Jump to content
House Price Crash Forum
Sign in to follow this  
munimula

Why The Weak Us Housing Market Is Bad News For B&q

Recommended Posts

Last year's weakness in the UK housing market has unsurprisingly taken its toll on DIY chains.

Both GUS, which owns Homebase, and B&Q owner Kingfisher reported that profits at their home improvement units had plunged over the past year.

But, the property bulls say, with the recovery in the housing market, shouldn’t life be getting better for DIY stores this year?

Don’t count on it...

GUS, which owns Argos and credit-checking group Experian, saw its full-year results battered by a plunge in profits at its DIY chain, Homebase. Earnings more than halved, from £113.8m to £51.8m. It’s not a result to write home about - but GUS said that at least it had outperformed the DIY retail market in general.

The result certainly compared favourably with the 75% profit plunge recorded by Kingfisher’s DIY chain, B&Q.

Underlying sales – that is, sales excluding openings of new stores - at the home improvement group fell 8.8% in the 13 weeks to April 29. Profits fell a staggering 75% on last year, down from £71.2m to £18m.

B&Q is suffering from the same problems as every other retailer, only magnified by 2005's housing slowdown. The company has had to slash prices in the face of weak demand and strong competition – profit margins fell by 3 percentage points. Meanwhile costs have risen by 4%.

And things don’t look set to improve any time soon. Chief executive Gerry Murphy said that “the UK market remains very promotional and weather sensitive.” Given the unseasonably wet May we’ve had, there could well be more bad news to come from Kingfisher.

Kingfisher was the worst-performing stock in the FTSE 100 last year. But despite a further 2% fall in Kingfisher’s share price yesterday, the group is still pretty optimistically valued. As John Foley on Breakingviews.com asks: “Why are the rickety group’s shares still trading at a 30% premium to the retail sector?”

As he points out, it’s got nothing to do with any confidence in a recovery, and everything to do with bid hopes. Investors are still hoping that US giant Home Depot is planning to swoop.

But unfortunately for Kingfisher, Home Depot is facing precisely the same pressures that B&Q has endured over the past year and a half or so.

The US housing market is now following in the footsteps of our own. The bad news is coming in thick and fast. Mortgage applications fell by 6% last week – the biggest fall since February. There were more than half a million homes for sale at the end of April – the most ever, according to Bloomberg.

Toll Brothers, the largest US luxury homebuilder reported recently that profit rose at its slowest pace in three years during the three months to April 30, with orders in the quarter down a third on the year before. The group cut its 2006 earnings forecast.

Unsurprisingly, confidence among US homebuilders is at its lowest in 11 years, according to the National Association of Home Builders. If you want to read more, we published a piece on the fragile state of the US housing market earlier this week – if you missed it, click here: Is the US housing market crumbling? (http://www.moneyweek.com/file/12849/is-the-us-housing-market-crumbling.html)

And of course, retailers in the States face the same rising fuel prices and interest rate hikes that are battering the UK high street. If anything, the impact of higher interest rates is worse over there because they have risen further from a much lower base.

So the idea of embarking on a major overseas acquisition in a declining market is probably not particularly attractive to Home Depot at the moment.

And for any property bulls still convinced that the recent uptick in the housing market is anything but a suckers’ rally, results from energy supplier Scottish Power made unpleasant reading. Because it looks like consumers are facing even higher energy bills.

The group, which has already hiked gas prices by 15% and electricity bills by 8% this year, said “further rises will be unavoidable in the short-term given continuing high wholesale prices.”

Not only does that squeeze the consumer, it’s another reason for the Bank of England to be worried about inflation. And it looks like new member Professor David Blanchflower will be more of a hawk than his predecessor Professor Stephen Nickell.

The new MPC member told a Treasury Select Committee: “We need to focus on inflation.” Well, of course – that’s pretty much the entire reason for the Monetary Policy Committee’s existence.

But Professor Nickell seemed to be far more concerned about consumer spending and growth than the inflation figures. So the fact that Professor Blanchflower admits he is watching inflation and has “started to work on the data” suggests that he is, at the very least, a lot less likely to vote for a cut than the man he’s replacing.

Higher interest rates and home improvements don't sit well together. Kingfisher may yet be the worst performer of 2006 as well.

A friend works as an IFA for a well known company and his clients are generally very senior company execs etc. Recently the exec of a large energy company said that they have a lot more costs to pass on to the customer still.

B&Q is a good example - margins down 3% and yet costs up 4%. They can only cut costs so far and as can be seen with these low profits there isn't much scope for further cuts.

What happens then, when retailers can't cut any further? Inflation will pick up, it should do anytime now and will be fuelled by the higher energy costs.

Inflation under 2% is going to be a thing of the past.

Edited by munimula

Share this post


Link to post
Share on other sites

A friend works as an IFA for a well known company and his clients are generally very senior company execs etc. Recently the exec of a large energy company said that they have a lot more costs to pass on to the customer still.

B&Q is a good example - margins down 3% and yet costs up 4%. They can only cut costs so far and as can be seen with these low profits there isn't much scope for further cuts.

What happens then, when retailers can't cut any further? Inflation will pick up, it should do anytime now and will be fuelled by the higher energy costs.

Inflation under 2% is going to be a thing of the past.

Inflation under 2% is already a thing of the past.

Share this post


Link to post
Share on other sites

:o “Real” inflation hasn’t been under 2% for some time ! I believe it’s been about 6% over the last couple of years. But Gordon (slackjaw) Brown assures me its not actually, I’m wrong its 2%, always has been and always will be ! :lol:

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.