B&M braced for cost of living squeeze

After a stellar pandemic performance, growth at B&M European Value Retail (BME) has stalled and the discount retailer is facing an abundance of uncertainty. 

Revenue and profit at B&M remain well above pre-Covid levels, but figures have plateaued year-on-year. This is largely due to the performance of B&M stores in the UK, which saw sales fall by 4.1 per cent to £3.9bn. In contrast, the group’s presence in France is growing fast. 

Management now expects adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda) in 2023 to be between £550mn and £600mn. This estimate towers above pre-pandemic levels of £342mn, but is lower than profits achieved over the past two years. 

Inflation makes firm predictions difficult, though. For B&M, product cost prices are likely to go up, while consumer spending is likely to be reined in. Inflationary pressures could also affect the type of products customers buy. General merchandise, for example – which has enjoyed consecutive years of very strong growth, and has good margins – could prove less popular than usual, as customers prioritise food and other essentials. 

As such, B&M expects its adjusted Ebitda margin to fall by between 70 to 130 basis points, but to remain structurally higher than pre-pandemic levels.

The cost of living squeeze is not necessarily bad news for B&M. As the UK becomes more price-conscious, more shoppers may turn to discounters in search of bargains (according to internal price comparisons, a basket of food and fast moving consumer goods from B&M is about 15 per cent cheaper than one from its supermarket competitors.) Meanwhile, 93 per cent of all products sold at B&M are less than £20, making it less exposed to sharp reductions in spending on expensive items. 

Historically, the firm has performed best when consumer confidence is weakening, such as in the first quarter of 2010, when austerity measures were introduced after the global financial crisis.

There is still a lot of change to deal with, not least at management level. Chief executive Simon Arora – who acquired the chain with his brothers in 2004, when it had only 21 stores – is retiring, and will be replaced by the group’s chief financial officer.

And B&M looks like it could fall further, particularly given warnings about a margin squeeze. Its shares have fallen 36 per cent since the start of the year to a 12-month low. In the longer term, however, the company looks poised to benefit from the rising cost of living. With a forward price to earnings ratio of just 10.1 – compared with a five year average of 16.7 – it’s also cheaper than usual. Buy.

Last IC View: Buy, 550p, 17 Mar 2022