B&M shares fall 15% as margins and sales take hit

Shares of Liverpool-based B&M European Value Retail fell as much as 15% on Tuesday after the firm warned its profit margins would take a hit this year and said its UK like-for-like sales in the first eight weeks of its current financial year were 13.2% below last year and 11.5% below two years ago.

B&M said its adjusted EBITDA for the current year is expected to be in the range of £550 million to £600 million, below the levels reported in the past two years, but ahead of the FY20 pre-pandemic level of £342 million.

The outlook came as B&M, a FTSE 100 firm, announced results for the 52 weeks to March 26, 2022, showing revenue slipped 2.7% to £4.673 billion and profit before tax was flat at £525 million.

Nonetheless, B&M paid dividends totalling £430 million in FY22, including a £250 million special dividend paid in January 2022.

Full year ordinary dividend slipped to to 16.5p per share from 17.3p.

B&M is based in Liverpool and registered in Luxembourg — but its shares trade in London, where its stock fell 15% to around £3.89 to give the firm a current stock market value of about £3.9 billion. B&M shares are down 38% year to date.

B&M’s outgoing CEO 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.  

“As such, we are well positioned to support the communities in which we trade and continue our long-term growth strategy.”

In his review, Arora wrote: “Looking into FY23, some level of markdowns are expected to return and there may be an adverse impact from category mix as customers shift spending away from more discretionary higher margin General Merchandise categories in favour of Food and FMCG products.

“As a result of this gross margin dilution, B&M UK adjusted EBITDA margin is expected to step back between 70 to 130 bps but to remain structurally higher than pre-pandemic levels.”

B&M said Alex Russo, currently chief financial officer, will succeed Arora as CEO when he retires in the coming months. 

“The appointment of Alex reflects the outcome of a thorough assessment and external benchmarking process over the last six weeks in which the board was assisted and advised by Russell Reynolds Associates,” said B&M.

Alex has considerable relevant experience across the Grocery, General Merchandise and discount retail sectors both in the UK and internationally. 

“This has included senior leadership positions at retailers such as Asda, Tesco plc and Kingfisher plc. 

“Since he joined the group in October 2020 he has demonstrated impressive commercial acumen and operational management skills in addition to being a highly capable CFO.  

“The appointment of an internal candidate reflects the strengthening of the senior leadership team over the past few years.

The board will now consider the most appropriate handover plan. A process to recruit a successor to Alex as CFO has already begun.  

“In the meantime, both Simon and Alex will remain in their existing roles in order to minimise disruption to the business.”

Russo‘s remuneration package will include a base salary of £800,000, pension contribution of 3% of base salary, annual bonus maximum award of 200% of base salary, and LTIP maximum of 200% of base salary.

Interactive Investor head of investment Victoria Scholar said: “Shares in B&M have fallen sharply … this morning with investors spooked by its profit margin warning for the year.

“The shares are down by around 35% since the December peak as the cost-of-living crisis, spiralling inflation, and the departure of its long-term respected CEO.

“However, as value for money becomes increasingly important for the consumer and with the government’s generous £15 billion support package perhaps B&M is well positioned to fare better than others amid the challenging affordability environment.”

Edison Group director of consumer Russell Pointon said: “This is a difficult set of results for B&M, which has seen its group revenue decrease by 2.7% and its UK revenue fall 4.1%, caused by a like-for-like revenue decline of 9%.

“However, the group noted that on a two-year basis compared to 2020 group adjusted EBITDA had increased 80.8%, and that high elevated sales comparatives during 2021 makes it is more accurate to compare the group’s performance using its pre-pandemic results as a benchmark.

“On this basis, like-for-like revenues were up 13% driven by an increase in sales densities which are higher than pre-pandemic levels.

“Even judging the group’s performance in relation to pre-pandemic levels, the outlook for the group going forward remains mixed.

“Following the recently announced departure of the group’s chief executive and his family’s 4% reduction of their shareholdings, investors have been hoping that these sets of results will demonstrate that the group can continue to deliver sustainable growth going forward.

“The group’s continued growth in international markets, such as France which saw a 14.2% increase in group revenue, may offer a small sign of what investors are hoping for.

“However, if the group is to sustain the step up in sales compared to pre-pandemic levels, it must find new ways to provide competitive prices for its customers.

“Amidst rising inflation, B&M’s may be able to benefit from customers looking for lower-priced alternatives as they tighten their budgets.

“Senior management remained confident it could capitalise on customer down trading trends, noting that their recent internal price comparison revealed that their products cost 15% less on average than their larger supermarket competitors.

“Yet, it is difficult to determine how consumer spending behaviour will change as macroeconomic pressures continue to mount.”

AJ Bell investment director Russ Mould said: “When households feel the pinch one of the obvious things they can do is trade down to cheaper options and this should play into the hands of variety discount store B&M.

“However, the company is simultaneously losing the tailwind it had during the pandemic when it was in a select grouping of shops which were able to remain open.

“And its 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 CEO 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.

“Longer term there looks a decent chance B&M can emerge from the current cost of living crisis in better shape than it entered it.

“The company enjoys the kind of scale, allied with a strong balance sheet, which should help see it through tough times and come out the other side with its market position bolstered.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.