Kingfisher’s cash conundrum, second warning for Moss Bros and Softcat’s worrying language

“The FTSE 100 takes a small step back on Wednesday, falling 0.3% to 7,037 on the back of weakness in miners and banks,” says AJ Bell Investment Director Russ Mould.

Kingfisher

“The retail sector is truly going through one of its worst periods in recent memory. B&Q may be one of Britain’s best known DIY chains but brand strength doesn’t always guarantee financial success.

“B&Q’s fourth quarter like-for-like sales fell by 5.1%, as revealed in parent company Kingfisher’s results.

“Equally embarrassing for Kingfisher is its drastic decline in cash generation. Operating cash flow fell by 45% to £557m in the past financial year. Once you knock off the capital expenditure and tax, free cash flow went from £459m a year ago to a miserable £6m this time round.

“Remember that free cash flow should really fund the dividend, so Kingfisher looks to be in a tricky situation going forward when you consider the dividend bill is normally about £230m a year.

“The sharp reduction in cash was principally down to changes in working capital as Kingfisher increased stock levels. It has a plan to reduce stock in the new financial year, but clearly this is going to be an area of concern to investors.”

Moss Bros

“Moss Bros has followed a similar pattern to many other retail companies. First came the slowdown in sales growth, then came the profit warning; and now we’ve got the second profit warning and a dividend cut.

“The company says it is taking action early in order to protect the underlying strength of the business. However, tradition suggests companies in Moss Bros’ situation normally have one more profit warning upon which the management start to take more drastic action.

“A lack of stock is one of the worst things to happen to a retailer as the few customers who are walking into its shops may leave disappointed if they can’t get what they want.

“Moss Bros says its stock shortage will last until late spring, so clearly there are elevated risks over near-term earnings.”

Softcat

“Half year results from IT supplier Softcat are fairly strong – adjusted operating profit is up nearly 20% year-on-year thanks to higher customer numbers and cross-selling.

“So why is it one of the worst performers on the FTSE 250 today? After all, customer growth had slowed a little but gross profit per customer was materially higher.

“Seemingly subtle hints on future trading can be seized on by the market and a close look at the outlook statement which accompanies the numbers helps reveal why the shares have nosedived.

“Chief executive Martin Hellawell says: ‘the board is confident in meeting its expectations for the full year, but we have some important months ahead and will remain very focussed on continuing to deliver outstanding service for our customers’.

“The key word here is ‘but’. This almost amounts to a mild profit warning and for a company like Softcat, which was previously trading on a lofty valuation, even the possibility of a worse than expected performance is enough to drive investors to the exit door.”

These articles are for information purposes only and are not a personal recommendation or advice.