Our head of markets picks through half-year results from the DIY retailer whose share price is booming.
The pandemic has forced the hand of many companies in accelerating their pace of change, and for Kingfisher (LSE:KGF) this has been beneficial to a transformation plan which was already in place, but moving at a pedestrian rate.
While the closure of stores during the lockdown had an inevitably negative effect on the first three months of this six-month reporting period, this has now been reversed and, coupled with something of a return to normality has been the strong growth in online sales.
In particular, Kingfisher has reordered its method of delivering customer orders, and the “Click and Collect” service has been especially successful, with short fulfilment times, enabling customers to collect goods almost immediately and without spending excessive time at the pick-up points. Click and Collect now accounts for over 90% of group online orders, and overall online sales over the period grew by 164%, now representing 19% of group sales, as compared to a previous 7%.
It remains to be seen how much of that change is permanent, depending on consumer habits, but it seems likely that there has been a fundamental change in the way customers shop. In addition, the very nature of the lockdown clearly prompted many to concentrate on home improvements given the absence of spending alternatives such as travel.
At the same time, Kingfisher has improved its financial position through any number of measures. Working capital, for example, improved significantly in the six months ended 31 July 2020, as inventories were run down and payments to some major suppliers were deferred. While some of this will reverse in the second half of the year, it nonetheless contributed to a significant improvement in free cash flow, which rose by 410%, and net debt, which reduced from £2.4 billion to £1.4 billion.
The business rates relief programme, lower capital expenditure, the cancellation of the dividend and higher operating profit were also contributors to a healthy cash position, including access to £3.7 billion of liquidity if needed.
Despite like-for-like sales having declined by 1.6% for the half-year, the significant improvement in the second quarter (sales up 19.5%) and performance in the third quarter to date (up 16.6%) provide room for optimism.
There remains much to do, with the transformation plan having been given a boost by the pandemic, but certainly not to completion. The exit from the Russian business is ongoing, the ferocity of online competition has intensified during lockdown, and there are still parts of the business which are unwieldy in terms of the streamlining the company is aiming to achieve, both in terms of business lines and also geography.
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Even so, there is little doubt that Kingfisher has made substantial progress of late. The stock has reflected both the successes and tribulations of the last few months, with Kingfisher’s relegation from the FTSE 100 index in March being immediately reversed with promotion in June. The share price has, over the last year, risen 31%, which is a significant outperformance of the wider FTSE 100 index, which has declined by 21% in that period.
Indeed, since the widespread markdown of prices in March, the shares have risen 113% from those lows and could well now be up with events. As such, the next stage of the transformation is for Kingfisher to deliver, with the market consensus of the shares as a ‘hold’ likely to remain in place for the time being.
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