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Retail Wars - Should you invest in Kingfisher or Home Retail Group?

Conditions on the UK High Street are clearly on the mend, a scenario underpinned by latest data from the Office of National Statistics. This showed retail sales rise at their quickest quarterly pace for more than a decade, surging 1.6% during April-June from the previous three-month period.

With this in mind, the team at Motley Fool have run their rule over the investment case for the following British ‘blue chip’ retail giants.

Home Retail Group
Home Retail Group (LSE: HOME) is enjoying resplendent sales growth at its Argos and Homebase stores, and saw like-for-like sales at these outlets advance 4.9% and 7.9% respectively during March-May.

And the retailer is rolling out a multitude of initiatives to keep turnover rolling higher, from integrating Argos outlets into its Homebase stores through to increasing the number of its digital, catalogue-less Argos shops. It is also looking to benefit from the rise of online shopping, and announced last month plans to increase the number of stores which can offer ‘Click & Collect’services for eBay.

The company has also shaken up its distribution network at Argos by installing a ‘hub and spoke’ system, which allows its larger outlets to swiftly shift goods to smaller shops in the same designated area. In particular, the move marks a significant step in its bid to take on the likes of Amazon, allowing it to roll out a same-day delivery service to homes and stores.

Forecasters expect Home Retail Group to follow last year’s chunky 35% earnings improvement with growth to the tune 12% for both of the years ending February 2015 and 2016. A prospective P/E rating of 14.5 represents reasonable if not outstanding value, but in my opinion the firm’s multi-pronged investment scheme should deliver long-term earnings growth.

Kingfisher (LSE: KGF) caused much head-scratching last month when it announced that total underlying sales slipped 1.8% during May-July. Not only did sales drop 1.3% in its core UK and British markets, but the firm — which operates DIY stores including B&Q and Screwfix — also reported weakness in France and Poland.

Still, I believe the company should hurdle current difficulties and enjoy solid sales growth in the long-term. Like Home Retail Group’s Homebase, I believe that Kingfisher should benefit from a steady recovery in the British housing market, while the introduction of its ‘Click, Pay & Collect’ service should also boost online transactions. In the meantime the company has also identified cost and margin protective measures to mitigate the effect of current revenues weakness.

In addition, the business is enhancing its presence on foreign shores and announced plans to acquire France’s Mr Bricolage in April. The deal will enable the British firm to enjoy synergies in the country, while the French DIY house’s presence in other overseas markets will also boost Kingfisher’s international presence.

Kingfisher is in line to experience a slight earnings dip in the year ending January 2015 as sales stagnate, although a 13% improvement is pencilled in for the following 12 months as conditions in the UK and Europe improve. These projections create attractive P/E multiples of 12.9 and 11.4 respectively, while a handsome dividend yield of 3.8% through to the close of fiscal 2016 sweetens the investment case.

Source: Royston Wild - The Motley Fool

06 August 2014

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Thank you for the excellent presentation that you gave at Woodbury Park on Thursday morning. It was very interesting and thought-provoking for our Retail members. The feedback has been excellent.

Martin Elliott. Chief Executive - Home Hardware.

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