Kingfisher still believes its transformation plan will boost profit by £500m over five years, despite unhelpful external conditions and growing scepticism among analysts and investors that the target will ever be met.
The home improvement group, which reports half-year results on Wednesday, is halfway through its “One Kingfisher” programme aimed at cutting costs, simplifying ranges and increasing online sales. The target of £500m in additional profit was announced by chief executive Véronique Laury in January 2016, but analysts’ forecasts imply an uplift of less than £300m by 2021. The shares are almost a fifth below their 2016 level, and earnings forecasts have been falling.
“We have set out a plan that we always said would be back-end loaded,” said Ms Laury, who argued that the revamp is taking time because it goes much deeper than other business transformation programmes. “Many others are just scratching the surface, adding more cost on top of their existing costs.”
Few dispute the logic of unifying buying teams and eliminating duplication — Kingfisher cites the example of lightbulbs, where it has cut the number of suppliers from 55 to just eight, reducing prices by a fifth in the process.
But doubts exist about the concept of standardising ranges across countries as diverse as Romania and the UK. “They are not Ikea. They cannot deliver the same proposition across countries in the way that Ikea can. They are not unique enough,” said Steve Collinge, managing director of Insight Retail. Kingfisher said, however, that its research had consistently shown that customers’ needs are “more similar than different”.
Ms Laury also pointed out that “the world has changed” since Kingfisher started formulating the plan. In the UK, its biggest market, traditional rival Homebase has been beset by problems, offering Kingfisher a chance to benefit, but discounters such as B&M are targeting DIY. In France, online start-up Mano Mano is grabbing share.
Recent trading has been volatile; the first quarter was affected by poor weather in the UK, where Kingfisher runs the B&Q chain which reported a 9 per cent fall in sales in the period. The second was hit by slower growth at its Castorama chain in France, where sales were down 3.8 per cent.
But for all the doubts about the targets, most analysts are still buyers of its stock. Many of the funds that hold it are value-oriented. “The shares are not pricing in any improvement. If anything, they are saying deterioration, so anything other than decline will be positive,” said one manager who has bought Kingfisher shares in the past year. He added that shares in US peers, such as Lowes and Home Depot, trade at much higher valuations despite being “basically the same business”.
Geoff Ruddell, an analyst at Morgan Stanley, said the group could become a target for activist investors. “Kingfisher has £3.5bn of property, no debt, a surplus in its pension scheme and nine separable businesses,” he wrote in a note to clients. Failure to deliver on the unification programme might focus attention on these attributes, he added.
Kingfisher also owns Screwfix, which operates from smaller sites on industrial estates and sells more to the building trade. Almost a third of sales are made online, against 6 per cent at B&Q, which sells mostly to consumers through big stores at out-of-town retail parks. “Screwfix is the jewel in the crown,” said Mr Collinge. “I expect they will come under increasing pressure to split it off, which they will resist.” Indeed, the company said Screwfix was integral to the business, not least because of its digital expertise.
Kingfisher, a decentralised conglomerate built up by acquisitions, has defied previous attempts to impose more central management. A 2012 pledge to add £300m of profit in five years fell by the wayside; come 2017, profits were actually lower. But Ms Laury’s determination mirrors that of Archie Norman, the Marks and Spencer chairman who was once Kingfisher’s finance director and is now in the midst of his own five-year plan. He has firmly told M&S’s investors that he is focused on transforming the company for the long term, not in day-to-day share price movements.
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