Financial review

Financial summary

Profit and EPS including all exceptional items for the year ended 31 January 2009 are set out below.

	2008/09 £m	2007/08 £m	Increase/ (decrease)
Profit for the year	£206m	£272m	(24.3)%
Basic EPS – total operations	8.9p	11.7p	(23.9)%

A summary of the continuing reported financial results for the year ended 31 January 2009 is set out below.

	2008/09 £m	2007/08 £m	Increase/ (decrease)
Revenue	10,026	9,050	10.8%
Operating profit before exceptional items	446	424	5.2%
Operating profit	173	428	(59.6)%
Adjusted pre-tax profit	368	357	3.1%
Profit before taxation after exceptional items	90	366	(75.4)%
Adjusted basic earnings per share	11.0p	10.6p	3.8%
Basic earnings per share	0.2p	10.9p	(98.2)%
Dividends	5.325p	7.25p	(26.6)%

A reconciliation of statutory profit to adjusted profit is set out below.

	2008/09 £m	2007/08 £m	Increase/ (decrease)
Profit before taxation	90	366	(75.4)%
Exceptional items	273	(4)
Profit before exceptional items and taxation	363	362	0.3%
Financing fair value remeasurements	5	(5)
Adjusted pre-tax profit	368	357	3.1%
Income tax expense on pre-exceptional profit	(95)	(116)	(18.1)%
Impact of prior year items on income tax	(16)	5
Income tax on fair value remeasurements	(2)	2
Minority interests	3	2
Adjusted post-tax profit	258	250	3.2%

Comparatives

On 30 January 2009 the Group finalised the sale of Castorama Italy. As a result of the sale, Castorama Italy’s results, including a £178 million post-tax profit on the sale of the business, are disclosed within discontinued operations. Comparatives have been restated to reflect this.

Overview

Total reported sales on continuing businesses grew 10.8% to £10.0 billion on a reported rate basis, and 1.2% on a constant currency basis. During the year, an additional 70 net new stores, including 45 trade counters, were added, taking the store network to 807 (excluding Turkey JV). On a like-for-like (LFL) basis, Group sales were down 4.1%. The fall in sales was driven mainly by the UK and France, which fell 6.5% and 1.3% respectively on a LFL basis during the year.

Operating profit before exceptional items grew by 5.2% to £446 million and fell by 59.6% to £173 million after exceptional items. Profit for the year, including all exceptional items, fell by 24% to £206 million.

The net interest charge for the year was £83 million, up £21 million on the prior year largely as a result of movements in exchange rates.

Adjusted pre-tax profit increased by 3.1% to £368 million.

FRANCE – OPERATING REVIEW

Retail sales £m	2008/09 £m	2007/08 £m	% Change (Reported)	% Change (Constant)	% LFL Change
France includes Castorama and Brico Dépôt. All trading commentary below is in constant currency.
France	3,888	3,224	20.6%	3.1%	(1.3)%
Retail profit £m
France	283	237	19.2%	1.9%

Kingfisher France

Banque de France data shows that comparable DIY store sales* declined by around 1.1%, and on this basis Kingfisher’s businesses outperformed the market by delivering broadly flat comparable sales, despite disruption from store revamps. Across the two businesses, 10 new stores were opened, two relocated and eight revamped, adding around 5% new space. In 2009/10, around 3% new space is planned.

Total sales grew 3.1% to £3.9 billion (-1.3% LFL) with retail profit up 1.9% to £283 million, reflecting the weaker sales environment. Gross margins were up 120 basis points due to higher own-brand sales penetration and sales mix benefits at Castorama, and improved stock management at Brico Dépôt.

Castorama total reported sales grew 2.7% to £2.1 billion (+0.6% LFL, +1.7% on a comparable store basis) supported by its new ranges and store modernisation programme. Stores trading in the new format, representing 49% of total selling space, continue to outperform.

