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LONDON (Alliance News) - B&Q and Screwfix owner Kingfisher PLC Thursday reported a strong increase in its retail profit for the first quarter, helped by robust trading in the UK and Poland, but saw its share drop as it warned of tougher trading in the second quarter against stronger comparatives and said margins were hit by promotions and sales mix.
"Trading in the second quarter will be tougher, entirely around weather comparatives. Underlying macroeconomic terms are trending the right way," Chief Executive Ian Cheshire told journalists in a conference call Thursday.
Kingfisher shares were down 6.0% at 392.40 pence, making them the biggest faller in the FTSE 100 Thursday morning.
Kingfisher said the weather helped drive strong seasonal gains at B&Q in the first quarter, with an unseasonally pleasant early Spring in the UK boosting sales of its barbecue products, while also benefiting from a late Easter, increased project-related spend in the UK and Poland, and improving housing activity in the recovering UK housing market.
In the UK, B&Q and the Screwfix business both posted strong growth in profits and sales, although Kingfisher said gross margins were down around 200 basis points on the back of more promotional activity and the sales mix.
"We sold a lot of lower-margin outdoor seasonal and building products, and there was a big promotional push in the kitchen and bathroom area," said Cheshire.
Europe's largest home improvement retailer, which also owns and operates the brands Castorama and Brico Dépôt in France, posted a 19% increase in its retail profit of GBP142 million in the quarter ended May 3, up 20% in constant currency. Profit growth was driven by a 6.1% rise in sales on a reported basis, and a 9.2% increase at constant exchange rates.
Retail profit is operating profit before central costs, exceptional items and amortisation.
Earlier this year the group announced the start of a multi-year programme of additional capital returns to shareholders, starting with around GBP200 million during the current financial year.
Kingfisher said Thursday that it has already returned around GBP35 million to shareholders via a share buy back, and announced it will return another GBP100 million via a special dividend of 4.2 pence per share on July 25.
"We have made a strong start to the year, capitalising on more favourable weather conditions right across Europe to achieve sales and profit growth in France, the UK and Poland, our three largest markets. Whilst this is encouraging, the first quarter is one of our smallest and the growth achieved largely reflects comparisons with the very difficult start to last year," Cheshire said in the company's statement.
France is the leading profit contributor for the group, followed by the UK and Poland, although Kingfisher's French business has been a drag on the group for some time, with the company citing weak consumer confidence as the main problem.
"Our position in France is significantly weaker when looking at like-for-likes over the last two years," said Cheshire.
Last month, the group said it was in exclusive negotiations to acquire French home improvement retail chain Mr Bricolage for an overall enterprise value of around EUR275 million.
Kingfisher said Thursday that it is still in exclusive negotiations with the principal shareholders of Mr Bricolage to acquire their shareholdings.
Under the terms of the proposed deal, the group would acquire a 41.9% stake from from ANPF, which is held by franchisees, and 26.2% from the Tabur Family, at an agreed price per share of EUR15. It also said that it would file a mandatory offer to acquire the shares held by the minority shareholders at the same price.
Mr Bricolage would add a third, complementary strong business alongside Kingfisher's existing two successful brands in France - Castorama and Brico Dépôt.
Kingfisher recently sold its entire 21.2% stake in German business Hornbach, and last year acquired the Bricostore business in Romania. Kingfisher said it received proceeds of EUR236 million from the disposal of Hornbach.
Kingfisher has also been investing in the business by expanding into new markets, taking its profitable Screwfix business in the UK abroad, with a four-store pilot of Screwfix in Germany, which it said is on track to open in summer this year. It also opened its first Brico Dépôt store in Portugal.
The group has continued to see a strong performance from its Screwfix business in the UK, as well as its operations in Poland and Russia, despite continued weakness in its French business. Kingfisher said that gross margin dynamics are starting to improve in France given reduced input pressures and milder retail pricing tension.
During the first quarter, Russia and Poland continued to see double-digit sales growth, while its B&Q business in China continued to struggle, hit by a slowing Chinese property market.
Earlier this year the group announced that it was looking for a strategic partner for B&Q China, now that the business is stable with the core business broadly break even.
It said it was hoping to replicate "the successful partner approach in Turkey", where its operates the Koçtas brand, a 50% joint venture in Turkey with the Koç Group.
Ian Cheshire told journalists in March that the group already has potential partners "knocking on the door" but would not elaborate.
"They are now half-way through the door, I would say. We have started the process. However as we said before, we expect it to be a 6 to 12 month process," said Cheshire.
Before the group announced its partnership plans for China in March, some analysts had been seen a potential China exit on the cards, weighing up whether the group would pull the plug on the whole business.
"We believe the recovery in UK housing transactions,which accelerated significantly from spring 2013, is only now starting to feed through to DIY spend, and we expect this to fuel like-for-like growth strongly over the next two years," analysts at Jefferies said in a research note earlier this month.
By Rowena Harris-Doughty; rowenaharrisdoughty@alliancenews.com; @rharrisdoughty
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