Kingfisher pulls out of dive

It was a remarkable comeback for Sir Geoffrey Mulcahy of Kingfisher last week, after the Woolworths-to-B&Q group unveiled sharply improved interim results. Profits ahead 47 per cent to pounds 109.6m; sales up 10.4 per cent to pounds 2.5bn. It seemed as if the woes of the last two years had been left firmly behind.

Then the group was poised on a slippery slope to either a takeover or radical surgery. The business that had re-established Woolies as a serious High Street brand, and built a sizeable DIY operation in B&Q, looked to have lost its direction. Profits were slipping, at a time when other retailers were emerging from recession with their credibility intact.

Like the company, however, the problems at Kingfisher were very much Sir Geoff's creation. Although he seems to have gotten the group out of this mess, doubts remain as to whether the improvements are a viable long-term solution to Kingfisher's problems. Many of these lie at management level, partly due to the success the then plain Mr Mulcahy and his team had after their takeover of Woolworths in 1982. By 1994, there was a distinct impression of a management resting on its laurels.

At this point the rot became evident and shares plummeted from a peak of 778p in December 1993 to a low of 389p in January 1995. The City was restless; many thought it was time for Sir Geoff to bow out gracefully and hand over control to a new retail supremo. However, the City was prepared to give him one last chance.

The fruits of that became apparent in a review of operations, concluded last September. Sir Geoff moved from his position of executive chairman to chief executive. Heads began to roll. Criticism of spiralling boardroom pay was met by the abrupt departure of chief executive Alan Smith and finance director James Kerr Muir.

To show that sentiment played no part in his decisions, Sir Geoff ousted Nigel Whittaker, head of group corporate affairs, and the person who had recruited Mulcahy from British Sugar to Woolworths.

As well as tightening up the head office in London's West End - staff numbers were cut by 40 to 100 - he changed the management basis of the individual businesses. Responsibility for each was devolved to separate operations, while head office would continue to set strategy and monitor performance.

Another major improvement of the last two years was the introduction of more sophisticated management information systems. Investment in a new electronic point-of-sale system at Woolworths has now been completed, and the group is confident of further benefits. Likewise, a big exercise is under way at Comet to examine every aspect of its supplier base and the most appropriate technology. A big investment is also afoot at B&Q to develop better systems for its supplier chain. This has already led to better stock control and lower "shrinkage" - the term the industry still quaintly uses for theft.

Although shareholders welcome the moves, concerns remain that more needs to be done strategically. The group is open to accusations of unwieldiness. Through Darty, the French electrical retailer, to Comet in the UK, Woolworths, Superdrug, and B&Q, some say it has its fingers in too many pies.

Kingfisher remains unrepentant. It points to data from Verdict, the market research group, that shows its markets are all forecast to achieve better than average growth.

In 1982, Woolworths was almost at death's door. Since then it has undergone a remarkable transformation. Interim profits last week of just pounds 4.6m, on sales of pounds 589m, are a poor guide, as most of the profits come in the second half of the year from the Christmas rush. The store has concentrated its efforts on wooing mums, with a range of products for kids, from videos and music to pick'n'mix sweets.

The shops are being restructured to satisfy three target markets. "Local" stores will compete in suburban areas, and "heartland" stores will operate in market towns, where they are often the largest single outlet. City centre stores will be in major shopping centres. Sir Geoff has said that 100 of Woolworths' 780 stores will be converted to the "local concept" in time for the crucial Christmas period.

Since their nadir, the shares have staged a steady recovery. The premium rating Kingfisher once enjoyed has been eroded, but they continue to trade near the sector's average. Sir Geoff is keen to downplay expectations. However, some of the confidence has definitely returned.

It may still be early in the revival process, but there are enough positive signs to recommend a purchase.

Kingfisher

Share price 675p

Prospective p/e 17*

Gross dividend yield 3.1%

Year to 1 June 1994 1995 1996 1997* 1998*

Turnover (pounds bn) 4.45 4.89 5.28 n/a n/a

Pre-tax profits (pounds m) 309.3 244.2 311.7 368.9 428

Earnings p/s (p) 37.6 31.5 31.5 39.7 45.9

Dividend p/s (p) 14.9 15.2 16.2 18 20

*Panmure Gordon forecasts