May 31, 2007 / 6:38 AM / 11 years ago

Interest rate worries cloud Kingfisher

LONDON (Reuters) - Kingfisher (KGF.L), the leading home improvement retailer in Europe and Asia, saw its sales exceed expectations in the first quarter after an early spring boosted demand for gardening and outdoor products.

A B&Q is seen in an undated publicity photo. Kingfisher, owner of home improvement chain B&Q, saw its like-for-like sales rise 6.7 percent in the first quarter, exceeding expectations after warm spring weather boosted sales of gardening and outdoor products. REUTERS/Handout

However, shares in Kingfisher, owner of the B&Q and Castorama brands, fell as much as 3.3 percent to their lowest since early March after Chief Executive Gerry Murphy said demand in the second half could be dented by interest rate hikes.

“Today’s figures are supportive although rising interest rates across Europe continue to cast a major shadow over the outlook,” equity analyst Keith Bowman at Hargreaves Lansdown Stockbrokers said.

“The concern is that Q1 proves to be as good as it gets.”

Retail profit at the UK-based chain rose 29.5 percent to 88.6 million pounds. Like-for-like sales rose 6.7 percent.

“Kingfisher delivered strong sales and profit growth in the first quarter as good weather across Europe drove early seasonal demand for gardening and outdoor products. The year has started well, although it is still early days,” CEO Murphy said.

He warned two interest rates hikes so far this year in Britain, where it makes 60 percent of its profits, would dent enthusiasm for bigger home improvement projects.

Kingfisher’s 6 million weekly shoppers would also only buy big-ticket items like garden furniture once a year and the early spring meant many had already bought what they needed.

“If they buy at Easter, they don’t buy again in May,” Murphy told reporters on a conference call.

SHARES FALL

Kingfisher shares closed down 1.8 percent at 248-1/4 pence, underperforming the DJ Stoxx index of European retailers .SXRP and reversing early gains. Its biggest rival is Home Depot (HD.N), the world’s largest home improvements chain.

The stock had shed more than 7 percent of value in the past month on concerns about Britain, where it makes 60 percent of its profits, and ambitious renovation plans.

“We suspect that with the recent Bank Holidays being rather wet B&Q’s Q2 performance will not be as good,” Seymour Pierce analyst Richard Ratner wrote in a note.

Kingfisher showed particularly strong growth in Europe, excluding Britain and France, with like-for-like sales up 21.7 percent helped by booming property markets and a heatwave in Poland.

Market demand in Russia, where it opened its first Castorama store last year, was also “very strong”, Murphy said.

“After decades of communism there is a lot of fixing to be done in Russia. For us, Russia looks like a pretty good opportunity,” he said.

In Asia, Kingfisher fared less well in the quarter with like-for-like sales falling 3.7 percent as the Chinese New Year celebrations typically kept shoppers away from stores.

Murphy said B&Q, China’s biggest home improvement retailer, as usual would ramp up promotions in the second half to lure them back. Kingfisher opens its first Hong Kong store on Friday and in on track to continue opening 8-10 stores in China a year.

In total, Kingfisher will have 10 percent more stores by the end of this year than at the start, Murphy said.

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