Kingfisher is giving itself a DIY makeover and the shares should respond
It’s not just a quick coat of new paint – the retailer is undertaking a wholesale transformation of its business, says Robert Stephens
THE coronavirus pandemic has prompted sweeping changes to business models across retail. Companies are scrambling to boost their online capabilities, reduce costs and adapt to fastchanging consumer tastes.
Questor believes that DIY chain Kingfisher can successfully adjust its business to capitalise on the rapid evolution of shopping. The firm is introducing wholesale changes to how it operates, including major investment in its online offering.
It is responding to the growing popularity of e-commerce sales among the company’s customers since lockdown began. For example, the business recorded a rise in online sales of more than 200pc in May and June as demand among consumers rebounded sharply following
a challenging first part of the year. While the pace of online sales growth is likely to slow to some extent, the firm is redesigning its store operating model to allow for a more efficient “click and collect” service. It is also improving “last-mile” delivery options from its stores and into homes, while prioritising the introduction of new technology to improve the online experience for its customers.
As well as e-commerce investment, the company’s refreshed strategy includes a major reorganisation of its structure. This will provide its various retail brands – such as B&Q and Screwfix – with greater autonomy over the products they sell and how they are marketed to customers.
This should improve its ability to adapt to changing market trends in a fast-paced retail environment. It also focuses the firm’s appeal on local customer tastes, rather than an outdated one-size-fits-all approach across geographical locations.
This “local” approach reverses a long-standing strategy that aimed to centralise the company’s operations. Alongside this, the firm will increase the current 39pc of turnover that is generated by selling its own brands. They allow it to stand out from rivals and offer higher margins that should support profit growth in future.
In Questor’s view, the outlook for the DIY market is very mixed. In the long run, factors such as continued urbanisation and ageing housing stock in the company’s key markets could mean that sales of home improvement products remain buoyant. Likewise, the rise of working from home may stimulate demand for Kingfisher’s higher-value items, such as garden buildings.
In the short run, however, rising unemployment and a weak economic outlook as a result of Covid-19 may cause many people to spend less on non-essential items. Notably, they may delay major home improvements until the economy looks more positive and their job prospects are more secure.
A continuation of the pandemic could also cause logistical challenges for the business. It experienced delays to the delivery of some products earlier this year when factories were forced to close during lockdown. Meanwhile, other threats such as Brexit may weigh on investors’ sentiment towards European-focused businesses.
Although it faces a number of risks, we are optimistic about Kingfisher’s prospects. The company has a solid financial position that should enable it to survive economic uncertainty. For instance, it has access to more than £3bn of cash resources, which will provide support should sales growth stall in the near term. Meanwhile, its status as an “essential” retailer should mean it suffers less disruption than others should further lockdown measures be put in place in key markets such as Britain and France. It was among the few chains allowed to stay open throughout lockdowns.
For the current year, the company is not providing specific financial guidance. However, a historic priceto-earnings ratio of 14.5 suggests that it offers good value for money as it implements a revised strategy that should improve profitability.
With a sharper focus on e-commerce and product differentiation via its own brands, we believe the firm can adapt to a changing retail environment. This may broaden its appeal to a wider range of consumers and lead to improved share price performance.
Questor says: Ticker: KGF
Share price at close: 270.3p