- Variety goods value retailer has retained customers won during the pandemic
- Appoints Alex Russo as new CEO
- Sees unpredictable trading and margin pressure ahead
Shares in B&M European Value Retail (BME) plunged 11% to 409.8p, making them the biggest faller on the FTSE 100, after the variety discount store warned inflation is making consumer behaviour ‘difficult to predict’ and said gross margins are likely to come under pressure.
Annual sales and profits declined as the discount retailer lapped demanding prior year comparatives, although the news finance director Alex Russo will succeed Simon Arora as chief executive removes recent leadership uncertainty.
SHOWING RESILIENCE
Resilient results for the year to March 2022 revealed a 2.7% drop in group sales to £4.67 billion as B&M lapped exceptionally tough comparatives, though sales increased 22.5% on a two-year basis compared with pre-pandemic 2020.
Adjusted pre-tax profits softened 3% year-on-year to £524 million.
One year like-for-like sales in the core B&M UK business were down 9% but up 13% on a two-year basis thanks to the retention of new customers won during the Covid crisis, when B&M was in a select grouping of shops able to remain open.
UNPREDICTABLE TRADING PATTERNS
Over the first eight weeks of the new financial year, B&M UK’s like-for-likes were down 13.2% and 11.5% versus 2022 and 2021 respectively and the retailer warned trading patterns are expected to ‘remain unpredictable in the year ahead’.
The retailer also expects to experience margin pressure as ‘some level of markdowns’ return and cash-strapped shoppers shift their spending away from discretionary higher-margin general merchandise in favour of lower-margin food and fast moving consumer goods.
For the full 2023 financial year, B&M guided towards group adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in the £550 million to £600 million range, implying a 7% drop from last year’s £619 million haul at the mid-point, though guidance is comfortably above 2020’s pre-pandemic earnings level of £342 million.
Outgoing head Simon Arora said: ‘The retail industry is facing inflationary pressures whilst 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.’
EXPERT VIEWS
Shore Capital commented: ‘Despite the uncertain economic backdrop B&M is confident it is in a solid position to continue to grow profitably in the UK and develop the French business in the long term.’
Though the shares are down sharply year-to-date, the broker stressed B&M is ‘firmly in the retail value for money camp, which is a virtue, given the cost-of-living squeeze expected this year.’
Liberum Capital argued this morning’s share price reaction is ‘overdone. B&M is a significantly improved business compared to pre-pandemic and remains favourably positioned to take share in a consumer downturn’.
The broker believes Russo’s appointment ‘will bring continuity to what is a well-executed strategy’.
AJ Bell investment director Russ Mould pointed out that B&M’s value-based proposition means ‘margins are pretty skinny and therefore vulnerable to inflation. That helps explains why revenue and earnings were lower in the year just gone than the previous 12-month period and why the current year could see a further fall in profit.
‘That’s not the message the market wanted to hear from B&M, even if the company is in a considerably stronger place than it was pre-pandemic.
‘At least it sets a reasonably low bar for incoming chief executive Alex Russo as he gets set to replace founder and current incumbent Simon Arora.
‘The company hasn’t wasted any time in appointing the retiring Arora’s successor, though with Russo stepping up from the chief financial officer position it is not the most imaginative choice.
‘While a fresh injection of ideas to the business might have been welcome, ultimately Arora has taken B&M from a struggling Blackpool grocery chain to a leading UK chain in the ranks of the FTSE 100 so maintaining some continuity has logic to it.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
