B&M crash is opportunity to buy 'long-term winner'

After plunging to a multi-month low, buyers dived in as experts remain optimistic.

Now neck-and-neck with Marks & Spencer (LSE:MKS) in terms of stock market value, B&M European Value Retail (LSE:BME) continues to show it has the formula for success in a tough UK marketplace.

Today's interim results featuring like-for-like sales growth of 3.7% and the opening of 30 new stores is the kind of performance most other chains can only dream about.

Unfortunately for investors, B&M doesn't just trade in the UK. The downside as far as today's share price performance is concerned relates to Germany, where distribution issues and continued weak sales have proved to be a big drag on interim figures.

The 98-store discount chain Jawoll slumped to a bigger-than-expected £12.2 million underlying loss, while B&M has also taken a non-cash impairment charge of £59.5 million and announced plans for a strategic review of the German business.

Jawoll's troubles contributed to a 3% fall in adjusted group profits to £96 million, which broker Morgan Stanley said was the first time the company had reported a decline since its IPO in 2014. With today's figures short of consensus and likely to trigger downgrades to full-year forecasts, B&M shares fell as much as 10% in early deals to 336.6p.

Source: TradingView Past performance is not a guide to future performance

The FTSE 250 index stock had been valued at £3.78 billion at the start of trading this morning, compared with £3.67 billion for department store chain M&S. B&M shares were near their peak at 425p this time last year, only to become more unpredictable on concerns about German trading.

In light of today's news, investors are likely to see a strategic review as a positive development if it accelerates a decision on the future of the Jawoll business.

Analysts at Numis Securities said:

"We see the combination of management action on Germany and encouraging trading elsewhere, in particular in the new UK stores, as supportive for the longer-term B&M investment case."

They have a price target of 475p, which is supported by the prospect of a £150 million return of surplus cash via a freehold property sale. The half-year dividend was kept at 2.7p today.

Analysts at Jefferies said B&M remained a "long-term winner" with earnings anchored by the ongoing scope for domestic expansion. They added that a price/earnings multiple of 16x was well supported by double-digit UK profit delivery for some time to come.

Today's figures showed that B&M grew total sales in the UK by 13.8% to £1.46 billion in the six months to September 29, with underlying earnings up 13.7% to £137.3 million.

Chief executive Simon Arora had hoped to bring the "same price disruption and value for money" to markets in Germany and France. He has seen contrasting fortunes on that front, with the 99-strong Babou chain in France showing some good early progress.

The group now trades from a total of 1,132 stores, compared with 948 a year earlier. This includes 645 B&M stores in the UK and a further 290 under the Heron Foods brand.

It said its target of 950 B&M fascia stores in the UK was looking like an increasingly conservative estimate given the performance of new stores and supply of suitable sites.

Arora, who has run the business since 2004, said: "I believe B&M is well-positioned for the short, medium and long term.

"The B&M UK stores business and Heron Foods are high returning, cash generative businesses which are well adapted to the profound structural change taking place in the retail industry and attuned to the needs of an increasingly price-conscious consumer.

"The opportunities to expand those winning formats across the UK remain substantial."