Brico Dépôt total reported sales grew 3.5% to £1.8 billion (-3.6% LFL), reflecting growth in store numbers offset by weaker trade demand from a slowdown in housing starts (down 16%) and big project planning consents (down 17%).

* Banque de France data including relocated and extended stores.

UK – OPERATING REVIEW

Retail sales £m	2008/09 £m	2007/08 £m	% Change (Reported)	% LFL Change
UK includes B&Q in the UK, Screwfix and Trade Depot.
UK	4,279	4,395	(2.6)%	(6.5)%
Retail profit £m
UK	129	153	(15.6)%

Kingfisher UK

Total sales declined by 2.6% to £4.3 billion (-6.5% LFL) reflecting a weakening economic environment which impacted both the trade market and consumer spending, particularly in higher ticket project areas. Retail profit was £129 million, down £24 million on the prior year, with margin and cost initiatives helping to offset the impact of lower sales.

UK Market

The total UK home improvement market* declined by around 4% over the year as the UK economic environment worsened, impacting consumer spending. Kingfisher’s UK businesses in aggregate outperformed the market.

B&Q’s total reported sales were £3.8 billion, down 4.5% (-6.1% LFL). Good sales growth from revamped large stores and new ranges helped offset a weak outdoor season (down 10%) and reduced consumer expenditure, especially in higher ticket sales, including kitchen and bathroom ranges (down 8%). Sales of core DIY and room makeover products were more resilient (down 3%).

Retail profit was £106 million, down £25 million on the prior year, with margin and cost initiatives helping to offset the impact of lower sales. Gross margins were up 60 basis points across the year, reflecting lower mark-down activity and sales of higher margin products offset by increased promotional activity during the last quarter.

Decisive management action on costs across the year to shield against slower sales resulted in an overall cost reduction of 1% compared to last year despite underlying cost inflation of 3% and around 1% from new store space.

Renewal programme update

In the medium-term, B&Q aims to grow its share of home improvement expenditure by strengthening its appeal to both the Do-it-Yourself (DIY) and Do-it-For-Me (DFM) customer. During 2008/09, B&Q continued with its renewal programme, which includes updating product ranges, introducing more services and improving its store environments to ensure B&Q is the first and only store for a greater proportion of customers’ home improvement spend.

Sixteen large store revamps (including two lower-cost trial revamps), which encompass more clearly defined shop-within-shop sections, room-set displays and more space allocated to kitchens, bathrooms, tiling and flooring areas were completed. The new format large stores continued to significantly outperform the older format. B&Q now has 119 large stores (56 in the modern format) and 203 medium stores (of which 168 have been modernised). Overall net space increased 1% during the year, with a similar increase expected during 2009/10.

UK Trade

Screwfix total sales grew 13.0% to £492 million, driven by the continued roll-out of trade counters, which provide customers with immediate product availability. An additional 45 outlets opened during the year, taking the total to 138. Trade counters now represent over 50% of total sales.

In a tough trade market retail profit increased 7.6% to £30 million compared to last year due to strong sales growth and focus on cost management.

* Market data from GfK for the leading retailers of home improvement products and services (including new space). However, this data is not exhaustive and excludes retailers such as IKEA, Topps Tiles and smaller independents.

OTHER INTERNATIONAL – OPERATING REVIEW

Retail sales £m	2008/09 £m	2007/08 £m	% Change (Reported)	% Change (Constant)	% LFL Change
Other International includes Poland, China, Spain, Ireland, Russia, Turkey JV and Hornbach in Germany. South Korea and Taiwan JV included in comparatives only. Following the Castorama Italy disposal its results have been excluded from both years. Joint Venture and Associate sales are not consolidated. All trading commentary below is in constant currency.
Other International	1,859	1,431	29.9%	7.0%	(3.7)%
Retail profit £m
Other International	91	79	15.1%	(6.1)%

Other International total sales increased 7.0% to £1.9 billion. LFL sales were down 3.7% reflecting high LFL declines in China. Retail profit was down 6.1% to £91 million, reflecting strong growth in Poland and Hornbach (21% economic interest), offset by increased losses in China.

