EUR 850.00 For Business Accounts Only

Morningstar | Languishing French Business Weighs on Kingfisher's Growth; Lowering FVE

Narrow-moat Kingfisher's French business continues to weigh on profits, with Castorama (53% of France sales) sales falling 6% in the first half, hindered by weak brand perception, an evolving retail environment, and flat sales for the home improvement market, according to Banque de France. The U.K. and Ireland segment also showed mixed performance, with B&Q (70% of segment) sales falling 2.3% and Screwfix sales rising 10.4% as the latter brand continues to open locations. This lumpy performance makes assessing the progress of the ONE Kingfisher plan difficult as deleverage across much of the group masks improvements from efforts underway. Given Kingfisher’s inability to link together consistent performance across the majority of its business, we plan to reduce our GBX 342 fair value estimate by a high-single-digit rate after assessing recent results.

Near-term uncertainty shouldn’t materially affect our five-year outlook, which includes sales growth averaging 1%, 5% operating income growth (as ONE Kingfisher initiatives begin to pay off), and mid-single-digit EPS growth. While the top line should remain intact as it already incorporates a competitive retail landscape, most of our valuation change should come from the operating margin line, as taking price has become increasingly difficult in categories with substitutes and low sales growth could offer modest cost leverage.

There are signs of improvement stemming from the ONE Kingfisher plan, with 42% of products unified as the firm continues to decrease the global suppliers it utilizes. Efforts to increase digital penetration are working, with digital sales representing 6% of sales, up from 5% last year, and operational efficiency initiatives are paying off (with GBP 14 million of benefits in the first half). However, these inroads are not sufficient to offer confidence that the firm can consistently stimulate top-line growth over the near term, leading to our tempered 2018-19 outlook.