Best Idea Kingfisher (KGF) reported a strong pre-second-quarter close trading update that demonstrates that our investment thesis is playing out. Like-for-like sales were positive across all geographies, and sales accelerated from a year ago in the firm's core markets.
A robust housing market in the U.K. is boosting in store sales
Although we may lower our fair value estimate modestly following the strengthening of the sterling against the euro in recent days, these results were very close to our forecasts and show that our investment thesis and like-for-like sales model are firmly intact.
Upside remains to the shares, and we recommend investors looking for exposure to global housing should kick the tyres of Kingfisher. Our narrow economic moat rating is based upon Kingfisher's structural defences against online competition, and we think this competitive advantage provides investors with greater downside protection in comparison to other brick and mortar retailers.
With 80% of sales derived in the U.K. and France, business results and the stock are primarily driven by these two markets. Both offered like-for-like sales upside in the second quarter. In the U.K., B&Q sales rose 3.4%, just ahead of our 3.2% estimate and a material improvement on the flat sales reported last year. On a two-year stacked basis, sales grew by 5.2%, exactly in line with our forecast for the full year. In the small trade segment, Screwfix continued its strong performance, growing 16.7% on a like-for-like basis, in line with the first quarter.
In France, sales recovered on the back of modestly improving housing data. Like-for-like sales very modestly beat our forecasts, rising 1.7% and 0.7% at Castorama and Brico Depot respectively. This is encouraging because it implies that our revenue forecast model, which is based on house prices, remains predictive. On a reported basis, however, the weaker euro is likely to dampen sales in France in the second half of the year to below the 2.6% reported in this trading update.
No margin data was provided, and we shall temper our enthusiasm somewhat until we see the full second-quarter report, but the sales figures for the last 10 weeks imply that robust housing data in the U.K. and France are driving an acceleration in same-store sales. With the European housing market in an earlier stage of recovery than the U.S., and with a significant multiple discount to its U.S. peers, we continue to believe there is upside to Kingfisher.
