ii view: Kingfisher’s Screwfix expansion shaves profit hopes

Expanding its trade related stores in France and on a forecast dividend yield of close to 5%. Buy, sell, or hold?

Third-quarter trading update to 31 October

• Currency adjusted total sales up 1.7% to £3.26 billion 
• Currency adjusted like-for-like or same store sales rose 0.2%

Guidance: 

• Now expects full-year profit of between £730 million and £760 million, down from £730-£770 million

Chief executive Thierry Garnier said:

“While the market backdrop remains challenging, DIY sales continue to be supported by new industry trends such as more working from home and a clear step-up in customer investment in energy saving and efficiency. We continue to execute our strategy at pace, and to invest for growth.”

ii round-up:

DIY retailer Kingfisher (LSE:KGF) today reported third-quarter sales broadly in line with City estimates, but shaved its full-year profit hopes given increased investment in both its new French Screwfix stores and staff wages.

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Currency adjusted same store sales rose 0.2% year-over-year, hindered by abnormally warm weather, while annual profit is now expected to come in at between £730 million and £760 million, down from a previous £730-£770 million. 

Kingfisher shares fell more than 1% in UK trading having come into this latest update down by a quarter year-to-date. Shares for rival DIY retailers Wickes Group (LSE:WIX) and Topps Tiles (LSE:TPT) are both down by two-fifths in 2022. 

Kingfisher, whose brands include B&Q, Castorama, and TradePoint, recently opened its first Screwfix store in France, with plans to open another four to five stores during the remainder of this financial year to the end of January. 

French same store sales grew 0.5% during this latest quarter, while UK & Irish sales on the same basis fell 2.3%. More recent group wide fourth-quarter sales to 19 November grew 2.8% from a year ago, aided by customer interest in energy efficient products like insultation. 

Annual results are scheduled for 21 March. 

ii view:

Kingfisher is a multiformat home improvement retailer with over 1,500 outlets. It trades from eight European countries including the UK and Ireland, France and Poland and employs over 60,000 people. The UK and Ireland account for its biggest slug of sales at just under a half. That’s followed by France at just over a third, Poland at just over a tenth and other European nations the balance. 

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Strategic priorities include extending its range of Own Exclusive Brands (OEB), downsizing bigger stores, and opening new compact stores, and increasing its trade focused sales via growth in its Screwfix and Tradepoint outlets as is now happening in France.

For investors, and as with retailers generally, the weather and its influence on sales is worth remembering. The tough backdrop of rising interest rates, potentially falling property prices and a cost-of-living crisis also warrant consideration, as do rising taxes and the hinderance which currency movements can have.   

More favourably, a broad improvement programme remains ongoing, with success arguably reflected in a 15.3% improvement in like-for-like sales over the last three years. Market share gains are being made, ecommerce sales now account for 16% of overall company sales compared to around 8% prior to the pandemic, while an expansion of its trade related stores in France is now being pushed. 

On balance, and while a forecast dividend yield of close to 5% offers grounds for patience, exposure to both retailing and the housing market indirectly leave the risk/reward ratio finely balanced.  

Positives: 

• Diversity of geographical locations and brand names
• Attractive dividend yield (not guaranteed)

Negatives:

• Uncertain economic outlook
• The weather can impact performance

The average rating of stock market analysts:

Weak hold