Resilient B&Q beats the gloom for now

Kingfisher, the parent company of home-improvements chain B&Q, defied expectations last week to deliver a rise in first-half profits – a welcome contrast to the long line of dismal retail performers this year in what is being dubbed the “brutal season”.

A strong performance in its European operations, notably in France and Poland, helped buoy the group’s pre-tax profits to £206m for the six months to August 2.

Yet, despite the better-than-expected figures, group chief executive Ian Cheshire is sticking to a well-worn script, warning of “very tough times ahead, especially in the UK”. He says it is too early to say how turmoil in the financial markets will affect business at Europe’s largest home improvements group.

Non-UK strategy

For now, though, analysts see Kingfisher outperforming its rivals over the next 18 months even as consumers cut down on spending, as a result of Cheshire’s”clear strategy”. This strategy includes a renewed focus on stores and the products it stocks and thriving non-UK operations.

A fortnight ago rival Home Retail Group revealed the worst sales drop at Argos for nearly a decade, falling by 5.8% in the three months to August 30, and its plans to write down the value of DIY chain Homebase by about £700m later this year. And Comet owner Kesa Electricals has warned of a first-half loss, while Woolworths – the subject of takeover talks – posted a record fall in underlying pre-tax profits of £90.8m in the six months to August 2. Ironically, Kingfisher began life as Woolworth Holdings back in 1982, as a parent company for Woolworths, B&Q and Woolworths Properties. The group acquired the electricals chain Comet and health retailer Superdrug in the Eighties before changing its name to Kingfisher in 1989.

After demerging its electrical and furniture arms to form Kesa in 2003, Kingfisher has gone back to basics concentrating on its core consumer and trade DIY market.

Cheshire, who was promoted from chief executive of B&Q in January, has previously been credited with boosting inter-national growth and profits as well as being behind the online growth of B&Q, Comet and Woolworths before the company demerged.

Analyst Tony Shiret of Credit Suisse says: “At this stage, in this environment, he’s doing pretty well. But the market will reserve judgement for a little while yet.”

Sticking with DIY

That B&Q and sister chain Screwfix have not been hit as hard as rivals in the UK is in no small part to them having steered clear of products such as furniture and soft furnishings. However, one analyst also says that the sector failed to innovate enough when UK sales were strong, “almost using the market as a cash cow” and is now paying the price.

Retail analyst Andy Wade of Numis Securities says Kingfisher has “come a long way” from just a few years ago. He says: “The environment out there is difficult at the moment, particularly relating to housing and house transactions.”

Another industry observer suggests that a difficult market “plays into Kingfisher’s hands”. He says that cash-strapped households are turning to “do it yourself” instead of hiring tradesmen. His view is supported by figures revealed last week by research company Hitwise, which shows UK internet visits to house and garden retail websites increased by 20.5% over the past 12 months, from 0.49% of the total in August 2007 to 0.59% last month.

Shiret concurs and adds that although DIY chains such as Homebase have suffered from a drop in discretionary purchases such as kitchens and white goods, they have a “very” different product mix from B&Q where the average transaction hovers around the £25 mark.

“B&Q is doing better, but nobody is doing fantastically well,” adds Shiret. That even Kingfisher’s management cannot get excited by forecast-beating results, tells its own story.

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