Britain’s Kitchen Boom Defies Home Improvement Slump—Investor Bet?

The housing market remains subdued and ambitious home makeovers have largely been put on hold. Yet one part of the home is still attracting serious spending: the kitchen.

Thierry Garnier, chief executive of the B&Q and Screwfix owner Kingfisher, said this week that kitchens are ‘becoming a more important part of our lives and a more important room in the house’.

He said demand for kitchen improvements is growing in Britain, helped by the popularity of Kingfisher’s Ashmead Shaker-style range. An eight-unit configuration costs about £1,700.

Kingfisher has also seen interest pick up across Europe, where it operates the Brico Depot and Castorama chains.

Garnier’s comments about the early stages of a possible kitchen boom will interest investors. Kingfisher reported a 10 per cent rise in first-half profits and raised its full-year profit forecast to between £595million and £653million.

Other companies, including Howden Joinery and Wickes, are reporting similar demand for affordable kitchen renovations and replacements.

The home improvement sector has been widely viewed as depressed, making the willingness of households to spend on an Ashmead kitchen—or another budget-friendly alternative—particularly notable.

It may suggest that the pessimism surrounding the sector has gone too far, especially given analysts’ increasingly positive assessments of its major listed companies.

Kingfisher and its rivals may also be sending a warning to Chancellor John Healey ahead of next month’s Budget, urging the Government not to introduce punitive increases in business rates.

At the same time, the companies appear to be adjusting to a more difficult environment in which consumers may remain cautious in the short term, but are unlikely to stop spending indefinitely. For investors prepared to bet on a recovery, that could create an opportunity. Here’s what is driving the trend.

Home improvement maths

Household finances are under pressure, mortgage rates are rising and further tax increases appear likely in the Budget.

As a result, families may eat out less often and spend more time dining at home. The kitchen is increasingly seen not just as a functional space, but as somewhere to entertain and recreate the bakes made by contestants on the latest series of The Great British Bake Off.

Expensive £100,000 kitchen extensions are currently out of reach for many households. Some may also be reluctant to undertake projects that could increase their property’s value while there is speculation that the mansion tax threshold could be reduced from £2million to £1.5million.

More modest renovations, however, are still being considered. Sam Cullen, an analyst at Peel Hunt, says: ‘There may not be much house price growth. But homes are still being bought and sold.’

Property transactions create demand for repairs and fresh decoration. Meanwhile, as Cullen notes, homeowners who are staying put may still spend on smaller projects, such as repainting a living room, replacing plastic light fittings with metal alternatives or fitting new kitchen cabinet doors.

That supports the possibility that a recovery could eventually extend beyond kitchens and into other areas of the home.

Richard Knight, manager of the Merchants investment trust, says: ‘I would expect an upgrade cycle to kick in eventually for all sorts of businesses in the field, which currently trade on low valuations, companies like Grafton Group, the building materials firm, Victorian Plumbing and DFS.’

After DFS reported its results this week, David Hughes of broker Shore Capital called the sofa retailer a ‘coiled spring’. He said it was ‘well placed to deliver in the event of a market recovery’.

On this basis, the shares, which are 16 per cent down this year at 145.5p, are a ‘buy’. But if you want to stay in the kitchen, here are the three names to consider.

Howden

The UK’s largest kitchen supplier, a £4.2billion member of the FTSE 100, holds a 25 per cent slice of the market. Howden manufactures most of its own products, selling them to self-employed kitchen fitters through its 800 or so out-of-town depots, whose managers enjoy a large measure of autonomy.

Karan Singh, UK equity portfolio manager at Fidelity International, says that Howden’s ability to keep marketing and other costs down frees up funds for investment ‘in product quality, service and price’.

He adds: ‘Howden is well positioned to benefit from a recovery, which could drive significant profit growth. But its balance sheet provides resilience if conditions remain subdued.’

Analysts share Singh’s enthusiasm for Howden, rating the shares that stand at 760.5p a ‘buy’ with a target price of 1,008p.

Kingfisher

The ‘stand-out’ performer in the £5.7billion Kingfisher empire is Screwfix, the haunt of electricians, painters and plumbers engaged in kitchen, decorating and construction work. 

The recipe for Screwfix’s success, according to Cullen, is its extensive store network in the UK, France and the Republic of Ireland, and the ease with which customers can check stock availability and proceed to purchase.

Such is Kingfisher’s confidence in the speed of Screwfix’s click-and-collect service that Olympic champion Mo Farah was chosen to star in the advertising campaign.

Following the half-year results, analysts at Bank of America raised their target price for Kingfisher shares to 400p, against the current 339p. 

But since the shares have leapt by 23pc over the past three months, other analysts see them as a ‘hold’. I will wait for a pullback in the share price before buying.

Wickes

The preference for a less expensive kitchen revamp is boosting FTSE 250 firm Wickes, which aims to be cheaper than its rivals.

Earlier this month, boss David Wood said customers were being more cautious, opting for ‘more affordable’ cabinets, but also treating themselves to premium appliances and work surfaces.

Wood also argues that a backlog of kitchen work is building up, as consumers have been delaying work for ‘at least half a decade’.

He says Wickes’ customers will be able to afford projects because they are ‘slightly older and more affluent than the average’.

Deutsche Bank’s Benjamin Yokyong-Zoega approves of Wickes’ focus on value, believing that this should help it gobble up more business in a difficult market. Shares are down 14 per cent this year to 201p. 

At this level, analysts consider them a ‘buy’, with one setting a target price of 329p, which would be a tasty gain.