Cracks showing
Kingfisher's (LON:KGF) heavily de-rated and increasingly shorted shares have spiked higher on a thin beat relative to expectations and its announcement of a share buyback programme.
We also suspect that the merest hint of corporate action has helped buoy the stock on Wednesday. With management comments dismissing the notion of a break-up out of hand, we would rather interpret the stock price reaction as reflecting increasing anxiety over ongoing self-help measures than indicative of medium-term probability.
As for Kingfisher’s slightly buffed outlook, whilst welcome, the improvement by a notch is less surprising to us than many, as we had already pencilled in a likely further increment of previously unguided savings from the group’s shorter-term goods not for re-sale (GNFR) drive, following promising outcomes reported in August. The disparity between Poland and weaker regions and outperformance of Screwfix are also not news. Still, it appears that the lack of further marked deterioration across the board—the group remains comfortable with full-year expectations—has encouraged the market to largely shrug-off signals that economic growth in the UK and France could yet weaken further.
ONE time
Obviously it is difficult to predict the extent of further benefits from marginal costs after £10m at the interim stage. However the group notes delivery of GNFR benefits has been “encouraging”, backing the view we stated in August that further moderate GNFR releases over the year to H1 2018/19 are plausible. We do however expect that the current performance of Poland and Screwfix will turn out to have been pretty well priced by year end. For Britain, we see greater risk to the downside, albeit moderate, for the remainder of H2, given the foggy horizon over economic growth into Q1 2018. Still, flat UK margins and continued focus on costs can certainly point to further operating expenditure ‘beats’ over the next few quarters, like the one that impressed (perhaps over-impressed) the market on Wednesday.
As to the more substantive ONE cost-unification programme, apart from management conviction, evidence that can corroborate reports of positive impact is scant for now. A 30% rise in bathroom furniture sales is encouraging, as is the first feed through of cost price reduction to ‘investment in price’. “Lower prices are starting to resonate with customers”, says Kingfisher. But these and more unequivocal progress on long-term costs will need to do so more clearly over the medium term to trigger the stock’s next best day for years.
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