Join our community of smart investors

Kingfisher facing tough times

Kingfisher's DIY retailing operations are continuing to struggle amidst tough consumer conditions - and near-term prospects remain poor
January 24, 2013

Business is tough for Kingfisher (KGF), the operater of DIY retail outlets that include B&Q and Screwfix in the UK and Castorama and Brico Dépôt in France. True, last year's wet summer weather certainly helped keep Kingfisher's customers away. But with retail conditions still fragile - average wages are still falling, leaving consumers under ongoing pressure - Kingfisher faces bigger long-term challenges than mere weather fluctuations. That was clear from the retailer's latest sales figures. At the third-quarter stage, group like-for-like sales had fallen 2.8 per cent year on year.

IC TIP: Sell at 285.5p
Tip style
Sell
Risk rating
Medium
Timescale
Long Term
Bull points
  • Reasonable dividend yield
  • Initiated self-help measures
Bear points
  • Underlying sales still falling
  • Poor consumer conditions
  • Weakening French housing backdrop
  • Earnings forecast to fall

The group looks especially embattled in the UK and Ireland, where its B&Q chain generates a third of Kingfisher's sales. B&Q's third-quarter like-for-like sales to 27 October slumped 4 per cent on the same period last year. Admittedly, Screwfix's sales did rise 10.9 per cent, but generating 5.5 per cent of group sales, it's too small to have made much overall difference and third-quarter underlying sales in the UK and Ireland fell 3.8 per cent. Management blamed the "generally weak consumer backdrop in the UK and a particularly challenging environment in Ireland".

Kingfisher's business in France, responsible for 40 per cent of group sales, is struggling, too. Its Brico Dépôt operation, focused on trade professionals, was hit especially hard as French housing market conditions weakened - in particular, management notes that new housing starts there are falling. Accordingly, Brico Dépôt's underlying sales slumped 4.9 per cent at the third-quarter stage. Castorama coped better, with some strength evident in kitchen and joinery product sales - but its like-for-like sales still fell 0.9 per cent. Overall, Kingfisher's French underlying third-quarter sales fell 2.8 per cent and, with the IMF expecting the French economy to grow just 0.4 per cent during 2013 as eurozone-related woe continues to bite, don't expect radical improvements there any time soon.

KINGFISHER (KGF)

ORD PRICE:289pMARKET VALUE:£6.8bn
TOUCH:285-289p12-MONTH HIGH:317pLOW: 247p
DIVIDEND YIELD:3.2%PE RATIO:13
NET ASSET VALUE:238pNET CASH:£222m

Year to end-JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200910.090.00.205.33
201010.556616.55.50
201110.567121.07.07
201210.879727.58.84
2013*10.672522.19.25
% change-2--+5

*Numis Securities estimates (earnings adjusted - not comparable with prior years)

Normal market size:9,000

Matched bargain trading

Beta: 0.97

Trading was more mixed at the other overseas operations. Underlying third-quarter like-for-like sales in Poland, Spain and Turkey fell 7.3 per cent, 8.5 per cent and 4 per cent, respectively, but rose 3.5 per cent in China and an impressive 21.3 per cent in Russia. Don't place too many hopes in that robust Russian performance, however - just 4.7 per cent of Kingfisher's sales come from there. Overall, third-quarter like-for-like sales at the other international division dropped 0.8 per cent year on year.

But Kingfisher is pursuing various self-help measures. Indeed, management announced in March that its self-help plan, called 'creating the leader', would deliver an additional £300m of annualised retail profit by its fifth year. It's an eight-point plan and includes such measures as upgrading the online offering and boosting the group's presence in its existing markets, while also expanding into new and developing markets. However, at the half-year stage, it emerged that this self-help effort had generated a £10m cost, reflecting the accelerated roll-out of commonly sourced own brands - so it could be a while before there's much sign of that targeted extra profit. In fact, the near-term earnings outlook appears distinctly unattractive - broker Numis Securities, for example, forecasts that adjusted earnings will fall 10 per cent in the year to the end of January 2013.