Morning Note: Market news and an update from DIY group Kingfisher.

Market News

Raphael Bostic (a Fed voting member) now sees just one rate cut this year, with the reduction probably coming later than previously expected.  However, Fed Chair Powell appears ready to support the job market even if inflation lingers. The 10-year Treasury currently yields 4.21%, while gold is $2,167 an ounce. In Europe, the ECB’s Nagel reiterated rate-cut decision hinge on data.

This morning in Asia, local currencies rose against the dollar. The yen and Yuan strengthened after authorities moved to counter last week’s weakness. Japan’s top FX official said recent moves have been “clearly driven by speculation,” while the PBOC set the yuan’s fixing at a stronger-than-expected level, a “clear signal” it won’t allow further weakening, ANZ said. Equity markets moved lower: Nikkei 225 (-1.2%); Hang Seng (-0.2%); Shanghai Composite (-0.7%).  

The FTSE 100 is currently little changed at 7,932, while US markets are currently expected to open a touch lower this afternoon. Peter Thiel, Jeff Bezos, and Mark Zuckerberg are among those who’ve sold hundreds of millions of dollars of their companies’ shares this quarter, in a signal that recent stock market exuberance could be peaking, the FT said.

Brent Crude snapped a three day loss to trade at $85.80 a barrel as geopolitical tensions rose. Morgan Stanley has upgraded its recommendation in energy stocks on the back of oil prices and attractive valuations. Commodity prices may advance 15% this year as borrowing costs come down, manufacturing recovers, and geopolitical risks persist.

Source: Bloomberg

Company News

Kingfisher has this morning released results for the financial year to 31 January 2024, which was in line with guidance that was cut in November. The forecast for the current financial year is slightly below market expectations. The shares have been a poor performer and in response to today’s update they are down 2% in early trading.

Kingfisher is a pan-European DIY chain with more than 1,600 stores across brands such as B&Q, TradePoint, Screwfix, and Castorama. The market is expected to be driven by population growth, urbanisation, and the need to repair an ageing housing stock. This is being helped in part by more working from home and the focus on energy efficiency.

The group’s medium-term financial priorities are focused on growth, cash generation, and higher returns to shareholders. Retail space is expected to grow by 1.5%-2.5% each year and the group is targeting sales and adjusted PBT ahead of the market, and free cash flow of more than £500m p.a. from FY26/27 The group intends to maintain an efficient capital structure, with surplus capital to be returned via share buybacks or special dividends.

During the latest year, reported sales fell by 1.8% at constant currency to £13.0bn. On a like-for-like (LFL) basis (which includes stores that have been open for more than a year and excludes the impact of currency and portfolio changes) sales fell by 3.1%. Total e-commerce sales rose by 6.4% and now account for 17.4% of sales, vs. a 30% ambition. The group saw a sequential quarterly improvement in volume trend in ‘core’ categories as retail price inflation tapered. In the final quarter, LFL sales were down by 4.3%.

Kingfisher UK & Ireland LFL sales grew by 0.8% and the group enjoyed consistent market share gains. By banner, B&Q was up 0.4% and Screwfix rose 1.4%. Outside of the UK, the group’s business was impacted by more challenging consumer backdrop. Kingfisher France LFL sales were down by 5.9%, with Castorama falling by 4.8% and Brico Dépôt down 7.1%. The group has made significant adjustments to the cost base. The Other International division saw LFL sales fall by 7.7%.

The group’s gross margin rose by 10 basis points to 36.8%, reflecting effective management of inflation and supplier negotiations, partially offset by higher customer participation in promotional activity in France and Poland. The adjusted retail profit margin fell by 130 basis points to 5.8%, reflecting in part higher operating costs. Adjusted pre-tax profit, which excludes the impact of transformation P&L costs and exceptional items, fell by 25% to £568m, slightly above the group’s guidance.

The group generated free cash flow of £514m, reflecting the unwind of working capital outflows from the prior year and lower capital expenditure. As a result, net debt fell from £2.3bn to £2.1bn, with gearing (1.6x net debt to EBITDA) below the medium-term target ceiling of 2.0x.

The group once again maintained its dividend at 12.4p (5.3% yield) and has commenced new £300m share buyback programme, with £50m completed by the end of the financial year.

Looking forward to the financial year to 31 January 2024, the group expect repairs, maintenance, and renovation on existing homes to provide resilience, but is cautious on the overall market outlook given the lag between housing demand and home improvement demand.

The year has kicked off on a subdued note, with Q1 LFL sales down 2.3% to date, although there has been an improved sales trend compared to the previous quarter. Volume trends have improved in all three categories: core, ‘big-ticket’, and seasonal. The group is targetting c.£120m of additional cost reductions and productivity gains to partially offset higher pay rates and technology investments. Guidance for the year is adjusted PBT of £490m-£550m and free cash flow of £350m-£410m. The profit forecast is slightly below the current market estimate of £560m. Further out, the group is targeting free cash flow of £450m in FY25/26, followed by more than £500m p.a. from FY26/27.

Source: Bloomberg