EUR 850.00 For Business Accounts Only

Morningstar | French Business Continues to Drag on Kingfisher's Profits, With Few Signs of Pressure Easing

We don't plan to alter our GBX 300 fair value estimate for narrow-moat Kingfisher after assessing the third-quarter sales update. We view the shares as undervalued. While total sales in constant currency rose 1.2%, in line with our 1.4% outlook for the second half, currency provided some headwinds in the period, leading to reported growth of just 0.2%. The France business (37% of sales) continues to track slightly worse than our more than 1% decline forecast for the second half, with Castorama disproportionately affecting results with a nearly 9% downtick in the period. However, Brico Depot performed decently with sales growth of 1.5%, implying that the total French consumer base is not struggling but that Castorama’s troubles are self-inflicted and efforts to restore proper merchandising should help ease pressure ahead. Screwfix (13% of sales) again posted double-digit growth, at 11%, putting the brand on track to potentially mark its seventh year of double-digit top-line expansion.

The company has decided to exit Russia, Spain, and Portugal, which we estimate represented more than GBP 400 million in 2017 sales (about 3.5% of total sales). This decision should provide a natural lift to Kingfisher’s operating margin, given that the three subsidiaries together generated an operating profit loss of around GBP 8 million last year, tempering the corporate profitability level. With renewed focus on the core store base (France and the United Kingdom), where Kingfisher has leading market share visibility, we think equity to the brand intangible asset could be stabilized, a supporting factor underlying our narrow moat rating. That said, competitive pressures across the home improvement landscape could lead the company to price tactically, limiting the operating margin gains it could capture, which we have rising to 6.3% in fiscal 2023 from 5.9% in fiscal 2018, despite the massive restructuring underway via the One Kingfisher plan.