EUR 850.00 For Business Accounts Only

Morningstar | Kingfisher struggles to capture expense leverage as French sales languish, hindering 2018 profit.

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% in 2022 from 5% in 2018. We believe these changes will allow Kingfisher to build on its current competitive advantages and place the firm in a defensible position to remain relevant despite the proliferation of e-commerce competitors.Kingfisher's brand intangible asset and size help create a low-cost position that is the foundation of our narrow economic moat rating. The company'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) generates significant bargaining power with vendors when it comes to products, advertisement, and rent, among other things. We also believe the specialized nature of Kingfisher's offerings (including more than 20% of sales driven by exclusive private-label products) provides some protection from mass merchants and large online retailers and builds brand loyalty, supporting the brand intangible asset. Despite these competitive advantages, Kingfisher falls short of a wide moat because it also competes in some commoditized categories in which identical products are available from other suppliers, consistent pricing power remains elusive, and no switching costs exist.However, even with a greater presence of private label and a unified product offering ahead, Kingfisher will lag Lowe’s and Home Depot in leveraging its scale, and we do not expect it to achieve the double-digit normalized EBIT margins that we forecast for its U.S. counterparts. This should lead returns on invested capital to reach about 9% over our forecast, in line with our weighted average cost of capital estimate of 9%.