During the year, 26 stores opened comprising nine in Poland (three Brico Dépôts), six in Turkey, four each in China and Spain, two in Russia and one in Ireland, adding around 13% net new selling space. A further 15 stores are planned for 2009/10, including six in Poland, one in Spain, five in Turkey and three in Russia.

In Eastern Europe sales in Poland were up 19.1% (up 47.2% in reported rates) to just over £1 billion (+9.8% LFL despite a tough comparative of +22.5%) and retail profits were up 15.4% to £124 million. Strong consumer spending in housing and construction, new bathroom and garden catalogues and new decorative ranges all boosted sales and profits.

In Russia, sales almost doubled compared to the prior year to £150 million (+24.6% LFL). In Turkey, Kingfisher’s 50% JV, Koçtaş continued to grow sales (+10.3% LFL) and retail profit was slightly up, despite the impact of six store openings compared to five in the prior year. Koçtaş continues to benefit from Kingfisher sourcing buying power and own-brand sales penetration.

Hornbach, in which Kingfisher has a 21% economic interest, contributed £29 million to retail profit.

B&Q China sales declined 23.7% to £431 million (-27.9% LFL) with losses of £52 million reflecting the sharp fall in sales and the margin impact of stock clearance activity which began towards the end of Q3.

Taxation

The effective rate of tax, calculated on continuing profit before exceptional items and prior year tax adjustments is 31% (2007/08: 31%). The overall rate is distorted by the £273 million exceptional charge on which only £7 million of tax relief (3%) is assumed.

The effective tax rate is calculated as follows:

Effective tax rate calculation 2008/09	Profit £m	Tax £m
Profit before tax and tax thereon	90	88
Add: exceptional charge and tax thereon	273	7
Add: prior year items	–	16
Total	363	111
Effective rate		31%

The effective rate of tax is sensitive to the blend of tax rates and profits in the various jurisdictions. The tax rates for this financial year and the expected rates for next year are as follows:

Jurisdiction	Statutory tax rate 2008/09	Statutory tax rate 2009/10
UK	30%-28%	28%
France	34%	34%
Poland	19%	19%
China	25%	25%
Rest of World	0%-34%	0%-34%

Taxation risk management

Kingfisher seeks to organise its tax affairs efficiently and in a way which enhances shareholder value whilst balancing the tax risk it faces. Tax risks can arise from changes in law, differences in interpretation of law, changes in tax rates and the failure to comply with the tax law and associated procedures. The Group manages and controls these risks with local management, its Group tax department and advice from reputable professional firms. Where disputes arise with tax authorities the Group addresses the areas of dispute promptly in a professional, open and constructive manner.

Exceptional items

	2008/09 £m (Charge)/gain
China restructuring	(107)
UK restructuring	(19)
Carrying value impairment of Hornbach	(36)
Impairment of goodwill	(124)
Profit on disposal of Italy	204
Profit on disposal of properties	13
	(69)
Tax on exceptionals	(19)
Net exceptional items	(88)

The Group recorded a total post-tax exceptional charge of £88 million in the year including a post-tax £178 million profit on the sale of Castorama Italy which has been treated as a discontinued item.

An exceptional loss of £107 million has been recorded in 2008/09 relating to the B&Q China turnaround plan. The plan involves rationalising the store portfolio from 63 to 41 and then revamping the remaining stores, 17 of which will also be downsized. The exceptional loss comprises store asset impairments, lease exits, inventory write-down and employee redundancy costs. The cash cost of the exceptional loss will be broadly offset by two freehold property disposals.

The Group has recorded an exceptional loss of £19 million following the announcement in November 2008 that Trade Depot in the UK would be closed. The closure will be completed during the first half of 2009/10.

Accounting standards require us to perform impairment tests on goodwill each year or when there is an event which may lead to goodwill being impaired. As a result of the challenging retail environment we have reviewed the carrying value of the assets held on our balance sheet. The models used to value these assets include a number of assumptions including market growth and operating profit percentage. Due to the uncertainty within the market, growth assumptions for the short term have been based on prudent estimates. This has led to the recording of an impairment of £36 million in relation to our investment in Hornbach and £124 million in relation to goodwill allocated against B&Q China. Both these write-downs are treated as exceptional.

The Group has recorded an exceptional profit of £13 million on disposal of properties (2007/08: £39 million profit).

The tax charge on exceptionals of £19 million includes the tax charge on the disposal of Italy of £26 million, less the £7 million relief assumed on other restructuring costs.

Earnings per share

As a result of the high level of exceptional items, we have recorded basic earnings of 0.2p per share in the year (2007/08: 10.9p). On an adjusted basis earnings per share have increased by 3.8% to 11.0p. Total earnings per share have reduced by 24% to 8.9p (2007/08: 11.7p).

	2008/09	2007/08
Basic earnings per share	0.2p	10.9p
Exceptional items	11.7p	(0.2)p
Financing fair value remeasurements (net of tax)	0.1p	(0.1)p
Impact of prior year items and exceptionals on income tax	(1.0)p	–
Adjusted earnings per share	11.0p	10.6p

Dividends

The Board has proposed a final dividend of 3.4p per share, making the total dividend for the year 5.32p per share, down 26.6% on the prior year. This is in line with the Board’s announcement in March 2008. This dividend is covered 2.1 times by adjusted earnings (2007/08: 1.5 times).

The final dividend for the year ended 31 January 2009 will be paid on 19 June 2009 to shareholders on the register at close of business on 8 May 2009, subject to approval of shareholders at the Company’s Annual General Meeting, to be held on 3 June 2009. A dividend reinvestment plan (DRIP) is available to all shareholders who would prefer to invest their dividends in the shares of the Company.

The shares will go ex-dividend on 6 May 2009. For those shareholders electing to receive the DRIP the last date for receipt of election is 29 May 2009.

Return on Capital (ROC)

As part of our focus on increasing returns across the Group, we are adopting two new Return on Capital (ROC) measures that have simpler definitions and focus on operational metrics.

The first measure, Standard Return on Capital is primarily a Group measure. It is stated on a non-lease adjusted basis, although we also quote a lease adjusted number. The second measure, Lease Adjusted ROC excluding Goodwill is used to monitor performance at a business unit level.

Standard Return on Capital

	2008/09	2007/08	Increase/ (decrease)
Return on Capital (ROC)	6.0%	5.9%	0.1pps

For Standard ROC, Return is calculated as post tax Retail Profit less central costs and excluding exceptional items, other than realised property profit. Return also includes the operating results for Castorama Italy. Return is then divided by a two-point average of Invested Capital (calculated as Net Assets excluding Net Debt and Pension-related items including related Deferred Tax).

In this new approach, the ROC has increased from 5.9% (restated 2007/08) to 6.0% in 2008/09 compared to the Group’s weighted average cost of capital (WACC) 8.3%.

Lease adjusted ROC is based on the same definition except it excludes property lease costs, and Invested Capital is adjusted for lease costs capitalised at the long-term property yield. Lease adjusted ROC has increased from 5.3% (restated 2007/08) to 5.7% in 2008/09.

Lease adjusted ROC excluding goodwill and property profit

Kingfisher’s underlying ROC by geographic division is set out below. Return is stated adjusted for property lease costs and before property profits. Invested capital excludes goodwill but includes capitalised leases. These numbers exclude the results of Castorama Italy:

					Returns % (ROC)1
	Retail Sales £bn	Proportion of Group sales %	Invested Capital (IC) £bn1	Proportion of Group IC %	2008/09	2007/08
Excluding goodwill of £2.5 billion.
UK	4.3	43%	5.6	63%	5.4%	5.1%
France	3.9	39%	1.8	20%	11.9%	11.3%
Other international	1.8	18%	1.5	17%	8.1%	7.5%

Cashflow

The Group exceeded its flat net debt target for the year reporting year end net debt of £1,004 million (2007/08: £1,559 million). On a constant currency basis net debt has decreased by £0.8 billion from £1.8 billion including a £0.5 billion benefit on the sale of Castorama Italy.

