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Challenging conditions make B&M European Value Retail a bear stock

Publication Date: 01 Aug 2019 - By Gaurav S. By Gaurav S.
Actionable
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Equity Fundamental Equity UK EU Consumer

In the unforgiving world of discount retailers, B&M European Value Retail (LON:BME) has enjoyed a decades-long head start but the company is no outlier to complexities within the segment where intense competition and low margins are a way of life, according to a new report. 

In its examination of BME’s fundamentals, research and analysis firm Vision Research (VR) opines that far from being insulated or shielded from operating pressure within the discount retail segment, the company is particularly vulnerable to it. 

The Luxembourg-registered, but Liverpool, UK-headquartered retailer was formed in 1978 but only faced the pressures of being publicly-listed as recently as 2014. The first few years were solid seeing it catapulted to the FTSE 250 list boosted by store increases of more than 2400% (25x) over an eight-year period up to 2016.

However, much since then gives cause for concern says VR, including a lack of store portfolio diversity and a lacklustre response to the growing online shopping market. BME operates under four business streams - namely B&M (UK), Heron (UK), Jawoll (Germany) and Babou (France) - but remains reliant on the British market for nearly 90% of its total sales.

The report raises serious qualitative concerns, primarily predicated on a business model reliant on stealing competition for rival discounters. In that respect, BME has been fortuitous over the short-term given the recent bankruptcies of direct rival Poundworld and global toy retailer Toys R’ Us. 

As one-off benefits of such bankruptcies fade away, BME faces intense competition from rivals, especially from Home Bargains in its mainstay British market. What’s more, VR notes that while UK rivals, including Home Bargains, are offering discount online deals, B&M banner doesn’t offer this option. 

“Big reason B&M banner doesn’t have e-commerce capabilities is the modest basket size of £14.This is understandable, as online would be margin dilutive given the transaction size. However, this may be misguided as the secular shift online is ongoing.”

BME continues to face poor per store revenue trends with B&M and Jawoll (negative) and Heron (decelerating), leading VR to opine that the company’s current valuation is “unattractive.” Adjusted EBITDA margins have contracted for multiple years.

The report also raises concerns about BME’s decision to continue with its physical store expansion without adequate attention being given to poor per store revenues and low productivity at new retail spaces. In summation, VR deems BME to be a “bear case” with a challenging road ahead. 

For more, download and read Vision Research's full report on the fundamental investment case for B&M European Value Retail, via ReachX’s research marketplace.   

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav S.

 

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