On the surface, B&M’s interim results would be the envy of many a high street operator, with pre-tax profit up 32.5% to £115m and group revenue up 16% to £1.5bn.
There is no denying that these results are impressive – but look a little closer and there are signs that, by B&M’s exemplary standards, its performance is waning.
For the same period in 2017, the retailer’s UK like-for-likes were up 7.5% - this year the increase was 0.9%. B&M’s overall sales rose 7.1%, which show that new stores are the primary driver of its sales momentum.
This explains why the value retailer has upped its ambitions for new UK store openings this year from 45 to 58. However, has B&M taken its eye off of its existing store estate in the pursuit of expansion?
Chief executive Simon Arora says strong comparables and hot weather are the reasons for its slower like-for-likes sales during in its first half.
“Subdued like-for-likes didn’t stop us from delivering an entirely unsubdued profit performance, but we did have a quiet August Sale because we didn’t have enough product to put in it,” he admits.
The retailer’s first quarter like-for-likes rose 3.6%, while its second quarter sales declined 1.6%. However, Arora says its supply issues have run their course and that the retailer’s “store opening programme almost guarantees” a gangbuster Christmas.
The business is prioritising store openings across the South and Southeast across the remainder of its financial year, and recently recorded its biggest opening day sales to date at its 600th opening in Tonbridge, Kent.
International teething problems
However, further afield the acquisitive retail group is having a tougher time.
Profits plunged 81% to £1.1m at its German business Jawoll, which it acquired in 2014, despite sales rising 4.1% to £111.2m.
Arora said the business sacrificed margin as it sold off discontinued stock as it moved to B&M’s supply base.
“The business is currently transitioning out of products bought locally which are being discontinued and built out into products from the Far East from the manufacturers.
“As most of your readers will know, exiting old ranges to make room for new ones is expensive for margin. But the good news is that initial reaction from the product is very positive.”
B&M has also overhauled the management team which it inherited with the Jawoll acquisition during the half year.
However, it begs the question why has taken four years to get the right products and people at the helm of Jawoll? And why - when profits have flatlined at its German arm - is now the right time to be diving into a new international market?
B&M acquired French discount chain Babou last month for €91.2m (£80.6m), which comes with a 95-strong store estate.
Arora says that although the timing of the acquisition is not ideal, Babou presented too good an opportunity to turn down.
“We’ve spent €90m euros, which represents only a few months worth of [B&M group] EBITDA, and gives us 2.5m sq ft of retail space in France,” he says.
“Babou presents an opportunity that we wouldn’t want to turn down, even if in an ideal market we’d have acquired it next year.”
There is a lot to be positive about in B&M’s results, which is often at the top of City analysts buy lists. Nevertheless, these interim results could be viewed as the first set of alarm bells for a business which is in danger of overstretching itself.
Arora is a skilled operator and there is no reason that he cannot create a pan-European discount business.
The trick will be to realise this ambition without losing what has made B&M a success to date. Hopefully running out of stock mid-season and taking four years to reconfigure a supply chain is a blip on a previously unblemished record rather than the beginning of a new trend.