The Group generated £867 million of cash from operating activities in the year, up £354 million on the prior year. The year on year change is mainly as a result of our increased focus on working capital. In particular, despite an increase in the number of stores, we have recorded a reduction in the level of stock held of £169 million, whereas in 2007/08 an increase of £216 million was reported. A significant amount of this reduction was driven by our mature businesses.

Net cashflows from investing activities in our continuing operations totalled £320 million in line with 2007/08 which benefited from a high level of asset disposals and the sale of B&Q Taiwan. As detailed below, gross capital expenditure decreased by 31% in 2008/09 to £390 million.

Cash will continue to be a key focus for the Group with our businesses working to reduce working capital and manage capital investment tightly.

Working capital

	£m
Decrease in inventories (note 32)	169
Decrease in trade and other receivables (note 32)	69
Decrease in trade and other payables (note 32)	(23)
Decrease in working capital including impact of exceptional items 215	215
Less: Exceptional items impact on working capital	(35)
Decrease in working capital	180

Capital expenditure

As detailed last year the Group’s Capital Investment process has changed to prioritise its capital investment into projects and businesses that offer the potential for the most attractive returns. This is supported by a rigorous capital allocation process:

• An annual strategic planning process (which leads into the budget process for the following year) based on detailed plans for all businesses for the next three years. This process drives the key strategic capital allocation decisions and the output is reviewed by the Board, twice a year.
• A capital approval process through a Capital Expenditure committee, chaired by the Group Chief Executive including the Group Finance Director and Group Property Director. The committee is delegated to review all projects between £0.75 million and £15.0 million (including the capitalised value of lease commitments).
• Projects above this level are approved by the Board although all projects above £0.75 million are notified to the Board.
• Investment criteria and challenging hurdle rates for IRR (Internal Rate of Return) and payback with a target for year three returns versus initial cash investment.
• An annual post-investment review process to undertake a full review of all projects above £0.75 million which were completed in the last four years, together with a review of recent performance on all other existing stores. The findings of this exercise are considered by both the Retail Board and the Board and directly influence the divisional and Group development strategy and the assumptions for similar project proposals going forward.

Gross capital expenditure on continuing operations decreased by 31% in the year to £390 million in line with our annual capital target. £174 million was spent on property (2007/08: £220 million) and £216 million on fixtures, fittings and intangibles (2007/08: £293 million). A total of £62 million of proceeds from disposals was received during the year. This is lower than 2007/08 when we generated £117 million including £73 million on the sale and leaseback of Worksop, B&Q UK’s central distribution centre.

Payments to acquire businesses in the year amounted to £7 million (2007/08: £1 million) which related to the purchase of minorities in China.

Management of liquidity risk and financing

Kingfisher regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cashflow forecast for the next three years, determining the level of debt facilities required to fund the business, planning for repayments of debt at its maturity and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.

At the year end, Kingfisher had undrawn committed bank facilities available to it totalling £775 million. Of this, £275 million matures in March 2010 and £500 million in August 2012. Kingfisher’s policy has been to arrange committed bank facilities and then to refinance these with longer-term debt in the bond and US Private Placement markets.

Kingfisher deposits surplus cash with a number of banks with strong credit ratings and with money market funds which have the strongest, AAA, credit rating. A credit limit for each bank or fund is agreed by the Board covering the full value of deposits and a proportion of the value of derivative contracts. The credit risk is reduced further by spreading the investments and derivative contracts across several counterparties. At the year end, Kingfisher had a total of £915 million of cash deposited with banks and in money market funds and the highest cash deposit with a single bank or money market fund was £89 million.

