Kingfisher

Written by Senior Portfolio Manager, Michael Hakes, CFA, MBA.

We recently added Kingfisher to the Income Growth Fund at a 2% weight and 5% Yield.

Kingfisher is an international home improvement retailer with over 2,000 stores operating in the U.K and several countries in Europe, including France, Poland and Romania. Their store banners include B&Q, Screwfix, Brico Depot and Castorama. Figure 1 shows sales by banner and EBIT by country. We would highlight that the U.K. represents 49% of sales and 76% of profits while France accounts for  33% of sales and only 17% of profits.

Figure 1.

Kingfisher has faced strong headwinds over the last few years as consumers in their markets have faced higher interest rates and weak housing markets. For example, in France, consumer sentiment is at 20-30 year lows and the, usually high at 14%, has surged to 18%. This tough macro environment has been driven by a lack of confidence in the economy, the political environment and food inflation.

Figure 2 illustrates French margins over the long term.   Margins have been under pressure over the last 8 years, hovering around 3-4%. In 2018, Castorama made a number of mistakes in product selection and sourcing. In failing to properly identify customer needs, it offered the wrong products, lost market share and ultimately had to mark down inventory. While margins have yet to recover, management has been testing several new initiatives in France for almost 2 years now and believes they can bring margins back to the 5-7% level.

Figure 2.

Overall, the management team has been investing heavily in digital technologies, utilizing Artificial Intelligence to improve inventory control and clearance programs. Store growth is expected to be about 2% per year.

Figure 3 shows the historical valuation of Kingfisher shares, the long-term average and one standard deviation above and below the average. Currently, Kingfisher shares are discounting a lot of bad news.

Figure 3.

We believe Kingfisher shares are undervalued and should offer good upside potential to patient investors. As the U.K. and France begin to cut rates through 2024 and the benefit of the new management initiatives become apparent, we think Kingfisher could trade back to more historical valuation levels. We can see the stock rising 20-30% over the next 18 months.