Any improvements attempted by the Kingfisher boss Thierry Garnier can only be a cosmetic job. The owner of B&Q and Screwfix is battling a downturn in spending by consumers on fixing up their homes and lingering cost inflation, which has amplified the impact on the bottom line.
Adjusted profit guidance for this year has been cut to £590 million, from the £634 million previously expected, itself a marked drop on the £758 million that it generated last year as the pandemic boom has given way to a sharp slowdown in the housing market.
The core of Kingfisher’s troubles were in France and Poland, where like-for-like sales declined 3.8 and 10.9 per cent respectively over the first six months of the financial year. That offset a better performance in the UK and Ireland, where sales edged into the positive at 1.7 per cent.
Freak weather — the UK’s March cold snap and then the summer heatwave on the Continent — masked the full picture on how stubborn inflation and the rapid rise in interest rates is impacting on demand. Rising prices have hit confidence worst in Poland and France, and an increase in discount sales hit the group’s gross margin.
Kingfisher plays to different customer bases via its retail banners, ranging from the B&Q DIY-er, to the Screwfix trade buyer and Brico Dépôt’s skew towards the discount end of the market. But all are ultimately tethered to how well demand holds up amid higher interest rates and price inflation. More than half of sales come from the repair, maintenance and improvement market, which won’t go unscathed, particularly after the pandemic swell in home improvements.
Garnier has a strategy of putting in place more variety across its different geographical markets, cutting back on inventory and growing the proportion of online sales within the overall mix. Those are sensible strategic aims but the macro situation could easily disrupt progress even further.
That explains why Kingfisher remains one of the most shorted companies on the London market.
The risk of more cuts to guidance is not reflected in the group’s current valuation. A 10 per cent fall in the share price on the back of the latest warning puts the shares at just over eight times forward earnings, only a slight discount to a three-year average multiple of ten.
But cut this year’s earnings forecast by analysts by the same 7 per cent degree as yesterday’s profit warning and the valuation multiple moves within a hair’s breadth of that average.
True, the volume of inventory declined 11 per cent year over year, and buying less stock benefited free cashflow, which is still expected to come in at £500 million this year. That was the justification for another £300 million share buyback.
But with seasonal sales the worst hit, there could be scope for more discounting this year, which would impact on the margin. The easing cost of raw materials and freight rates should start to show up more later this year, according to Garnier.
Questions now include whether the group will row back further on its expansion plans in the Continent to preserve cashflow. The guidance for gross capital expenditure this year has been reduced to £425 million from the £449 million that would have left it in line with last year. That partly reflects fewer store openings in France and Poland.
Shaky demand has not deterred management from launching Screwfix online in four countries later this year, including Belgium, Poland and Spain. Those will be serviced by its French distribution centre, making the outlay associated with the expansion minimal. But now, the rewards may not justify the marketing push and attention.
ADVICE Avoid
WHY The risk of further profit warnings is not reflected in the shares’ valuation
Team17
Pandemic-era lockdowns were like an easy cheat for video game developers, kicking sales rates up to another level. That has given way not only to a natural slowdown in demand from gamers, but also heightened competition as delayed releases are launched into the market at once.
For Team17, the indie video games studio behind the Worms franchise, the impact on its shares has been a 30 per cent reduction over the past 12 months alone and a dramatic moderation in earnings expectations. The shares now trade at 11 times forward earnings, a quarter of the peak valuation in 2021.
New releases pushed revenue up by almost a third over the first half of this year to almost £70 million, which puts it halfway to a consensus revenue forecast of £140 million for this year. And that is before the crucial Christmas trading period.
But with new titles come higher marketing costs and that, as well as a hiring spree to support new games, cut into the margin in the first half.
Management has said profitability will be weighted towards the second half as some costs wind down. It generated only £16.5 million of the £49 million forecast by analysts for the full year.
But that brings with it inherent risk, as analysts at Jefferies point out. The release slate for the second half of this year is a busy one, and competition means Team17 might not recoup as much of the cash it has spent on marketing and development it needs to meet consensus.
Competition and cost of living pressures have also brought greater discounting, although Team17 says it is averaging a 20 per cent markdown versus the 40 to 60 per cent across the broader market.
The acquisition of Astragon Entertainment and StoryToys has given Team17 access to the children’s education and simulation games markets, part of a strategy to bulk out the library of games with third-party titles, in addition to its own, higher-margin, intellectual property.
Team17 has a discount valuation and net cash of just over £45 million on its balance sheet. A potential takeover offer is one of the few clear catalysts that could lift the shares any time soon.
ADVICE Hold
WHY Competition and risk of further margin pressure could hold back the shares
