Kingfisher’s Treasury function has primary responsibility for managing certain financial risks to which the Group is exposed. The Board reviews the levels of exposure regularly and approves Treasury Policies covering the use of financial instruments required to manage these risks. Kingfisher’s Treasury function is not run as a profit centre and does not enter into any transactions for speculative purposes.
In the normal course of business, the Group uses financial instruments including derivatives. The main types of financial instruments used are fixed term debt, bank loans and deposits, money market funds, interest rate swaps and foreign exchange contracts.
Interest rate risk – Borrowings arranged at floating rates of interest expose the Group to cash flow interest rate risk, whereas those arranged at fixed rates of interest expose the Group to fair value interest rate risk. The Group can manage its interest rate risk by entering into certain interest rate derivative contracts which modify the interest rate payable on the Group’s underlying debt instruments.
Currency risk – The Group’s principal currency exposures are to the Euro, US Dollar, Polish Zloty and Romanian Leu. The Euro, Polish Zloty and Romanian Leu exposures are operational and arise through the ownership of retail businesses in France, Spain, Portugal, the Republic of Ireland, Poland and Romania. The Group disposed of its Russian retail business on 30 September 2020.
In particular the Group generates a substantial part of its profit from the Eurozone and, as such, is exposed to the economic uncertainty of its member states. The Group continues to monitor potential exposures and risks and consider effective risk management solutions.
It is the Group’s policy not to hedge the translation of overseas earnings into Sterling. In addition, the Group has significant transactional exposure arising on the purchase of inventories denominated in US Dollars and settlement of freight costs in USD, which it hedges using forward foreign exchange contracts.
Under Group policies, the Group’s operating companies are required to hedge committed inventory purchases and a proportion of forecast inventory purchases arising in the next 18 months. Additionally, several of the Group’s operating companies hedge forecast freight costs arising in the next 12 months. These are both monitored on an ongoing basis.
The Group also has exposure to certain leases denominated in currencies which are different from the functional (reporting) currencies of the lessee. To reduce the Group’s exposure to this, most of the affected lease liabilities have been designated as net investment hedges of Group assets held in the same currency.
Liquidity risk – The Group regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cash flow forecast for the medium term, determining the level of debt or facilities required to fund the business, planning for repayment of debt at its maturity and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.
Credit risk – The Group manages credit risk from investing activities in accordance with treasury policy. The Group deposits surplus cash with a number of banks with strong long-term credit ratings (BBB and above) and with money market funds with AAA credit ratings offering same-day liquidity. An exposure limit for each counterparty is agreed by the Board covering the full value of deposits and the fair value of derivative assets. Credit risk is also managed by spreading investments and entering into derivative contracts across several counterparties. As of 31 January 2023 the highest total cash investment with a single counterparty was £7m (FY 21/22: £85m).
The Group’s exposure to credit risk at the reporting date is the carrying value of trade and other receivables, cash at bank, short-term deposits and the fair value of derivative assets.