Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

B&M is coming for Middle England.

The discounter aims to increase its number of British stores from 537 to 950 in the next few years. B&M European Value Retail SA, to give the retailer its full title, sees itself as the Aldi or Lidl of garden furniture and pet beds.

The German discounters have made huge inroads among wealthier customers with cut-price lobster and prosecco. B&M has its eyes on the same crowd, with plans to capture more ground in the affluent home counties surrounding London and among the cash-rich retirees living on England's south coast.

That's filled investors with confidence, pushing its shares up by 30 percent in the past year. After all, its strategy has been road-tested by Aldi and Lidl in their fight with the big supermarket chains. Simply open up stores in middle-class towns and watch the shoppers flock in.

Not So Bargain Basement
Shares in B&M reached an all-time high this week
Source: Bloomberg

The trouble is that while Aldi and Lidl have continued to grow rapidly through expansion, their like-for-like sales growth has stalled somewhat. And there's a similar worry at B&M, that by opening up too many stores it will cannibalize sales from existing shops. Terry Leahy, the ex-Tesco CEO who chairs B&M, should know all about this given that his former employer over-stretched too.

Simon Arora, the B&M chief executive, points to strong same-store sales growth in his defense. Nevertheless, such grand ambitions do risk damaging the existing estate.

B&M Bounce
The discounter's U.K. same store sales have rebounded
Source: Bloomberg Intelligence

There's also been a setback at B&M's fledgling German business. The cost of clearing the stock that came with the acquisition of the Knuller chain cut the German gross margin by 0.55 percentage points.

Meanwhile, B&M isn't helped by the impact of sterling's slump on the cost of sourcing goods from overseas.

So far, it is navigating this danger well, thanks to currency hedging and sales growth, which helps it get better deals from Asian suppliers. The U.K. gross margin rose by 0.29 percentage points in the year to March 25. Arora says it should remain stable this year. But foreign sourcing will continue to challenge.

There's also the potential for risky acquisitions, with the company holding off from repeating last year's 100 million pound special dividend. Net debt to adjusted Ebitda was 1.71 times, well below the target of 2.25 times, so there's room for another payout. But the company is keeping its powder dry for possible deals.

Plus it's not as if the shares are cheap, trading at about 21 times expected earnings -- well above the average for British retailers and supermarkets.

Plastic Premium
B&M's valuation is ahead of the broader retail sector
Source: Bloomberg

B&M's built a bit of a niche for itself selling nostalgic British tinned goods and biscuits at knock-down prices. It's going to have to shift plenty of corned beef, Spam and Mint Clubs to justify investor faith.

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

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net