Retailers can be popular shares with investors on the hunt for passive income. Running a lean ship (or shop) can mean that, while profit margins may be thin, cash profits can add up thanks to large sales volumes. And that can make for juicy dividends.
One FTSE 250 retailer in my portfolio looks like it has promising long-term income potential, to me. But it also has some notable risks.
Price-focussed retailer with a well-known brand
The share in question is B&M European Value Retail (LSE: BME). In the UK it trades as B&M and also Heron Foods. The company has also been expanding its footprint on the continent.
In each case the formula is similar: B&M aims to offer an attractively priced assortment of goods.
The dividend yield currently sits at 4.9%. Compared to the 3.5% offered by the wider FTSE 250 right now, that grabs my attention. In fact, this is a comedown. The most recent annual dividend per share is the lowest in years. It is around 27% below where it stood back in 2022, for example.
Short-term trouble or long-term decline?
It is not just the dividend that has fallen. B&M shares sell on a price-to-earnings ratio of 12 today in part because the share price has fallen. Over five years, the share price has fallen 65%. A fall of that magnitude is rarely a positive signal.
So it is for B&M? The company has been struggling to maintain its attractiveness to shoppers, especially when it comes to fast-moving consumer goods.
The challenge here is a common one for discount retailers. To be more attractive, it can cut selling prices, but that eats directly into profit margins, which are already thin. Last year, the company’s net profit margin was around 3%.
Some promising signs, but no firm recovery yet
As a B&M shareholder, I was therefore interested in the company’s release this week of a trading update for the first quarter of its financial year. There was good news: like-for-like sales revenues at Heron and the French B&M both rose. Total company revenues rose by 2%.
But there was other less good news too. The UK B&M sales figures were below the same period last year. The company pinned that on unusually warm weather last year pushing up outdoor and garden sales.
While the trading margin for general merchandise showed year-on-year growth, it declined in fast-moving consumer goods. The business is cutting prices to be competitive, eating into profitability.
B&M has a lot of work still to do to get even close to its past financial performance.
I’m hanging on, but there are risks
Will that happen? Management has identified the challenge and is seeking to fix the problems.
The company is keeping a tight lid on inventory management, though that can be a double-edged sword if a sales boom runs through available stock and leads to some empty shelves.
B&M remains profitable. I believe it can maintain its dividend, though that is not guaranteed.
I think the basics here remain decent and I plan to hang onto my shares. From a passive income perspective, I continue to see this share as a possible bargain and worth considering. But I am also realistic about the ongoing challenges the business faces.
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Christopher Ruane owns shares in B&M European Value Retail.