There are no significant debt maturities until 2010, when £620 million of debt is due, comprising two bonds and a bank term loan, of which £175 million is due in March and £445 million in October.

The maturity profile of Kingfisher’s debt is illustrated at: www.kingfisher.com/investors/debtinvestors/debtmaturity.

The terms of the US Private Placement note agreement and the committed bank facilities require only that the ratio of Group operating profit, excluding exceptional items, to net interest payable must be no less than 3:1. The Group is in compliance with this covenant, with the ratio at the year end being 5.3:1.

The Group has entered into interest rate derivative contracts to convert the fixed rate payable on its bond and US Private Placement notes to floating rate, except for €300 million of debt which remains at fixed rate. The floating rate interest rates paid by the Group under its financing arrangements are based on LIBOR plus a margin. The margins were not changed during the year. Under the terms of the financing agreements, the margins are fixed and are not subject to change in line
with credit ratings or financial ratios.

Debt and facility maturity profile 08/09

£ equivalent millions

Financial risk management

Kingfisher’s treasury function has primary responsibility for managing certain financial risks to which the Group is exposed, details of which are provided in note 25 of the accounts.

Capital risk management

The Group’s objectives when managing capital are:

• To safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for its shareholders and benefits for its other stakeholders; and
• To maintain a balance between the higher returns that may arise from a higher level of borrowings and the advantages of a strong credit profile.

The Group manages its capital by:

• Making an assessment of the return on invested capital;
• Monitoring the impact on the Group’s net debt; and
• Reviewing the level of dividends.

The Group is subject to certain externally imposed capital requirements as follows:

• Kingfisher Insurance Limited and Kingfisher Reinsurance Limited, wholly owned subsidiaries, are subject to minimum capital requirements as a consequence of their insurance activities.
• Certain direct and indirect subsidiaries of B&Q (China) B.V., a wholly owned subsidiary, are subject to minimum capital requirements under Chinese statute.

The Group complied with the externally imposed capital requirements during the year.

Property

The Group owns a significant property portfolio, most of which is used for trading purposes. If the Group had continued to revalue this it would have had a market value of £3.2 billion at year end (2007/08: £3.6 billion), compared to the net book value of £2.7 billion recorded in the financial statements. The value of our property portfolio has decreased due to rising yields (£0.5 billion decrease) and the sale of Castorama Italy (£0.3 billion decrease) only being partly offset by currency gains (£0.4 billion increase).

The values are based on valuations performed by external qualified valuers where the key assumption is the estimated yields.

The valuation exercise was performed in October 2008 with approximately one-third of the portfolio valued by external professional valuers.

Property market value by segment

Pensions

At the year end, the Group had a deficit of £74 million in relation to defined benefit pension arrangements of which £40 million is in relation to its UK scheme. In 2007/08 the Group had a surplus of £77 million. The decrease was predominantly due to a fall in the fair value of the pension scheme assets, reflecting market movements.

The approach used to prepare the pension valuation is in line with current market practice and international accounting standards, and has been applied consistently. This uses a number of assumptions which are likely to fluctuate in the future and so may have a significant effect on the accounting valuation of the scheme’s assets and liabilities.

A key assumption in valuing the pension obligation is the discount rate. Accounting standards require this to be set based on market yields on high-quality bonds at the balance sheet date. Due to the current volatility of the bond market, there can be significant variances in the yield rate from day to day. During January 2009 there was a 0.7% difference between the highest annual yield percentage and the lowest annual yield percentage on the index on which we base our discount rate assumptions.

To aid understanding of the impact that changes to the assumptions could have on the pension obligation we have included sensitivity analysis as part of the pension disclosure in note 28 of the consolidated financial statements. Further details of all the key assumptions are also contained within the note.