Five years on from the DIY boom that captured investors’ attention at the start of the pandemic, home improvement retailers are trying to get their own houses in order.
B&Q owner Kingfisher saw shares slump 14 per cent this week on the back of disappointing 2025 guidance. With UK wage growth now outstripping inflation, improving real incomes had been expected to translate into greater consumer spending this year. Yet DIY appetite remains muted, not helped by stubbornly high borrowing rates and a so-so housing market.
Kingfisher is also contending with problems at its French arm, yet there are reasons for optimism. Both it and smaller rival Wickes, spun out of Travis Perkins in 2021, say they are taking UK market share following the collapse of rivals such as Homebase. Wickes points to its keen pricing and success in attracting younger customers as key attributes.
With consumers still cautious, both companies are also talking up their trade arms. This focus brings the retailers more definitively into others’ orbit; Wickes said last week it was taking business from building merchants, hinting perhaps that its former parent is among those suffering from the increased competition. This month, Travis Perkins delayed publication of its full-year figures, citing auditor delays. Operating profit is still expected to be in line with guidance given last October, when it warned on the state of its merchanting business.
Shifting from DIYers to tradespeople has obvious appeal for the home improvement companies — trade customers buy in greater volumes, and do so more often — but it is not a sure fire winner.
For one thing, differing purchasing habits mean stock levels and turnover must be watched more closely than ever. That’s a reminder that the unglamorous business of inventory management is a vital part of any retailer’s success, whatever the state of their underlying markets.
BUY: Wickes (WIX)
Both the retail and design and installation arms have enjoyed a brighter start to 2025, writes Michael Fahy.
In general, chief executives are an optimistic bunch, so it was no surprise to hear Wickes’s David Wood sounding so upbeat even as the DIY retailer reported a 2 per cent decline in like-for-like sales and a near-halving of reported pre-tax profit.
The profit decline had more to do with impairments, as adjustments were made to the carrying value of its store network. This was due to a reassessment of future cash flows after a few tough years for the sector.
Chief financial officer Mark George argued that such actions should be expected at the bottom of a cycle and that “virtually none” of the stores are currently lossmaking, although marginal performers are reviewed as and when leases fall due for renewal. Overall, though, Wickes expects to open more stores than it closes — up to seven will be added this year, following the acquisition of four former Homebase stores.
The group’s top line was dragged down by its design and installation business, which offers bigger-ticket items such as kitchens and bathrooms. That business reported a double-digit revenue decline, although Wood says it has now experienced two successive quarters of volume-driven growth.
“We believe we are seeing a sustained recovery in that business,” he said. “We think we’ve found the bottom of the cycle for big-ticket items.”
Over the past decade, the DIY market has been growing at about 2.5 per cent a year and the recent fallow period has led to a consolidation, with the failures of Homebase, Carpetright and CTD Tiles keeping insolvency practitioners busy last year.
Double-digit growth in the number of trade accounts opened is therefore evidence that Wickes has been growing its share — it now has 6 per cent of a £27bn market. Investec analyst Kate Calvert argued that the retailer should benefit from “material operational gearing upside” as the market recovers, which could lead to a doubling of profits.
In the meantime, the announcement of a further £20mn buyback is an added bonus for a share that continues to offer a dividend yield of 6 per cent even after a valuation gain of about a fifth since the start of this year.
Based on FactSet consensus earnings of 15p a share, Wickes’s shares trade at 12 times earnings. This is the same as B&Q owner Kingfisher, despite analysts’ expectations that Wickes’ earnings growth will be much stronger.
HOLD: Kingfisher (KGF)
Downbeat guidance leads to sell-off in B&Q owner’s shares, writes Michael Fahy.
Presumably, the reason why Kingfisher chief executive Thierry Garnier was so keen to highlight the market share gains made by the DIY group in the past 12 months was because there was little else positive about the numbers.
Adjusted pre-tax profit fell by 7 per cent to £528mn, which was broadly in line with expectations. An uplift in retail profit in Poland and a flat result in the UK & Ireland were not enough to account for the continued decline in profitability in France, or the losses incurred in other parts of the international business — including a joint venture in Turkey, which is undergoing a restructuring that will see 30 per cent of its stores shuttered.
Garnier said Kingfisher had “accelerated” plans to restructure the Castorama business in France, where like-for-like sales fell by 6.6 per cent. This has included restructuring or modernisation of its worst-performing stores and a restructuring of its head office that will take out £9mn of annualised costs. However, retail profit margins in the French business fell from 3.3 per cent to just 2.4 per cent, and this doesn’t include the losses incurred in the rollout of the Screwfix business in the country.
Once £221mn of one-off charges (mainly store and goodwill impairments) are factored in, the group’s reported pre-tax profit fell by 35 per cent to £307mn.
The thing that disappointed investors most, however, was the muted outlook. An adjusted pre-tax profit forecast range of £480mn-£540mn was below the consensus forecast of £546mn, with Garnier pointing to government budgets in the UK and France that “have raised costs for retailers and impacted consumer sentiment”.
The shares fell by 14 per cent, leaving them flat on a 12-month basis.
There is an argument to be made that, like Wickes, market share gains leave it better placed to deal with an upturn, and Kingfisher’s 5 per cent dividend yield (and £300mn buyback announced alongside the results) offer decent compensation in the interim.
Yet in Kingfisher’s case, the downbeat guidance suggests that a recovery could take some time and after maintaining a dividend for three years as earnings per share have fallen, the dividend cover of 1.7 times is looking a little thin.
A valuation of 11 times earnings might be below its 10-year average, but so are its returns, and buybacks are only really worthwhile once earnings show signs of sustainable improvement.
SELL: Vistry (VTY)
The housebuilder said demand from partners was flat in the first quarter of the year, writes Natasha Voase.
“Challenging” is perhaps an understatement when it comes to Vistry, which spooked the market late last year with a volley of profit warnings. The housebuilder reported a flat set of results reflecting last year’s cost control issues, increased building safety provisions and softer partnership homes demand.
Total completions rose 7 per cent to just over 17,000 while revenue was up 6 per cent on a reported basis. However, pre-tax profit fell 64 per cent before accounting for exceptional items.
More concerning, far from reaching the promised net cash position at the end of the year, the housebuilder’s net debt position more than doubled to £180.7mn. We also note that, before exceptional items relating to building safety and restructuring, operating cash inflows before exceptional items decreased by 20 per cent to £340mn. Vistry said that it would be focusing on improved cash generation to ensure a “steady reduction in average net borrowings”. As part of the effort to accelerate cash release from its land bank, the housebuilder is considering bulk sales and discounting.
Vistry also reported a slowdown in demand from affordable housing providers, although it did see an increase in demand from the private rental sector. The housebuilder said that it expected partner-funded activity to step up as the government’s £2bn of affordable housing funding is allocated. However, the FT noted that this figure is lower than the average state spending for the sector over the past five years.
The focus on cash generation is good, although we note that last year was supposed to be all about cash generation, too. Stretched budgets at affordable housing providers have also highlighted some of the risks in Vistry’s new model. While we don’t think that things can get much worse, we also don’t see them getting much better. Besides which, there are better, more reliable housebuilder stocks out there.
