Shares in B&Q owner and FTSE 100 member Kingfisher (LSE: KGF) dropped again today (22 November) as investors reacted to the latest trading update from the firm.
As someone who has long been wary of the company as an investment, I can’t say I’m surprised.
Another profit warning
If anything, Wednesday’s statement shows just how much pain the ongoing cost-of-living crisis is causing the company. Total like-for-like sales dipped 3.9% in Q3 with trading in France proving particularly difficult thanks to a “weak market backdrop“.
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This makes perfect sense. With a property market in the doldrums and many families still trying to adapt to higher prices for pretty much everything, most home improvement tasks are easily postponed.
The outlook isn’t encouraging either. Group like-for-like sales were down 3.4% in the three weeks to 18 November. While actions have been taken to cut costs in France to help offset the impact of inflation, the firm already expects that this won’t be enough to turn things around.
All this has forced Kingfisher to lower its estimate on adjusted pre-tax profit for the full year. Around £560m is now expected. Worryingly, that’s £30m lower than previous guidance from only a few months ago. It’s also a far cry from the sort of money the £4.1bn cap business was making while the pandemic raged.
Decent dividends
For balance, it’s worth trying to find a silver lining to these multiple clouds.
Kingfisher’s woes mean it was trading at a low valuation of 10 times forecast earnings even before Wednesday’s statement. That’s fairly low within the consumer cyclicals sector.
There’s also a 5.5% dividend yield in the offing for income hunters, at least based on existing analyst forecasts and the current share price. At the time of writing, this looks to be safely covered by profit. It’s also significantly more than the 3.9% or so I’d get from a fund that passively tracks the return of the FTSE 100.
A favourite with shorters
The problem is that going against the crowd can be risky. This is especially true when that crowd includes those who are actively betting that the share price has further to fall.
As I type, Kingfisher remains a favourite with short sellers. In fact, there are only three companies that are more popular with these usually well-informed traders in the entire UK market. These are fast fashion firms Boohoo and ASOS and troubled Metro Bank. That’s not a club most listed firms would want to be part of.
Now, short sellers can sometimes be wrong or outstay their welcome. Any sign that trading is stabilising at Kingfisher’s stores could send them rushing to close their positions. This could see the share price rocket to the benefit of brave contrarians. Even evidence of a wider recovery in consumer sentiment could be sufficient.
Not for me
As usual, however, the question I’m asking is whether Kingfisher fits in with my strategy of investing in high-quality stocks for the long term. With low margins, questionable growth prospects and a frankly terrible capital return over the last five years (-10%), the answer from me remains a solid ‘no’.
In fact, I reckon this remains one of the worst value traps in the index.
