EUR 850.00 For Business Accounts Only

Morningstar | Lowering Kingfisher Moat Rating to None as Efforts to Unify Business Fail to Spark ROIC Increase

We are lowering our economic moat rating for Kingfisher to none from narrow after reassessing the firm’s brand intangible assets and scale, now that the firm is halfway through its five-year One Kingfisher restructuring plan. Our contention is supported by returns on invested capital (including goodwill) that have remained depressed, dropping to 7.1% in 2018 (below our 9% weighted average cost of capital) and averaging 7.3% over the past five years. This in turn has led us to downgrade our stewardship rating to Poor from Standard, as ROICs imply that economic profits are being destroyed rather than created.

We attribute these unimpressive returns to a variety of macroeconomic factors (including fear over Brexit), management’s decision to drastically reduce stock-keeping units over a short period (which has failed to enhance sales or profits), and a highly competitive environment in France and the United Kingdom. We are maintaining our GBX 300 fair value estimate and view the shares as undervalued.

While Kingfisher’s brands were largely run as distinct units in the past, under CEO Veronique Laury and the One Kingfisher plan we’ve been encouraged by the firm’s efforts to materially reduce the number of global suppliers and SKUs (by around 80%), which we expected would lead to improved bargaining power. However, we are now skeptical of the firm’s ability to fully monetize this scale advantage as there has been significant consumer disruption from the drastic reduction in product offerings, which has hurt sales. Additionally, we now believe that the highly competitive environment in France will make it challenging for Kingfisher to price aggressively (to avoid material share erosion) and generate excess profits. We think Kingfisher’s inability to adequately respond to consumer trends in this market has led to underperformance over the past few years, which we expect to persist given the competitive landscape for home improvement (and other category) retailers.