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Morningstar | Kingfisher Moat Rating Falls to None as Competition Remains Fierce

Kingfisher has undertaken significant initiatives through its One Kingfisher plan to improve the operating profit profile of a previously siloed business model by unifying the organization. In focusing on a united product offering across regions and brands, an increased digital presence, and the elimination of redundancies in goods not for resale, the firm’s margin and cost profile should be on a modestly improving trajectory despite ongoing struggles in the French market; we model operating margins rising to 6.5% in 2023 from 5.9% in 2018. In our opinion, constraints surrounding profit growth indicate the firm lacks a competitive advantage, leading to economic profits that fail to surpass our 9% weighted average cost of capital estimate and thus our no-moat rating.Kingfisher's scale (nearly GBP 12 billion in sales, representing 5% share in Europe overall, including operating as the market share leader in the United Kingdom and the second-leading player in France) helps generate some bargaining power with vendors when it comes to products, advertisement, and rent, among other things. Additionally, the specialized nature of Kingfisher's offerings (including more than 30% of sales driven by exclusive private-label products) provides some protection from mass merchants and large online retailers and builds modest brand loyalty. However, we don't think these factors are robust enough to offer the firm a competitive advantage, as indicated by its mid-single-digit operating margins over the last five years. We think this is a function of the commoditized categories Kingfisher competes in (identical products are available from other suppliers), which makes the ability to set prices consistently elusive and more than offsets the aforementioned factors.Even with a greater presence of private label and a unified product offering ahead, we believe Kingfisher will lag Lowe’s and Home Depot in leveraging its scale, and we do not expect it to achieve the double-digit EBIT margins that we forecast for its U.S. counterparts. This should lead returns on invested capital, excluding goodwill, to reach about 9% over our forecast.