Kingfisher disruption starts with the shares

Kingfisher “disruption” starts with the shares

Savings

Underlying profits that were comfortably above consensus and further efficiency wins helped balance a year in which Kingfisher again failed to convince that its costly revamp adds enough value. On the one hand, encouraging signs of what is possible from the product unification drive included an 180 basis point underlying gross margin expansion on streamlined ranges and further Goods not for Resale savings, which rose by £28m to £58m, with more to come. Wider efficiencies trimmed another £2m. Kingfisher’s main engine also turned over satisfactorily, especially for a group that’s meant to be in transition, with retail profits ticking 0.3% higher.

Keyword is “disruption”

But CEO Véronique Laury seemed determine to prepare investors for a year of far less plain sailing. Wednesday’s report was peppered with the word “disruption” and investors took the hint, selling the shares the hardest since June 2016. The tumble by as much as 8% suggests investors fear 18/19 may even be worse than Laury’s assessment of current trading on which “overall confidence is not great”. A UK consumer that could soon face less straitened times, looking at Wednesday’s better-than-expected earnings growth data, does not yet feel encouraged enough to buy more big ticket items, keeping B&Q sales under pressure. Even more concerning, underlying sales retreated at the group’s recently best-performing UK business, Screwfix. In light of that, Laury’s flagging of “another big year in our transformation plan” was interpreted as ‘another tough year’, possibly with more margin erosion than the 30 basis point slip in 2017/18.

France drags

Problems in France remain even more entrenched, now looking unmistakably structural, and raising questions around the long-term strategy for Castorama and Brico Dépôt. The likelihood that the group will have the bandwidth for significant self-help for those businesses on top of the ONE plan, which has around three more years to run, is low. So France is likely to remain a drag for the long term. All told, challenges of uncertain magnitude on the horizon left little to buy in Kingfisher’s finals and lots to sell. To be clear, the group could not have been better managed last year. But dividends were in-line, and the £600m buyback is almost complete, whilst the net cash outlook offers little leeway for a repeat.

Kingfisher has a relatively average market rating for a UK retailer and this could yet allow the shares to rise this year despite their 10% fall so far. Even then, the still unproven nature of its ONE gambit and deteriorating key markets are likely to keep undoing any progress the shares make at regular intervals.