company is already into online retailing. With a strong foothold in online
services, Kesa is well placed to benefit from growing online spending.

New format stores

Kesa opened 15 new format Darty stores in the fiscal year 2007. Of the 15, three were new stores,
five were relocated stores and seven were refurbished/extended stores. During fiscal year 2008,
Darty plans to open a further 26 new format stores of which seven will be new stores, five will be
relocated stores and 14 will be refurbished/extended stores.

The company also introduced mezzanine trading floors concept in 2006 n Comet stores. It introduced
this concept in four stores in 2007 and plans to introduce it in 10 more stores in fiscal 2008. The
company introduced relay program for its small to mid-sized stores. During 2007, ten relays and one
relocation were completed and one new store was opened. By the end of 2008, a further 10 relays
are planned.

The opening of new stores and introduction of newer concepts is expected to drive better revenue
growth.

Threats

Rising labor wages in UK

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SWOT Analysis

Labor costs are rising in the UK. The UK government announced that the adult minimum wage rate
would rise from £5.05 to £5.35 per hour in October 2006. The national minimum wage is expected
to further rise to £5.52 an hour from October 2007 in the UK. The rate for those aged 18 to 21 years
would be increased from £4.45 to £4.60 per hour and the rate for workers aged 16-17 years would
increase from £3.30 to £3.40 per hour.

The company employs about 26,493 employees annually on an average in 10 countries around the
world in the fiscal year 2007. Out of these 32.2% of employees are located in the UK. An increase
in labor costs would adversely impact the company's margins.

High interest rates in UK

Though the UK retail market is poised to grow by about 15% during 2006-2011, a slight decline is
expected in 2007. Growth in 2007 at 2.8% will be slightly lower than 2006’s 2.9%. Although the Bank
of England cut interest rates in August 2005, they still remain at high levels. Interest rates in the UK
stood at a high of 4.5% at the end of January 2006. This was further raised to 5.25% in January
2007, 5.5% in May 2007 and was raised further by 25 basis points to 5.75% in July 2007.

The high cost of credit will act as a brake on consumer expenditure encouraging households to limit
non-essential expenditure, particularly on deferrable big ticket purchases and this could adversely
affect Kesa’s performance.

Intense competition

The company has been facing intense competition in all its markets and businesses. The company
faces competition from other retail stores including Wal-Mart, Tesco and Metro. In addition to these
big names, the company also faces competition from the exclusive company showrooms of the
brands which Kesa retails. Increasing competition would adversely affect its profitability.

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