B&M’s interim results show that the retailer is a strong growth business, so why has its post-IPO share price been underwhelming?

Despite a good rally over the last month, B&M was still trading just below its 270p IPO price at last night’s close.

But investors who backed the IPO of this fast-growing discount business back in June will be delighted by the strong interim results announced this morning, with adjusted EBITDA up 34% to £73m on the back of 30% growth in sales to £740m.

The three pillars of B&M’s growth strategy are g ood LFL sales growth, strong new space growth and international expansion. It delivered on all three aspects in the first half.

During the IPO, B&M made no secret of the fact that it has a superior record of like-fr-like sales growth than its discount rival Poundland, because of the ability to trade consumers up through its multiple price-points and thus increase average transaction values.

However, Poundland was able to announce bullish first-quarter trading (for the 13 weeks to the end of June), with about 6% like-for-like sales growth thanks to the benefit of a late Easter in April as well as much better spring weather.

Funnily enough, B&M also saw 6% like-for-like sales growth in that quarter, with its seasonal/gardening business doing well, but its second-quarter like-for-like growth was also very good at 3.7% (to average a healthy 4.8% for the first half overall), despite an even stronger comp of +7.9% LFL a year ago and the warm weather in September when B&M launched its autumn ranges.

And UK gross margins improved by as much as 54bps in the first half at B&M, driven by a strong sell-through of the seasonal gardening and outdoor range and better buying in non-food lines in general.

New store openings are also driving the overall growth of the UK core business, with the 400th store just opened putting it well on the way to its 850 store target, and B&M says that “the UK retail property market remains highly favourable to support our store opening programme”.

There was no specific reference today to the mooted deal with Homebase for B&M to buy more of it stores but, coincidentally, the 400th store opening last month was a conversion of a former 33,000 sq ft Homebase unit in Cheadle Heath, Stockport.

Former DIY stores have provided rich pickings for B&M in its new store opening programme (hence the fact that nearly 40 B&M stores have outdoor garden centres), but B&M chief executive Simon Arora said today that “there are at least six retailers that are in active negotiations with us on right-sizing their estates”.Nno doubt a few of these are over-spaced supermarket chains…

B&M will open at least 50 new stores in the current financial year and it is confident enough about the pipeline of new sites and the performance of recent openings to increase its target for store openings in the next financial year from 40 to at least 45 stores.

As for international growth, it was a surprise to hear that that the recently acquired German discount business, Jawoll, is so profitable. It chipped in a useful £7m of EBITDA on sales of £59m for 5 months of the first half.

B&M is clearly pleased with what it has found in Germany and the local management (who retain a 20% stake) are incentivised to drive future financial performance through to 2018, helped by B&M sourcing synergies.

There is therefore a lot to like about B&M, with years of profitable growth clearly visible on the horizon. So why have the shares been so lacklustre since the IPO?

Well, the City “discounts” future growth and the fact is that the valuation of the group was pretty full back in June and the strong first half growth of B&M was only in line with analysts’ expectations.

There is also Poundland to consider, as that is an alternative play on the growth of the discount market even if its single-price approach doesn’t seem to have the flexibility of a multi-price operator such as B&M.

B&M is capitalised at about £2.7bn and Poundland at about £800m (just above its IPO valuation).

In due course, both B&M and Poundland should be discount retailers to back for the long term, but in the short term they are having to grow into their valuations.

  • Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank