Kingfisher's lower sales and margin shrinkage disappoint

Though chief executive Véronique Laury made progress with her ongoing 'ONE Kingfisher' operational improvement plan, retail profit increased only 0.4% to £223m due to a £17m forex hit and squeezed margins in both the UK and France from an extra £5m of store development costs. The consensus forecast from analysts was for profits nearer £234m.

In France, total sales were 1.5% higher and LFL sales up 0.1% as data showed the home improvement market was broadly flat overall, while the fourth quarter holds little hope for significant improvement with weak house building data.

French gross margins shrank 30 basis points as the Castorama and Brico Dépôt chains used more price promotions, which analysts expect to continue.

The UK enjoyed 5.5% growth in total sales, with LFL sales 4.6% higher, accelerating from the 4.6% and 3.3% respective numbers in the first half of the year.

B&Q UK & Ireland saw a big improvement from a flattish first half, with sales up 1.2% and LFLs improving 2.4% thanks to good sales of outdoor seasonal and building products.

Screwfix sales surged up 23.4%, helped by 13 new outlets, with LFLs 13.3% ahead of a strong comparative period last year, driven by new and extended trade ranges.

But gross margins contracted 120 basis points due to strong growth from lower-margin Screwfix and higher sales of seasonal categories in B&Q, which was only partially offset by the cost improvements from Laury's ONE plan.

Laury said the new unified IT system, a key enabler of her plans, continues to make progress.

"In addition we have secured a further five agreements on the B&Q stores already planned for closure, taking the total to 31.

"I am very encouraged by development work on the first wave of the unified 'core essential' ranges, which will land in stores from next year. We now look forward to updating you on the detail of our long term strategy in early 2016."

Goldman Sachs said, as a result of lower-than-forecast profitability and the enduring tough environment in France, it would cut its PBT and EPS estimates by roughly 1% for the full year and subsequent two, but kept its 410p price target and 'buy' rating unchanged.

Investec, which retained its 'sell' recommendation, said the Q3 trading update illustrated the ongoing issues facing Kingfisher and that Laury's strategic initiatives represent "a multi-year infrastructure upgrade programme for which the benefits will be back-end weighted".

"Therefore, Kingfisher represents a near-term play on the European consumer, for which we see no sustainable signs of a pick-up in the near future. Whilst the shares do have some yield support, we continue to see better value elsewhere within the sector."