Kingfisher transformation takes shape but uncertainty clouds outlook

Annual results from retailer Kingfisher beat the City's profit forecasts thanks to strong growth from its Screwfix chain, but while the transformation of B&Q and French businesses continued, sales began to slow in the second half amid concerns of a consumer slowdown.

For the year to 31 January adjusted sales rose 8.7% to £11.2bn, helped by currency effects, with UK & Ireland sales up 2.4% or 5.9% on a like-for-like basis.

But while total adjusted sales in constant currencies rose 2.7% in the first six months, growth slowed to 1.7% for the full year, while UK & Ireland LFL sales in constant currencies were up 3.1% in the first they were down to 2.4% for the full year.

While there was some uncertainty expressed over the looming French election and Britain's exit from the EU, management remain confident in their £500m target uplift in operating profit by January 2021 and the return of a further £400m of capital by the year ending January 2019 via share buyback.

With chairman Daniel Bernard announcing that he will retire in June, the FTSE 100 group has appointed ex InterContinental Hotels and Fitness First CEO Andy Cosslett, somewhat of a specialist in transformational and cultural change, as the new boardroom overseer.

Chief executive Véronique Laury hailed the achievement of growing sales and profit alongside delivering the first year of strategic milestones of her five-year 'One Kingfisher' transformation plan to create a "unified company where customer needs come first".

She added: "Looking forward, the EU referendum has created uncertainty for the UK economic outlook and we remain cautious on the outlook for France, especially in light of the forthcoming presidential elections.

"Looking longer term, supported by the expertise and energy of our colleagues, we remain confident in the size of the prize and our ability to deliver the plan - both the financial benefits the transformation will unlock and the stronger business it will create."

Looking at the results by division, DIY chain B&Q's total sales declined by 3.3%, reflecting planned 65 store closures over the last two years, but LFL sales increased 3.5%,

Building trade-focused Screwfix, driven by strong growth from specialist trade desks exclusive to plumbers and electricians, strong digital growth and the opening of 60 new outlets, delivered a 23.2% sales surge or 13.8% on a LFL basis.

On a group level, underlying pre-tax profit grew 6% to £787m, versus a consensus estimate of £775m, while underlying basic earnings per share improved 18% to 25.9p.

With free cash flow down to £459m from £483m amid increased capital expenditure on the transformation programme and alongside the first £200m chunk of the share buyback, the dividend was lifted a modest 3% to 10.4p.

Analysts at RBC Capital Markets said Kingfisher's PBT was broadly in line with its forecast, with the UK and France showing slightly better-than-expected margins but worse LFL sales, and the dividend a little short of its estimate.

RBC maintained a cautious stance owing to a gloomy French consumer outlook, with its own survey work suggesting Castorama is lagging Leroy Merlin on various metrics Castorama’s online offer not expected to improve until next year.

Analysts also highlighted a "short-term benefit but longer-term threat in the UK from new entrant Bunnings", and thought "execution risk is high this year given the extent of range change in stores".

Neil Wilson at ETX Capital said these were "solid enough" results, but "evidence of a slight slowdown in the second half of the year might be cause for concern, while a lot of the gains seem to be down to the weak pound".

He said the slowdown in sales and profits in the second half "may reflect some pullback in consumer spending in Britain in addition to seasonal factors", with France also dragging on the group sales in the second half.

"Castorama and Brico Depot considerably underperformed - Kingfisher may consider offloading its French business in due course if it continues to degrade shareholder value and act as a drag on the UK business,” Wilson added.