A while back, I bought what I thought looked like a great UK value share. The company was solidly profitable, with a chunky dividend and large business.
Step forward to today, though, and that share continues to look cheap. Or does it?
Well-known retailer focused on price
The share in question is B&M European Value Retail (LSE: BME).
This FTSE 250 company is well-known by millions, thanks to its nationwide chain of shops.
At the interim point in its current financial year, it reported that revenue was up 4% to £2.7bn. But that growth came at a cost: profit before tax more than halved. Still, it came in at £75m.
Profits have come under strain because B&M is operating in a highly competitive market and some of its pricing has not been attractive enough for customers.
Cutting prices eats into profitability and I see that as an ongoing risk given the market in which B&M operates.
Could there be good news on the horizon?
Still, B&M is well aware of these challenges and is taking measures it hopes can address them.
In the company’s most recent trading update, the chief executive said, “I remain confident that the actions we are taking will restore sustainable like-for-like growth at B&M UK over the next 12 to 18 months and provide a strong foundation for future growth“.
That sounds like a long wait to me.
I am a long-term investor, but I would like to see more evidence sooner that the turnaround strategy’s focus on things like on-shelf availability and the number of products carried in a store is delivering meaningful financial change at scale.
B&M has proven over the years that it can appeal to shoppers, generate sizeable sales, and make a handy profit. I still think the basics are in place.
If the current approach to fixing the business delivers, that could provide good news that helps to boost the value share.
Here’s my concern, though
But what if it does not?
It is not as if B&M management were not aware of the situation prior to the tenure of the current boss.
Putting money into cutting prices can help woo some shoppers, but it is only one part of the overall picture. It eats directly into profit margins even for sales that would have been made anyway.
It is very difficult if not impossible for a retailer like B&M to target instore pricing so that it adds new sales without reducing the profitability of existing ones.
Other factors beside price have likely hurt B&M, including instore product availability.
A weakening economy could play to its strengths as a discount retailer, but they might also force the company to become even more competitive on price if rivals do, further reducing profit margins.
To me this looks like a value share. But if simple price fixes are not enough to restore sales growth at an acceptable level of profitability, it could yet turn out to be a value trap.
A 49% share price decline over the past year suggests many investors have lost faith in the investment case. I am hanging on for now but will not be buying any more shares.
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Christopher Ruane owns shares in B&M European Value Retail.
