3 big reasons I’d avoid shares in this FTSE 100 retailer

Shares in B&Q and Screwfix owner Kingfisher (LSE:KGF) fell over 5% in early trading this morning following the release of full-year results. Given the positive numbers posted, this might seem a strange reaction from the market.

In the 12 months to the end of January, adjusted sales rose 1.7% in constant currency to £11.2bn. Adjusted pre-tax profit came in ahead of expectations at £743m — up 8.3% thanks largely to favourable foreign currency movements and like-for-like sales growth in the UK and Poland.  

In addition to these encouraging figures, the company also reported that its five-year plan to boost annual profit levels by £500m from 2021 through the creation of a unified home improvement offer, greater operational efficiency and improved digital capability was on track.

To cap things off, Kingfisher’s balance sheet looks even more robust, with the company having £641m net cash by the end of the reporting period — £95m more than the previous year.  

As an investment, Kingfisher also ticks a lot of boxes. Trading on 14 times earnings, its shares already looked reasonably valued before today. Factor-in a low price-to-earnings growth (PEG) ratio of 0.9, a distinct lack of competitors in its market, a yield of 3.2% and that huge net cash position and things start to look very attractive indeed.

Right now however, I wouldn’t be a buyer. Here’s why…

Turning the screw

The first reason I wouldn’t go near Kingfisher’s shares at the current time is — you’ve guessed it — Brexit. Although no one knows exactly what will happen in the market once Article 50 is triggered, it’s likely that the share prices of companies that are dependent on the UK for a large proportion of their profits could come under pressure. Today’s rather gloomy comments from Kingfisher’s CEO Véronique Laury would seem to support this. Reflecting that last year’s EU referendum had “created uncertainty” for the UK economy, Laury also commented that the company remained “cautious” on its outlook in France as a result of the forthcoming presidential elections. 

Secondly, yesterday’s announcement that inflation had climbed to its highest rate since September 2013 (2.3%) won’t have made pleasant reading for most retailers, particularly companies with cyclical earnings like Kingfisher. After all, DIY projects are easily shelved as consumer belts tighten. Why bother painting the bedroom or buying that new set of garden furniture when there are so many more pressing expenses to think about?

A better option?

My third reason for avoiding shares in Kingfisher at the current time follows on from the points made above. As I see it, there are many far more defensive shares out there — even within the retail sector — whose prospects are decidedly brighter. The UK’s biggest retailer Tesco (LSE: TSCO) is just one example. After all, regardless of how cut-throat the grocery market is or how consumer behaviour may be impacted as inflation overtakes wage growth, it’s a fact that businesses like Tesco have far more predictable earnings. Everyone needs to eat.

Under the stewardship of Dave Lewis, the £15bn cap has streamlined its operations and is now far more focused on its UK business. With a market share far greater than its nearest competitor (28% compared to Sainsbury’s 16.5%, according to Kantar Worldpanel) and dividends set to resume and rise rapidly over the next two years, I think Tesco is a far safer bet at the current time.