Must read: Kingfisher, Next, UK inflation

A Screwfix store, part of Kingfisher, in Rayleigh, Essex. Photo: John Keeble/Getty Images.

Kingfisher (Tues 24 March)

Richard Hunter, Head of Markets, interactive investor says, “Investors will be hoping that Kingfisher (LSE:KGF) maintains its recent progress, especially after a pleasing third-quarter update in December which saw the group upgrade its estimates for the second time this year. Adjusted pre-tax profit for the full year is now expected to fall between a range of £540 million and £570 million, raised from a previous estimate of £480 million to £540 million, and compared to £528 million last year.

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This comes despite some ongoing disappointment in its overseas operations. Like-for-like sales in the third quarter fell by 1.3% in Poland and by 2.5% in France, where the long-suffering Castorama unit remains in focus as the group simplifies and modernises the store estate, although this restructure is a slow burner.

In addition, increased taxes in both the UK and France are a burden on the group, while big ticket and seasonal sales expose Kingfisher to both cyclical pressure via housing markets as well as unpredictable weather.

More favourably, Kingfisher is in the throes of a cost savings programme to mitigate some of this pressure, which resulted in a reduction of £120 million in the previous year. Meanwhile, like-for-like sales showed 3% growth in the third quarter, including a 19% increase in B&Q online sales. Group e-commerce sales as a whole rose by 10.2%, with a focus on own-brand exclusive products, which now account for around 44% of overall sales.

Meanwhile, a dividend yield of 4%, alongside a previous £300 million share buyback programme are price supportive. Additional support came in the form of repairs, maintenance and existing home renovation activity, lines which form part of core sales and represent 70% of overall revenues. Screwfix, long since Kingfisher’s jewel in the crown, continues to hold its own with the format in the early stages of being extended abroad with a longer-term ambition of 600 stores in France.

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The outlook for the company among investors has had a mixed reception over recent times. The shares have risen by 19% over the last year, although they remain 14% lower than the peaks reached during the DIY boom of the pandemic, and are 25% down from the previous peak reached in March 2014. Despite this, the shares are not obviously cheap in terms of historic valuation. The jury remains out on prospects, but the group could improve its reputation by building on a more positive performance of late.”

Next FY (Thurs 26 March)

Richard Hunter, Head of Markets, interactive investor says, “Next’s ability to shoot the lights out is alive and well, resulting in yet another profit upgrade for the year as a whole at the third-quarter update in October.

As one of the best run and most respected stocks within the FTSE 100, Next (LSE:NXT) finds itself needing to walk the continuous tightrope of becoming a victim of its own success, with expectations for its results being so high. Even so, the last quarter blew past estimates by a striking margin and as a result, the outlook for pre-tax profit for the year as a whole was lifted from a previous £1.1 billion to £1.135 billion.

The performance came despite coming up against strong comparatives, and where the group had previously cautioned that the success of the second half would be less than that of the first. Favourable weather and the additional business gained from the Marks & Spencer Group (LSE:MKS) cyber incident would not be repeated, while the effects of National Insurance would be washing through. Anaemic UK economic growth is an additional headwind.  

However, the full price sales numbers were striking. For the UK, growth came in at 5.4% against an estimated 1.9%, and was lower than the first-half number of 7.6% as predicted. The overseas business continued its inexorable growth of 38.8% versus an estimate of 19.4%, and sailed past the first-half rise of 28.1%, as the virtuous circle of improved sales enabled a 50% increase in digital marketing spend.

Next has also confirmed that its share buyback programme remains on hold, since the share price is well above the group’s own target (currently £121 per share) of triggering such buybacks. Instead, based on current assumptions, the projected yield should include a special dividend which would take the yield to 4.7% as compared to the currently pedestrian 1.9% level.

Unsurprisingly, the share price has awoken to the singular strength of this slick and well-regarded company. The price has risen by 34% over the last year, helping to lift the three-year performance to growth of 95%, which is a considerable achievement given the traditional restraints which retail stocks face. Such gains may well put Next on a premium to its longer term valuation, but given the group’s ability to deliver time and time again, perhaps the punchy price is justified.”

UK inflation – Wed 25 March

Victoria Scholar, Head of Investment, interactive investor says, “UK CPI inflation for February out Wednesday is expected to ease slightly to 2.9% year-on-year. However, this mostly captures the period before the start of the Iran war on 28 February with the effects of the conflict likely to start showing up next month. With Brent crude up by more than 50% over the last month and more than 75% since the start of January, the energy price shock has caused inflation fears to resurface with a vengeance.

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The potential fallout is likely to play out in three stages. The first stage, which is already under way is via pressure on consumers and businesses (such as airlines) through higher petrol prices. The second stage is via higher household energy bills, although the pre-set quarterly energy price cap will shelter households in April when energy bills will actually fall by around 6%. It will only be in July when the increase in energy prices (if sustained), starts to impact bills and inflation.

The third stage is through second-round effects such as higher fertiliser costs pushing up supermarket prices, leading to higher inflation across the economy. Therefore, inflation is likely to rise back above 2.5% but not until the second half of the year, whereas before it was expected to settle below 2%. If coupled with weak growth, the UK could find itself in a nasty period of stagflation that can be very difficult to get out of.  

The Bank of England voted 9-0 to keep rates unchanged at 3.75% this week and sharply upgraded its forecasts for inflation to 3% in Q2 and 3.5% in Q3. The Middle East turmoil has sparked a major change in outlook for inflation and interest rates which were both finally on comforting downward trajectory at the start of the year but now face a very uncertain outlook depending on the severity and longevity of the conflict and the extent of the knock-on energy shock.”