What would you say to a FTSE 100 stock whose share price has fallen by 40% over the past two years, dropping it to a forward P/E of only around 10? Dividends, you ask? Flat for a couple of years, but generally progressive and set to yield 5.1% this year and 5.3% next.
The company’s balance sheet? Net debt at the interim stage stood at a shade under £2.4bn, but that was equivalent to 1.8 times the previous 12 months’ EBITDA figure, which doesn’t seem outrageous — and net debt had reduced a little from the previous year end, by £158m.
Home improvement
The company I’m talking about is Kingfisher (LSE: KGF), the owner of the B&Q, Castorama, Brico Dépôt and Screwfix retail brands. Kingfisher bills itself as “a home improvement company with over 1,300 stores in 10 countries across Europe, Russia and Turkey,” and I think it offers a tempting proposition for contrarian investors.
Kingfisher shares did fall 7% Wednesday as its third-quarter update revealed weak trading, with sales in the period down 3.2% at constant currency (and like-for-like sales down 3.7%).
Total sales in the UK and Ireland actually picked up a modest 0.4%, all down to Screwfix that posted a 7.9% jump (I helped by buying a new drill) while B&Q sales dropped 3.5%. In the firm’s second biggest market of France, sales dropped 6.2%.
Weaknesses
The company put the like-for-like drop down to “continuing disruption from new range implementations, lower promotional activity and ongoing operational challenges in France, and softer market conditions in our main markets.” So that’s partly down to one-offs, it sounds, but also partly due to weak retail trading at the moment — and that latter shouldn’t really come as any surprise.
But the issues seem to run a bit deeper than that simple summary suggests, as new chief executive Thierry Garnier reckons the company has “not found the right balance between getting the benefits of group scale and staying close to local markets,” adding that “we are trying to do too much at once with multiple large-scale initiatives running in parallel.”
He says that the “priority is to fix our operational issues – particularly in IT and supply chain in France – and refocus our efforts,” and in the longer run to “refocus on our customers, simplify our model, embrace digital and return our business to growth.”
New broom
As so often happens, companies can lose their way a little and it can take a new leader to shake them up a bit. But at the same time, a change of management is also a good time to get all the dirty washing out and expose every weakness you can find, safe in the knowledge that the previous management will get the blame and you can start with a clean slate.
With that in mind, I think Kingfisher’s problems are far from catastrophic, and don’t come close to the troubles that have been encountered by other retail giants across the UK and the EU.
I agree with my colleague Rupert Hargreaves, who thinks Thierry Garnier is exactly who the company needs to get it back on the road to growth.
