EUR 850.00 For Business Accounts Only

Morningstar | External Headwinds Stall Kingfisher’s Profit Opportunities; Shuffling of Management Positions Ensues

While no-moat Kingfisher achieved the interim goals of its One Kingfisher plan in 2018, headwinds (wage and cost inflation and weak economic environment in the U.K.) prevented the firm from benefiting from the fruits of its labors. For 2018-19, the firm planned on unifying 40% of its cost of goods sold, which it successfully executed on, exiting the year 50% complete (and now aspires for 70% by the end of 2019-20). It also anticipated it would complete its unified IT rollout and launch e-commerce capabilities in France and Poland, which it has successfully achieved in France. Furthermore, Kingfisher did deliver more than its GBP 30 million goal in operating efficiency benefits (GBP 42 million). However, we believe these efforts will be offset by competitive pressures, which should temper profitability, with operating margins holding around 6% on average over the next five years, below its 10.3% peak this decade (in 2012). Additionally, pockets of weakness (including sales that fell 7% at Castorama and 3% at B&Q for the fiscal year) waylaid the progress the company made in its transformation, leading to adjusted earnings per share that declined 9%.

Kingfisher took its One Kingfisher plan off the table and inserted new goals that include growth in group sales along with higher gross margin, retail profit and return on equity. Without any insight to the magnitude of these metrics we are maintaining our five-year outlook, which included, on average, flat sales growth, a gross margin that moves just below 38% (versus a 37% average over the prior three years) and a ROE that rises to slightly above 8% (from a 7.7% average). These modest gains underlie our GBX 300 fair value estimate, which we don’t plan any material change to after today’s update. While shares are undervalued, we expect they could continue to languish until a permanent management team has been appointed and uncertainty surrounding Brexit concludes (U.K. accounts for 43% of fiscal 2019 sales).

We recently revised our stewardship rating to poor from standard, given the weak, single-digit returns on invested capital the company continues to produce, which fall below our 9% weighted average cost of capital estimate and imply the destruction of economic rents. In considering the company’s inability to drive growth across the board, a fresh vision could help alter the company’s trajectory in our opinion, and Kingfisher announced its decision to launch a succession search for the next CEO to replace Veronique Laury, who plans to stay on until the transition is complete. Additionally, the company has finally slotted John Wartig into the interim CFO position to replace Karen Witts, who indicated her departure in the fall of 2018, and the firm continues to search for its permanent financial head. Finally, the company noted its chief CTO, Steve Willett, would be retiring but offered no insight on his replacement, a position we believe is important given the company’s opportunity for further e-commerce gains; Kingfisher lands just 6% of its business through digital channels currently, not far below its U.S. home improvement counterparts (wide-moat Home Depot and Lowe’s).