Kingfisher Earnings: Rise in Promotional Activities and Cost Inflation Leads To Big Drop in Profits

Kingfisher KGF reported a 23% decline in retail profit during the first half of its fiscal year, driven by cost inflation and an increase in promotional activities to drive sales in France and Poland. The group’s reliance on clearance activities to support sales highlights its no moat rating, which we maintain. Management cut its full-year profit-before-tax guidance to GBP 590 million, a 7% reduction from previous estimates. We lower our fair value estimate to GBX 290 from GBX 310 to incorporate the group’s weak profit outlook, but keep our top-line estimates unchanged. Shares appear undervalued.

Like-for-like sales declined 2.2% during the first half, which reflects a 1% decline in core big-ticket items and a 6% drop in seasonal products due to unfavorable weather. Geographically, its U.K. segment continues to perform the best and was the only region to report like-for-like sales growth. The trend appears to be continuing into the third quarter, with the U.K. showing continued positive momentum and sales in France slightly lower.

The weaker outlook has not hit Kingfisher’s capital return. An interim dividend of GBP 0.38 was declared, flat year over year. In addition, a new GBP 300 million share buyback was also announced following the completion of GBP 600 million of buybacks during the last two and half years.