Multi-price value retailer B&M European Value Retail's (BME) half year results contain no nasty surprises, show strong growth in the UK and Germany and engender confidence full year profit expectations can be achieved.
The Sir Terry Leahy-chaired discounter also confounds expectations of a second quarter sales deterioration by reporting modest growth. There's also news of a solid start to the third quarter, B&M set fair for the Christmas selling season, although margins have taken quite a hit from rising costs.
VALUE PROPOSITION
'Naturally, we are mindful of the current economic uncertainties in the UK but given the strength of our retail model and with the full benefits now flowing from the step change investments we made last year in our store opening programme and new supply chain capacity, we are confident of meeting expectations during the remainder of this year,' assures CEO Simon Arora.
He adds 'everyone loves a bargain and when customers need to seek out value, our proposition comes into its own.'
B&M's shares have fallen sharply since the Brexit vote, investors spooked by the projected impact of higher sterling costs on the FTSE 250 constituent's non-food business. There's price elasticity of demand for these more discretionary products, limiting B&M's ability to pass on higher costs to cash-strapped shoppers.
Shares urged readers to short the stock at 252.4p in August, flagging the plunging pound and more intense competition as risks, a savvy call, thus far. Yet the shares rebound 3% to 246.2p on interims revealing 17.2% growth in adjusted pre-tax profits to £77.9m, a 76% increase in cash flow from operations to £77.7m and an 18.8% dividend hike to 1.9p, which follows the payment of a £100m special dividend of 10p in June.
UK like-for-like sales rose 1.9% in the first half, implying an improvement from flat sales in Q1 to growth of between 0.4%-to-0.5% in Q2. The effect of last year's flurry of store openings is having less of an impact in terms of cannabilisation of the existing estate.
MARGIN PRESSURE
However, B&M also reports a significant 33 basis point slump in EBITDA margins too. UK costs are moving up due to the impact of the living wage, the effect of flat same-store sales on a fixed cost base, as well as higher rental and business rates costs as B&M pushes into the south of the UK.
In the opposing camp is Haitong's Tony Shiret, a seller with a 190p fair value estimate. The seasoned retail analyst writes: 'Overall, as we expected, a steadying of performance despite further margin compression and re-iteration of physical expansion aims allow the company to make confident statements about the immediate future - albeit “solid” UK trade into 3Q against weak comparatives is not the most upbeat trade description we have heard.'
