Kingfisher blames French for another profit warning

A second successive profit downgrade has scotched any hopes of recovery at Kingfisher (LSE:KGF), with the French operation being the latest culprit for further weakness.

The combined Castorama and Brico Depot business account for 32% of overall group sales, and the latest update makes for sorry reading. Castorama saw a sales decline of 6.9% and Brico Depot 10.6%, leading to an overall drop in France of 8.7%.

A number of issues plagued the business over the quarter, ranging from the unseasonably warm weather which delayed the start of sales of products such as heating and insulation, to the general weakness of the French home improvement market, which deteriorated much more than had been expected. The quarter was also up against strong comparatives from the previous year, when customers had been anticipating energy price increases and potential power shortages, thus driving up sales of heating and energy efficient products.

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Kingfisher has therefore taken a red pen to costs in France, lowering discretionary spend, managing staff levels down and accelerating several cost reduction initiatives. However, even with these plans in place, the group concedes that these combined efforts will not be sufficient to offset the impact on reduced sales which is likely to continue for the remainder of the year.

Elsewhere, other international markets (which together account for 19% of group sales) also saw declines of 3.7%, including in Poland where, despite early signs of recovery, sales dropped by 2.9%. Consumer confidence is improving but still negative, while strong comparatives again put a lid on any potential surprises to the upside.

The saving grace from the update comes from the performance of UK and Ireland, the largest region which accounts for 49% of group sales, and from the continuing strength of Screwfix in particular. Sales increased by 3.3%, with a contribution of 6.8% growth from Screwfix, a business which has long been the company’s jewel in the crown.

Indeed, Kingfisher has recognised this by continuing to roll out the brand. A further 11 stores were opened in the UK, bringing the total to 23 new stores in the year to date, while the group is also testing the waters overseas by opening a further four stores in France and a pure play online offer in six other European countries.

The combined performance of the group was a decline of 2.1% to sales, while current trading has seen the trend continue with sales down by 3.4% over the last three weeks. As such, guidance on pre-tax profit for the year has been reduced once more to £560 million from £590 million in September, which itself followed a downgrade from an initial estimate of £634 million.

By way of comparison, pre-tax profit for the previous year as a whole was £758 million, reflecting the widening gap and deteriorating performance this year. The weaker backdrop is also expected to have an impact on free cash flow, where the previous expectations of in excess of £500 million have been reduced to around £470 million.

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More positively, the e-commerce channel has seen further strong growth of 31.8% year-on-year, while the group’s reliance on own exclusive brands, which account for around half of sales, is a helpful boost to margins. The previously announced share buyback scheme of £300 million is now underway, while in the background a dividend yield of 5.4% provides some incentive for shareholders to wait for a potential recovery.

Further out, Kingfisher still has much to go for. The continuing trend of hybrid-working and energy efficient renovations help underpin sales, while the strength of the Screwfix brand is clear and expanding.

In the meantime, however, the group is in a difficult phase and the share price has again reacted poorly to these results, adding to a decline of 6% over the last year, which compared to a marginal gain of 0.4% for the wider FTSE100. For the moment, a positive direction of travel is proving hard to establish and the market consensus of the shares as a sell reflects limited confidence in the immediate prospects.