Tuesday 21 March 2006
Kingfisher plc
Preliminary results for the 52 weeks ended 28 January 2006
Group Financial Summary
2005/06 / 2004/05 / Change / Constant Currency / LFL salesRetail sales / £8,010m / £7,650m / +4.7% / +3.9% / -2.2%
Adjusted pre-tax profit (1) / £445.7m / £661.4m / -32.6%
Adjusted post-tax profit (1) / £285.1m / £454.4m / -37.3%
Adjusted basic EPS (1) / 12.3p / 19.7p / -37.6%
Pre-tax profit / £231.8m / £647.7m / -64.2%
Post-tax profit / £139.0m / £446.5m / -68.9%
Basic EPS / 6.0p / 19.3p / -68.9%
Full year dividend / 10.65p / 10.65p / -
Net debt / £1,355.2m (£841m as at 29 January 2005)
(1) Adjusted measures are before exceptional items, financing fair value remeasurements and amortisation of acquisition intangibles. A reconciliation to statutory amounts is set out in the Financial Review.
Summary
· Tough trading conditions impact B&Q sales and profits
o New management team launched action programme
o Initiatives delivering first results
· In France, Kingfisher outperformed the market with sales up 6%
· In Rest of Europe and Asia, sales up 28% with 47 new stores in eight countries
· Net exceptional costs of £215.4 million, principally B&Q restructuring programme
· Market values of properties up 12% (£325 million). Property market value of £3.0 billion.
Gerry Murphy, Group Chief Executive, said:
“Strong performances in continental Europe and Asia were more than offset by a sharp downturn in home-related spending in the UK, presenting B&Q with its toughest trading environment for many years.
“The UK home improvement market continues to weaken into 2006. With the important spring and summer season still to come, it is too early to forecast the full year, although a continuation of the recent stronger mortgage and housing trends could provide some support later in the year.
“B&Q’s new management has acted to support trading and accelerate development of stores, ranges and services for the future. I am convinced that these initiatives will make B&Q more attractive to its customers and more valuable for shareholders.
“Kingfisher made good progress against its longer-term objectives of strengthening its established businesses, expanding its developing operations, entering new markets and harnessing the Group’s buying power.”
2005/06 OPERATING SUMMARY
(all percentage increases are in constant currencies)
UK
Consumer spending in the year was increasingly impacted by high levels of household debt and rising taxes, as well as higher utility and fuel bills. Concerns about the outlook for the housing market further impacted the home improvement sector, as seen in the 3.7% decline in the household goods market (ONS) and an estimated decline in the Repair Maintenance and Improvement market of nearly 4% in the year, the weakest market for over 10 years.
Against this background B&Q’s total reported sales fell 3.7% to £3.9 billion. Retail profit of £208.5 million, down 52.0%, was impacted by the lower sales, stock clearance, more aggressive price discounting and cost inflation.
As the year progressed it became apparent that the UK home improvement sector was facing a sharp cyclical down-turn in demand whilst continuing to open additional retail space planned some years earlier. Ian Cheshire, Chief Executive of B&Q since June 2005, and his new management team launched an action programme to:
· Reinforce price competitiveness
o Price reductions on nearly 800 top selling products
o Store-wide promotional events
o Over 60s (Diamond Club) discount card extended
· Reduce costs
o Streamlined support offices, with 400 fewer roles
o Stock levels managed down, £90 million below last year’s level
· Enhance customer service
o Improved stock availability of the top 100 products
o Dedicated Service Squads introduced in 100 stores
· Develop new product ranges
o New ranges including kitchens, tiles, flooring and air-conditioning
o Streamlined the process for new product introduction
o Over 3,000 new products to be introduced in 2006/07
· Manage and develop store capacity
o Closed 17 less productive stores; plans to downsize 17 oversized stores
o 21 mini-Warehouse conversions, eight new mini-Warehouses opened
o Two new Warehouse stores trialling new merchandising and ranges
o Management transferred from Asia and France for Warehouse renewal
The action programme gathered momentum during the second half as the initiatives with more immediate impact, such as price promotions and ‘Service Squads’, helped improve relative sales performance. Other initiatives, such as improved stock availability, price reductions and Warehouse store development, are expected to deliver increasing benefits through 2006/07.
