B&Q owner Kingfisher cuts profit forecast by 7%

Kingfisher (KGF) saw its profits slashed by a third at the half-year mark, blaming bad weather and inflation. The home improvement retailer said the numbers were “slightly ahead of expectations” but cut its full-year pre-tax profit forecast from £634mn to £590mn as it anticipates tougher trading conditions going forward. The shares sank 7 per cent in early trading as the market registered its disapproval.

The profit slump was despite a 1 per cent bump in revenue, a sign of how increased costs from wage inflation and energy bills have hit the company. And the sales increase turns into a 1 per cent fall when you factor in currency fluctuations. Meanwhile, there was no growth in its 3.80p per share dividend, which remains covered by earnings multiple times.

To improve this bleak picture, Kingfisher hopes to grow its online presence and cut costs. The company said ecommerce sales rose 7.1 per cent, driven by growth in the UK, Ireland and France. It wants a quarter of its sales to be online. During the period, that figure hit 16.8 per cent, up from 15.6 per cent last year.

“We will do this by offering our customers faster fulfilment of orders, greater convenience and broader product choice, leveraging our store assets, ecommerce marketplace and data-led propositions,” Kingfisher said. That sounds as though it will cost money, which may pose difficulties for Kingfisher’s “multi-year cost reduction programmes”.

The company plans to trim the fat by decreasing its net inventory by 2 per cent, optimising its supply chain, and “transitioning to a more agile and modular technology operating mode”. That sounds great, but investors might question whether the company will achieve these aims considering how badly something as simple as a rainy summer hit its performance. 

The company said its results suffered due to extreme heatwaves in Europe, combined with a rainy July in the UK. The retailer hopes that a return to “normal” conditions next year will improve matters. The implication is that customers are put off both by hot weather and wet weather – something worth taking on board if you accept the notion that we are likely to be subject to more extreme weather patterns in the future. 

Climate aside, the question marks around Kingfisher’s short-term performance and longer-term prospects make it hard for us to justify any change to our outlook on the stock, although the 36 per cent discount to net asset value (NAV) and the prospective dividend yield will doubtless appeal to those with greater faith in the business. At this stage, however, we can't be sure that inflationary pressures will dissipate to a significant degree through the remainder of 2023 and perhaps beyond. Sell.

Last IC view: Sell, 271p, 21 Mar 2023