Kingfisher needs home improvement of its own after Q3 results

Areas remain where Kingfisher (LSE:KGF) needs to get its own house in order, most notably an underperforming French operation which accounts for 30% of group sales.

Over the three months ended 31 October, like for like sales in France dropped by 4.3%, underneath which revenues at its long-suffering Castorama unit fell by 4.7%, where the pressure has been in evidence for some time. Indeed, the group previously announced that the unit would now be simplified, and reported good progress in the restructure and modernisation of the store estate, while Kingfisher has also been trialling some of its more successful UK strategies abroad in an attempt to bolster sales.

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Even so, the numbers reveal again where the repair work needs to be done. The group previously reported that despite accounting for almost a third of group sales, France contributed only 16% to profits. In the latest quarter, the situation was helped neither by the fact that consumer optimism remains patchy nor by a Budget ahead of which there was some reluctance to spend.

In addition, as a result of the Budget measures announced in both the UK and France during the quarter, the group is estimating a hit of £45 million to profits, mainly due to the revised National Insurance (and French equivalent) implications.

More positively, while there is also pressure in the UK and Ireland market, this part of the business was rather more resilient in withstanding these challenges, with an overall improvement of 0.4% in like for like sales. UK and Ireland currently accounts for 52% of group sales, which previously translated to a 77% share of group profits.

This continues to be achieved despite some expected and ongoing weakness in the sale of big ticket items such as kitchens, bathrooms and storage, where LFL sales dropped by 4%. However, the company noted that support was in evidence from repair, maintenance and existing home renovation activity, which form part of core sales which represent 69% of the group total.

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Within the UK and Ireland, Screwfix, long since Kingfisher’s jewel in the crown, continues to hold its own with the format in the early stages of being extended abroad and grew LFL sales by 1.8% in the period. The unit now accounts for 21% of group sales and continues to reap the benefits of its accessible and efficient model to the trade. There was also another promising performance in the period from TradePoint, with an increase of 4.9% in LFL sales, while the ecommerce category at B&Q also continued its momentum, with growth of 45% in the value of business done and total sales increasing by 14.3% year on year.

At the group level, Kingfisher saw LFL sales decline by 1.1%, with total group revenues of £3.2 billion in line with expectations. Apart from the Budget uncertainty in both the UK and France which crimped demand, unseasonal weather worked against the group such that a promising August and September was offset by a weaker October.

Kingfisher remains on track to achieve the previous target of £120 million of cost reductions for the year and the £300 million share buyback scheme is still in progress, while a dividend yield of 4.2% provides some attraction for income seekers. 

Current trading and outlook comments were cautious, and while the tightening of the full-year profit estimate does not represent a profit warning as such, the top end of the previously guided £510 to £550 million range has been shaved to between £510 and £540 million.

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It is perhaps that note of caution which has resulted in the shares being somewhat flattened in early trading. The decline partly offsets what had been a strong run of late, with the shares having risen by 38% over the last year, as compared to a gain of 10.3% for the wider FTSE100.

The continuing trend of hybrid-working and energy efficient renovations help underpin sales, and the strength of the Screwfix brand is self-evident. However, the clear disappointment resulting from this update, whereby Kingfisher needs some home improvement of its own, also means that any upgrade to the current market consensus of the shares as a hold is off the table for now.