Editor’s note: the original version of this article incorrectly stated that liabilities exceeded its assets by £742m; however, assets exceeded liabilities by £742m.
The B&M European Value Retail (LSE:BME) share price didn’t have a good start to the week (24 February). It fell 8% during early Monday trading and continued a miserable run, which has seen it fall 49% over the past 12 months.
The most recent sell-off was prompted by a profits downgrade. The company now expects to report adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of £605m-£625m for its current financial year, which ends in March (FY25).
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The reduction was said to reflect “the current trading performance of the business, an uncertain economic outlook and the potential impact of exchange rate volatility on the valuation of stock and creditor balances”. Although currency movements are a non-cash item, they do impact on earnings.
The group also announced its chief executive will retire at the end of April.
In January, the company was forecasting earnings of £620m-£650m. And three months earlier, in November, it was predicting a range of £620m-£660m.
By comparison, it made £616m during its previous financial year. It now looks likely that the company will have failed to grow its profits in FY25.
Wider problems
B&M’s problems could be a bad sign for other FTSE retailers. When consumer confidence is low and incomes are squeezed — gross domestic product (GDP) per head has fallen for two successive quarters — I’d have thought the so-called discounters, like B&M, would do better.
But its ‘everyday low price‘ offer — and its ‘laser-focus‘ on keeping down costs for customers — appears to be falling out of favour with shoppers.
In June 2014, the company celebrated its 10th year as a listed company. Its shares floated at 270p. At the time of writing, they’re changing hands for 4p below this. So it appears as though the company’s gone nowhere in over a decade. This has dented its reputation for being a solid defensive stock, the sort of share that investors look for during times of economic headwinds.
Another possible explanation for its disappointing share price performance could be its decision not to have an online presence. The group trades exclusively through its 1,112 stores in the UK and 134 in France.
On the plus side
However, there are some positives. Income investors might be tempted by the stock’s yield. Based on its payouts over the past 12 months (34.7p), it’s currently yielding a very impressive 12.8%. However, this includes a special dividend of 20p, which I suspect won’t be repeated (or possibly reduced) this year. Dividends are never guaranteed and B&M’s have been particularly erratic in recent times.
But the business has ambitious plans to open more stores in both the UK and France. Also, despite the profits warning, the company still makes plenty of money. The shares now trade on a historic (FY24) price-to-earnings (P/E) ratio of 7.4. This is very low by historical standards and below many of its peers.
Yet there are too many ‘red flags’ to make me want to invest in the company. With its focus on low-cost household essentials, it’s the sort of stock that should be doing better during these troubled times, and not one that’s issuing profit warnings.
