Big Headwinds for B&M

Value stores face a tough time when competiton's this fierce.
As of 5:47 AM EDT
396.20 GBp

Shoppers walking into a B&M store are prone to distraction from a mountain of cut-price goods, ranging from plastic seagulls to flowery tea sets. It's the same for investors, who probably found much in the discount retailer's first half results to catch their eye.

B&M European Value Retail SA said Tuesday that overall sales rose 18 percent to 1.1 billion pounds in the six months to Sept. 24, boosted by new-store openings, while pre-tax profit and cash flow from operations also increased strongly. Investors took comfort from the report, particularly B&M's reassurance that it was on track to meet full-year profit expectations. That helped the shares rise as much as 5 percent before they settled back down to around 0.6 percent.

Not so Much to Like

B&M's same-store sales growth is vanishingly small compared to previous years

Source: Bloomberg Intelligence, company report

Investors should be mindful of two warning signs. The first is the trend of deteriorating same-store sales -- the latest report of an improvement to 0.2 percent growth in the first half is a far cry from much higher rates a few years ago. B&M blames this on the short-term effect of new stores on its existing outlets. Excluding this, same store sales growth would have been 1.9 percent.

The second is that the margin on earnings before interest, tax, depreciation and amortization basis fell slightly, from 9.3 percent to 9 percent. That was due to new warehouse capacity coming on stream, which pushed up costs, an increase in the minimum wage and the effect of opening stores in the south east of England, where rents are higher.

That could be just a taste of things to come. 

About 30 percent of what B&M buys is dollar denominated, so the post-Brexit slump in sterling means higher sourcing costs. Although B&M isn't committed to selling for a fixed price, such as a pound, its shoppers will still be looking for a bargain.

Premium Pause

B&M's superior price earnings ratio has slipped compared with rivals

Source: Bloomberg Intelligence

Chief Executive Officer Simon Arora says the company can manage the pound's drop as it's hedged until the end of March. While all retailers face higher sourcing costs, he says B&M has a more efficient business model, and so can handle the hit better than rivals. That'll keep its existing value conscious customers coming to stores, and might even some attract new ones, particularly if incomes get squeezed next year.

That could prove over-optimistic. Its ability to undercut competitors is by no means guaranteed as rivals will also be under severe pressure to keep their expenses in check. 

More worryingly, its track record on efficiency has blemishes. Last year, the company opened two distribution centers and a slew of stores, but things didn't run smoothly. B&M suffered a pickup in overhead costs, and the supply of some products to stores was disrupted. As it now aims to expand from about 500 stores today to 850 over the next five years, it's hard to see why investors should be confident in its ability to control costs and keep shelves full. 

And, a big push to expand raises risks that it will continue to cannibalize existing stores, something that's already feeding a deterioration in same-store sales growth.

The shares are down 25 percent over the past year and trade a forward price to earnings ratio of 16 times, a premium to the 13 times for the FTSE 350 General Retailers index. The company's premium to the broader market has been shrinking over the past year, and that trend won't likely be reversed until B&M can banish doubts about sterling's slump and its efficiency prowess.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Andrea Felsted in London at

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