Will investors shop elsewhere as Kingfisher profits slump?

Despite making some progress, these are tough times for the DIY trade and investors have a decision to make. Our head of markets assesses prospects for the UK firm.

Kingfisher (LSE:KGF) is swimming against a strong tide of tough comparatives and a deteriorating economic outlook, although over a longer term view progress is still being made.

For context, the company is now making additional comparisons with the pre-pandemic period of three years ago, representing the business as it had previously been before an enforced and accelerated transformation plan took hold.

Indeed, there is much evidence that the business has progressed, with revenues for the six months ended 31 July ahead by almost 17% over the three years. There's also been a notable shift to online sales, which have grown by 156% and which now represent 16% of group sales, around double the figure going into the various lockdowns.

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At the same time, the company’s “own exclusive brand” sales account for 45% of the group total, with a broad based offering from kitchens to electricals, providing a value proposition at a time when consumers’ propensity to spend is suffering.

In addition, Screwfix, long since the jewel in the group’s crown, is being expanded not only on home shores but also in France. Market share has been growing steadily, which largely explains the strong three-year comparative, while costs and margins are being targeted in light of current inflationary pressures.

The company’s general cash generation and confidence in prospects has enabled a share buyback programme, which is ongoing. While there has been no increase to the dividend which is unchanged, the current yield of 5% is relatively punchy and an incentive for shareholders to wait as the business evolves.

However, the current backdrop cannot be overlooked. A combination of inflationary pressures has shaved gross margins, which have declined to 36.7% from 38%. An inventory rebuild has reduced free cash flow, which in turn, and along with the cost of the buyback and dividend programme, has increased net debt to £1.85 billion from a previous £908 million. Although pre-tax profits for the half are in line with expectations at £474 million, this figure represents a decline of 30% year-on-year.

The immediate outlook is similar, with the company reporting a sales decline of 0.7% so far in the third quarter, although up by 15.2% on a three-year view. In addition, there has been continued demand for outdoor and big ticket items, while the company continues to tweak its overall offering to remain relevant and competitive.

The question for investors is whether to compare this 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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Despite an initial bounce in early trade, the share price reaction is a clear indication of the decision investors have made, with the price having fallen by 33% over the last year, as compared to a gain of 4.8% for the wider FTSE100. Nor does the pressure ease on what could be an extremely challenging outlook as economic conditions continue to deteriorate – the market consensus of the shares as a "sell" suggests not only a tough time to come, but also perhaps better prospects elsewhere.