Kingfisher: doing-it-itself

Tough economic times usually encourage homeowners to renovate their properties rather than move. But even the keenest DIY enthusiast ultimately feels the pinch. So it is no surprise that Kingfisher’s better than expected first-half profits owed more to smart management than to underlying market trends.

That was particularly true at the company’s UK and Irish chains, B&Q and Screwfix, where like-for-like sales were down 1.5 per cent year-on-year in a sagging market. But Europe’s largest home improvement group still squeezed costs and pushed a higher-margin product mix – with the result that gross margins edged up by 20 basis points. That was all the more creditable given the background of stock clearance at bankrupt former rival Focus DIY.

In Kingfisher’s other big market, France – where it owns the Brico Dépôt and Castorama chains – a modicum of growth is still trickling through. Even against that slightly brighter background, however, Kingfisher’s stores outperformed; like-for-like sales were up 4.5 per cent, and gross margins added 130bp.

Kingfisher’s management, led by chief executive Ian Cheshire, seem relatively confident that this strategy of driving growth from the likes of more centralised buying and product innovation can be maintained in the second half of 2011, when UK margins should benefit further from dwindling Focus disruption. That prompted some upward full-year profits revisions on Thursday. The big risks are obvious: given the economic headwinds battering both the UK and the eurozone, consumer confidence could prove extremely fragile in France, while sales growth in the UK will be hard won.

The shares fell 25 per cent over the summer, but rallied 5 per cent to trade on a multiple of 11 times next year’s earnings. That reflects considerable faith in management’s recession-beating abilities.

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