Kingfisher wings clipped by softer fourth quarter, uncertain outlook

Kingfisher reported an 8% fall in annual profits on flat sales as chief executive Véronique Laury completed a second year of her five-year overhaul of the B&Q and Screwfix owner but remained very cautious about 2018.

Sales of £11.7bn in the 12 months to 31 January were up almost 4% thanks to currency swings but down 0.3% at constant currencies or 0.7% lower on a like-for-like due to store closures as UK business endured a weak fourth quarter.

UK and Irish LFL sales were up 0.6% over the year after a strong year for Screwfix and the transformation disruption, though the fourth quarter saw softer demand for big ticket categories such as kitchens. France saw LFL sales decline 3.5% as the Bricot Dépôt and Castorama chains underperformed the market's 0.7% growth and were disrupted by the ongoing transformation, though the final quarter saw a more encouraging 1.3% at Castorama.

Elsewhere overseas, Poland LFL sales were up 5.3% and a profit was generated, but the smaller Russia and Spain operations saw losses and falling sales.

But while disruption and stock clearance saw the gross margin shrink 30 basis points during the year, Laury's efforts to unify the product range across all the group's brands is seeing some effect, with GM for unified and unique ranges up 180bps.

Laury said it was a year of "good progress" with "a significant step up in the level of activity" as more than a third of the product ranges have been unified and "are being well received by customers", while the coming year will see the final year of roll out of the unified IT platform.

Profit before tax and exceptional items fell 8% to £683m, though at the underlying level, if excluding transformation costs, PBT was up 1.3% to £797m, versus a consensus forecast of £785m. A full year dividend of 10.8p was up 4% on the year before, even as adjusted earnings per share fell 10.7% to 21.8p.

Laury acknowledged that the performance this year "has been mixed", with solid growth at Screwfix and Poland, offset by continued weaker sales in France and some business disruption, principally reflecting product availability and clearance.

"We are acting on the causes of this disruption, however next year will be another big year in our transformation plan. The pace of change is quick and impactful but necessary as we build the new ONE Kingfisher engine to support our ambition to be the leading home improvement company, based on putting customer needs first.

"The outlook for our main markets is also mixed. The UK is more uncertain, France is encouraging yet volatile, whilst the market in Poland remains supportive."

In the new financial year the combination of goods-not-for-resale savings and net savings from operational efficiencies are expected to be around £30m, while the 2018-19 year will also see the final £140m of the share buyback plan.

REACTION & ANALYSIS

Kingfisher's shares fell 7% to 314p on Wednesday morning, their lowest level for four months.

Investors were likely to be disappointed in the softer fourth quarter for Screwfix in particular and the very cautious outlook, said analyst Neil Wilson at ETX Capital, though he saw France turning a "bit more positive" despite remaining volatile.

On the softness, he said: "We see that as the property market cools and consumers tighten the purse strings a bit, they are not investing in big ticket purchases. The less people move homes, the less they are splashing out on big improvements. Uncertainty weighs on big ticket purchases despite the economy being close to full employment – confidence in house prices continuing to rise is a big factor here and one that is often overlooked in terms of broader consumer confidence. The fact that people are less certain that their house will rise in value than they were before Brexit is an important consideration for homeowners making longer-term spending decisions."

Tony Shiret at Whitman Howard judged that the 11 p/e ratio before these numbers based on 2019/20 forecasts was broadly in line with the UK quoted peer group and "based on around half of the One Kingfisher programme being delivered. That still looks cautious but investor focus will for now move to how the short-term is managed."

Guidance and the weakening of late year UK sales suggested to Shiret that the pre-existing 2018/19 consensus of £822m will be reduced 3-4% to the £790-800m region.

"We believe that investors are likely to be concerned by the 24% increase in inventory to support the sales base during implementation of the new buying strategy which has resulted in cash balances dropping much more than expected to £68m," he said, though judging the likelihood of Laury's ONE Kingfisher being delivered as "unchanged" by the mix of news.

While profits came in slightly above expectations, George Salmon at Hargreaves Lansdown noted that this had been driven by UK cost savings and a "less bad than expected showing" from the French business.

“After the struggles of DFS and Carpetright, these results are further evidence that Brits are cutting back on big-ticket domestic items," he said.

The UK weakness and uncertain sales trends are the main headlines, especially at Screwfix, which has so often bailed out the UK business in recent years, but Salmon noted the plus side was that Kingfisher making good headway in delivering some "serious cost savings and operational improvements".

"While progress is being made with these self-help measures, the changes are proving far from simple to implement. All told, things look difficult.”