The owner of B&Q is making an impressive turnaround.
Retailers' trading updates serve a dual purpose. First, they give you hard information on how a particular retailer's go-to-market offering is faring in terms of 'wallet share'.
Second, they provide a useful guide as to how consumers generally are spending -- John Lewis' department store and Waitrose supermarkets' weekly trading reports, for example, are regularly pored over by economic analysts.
And the upshot from today's third-quarter update from Kingfisher (LSE: KGF) is that this particular retailer is faring better than its customers. Noting that the company was "continuing to assume no early help from improved consumer demand," chief executive Ian Cheshire unveiled an impressive 28% increase in profits.
Big sheds, big business
Let's start at the beginning. Kingfisher these days is a clutch of businesses selling DIY goods. Here in the UK it owns 'big shed' outlet B&Q and mail order supplier Screwfix, while brands such as Castorama, Hornbach and Brico Depôt serve as the trading formats in Europe.
Overall, Kingfisher reckons to be the third-largest DIY retailer in the world, with almost 830 stores in eight countries in Europe and Asia. Sales exceed £10 billion, and the business has over 80,000 employees. In other words, although the name may be unfamiliar, Kingfisher is no fledgling.
That said, it's no soaraway success, either. Incoming chief executive Cheshire's plan to boost shareholder returns, called 'Delivering Value', and launched in 2008, was sorely needed: for most of the decade, Kingfisher's share price had meandered in the range 200 pence to 300 pence, and at the time Cheshire came on board, was even lower -- 140 pence.
Based around seven simply-stated objectives, Delivering Value had some very simple messages:
- Drive up B&Q's profit
- Exploiting the UK's 'trade' opportunity
- Expand the French business
- Roll out in Eastern Europe
- Turn around B&Q China
- Grow group sourcing to improve buying terms
- Reduce working capital
It's hard to quibble with any of those -- and also good to see words like 'turn around.'
Work the plan
Today's trading update shows the success of those strategies. Indeed, if it wasn't for Delivering Value, the results would have been a lacklustre affair indeed.
While sales were up just 5.6%, as I said earlier, profits were up a sparkling 28%. "Our self‑help initiatives continued to boost profitability and cash generation right across the group," summed up Cheshire.
Sales growth had been strong in the UK and Poland, the other Eastern European businesses -- including Russia and Turkey -- had delivered solid sales and profit growth, while the China turnaround had seen losses more than halved during the quarter.
Overall, some 80% of the quarter's profit had been earned outside the UK and Ireland. Net debt was down again, falling to £200 million -- as opposed to £1 billion at the start of 2009 -- while progress described as 'excellent' characterised the working capital reductions in the UK and France, two of the company's largest operations.
In short, decent results, delivered by drafting a straightforward recovery plan, and then sticking to it.
But is it a buy?
Delivering Value, as I've said, was much needed. Kingfisher has a low operating margin (full-year sales of £10 billion earned just £187 million in profits), coupled to an equally low return on capital employed. This is clearly a business that needs to boost sales while at the same time freeing up capital and cutting costs.
Yet a forecast P/E of 15.9 brackets Kingfisher with retailers whose renaissances are more advanced -- companies such as Sainsbury (LSE: SBRY) and William Morrison (LSE: MRW), and clearly the board can't afford to stumble in delivering on Delivering Value's promise. Kingfisher's current market cap is around £5.5bn.
In short, with a forecast yield of 2.4%, and trading at close to their highest levels since early 2007, Kingfisher's shares aren't especially cheap. But the business model is simple, the international revenue and profit streams are attractive, and the growth prospects remain strong. A share to buy on a dip, then -- and I can't believe that we won't be seeing any more of those in the months ahead.
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