DIY retail group Kingfisher has posted better than expected results for 2008/09, with total retail sales up 11.1% to GBP5,130m, masking a like-for-like decline of 2.6%. However, the gloomy prospects for the DIY market could mean hard times ahead for Kingfisher. In the current climate, managing costs and cashflows has become all important, as the global outlook continues to darken by the day.
Kingfisher's positive results included retail profit up 22.7% to GBP277m, and net debt down from GBP1,559m to GBP1,448m. However, as the retailer's sales performance in the UK was broadly flat (like-for-likes down 4.8%), international contribution - and especially sales in France, which were up 19.3% in total and 0.7% in like-for-like terms - have become increasingly important to Kingfisher. While the struggling Castorama business in Italy has been divested, two other countries in its portfolio stand out: Poland due to its positive input, with sales up 20.6%; and China, where with losses of GBP17m and like-for-like declines of 23.6%, the retailer continues to struggle.
For DIY in general, the outlook is gloomier than it has been for many years. In three of the countries in which the retailer has a presence - Spain, Ireland and the UK - the housing market has crashed. As DIY expenditure is closely linked to the number of housing transactions, Kingfisher will somehow have to guide its business through sharply declining markets. Although the retailer can grow its market share when weaker players drop out under economic duress, strong positive sales growth will almost certainly be elusive, and margins will come under pressure. Moreover, the benefits of such a strategy would only materialize once the current crisis has run its course.
The outlook for Eastern Europe has also darkened considerably. The credit crunch will leave its braking tracks in the real economy, and consumer credit will be sharply reduced going forward. Currently, the main problem is rocketing inflation, as this reduces consumer spend on big ticket items and non-essential goods: consumers will need to eat, so a new kitchen can wait. Although less acute, the problem is similar in France, where declining purchasing power and rising inflation have been the main topics of the year.
Inflation has also crept into the supply chain, with high energy and transportation costs pushing up factory gate prices. This means that the retailer is being squeezed from two ends: higher costs and slower sales.
By focusing its ranges on the value end and energy-efficient products - which not only address environmental concerns but also help customers to save money in times of energy-price inflation - the retailer is taking the right steps. Arguably, the team around Ian Cheshire has prepared well, doing all it could. However, in current market conditions, there is little the board can do, especially as the outlook for retail as a whole becomes bleaker by the hour.
Source: Verdict Research