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B&Q and Screwfix Sales Boost Kingfisher Profits

Kingfisher brands B&Q and Screwfix boast "impressive sales" in the third quarter, say equity analysts. But they remain cautious as the real impact of Brexit is yet to be seen 

Philip Gorham 22 November, 2016 | 9:43AM

Kingfisher (KGF) third-quarter sales growth of 1.8% was in line with our forecast, although downside in France was offset by a remarkably robust performance in the UK. At B&Q, like-for-like sales growth of 3.5% was better than we had expected, but sales at Screwfix moderated only slightly, to 12.7%.

These figures are impressive, given the slowdown in the U.K. housing market, and we suspect the full impact of the European Union referendum result and the abolition of the government’s Help to Buy scheme are yet to be felt. Next year may prove to be the litmus test for DIY sales in Britain. We currently forecast a low-single-digit decline in U.K. comps, but we recognise that a great deal of uncertainty surrounds near-term sales, including the influence of overseas demand, housing supply strategy, and domestic consumer confidence in the post-Brexit environment.

We reiterate our £3.70 fair value estimate for Kingfisher's ordinary shares. We remain cautious in the short term, as we believe the impact of Brexit is yet to be seen in the U.K. housing data, but in the long run, we believe Kingfisher possesses some defences against new online entrants, and we maintain our narrow moat rating. 

As UK Sales Grow, France Struggles

France remains a very difficult market for Kingfisher, with like-for-like sales down 3.8% and 3.3% at Castorama and Brico Depot, respectively. An industry contraction is partly to blame, but of more concern is that Kingfisher’s banners both continue to underperform the market. We do not forecast positive comps to return in France until 2019, but we are becoming increasingly concerned that the firm will need to take additional measures to deliver that turnaround, including store rationalization and further improvements to merchandise mix.

We think the source of Kingfisher's narrow economic moat – its defences against online entrants in categories where receipt of the product is required immediately – should ensure that the firm continues to generate economic profits for at least a decade. Our analysis shows that in categories such as kitchens and bathrooms, where Kingfisher offers high-ticket private-label products, around 20% of its business, its pricing power is strong, but in categories in which it sells brands or commodified products, pricing power is weak.         

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Kingfisher PLC195.35 GBX0.70

About Author

Philip Gorham  

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