Why has this FTSE 100 stock slumped after a huge 75% profit rise?

macro shot of computer monitor with FTSE 100 stock market data in trading application

Home improvement stock Kingfisher (LSE: KGF) has seen a 5% drop in share price in today’s trading so far, making it among the biggest FTSE 100 losers. This is despite a sharp 75% increase in its post-tax profits for the half-year ending 31 July compared to the same period last year. 

There are other positives in its result released earlier today, too. Its sales have risen by 20% from last year and its dividend has been increased by 38%. Further, its net debt ratio has also improved. It is now 0.5 times earnings before interest, taxes, depreciation, and amortisation, also known as EBITDA. This is a decline from 0.9 times in just January this year. 

Why is the Kingfisher share price falling?

So why is the stock slipping? I expect that has to do with its third-quarter sales. Its trading update for the current quarter up to 18 September was also released along with its half-year financials. During this quarter so far, like-for-like (LFL) sales have actually declined marginally. This compares unfavourably to a 23% increase for the half-year in question. LFL can be an important measure for retailers, because it provides an good sense of underlying demand by removing the impact of store closures and openings across locations.

Further, the company’s outlook is relatively weak as well. In the second half of its financial year, Kingfisher expects LFL sales to decline between 3% and 5% from last year. The B&Q and Screwfix owner was a big gainer last year, as home improvements were in focus during lockdowns. So it is unsurprising that there is a softening in sales since freedom day in the UK. This also translates into expectations of reduction in sales numbers.

The company’s sales are still expected to increase compared to 2019, which is the last normal year pre-pandemic, between 9% and 13%, for the rest of its financial year.  Also, it is interesting to note that it now expects sales to decline less compared to 2020 as well. It had earlier expected the decline to range from 5% to 15%. 

Sharp run-up in the FTSE 100 share

While the sales picture, as a result of the atypical scenario, is not easy to define as either good or bad, there is no doubt that Kingfisher’s share price has run up a lot. It has significantly surpassed its pre-pandemic highs of February 2020 by 57%. And its share price is up 72% compared to that two years ago. Both the ongoing stock market correction and that in its own expected performance indicate that it may not rise as fast in the near future. 

I think it is likely that its share price can dip more in the near future, unless of course there is any truth to speculation of the firebreak lockdown. This will send us all right back into the safety of our houses, and could encourage demand for home improvement products and services once again. 

My takeaway

I will be on the lookout to buy the Kingfisher stock on dips. It is a financially healthy company, with a recognised brand name that fills an important demand.

The post Why has this FTSE 100 stock slumped after a huge 75% profit rise? appeared first on The Motley Fool UK.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.