Kingfisher share price downbeat amid gloomy H1 sales forecasts

Shares in home improvement retailer Kingfisher have outperformed some of its competitors in the UK market, but inflationary pressures continue to weigh on the industry. As the company prepares to report H1 earnings on Tuesday 20 September, investors will be hoping the company is still on track to meet its profit guidance.

The Kingfisher [KGF.L] share price has been steadily declining this year, with investors forecasting a slowdown in trading as macroeconomic pressures rise. The group, which owns UK home improvement retailers B&Q and Screwfix, will be hoping that its half-year results on 20 September will help reverse the shares’ downward trend this year.

Even before rising inflation began to impact businesses at the beginning of the year, investors were betting on a slowdown for the DIY store owner. The group saw profits surge during the coronavirus pandemic as repeated lockdowns encouraged people to take home improvement into their own hands. However, as inflation has started to eat away at margins and homeowners return to the office, the share price has been weighed down and fallen 23.9% since the beginning of the year as of 15 September.

Kingfisher shares have not been the only home improvement retailer under pressure this year. In fact, the company has outperformed several of its competitors. Travis Perkins [TPK.L], which owns retailer Toolstation alongside its core builder’s merchant business, has seen its share price tumble 45.4% since the beginning of the year, while Wickes [WIX.L] was down 46.6% over the same period.

Q1 revenue remains above pre-pandemic levels

In a first-quarter trading update, Kingfisher noted that while sales were slightly below what was seen at the peak of the pandemic, they still sat comfortably above pre-pandemic levels. Total revenue of £3.2bn for the quarter was 5.4% lower than the year before but up 16.2% from three years earlier. The group is hopeful that the pandemic shift to DIY has led to some longer-term demand-boosting trends.

To signify Kingfisher’s optimism, the group announced a further £300m in share buybacks in May. This was announced after the completion of a £145m package at the beginning of the year. Alongside the company’s comfortable current 5% dividend yield, the scheme aims to return more back to shareholders over the course of the year.

Despite the generally positive update, the group was quick to acknowledge the upcoming challenges it faces. Investors are fearful that budget-constrained customers will lower expenditure on the luxury of home improvement and hurt Kingfisher’s top line while inflationary cost pressures slice margins. However, CEO Thierry Garnier insists that it continues “to effectively manage inflationary and supply chain pressures”, and the company maintains its full-year profit target of £770m.

Screwfix business set to lead growth

Kingfisher is determined to continue to grow its top line despite a cloudy market outlook. The group has targeted growing its business operations in Poland, which reported particularly strong sales growth of 59% in the first quarter.

In the UK, its Screwfix business has been the main driver of growth. In the middle of July, it was announced that the 800th Screwfix store was opened, with Kingfisher planning the opening of 80 new stores across the UK and the Republic of Ireland by the end of January 2023. The brand has also started operations in France, with the first Screwfix store scheduled to open in the second half of this year. Kingfisher has already captured the French market with its Castorama and Brico Dépôt stores, which accounted for £1.1bn of the group’s total sales in Q1.

Screwfix has performed well in recent years in the UK. It has captured an increasing amount of market share by catering to both people in the trade and a do-it-yourself customer base. In 2021, it had the third biggest market share in the home improvement sector — behind its big brother B&Q and rival Homebase. The recently launched ‘Sprint’ service, which promises delivery to site in under 60 minutes for only £5, is another initiative launched to capture further market share.

Analyst forecasts downbeat due to inflation

Despite these optimistic growth ambitions, the inflationary challenges that face the company have left analysts split over Kingfisher shares. Out of 20 analysts polled by the Financial Times, six believe the share will ‘outperform’, eight gave them a ‘hold’ rating while the remaining six analysts believed they will ‘underperform’.

From 16 of these analysts offering 12-month price targets, there was a median target of 265p. This is equivalent to a 6.8% upside on its 15 September closing price.

According to a consensus of analyst estimates compiled by Kingfisher, H1 like-for-like group sales are expected to fall by 4.2%, with UK sales down 11.6%. Polish operations are the only side of the business expected to record growth, with a 23.4% increase in revenue forecast by the analysts. Adjusted profit before tax is expected at £469m, which would place the company more than halfway to its full year guidance of £770m.