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Kingfisher's French operations struggle

Steve Clayton | 24 November 2015 | A A A
Kingfisher's French operations struggle

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Kingfisher Ordinary 15,5/7p

Sell: 248.00 | Buy: 248.10 | Change -3.20 (-1.27%)
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Kingfisher is struggling to get any real traction in its extensive French operations, in the face of an economy that has lacked momentum for some time. The recent tragic events in Paris are unlikely to help the situation either. In the UK, B&Q is holding its own, whilst Screwfix conquers all before it, with double digit Like-for-like (LFL) sales.

Internationally, a solid enough underlying trading picture is smudged by appalling weakness in the Russian ruble. Mr Putin might be portrayed as a strongman President, but his currency is made of marshmallow. So 8% LFL ruble sales growth translates into a reported fall in sterling sales in Russia of almost 30%. In Kingfisher's large Polish business 3.5% LFL zloty sales translate into a 5.7% decline in reported sterling sales values.

Overall, the combination of a weak French performance, and the impact of currencies offset 14% growth in UK and Ireland Retail Profits, to leave overall group Retail Profit down 6.6% at £223m. The company says the ONE Kingfisher plan is going well, but we have to wait until early next year for a full strategic update. The market is unenthused by the numbers and the stock has opened around 3% lower.

Our view:

What Kingfisher does internationally is rather similar. Yet only 22% of goods are bought by the group, the rest are bought by the individual chains. Even more surprising, 98% of the products sold across the group are only found in one format, in one country.

Clearly, the group could improve its buying clout, if it bought as much as possible on a group-wide basis, to go into stores across Europe. At this stage, Kingfisher sees scope to shed around half of its product range and to unify c.90% of core essentials.

Returns at B&Q have lagged those at the company's French operations for some time, and the UK chain is seeking to shed or shrink weaker stores. Last year, Kingfisher made UK margins of 6.0% versus 8.4% in France, despite UK profit rising and French earnings declining.

Hopefully, Ms Laury's ONE Kingfisher plan will raise group returns. So far this century, Kingfisher has rarely managed to make a double digit return on invested capital.

Kingfisher trades on a prospective PE of circa 16x according to Bloomberg, versus a historic average of just under 14x. The forecast dividend yield of 2.9% (variable and not guaranteed) is unexceptional, but at least the balance sheet is a lot stronger now though; back in the last decade, Kingfisher had net debts of a billion pounds or more.

Ms Laury is not the first Kingfisher CEO to try and make the individual businesses play nicely together. There could be a lot to go for. But so far, progress is in the stuff behind the scenes, like IT Systems and range planning, and not yet visible in store. By the end of 2016 it should be much clearer whether the ONE Kingfisher plan is going to deliver as planned.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.