Shares in B&Q and Screwfix owner Kingfisher (LSE: KGF) fell by 8% when markets opened this morning after the group said adjusted pre-tax profit fell by 8.1% to £683m.
In fairness, the FTSE 100 group’s profits were expected to fall this year. Indeed, on the face of it the results were slightly ahead of expectations.
Kingfisher reported underlying earnings per share of 25.5p, versus consensus forecasts of 23.7p. The dividend was increased by 4% to 10.8p per share, ahead of a predicted payout of 10.6p. So why are the shares falling?
Uncertain consumer spending
Kingfisher’s total sales rose by 3.8% to £11,655m last year, but fell by 0.3% when exchange rate movements were excluded. Like-for-like sales were 0.7% lower on the same basis.
I believe that weaker sales are the main reason for today’s sell-off. In my view, these results have flagged up two areas of concern that could put pressure on profits this year.
The first is that UK sales appear to be worsening. They rose by 0.6% on a like-for-like (LFL) basis last year, as a 2.3% drop in B&Q like-for-like sales was offset by 10.1% growth at Screwfix. However, the final three months of the year saw sales slow at both outlets as customers steered clear of expensive items like kitchens. If this trend continues, sales could fall below expectations this year.
The second area of concern is France, where like-for-like sales fell by 3.5% at the firm’s Castorama and Brico Dépôt DIY chains. Worryingly, this reflected “weaker performance versus the market” as well as the impact of the group’s ongoing transformation programme.
This could be the answer
Chief executive Veronique Laury is pinning her hopes on the five-year ONE Kingfisher plan she launched after landing the top job in 2014. Ms Laury’s goal is to unify much of the product sold across the firm’s four main brands. This should cut costs, create unique product ranges and increase internet sales.
Progress so far is said to be on track, with 23% of product ranges unified by cost. Sales of the new products are outperforming those of older ranges and gross margins on the unified ranges are said to be up by 1.8%.
A new, unified IT platform now handles more than 50% of group sales, and the proportion of goods sold over the internet rose from 4% to 6% last year.
Should you buy?
I think Kingfisher is a good business that’s doing the right things. It also has very little real competition in the UK. But I am concerned about consumer demand, which seems uncertain.
Today’s results referred to “a mixed picture” for sales in 2018/19. Cost savings are expected to total £30m this year and management expect profit margins to improve, as more unified ranges are rolled out.
Analysts’ forecasts before today’s results were for earnings to rise by 4% to 26.5p per share this year. The dividend is expected to climb 8% to 11.7p.
These forecasts put the stock on a forecast P/E of 11.7, with a prospective yield of 3.8%. Although I’m concerned about consumer demand, I think the shares rate as a long-term buy while they’re close to 300p.
