B&M turnaround inspires new faith

Christmas 2016 was the most successful ever for B&M - something we're not sure will become a common feature over the coming month as other UK retailers report. The stronger like-for-like growth reflects several factors that should continue to play out in 2017: strong demand for the group's well-targeted product range, improved in-store customer service standards and the normalisation of service levels from two new distribution centres. All this has led to better overall operational stability and improved stock levels at existing stores. There was also an extra day of trading during the recent third quarter relative to 2015, but that only had a positive 1.1 per cent effect on sales.

Investors can also take heart from management repeating the relaxed rhetoric on margins seen at the time of the half-year results last year. While the group conducts its sourcing in US dollars, bosses said effective renegotiations with suppliers meant gross margins for the UK should stay flat for the year. On that note, management is confident the group will meet market expectations for adjusted cash profit in the financial year to March 2017. But even this might prove to be conservative: broker Peel Hunt said it was "difficult" not to upgrade its top-of-the-range forecasts following the strong third quarter. Furthermore, as B&M continues to move its product range away from food, there might even be room for outperformance on margins.

All of this is pretty impressive given the current inflationary environment and the difficulty discounters have increasing prices to mitigate cost increases compared with peers focused on the mid-market. However, B&M actually looks in an attractive spot compared with many other retailers. Its trading over Christmas stands in sharp contrast to groups such as Next (NXT), which issued a disappointing update on 3 January 2016, including another downgrade to expected annual profit. This suggests what we - and the market - have suspected for some time: as the consumer outlook in the UK grows more uncertain on lower GDP forecasts and ahead of Article 50, discounters should benefit as cash-conscious customers make an effort to trade down.

Growth isn't only coming from the UK business. B&M's overseas brand, Jawoll, is also gaining traction in Germany. Jawoll's sales revenue increased by 19 per cent on a euro basis during the third quarter, which equates to an increase of 43 per cent in sterling to £47.7m versus the same period a year earlier. Jawoll is now trading from 73 sites after opening a further seven in the third quarter. The plan is to kick new openings into high gear from this year on.