Fiery Flash: Kingfisher. One swallow does not make a summer

In recent days, shares of home improvement retailer Kingfisher surged approximately 18% following its first-half fiscal results. The rally was fueled by stronger-than-expected earnings, a modestly improved profit outlook for the full fiscal year, and the announcement of an additional £300 million share buyback. However, investors should remain cautious and consider how much further the company can realistically improve moving forward.

 

Kingfisher is a British company operating approximately 2,000 home improvement stores under banners such as B&Q, Castorama, Brico Dépôt, Screwfix, Trade Point, and Koçtaş. The majority of the group's stores are located in the UK and Ireland (1,233), Turkey (368), France (240), and Poland (102). With a net debt-to-EBITA ratio of 1.5, Kingfisher maintains a solid balance sheet, reflecting a stable financial position.

 

In the first half of fiscal year 2024/25 (ending July 31), Kingfisher reported a 2.4% decline in comparable sales growth at constant currencies. However, operating profit increased by 2%, boosting the operating margin by 40 basis points to 5.5%. Looking ahead, the company aims to drive like-for-like sales growth through e-commerce, marketplaces, and its own brands. Additionally, net space expansion is expected to contribute 1.5% to 2.5% to annual sales growth. Free cash flow is projected to rise from a target of £450 million this fiscal year to over £500 million annually thereafter.

 

Kingfisher lacks directly comparable listed peers in Europe. However, its U.S. counterparts, Home Depot and Lowe’s, have a far superior track record. In addition to their historically higher sales growth, these companies maintain significantly better margins. Home Depot is targeting an operating margin of approximately 13.55% in 2024, while Lowe’s aims for 12.45%. Kingfisher's weaker performance is evident in its significant stock market underperformance relative to Home Depot and Lowe’s. Over the past decade—and the one before that—Kingfisher's stock delivered an average annual total return of just 2.4%, with dividends accounting for the entirety of this return.

 

Stock market performance of home improvement stocks over the past decade

 

Source: Econopolis, LSEG Datastream

 

With a price-to-earnings ratio of approximately 15 and an enterprise value/EBITDA ratio for fiscal 2025-2026, along with a dividend yield of around 3.7%, Kingfisher’s stock is not highly priced. However, the true test lies in execution. Achieving the promised financial targets will be crucial for the company's stock performance moving forward.