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Retail sector ensures contrasting fortunes

There were mixed fortunes in the retail sector on Thursday, as DIY group Kingfisher and car and bicycle specialist Halfords updated investors.

The announcements came on the same day as a better-than-expected reading of retail sales figures, which rose 0.7% in June.

Although sales at Kingfisher, which owns the B&Q chain and has 860 stores in eight countries, were 0.5% lower in the second quarter of 2011 compared to the same period last year, its shares held firm, gaining almost 3% in morning trading.

Total sales including new stores were up 1% on constant currencies and the poor results in UK and Ireland were offset by strong sales internationally.

Like-for-like sales in the UK and Ireland slumped 5.5%, with total sales at B&Q dropping 6.7%. The weather was also a factor after sunshine in the first quarter produced higher numbers of seasonal product sales which then fell off as the rain arrived.

Bucking the trend, though, was Screwfix, where sales grew by 10.5% boosted by plumbing and electrical trade initiatives and the continued roll out of new outlets.

Sales in France, where business includes the Castorama and Brico Dépôt chains, grew by 4.9%, or 3.7% on a like-for-like basis. New ranges and modernisation at Castorama pushed sales up 2.5% while similar changes at Brico Dépôt saw sales jump 8.1%.

Other international markets also delivered good news as sales grew 5.4% with gains in Poland and Spain and huge success in Russia where sales rose by 29.8%. The numbers for China were less encouraging. B&Q sales there declined 7.2%, reflecting fewer stores compared with last year and a challenging housing market.

"As anticipated, conditions in our second quarter were tougher than the first quarter which benefitted from favourable weather. However, we remain on track year to date with strong sales growth in France and on-going sourcing initiatives supporting our profit growth," said Kingfisher chief executive Ian Cheshire.

He added that the UK market "remains challenging compounded by disruption in the second quarter from heavy stock clearance activity by a major competitor closing down."

Cheshire concluded: "These are testing times for retailers, particularly in the UK, but also an opportunity for strong businesses such as ours to strengthen their position. We expect to emerge from this year in excellent shape and well prepared to start delivering the next phase of our growth plans."

Analyst view: add/buy

Arden's retail analyst Nick Bubb rates Kingfisher stock an 'add', commenting in a note: "Management are developing an excellent record for EPS growth delivery and we think the shares are looking cheap at this level, on a forward P/E of only 11 times at 254p (we target 315p).

"We would still switch into Kingfisher from UK rival Home Retail (HOME) ('sell', 120p target), with Homebase likely to be struggling at present."

At Panmure Gordon, Philip Dorgan recently initiated coverage with a 'buy' recommendation and a target price of 350p.

He said: "The second-quarter performance is stronger than it looks in the UK, and France continues to motor. We think that Kingfisher shares still have significant upside, driven by cash generation, earnings growth and multiple expansion.

"In the medium term, we expect share buybacks and/or special dividends."

Source : Sarah Modlock - Interactive Investor

21 July 2011
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