A new UK Trade division was established to target the growing UK professional market for trade and building materials. This division includes Screwfix Direct which performed strongly following last year’s capacity expansion with sales up 18.7% to £271.3 million and profits more than doubled at £15.7 million. Screwfix Direct’s Trade Counter trial, set up to complement its online and catalogue business, has been successful with seven branches operating by the end of the financial year, and 15 more planned in 2006/07. The year also saw the opening of the first two Trade Depot branches with encouraging early results.
In France, according to Banque de France, DIY comparable store sales growth was 0.8%, its slowest rate for over 12 years. Total Kingfisher sales in France grew 6.3% (up 2.7% LFL) with retail profit up 8.1%. Castorama continued its successful revitalisation programme, improving its price perception ranking to 3rd, introducing over 6,000 new products, and increasing the total of new format stores to 24. Brico Dépôt traded well against strong comparatives. In the year, eight new stores opened and sales passed the £1 billion mark for the first time.
In the Rest of Europe and Asia, 47 new stores were opened in eight countries. Kingfisher’s sales grew by 27.6% (up 3.9% LFL). A strong underlying trading performance in Italy, Poland and China was offset by pre-opening costs in Russia, trading losses from the acquired OBI stores in China and a lower associate contribution from Hornbach.
The OBI stores are now trading under the B&Q China banner and will be fully converted by mid 2006/07. Expansion continued into new developing markets with significant growth potential. The first B&Q Home store in South Korea was opened, and the first Castorama Russia store opened shortly after the year end. This takes the number of countries in which Kingfisher operates to 11.
Harnessing buying power and international diversity
During the year, Kingfisher’s Strategic Supplier Management (SSM) programme delivered gross incremental benefits of £120 million. Group own-brand penetration was 22% with the strongest growth in China, which increased to 3.4% from 0.8%. Direct sourcing increased by 5% to $575 million across the Group, boosted by a 44% uplift in Kingfisher’s businesses outside the UK.
Kingfisher’s international diversity continued to be a source of strength, particularly in store format and range development.
FUTURE DIRECTION
Kingfisher aims to provide attractive returns for shareholders and develop new longer-term growth opportunities. This will be delivered by:
· Strengthening leadership positions in the UK and France
B&Q will continue to focus on cost control, developing new product ranges, improving existing store environments, enhancing customer service, and reinforcing price competitiveness. New store openings will be limited and focused mainly on the mini-Warehouse format.
In France, the ’twin-track’ strategy of developing the complementary Castorama and Brico Dépôt formats will continue. Castorama is now three years into its revitalisation programme and will continue to improve its ranges, maintain its price competitiveness and improve its stores, with a third of its estate expected to be in the new format by the end of the year. Brico Dépôt store openings will accelerate in 2006/07. Brico Dépôt is now targeting 120 stores in France, up from its previous target of 100.
· Expanding in Europe and Asia
Kingfisher’s businesses in Poland, Italy, Ireland, China and Taiwan have already achieved critical mass and are contributing strongly to overall growth and economic returns. Overall store numbers are expected to double in these markets over the next five years.
· Establishing in attractive new markets
Kingfisher will enter new markets where future growth and economics look attractive. The Koçtaş joint venture in Turkey is contributing to profits and growing strongly. Brico Dépôt in Spain is growing strongly and is expected to become profitable by 2007/08. Stores have recently been opened in growing markets including South Korea, Russia and UK Trade.
· Harnessing buying power and international diversity
Kingfisher will continue to harness the power of its buying scale and also its geographic diversity to offer customers better value and fresh ideas.
2005/06 OPERATING REVIEW
UK
For the 52 weeks ended 28 January 2006
Retail Sales £m / % Total / % LFL / Retail Profit £m (2) / % Total2005/6 / 2004/5 / Change / Change / 2005/6 / 2004/5 / Change
UK(1) / 4,172.0 / 4,277.2 / (2.5)% / (6.3)% / 219.4 / 442.1 / (50.4)%
(1) UK includes B&Q in the UK, Screwfix Direct and Trade Depot. It excludes B&Q in Ireland, which is reported within ‘Rest of Europe’.
(2) Retail Profit is defined in Note 1b of the Notes to the Financial Information.
UK Market - In 2005 consumer demand was seriously impacted by higher taxes and living costs, as well as concerns about indebtedness, interest rates and the direction of house prices. A 15% decline in housing transactions and 8% fewer planning applications for home alterations* compounded the weakness in demand for bigger ticket projects such as kitchens and bathrooms. *(for the nine months to September 2005).
