Kingfisher's profits fall by a third

Kingfisher (KGF) faces the same headwinds as its peers in the home improvement and DIY space. Demand is threatened by high inflation, weak consumer confidence, and the tightening of belts after the sector boomed during the pandemic. And the potential normalisation of a volatile housing market, which is susceptible to expected further interest rate hikes, could also dampen enthusiasm. But the owner of B&Q and Screwfix also faces particular challenges that make it look vulnerable when set against competitors, as it revealed a downturn in sales and profits. This is demonstrated by the circling of the short sellers – the company sits near the top of the list of the most shorted shares in London which is hardly an encouraging sign. 

While like-for-like (LFL) sales rose by 17 per cent on a 3-year basis, they were down by 4 per cent against last year. Of the company’s three geographic income segments, growth was only posted by the smallest revenue contributor. Other international sales, dominated by Poland, were up by 15 per cent to £1.3bn. It was bad news, however, for the key UK and Ireland and France markets, where revenue fell by 10 per cent to £3.2bn and by 5 per cent to £2.3bn respectively.

And gross margin fell by 130 basis points to 36.7 per cent. Management said that this, and the fall in pre-tax profits by a third, was due to strong comparatives. But this doesn’t inspire confidence as the sector outlook becomes more uncertain.

We recently maintained our buy recommendation on peer Wickes, which we think is more resilient in this market with its trade exposure and growth model. Kingfisher’s market reach looks more saturated, and its high and increased level of inventories – free cash flow fell by 86 per cent as result of an inventory rebuild programme – complicates the picture. And Wickes trades at a more attractive forward rating of 6 times consensus forward earnings, against Kingfisher’s 9 times, according to FactSet.

Panmure Gordon analysts said after Kingfisher’s capital markets day in July that “investors need to see the business shape once trade patterns have normalised post-Covid” and that profit forecasts “look exposed”. We think this is a wise position to take, especially after the business flagged in these results that after analysing “several trading scenarios to take into account the potential for a more uncertain macroeconomic environment” adjusted pre-tax profits for the full year could now fall within a range of £730mn to £770mn after it guided towards the latter figure at the start of this year. We move to hold.

Last IC view: Buy, 276p, 22 Mar 2022