Hey Kingfisher: Winter Is Coming

(Bloomberg Opinion) -- It’s one step forward, two steps back for European home-improvement group Kingfisher Plc. That’s not enough progress to banish the possibility of a breakup.

Sales of paddling pools to plants amid the U.K.’s heat wave helped Kingfisher’s B&Q chain lift same store-sales by a better than expected 3.6 percent in the three months to July 31. The more trade-focused Screwfix also improved from the first quarter, when snowy weather dragged down its performance.

But the picture was less pretty in France, where like-for-like sales fell 1 percent, underperforming the domestic market. The core Castorama chain was hit by disruption from Chief Executive Officer Veronique Laury’s efforts to buy more products centrally and upgrade information technology systems.

At the parent, though Thursday’s sales report was a welcome surprise, the gross margin fell by 0.4 percentage points in the first half.

Kingfisher deserves credit for making hay in the British market when the sun shone. In the past, it hasn’t always capitalized on ideal trading conditions.

It is also outperforming U.K. rivals, including Travis Perkins Plc’s Wickes, and Homebase, which was bought by retail restructuring group Hilco in May.

But the company must show that the recent sales uptick is because of genuine improvements in B&Q’s offer, and not just fair weather. The shares fell about 3.3 percent, so investors aren’t convinced that the recent performance can be sustained.

Hey Kingfisher: Winter Is Coming

Laury does have some things going in her favor.

Earlier this week, Homebase announced plans to close 42 of its 241 stores through a company voluntary arrangement. And Travis Perkins is reviewing its assets after a slump at its Wickes DIY chain. This makes her competitive environment in Britain slightly more benign, though there are still discount players B&M European Value Retail SA and Home Bargains to contend with.

Laury hasn’t made the most of Homebase’s woes so far. Australian counterpart Wesfarmers Ltd. had used it as its entree into the U.K. but it bungled the job, axing local management and ditching popular products. But she still has a chance. She shouldn’t blow it.

Hey Kingfisher: Winter Is Coming

Meanwhile, she must also improve the performance in France. The sales damage from the overhaul may start to fade and the benefits from the changes might start to come through, but that is by no means guaranteed.

Kingfisher says it’s on track to deliver its strategic milestones for this financial year, part of Laury’s plan to lift profit by an annual 500 million pounds ($635.4 million) by 2021 through her “One Kingfisher” strategy. This year’s goals include getting the group’s many divisions to buy 40 percent of products centrally and achieving 30 million pounds of cost savings. However, reaching the planned-for full-year increase in the gross margin looks a tall order.

Hey Kingfisher: Winter Is Coming

So far, investors haven’t seen much benefit from the approach Laury introduced in January 2016, little more than a year after she took the top job. The shares are down more than 20 percent since the end of February to about 278 pence. That is significantly below Morgan Stanley’s 430 pence per share estimate of the company's break-up value.

There could be a huge benefit from Kingfisher’s disparate divisions working more closely together. But the company has been trying to do this for the past decade, with limited success.

If Laury cannot finally make Kingfisher’s scale work, she should take a hammer to its conglomerate structure. With activist investors circling the consumer sector, she could well find the decision isn’t up to her.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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