They've recovered strongly from last October's multi-year low, but the City still rates shares in the DIY chain a sell. Our head of markets looks for evidence in these results that this view might change.
Kingfisher (LSE:KGF) is, without doubt, a leaner and meaner machine following the enforced and accelerated transformation plan following the pandemic. However, these latest annual numbers show some signs of faltering growth, admittedly compared to a strong set of comparatives from last year.
The B&Q owner has now added three-year comparisons to its metrics to highlight the progress which has been made since pre-pandemic, and the results are impressive. Like-for-like sales have risen by 15.6% over the period, while the increased focus on e-commerce has seen a rise of 146% in sales, now representing some 16% of the group total. Alongside these headlines, Screwfix continues to be a relative jewel in the crown, while Castorama in Poland has also seen burgeoning growth.
However, this set of results is largely hampered by the strength of last year’s showing, which has not been repeated. Adjusted pre-tax profit fell by 20% in the year ended 31 January 2023 to £758 million, although this is slightly ahead of the expected number of £741 million. Revenues and like-for-like sales have each fallen by 2%, underneath which e-commerce sales dropped 9.1%.
A combination of pricing promotion and the sales mix has also reduced gross margin to 36.7% from a previous 37.4%, while net debt has increased from £1.6 billion to £2.2 billion. Free cash flow has also suffered following lower earnings and the costs of inventory rebuild, swinging to a negative £40 million from a previous positive £385 million.
More positively, from a strategic perspective Kingfisher still has some firepower in its locker. The continued trend of hybrid working and energy efficiency renovations continues to underpin sales, while the strength of the Screwfix brand is being exported to overseas. Similarly, the e-commerce rollout will be expanded to both France and Poland, while the group’s reliance on own exclusive brands, which account for 45% of sales, is a helpful boost to margins.
In the meantime, however, the largest home market of the UK & Ireland suffered a sales decline of 24%, which throws serious doubt on the propensity of the consumer to continue discretionary spending, with some pressure on both the Screwfix and B&Q brands. While they are being adequately managed, inflationary and supply chain pressures remain. The dividend is also unchanged, suggesting a guarded outlook, although the yield of 4.5% provides some incentive for shareholders to wait.
The immediate outlook is marginally more positive, with the group reporting an increase of 0.5% in February like-for-like sales, while the company is relaxed with expectations for its profit figures in the new financial year. Resilient sales trends have been seen in its big ticket lines such as kitchens, bathrooms and storage, although strong comparatives will find their way to constraining Poland’s contribution this year.
A question for investors is whether to compare Kingfisher’s performance against pre-pandemic levels, where there has been significant progress, or against the strong comparatives of last year, where there has not.
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Indeed, the share price performance echoes this story. Over the three-year period, the share price has risen by 106%, whereas over the last year a decline of 7% compares with a dip of 0.5% for the wider FTSE100 index, despite a hike of 20% over the last three months.
The current market consensus of the shares as a 'sell' could indicate that the share price is up with events for now, or that there is considered to be better value elsewhere. In any event, the group still has some significant work to do in convincing investors that its growth path remains on track, although the initial share price reaction to the numbers is a positive start.
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