Are these retail results a good omen for the UK high street?

The Motley Fool

Les difficultés


DIY specialist Kingfisher(LSE: KGF) has seen its share price slip to its cheapest since early August on Tuesday, with the stock shedding 4% of its value following its latest financial release.

Investors continue to be perturbed by the difficulties Kingfisher is suffering in France, a region responsible for 40% of retail profits. Like-for-like sales at its Castorama and Brico Dépôt fascias slumped 3.8% and 3.3% respectively during August-September.

In better news, however, sales at the company's British operations were far more robust during quarter three. Underlying revenues at B&Q rose 3.5% during the quarter, while till activity at its Screwfix stores roared 12.7% higher.

Sparky sales

Electricals retailer AO World (LSE: AO) also painted a cheery picture concerning the state of the British retail sector.

The business advised on Tuesday that total UK revenues surged 18.7% between April and September, to £295.1m. And, unlike Kingfisher, AO World is also enjoying splendid revenues growth at its key European operations -- sales on the continent charged 66.9% higher in the first half, to EUR36.2m.

However, AO World sounded some caution looking ahead, the firm warning that "the economy clearly faces some uncertainty and the sterling softening during the year is likely to provide some pricing pressure."

Demand for big-ticket items like televisions and dishwashers is likely to come under severe pressure in the months ahead as Britain's attempt to exit the EU continues. Rising inflation is likely to heap pressure on shoppers' spending power, while a possible rise in unemployment and fall in wage growth could put a further dent in AO World's revenues further down the line.

Risky business

Of course these pressures are likely to hit Kingfisher, too, a worrying scenario as its UK markets are critical in keeping group sales afloat. Group like-for-like sales edged just 1.8% higher in the last quarter.

Broadly speaking, retail data since June's EU referendum has been much better than expected, crowned off by latest ONS data this week that showed October sales rise 7.4%. This is the fastest rate of growth for 14 years.

But it is a hard ask to expect this strong uptrend to continue, in my opinion, particularly for sellers of expensive items like AO World.

On the shelf

The City already expects AO World to remain loss-making during the current year ending March 2017. And I believe the firm's bottom line could keep on disappointing as suppliers follow the example of Apple and hike prices to compensate for pound weakness, putting AO World's already-thin margins under enormous pressure.

The near-term forecasts at Kingfisher is a little sunnier, the number-crunchers predicting a 7% earnings rise in the 12 months to January 2017. But while this results in a P/E rating of 15.2 times -- just above the FTSE 100 average -- I reckon this is far too heady given the firm's tough trading outlook at home and abroad.

I believe investors should leave both retailers on the shelf right now.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.