B&Q owner stands firm, but others may falter if the retail market's 'softening' turns into a downpour.
Just what an embattled chancellor needs on the eve of a tax-raising budget: a leading retailer boosting its profits forecast and singing the praises of the UK economy. But here's the catch: it's only half true.
Kingfisher, the owner of B&Q and Screwfix, along with similar businesses in France and Poland, has raised its profit expectations for the current financial year from £480m-£540m to £540m-£570m. However, it hasn't exuded confidence in the UK outlook.
Instead, Kingfisher noted "softening market conditions" and expressed concerns about inflation, uncertainty ahead of the autumn budget, and a softening labor market. This suggests that the company's improved profits are more of a self-help job than a sign of economic recovery.
In the UK, like-for-like sales in the last quarter were up 3%, and Kingfisher is gaining market share. It's benefiting from Homebase's administration a year ago, capturing a larger slice of the professional "trade" market, and improving its e-commerce performance. The sleek Screwfix operation continues to outshine its competitors.
Meanwhile, the recently struggling French operation (Castorama and Brico Dépôt) is undergoing restructuring, which has helped offset local "weak consumer sentiment" that's worse than in the UK. This progress can be seen as a retail parable in two ways.
First, it demonstrates that a well-managed company in a strong competitive position can thrive even during subdued economic conditions. Examples include Tesco, Sainsbury's, and Next, all of which have been great investments in the 12 months since Rachel Reeves' last budget, despite the rise in employers' national insurance and other challenges.
The second aspect is more nuanced. On one hand, the chaotic build-up to the budget has clearly dampened consumer confidence, as confirmed by a CBI distributive trades survey on Tuesday. On the other hand, Kingfisher's resilience provides a basic level of hope.
The term 'softening' doesn't mean outright softness. Instead, it's attributed to the four interest rate cuts since last October's budget, which have reduced mortgage costs. This is particularly beneficial for DIY businesses when it comes to expensive items like kitchens and bathrooms.
So, an optimistic scenario for consumer-facing companies can be sketched out, provided Reeves avoids inflation-raising blunders like last year's NICs rises and clears the way for the Bank of England to cut interest rates faster. The gilts market has partially embraced this story in recent weeks as yields have fallen from their September highs.
However, the alternative is not favorable for businesses. The prospect of rate cuts is the only significant factor working in their favor as they face wage and fixed cost pressures. Without lower borrowing costs, softening conditions could quickly turn soggy.
In summary, Kingfisher can handle most outcomes, but consumer sentiment across the retail landscape appears fragile.
