Kingfisher Reports 20% Drop in Full-Year Profits, Expects Further Declines

After no-moat Kingfisher KGFHY emerged as a beneficiary of the coronavirus pandemic, it has still managed to deliver solid full-year 2022 results against very tough comparatives and a challenging economic environment. Organic revenue fell 2.1% during the year; however, its 15.6% top-line growth since January 2019 paints a more accurate picture of the tailwinds the group experienced from the home improvement trend during lockdowns and a low-interest rate environment. These previous tailwinds have begun to unravel, leading to pretax profit declining 20% to GBP 758 million, marginally above our estimates, with management guiding for its fiscal 2024 profit before tax to fall even further to approximately GPB 633 million. While we plan to revise our forecasts for somewhat weaker-than-anticipated guidance, we don’t expect to make a material change to our GBX 330 fair value estimate. Shares appear slightly discounted.

Geographically, revenue declines were sharper across Kingfisher’s U.K. banners, where organic revenue fell 7%, largely due to its stronger comparatives, which is reflected by this region’s 15% growth during the past three years. The return of promotional activity (which was not required in previous years) and an unfavorable sales mix toward lower-margin products saw U.K. retail profit decline 24%. In France, retail profit fell 12%, with its profit margin declining 50 basis points to a mere 4.4%. We anticipate that group profitability will remain under pressure, especially given the buildup in the group’s inventories and weakening residential construction activity. Free cash outflow of GBP 40 million was reported, largely due to prebuying inventories in anticipation of price increases and to secure availability amid supply chain shortages. Management expects working capital outflow to unwind during the year and guided for free cash flow to exceed GBP 500 million.

The group proposed a dividend of GBP 0.124 per share, consistent with the previous year.