Interactive Investor

ii view: shares for discount retailer B&M European fall

31st May 2022 12:55

Keith Bowman from interactive investor

Expanding store numbers but facing a consumer cost-of-living crisis. We assess prospects. 

Full-year results to 26 March 

  • Revenue down 2.7% to £4.67 billion
  • Adjusted profit (EBITDA) down 1.2% to £619 million
  • Final dividend of 11.5p per share
  • Net debt up 52% to £790 million

Chief executive Simon Arora said: “I am very pleased with the results we have delivered. The strength and resilience of our business model has enabled us to execute our plans well and continue offering compelling value for money to customers. As a result, we have sustained the step-up in sales and profit compared to pre-pandemic levels.  

“The retail industry is facing inflationary pressures, while our customers are having to cope with a significant increase in the cost of living, making spending behaviour in the year ahead difficult to predict. However, we have seen before that during such times customers will increasingly seek out value for money, and B&M is ideally placed to serve those needs. As such, we are well positioned to support the communities in which we trade and continue our long-term growth strategy.”

ii round-up:

Value goods and food retailer B&M European Value Retail (LSE:BME) today reported annual results in line with City forecasts but warned of a hit to profit margins over the year ahead as some level of price markdowns returned.

B&M, which appointed chief financial officer Alex Russo as its new chief executive, expects adjusted profit for the year ahead of between £550 million to £600 million. That compares to the current analyst estimate of £586 million. Same-store UK sales for the first eight weeks of the new financial year fell 13.2% from a year ago. 

B&M shares fell by more than 10% in UK trading having already fallen by just over a quarter year-to-date coming into these latest results. Shares for rival retailer Next (LSE:NXT) are down around a fifth during 2022, while shares for Marks & Spencer (LSE:MKS) have fallen by around a third. The FTSE All World index is down by close to 13%. 

B&M’s products for sale cover a wide range from food to home furnishings, and DIY items to children's toys. Its adjusted UK profit margin is expected to retreat by up to 1.3% over the year ahead as customers shift spending away from more discretionary higher-margin general merchandise categories in favour of food and more day-to-day products given the cost-of-living crisis. 

Operating costs remain tightly controlled with freight costs competitively positioned for the year ahead and a flexible and low-cost store labour model. Fuel and energy costs collectively accounted for less than 1% of revenues for the 2022 year to the end of March.

All its French stores are now operating under the B&M banner with adjusted profit (EBITDA) for the year just gone more than doubling to £32 million. Total group adjusted profit for 2022 of £619 million is up from a pre-pandemic 2019-20 outcome of £342 million. 

A final ordinary dividend of 11.5p per share declared adds to the 5p ordinary interim and 25p special dividend already paid.  

ii view:

B&M Group was founded in 1978 and listed on the London Stock Exchange in June 2014. It currently operates 701 general UK stores, 311 Heron foods UK stores and 107 French store outlets. The departing chief executive Simon Arora has led the company for the past 17 years. Newly appointed Alex Russo, who joined B&M in October 2020, has previous senior leadership experience at Tesco (LSE:TSCO), Asda, and Kingfisher (LSE:KGF)

For investors, an uncertain economic outlook and the cost-of-living crisis for consumers make for a tough backdrop. The loss of B&M’s chief executive for over a decade cannot be brushed aside, while the positive impact from the pandemic is now unwinding. 

On the upside, its store numbers continue to increase with some 950 B&M UK general stores being targeted from the current 701. An estimated 38% of the UK population still live more than three miles from a B&M store. Adjusting for the pandemic, same-store sales are up 13% compared to the pre-pandemic 2019-20, suggesting some retention of new customers. A historic and forecast future dividend yield of close to 4% is not bad in an environment of still-low-if-rising interest rates. On balance, and while some caution looks sensible, this discount retailer appears unlikely to be forgotten by inflation-squeezed consumers.  

Positives: 

  • Diversified product range
  • Expanding store numbers

Negatives:

  • Uncertain economic outlook  
  • Exposure to currency movements 

The average rating of stock market analysts:

Strong hold

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