Kingfisher: Still with some firepower in its locker

A profit downgrade is never welcome news, and Kingfisher has been forced to revise its profit expectations after a troubled half-year of trading.

Poland was a particular drag, with like-for-like sales dropping by 10.9% given strong comparatives and a weak second quarter. France, which accounted for 24% of retail profit, saw LFL sales dip by 3.8%, where a strong performance at Castorama was offset by weakness at the Brico Depot business. The UK and Ireland helped to mitigate the situation, with an increase of 1.7% in LFL sales. The region accounted for 71% of retail profit over the half, where Screwfix maintained its position as the jewel in the crown with further market share gains.

Indeed, the power of the Screwfix brand is something which the group has recognised, with nine stores in France likely to increase to anything up to 20 stores this year. Kingfisher has announced that it is taking this exposure one stage further, launching the brand as a pure-play retailer in up to 20 countries imminently. At a time when e-commerce sales continue to show promise, rising by 7% over the period, this potential additional boost could lift spirits in due course should the experiment succeed.

In the meantime, however, the scale of the challenges is clear. Lower gross profit in France and Poland, coupled with additional operating costs in the UK and Ireland caused by higher pay and energy rates left their stain on trading, with seasonal sales also impacted by the weather and dropping by 5.9%, although improving towards the latter end of the half. Gross margin also dipped under the pressure by 0.4% to 36.3%, while a marginal increase in overall sales was in line with expectations.

At the headline level, however, the reading is less comfortable. Pre-tax profit of £317 million compared with £474 million the previous year, a decline of 33% and fell short of the expected £356 million. The numbers were similar on an adjusted basis, with a 29% decrease in pre-tax profit to £336 million comparing poorly with estimates of £359 million. At the same time, the company has also downgraded its full-year outlook given the current trading environment, where LFL sales are down by 2.4% in the current quarter. The previous guidance was for £634 million for the full year (which itself compared to £758 million last year) and this figure has now been reduced to £590 million.

More positively, the e-commerce rollout has also been expanded to both France and Poland, while the group’s reliance on own exclusive brands, which account for around half of sales, is a helpful boost to margins. Core and big ticket items have also shown some resilience, while the improving cash flow situation has allowed a new share buyback scheme of £300 million to be launched. The dividend remains unchanged, but the current yield of 5.3% provides some incentive for shareholders to wait.

Despite an accelerated transformation which was required due to the pandemic, Kingfisher remains a work in progress. The uncertain economic outlook in its main markets is a particular concern, where for example in France consumer confidence is at a 10-year low. The main UK and Ireland market clearly has its own challenges in what is likely still a rising interest rate environment, let alone the ferocity of competition which is central to retailing as a whole.

In strategic terms, Kingfisher PLC (LON:KGF) still has some firepower in its locker. The continued trend of hybrid-working and energy efficiency renovations help underpin sales, while the strength of the Screwfix brand is clear. However, the pace of progress is pedestrian and has weighed on the shares. Even prior to today’s bruising drop at the open, over the last year the price dipped by 5%, which compares to a gain of 6.4% for the wider FTSE100, with much of that weakness coming in the last six months. Despite the positive buyback announcement, the profit downgrade cannot be overlooked and the market consensus of the shares as a sell reflects little confidence in the group’s immediate outlook.

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