It’s a formidable refurbishment plan with grand ambitions and so the key question investors will be asking themselves about Kingfisher's (KGF) mooted rejuvenation is: Can the company do it?
The market’s initial reaction to the unveiling of the financial particulars behind the previously outlined strategy suggests pessimism – whether this is a healthy dose or a step too far depends whether you think management can achieve its aims.
Chief executive Véronique Laury wants to create ‘One Kingfisher’, a key plank of which involves having a unified offer across its brands – which includes B&Q and Screwfix in the UK and Castorama and Brico Dépôt in Europe. There have been mostly unsuccessful attempts at this before, which is perhaps where the market’s scepticism comes from.
But there does seem to be a root and branch change planned here. The company wants to have one central buying team as opposed to letting its underlying brands opt in to unified ranges, which makes the goal more realistic. Not only this, but the company says it will be more involved in the design process of the products, meaning it can work with its suppliers and genuinely benefit from economies of scale, which Ms Laury claimed had “never been leveraged properly”. At the capital markets day, management said it would be working with fewer suppliers and engaging with them to cut costs by roughly 5 per cent.
“If Kingfisher can get the benefits of buying – and from the presentations it really is trying to by putting lots of resources into place – then I think there are some big wins,” said Freddie George, research analyst at Cantor Fitzgerald.
And there will need to be, as out of the £500m profit uplift projected by the end of year five, £350m is to come from its new offer, with £50m from digital developments and £100m of savings mainly through a reduction in goods not for resale (GNFR).
Simon Irwin, analyst at Credit Suisse, said in a note that the initial results from unified ranges and GNFR “suggest these gains should be very achievable”.
But there is, obviously, a cost to the plan. Pre-tax profits are likely to be negatively hit by £50m in year one and by £70m-£100m in year two. This rises to a total of £220m through the life of the plan and sits alongside a further £270m of exceptional costs and £310m capex, leading to a total cash cost of £800m.
The company is highly cash-generative and had £435m of net cash at the half-year results in September. The ‘One Kingfisher’ plan will ravage this, though.
“Beyond FY18, guidance is implying a significant acceleration in profit growth, but we would adopt a wait-and-see approach,” Numis analyst Matthew Taylor said in a note. “The cash implications are rather more serious, with our revised forecast of £50m net debt in FY18 compared with net cash of £338m previously.”
But management has stated that it will continue to target a 2-2.5 times lease adjusted net debt/Ebitda, will also retain that ratio of dividend cover and expects to return £600m of capital above its dividend in the next three years, most likely through share buy-backs.
