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 Daily Telegraph - Business - - Business -

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.

buy

Questor says: Ticker: KGF

Share price at close: 270.3p

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