DIY retailer Kingfisher (KGF) was the top riser in the FTSE 100 on Tuesday, gaining 8.7% to 288p after it posted a surprisingly strong first half update and said the positive momentum of the second quarter had continued after the period end.

Sales for the six months to the end of July were down just 1.1% on an organic basis to £5.92 billion thanks in large part to a 164% increase in e-commerce sales, which now represent 19% of turnover compared with just 7% a year ago.

PROFITS GROWING AGAIN

Retail profits were up 17.7% on a like-for-like basis to £533 million, driven mainly by lower costs and a better performance from the UK DIY chain B&Q. Adjusted pre-tax profits were up 23.1% to £415 million.

Thanks to an improved operating result, a reduction in working capital and a £300 million decline in inventories, free cash flow increased a remarkable £838 million to surpass the £1 billion mark.

The firm has improved its sourcing to lower the cost of its products and paused several group-wide initiatives such as planned range reviews to allow it to focus on handling the coronavirus crisis.

Also, by stopping all non-critical IT projects it has been able to focus on improving the digital capability of its French business Castorama without disruption to the business, resulting in a better first half performance.

STRONG POSITION

The firm is on a strong financial footing, with access to over £3.7 billion in cash including £2.1 billion of its own cash in the bank as of this month, but given the ‘considerable uncertainty around Covid’ it has withheld the interim dividend.

The rebound in sales in the second quarter has continued in the third quarter with sales up 16.6% so far thanks to growth across all categories and stores.

‘Through our new strategic direction our retail banners have gained agility and have leveraged their distinct positioning. This has strengthened our market positions and delivered much improved LFL sales before and after the lockdowns’, said chief executive Thierry Garnier.

‘Looking forward, while the near term outlook is uncertain, the longer term opportunity for Kingfisher is significant. There is a lot more to do, but the new team and new plan is now established in the business and we are committed to returning Kingfisher to growth’, he added.

WORK IN PROGRESS

With Kingfisher having recently re-joined the FTSE 100 index, investors will be keen to make sure it stays there. However, with the UK government looking at rolling lockdowns or ‘circuit breakers’ to halt the spread of coronavirus, the firm needs to make sure it is prepared in case its stores have to close again.

Julie Palmer, partner at business advisory and insolvency firm Begbies Traynor (BEG:AIM), believes ‘it would be wise for B&Q to refine its click and collect service for the future, modelling it on the highly successful and much more mature process of its trade sister Screwfix. It also has to place greater value on its delivery service and work to create a strong logistics network that can service the demands of new DIY enthusiasts.’

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Issue Date: 22 Sep 2020