B&M European Value Retail SA (LSE:BME) chief executive Simon Arora may have chosen a good time to get out of the business, Jefferies reckons.
Arora announced on April 22 his intention to quit in a year’s time, since when the shares have slumped to 460p from 550p but even before that, the shares were struggling after “a resilient 2021”, with the shares down nearly 30% year-to-date, the broker noted.
Thanks to its admittedly limited food offering, B&M stores were able to carry on trading during the more severe lockdowns the UK government introduced to combat the Covid pandemic, and did well as a result but the playing field is now very different.
Although on the face of it, rising inflation and the concomitant urge of shoppers to become more cost-conscious should work in the favour of a company that features the word “value” in its name but Jefferies reckons the retailer’s historic UK food price advantage may be eroding.
“About one month ago we refreshed our B&M UK food basket monitor, having not done so since Aug 2019. We found that over a narrow basket of 41 SKUs [stock keeping unit] B&M’s cheapness relative to the UK majors contracted from 17.2% to 9.5% over that period. Conscious of the limited product count, we expanded the exercise to an additional 109 SKUs. Here we found a more sizeable c.15% price advantage in favour of B&M. When we combine the two we find a B&M's price leadership of 13.7% (this reduces to below 10% when compared with the most sharply positioned UK grocery majors),” Jefferies revealed.
“We appear to have slipped some way from the historic equation of a 20% leadership in food as a key driver for footfall into low occupancy cost locations, with gross margins accretion secured through a sizeable participation in non-food categories. Past concerns that BME may struggle to hold on to very favourable branded buying terms as it becomes a more scaled up player could become a renewed part of the investment debate,” the broker suggested.
Jefferies says it is staying cautious, cutting its price target to 460p from 520p, reflecting reduced earnings multiples and the aforementioned price advantage erosion concerns.
“In a strongly derated UK retail large-cap sector BME is our least favourite name,” Jefferies concluded.