Kingfisher's Castorama drama continues

There were a few signs of home improvements at Kingfisher (KGF), the DIY chain that owns the B&Q and Screwfix businesses in the UK, although its performance overseas dragged down its results.

UK & Ireland sales grew by 3 per cent, although retail profits also fell by 8 per cent due to higher operating costs.

However, sales in France fell by 6 per cent in constant currency terms, with the market weakening as the year progressed. Retail profits fell by 30 per cent in France and by 47 per cent in Poland. Its group-wide adjusted pre-tax profit fell by a quarter to £568mn.

The company launched a new plan to tackle underperformance in its French arm, particularly at the Castorama DIY chain. It plans to cut space at its worst-performing stores by subletting to discount retailers, while also modernising or converting some outlets to its more profitable Brico Dépôt brand. Across its various territories, it is also trialling smaller stores on high streets and retail parks.

However, a third profit warning in six months indicated that end markets are expected to remain weak, with sales down 2.3 per cent since January. Free cash flow, particularly, is forecast to be much lower at between £350mn and £410mn this year, down from £514mn.

Kingfisher’s shares are trading 9 per cent below where they were a year ago at 10 times forecast earnings, which is slightly below peers. Although there’s an argument that they could re-rate significantly if end markets pick up, its turnaround efforts in France are now in their fourth year without much sign of things getting any better. We still think risks are weighted towards the downside. Sell.

Last IC view: Sell, 222p, 19 Sep 2023