B&Q estimates that the Repair, Maintenance and Improvement market declined nearly 4% in the year, the weakest market for over 10 years. B&Q’s market share was 14.8% (2004/05: 14.7%) and B&Q continued to be ranked as the number one DIY retailer by Verdict in its 2006 Customer Service Index.
B&Q
Trading - B&Q’s total sales fell 3.7% to £3.9 billion (down 7.8% LFL). Customer footfall was lower and sales in all major categories were weak, with sales of kitchens, bathrooms and bedrooms the worst affected. Retail profit fell 52.0% to £208.5 million reflecting the lower sales and lower margins as a result of stock clearance, more aggressive discounting and price competition in the weak market. Furthermore, underlying LFL cost inflation was 4% with store rents rising by 6% and business rates by 15%.
Management Action - In the second quarter of 2005/06, it became apparent that the UK home improvement market was in a sharp cyclical down-turn with little prospect of an early bounce-back. New management acted to improve competitiveness and reduce costs so that B&Q is better suited to operate in the current market, and well placed to benefit from a market upturn when this comes. Immediate priorities were to develop new product ranges, reinforce price competitiveness, enhance customer service and improve store environments whilst reducing operating and fixed costs.
Product range development – UK consumers continue to regard product choice as the key driver in deciding which DIY store to visit. B&Q has the widest range of all DIY stores with its largest Warehouse stores stocking around 32,000 products. Half of all the smaller, older stores have now been converted to mini-Warehouse format with an increase of up to 30% in product choice. B&Q also plans to broaden its ranges in its Warehouse stores. For example from a standing start, B&Q became the UK’s number one retailer of fixed air conditioning following the introduction of an exclusive DIY range sourced from the Far East. During the second half of the year, the process for reviewing and updating existing product ranges was overhauled with the aim of reducing the time from ’concept to shelf’. New products introduced in the year performed well, including updated ranges of tiles, wooden floors, bathrooms, kitchens and plants, with more new products planned for 2006/07.
Price competitiveness - B&Q continued its long-term ‘Every Day Low Pricing’ strategy on everyday products reducing prices across many ranges including paint and light-bulbs. A new ‘Real Deal’ marketing campaign was launched, with more prominent communication of great value. B&Q also extended the Diamond Card, its over 60s discount card, to every store in the UK.
In addition, B&Q trialled two ‘10% off’ weekends and two ’Big Project’ weekends to stimulate demand. These drove footfall and market share in higher ticket projects and reduced stocks to below last year’s levels. During 2006/07 new store tills will be introduced with improved systems functionality allowing promotions to be specifically targeted at major projects.
Service improvements - ’Service Squads’ were introduced in over 100 of B&Q’s biggest stores in the year and this roll-out will continue in 2006/07. Service Squads are shop floor staff, linked with two way radio communications, whose sole responsibility is customer assistance. Stores were also cleared of excess ’point of sale’ material which improved navigation. Staff servicing the Showroom categories have undergone specialist training to help customers plan and design their kitchen and bathroom projects and more specialist consultants have been scheduled to work in-store during busy periods.
Store development - Following 10 years of expanding the Warehouse store network B&Q has almost twice the selling space of its nearest direct competitor.
Recognising that finding and obtaining planning permission for economically attractive sites for new Warehouse stores was becoming increasingly difficult, B&Q developed a smaller format mini-Warehouse. This has been very successful; popular with customers, easier to develop and with good financial returns. Building on the existing Warehouse estate and the new mini-Warehouse format, B&Q has re-focused its store development on the mini-Warehouse format and on updating the larger Warehouse stores to showcase finished home improvement projects alongside component tools and materials. It will close older, smaller stores not suitable for conversion due to their proximity to other B&Q stores and limit new store openings to markets where B&Q is not currently represented.
During the year, six Warehouse and eight mini-Warehouse stores opened and 21 stores were converted to the mini-Warehouse format. In total 25 stores closed, 17 as part of the space rationalisation programme, with a further three planned in 2006/07. B&Q now has 114 Warehouses, 88 mini-Warehouses and 120 unconverted smaller stores. Format trials continue in four Warehouse stores aimed at developing a modernisation blueprint for the Warehouse estate. These trials are expected to complete during 2006.