Kingfisher shares slump as firm in need of further repair

Kingfisher (LSE:KGF) is still working to get its own house in order, and the results reveal once more where most of the repair work needs to be done.

An underperforming French operation which accounts for 30% of group sales saw a drop of 31.6% in retail profit, which represents just 14% of the total. The long-suffering Castorama unit, where pressure has been in evidence for some time, remains in focus as the group simplifies and modernises the store estate, although this restructure is a slow burner. In the meantime, impairments across a French operation which has been hampered by economic and political uncertainty has weighed heavily on pre-tax profit for the group as a whole, which declined by 35.4% to £307 million. 

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More positively, the adjusted pre-tax profit number, which is Kingfisher’s preferred measure, came in at £528 million against expectations of £523 million and within the group’s own previously guided range of between £510 million and £540 million. Nonetheless, revenues declined by 1.5% to £12.78 billion and like-for-like sales fell by 1.7% for the period, underlining the ongoing challenges which are generally being felt across the group. 

While there is a difficult backdrop in the UK and Ireland market, this part of the business was rather more resilient in withstanding these challenges, with an overall improvement of 0.6% in retail profit. This part of the business currently accounts for 51% of group sales, which translates to an 80% share of group profits, with some glimmers of light emerging.

Some support has more recently been derived from repairs, maintenance and existing home renovation activity, lines which form part of core sales that represent 67% of the group total. In addition, Kingfisher has noted an uptick in its kitchen and outdoor lines, with a marginally improving trend over the last quarter.

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% in the period against inevitably strengthening comparatives. There was also another promising performance in the period from TradePoint, with an increase of 6.7% in LFL sales, while ecommerce sales grew overall by 8.3% with the rollout now applying to the home market, as well as to France, Poland and Iberia.

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Kingfisher has also battened down the hatches on costs to the tune of £120 million, and plans to increase this focus given the estimated £145 million of additional pressure to come in the current year, not least of which is due to inflation and higher wage rates resulting from Budget measures in both the UK and France. Further cost savings and  gross margin improvements, which improved to 37.3% from 36.8% in the period, should fully offset the increased numbers.

The announcement of a new share buyback programme of £300 million should provide some support to the share price in due course and adds to a dividend yield of 4.4% which provides some attraction to income seekers. However, the outlook is less upbeat and the shares have suffered in early trade as a result.

The guided adjusted pre-tax profit range of between £480 million and £540 million is skewed to the downside compared to the current year and is below market estimates even at the upper end of the range. As such, the accompanying aim of exceeding free cash flow of £500 million by 2026/2027 is cutting no ice with investors.

The precipitous drop at the open reverses some of the progress which the company had been making. Prior to today and despite a dip of 14% over the last six months on concerns around the immediate economic outlook, the shares had posted a strong gain of 20% over the last year, as compared to a rise of 9% for the wider FTSE100.

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The continuing trend of hybrid-working and energy efficient renovations help underpin sales, and the strength of the Screwfix brand is self-evident, while the performance since the pandemic took hold is even more striking with a spike of 84% over the last five years. However, the clear disappointment over the profit guidance grabs the headlines for now and the market consensus of the shares as a hold may come under review as investors reset their more immediate expectations.