It has been a miserable few months for shareholders in retailer Kingfisher (LSE: KGF). The owner of home improvement fascia including B&Q and Screwfix has seen its shares fall by around a quarter since February. On a five-year timeline, the Kingfisher share price has declined 14%.
But the company has strengths like those well-known brands and large existing customer bases. Offering a yield of 5.6% and trading on a price-to-earnings ratio of under 10, on one analysis the shares might look cheap.
But are they – or could they fall further from here?
Weak sales performance
There are some clues to the possible answer contained in the company’s interim results, released today (19 September).
Sales compared to the same period in the prior year grew by 1.1%. But that partly benefits from a favourable exchange rate. Stripping that out, sales shrunk 1%.
Worse, on a like-for-like basis, sales were 2.2% lower, even before allowing for exchange rate impacts. At a time of high price inflation in many markets, such weak sales growth bodes poorly for the sales outlook in the coming several years, I think.
The company pinpointed challenges in its Polish operation rather than the UK and Ireland division, which it said has ‘positive momentum’.
However, the company issued a profit warning. It now expects around £590m in adjusted profit before tax for the year, compared to £634m back in April.
Uncertain market outlook
While the company struck a positive note – and announced a new £300m share buyback – I see some reasons for concern here. With the Kingfisher share price down around 7%, as I write this on Tuesday morning, it seems I am not alone.
We know from housebuilders’ trading updates over the summer that the market for new housing in the UK is stuttering, as buyers grapple with rapidly increasing interest rates. I expect that to hurt demand for building and decorating products too.
Sales at Kingfisher have started to decline in value terms. Given inflation, the decline in volume terms might be even worse (that was not broken out in the interim results).
So while I think the company’s renewed focus on cost control could help it try to maintain profit margins, I expect market demand to get worse, not better, from here. I would not be surprised if that leads to more bad news from Kingfisher, either in this financial year or next.
The interim dividend was held flat at 3.8p per share. That is good news in terms of maintaining the prospective yield, but holding the payout flat (as happened last year too) does not strike me as a sign of management confidence.
No rush to buy
On the positive side, the business remains profitable, although statutory post-tax profit slid by an alarming 37% to £237m.
With its large store estate and digital presence, I think the company has the tools it needs to survive, even in a difficult market. I think it could do well when consumers are once again ready to spend on DIY in a big way.
For now though, I reckon the seemingly cheap Kingfisher share price merely reflects City expectations of difficult trading in coming years.
Things could get much worse before they get better and I have no plans to buy the shares.
