B&M European Value Retail SA (LON:BME) prices compare favourably with Amazon.com Inc. (NASDAQ:AMZN) in the UK, Barclays said as it initiated coverage of the stock with an ‘overweight’ recommendation and target price of 450p.
"B&M has entered a virtuous circle in which like-for-like sales growth and new store expansion increase its volumes, which in turn reduce its cost ratios and allow it to invest in prices and put pressure on peers. (Our price survey suggests B&M compares very favourably with Amazon in the UK.)," Barclays said.
"B&M is helping to catalyse withdrawal of capacity, further reinforcing its virtuous circle."
READ: B&M expects record full-year earnings after Christmas sales grow despite weaker UK performance
Barclays expects the company’s recent weakness in like-for-like sales should “prove temporary” and expects a recovery in the fourth quarter.
The variety retailer posted a 1.6% drop in UK like-for-like sales for the third quarter following a 3.9% increase a year ago amid a difficult retail market.
However, total group revenue rose 12.1% to £1.09bn in the quarter on a reported basis, boosted by growth in the UK Heron Foods business and the German discount retail arm Jawoll along with a contribution from recently acquired French discount chain, Babou.
B&M said that it remains on course to achieve sales and earnings growth this financial year and the next. It plans to open 56 new B&M stores in 2019.
“We think that B&M's UK store network can go well beyond its 950 target. That the food opportunity is considerable and that the international business represents a free option,” Barclays said.
Shares rose 1.2$ to 278.6p in mid-morning trading.