Somewhere in the Proactive news archive is an article about the stock market winners in the early stages of the pandemic.
(Here it is, if you want a trip down Covid memory lane.)
Two years after the first lockdowns in the UK, the picture is not looking so bright for some of them, such as AO World PLC (LSE:AO.), ASOS PLC (AIM:ASC) and now B&M European Value SA.
AO World’s shares have plunged from around 250p in the final quarter of 2021 to around 80p now while ASOS PLC (AIM:ASC) has plummeted from 5,000p or more in the middle of last year to a mere 1,558p now.
B&M European Value’s fall has not been so precipitous, although shareholders can’t be happy at the shares languishing at 404.5p when as recently as the beginning of March they were trading at 600p.
The shares were riding high before Simon Arora, who has been in charge of the chain with the eyeball-hurting fascia for 18 years, said he would retire in April 2023. Today's profit warning from B&M suggested he might have decided it is a good time to move on.
Arora and his brother Bobby bought the chain in 2004 and turned it into a national retail phenomenon, more or less becoming the retail chain Woolworth could’ve been.
It’s rarely a good sign when a founder or company guru bows out but the portents were there when various Aroras sold 40mln shares at 585p a share back in January.
Today, the company announced finance chief Alex Russo would step into the hot seat when Arora moves on. A date has yet to be set for the transfer of power but the fact that Russo’s appointment has been announced suggests the change may happen sooner than previously expected.
READ B&M tumbles after announcing new CEO
There may be trouble ahead
In theory, B&M should be well-placed to benefit from the current inflationary environment as customers trade down to cheaper alternatives but if that is the case why does Arora seem to be in such a hurry to get out?
One clue might be that most of the products it sells are manufactured in China and the People’s Republic’s manufacturing capacity has been knocked for six by another flare-up of Covid-19.
“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,” said Russ Mould, the investment director at AJ Bell.
“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,” Mould said.
He also said the appointment of insider Russell was 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,” he concluded.
Share price reaction is "overdone"
Stockbroker Liberum, which rates B&M shares as a buy, said this morning’s share price reaction is overdone.
“B&M is a significantly improved business compared to pre-pandemic, now boasting very strong c. 13% EBITDA margin and remains favourably positioned to take share in a consumer downturn. The company has also announced that current CFO Alex Russo will succeed Simon Arora as CEO, which we expect will bring continuity to what is a well-executed strategy. Trading at a forward PE [price/earnings] multiple of 10x supported by a 7%+ FCF [free cash flow] yield and 4%+ dividend yield with scope for ongoing specials, the shares appear very attractive,” it asserted.
Sophie Lund-Yates at Hargreaves Lansdown was not so sure.
“The group warned of the wider pressures facing the retail industry as customers see their disposable income dwindle. While on one hand, struggling customers may be tempted to try a value name, on the other, B&M’s core existing customers may hold off buying the extra non-essential items the chain is famed for,” she said.
The fact remains that B&M, with its limited range of food, was allowed to carry on trading during the lockdown while competitors that did not have a food offering, had to put the shutters up.
The playing field is a bit more level now and at the risk of undermining my own metaphor, the company may find it more of an uphill struggle.
Shares in B&M were down 13% in lunchtime trading.