I’m sorely tempted to invest in Kingfisher (LSE:KGF) despite the fear of a major downturn in the home improvement market. It’s a company that's been forced to cope with some serious problems in recent years – many of which were self-inflicted But the fairly new (appointed 2017-19) management team seem to have revived the company by concentrating on continuous improvement within Kingfisher’s circle of competence and competitive advantage.
Despite the recent jump in underlying profits its market capitalisation has fallen from £10bn to £5.2bn.
Kingfisher remains the strongest player in big-box general DIY sheds (B&Q in the UK & Ireland, Castorama in France and Poland, Brico Depot in Romania).
It is also a very significant retailer of building tools and materials to professional tradespeople, especially through its fast-growing Screwfix and the B&Q TradePoint (and similar schemes in other countries).
The third area is the supply of home improvement products at discount prices – Brico Depot France, Brico Depot Iberia.
These banners hold either the number one market position in their respective countries, or number two. We in the UK are familiar with Screwfix dominating the capital-light trade counter service and B&Q dominating the consumer home improvement market in towns up and down the country.
Kingfisher’s average earnings per share over the last thirteen years are 22.2p. With its current share price of 250p this gives a cyclically adjusted price earnings ratio of 11.3.
Dividend yield is 12.4p/250p = 5%, which, it seems to me, is unthreatened by the risk of financial distress. The directors are committed to a “progressive, sustainable dividend policy” (2022 Report)
In addition to the £254m to be paid out in dividends in respect of trading for the year to the end of January 2022 the group has bought £300m of its own shares.
Thus we see that this £5.2bn MCap company is so cash generative and has so much cash in the bank that it can hand over £554m to shareholders via proposed dividends and the ongoing share buyback programme in one year.
Kingfisher has no borrowings alongside £823m of cash, combined with a history of cash flow from operations north of £700m year after year.
It also has £2.8bn of freehold property on the books.
Being a (fairly) fast stock-turn retailer, inventories are covered by credit obtained from suppliers.
Is it reliant on DIY?
In the past, in addition to selecting shares, I’ve invested in properties for re-development, and so I’m familiar with using B&Q’s TradePoint: I (or an employee) can pitch-up at a B&Q outlet, select goods and take them away after showing the card.
I get “trade prices”, and up to 60 day’s credit, with a neat monthly bill. TradePoint customers pay the same as ordinary shoppers until they reach the threshold of £250 in a month. After that, a 5% discount is applied. Reach £1,000 and 10% is knocked off for the rest of that month and the next three months.
Admittedly, for many items e.g. a truck load of bricks, prices are often lower elsewhere. Why, you might ask did I spend so much at B&Q and Screwfix when builders merchants can be cheaper? I also had accounts with three builder’s merchants and bought a lot from them.
Firstly, builder’s merchants are not always cheaper – Kingfisher can be competitive on some things.
Second, builder’s merchants are great for buying a truck load of heavy items – blocks, insulation, plasterboard, etc. Play one off against the other and prices can fall significantly. But builder’s merchants cannot stock a wide range of the less heavy items – dozens of different light fittings, kitchens, doors, paints, baths, tiles, flooring, etc. That is where B&Q and Screwfix really come into their own. They stock thousands of items to choose from. Thus, Kingfisher has a loyal customer base in tradesmen of all descriptions. It is certainly not for DIY enthusiasts only.
Last year TradePoint sales were £834m, which was a mere 20% of B&Q’s overall turnover. But it is growing fast - over the last two years TradePoint increased sales by 33% LFL, and has a target to reach £1bn. Screwfix does however put it in the shade; it already sells £2.3bn pa.
So, why did the shares fall?
In 2016 the newly appointed CEO, Ms Véronique Laury, launched her big strategic idea to transform the group from one where product ranges and sourcing varied from one country to another. The plan was to have a common set of product lines in France, Ireland, Poland, etc.
As well as having “unified” products, the company would have “unique” products that competitors did not stock. There was also to be a one IT system across the Group, and some operational cost savings.
The promise was that the company could reap a benefit amounting to £500m per year, raising profits from the £700m range to more like £1.2bn. It would cost up to £800m to implement all the changes, but it would be worth it in the end.
Making the short-term sacrifice more palatable was the offer of over £600m returned to shareholders over three years by way of share buybacks. This was on top of the annual dividend of around £230m.
True to her word, £630m was spent on share repurchases – and the balance sheet remained strong. At the same time dividends per share rose from 10p to 10.82p. So that is all good.
What was not so good was the poor performance in some parts of the empire. In particular, both Castorama and Brico in France suffered from poor management. French sales flatlined for ten years, not even keeping pace with inflation. And operating profits from France fell from over £400m in 2012 to just £164m in the year to January 31, 2020.
It was even worse in the, much smaller, Russian and German operations, which were closed.
But things have perked up in France under the new management after Laury’s resignation in 2019. Sales there are now up to £4.5bn, and profits £221m.
In the UK sales overall ha.......
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