Can "disruptive" B&M rally to a new high?

by Graeme Evans from interactive investor |

B&M continues to trade well in the UK, but can it replicate the success in Germany and France?

A pricing strategy based around being as disruptive as possible continues to pay off for B&M European Value Retail (LSE:BME), even if its shares failed to respond to stronger UK trading today.

Annual results from the fast-growing discount retailer showed a return to form in the UK in the fourth quarter, following a weak performance in homewares over the previous two quarters.

UK like-for-like sales in the period jumped by a bigger-than-expected 5.8% and were followed by the chain's best ever Easter trading season, although this has been offset by a challenging period for B&M's loss-making German discount chain Jawoll.

This meant an 8% rise in pre-tax profits to £239.8 million was slightly below City expectations, with the cost of opening a new southern distribution centre in Bedford by January also prompting Numis Securities to lower its forecasts for the current financial year by 8% today.

Shares fell 4% to 365.5p as the £3.8 billion-valued retailer continued its choppy recent performance. The stock peaked at 423p at the end of 2017, only to fall back sharply amid last autumn's retail weakness and B&M's own difficulties in UK homewares.

This pushed shares below 280p in December, although they were back trading near 400p by last month. Analysts at Numis think the stock is capable of setting a new record at 475p, based on continued strong growth in profitability in the UK.

They said today:

"We continue to view B&M as a leading disruptor, with growth well underpinned by a UK store roll-out and optionality from success in Europe."

B&M said it had a "long growth runway" towards its long-term store target of 950 in the UK, with plentiful opportunities to add new stores profitably. The programme for this year involves another 50 B&M stores on top of the current UK estate of 620 B&M sites and 281 under Heron.

The group, which grew B&M fascia revenues by 8.7% to £2.8 billion in the last financial year, said progress in some key categories suggested customers increasingly saw it as a destination retailer. It pointed to the evidence offered by a 7% share of the UK toy market, which compares with B&M's share of total retail spending at below 1%.

Chief executive Simon Arora said the next challenge for the company would be to bring the "same price disruption and value for money" to new markets in Germany and France.

In Germany, the loss of £10.2 million from the 96 store Jawoll chain reflected the need to clear obsolete stock to make way for new ranges and a greater proportion of product sourced through B&M's supply chain. The 96-outlet chain Babou in France was also added last October.

Analysts at UBS said uncertainty about when Germany would make a meaningful contribution was likely to hang over the stock. They added:

"The return to like-for-like growth in the UK is reassuring, although we still await evidence of profitable long term growth at Jawoll."

UBS has a buy recommendation and price target of 425p, while counterparts at Goldman Sachs are at 435p. They said B&M traded on 2019 price/earnings multiple of 17.9x, which is a discount to its historical average of 20.6x but a premium to the bank's general retail coverage at about 9.8x.

B&M shares offer a projected 2% dividend yield, having raised the full-year payout by 5.7% to 7.6p a share in today's results.

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